59–119 

114TH CONGRESS EXEC. REPT. " ! SENATE 2d Session 114–1 

PROTOCOL AMENDING TAX CONVENTION 

WITH SWITZERLAND 

FEBRUARY 9, 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. 112–1] 

The Committee on Foreign Relations, to which was referred the 

Protocol Amending the Convention between the United States of 

America and the Swiss Confederation for the Avoidance of Double 

Taxation With Respect to Taxes on Income, signed at Washington 

on October 2, 1996, signed on September 23, 2009, at Washington, 

as corrected by an exchange of notes effected November 16, 2010, 

and a related agreement effected by an exchange of notes on September 23, 2009 (Treaty Doc. 112–1) (collectively, the ‘‘Protocol’’), 

having considered the same, reports favorably thereon with one 

declaration and conditions related to reporting on mandatory arbitration, as indicated in the resolution of advice and consent, and 

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

CONTENTS 

Page 

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

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

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

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

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

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

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

VIII. Text of Resolution of Advice and Consent to Ratification .......................... 7 

IX. Annex 1.—Technical Explanation ................................................................ 11 

X. Annex 2.—Transcript of Hearing of October 29, 2015 ................................ 23 

I. PURPOSE

The purpose of the Protocol, along with the underlying treaty, is 

to promote and facilitate trade and investment between the United 

States and Switzerland, and to bring the existing treaty with SwitVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00001 Fmt 6659 Sfmt 6602 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
2 

zerland (the ‘‘Treaty’’) into conformity with current U.S. tax treaty 

policy. Principally, the Protocol will modernize the existing Treaty’s 

rules governing exchange of information; provide for the establishment of a mandatory arbitration rule to facilitate resolution of disputes between the U.S. and Swiss revenue authorities about the 

Treaty’s application to particular taxpayers; and provide an exemption from source country withholding tax on dividends paid to individual retirement accounts. 

II. BACKGROUND

The United States has a tax treaty with Switzerland that is currently in force, which was concluded in 1996 along with a separate 

protocol to the treaty concluded on the same day (‘‘1996 Protocol’’). 

The proposed Protocol was negotiated to modernize our relationship with Switzerland in this area and to update the current treaty 

to better reflect current U.S. and Swiss domestic tax policy. 

III. MAJOR PROVISIONS

A detailed article-by-article analysis of the Protocol may be found 

in the Technical Explanation Published by the Department of the 

Treasury on June 7, 2011, which is included in Annex 1. In addition, the staff of the Joint Committee on Taxation prepared an 

analysis of the Protocol, JCX-31-11 (May 20, 2011), which was of 

great assistance to the committee in reviewing the Protocol. A summary of the key provisions of the Protocol is set forth below. 

The Protocol is primarily intended to update the existing Swiss 

Convention to conform to current U.S. and Swiss tax treaty policy. 

It provides an exemption from source country withholding tax on 

dividends paid to individual retirement accounts; provides for the 

establishment of a mandatory arbitration rule to facilitate resolution of disputes between the U.S. and Swiss revenue authorities 

about the Treaty’s application to particular taxpayers; and modernizes the existing Convention’s rules governing exchange of information. 

INDIVIDUAL RETIREMENT ACCOUNTS

The Protocol updates the provisions of the existing Convention, 

as requested by Switzerland, to provide an exemption from source 

country withholding tax on dividends paid to individual retirement 

accounts. 

MANDATORY ARBITRATION

The Protocol incorporates mandatory, binding arbitration in certain cases that the competent authorities of the United States and 

Switzerland have been unable to resolve after a reasonable period 

of time under the mutual agreement procedure. The procedures include: (1) the opportunity for taxpayer participation by providing 

information directly to the arbitral panel through position papers; 

and (2) a prohibition against either state appointing an employee 

of its tax administration as a member of the arbitration panel. 

EXCHANGE OF INFORMATION

The Protocol would replace the existing Treaty’s tax information 

exchange provisions (contained in Article 26) with updated rules 


rfrederick on DSK6VPTVN1PROD with HEARING
3 

that are consistent with current U.S. tax treaty practice. The Protocol provides that the tax authorities of the two countries shall exchange information relevant to carrying out the provisions of the 

Convention or the domestic tax laws of either country. This broadens the Treaty’s existing information sharing provisions, which provides for information sharing only where necessary for the prevention of income tax fraud or similar activities but in a manner consistent with long-standing U.S. tax laws. The Protocol also enables 

the United States to obtain information (including from financial 

institutions) from Switzerland whether or not Switzerland needs 

the information for its own tax purposes. 

IV. ENTRY INTO FORCE

The proposed Protocol will enter into force between the United 

States and Switzerland on the date of the later note in an exchange 

of diplomatic notes in which the Parties notify each other that their 

respective applicable procedures for ratification have been satisfied. 

The various provisions of this Protocol shall have effect as described in paragraph 2 of Article V of the Protocol. 

V. IMPLEMENTING LEGISLATION

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

self-executing and does not require implementing legislation for the 

United States. 

VI. COMMITTEE ACTION

The committee held a public hearing on the Convention on 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 this report. On November 10, 2015, the committee considered the Protocol and ordered it favorably reported by 

voice vote, with a quorum present and without objection. 

In the 112th Congress, on July 26, 2011, the committee considered the Protocol and ordered it favorably reported by voice vote, 

with a quorum present and without objection. 

In the 113th Congress, on April 1, 2014, the committee again 

considered the Protocol and ordered it favorably reported by voice 

vote, with a quorum present and without objection. 

VII. COMMITTEE COMMENTS

The committee on Foreign Relations believes that the Protocol 

will stimulate increased trade and investment, strengthen provisions regarding the exchange of tax information, and promote closer co-operation between the United States and Switzerland. The 

committee therefore urges the Senate to act promptly to give advice 

and consent to ratification of the Protocol, as set forth in this report and the accompanying resolution of advice and consent. 


rfrederick on DSK6VPTVN1PROD with HEARING
4 

A. MANDATORY ARBITRATION

The arbitration provision in the Protocol is largely consistent 

with the arbitration provisions included in recent treaties negotiated with Canada, Germany, Belgium, and France. It includes the 

modifications that were made first to the French treaty provisions 

to reflect concerns expressed by the Senate during its approval of 

the other treaties. Significantly, the provision in the Protocol includes: (1) the opportunity for taxpayer participation by providing 

information directly to the arbitral panel through position papers; 

and (2) a prohibition against either state appointing an employee 

of its tax administration as a member of the panel. 

B. EXCHANGE OF INFORMATION

All tax treaties provide a process for the exchange of information 

between the two Competent Authorities who have the responsibility of enforcing national tax laws. If issues arise regarding a taxpayer failing to pay owed taxes that may be subject to taxation, the 

Competent Authority may formally request information and assistance from the other Competent Authority. 

The Internal Revenue Services, designated the U.S. Competent 

Authority, must under the IRS Manual, exhaust all reasonable attempts to secure the information regarding the taxpayer’s accounts 

before making an exchange of information request of the foreign 

competent authority. The Joint Committee on Taxation publishes 

an annual report with the total number of tax treaty disclosures. 

The latest report, dated June 5, 2015, indicated 2557 disclosures of 

tax-payer specific returns or return information made to a foreign 

competent authority under either a tax treaty or a tax information 

exchange agreement in the previous calendar year. 

The committee notes that an exchange of information undertaken 

pursuant to a tax treaty is a tightly controlled process. 

U.S.government officials engaging in an exchange of information 

with a foreign Competent Authority are required to safeguard U.S. 

taxpayer information under the taxpayer confidentiality provisions 

of 26 U.S.C. 6103. The U.S. ‘‘Competent Authority’’ is authorized 

to decline an information request from a foreign government if the 

U.S. official has reason to believe the information will be disclosed 

in an unauthorized manner, misused for purposes other than legitimate tax collection, or otherwise used or disclosed for a purpose 

other than the legitimate enforcement of tax laws. The U.S. Competent Authority has declined requests the engage in information 

exchange when the Competent Authority had reason to believe the 

information would be used inappropriately or disclosed in an unauthorized manner. 

Furthermore, the committee notes that U.S. taxpayers are further protected under the IRS Manual and long-standing tax treaty 

practice by the fact that a foreign Competent Authority is obligated 

to exhaust all reasonable efforts to secure the information and 

must present a credible case for the need for the information before 

a treaty request will be honored by the U.S. Government. 

The Protocol would replace the existing Treaty’s tax information 

exchange provisions with updated rules that are consistent with 

current U.S. tax treaty practice. The Protocol would allow the tax 

authorities of each country to exchange information relevant to carVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00004 Fmt 6659 Sfmt 6602 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
5 

rying out the provisions of the Treaty or the domestic tax laws of 

either country, including information that would otherwise be protected by the bank secrecy laws of either country. It would also enable the United States to obtain information (including from financial institutions) from Switzerland whether or not Switzerland 

needs the information for its own tax purposes. 

With respect to the issue of exchange of information under the 

treaty, the committee notes that the new standard under the Protocol for when Treasury can seek information in a tax inquiry 

under the exchange of information provisions in the treaty is in 

fact the existing standard under the U.S. tax law that has been in 

effect since 1954. The relevant federal statute (26 U.S.C. 

§ 7602(a)(1)) authorizes the IRS, for the purpose of examining a tax 

return or determining a person’s tax liability, ‘‘to examine any 

books, papers, records, or other data which may be relevant or material to such inquiry.’’ 

This ‘‘may be relevant’’ standard has been repeatedly upheld by 

the U.S. Supreme Court. See e.g., United States v. Arthur Young 

& Co., 465 U.S. 805 (1984). A version of this standard has been 

part of the model U.S. Tax Treaty since 1996, and prior versions 

of the U.S. Model Tax Treaty were consistently interpreted as establishing the same standard. Since 1999, the Senate has approved 

at least fourteen other tax treaties specifically providing for the exchange of information that is or may be relevant for carrying out 

the treaty or the domestic tax laws of the parties. 

The existing U.S.-Swiss tax treaty (which is proposed to be 

amended) is the only treaty that requires an establishment of tax 

fraud before Switzerland would hand over any information on U.S. 

accountholders with Swiss bank accounts. No other U.S. tax treaty 

uses this standard. 

The committee further notes that the exchange of information 

provisions under tax treaties only permit the exchange of information that is foreseeably relevant to the collection of taxes. The treaties do not permit what has been mistakenly characterized as ‘‘bulk 

collection of the private financial information of all U.S. citizens 

living abroad.’’ The type of information that would be covered 

under the information exchange standard has been described by 

the Supreme Court in the domestic context as ‘‘critical to the investigative and enforcement functions of the IRS.’’ See United States 

v. Powell, 379 U.S. 48 (1964). 

The proposed threshold under the U.S.-Switzerland Protocol 

would apply the same statutory standard to U.S. citizens with bank 

accounts abroad as already applies to U.S. citizens with bank accounts in the United States. 

The committee takes note of the difficulties faced in 2008–2009 

by the Internal Revenue Service and the Department of Justice in 

obtaining information needed to enforce U.S. tax laws against U.S. 

persons who utilized the services of UBS AG, a multinational bank 

based in Switzerland. The committee expects that the proposed 

Protocol—including in particular the express provisions making 

clear that a country’s bank secrecy laws cannot prevent the exchange of tax information which may be relevant to the enforcement of the tax laws and requested pursuant to the treaty—should 

put the government of Switzerland in a position to prevent recurrence of such an incident in the future. 


rfrederick on DSK6VPTVN1PROD with HEARING
6 

The committee takes note of Article 4 of the Protocol which sets 

forth information that should be provided to the requested State by 

the requesting State when making a request for information under 

the Treaty. It is the committee’s understanding based upon the testimony and Technical Explanation provided by the Department of 

the Treasury that, while this paragraph contains important procedural requirements that are intended to ensure that ‘‘fishing expeditions’’ do not occur, the provisions of this paragraph will be interpreted by the United States and Switzerland to permit the widest 

possible exchange of information and not to frustrate effective exchange of information. In particular, the committee understands 

that with respect to the requirement that a request must include 

‘‘information sufficient to identify the person under examination or 

investigation,’’ it is mutually understood by the United States and 

Switzerland that there can be circumstances in which there is information sufficient to identify the person under examination or investigation even though the requesting State cannot provide the 

person’s name. 

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

The committee has included one declaration in the recommended 

resolution of advice and consent. The declaration states that the 

Protocol is self-executing, as is the case generally with income tax 

treaties. Prior to the 110th Congress, the committee generally included such statements in the committee’s report, but in light of 

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

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

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

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

D. CONDITIONS RELATED TO REPORTING ON MANDATORY ARBITRATION

The committee has included conditions in the recommended resolution of advice and consent. These types of conditions have been 

included in prior resolutions of advice and consent for tax treaties 

that provide for mandatory arbitration. 

Specifically, not later than 2 years after the Protocol enters into 

force and prior to the first arbitration conducted pursuant to the 

binding arbitration mechanism provided for in the Protocol, the 

Secretary of the Treasury is required to transmit to the Committees on Finance and Foreign Relations of the Senate and the Joint 

Committee on Taxation the text of the rules of procedure applicable 

to arbitration panels, including conflict of interest rules to be applied to members of the arbitration panel. 

In addition, not later than 60 days after a determination has 

been reached by an arbitration panel in the tenth arbitration proceeding conducted pursuant to the Protocol or any similar treaties 

specifically identified, the Secretary of the Treasury must submit 

to the Joint Committee on Taxation and the Committee on Finance 

of the Senate a detailed report regarding the operation and application of the arbitration mechanism contained in the Protocol and 

such treaties. The Secretary of the Treasury is further required to 

submit this type of report on March 1 of the year following the year 

in which the first report is submitted, and on an annual basis 

thereafter for a period of five years. Finally, the section clarifies 


rfrederick on DSK6VPTVN1PROD with HEARING
7 

that these reporting requirements supersede the reporting requirements contained in paragraphs (2) and (3) of section 3 of the resolution of advice and consent to ratification of the 2009 France Protocol, approved by the Senate on December 3, 2009. 

E. AGREEMENTS RELATING TO REQUESTS FOR INFORMATION

In connection with efforts to obtain from Switzerland information 

relevant to U.S. investigations of alleged tax fraud committed by 

account holders of UBS AG, in 2009 and 2010 the United States 

and Switzerland entered into two agreements pursuant to the U.S. 

Switzerland Tax Treaty. 

In particular, on August 19, 2009, the two governments signed 

an Agreement Between the United States of America and the Swiss 

Confederation on the request for information from the Internal 

Revenue Service of the United States of America regarding UBS 

AG, a corporation established under the laws of the Swiss Confederation. On March 31, 2010, the two governments signed a separate protocol amending the August 19, 2009 agreement. 

The committee supports the objective of these agreements to facilitate the exchange of information between Switzerland and the 

United States in support of U.S. efforts to investigate and prosecute alleged tax fraud by account holder of UBS AG. 

The committee notes its concern, however, about one provision of 

the March 31, 2010 protocol. Paragraph 4 of that protocol provides 

that ‘‘For the purposes of processing the Treaty Request, this 

Agreement and its Annex shall prevail over the existing Tax Treaty, its Protocol, and the Mutual Agreement in case of conflicting 

provisions.’’ 

Some could interpret the March 31, 2010, protocol’s language indicating that the August 19, 2009, agreement ‘‘shall prevail’’ over 

the existing U.S.-Switzerland tax treaty to mean that the agreement has the effect of amending the tax treaty. The U.S.-Switzerland tax treaty is a treaty concluded with the advice and consent 

of the Senate. Amendments to treaties are themselves ordinarily 

subject to the advice and consent of the Senate. The executive 

branch has not sought the Senate’s advice and consent to either the 

August 19, 2009 agreement or the March 31, 2010 protocol. The executive branch has assured the committee that the two governments did not intend this language to have any effect on the obligations of the United States under the U.S.-Switzerland tax treaty. 

In order to avoid any similar confusion in the future, the committee expects that the executive branch will refrain from the use 

of similar language in any future agreements relating to requests 

for information under tax treaties unless it intends to seek the Senate’s advice and consent for such agreements. 

VIII. TEXT OF RESOLUTION OF ADVICE

AND CONSENT TO RATIFICATION

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

SECTION 1. SENATE ADVICE AND CONSENT SUBJECT TO A DECLARATION 

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

America and the Swiss Confederation for the Avoidance of Double 


rfrederick on DSK6VPTVN1PROD with HEARING
8 

Taxation With Respect to Taxes on Income, signed at Washington 

October 2, 1996, signed September 23, 2009, at Washington, with 

a related agreement effected by an exchange of notes September 

23, 2009, as corrected by an exchange of notes effected November 

16, 2010 (the ‘‘Protocol’’) (Treaty Doc. 112–1), subject to the declaration of section 2. 

SECTION 2. DECLARATION 

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

to the following declaration: 

The Protocol is self-executing. 

SECTION 3. CONDITIONS 

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

to the following conditions: 

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

and prior to the first arbitration conducted pursuant to the 

binding arbitration mechanism provided for in the Protocol, the 

Secretary of the Treasury shall transmit to the Committees on 

Finance and Foreign Relations of the Senate and the Joint 

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

to be applied to members of the arbitration panel. 

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

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

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

shall include the following information: 

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

number of cases pending on the respective dates of entry 

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

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

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

agreement as of the date of the report. 

(III) The number of such cases for which arbitration 

proceedings have commenced as of the date of the report. 

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

such treaty, including the following information regarding 

each case: 

(I) The commencement date of the case for purposes 

of determining when arbitration is available. 

(II) Whether the adjustment triggering the case, if 

any, was made by the United States or the relevant 

treaty partner. 

(III) Which treaty the case relates to. 


rfrederick on DSK6VPTVN1PROD with HEARING
9 

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

case. 

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

authorities through a mutual agreement, if so resolved. 

(VI) The date on which an arbitration proceeding 

commenced, if an arbitration proceeding commenced. 

(VII) The date on which a determination was 

reached by the arbitration panel, if a determination 

was reached, and an indication as to whether the 

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

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

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

case to the competent authority of a Contracting State 

submitted a Position Paper for consideration by the 

arbitration panel. 

(II) An indication as to whether the determination of 

the arbitration panel was accepted by each concerned 

person. 

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

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

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

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

taxation) submitted by each competent authority to 

the arbitration panel. 

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

(i) the 2006 Protocol Amending the Convention between 

the United States of America and the Federal Republic of 

Germany for the Avoidance of Double Taxation and the 

Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, done at 

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

(ii) the Convention between the Government of the 

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

the Prevention of Fiscal Evasion with Respect to Taxes on 

Income, and accompanying protocol, done at Brussels July 

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

(iii) the Protocol Amending the Convention between the 

United States of America and Canada with Respect to 

Taxes on Income and on Capital, signed at Washington 

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

Doc. 110–15); or 

(iv) the Protocol Amending the Convention between the 

Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with ReVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
10 

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. 


rfrederick on DSK6VPTVN1PROD with HEARING
(11) 

IX. ANNEX 1.—TECHNICAL EXPLANATION

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE PROTOCOL SIGNED AT WASHINGTON ON 

SEPTEMBER 23, 2009 AMENDING THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE 

SWISS CONFEDERATION FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT 

WASHINGTON ON OCTOBER 2, 1996, AS AMENDED BY THE 

PROTOCOL SIGNED ON OCTOBER 2, 1996 

This is a Technical Explanation of the Protocol signed at Washington on September 23, 2009 and the related Exchange of Notes 

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

amending the Convention between the United States of America 

and the Swiss Confederation for the avoidance of double taxation 

and the prevention of fiscal evasion with respect to taxes on income, signed at Washington on October 2, 1996 as amended by the 

Protocol also signed on October 2, 1996 (together, the ‘‘existing 

Convention’’). 

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

Model Income Tax Convention, published on November 15, 2006 

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

Tax Convention on Income and on Capital, published by the 

Organisation for Economic Cooperation and Development (the 

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

This Technical Explanation is an official guide to the Protocol 

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

with respect to the interpretation and application of the Protocol 

and the Exchange of Notes. 

References to the existing Convention are intended to put various 

provisions of the Protocol into context. The Technical Explanation 

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

the Protocol and Exchange of Notes. The Technical Explanation is 

not intended to provide a complete guide to the existing Convention 

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

that the existing Convention has not been amended by the Protocol 

and Exchange of Notes, the technical explanation of the Convention 

signed at Washington on October 2, 1996 and the Protocol signed 

on also signed on October 2, 1996 remains the official explanation. 

References in this Technical Explanation to ‘‘he’’ or ‘‘his’’ should be 

read to mean ‘‘he or she’’ or ‘‘his or her.’’ References to the ‘‘Code’’ 

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


rfrederick on DSK6VPTVN1PROD with HEARING
12 

The Exchange of Notes relates to the implementation of new 

paragraphs 6 and 7 of Article 25 (Mutual Agreement Procedure), 

which provide for binding arbitration of certain disputes between 

the competent authorities. 

ARTICLE 1

Article 1 of the Protocol revises Article 10 (Dividends) of the existing Convention by restating paragraph 3. New paragraph 3 provides that dividends paid by a company resident in a Contracting 

State shall be exempt from tax in that State if the dividends are 

paid to and beneficially owned by a pension or other retirement arrangement which is a resident of the other Contracting State, or 

an individual retirement savings plan set up in and owned by a 

resident of the other Contracting State, and the competent authorities of the Contracting States agree that the pension or retirement 

arrangement, or the individual retirement savings plan, in a Contracting State generally corresponds to a pension or other retirement arrangement, or to an individual retirement savings plan, 

recognized for tax purposes in the other Contracting State. 

The exemption from tax provided in new paragraph 3 shall not 

apply if the pension or retirement arrangement or the individual 

retirement savings plan receiving the dividend controls the company paying the dividend. Additionally, in order to qualify for the 

benefits of new paragraph 3, a pension or retirement arrangement 

or individual retirement savings plan must satisfy the requirements of paragraph 2 of Article 22 (Limitation on Benefits). 

ARTICLE 2

Article 2 of the Protocol replaces paragraph 6 of Article 25 (Mutual Agreement Procedure) of the existing Convention with new 

paragraphs 6 and 7. New paragraphs 6 and 7 provide a mandatory 

binding arbitration proceeding. Paragraph 1 of the Exchange of 

Notes provides that binding arbitration will be used to determine 

the application of the Convention in respect of any case where the 

competent authorities have endeavored but are unable to reach an 

agreement under Article 25 regarding such application (the competent authorities may, however, agree that the particular case is 

not suitable for determination by arbitration. Paragraph 1 of the 

Exchange of Notes provides additional rules and procedures that 

apply to a case considered under the arbitration provisions. 

New paragraph 6 provides that a case shall be resolved through 

arbitration when the competent authorities have endeavored but 

are unable to reach a complete agreement regarding a case and the 

following three conditions are satisfied. First, tax returns have 

been filed with at least one of the Contracting States with respect 

to the taxable years at issue in the case. Second, the case is not 

a case that the competent authorities agree before the date on 

which arbitration proceedings would otherwise have begun, is not 

suitable for determination by arbitration. Third, all concerned persons and their authorized representatives agree, according to the 

provisions of new subparagraph (7)(d), not to disclose to any other 

person any information received during the course of the arbitration proceeding from either Contracting State or the arbitration 

board, other than the determination of the board (confidentiality 


rfrederick on DSK6VPTVN1PROD with HEARING
13 

agreement). The confidentiality agreement may also be executed by 

any concerned person that has the legal authority to bind any other 

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

with the legal authority to bind its subsidiary with respect to confidentiality may execute a comprehensive confidentiality agreement 

on its own behalf and that of its subsidiary. 

New paragraph 6 provides that an unresolved case shall not be 

submitted to arbitration if a decision on such case has already been 

rendered by a court or administrative tribunal of either Contracting State. 

New paragraph 7 provides additional rules and definitions to be 

used in applying the arbitration provisions. Subparagraph (7)(a) 

provides that the term ‘‘concerned person’’ means the person that 

brought the case to competent authority for consideration under 

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

to either Contracting State may be directly affected by a mutual 

agreement arising from that consideration. For example, a concerned person does not only include a U.S. corporation that brings 

a transfer pricing case with respect to a transaction entered into 

with its Swiss subsidiary for resolution to the U.S. competent authority, but also the Swiss subsidiary, which may have a correlative adjustment as a result of the resolution of the case. 

Subparagraph (7)(c) provides that an arbitration proceeding begins on the later of two dates: two years from the commencement 

date of that case (unless both competent authorities have previously agreed to a different date), or the earliest date upon which 

all concerned persons have entered into a confidentiality agreement 

and the agreements have been received by both competent authorities. The commencement date of the case is defined by subparagraph (7)(b) as the earliest date on which the information necessary to undertake substantive consideration for a mutual agreement has been received by both competent authorities. 

Subparagraph (1)(c) of the Exchange of Notes provides that notwithstanding the initiation of an arbitration proceeding, the competent authorities may reach a mutual agreement to resolve the 

case and terminate the arbitration proceeding. Correspondingly, a 

concerned person may withdraw its request for the competent authorities to engage in the Mutual Agreement Procedure and thereby terminate the arbitration proceeding at any time.Subparagraph 

(1)(p) of the Exchange of Notes provides that each competent authority will confirm in writing to the other competent authority and 

to the concerned persons the date of its receipt of the information 

necessary to undertake substantive consideration for a mutual 

agreement. Such information will be submitted to the competent 

authorities under relevant internal rules and procedures of each of 

the Contracting States. The information will not be considered received until both competent authorities have received copies of all 

materials submitted to either Contracting State by concerned persons in connection with the mutual agreement procedure. 

The Exchange of Notes provides several procedural rules once an 

arbitration proceeding under paragraph 6 of Article 25 has commenced, but the competent authorities may complete these rules as 

necessary. In addition, as provided in subparagraph (1)(f) of the 

Exchange of Notes, the arbitration panel may adopt any procedures 


rfrederick on DSK6VPTVN1PROD with HEARING
14 

necessary for the conduct of its business, provided the procedures 

are not inconsistent with any provision of Article 25 or of the Exchange of Notes. 

Subparagraph (1)(e) of the Exchange of Notes provides that each 

Contracting State has 90 days from the date on which the arbitration proceeding begins to send a written communication to the 

other Contracting State appointing one member of the arbitration 

panel. The members of the arbitration panel shall not be employees 

of the tax administration which appoints them. Within 60 days of 

the date the second of such communications is sent, these two 

board members will appoint a third member to serve as the chair 

of the panel. The competent authorities will develop a non-exclusive list of individuals familiar in international tax matters who 

may potentially serve as the chair of the panel, but in any case, 

the chair can not be a citizen or resident of either Contracting 

State. In the event that the two members appointed by the Contracting States fail to agree on the third member by the requisite 

date, these members will be dismissed and each Contracting State 

will appoint a new member of the panel within 30 days of the dismissal of the original members. 

Subparagraph (1)(g) of the Exchange of Notes establishes deadlines for submission of materials by the Contracting States to the 

arbitration panel. Each competent authority has 60 days from the 

date of appointment of the chair to submit a Proposed Resolution 

describing the proposed disposition of the specific monetary 

amounts of income, expense or taxation at issue in the case, and 

a supporting Position Paper. Copies of each State’s submissions are 

to be provided by the panel to the other Contracting State on the 

date on which the later of the submissions is submitted to the 

panel. Each of the Contracting States may submit a Reply Submission to the panel within 120 days of the appointment of the chair 

to address points raised in the other State’s Proposed Resolution or 

Position Paper. If one Contracting State fails to submit a Proposed 

Resolution within the requisite time, the Proposed Resolution of 

the other Contracting State is deemed to be the determination of 

the arbitration panel in the case and the arbitration proceeding 

will be terminated. Additional information may be supplied to the 

arbitration panel by a Contracting State only at the panel’s request. The panel will provide copies of any such requested information, along with the panel’s request, to the other Contracting State 

on the date on which the request or response is submitted. All communication from the Contracting States to the panel, and vice 

versa, is to be in writing between the chair of the panel and the 

designated competent authorities with the exception of communication regarding logistical matters. 

Subparagraph (1)(h) of the Exchange of Notes provides that the 

presenter of the case to the competent authority of a Contracting 

State may submit a Position Paper to the panel for consideration 

by the panel. The Position Paper must be submitted within 90 days 

of the appointment of the chair, and the panel will provide copies 

of the Position Paper to the Contracting States on the date on 

which the later of the submissions of the Contracting States is submitted to the panel. 


rfrederick on DSK6VPTVN1PROD with HEARING
15 

Subparagraph (1)(i) of the Exchange of Notes provides that the 

arbitration panel must deliver a determination in writing to the 

Contracting States within six months of the appointment of the 

chair. The determination must be one of the two Proposed Resolutions submitted by the Contracting States. Subparagraph (1)(b) of 

the Exchange of Notes provides that the determination may only 

provide a determination regarding the amount of income, expense 

or tax reportable to the Contracting States. The determination has 

no precedential value, and consequently the rationale behind a 

panel’s determination would not be beneficial and may not be provided by the panel. 

Subparagraphs (1)(j) and (1)(k) of the Exchange of Notes provide 

that unless any concerned person does not accept the decision of 

the arbitration panel, the determination of the panel constitutes a 

resolution by mutual agreement under Article 25 and, consequently, is binding on both Contracting States. Within 30 days 

of receiving the determination from the competent authority to 

which the case was first presented, each concerned person must advise that competent authority whether the person accepts the determination. In addition, if the case is in litigation, each concerned 

person who is a party to the litigation must also advise, within the 

same time frame, the court of its acceptance of the arbitration determination, and withdraw from the litigation the issues resolved 

by the arbitration proceeding. If any concerned person fails to advise the competent authority and relevant court within the requisite time, such failure is considered a rejection of the determination. If a determination is rejected, the case cannot be the subject 

of a subsequent arbitration proceeding. 

For purposes of the arbitration proceeding, the members of the 

arbitration panel and their staffs shall be considered ‘‘persons or 

authorities’’ to whom information may be disclosed under Article 26 

(Exchange of Information). Subparagraph (1)(n) of the Exchange of 

Notes provides that all materials prepared in the course of, or relating to the arbitration proceeding are considered information exchanged between the Contracting States. No information relating 

to the arbitration proceeding or the panel’s determination may be 

disclosed by members of the arbitration panel or their staffs or by 

either competent authority, except as permitted by the Convention 

and the domestic laws of the Contracting States. Members of the 

arbitration panel and their staffs must agree in statements sent to 

each of the Contracting States in confirmation of their appointment 

to the arbitration board to abide by and be subject to the confidentiality and nondisclosure provisions of Article 26 of the Convention 

and the applicable domestic laws of the Contracting States, with 

the most restrictive of the provisions applying.Subparagraph (1)(m) 

of the Exchange of Notes provides that the applicable domestic law 

of the Contracting States determines the treatment of any interest 

or penalties associated with a competent authority agreement 

achieved through arbitration. 

Subparagraph (1)(l) of the Exchange of Notes provides that any 

meetings of the arbitration panel shall be in facilities provided by 

the Contracting State whose competent authority initiated the mutual agreement proceedings in the case. Subparagraph (1)(o) of the 

Exchange of Notes provides that fees and expenses are borne 


rfrederick on DSK6VPTVN1PROD with HEARING
16 

equally by the Contracting States, including the cost of translation 

services. In general, the fees of members of the arbitration panel 

will be set at the fixed amount of $2,000 per day or the equivalent 

amount in Swiss francs. The expenses of members of the panel will 

be set in accordance with the International Centre for Settlement 

of Investment Disputes (ICSID) Schedule of Fees for arbitrators (in 

effect on the date on which the arbitration board proceedings 

begin). The competent authorities may amend the set fees and expenses of members of the board. Meeting facilities, related resources, financial management, other logistical support, and general and administrative coordination of the arbitration proceeding 

will be provided, at its own cost, by the Contracting State whose 

competent authority initiated the mutual agreement proceedings. 

All other costs are to be borne by the Contracting State that incurs 

them. 

ARTICLE 3

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

competent authorities of the Contracting States. 

Paragraph 1 of Article 26 

The obligation to obtain and provide information to the other 

Contracting State is set out in new Paragraph 1. The information 

to be exchanged is that which may be relevant for carrying out the 

provisions of the Convention or the domestic laws of the United 

States or of Switzerland concerning taxes covered by the Convention, insofar as the taxation thereunder is not contrary to the Convention. This language incorporates the standard in 26 U.S.C. Section 7602 which authorizes the IRS to examine ‘‘any books, papers, 

records, or other data which may be relevant or material.’’ (emphasis added) In United States v. Arthur Young & Co., 465 U.S. 805, 

814 (1984), the Supreme Court stated that the language ‘‘may be’’ 

reflects Congress’s express intention to allow the IRS to obtain 

‘‘items of even potential relevance to an ongoing investigation, 

without reference to its admissibility.’’ (emphasis in original) However, the language ‘‘may be’’ would not support a request in which 

a Contracting State simply asked for information regarding all 

bank accounts maintained by residents of that Contracting State in 

the other Contracting State. 

Exchange of information with respect to each State’s domestic 

law is authorized to the extent that taxation under domestic law 

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

may be exchanged with respect to a covered tax, even if the transaction to which the information relates is a purely domestic transaction in the requesting State and, therefore, the exchange is not 

made to carry out the Convention. An example of such a case is 

provided in the OECD Commentary: a company resident in one 

Contracting State and a company resident in the other Contracting 

State transact business between themselves through a third-country resident company. Neither Contracting State has a treaty with 

the third State. To enforce their internal laws with respect to 

transactions of their residents with the third-country company 


rfrederick on DSK6VPTVN1PROD with HEARING
17 

(since there is no relevant treaty in force), the Contracting States 

may exchange information regarding the prices that their residents 

paid in their transactions with the third-country resident. 

New paragraph 1 clarifies that information may be exchanged 

that relates to the administration or enforcement of the taxes covered by the Convention. Thus, the competent authorities may request and provide information for cases under examination or 

criminal investigation, in collection, on appeals, or under prosecution. 

Information exchange is not restricted by paragraph 1 of Article 

1 (General Scope). Accordingly, information may be requested and 

provided under this Article with respect to persons who are not 

residents of either Contracting State. For example, if a third-country resident has a permanent establishment in Switzerland, and 

that permanent establishment engages in transactions with a U.S. 

enterprise, the United States could request information with respect to that permanent establishment, even though the 

thirdcountry resident is not a resident of either Contracting State. 

Similarly, if a third-country resident maintains a bank account in 

Switzerland, and the Internal Revenue Service has reason to believe that funds in that account should have been reported for U.S. 

tax purposes but have not been so reported, information can be requested from Switzerland with respect to that person’s account, 

even though that person is not the taxpayer under examination. 

The obligation to exchange information under paragraph 1 does 

not limit a Contracting State’s ability to employ unilateral procedures otherwise available under its domestic law to obtain, or to require the disclosure of, information from a taxpayer or third party. 

Thus, the Protocol does not prevent or restrict the United States’ 

information gathering authority or enforcement measures provided 

under its domestic law. 

Although the term ‘‘United States’’ does not encompass U.S. possessions for most purposes of the Convention, Section 7651 of the 

Code authorizes the Internal Revenue Service to utilize the provisions of the Internal Revenue Code to obtain information from the 

U.S. possessions pursuant to a proper request made under Article 

26. If necessary to obtain requested information, the Internal Revenue Service could issue and enforce an administrative summons 

to the taxpayer, a tax authority (or a government agency in a U.S. 

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

Paragraph 2 of Article 26 

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

constraints as information obtained under the laws of the requesting State. Information received may be disclosed only to persons, 

including courts and administrative bodies, involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of the of appeals in relation 

to, the taxes covered by the Convention. The information must be 

used by these persons in connection with the specified functions. 

Information may also be disclosed to legislative bodies, such as the 

tax-writing committees of Congress and the Government Accountability Office, engaged in the oversight of the preceding activities. 


rfrederick on DSK6VPTVN1PROD with HEARING
18 

Information received by these bodies must be for use in the performance of their role in overseeing the administration of U.S. tax 

laws. Information received may be disclosed in public court proceedings or in judicial decisions. 

New paragraph 2 also provides that information received by a 

Contracting State may be used for other purposes when such information may be used for such other purpose under the laws of both 

States, and the competent authority of the requested State has authorized such use. This provision is derived from the OECD Model 

Commentary, which explains that Contracting States may add this 

provision to broaden the purposes for which they may use information exchanged to allow other non-tax law enforcement agencies 

and judicial authorities on certain high priority matters (e.g., to 

combat money laundering, corruption, or terrorism financing). To 

ensure that the laws of both States would allow the information to 

be used for such other purpose, the Contracting States will only 

seek consent under this provision to the extent that the non-tax 

use is allowed under the provisions of the Mutual Legal Assistance 

Treaty between the United States and Switzerland which entered 

into force on January 23, 1977 (or as it may be amended or replaced in the future). 

Paragraph 3 of Article 26 

New paragraph 3 provides that the obligations undertaken in 

paragraphs 1 and 2 to exchange information do not require a Contracting State to carry out administrative measures that are at 

variance with the laws or administrative practice of either State. 

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

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

which would be contrary to public policy. 

Thus, a requesting State may be denied information from the 

other State if the information would be obtained pursuant to procedures or measures that are broader than those available in the requesting State. However, the statute of limitations of the Contracting State making the request for information should govern a 

request for information. Thus, the Contracting State of which the 

request is made should attempt to obtain the information even if 

its own statute of limitations has passed. In many cases, relevant 

information will still exist in the business records of the taxpayer 

or a third party, even though it is no longer required to be kept 

for domestic tax purposes. 

While paragraph 3 states conditions under which a Contracting 

State is not obligated to comply with a request from the other Contracting State for information, the requested State is not precluded 

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

subject to the limitations of its internal law. 

Paragraph 4 of Article 26 

New paragraph 4 provides that when information is requested by 

a Contracting State in accordance with this Article, the other Contracting State is obligated to obtain the requested information as 

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

that State has no direct tax interest in the case to which the reVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00018 Fmt 6601 Sfmt 6601 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
19 

quest relates. In the absence of such a paragraph, some taxpayers 

have argued that paragraph 3(a) prevents a Contracting State from 

requesting information from a bank or fiduciary that the Contracting State does not need for its own tax purposes. This paragraph clarifies that paragraph 3 does not impose such a restriction 

and that a Contracting State is not limited to providing only the 

information that it already has in its own files. 

Paragraph 5 of Article 26 

New paragraph 5 provides that a Contracting State may not decline to provide information because that information is held by financial institutions, nominees or persons acting in an agency or fiduciary capacity. Thus, paragraph 5 would effectively prevent a 

Contracting State from relying on paragraph 3 to argue that its domestic bank secrecy laws (or similar legislation relating to disclosure of financial information by financial institutions or intermediaries) override its obligation to provide information under 

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

such as the identity of a beneficial owner of bearer shares. Paragraph 5 further provides that the requested State has the power 

to meet its obligations under Article 26, and paragraph 5 in particular, even though it may not have such powers for purposes of 

enforcing its own tax laws. 

Paragraph 2 of the Exchange of Notes provides that the Contracting States understand that there may be instances when paragraph 3 of Article 26 may be invoked to decline a request to supply 

information that is held by a person described in paragraph 5 of 

the Article. Such refusal must be based, however, on reasons unrelated to that person’s status as a bank, financial institution, agent, 

fiduciary or nominee, or the fact that the information relates to 

ownership interests. For example, a Contracting State may decline 

to provide information relating to confidential communications between attorneys and their clients that are protected from disclosure 

under that State’s domestic law. 

Treaty effective dates and termination in relation to exchange of information 

Article 5 of the Protocol sets forth rules governing the effective 

dates of the provisions of Articles 3 and 4 of the Protocol. The competent authorities are obligated to exchange information described 

in new paragraph 5 of Article 26 if that information relates to any 

date beginning on or after September 23, 2009, the date on which 

the Protocol was signed notwithstanding the provisions of the existing Convention. In all other cases of application of new Article 26, 

the competent authorities are obligated to exchange information 

that relates to taxable periods beginning on or after January 1 of 

the year following the date of signature of the Protocol. 

A tax administration may also seek information with respect to 

a year for which a treaty was in force after the treaty has been terminated. In such a case the ability of the other tax administration 

to act is limited. The treaty no longer provides authority for the tax 

administrations to exchange confidential information. They may 


rfrederick on DSK6VPTVN1PROD with HEARING
20 

only exchange information pursuant to domestic law or other international agreement or arrangement. 

ARTICLE 4

Article 4 of the Protocol replaces paragraph 10 of the Protocol to 

the existing Convention. New Protocol paragraph 10 provides 

greater detail regarding how the provisions of revised Article 26 

(Exchange of Information) will be applied. 

New Protocol paragraph (10)(a) lists the information that should 

be provided to the requested State by the requesting State when 

making a request for information under paragraph 26 of the Convention. Clause (i) of paragraph (10)(a) provides that a request 

must contain information sufficient to identify the person under examination or investigation. In a typical case, information sufficient 

to identify the person under examination or investigation would include a name, and to the extent known, an address, account number or similar identifying information. It is mutually understood 

that there can be circumstances in which there is information sufficient to identify the person under examination or investigation 

even though the requesting State cannot provide a name. 

Clause (ii) of paragraph (10)(a) provides that a request for information must contain the period of time for which the information 

is requested. Clause (iii) of paragraph (10)(a) provides that a request for information must contain a statement of the information 

sought, including its nature and the form in which the requesting 

State wishes to receive the information from the requested State. 

Clause (iv) of paragraph (10)(a) provides that a request for information must contain a statement of the tax purpose for which the information is sought. Clause (v) of paragraph (10)(a) provides that 

the request must include the name and, to the extent known, the 

address of any person believed to be in possession of the requested 

information. 

New Protocol paragraph (10)(b) provides confirmation of the extent to which information is to be exchanged pursuant to new paragraph 1 of Article 26. The purposes of referring to information that 

may be relevant is to provide for exchange of information to the 

widest extent possible. This standard nevertheless does not allow 

the Contracting States to engage in so-called ‘‘fishing expeditions’’ 

or to request information that is unlikely to be relevant to the tax 

affairs of a given taxpayer. For example, the language ‘‘may be’’ 

would not support a request in which a Contracting State simply 

asked for information regarding all bank accounts maintained by 

residents of that Contracting State in the other Contracting State. 

New Protocol paragraph (10)(b) further confirms that the provisions of new Protocol paragraph (10)(a) are to be interpreted in 

order not to frustrate effective exchange of information. 

New Protocol paragraph (10)(c) provides that the requesting 

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

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

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

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

the judicial proceedings of the requesting State. The requested 

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


rfrederick on DSK6VPTVN1PROD with HEARING
21 

form under its own laws and administrative practices with respect 

to its own taxes. 

New Protocol paragraph (10)(d) confirms that Article 26 of the 

Convention does not restrict the possible methods for exchanging 

information, but also does not commit either Contracting State to 

exchange information on an automatic or spontaneous basis. The 

Contracting States expect to provide information to one another 

necessary for carrying out the provisions of the Convention. 

New Protocol paragraph (10)(e) provides clarification regarding 

the application of paragraph (3)(a) of revised Article 26, which provides that in no case shall the provisions of paragraphs 1 and 2 be 

construed so as to impose on a Contracting State the obligation to 

carry out administrative measures at variance with the laws and 

administrative practice of that or the other Contracting State. The 

Contracting States understand that the administrative procedural 

rules regarding a taxpayer’s rights (such as the right to be notified 

or the right to an appeal) provided for in the requested State remain applicable before information is exchanged with the requesting State. Notification procedures should not, however, be applied 

in a manner that, in the particular circumstances of the request, 

would frustrate the efforts of the requesting State. The Contracting 

States further understand that such rules are intended to provide 

the taxpayer a fair procedure and are not to prevent or unduly 

delay the exchange of information process. 

ARTICLE 5

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

Paragraph 1 

Paragraph 1 provides for the ratification of the Protocol by both 

Contracting States according to their constitutional and statutory 

requirements. Instruments of ratification shall be exchanged as 

soon as possible. 

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

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

of State sends the treaty to the President who formally transmits 

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

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

the Senate Committee on Foreign Relations to hold hearings on the 

treaty and make a recommendation regarding its approval to the 

full Senate. Both Government and private sector witnesses may 

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

Paragraph 2 

Paragraph 2 provides that the Convention will enter into force 

upon the exchange of instruments of ratification. The date on 

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

which its provisions take effect. Paragraph 2, therefore, also conVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00021 Fmt 6601 Sfmt 6601 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
22 

tains rules that determine when the provisions of the treaty will 

have effect. 

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

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

of January of the year following the entry into force of the Protocol. 

For example, if instruments of ratification are exchanged on October 25 of a given year, the withholding rates specified in paragraph 

3 of Article 10 (Dividends) would be applicable to any dividends 

paid or credited on or after January 1 of the following year. If for 

some reason a withholding agent withholds at a higher rate than 

that provided by the Convention (perhaps because it was not able 

to re-program its computers before the payment is made), a beneficial owner of the income that is a resident of the other Contracting State may make a claim for refund pursuant to section 

1464 of the Code. 

Paragraph (2)(b) provides rules for the effective dates of Articles 

3 and 4 of the Protocol. Those Articles shall have application for 

requests made on or after the date of entry into force of the Protocol. Clause (i) provides that information described in paragraph 

5 of revised Article 26 (Exchange of Information) shall be exchanged upon request if such information relates to any date beginning on or after September 23, 2009, the date of signature of the 

Protocol. Clause (ii) provides that in all other cases, information 

shall be exchanged pursuant to Articles 3 and 4 if the information 

relates to taxable periods beginning on or after January 1, 2010. 

Paragraph (2)(c) sets forth a specific effective date for purposes 

of the binding arbitration provisions of new paragraphs 6 and 7 of 

revised Article 25 (Mutual Agreement Procedure) (Article 2 of the 

Protocol). Paragraph (2)(c) provides new paragraphs 6 and 7 of revised Article 25 is effective for cases (i) that are under consideration by the competent authorities as of the date on which the Protocol enters into force, and (ii) cases that come under such consideration after the Protocol enters into force. In addition, paragraph 

(2)(c) provides that the commencement date for cases that are 

under consideration by the competent authorities as of the date on 

which the Protocol enters into force is the date the Protocol enters 

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

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

the later of two years after the entry into force of the Protocol (unless both competent authorities have previously agreed to a different date) and the earliest date upon which the agreement required by new paragraph (6)(d) of revised Article 25 has been received by both competent authorities. 


rfrederick on DSK6VPTVN1PROD with HEARING
(23) 

X. ANNEX 2.—TRANSCRIPT OF HEARING OF OCTOBER 29, 2015 

TREATIES 

THURSDAY, OCTOBER 29, 2015 

U.S. SENATE, COMMITTEE ON FOREIGN RELATIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 2:17 p.m., in room 

SD–419, Dirksen Senate Office Building, Hon. Johnny Isakson presiding. 

Present: Senators Isakson, Gardner, Menendez, and Murphy. 

OPENING STATEMENT OF HON. JOHNNY ISAKSON, 

U.S. SENATOR FROM GEORGIA 

Senator ISAKSON. The Senate Foreign Relations Committee is 

called to order. 

To begin with, I would like to ask unanimous consent that we 

introduce three letters into the record at this hearing. One is from 

a number of companies in the United States of America in favor 

of the tax treaties. One is from the Business Roundtable and other 

executive organizations. And one is from the Ambassadors and Embassy organizations of the countries affected by the treaties. 

So without objection, that will be entered into the record. 

[EDITOR’S NOTE.—The three letters submitted for the record can be 

found in the ‘‘Additional Material Submitted for the Record’’ section 

at the end of this hearing.] 

Senator ISAKSON. I want to thank our witnesses for being here 

today and Senator Menendez for being here today. This is an important hearing for a lot of American businesses. It means more 

business for the United States, and it means predictable regulation 

in terms of many foreign businesses and opportunities overseas. 

We are going to consider eight tax treaties, several of which this 

committee has considered in the past. The importance of tax treaties to American businesses and individuals is underappreciated 

and not widely understood, including, I will admit, by myself until 

I was asked to chair this hearing and got into the details of it. 

For any business, one of the greatest disincentives to expand and 

take advantage of new opportunities is uncertainty. For governments, ensuring a favorable business climate environment by minimizing uncertainty is one of the most important things we can do 

to help U.S. businesses grow. 

The United States uses a worldwide tax system that taxes the 

income of a U.S. citizen, resident, or corporation, whether the inVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00023 Fmt 6601 Sfmt 6601 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
24 

come is earned in the United States or in a foreign country. A 

worldwide system of taxation would often result in double taxation 

if not for tax treaties. 

Tax treaties ensure certainty by establishing rules on what foreign income may be taxed by the country in which it is earned, and 

how much tax may be withheld in foreign income. Tax treaties benefit the United States businesses and citizens in a number of ways 

by facilitating trade, foreign investment, and by preventing double 

taxation. They provide U.S. investors with greater certainty about 

the tax burden by ensuring the treaties are equally and fairly overseen, and by allowing them to invest and compete abroad with a 

thorough knowledge of how the regulations in that country will 

work. 

Tax treaties strengthen the ability of United States business to 

explore many new opportunities abroad by establishing a predictable framework for new taxation to be structured. 

Further, tax treaties provide tools to help resolve tax disputes between the United States and other countries. Without those tools, 

United States investors would have limited ability to resolve these 

problems on their own. 

It is not just businesses that benefit from tax treaties, as they 

also impose reasonable limits on the amount of tax other countries 

may levy or can impose or withhold on a U.S. person who might 

live or work overseas. 

Tax treaties also help ensure the United States maintains an appropriate tax base by preventing tax fraud. 

In previous Congresses, this committee has responded with similar treaties and conventions and protocols with Chile, Hungary, 

Luxembourg, Poland, Spain, Switzerland, and the OECD Mutual 

Assistance Protocol. Today, we will, for the first time, hear about 

an update to the new treaty with Japan. 

It is time to move these treaties forward to the full Senate and 

for a full vote in the Senate as reasonably and early as possible. 

With that statement read, I will turn it over to the ranking member for any comment he may have. 

OPENING STATEMENT OF HON. BOB MENENDEZ, 

U.S. SENATOR FROM NEW JERSEY 

Senator MENENDEZ. Thank you, Mr. Chairman. As someone who 

has sat and chaired some of these in the past, I can tell you that 

we are in for a scintillating hearing. [Laughter.] 

Gentlemen, I know you are going to make it so. 

Let me say, however, we are discussing eight important treaties 

pending before the committee, a new protocol to the existing tax 

treaty between the United States and Japan, which brings the 

treaty into line with our modern tax relationships, as well as seven 

other treaties and protocols the committee has considered over the 

past few years. 

As I think most members are aware, this committee has expended significant effort in recent years to obtain Senate confirmation of pending income tax treaties and protocols. In February of 

last year, Senator Cardin chaired a hearing, together with Senator 

Barrasso, on five income tax treaties and protocols with Switzerland, Hungary, Luxembourg, Chile, and the OECD multilateral. 


rfrederick on DSK6VPTVN1PROD with HEARING
25 

And I chaired hearing a few months later on the Spain and Poland 

treaties. The committee approved all seven previous treaties last 

Congress. 

Today, we continue our consideration of tax treaties with the 

Japan protocol, which was transmitted to the Senate in April. 

We have important and accelerating trade relationships with 

Japan. Being the largest and third-largest economies in the world, 

together our countries account for nearly one-third of global GDP. 

The United States has consistently been the largest source of foreign direct investment in Japan, and Japan is similarly one of the 

top investors in the U.S. economy. 

American and Japanese businesses employ hundreds of thousands of people in both countries. As our trade and investment 

links continue to deepen, it behooves us to simplify the tax administration between our countries and ensure that an outdated tax 

treaty does not stand in the way of continued cross-border investment. 

Traditionally, tax treaties have enjoyed strong bipartisan support, and I continue to urge my colleagues in the Senate to ratify 

these crucial components of U.S. trade and tax policy. 

And I look forward to the hearing, Mr. Chairman. 

Senator ISAKSON. Thank you, Senator Menendez. 

We are very fortunate to have two very distinguished witnesses 

to testify today. First, Mr. Robert Stack, the Deputy Assistant Secretary for the International Tax Affairs, Department of the United 

States Treasury; second, Mr. Thomas A. Barthold, Chief of Staff, 

Joint Committee on Taxation and, I might add, a significant adviser to the Finance Committee, where I benefited from his advice 

on many occasions. 

So we welcome your testimony today, and we will start with Mr. 

Stack first. 

STATEMENT OF ROBERT B. STACK, DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL TAX AFFAIRS, DEPARTMENT 

OF THE TREASURY, WASHINGTON, DC 

Mr. STACK. Thank you, Senator. 

Chairman Isakson, Ranking Member Menendez, and distinguished members of the committee, I appreciate the opportunity to 

appear today to recommend on behalf of the administration favorable action on eight tax treaties pending before this committee. The 

proposed agreements before the committee today with Chile, Hungary, Japan, Luxembourg, Poland, Spain, and Switzerland, as well 

as the proposed Protocol to the Convention on Mutual Administrative Assistance in Tax Matters, which I will refer to today as the 

multilateral convention, serve to further the goals of our tax treaty 

network, in particular, the goals of increased transparency, relief 

from double taxation, and protecting U.S. tax treaties from abuse. 

It has now been over 5 years since the Senate provided its advice 

and consent to a tax treaty. This prolonged and unprecedented 

delay in approving tax treaties is inconsistent with the Senate’s 

long history of bipartisan support for these agreements. 

It denies U.S. businesses important protections against double 

taxation. It denies our law enforcement community the tools they 

need to fight tax evasion. It jeopardizes U.S. leadership on issues 


rfrederick on DSK6VPTVN1PROD with HEARING
26 

of transparency in tax matters and causes other countries to question the United States’ commitment to tax treaties. 

I would like to take the opportunity at the outset to briefly address a concern that has been expressed by some in the Senate 

about these proposed tax treaties. As I understand it, the claim is 

that these agreements adopt a new and unacceptably low standard 

for exchanging information that departs from the prior U.S. policy 

of exchanging information only in cases of suspicion of tax fraud. 

To the contrary, the standard in the pending treaties that permits exchange of information that may be relevant or is foreseeably 

relevant is not new. In fact, it has been the U.S. model standard 

since 1996 and has subsequently been endorsed as the international standard for information exchange under our tax treaties. 

Of the 57 United States income tax treaties in force, all of which 

were approved by the Senate, only one, our existing treaty with 

Switzerland, refers to exchanging information only in cases of tax 

fraud or the like. This standard allowed Switzerland to become a 

haven for tax cheats. That is why that treaty must be updated. 

Moreover, the foreseeably relevant standard has safeguards that 

prevent so-called fishing expeditions and ensures that information 

is kept confidential. 

Because my written statement and the Treasury technical explanations describe in detail the provisions of the eight agreements 

pending before this committee, I would like to highlight only the 

most noteworthy aspects of each agreement. I would like to start 

with the proposed protocol to the multilateral convention. 

If approved by the Senate, this agreement would establish several new information exchange relationships for the United States, 

which would enhance the IRS’s ability to fight tax evasion. The 

proposed protocol amends the multilateral convention, which in its 

existing form is open to signature only by countries which are 

members of either the OECD or the Council of Europe, to allow any 

country to become a signatory, provided that all other signatories 

are satisfied that such a country has a sufficient legal framework 

to ensure that information exchanged pursuant to the agreement 

will be kept confidential. 

The proposed protocols amending the United States tax treaties 

with Luxembourg and Switzerland replace the limited information 

exchange provisions of the existing tax treaties with updated rules 

that are consistent with the international standard. 

The Treasury Department is hopeful that the proposed protocols 

with Luxembourg and Switzerland, if approved by the Senate, will 

greatly improve the collaboration between the IRS and the revenue 

authorities of Luxembourg and Switzerland in tax law enforcement 

matters. 

The proposed income tax treaty with Chile, if approved by the 

Senate, would be only the second United States income tax treaty 

enforced in South America, a region into which the Treasury Department has long sought to expand the U.S. tax treaty network. 

The most important feature of the proposed tax treaties with 

Hungary and Poland, which would both replace existing tax treaties with those countries, is that each agreement contains a comprehensive limitation on benefits article, which is designed to prevent third country investors from inappropriately taking advantage 


rfrederick on DSK6VPTVN1PROD with HEARING
27 

of the treaty, a practice known as treaty shopping. Data from 

United States corporate tax returns show that the existing tax 

treaties with Hungary and Poland, which do not have limitations 

on benefit provisions, are facilitating treaty shopping. And for this 

reason, replacing them with new agreements has been a top treaty 

priority for the Treasury Department. 

The proposed protocols amending the U.S. tax treaties with 

Japan and Spain significantly reduce source taxation of cross-border payments of income and gains. In addition, the proposed protocols adopt mandatory binding arbitration as a means of resolving 

certain disputes between the tax authorities. 

The proposed protocol with Switzerland also contains a mandatory binding arbitration provision. 

Another noteworthy feature of the proposed protocol with Japan 

is its adoption of rules that obligate the tax authorities to provide 

limited assistance to each other in the collection of taxes. While as 

a general matter, it is not the policy of the Treasury Department 

to include such assistance in collection provisions in U.S. treaties, 

we concluded after consultation with the IRS that entering into 

such an agreement with Japan would produce a net revenue benefit to the United States. 

Let me repeat our appreciation for the committee’s interest in 

these agreements. We are also grateful for the assistance and cooperation of the staffs of this committee and of the Joint Committee on Taxation, as well as the tireless work of the Treasury 

staff. 

We urge the committee and Senate to take prompt and favorable 

action on all eight agreements, and I would be happy to answer 

any questions you may have. Thank you. 

[The prepared statement of Mr. Stack follows:] 

PREPARED STATEMENT OF ROBERT B. STACK

Chairman Isakson, Ranking Member Menendez, and distinguished members of 

the committee, I appreciate the opportunity to appear today to recommend, on 

behalf of the administration, favorable action on eight tax treaties pending before 

this committee. 

This administration is committed to eliminating barriers to cross-border trade and 

investment, and tax treaties are one of the primary means for eliminating such tax 

barriers. Tax treaties provide greater certainty to taxpayers regarding their potential liability for tax in foreign jurisdictions, and they allocate taxing rights between 

jurisdictions to reduce the risk of double taxation. Tax treaties also ensure that taxpayers are not subject to discriminatory taxation in foreign jurisdictions. 

Additionally, this administration is committed to preventing tax evasion, and our 

tax treaties play an important role in this area. A key element of U.S. tax treaties 

is exchange of information between tax authorities. Under tax treaties, one country 

may request from the other such information that is foreseeably relevant for the 

proper administration of the first country’s tax laws. Because access to information 

from other countries is critically important to the full and fair enforcement of U.S. 

tax laws, information exchange is a top priority for the United States in its tax 

treaty program. I would like to emphasize to the committee that as we establish 

exchange of information relationships, the administration places a high priority on 

ensuring that our treaty partners not misuse the information exchanged. The 

United States will only exchange tax information with a country if we are satisfied 

that the county has adequate confidentiality laws that will protect the information 

we have provided. 

A tax treaty reflects a balance of benefits that is agreed to when the treaty is 

negotiated. In some cases, changes in law or policy in one or both of the treaty partners make the partners more willing to increase the benefits beyond those provided 

in an existing treaty; in these cases, revisions to a treaty may be very beneficial. 

In other cases, developments in one or both countries, or international developments 


rfrederick on DSK6VPTVN1PROD with HEARING
28 

more generally, may make it desirable to revisit an existing treaty to prevent 

improper exploitation of treaty provisions and eliminate unintended and inappropriate consequences in the application of the treaty. In yet other cases, the United 

States seeks to establish new income tax treaties with countries in which there is 

significant U.S. direct investment, and with respect to which U.S. companies are experiencing double taxation that is not otherwise relieved by domestic law remedies, 

such as the U.S. foreign tax credit. Both in setting our overall negotiation priorities 

and in negotiating individual treaties, our focus is on ensuring that our tax treaty 

network fulfills its goals of facilitating cross-border trade and investment and preventing tax evasion. 

It has now been over 5 years since the full Senate last gave its advice and consent 

to a tax treaty. This prolonged delay is inconsistent with the Senate’s long history 

of bipartisan support for timely consideration and approval of tax treaties, and it 

is damaging to important U.S. interests. It denies U.S. businesses important protections against double taxation. It denies our law enforcement community the tools 

they need to fight tax evasion. It jeopardizes U.S. leadership on issues of transparency. It causes other countries to question our reliability as a treaty partner and 

makes it harder to gain cooperation in other matters important to the United 

States. 

The administration urges the Senate to act swiftly to approve the pending tax 

treaties and protocols with Switzerland, Luxembourg, Hungary, Chile, Spain, 

Poland, and Japan, as well as the protocol amending the Multilateral Convention 

on Mutual Administrative Assistance in Tax Matters. Each proposed treaty serves 

to further the goals of our tax treaty network, and in particular, the goals of providing meaningful tax benefits to cross-border investors as well as protecting U.S. 

tax treaties from abuse. 

The proposed tax treaty with Chile would be the first tax treaty between the 

United States and Chile. The proposed tax treaties with Hungary and Poland would 

replace existing treaties the revisions of which have been a top tax treaty priority 

for the Treasury Department. The proposed protocols with Japan, Luxembourg, 

Spain, and Switzerland modify existing tax treaty relationships. The proposed protocol to the Multilateral Convention brings the Multilateral Convention, which the 

United States signed in 1989, into conformity with current international standards 

for full exchange of information between tax authorities to combat tax evasion. 

Before talking about the proposed treaties in more detail, I would like to discuss 

some general tax treaty matters. 

PURPOSES AND BENEFITS OF TAX TREATIES

Tax treaties set out clear ground rules that govern tax matters relating to trade 

and investment between two countries. One of the primary functions of tax treaties 

is to provide certainty to taxpayers regarding a threshold question with respect to 

international taxation: whether a taxpayer’s cross-border activities will subject it to 

taxation by two or more countries. Tax treaties answer this question by establishing 

the minimum level of economic activity that must be conducted within a country by 

a resident of the other country before the first country may tax any resulting business profits. In general terms, tax treaties provide that if branch operations in a 

foreign country have sufficient substance and continuity, the country where those 

activities occur will have primary (but not exclusive) jurisdiction to tax. In other 

cases, where the operations in the foreign country are relatively minor, the home 

country retains the sole jurisdiction to tax. 

Another primary function of tax treaties is relief from double taxation. Tax treaties protect taxpayers from potential double taxation primarily through the allocation of taxing rights between the two countries. This allocation takes several forms. 

First, because residence is relevant to jurisdiction to tax, a tax treaty includes a 

mechanism for resolving the issue of residence in the case of a taxpayer that otherwise would be considered to be a resident of both countries. Second, with respect 

to each category of income, a tax treaty assigns primary taxing rights to one country, usually (but not always) the country in which the income arises (the ‘‘source’’ 

country), and the residual right to tax to the other country, usually (but not always) 

the country of residence of the taxpayer (the ‘‘residence’’ country). Third, a tax 

treaty provides rules for determining the country of source for each category of income. Fourth, a tax treaty establishes the obligation of the residence country to 

eliminate double taxation that otherwise would arise from the exercise of concurrent 

taxing jurisdiction by the two countries. Finally, a tax treaty provides for resolution 

of disputes between jurisdictions in a manner that avoids double taxation. 

As a complement to these substantive rules regarding the allocation of taxing 

rights, tax treaties provide a mechanism for dealing with disputes between countries 


rfrederick on DSK6VPTVN1PROD with HEARING
29 

regarding the proper application of a treaty. To resolve such disputes, designated 

tax authorities of the two governments—known as the ‘‘competent authorities’’ in 

tax treaty parlance—are required to consult and endeavor to reach agreement. 

Under many such agreements, the competent authorities agree to allocate a taxpayer’s income between the two taxing jurisdictions on a consistent basis, thereby 

preventing the double taxation that might otherwise result. The U.S. competent 

authority is the Secretary of the Treasury, who has delegated this function to the 

Deputy Commissioner (International) of the Large Business and International Division of the Internal Revenue Service (IRS). 

Another key element of U.S. tax treaties is the exchange of information between 

tax authorities. Under tax treaties, one country may request from the other such 

information that is foreseeably relevant for the proper administration of the first 

country’s tax laws. Some have suggested that this standard is ambiguous and that 

it represents a lower threshold than the standard in earlier U.S. tax treaties. This 

is not the case. For at least 50 years, bilateral income tax treaties have permitted 

revenue authorities to exchange information for tax administration purposes. Moreover, this standard has been extensively defined in internationally agreed guidance 

to which no country has expressed a dissenting opinion to date. 

Because access to information from other countries is critically important to the 

full and fair enforcement of U.S. tax laws, information exchange is a top priority 

for the United States in its tax treaty program. As we establish exchange of information relationships, the administration places a high priority on ensuring that the 

exchanged information will not be misused by our treaty partners. The United 

States will not exchange tax information with a country unless it has adequate confidentiality laws that will protect the information we have provided, and it has demonstrated the foreseeable relevance of the requested information to a tax matter. 

Tax treaties also include provisions intended to ensure that cross-border investors 

do not suffer discrimination in the application of the tax laws of the other country. 

This is similar to a basic investor protection provided in other types of agreements, 

but the nondiscrimination provisions of tax treaties are specifically tailored to tax 

matters and, therefore, are the most effective means of addressing potential discrimination in the tax context. The relevant tax treaty provisions explicitly prohibit 

the types of discriminatory measures that once were common in some tax systems 

and clarify the manner in which possible discrimination is to be evaluated in the 

tax context. 

In addition to these core provisions, tax treaties include provisions dealing with 

more specialized situations, such as rules addressing and coordinating the taxation 

of pensions, Social Security benefits, alimony, and child-support payments in the 

cross-border context. (The Social Security Administration separately negotiates and 

administers bilateral totalization agreements.) These provisions are becoming 

increasingly important as more individuals move between countries or otherwise 

engage in cross-border activities. While these matters may not involve substantial 

tax revenue from the perspective of the two governments, rules providing clear and 

appropriate treatment are very important to the affected taxpayers. 

TAX TREATY NEGOTIATING PRIORITIES AND PROCESS

The United States has a network of 57 comprehensive income tax treaties covering 66 countries. This network covers the vast majority of foreign trade and investment of U.S. businesses and investors. In establishing our negotiating priorities, 

our primary objective is the conclusion of tax treaties that will provide the greatest 

benefit to the United States and to U.S. taxpayers. We regularly seek input from 

the U.S. business community and the IRS regarding the areas on which we should 

develop our treaty network, and any practical problems encountered under particular treaties or particular tax regimes. 

Numerous features of a country’s tax legislation and its interaction with U.S. 

domestic tax rules are considered in negotiating a tax treaty. Examples include 

whether the country eliminates double taxation through an exemption system or 

credit system, the country’s treatment of partnerships and other transparent entities, and how the country taxes contributions to, earnings of, and distributions from 

pension funds. 

Moreover, a country’s fundamental tax policy choices are reflected not only in its 

tax laws, but also in its tax treaty policy positions. These choices differ significantly 

from country to country with substantial variation even across countries that seem 

to have quite similar economic profiles. A tax treaty negotiation must take into 

account all of these aspects of the treaty partner’s tax system and treaty policies 

to arrive at an agreement that accomplishes the United States tax treaty objectives. 


rfrederick on DSK6VPTVN1PROD with HEARING
30 

Obtaining the agreement of our tax treaty partners on provisions of importance 

to the United States sometimes requires concessions on our part. Similarly, the 

other country sometimes must make concessions to obtain our agreement on matters 

that are critical to it. Each tax treaty that is presented to the Senate represents 

not only the best deal that we believe can be achieved with the particular country, 

but also constitutes an agreement that we believe is in the best interests of the 

United States. 

It is not uncommon for the Treasury Department to conclude that the right result 

may be no tax treaty at all. With certain countries there simply may not be the type 

of cross-border tax issues that are best resolved by a treaty. For example, if a country does not impose significant income taxes, or imposes tax on a strictly territorial 

basis (that is, it exempts not only dividend income but all foreign source income 

from taxation by reason of its foreign source), there is little possibility of unresolved 

double taxation of cross-border income, given the fact that the United States provides foreign tax credits to its citizens and residents regardless of the existence of 

an income tax treaty. Under such a circumstance, it would not be appropriate to 

enter into a comprehensive tax treaty with that particular country because doing 

so would result in a unilateral concession of taxing rights by the United States. 

Absent instances of unrelieved double taxation, a bilateral agreement that focuses 

exclusively on the exchange of tax information (often referred to as a ‘‘tax information exchange agreement’’ or ‘‘TIEA’’) may be appropriate. 

In other cases, a tax treaty may be inappropriate because the potential treaty 

partner is not willing to agree to rules that address tax issues U.S. businesses operating there have identified. If the potential treaty partner is unwilling to provide 

meaningful benefits in a tax treaty, such a treaty would provide little or no relief 

from double taxation to U.S. investors, and accordingly there would be no merit to 

entering into such an agreement. The Treasury Department will not conclude a tax 

treaty that does not provide meaningful benefits to U.S. investors or which may be 

construed by potential treaty partners as an indication that we would settle for a 

tax treaty with inferior terms. 

COMBATING TAX EVASION AND IMPROVING TRANSPARENCY

THROUGH FULL EXCHANGE OF INFORMATION

As noted above, effective information exchange to combat tax evasion and ensure 

full and fair enforcement of the tax laws is a top priority for the United States. A 

key provision found in all modern U.S. tax treaties is a rule that obligates the competent authorities of the two countries to obtain and exchange information that is 

foreseeably relevant to tax administration in the requesting country. In recent years 

there has been a global recognition of the need to strive for greater transparency 

and for full exchange of information between revenue authorities to combat tax evasion. The United States has taken a leading role in this movement. 

The proposed protocols amending the bilateral tax treaties with Switzerland and 

Luxembourg and the Multilateral Convention that are before the committee today 

are intended to ensure full exchange of information to prevent tax evasion and 

enhance transparency. These proposed protocols incorporate the modern international standards for exchange of information, which require countries to obtain 

and exchange information for both civil and criminal matters, and which require the 

tax authorities to obtain and exchange information held by banks or other financial 

institutions. 

The international standards on transparency and exchange of information for tax 

purposes are now virtually universally accepted in the global community. Indeed, 

all jurisdictions surveyed by the Global Forum on Transparency and Exchange of 

Information for Tax Purposes (the Global Forum) are now committed to implementing these standards. The Global Forum, now the largest international tax 

group in the world with 126 member jurisdictions (and 15 observing members), 

endorses exchange of information. The Global Forum uses a robust and comprehensive monitoring and peer review process by evaluating the compliance of jurisdictions with the international standards of transparency. 

Initiated by the Organization for Economic Cooperation and Development 

(OECD), the Global Forum has been a driving force behind the acceptance and implementation of international standards. The United States actively participates in 

the Global Forum. Treasury’s Offices of Tax Policy and General Counsel, and IRS’s 

Office of Chief Counsel and its Large Business and International Division have 

devoted substantial resources over the past 2 years both to the peer review of U.S. 

rules and procedures and to our role as members of the Steering Group and Peer 

Review Group of the Forum. 


rfrederick on DSK6VPTVN1PROD with HEARING
31 

In addition, the G20 has, for the past several years, stressed the importance of 

quickly implementing the international standards for transparency and exchange of 

information. It has also requested proposals to make it easier for developing countries to secure the benefits of the new cooperative tax environment, including a multilateral approach for the exchange of information. 

Against the backdrop of the Global Forum and the G20 process, the proposed Protocol to the Multilateral Convention was opened for signature on May 27, 2010. The 

Multilateral Convention is an instrument that permits its signatories to exchange 

information for tax purposes. However, because it was signed in 1989, its provisions 

are out of date in many respects and do not conform to current international standards for transparency and exchange of information. In addition, prior to its amendment by the proposed protocol, the Multilateral Convention was open for accession 

only to member countries of either the Council of Europe or the OECD. The proposed protocol to the Multilateral Convention conforms the existing agreement to 

the current international standards for exchange of information, and opens the 

agreement for signature by any country, provided that the Parties have provided 

unanimous consent. This important agreement is therefore a centerpiece to the 

global effort to improve transparency and foster full exchange of information between tax authorities. 

ENSURING THE PROTECTION AND CONFIDENTIALITY OF INFORMATION

EXCHANGED WITH OUR TREATY PARTNERS

As we modernize existing exchange of information relationships and establish new 

relationships, the administration is also strongly committed to ensuring that information that we provide our treaty partners will not be misused and will be strictly 

protected and treated as confidential. One of the critical principles under today’s 

existing international standards for information exchange upon request is that the 

country receiving information must ensure that exchanged information is kept confidential and only used for legitimate tax administration purposes. Consistent with 

this standard, the United States will not enter into an information exchange agreement unless the Treasury Department and the IRS are satisfied that the foreign 

government has strict confidentiality protections. Specifically, prior to entering into 

an information exchange agreement with another jurisdiction, the Treasury Department and the IRS closely review the foreign jurisdiction’s legal framework for maintaining the confidentiality of taxpayer information. Before entering into an agreement, the Treasury Department and the IRS must be satisfied that the foreign 

jurisdiction has the necessary legal safeguards in place to protect exchanged information. 

Even if an information exchange agreement is in effect, the IRS will not exchange 

information with a country if the IRS determines that the country is not complying 

with its obligations under the agreement to protect the confidentiality of information 

and to use the information solely for collecting and enforcing taxes covered by the 

agreement. 

With respect to the Multilateral Convention, a Coordinating Body, on which the 

United States sits, was established under the terms of the Multilateral Convention 

for the express purpose of evaluating the domestic laws of countries that request 

to sign the agreement to ensure that new signatories will provide confidential treatment to information received under the agreement. In many cases, potential signatory countries have statutory confidentiality laws that cover information exchanged 

pursuant to an international agreement. In other cases, the potential signatory 

country has agreed to adopt as law the confidentiality provisions that are found in 

the Multilateral Convention itself. Countries that do not have sufficient domestic 

laws or the legal framework to guarantee the confidentiality of taxpayer information 

are not permitted to sign the proposed protocol to the Multilateral Convention. 

ENSURING SAFEGUARDS AGAINST ABUSE OF TAX TREATIES

A high priority for improving our overall treaty network is a continued focus on 

prevention of ‘‘treaty shopping.’’ The U.S. commitment to including comprehensive 

Limitation on Benefits articles is a key element to limiting treaty benefits to residents of the United States and residents of the particular treaty partner on a reciprocal basis. Tax treaty benefits are not intended for residents of a third country. If 

third country residents are able to exploit one of our tax treaties to secure reductions in U.S. tax, such as through the use of an entity resident in a treaty country 

that merely holds passive U.S. assets, the benefits would flow only in one direction. 

That is, third country residents would enjoy U.S. tax reductions for their U.S. 

investments, but U.S. residents would not enjoy reciprocal tax reductions for their 

investments in that third country. Moreover, such third country residents may be 


rfrederick on DSK6VPTVN1PROD with HEARING
32 

securing benefits that are not appropriate in the context of the interaction between 

their home countries’ tax systems and policies and those of the United States. This 

use of tax treaties is not consistent with the balance of the agreement negotiated 

in the underlying tax treaty. Preventing this exploitation of our tax treaties is critical to ensuring that the third country will sit down at the table with us to negotiate 

on a reciprocal basis so we can secure for U.S. persons the benefits of reductions 

in source-country tax on their investments in that country. Effective antitreaty 

shopping rules also ensure that the benefits of a U.S. tax treaty do not accrue to 

residents of countries with which the United States does not have a bilateral tax 

treaty because that country imposes little or no tax, and thus the potential of unrelieved double taxation is low. 

In this regard, the proposed tax treaties with Poland and Hungary before the 

committee today include comprehensive limitation on benefits provisions and represent a major step forward in protecting the U.S. tax treaty network from abuse. 

These achievements demonstrate the Treasury Department has been effective in addressing concerns about treaty shopping through bilateral negotiations and 

amendments of our existing tax treaties. We hope the Senate will provide its advice 

and consent to the new tax treaties with Poland and Hungary, as well as the other 

tax treaties currently pending before the Senate, as soon as possible. 

CONSIDERATION OF ARBITRATION

A tax treaty cannot provide a stable investment environment unless the tax 

administrations of the two countries implement the treaty effectively. Under the 

mutual agreement procedure article, a U.S. taxpayer concerned with a treaty partner’s application of a treaty can bring the matter to the U.S. competent authority 

to resolve the matter with the competent authority of the treaty partner. The competent authorities are expected to work cooperatively to resolve the dispute. 

The U.S. competent authority has a good track record in resolving disputes. Even 

in the most cooperative bilateral relationships, however, there may be instances in 

which the competent authorities will not be able to reach timely and satisfactory 

resolutions. Moreover, as the number and complexity of cross-border transactions increase, so do the number and complexity of cross-border tax disputes. Accordingly, 

we have considered ways to equip the U.S. competent authority with additional tools 

to assist in resolving disputes promptly, including through arbitration. 

As it developed the arbitration provisions for the tax treaties with Canada, Germany and Belgium, the Treasury Department carefully considered and studied various types of arbitration procedures that could be included in our treaties and used 

as part of the competent authority mutual agreement process. Based on our review 

of the merits of arbitration in other areas of the law, the success of other countries 

with arbitration in the tax area, and the overwhelming support of the business community, we concluded that mandatory binding arbitration as the final step in the 

competent authority process can be an effective and appropriate tool to facilitate 

mutual agreement under U.S. tax treaties. 

Three of the treaties before the committee (the proposed protocols with Switzerland, Spain, and Japan) include mandatory arbitration provisions. In general, these 

provisions are substantially similar to arbitration provisions in several of our recent 

treaties (Canada, Germany, Belgium, and France) that the Senate has approved 

over the last several years. 

In the typical competent authority mutual agreement process, a U.S. taxpayer 

presents its case to the U.S. competent authority and participates in formulating the 

position the U.S. competent authority will take in discussions with the treaty partner. Under the arbitration provision in the proposed protocols with Switzerland, 

Spain, and Japan, as in the similar provisions that are now part of our treaties with 

Canada, Germany, Belgium, and France, if the competent authorities cannot resolve 

the issue within 2 years, the competent authorities must present the issue to an 

arbitration board for resolution, unless both competent authorities agree the case 

is not suitable for arbitration. The arbitration board must resolve the issue by 

choosing the position of one of the competent authorities. That position is adopted 

as the agreement of the competent authorities and is treated like any other mutual 

agreement under the treaty (i.e., one that has been negotiated by the competent 

authorities). 

The arbitration process in each of these proposed protocols is mandatory and binding with respect to the competent authorities. However, consistent with the negotiation process under the mutual agreement procedure generally, the taxpayer can 

terminate the arbitration at any time by withdrawing its request for competent authority assistance. Moreover, the taxpayer retains the right to litigate the matter 

(in the United States or the treaty partner) in lieu of accepting the result of the 


rfrederick on DSK6VPTVN1PROD with HEARING
33 

arbitration, just as it would be entitled to litigate in lieu of accepting the result of 

a negotiation under the mutual agreement procedure. 

In negotiating the arbitration provisions in the proposed protocols with Switzerland, Spain, and Japan, we took into account, as we did when we negotiated the 

arbitration provision in the 2009 protocol to the France tax treaty, concerns this 

committee expressed in its report on the 2007 protocol to the U.S.-Canada treaty 

over certain aspects of the arbitration rules in our treaties with Canada, Germany, 

and Belgium. Accordingly, the proposed arbitration rule in each of these treaties differs from the provision in the treaties with Canada, Germany, and Belgium in three 

key respects. First, the proposed rule allows the taxpayer who presented the original 

case that is subjected to arbitration to submit its views on the case for consideration 

by the arbitration panel. Second, the proposed rule prohibits a competent authority 

from appointing an employee from its own tax administration to the arbitration 

board. Finally, the proposed rule does not prescribe a hierarchy of legal authorities 

that the arbitration panel must use in making its decision, thus ensuring that customary international law rules on treaty interpretation will apply. 

Because the arbitration board can only choose between the positions of each competent authority, the expectation is that the differences between the positions of the 

competent authorities will tend to narrow as the case moves closer to arbitration. 

In fact, if the arbitration provision is successful, difficult issues will be resolved 

without resorting to arbitration. Thus, it is our objective that these arbitration provisions will rarely be utilized, but their presence will motivate the competent 

authorities to approach negotiations in ways that result in mutually agreeable conclusions without invoking the arbitration process. 

We are hopeful that our desired objectives for arbitration are being realized, even 

though we are still in the early stages in our experience with arbitration and at this 

time cannot report definitively on the effects of arbitration on our tax treaty relationships. Our observation is that, where mandatory arbitration has been included 

in a treaty, the competent authorities are negotiating with greater intent to reach 

principled and timely resolution of disputes. Therefore, under the mandatory arbitration provision, double taxation is being effectively eliminated in a timely and 

more expeditious manner. 

ASSISTANCE IN COLLECTION OF TAXES

Among the important modifications to the existing tax treaty with Japan that are 

made in the proposed protocol amending the tax treaty with that country is the introduction of provisions obligating the tax authorities of the United States and 

Japan to provide to each other limited assistance in the collection of taxes. While 

the inclusion of assistance in collection provisions has been part of the international 

norm of tax treaty policy (both the OECD and United Nations Model Tax Conventions contain such provisions), this has not been a policy that the Treasury Department has followed as a general matter, largely because of our concerns that such 

treaty obligations could lead to a disproportionate amount of additional burden on 

the IRS without the commensurate benefit to the U.S. fisc. For this reason, only five 

U.S. tax treaties in force contain assistance in collection provisions, including our 

treaties with Canada, Denmark, France, Netherlands, and Sweden. 

The Treasury Department’s general policy with respect to collection assistance remains unchanged, and we will continue to decline the many requests from other 

countries to include these provisions in tax treaties when we do not have reason to 

believe that doing so would yield net benefits to the fisc. We will continue to examine requests for collection assistance on a case-by-case basis, and will commit to 

such treaty provisions if, based on a thorough consultation with the IRS, we conclude that establishing collection assistance obligations with a particular country 

would on balance enhance the collection of U.S. taxes. The proposed protocol with 

Japan is an example of one such case. 

It is noteworthy that, in line with our continued concern that any obligations to 

assist a treaty partner in the collection of taxes must not lead to a disproportionate 

burden on the IRS, the proposed protocol with Japan contains a number of protections to ensure that the U.S. and Japanese tax authorities will provide such assistance in a limited and balanced manner. First, the protocol mandates the U.S. and 

Japanese tax authorities to arrive at a mutual understanding on a limit to the number of applications for assistance that either country may make in any given year. 

In addition, the two revenue authorities must mutually establish a minimum monetary threshold for applications, in order to prevent either country from seeking 

assistance in the collection of revenue claims that represent negligible amounts of 

taxes owed. 


rfrederick on DSK6VPTVN1PROD with HEARING
34 

As is explained in the following paragraphs, the scope of the collection assistance 

provisions in the proposed protocol with Japan differs in significant ways from the 

five collection assistance provisions we have in force with our other treaty partners. 

The Treasury Department firmly believes that these adjustments to the scope permitted in the prior treaties are both justified and appropriate. 

First, the proposed protocol permits a country to request assistance in the collection of a revenue claim that that country has against an individual citizen of the 

other country. Thus, Japan would be able to request, in certain cases, assistance 

from the IRS in the collection of a Japanese revenue claim against a U.S. citizen. 

However, the scope of such requests is limited only to situations in which the citizen 

has either, filed a fraudulent tax return (or a fraudulent claim for refund), willfully 

failed to file a tax return in an attempt to evade taxes, or has transferred assets 

to the other country to avoid collection of the revenue claim. 

Second, the proposed protocol permits a country to request assistance in the collection of a revenue claim that it has against a company resident in the other country. Just as is the case for collection against citizens, we have agreed to limitations 

with Japan on the scope of permissible collection assistance of companies resident 

in the other country. As a general matter, we do not want to allow the collection 

assistance provisions to be used as an end run against the dispute resolution provisions in the tax treaty. Therefore, under the proposed protocol, the tax authority of 

Japan may only request assistance from the IRS on the collection of a Japanese revenue claim against a company incorporated in the United States if the authority has 

exhausted all applicable dispute resolution mechanisms with respect to the particular revenue claim. 

EXPANDING THE U.S. TAX TREATY NETWORK

While much of the Treasury Department’s tax treaty negotiations involve modernizing existing agreements with key trading partners to close loopholes or improve 

the level of benefits to U.S. investors, we also engage countries such as Chile to 

negotiate new tax treaties. The Treasury Department actively pursues opportunities 

to establish new tax treaty relationships with countries in which U.S. businesses 

encounter unrelieved double taxation with respect to their investments. The Treasury Department is aware of the keen interest of both the business community and 

the Senate to conclude income tax treaties that provide meaningful benefits to crossborder investors with South American countries. If approved by the Senate and the 

Chilean Congress, the tax treaty with Chile would be the second U.S. tax treaty in 

force in South America. Thus, the proposed tax treaty with Chile represents a significant inroad into the South American region. 

The Treasury Department is also developing new tax treaty relationships in other 

regions of the world. For example, on July 7 of this year, the administration signed 

a new tax treaty with Vietnam, a country that U.S. businesses have listed as a priority because they have experienced significant unrelieved double taxation. We hope 

to transmit the new tax treaty with Vietnam soon for its advice and consent. This 

treaty, if approved by the Senate, would be the first agreement of its kind between 

the United States and Vietnam. 

DISCUSSION OF PROPOSED TREATIES

I would now like to discuss the eight tax treaties that have been transmitted for 

the Senate’s consideration. The treaties are generally consistent with modern U.S. 

tax treaty policy as reflected in the Treasury Department’s 2006 U.S. Model Income 

Tax Convention. As with all bilateral tax treaties, the treaties contain minor variations that reflect particular aspects of the treaty policies and domestic tax laws of 

the foreign countries, and their economic relations with the United States. We have 

submitted a Technical Explanation for each treaty that contains detailed discussions 

of the provisions of each treaty. These Technical Explanations serve as the Treasury 

Department’s official explanation of each tax treaty. 

Chile 

The proposed Chile tax treaty is generally consistent with U.S. tax treaty policy 

as reflected in the 2006 U.S. Model. There are, as with all bilateral tax treaties, 

some variations from these norms. In the proposed treaty, these variations from the 

U.S. Model reflect particular aspects of the Chilean tax system and treaty policy, 

the interaction of U.S. and Chilean law, and U.S.-Chile economic relations. 

The proposed treaty provides for reduced source-country taxation of dividends distributed by a company resident of one country to a resident of the other country. 

The proposed treaty generally allows for taxation by the source country of 5 percent 

on direct dividends (i.e., where a 10-percent ownership threshold is met) and 15 perVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00034 Fmt 6601 Sfmt 6621 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
35 

cent on all other dividends. Additionally, the proposed treaty provides for an exemption from withholding tax on certain cross-border dividend payments to pension 

funds. In recognition of unique aspects of Chile’s domestic tax system, the withholding rate reductions on dividend payments from Chile will generally not apply 

to Chile unless Chile makes certain modifications to its corporate tax system in the 

future. 

Consistent with the U.S. Model, the proposed treaty contains special rules for 

dividends paid by U.S. regulated investment companies and real estate investment 

trusts to prevent their usage to inappropriately avoid U.S. tax. 

The proposed treaty provides a limit of 4 percent on source-country withholding 

taxes on cross-border interest payments to banks, insurance companies, and certain 

other financial enterprises. For the first 5 years following entry into force, the proposed treaty provides a limit of 15 percent on all other cross-border interest payments. After the initial 5-year period, the 15-percent limit is reduced to 10 percent 

for all other cross-border interest payments. In addition, consistent with the U.S. 

Model, source-country tax may be imposed on certain contingent interest and payments from a U.S. real estate mortgage investment conduit. The proposed treaty 

also permits the United States to impose its branch-level interest tax according to 

the applicable withholding rate reductions for cross-border interest payments. 

The proposed treaty provides a limit of 2 percent on source-country withholding 

taxes on cross-border royalty payments that constitute a rental payment for the use 

of industrial, commercial or scientific equipment, and a limit of 10 percent on all 

other cross-border royalty payments. 

The taxation of capital gains under the proposed treaty generally follows the format of the U.S. Model, with some departures in recognition of unique aspects of 

Chile’s domestic tax system. Similar to the U.S. Model, gains derived from the sale 

of real property and real property interests may be taxed by the country in which 

the property is located. Likewise, gains from the sale of personal property forming 

part of a permanent establishment situated in a country may be taxed in that country. Gains from the alienation of shares or other rights or interests in a company 

may either be taxed at a maximum rate of 16 percent by the country in which the 

company is a resident, or in certain circumstances in accordance with that country’s 

domestic law. However, the proposed treaty recognizes a unique aspect of Chile’s 

domestic law and provides that these gains shall be taxable only in the country of 

residence of the seller if Chile makes certain modifications to its corporate tax system in the future. Certain other gains from the alienation of shares of a company 

are taxable only in the country of residence of the seller, such as gains derived by 

a pension fund. Furthermore, gains from the alienation of ships, boats, aircraft, and 

containers used in international traffic, as well as gains from the alienation of any 

property not specifically addressed by the proposed treaty’s article on capital gains, 

are taxable only in the country of residence of the seller. 

The proposed treaty permits source-country taxation of business profits only if the 

business profits are attributable to a permanent establishment located in that country. The proposed treaty generally defines a ‘‘permanent establishment’’ in a way 

consistent with the U.S. Model. One departure from the U.S. Model, but found in 

a number of other U.S. tax treaties with developing countries, is a provision that 

deems an enterprise to have a permanent establishment in a country if the enterprise has performed services in that country exceeding 183 days in a 12-month 

period. 

The proposed treaty preserves the U.S. right to impose its branch profits tax on 

U.S. branches of Chilean corporations. The proposed treaty also accommodates a 

provision of U.S. domestic law providing that income earned during the life of the 

permanent establishment, but deferred and not received until after the permanent 

establishment no longer exists, is still attributed to the permanent establishment. 

The proposed treaty provides that an individual resident in one country and performing services in the other country will become taxable in the other country only 

if the individual has a fixed place of business (a so-called ‘‘fixed base’’). The proposed 

treaty generally defines ‘‘fixed base’’ in a way consistent with the U.S. Model, with 

a departure found in a number of U.S. tax treaties with developing countries which 

deems an individual to have a fixed base if he or she has performed services in that 

country for at least 183 days in the taxable year concerned. 

The rules for the taxation of income from employment under the proposed treaty 

are similar to those under the U.S. Model. The general rule is that employment 

income may be taxed in the country where the employment is exercised unless three 

conditions constituting a safe harbor are satisfied. 

The proposed treaty permits both the residence country and source country to tax 

pension payments, although the source country’s taxation right is limited to 15 percent of the gross amount of the pension. Consistent with current U.S. tax treaty 


rfrederick on DSK6VPTVN1PROD with HEARING
36 

policy, the proposed treaty permits the deductibility of certain cross-border contributions to pension plans. Also consistent with current U.S. tax treaty policy, the proposed treaty provides for exclusive source-country taxation of Social Security 

payments. 

The proposed treaty contains a comprehensive ‘‘limitation-on-benefits’’ article 

designed to address ‘‘treaty shopping,’’ which is the inappropriate use of a tax treaty 

by residents of a third country. The limitation-on-benefits article is consistent with 

current U.S. tax treaty policy, although it contains a special rule for so-called ‘‘headquarters companies’’ that is also found in a number of other U.S. tax treaties. 

The proposed treaty incorporates rules providing that a former citizen or longterm resident of the United States may, for the period of 10 years following the loss 

of such status, be taxed in accordance with the laws of the United States. The proposed treaty also coordinates the U.S. and Chilean tax rules to address the ‘‘markto-market’’ provisions enacted by the United States in 2007, which apply to individuals who relinquish U.S. citizenship or terminate long-term residency. 

Consistent with the OECD and U.S. Models, the proposed treaty provides for the 

exchange between the competent authorities of each country of information that is 

foreseeably relevant to carrying out the provisions of the proposed treaty or enforcing the domestic tax laws of either country. The proposed treaty allows the United 

States to obtain information from Chile, including from Chilean financial institutions, regardless of whether Chile needs the information for its own tax purposes. 

The proposed treaty will enter into force when the United States and Chile have 

notified each other that they have completed all of the necessary procedures required for entry into force. With respect to taxes withheld at source, the treaty will 

have effect for amounts paid or credited on or after the first day of the second 

month following the date of entry into force. With respect to other taxes, the treaty 

will have effect for taxable years beginning on or after the first day of January next 

following the date of entry into force. 

Hungary 

The proposed tax treaty and related agreement, which will be effected by exchange of notes with Hungary, were negotiated to bring the existing tax treaty into 

closer conformity with modern U.S. tax treaty policy. Entering into a new agreement has been a top tax treaty priority for the Treasury Department because the 

existing tax treaty with Hungary, signed in 1979, does not contain the necessary 

treaty shopping protections and, as a result, is currently being used inappropriately 

by third country investors to gain access to U.S. treaty benefits. 

The proposed treaty contains a comprehensive Limitation on Benefits article 

designed to address this problem. Similar to the provision included in all recent U.S. 

tax treaties with member countries of the European Union, the new Limitation on 

Benefits article includes a provision granting so-called ‘‘derivative benefits.’’ The 

article also contains a special rule for so-called ‘‘headquarters companies’’ found in 

a number of other U.S. tax treaties. 

The proposed treaty incorporates updated rules providing that a former citizen or 

long-term resident of the United States may, for the period of 10 years following 

the loss of such status, be taxed in accordance with the laws of the United States. 

The proposed treaty also coordinates the U.S. and Hungarian tax rules with the 

‘‘mark-to-market’’ U.S. domestic tax laws enacted in 2007, which apply to individuals who relinquish U.S. citizenship or terminate long-term residency. 

The withholding rates on investment income in the proposed treaty are the same 

as, or lower than, those in the current treaty. The proposed treaty provides for reduced source-country taxation of dividends distributed by a company resident of one 

country to a resident of the other country. The proposed treaty generally allows for 

taxation by the source country of 5 percent on direct dividends (i.e., where a 10- 

percent ownership threshold is met) and 15 percent on all other dividends. Additionally, the proposed treaty provides for an exemption from withholding tax on certain 

cross-border dividend payments to pension funds. 

The proposed treaty updates the treatment of dividends paid by U.S. regulated 

investment companies and real estate investment trusts to prevent their usage to 

inappropriately avoid U.S. tax. 

Consistent with the existing treaty, the proposed treaty generally eliminates 

source-country withholding taxes on cross-border interest and royalty payments. 

However, consistent with current U.S. tax treaty policy, source-country tax may be 

imposed on certain contingent interest and payments from a U.S. real estate mortgage investment conduit. 

The taxation of capital gains under the proposed treaty generally follows the format of the U.S. Model. Gains derived from the sale of real property and real property interests may be taxed by the State in which the property is located. Likewise, 


rfrederick on DSK6VPTVN1PROD with HEARING
37 

gains from the sale of personal property forming part of a permanent establishment 

situated in a country may be taxed in that country. All other gains, including gains 

from the alienation of ships, boats, aircraft, and containers used in international 

traffic, as well as gains from the sale of stock in a corporation, are taxable only in 

the country of residence of the seller. 

The proposed treaty, like several recent U.S. tax treaties, provides that the OECD 

Transfer Pricing Guidelines apply by analogy in determining the amount of business 

profits of a resident of the other country. The source country’s right to tax such profits is generally limited to cases in which the profits are attributable to a permanent 

establishment located in that country. The proposed treaty preserves the U.S. right 

to impose its branch profits tax on U.S. branches of Hungarian corporations. The 

proposed treaty will also accommodate a provision of U.S. domestic law providing 

that income earned during the life of the permanent establishment, but deferred 

and not received until after the permanent establishment no longer exists, is still 

attributed to the permanent establishment. 

The proposed treaty would change the rules currently applied under the existing 

treaty regarding the taxation of independent personal services. Furthermore, an enterprise performing services in the other country will be taxable in the other country 

only if the enterprise has a fixed place of business in that country. 

The rules for the taxation of income from employment under the proposed treaty 

are similar to those under the U.S. Model. The general rule is that employment income may be taxed in the country where the employment is exercised unless three 

conditions constituting a safe harbor are satisfied. 

The proposed treaty preserves the current treaty’s rules that allow for exclusive 

residence-country taxation of pensions, and, consistent with current U.S. tax treaty 

policy, provides for exclusive source-country taxation of Social Security payments. 

Consistent with the OECD and U.S. Models, the proposed treaty with Hungary 

provides for the exchange between the tax authorities of each country of information 

relevant to carrying out the provisions of the proposed treaty or the domestic tax 

laws of either country. The proposed treaty allows the United States to obtain information (including from financial institutions) from Hungary whether or not Hungary needs the information for its own tax purposes. 

The proposed treaty would enter into force on the date of the exchange of instruments of ratification. With respect to taxes withheld at source, the treaty will have 

effect for amounts paid or credited on, or after, the first day of the second month 

following the date of entry into force. With respect to other taxes, the treaty will 

have effect for taxable years beginning on or after the first day of January next following the date of entry into force. The existing treaty will, with respect to any tax, 

cease to have effect as of the date on which the proposed treaty has effect with 

respect to such tax. 

Japan 

The proposed protocol to amend the existing tax treaty with Japan and an agreement effected by exchange of notes were negotiated to make a number of key 

amendments to the existing tax treaty with Japan concluded in 2003. Many of the 

provisions in the proposed protocol are intended to bring the existing tax treaty into 

closer conformity with current U.S. tax treaty policy as reflected in the U.S. Model. 

The provisions also reflect particular aspects of Japanese law and tax treaty policy, 

the interaction of U.S. law with Japanese law, and U.S.-Japan economic relations. 

The proposed protocol brings the existing treaty’s taxation of cross-border interest 

payments largely into conformity with the U.S. Model by broadening the existing 

treaty’s limited exemptions from source-country withholding to cover all payments 

of interest. However, contingent interest may be subject to source-country withholding tax at a rate of 10 percent, and full source-country tax may be imposed on 

payments from a U.S. real estate mortgage investment conduit. 

The proposed protocol with Japan expands the category of cross-border dividends 

that are eligible for an exemption from source-country withholding. Under the existing treaty, such dividends are exempt from source-country withholding if the company that beneficially owns the dividends has owned, for a period of at least 12 

months ending on the date on which the entitlement to the dividends is determined, 

greater than 50 percent of the voting stock of the company paying the dividends 

(and only if additional requirements are satisfied). The proposed protocol slightly 

lowers the ownership requirement for the exemption from source-country withholding to 50 percent or more of the voting stock of the company paying the dividends, and reduces the holding period requirement to 6 months. 

The proposed protocol amends the provisions of the existing Convention governing 

the taxation of capital gains to allow for taxation of gains from the sale of real property and from real property interests by the State in which the property is located. 


rfrederick on DSK6VPTVN1PROD with HEARING
38 

Accordingly, under the proposed protocol, the United States may fully apply the Foreign Investment in Real Property Tax Act. 

The proposed protocol updates the provisions of the existing Convention with 

respect to the mutual agreement procedure by incorporating mandatory arbitration 

of certain cases that the competent authorities of the United States and Japan are 

unable to resolve after a reasonable period of time. These provisions are similar to 

the mandatory arbitration provisions recently introduced into a number of other 

U.S. bilateral tax treaties. 

As previously discussed, above, the proposed protocol incorporates into the existing Convention provisions that enable the revenue authority of a country to request 

assistance from the revenue authority of the other country in the collection of taxes 

and related costs, interest and penalties. 

Consistent with the U.S. Model and the international standard for tax information 

exchange, the proposed protocol provides for the exchange between the revenue authorities of both countries of information foreseeably relevant to carrying out the 

provisions of the existing Convention (as modified by the proposed protocol) or the 

domestic tax laws of either country. The proposed protocol allows the United States 

to obtain information (including from financial institutions) from Japan whether or 

not Japan needs the information for its own tax purposes. 

The proposed protocol will 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, 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. Special rules apply for the entry into force of the mandatory binding arbitration provisions. 

Luxembourg 

The proposed protocol to amend the existing tax treaty with Luxembourg and the 

related agreement effected by exchange of notes were negotiated to bring the existing treaty, signed in 1996, into closer conformity with current U.S. tax treaty policy 

regarding exchange of information. 

The proposed protocol replaces the existing treaty’s information exchange provisions with updated rules that are consistent with current U.S. tax treaty practice 

and the current international standards for exchange of information. The proposed 

protocol allows the tax authorities of each country to exchange information 

foreseeably relevant to carrying out the provisions of the agreement or the domestic 

tax laws of either country. Among other things, the proposed protocol would allow 

the United States to obtain information from Luxembourg authorities whether or 

not Luxembourg needs the information for its own tax purposes. In addition, the 

proposed protocol provides that requests for information cannot be declined solely 

because the information is held by a bank or other financial institution. 

The proposed related agreement effected by exchange of notes sets forth agreed 

understandings between the countries regarding the updated provisions on tax 

information exchange. The agreed understandings include obligations on the United 

States and Luxembourg to ensure that their respective competent authorities have 

the authority to obtain and provide, upon request, information held by banks and 

other financial institutions and information regarding ownership of certain entities. 

The understandings also provide that information shall be exchanged without 

regard to whether the conduct being investigated would be a crime under the laws 

of the country from which the information has been requested. 

The proposed protocol would enter into force once both the United States and Luxembourg have notified each other that their respective applicable procedures for 

ratification have been satisfied. It would have effect with respect to requests made 

on or after the date of entry into force with regard to tax years beginning on or after 

January 1, 2009. The related agreement effected by exchange of notes would enter 

into force on the date of entry into force of the proposed protocol and would become 

an integral part of the proposed protocol on that date. 

Poland 

The proposed tax treaty with Poland was negotiated to bring the current treaty, 

concluded in 1974, into closer conformity with current U.S. tax treaty policy as reflected in the U.S. Model. There are, as with all bilateral tax treaties, some variations from these norms. In the proposed treaty, these differences reflect particular 

aspects of Polish law and treaty policy, the interaction of U.S. and Polish law, and 

U.S.-Poland economic relations. 

The proposed treaty contains a comprehensive Limitation on Benefits article designed to address ‘‘treaty shopping.’’ The existing tax treaty with Poland does not 


rfrederick on DSK6VPTVN1PROD with HEARING
39 

contain treaty shopping protections and, for this reason, revising the existing treaty 

has been a top priority for the Treasury Department’s tax treaty program. Beyond 

the standard provisions, the new article includes a provision granting ‘‘derivative 

benefits’’ similar to the provision included in all recent U.S. tax treaties with member countries of the European Union. The article also contains a special rule for 

‘‘headquarters companies’’ identical to with the rule in a number of other U.S. tax 

treaties. 

The proposed treaty incorporates updated rules that provide that a former citizen 

or former long-term resident of the United States may, for the period of 10 years 

following the loss of such status, be taxed in accordance with the laws of the United 

States. The proposed treaty also coordinates the U.S. and Polish tax rules to address 

the ‘‘mark-to-market’’ provisions enacted by the United States in 2007 that apply 

to individuals who relinquish U.S. citizenship or terminate long-term residency. 

The withholding rates on investment income in the proposed treaty are in most 

cases the same as or lower than those in the current treaty. The proposed treaty 

provides for reduced source-country taxation of dividends distributed by a company 

resident in one country to a resident of the other country. The treaty will generally 

allow for taxation by the source country of 5 percent on direct dividends (i.e., where 

a 10-percent ownership threshold is met) and 15 percent on all other dividends. 

Additionally, the treaty will provide for an exemption from withholding tax on certain cross-border dividend payments to pension funds. 

The proposed treaty updates the treatment of dividends paid by U.S. regulated 

investment companies and U.S. real estate investment trusts to prevent their usage 

to inappropriately avoid U.S. tax. 

The proposed treaty provides for an exemption from source-country taxation for 

the following classes of interest: interest that is either paid by or paid to governments (including central banks); interest paid in respect of a loan made to or provided, guaranteed or insured by a government, statutory body or export financing 

agency; certain interest paid to a pension fund, interest paid to a bank or an insurance company; and interest paid to certain other financial enterprises that are unrelated to the payer of the interest. The proposed treaty provides for a limit of 5 

percent on source-country withholding taxes on all other cross-border interest payments. In addition, consistent with the U.S. Model, source-country tax may be imposed on certain contingent interest and payments from a U.S. real estate mortgage 

investment conduit. 

The proposed treaty provides a limit of 5 percent on source-country withholding 

taxes on cross-border payments of royalties. The definition of the term ‘‘royalty’’ in 

the proposed treaty includes payments of any kind received as a consideration for 

the use of, or the right to use any industrial, commercial or scientific equipment. 

The taxation of capital gains under the proposed treaty generally follows the U.S. 

Model. Gains derived from the sale of real property and from real property interests 

may be taxed by the country in which the property is located. Likewise, gains from 

the sale of personal property forming part of a permanent establishment situated 

in either the United States or Poland may be taxed in that country. All other gains, 

including gains from the alienation of ships, aircraft, and containers used in international traffic and gains from the sale of stock in a corporation, are taxable only 

in the country of residence of the seller. 

Consistent with U.S. tax treaty policy, the proposed treaty employs the so-called 

‘‘Approved OECD Approach’’ for attributing profits to a permanent establishment. 

The source country’s right to tax such profits is generally limited to cases in which 

the profits are attributable to a permanent establishment located in that country. 

The proposed treaty defines a ‘‘permanent establishment’’ in a way that grants 

rights to tax business profits that are consistent with those found in the U.S. Model. 

The proposed treaty preserves the U.S. right to impose its branch profits tax on 

U.S. branches of Polish corporations. The proposed treaty also accommodates a provision of U.S. domestic law that attributes to a permanent establishment income 

that is earned during the life of the permanent establishment, but is deferred and 

not received until after the permanent establishment no longer exists. 

Under the proposed treaty an enterprise performing services in the other country 

will become taxable in the other country only if the enterprise has a fixed place of 

business. 

The rules for the taxation of income from employment under the proposed treaty 

are consistent with the U.S. Model. The general rule is that employment income 

may be taxed in the country where the employment is exercised unless the conditions constituting a safe harbor are satisfied. 

The proposed treaty contains rules regarding the taxation of pensions, Social 

Security payments, annuities, alimony, and child support that are generally consistent with the U.S. Model. Further, pensions and annuities are taxable only in the 


rfrederick on DSK6VPTVN1PROD with HEARING
40 

country of residence of the beneficiary. In addition, the treaty provides for exclusive 

source-country taxation of Social Security payments. Payments of alimony and child 

support are exempt from tax in both countries. Consistent with the U.S. Model and 

the international standard for tax information exchange, the proposed treaty provides for the exchange between the tax authorities of each country of information 

that is foreseeably relevant to carrying out the provisions of the proposed treaty or 

the domestic tax laws of either country. The proposed treaty allows the United 

States to obtain such foreseeably relevant information (including from financial 

institutions) from Poland whether or not Poland needs the information for its own 

tax purposes. 

The proposed treaty will enter into force when both the United States and Poland 

have notified each other that they have completed all of the necessary procedures 

required for entry into force. The proposed treaty will have effect, with respect to 

taxes withheld at source, for amounts paid or credited on or after the first day of 

the second month next following the date of entry into force, 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. The current treaty will, with respect to any 

tax, cease to have effect as of the date on which this proposed treaty has effect with 

respect to such tax. 

The proposed treaty provides that an individual who was entitled to the benefits 

under the provisions for teachers, students and trainees, or government functions 

of the existing treaty at the time of entry into force of the proposed treaty shall continue to be entitled to such benefits until such time as the individual would cease 

to be entitled to such benefits if the existing treaty remained in force. 

Spain 

The proposed protocol with Spain and an accompanying memorandum of understanding and exchange of notes make a number of key amendments to the existing 

tax treaty with Spain, concluded in 1990. Many of the provisions in the proposed 

protocol are intended to bring the existing treaty into closer conformity with the 

U.S. Model. The provisions in the proposed protocol also reflect particular aspects 

of Spanish law and tax treaty policy and U.S.-Spain economic relations. Modernizing 

the existing treaty has been a high tax treaty priority for the business communities 

in both the United States and Spain. 

The proposed protocol brings the existing tax treaty’s rules for taxing payments 

of cross-border dividends into conformity with a number of recent U.S. tax treaties 

with major trading partners. The proposed protocol provides for an exemption from 

source-country withholding on certain direct dividends (i.e., dividends beneficially 

owned by a company that has owned, for a period of at least 12 months prior to 

the date on which the entitlement to the dividends is determined, at least 80 percent of the voting stock of the company paying the dividends), as well as dividends 

beneficially owned by certain pension funds. With respect to other dividends, consistent with the U.S. Model, the proposed protocol limits to 5 percent the rate of 

source-country withholding permitted on cross-border dividends beneficially owned 

by a company that owns at least 10 percent of the voting stock of the company paying the dividends, and limits to 15 percent the rate of source-country withholding 

permitted on all other dividends. The proposed protocol permits the imposition of 

source-country withholding on branch profits in a manner consistent with the U.S. 

Model. 

The proposed protocol brings the existing tax treaty’s rules for taxation of crossborder interest payments largely into conformity with the U.S. Model by exempting 

such interest from source-country taxation. However, interest that is contingent interest may be subject to source-country withholding tax at a rate of 10 percent (in 

contrast to 15 percent under the U.S. Model). Consistent with the U.S. Model, full 

source-country tax may be imposed on payments from a U.S. real estate mortgage 

investment conduit. 

The proposed protocol exempts from source-country withholding cross-border payments of royalties and capital gains in a manner consistent with the U.S. Model. 

The proposed protocol updates the provisions of the existing treaty with respect 

to the mutual agreement procedure by requiring mandatory binding arbitration of 

certain cases that the competent authorities of the United States and Spain are 

unable to resolve after a reasonable period of time. The arbitration provisions in the 

proposed protocol are similar to other mandatory arbitration provisions that were 

recently incorporated into a number of other U.S. bilateral tax treaties. 

The proposed protocol replaces the limitation-on-benefits provisions in the existing 

tax treaty with updated rules similar to those found in recent U.S. tax treaties with 

countries in the European Union. 


rfrederick on DSK6VPTVN1PROD with HEARING
41 

Consistent with the U.S. Model and the international standard for tax information 

exchange, the proposed protocol provides for the exchange between the tax authorities of each country of information that is foreseeably relevant to carrying out the 

provisions of the tax treaty or the domestic tax laws of either country. The proposed 

protocol allows the United States to obtain such foreseeably relevant information 

(including from financial institutions) from Spain regardless of whether Spain needs 

the information for its own tax purposes. 

The proposed protocol will enter into force 3 months after both countries have notified each other that they have completed all required internal procedures for entry 

into force. The proposed protocol will have effect, with respect to taxes withheld at 

source, for amounts paid or credited on or after the date on which the proposed protocol enters into force, and with respect to other taxes, for taxable years beginning 

on or after the date on which the proposed protocol enters into force. Special rules 

apply for the entry into force of the mandatory binding arbitration provisions. 

Switzerland 

The proposed protocol to amend the existing tax treaty with Switzerland and 

related agreement effected by exchange of notes were negotiated to bring the existing treaty, signed in 1996, into closer conformity with current U.S. tax treaty policy 

regarding exchange of information. There are, as with all bilateral tax conventions, 

some variations from these norms. In the proposed protocol, these minor differences 

reflect particular aspects of Swiss law and treaty policy, and they generally follow 

the OECD standard for exchange of information. 

The proposed protocol replaces the existing treaty’s information exchange provisions with updated rules that are consistent with current U.S. tax treaty practice 

and the current international standards for exchange of information. The proposed 

protocol will also allow the tax authorities of each country to exchange information 

that may be relevant to carrying out the provisions of the agreement or the domestic 

tax laws of either country, including information that would otherwise be protected 

by the bank secrecy laws of either country. In addition, it will allow the United 

States to obtain information from Switzerland whether or not Switzerland needs the 

information for its own tax purposes, and provides that requests for information 

cannot be declined solely because the information is held by a bank or other financial institution. 

The proposed protocol amends a paragraph of the existing protocol to the existing 

treaty by incorporating procedural rules to govern requests for information and an 

agreement between the United States and Switzerland that such procedural rules 

are to be interpreted in order not to frustrate effective exchange of information. 

The proposed protocol and related agreement effected by exchange of notes update 

the provisions of the existing treaty with respect to the mutual agreement procedure 

by incorporating mandatory arbitration of certain cases that the competent authorities of the United States and Switzerland are unable to resolve after a reasonable 

period of time. 

Finally, the proposed protocol updates the provisions of the existing treaty to provide that individual retirement accounts are eligible for the benefits afforded to pensions under the existing treaty. 

The proposed protocol would enter into force when the United States and Switzerland exchange instruments of ratification. The proposed protocol would have effect, 

with respect to taxes withheld at source, for amounts paid or credited on or after 

the first day of January of the year following entry into force. With respect to information exchange, the proposed protocol would have effect with respect to requests 

for bank information that relate to any date beginning on or after the date the proposed protocol is signed. With respect to all other cases, the proposed protocol would 

have effect with respect to requests for information that relates to taxable periods 

beginning on or after the first day of January next following the date of signature. 

The mandatory arbitration provision would have effect with respect both to cases 

that are under consideration by the competent authorities as of the date on which 

the proposed protocol enters into force and to cases that come under consideration 

after that date. 

Protocol to the Multilateral Convention 

On January 25, 1988, the OECD and the Council of Europe jointly opened for signature the Multilateral Convention, which the United States signed in 1989. The 

proposed protocol to the Multilateral Convention was negotiated to bring the Multilateral Convention into conformity with current international standards regarding 

exchange of information for tax purposes. 

Although the Multilateral Convention contains broad provisions for the exchange 

of information, it predates the current internationally agreed standards on exchange 


rfrederick on DSK6VPTVN1PROD with HEARING
42 

of information. Thus, the obligations contained in the Multilateral Convention are 

subject to certain domestic law limitations that could impede full exchange of information. In particular, the Multilateral Convention does not require the exchange of 

bank information on request, nor does it override domestic tax interest requirements. In contrast, the current internationally agreed standards on transparency 

and exchange of information provide for full exchange of information upon request 

in all tax matters without regard to a domestic tax interest requirement or bank 

secrecy laws. The protocol amends the Multilateral Convention in order to bring it 

into conformity with these international standards, which are also reflected in the 

U.S. Model and OECD Model tax treaties. 

The Multilateral Convention specifies information the applicant country is to provide the requested country when making a request. In some situations, the name 

of the person under examination is not known to the applicant country, but there 

is other information sufficient to identify the person. The proposed protocol amends 

the Multilateral Convention by providing that a request for assistance is adequate 

even if the name of the person(s) under examination is not known, provided that 

the request contains sufficient information to identify the person or ascertainable 

group or category of persons. 

Prior to amendment, the Multilateral Convention was open for signature only by 

countries that were members of the Council of Europe, the OECD, or both. The proposed protocol amends the Multilateral Convention by allowing any country to become a party thereto. However, countries that are not members of the OECD or of 

the Council of Europe are only invited to become a party to the amended Convention 

subject to unanimous consent of the parties to the amended Convention. 

The Multilateral Convention as amended by the proposed protocol entered into 

force on June 1, 2011, for countries that signed and ratified it prior to that date. 

For countries that sign subsequent to that date, the Multilateral Convention as 

amended by the proposed protocol will enter into force on the first day of the month 

following the expiration of a period of 3 months after the date of deposit of the 

instrument of ratification with one of the Depositaries. 

Any Member State of the Council of Europe or of the OECD that is not yet a 

party to the Multilateral Convention will become a party to the Multilateral Convention as amended by the proposed protocol upon ratification of the Convention as 

amended by the proposed protocol by that Member State, unless it explicitly expresses the will to adhere exclusively to the unamended Convention. Any country 

that is not a member of the OECD or the Council of Europe that subsequently 

becomes a signatory to the Convention as amended by the proposed protocol shall 

be a party to the Convention as amended by the proposed protocol. 

The amendments shall have effect for administrative assistance related to taxable 

periods beginning on or after January 1 of the year following the year in which the 

Convention as amended by the proposed protocol, entered into force in respect of a 

party. Where there is no taxable period, the amendments shall have effect for administrative assistance related to charges to tax arising on or after January 1 of 

the year following the year in which the Convention as amended by the proposed 

protocol entered into force in respect of a party. Any two or more parties may mutually agree that the Convention as amended by the proposed protocol may have effect 

for administrative assistance related to earlier taxable periods or charges to tax. 

However, for criminal tax matters, the proposed protocol provides that the Convention as amended by the proposed protocol shall have effect for any earlier taxable 

period or charge to tax from the date of entry into force in respect of a party. A 

signatory country may nevertheless lodge a reservation according to which the provisions of the Convention as amended by the proposed protocol would have effect 

for administrative assistance related to criminal tax matters, only as related to taxable periods beginning from the third year prior to the year in which the Convention 

as amended by the proposed protocol entered into force in respect of that party. 

CONCLUSION

Chairman Isakson and Ranking Member Menendez, let me conclude by thanking 

you for the opportunity to appear before the committee to discuss the administration’s efforts with respect to the eight treaties under consideration. We appreciate 

the committee’s continuing interest in the tax treaty program, and we thank the 

members and staff for devoting time and attention to the review of these new treaties. We are also grateful for the assistance and cooperation of the staff of the Joint 

Committee on Taxation. 

On behalf of the administration, we urge the committee to take prompt and favorable action on the agreements before you today. That concludes my testimony, and 

I would be happy to answer any questions. 


rfrederick on DSK6VPTVN1PROD with HEARING
43 

Senator ISAKSON. Thank you, Mr. Stack. 

Mr. Barthold. 

STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, 

JOINT COMMITTEE ON TAXATION, WASHINGTON, DC 

Mr. BARTHOLD. Thank you, Mr. Chairman. 

The Joint Committee staff, led by my colleague, Kristine Roth, 

has prepared pamphlets covering each of the proposed treaties and 

protocols. These pamphlets provide detailed descriptions of the 

treaties and protocols, and include comparisons with U.S. model 

and other recent U.S. treaties, as well as providing discussion of 

issues raised by the proposed agreements. 

There are many proposed agreements before your committee 

today. I will highlight only a few issues presented by these agreements, with some emphasis on the most recent protocol with 

Japan. 

Let me note first, though, that treaties and protocols are negotiated in the context of the tax laws of the two countries involved 

in the negotiation. We understand that there have been potentially 

noteworthy changes in the income tax laws of Chile, Poland, and 

Spain since the Foreign Relations Committee last considered the 

proposed agreements with those countries in 2014. 

In particular, in Chile, the corporate shareholder income tax, 

which is fully integrated, has been the subject of reform legislation 

scheduled to take effect in 2017. And under this reform, a shareholder of a Chilean corporation who is a resident of a country with 

which Chile does not have an income tax treaty, would be credited 

with 65 percent rather than 100 percent of the corporate tax paid. 

We also understand that the Government of Spain has enacted 

legislation that, among other things, reduces its corporate tax rate 

and modifies its depreciation rules, and that the Government of Poland has enacted changes to the individual income tax and corporate income tax. 

The committee may wish to inquire of my colleagues from the 

Treasury Department if they believe that these current proposed 

agreements appropriately accommodate these internal law developments in these other countries. 

The principal purposes of income tax treaties are to reduce or 

eliminate double taxation of income, and to prevent avoidance or 

evasion of taxes between the two countries. These objectives are 

primarily achieved through countries agreeing to limit, in certain 

situations, its right to tax income derived from its territory by residents of the other country and providing procedures to resolve disputes. 

The proposed protocol with Japan broadens the scope of companies eligible for a zero withholding tax rate on parent subsidiary 

dividends provided under the existing treaty. The proposed protocol 

with Spain would bring to 13 the number of U.S. income tax treaties that provide such a zero rate on direct dividends. The U.S. 

model treaty does not provide a zero rate on direct dividends. In 

previous testimony before the committee, the Treasury Department 

has stated that the dividend withholding tax should only be eliminated on the basis of an overall balance of benefits, and only in sitVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00043 Fmt 6601 Sfmt 6602 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
44 

uations where treaties have restrictive limitations on benefit rules 

and provide comprehensive information exchange. 

I observe that every recent U.S. income tax treaty or protocol has 

included restrictive limitation-on-benefits provisions and comprehensive income information exchange provisions. Therefore, the 

committee may wish to inquire whether there are particular considerations the Treasury Department will now take into account in 

deciding whether to negotiate for zero-rate direct-dividend provisions in future income tax treaties or protocols, and whether the 

new U.S. model treaty that is being developed by the Treasury Department will eliminate withholding tax on direct dividends. 

The proposed protocol with Japan also provides for, as noted by 

Mr. Stack, mandatory and binding arbitration in mutual agreement procedure cases pending before the competent authorities 

that have been without resolution for 2 years or more. The protocols amending the Swiss and Spanish treaties also include similar 

provisions. 

While similar to arbitration procedures adopted in some recent 

income tax treaties, the Japanese protocol presents some significant differences. First, it does not require the presenter of the case 

to have filed a return with each of the two jurisdictions. It also 

may expedite the schedule on which the taxpayer who seeks a bilateral advanced pricing agreement may have it resolved by binding arbitration related to that advanced pricing agreement. And 

the proposed protocol also departs from the U.S. model treaty general rules limiting participation of a taxpayer in any mutual agreement proceedings by allowing that taxpayer who presents a case to 

submit a position paper directly to the arbitration panel. 

The committee may wish to consider the extent to which the inclusion of mandatory arbitration rules and the particular features 

of the Japanese protocol now represent United States policy regarding mandatory binding arbitration. In particular, you may wish to 

inquire about the criteria on which the Treasury Department determines whether to include such provisions, the appropriate scope of 

issues eligible for determination by binding arbitration, the absence 

of precedential value, and the role of the taxpayer in an arbitration 

proceeding. 

Lastly, the pending protocol with Japan also expands the mutual 

collection assistance available under the Japan treaty to include 

taxes not otherwise covered by the treaty and to permit collection 

assistance against one’s own nationals on behalf of the other jurisdiction in cases of fraudulent conduct by the citizen. 

This provision aggregates what is known as the revenue rule, a 

common law doctrine against providing collection assistance to 

which the United States has generally adhered. The changes to the 

scope of collection assistance are similar to those of only five other 

countries, but there is no comparable provision in the U.S. model 

treaty, and the United States has expressly reserved with respect 

to a similar provision that is included in the OECD multilateral 

treaty, which is also pending before this committee. 

The protocol’s article requires the competent authorities to negotiate limitations to the extent of which assistance will be sought or 

provided in order to ensure that the administrative burden is not 

unfairly imposed on the jurisdiction. 


rfrederick on DSK6VPTVN1PROD with HEARING
45 

The committee may want to, again, explore the basis for agreeing 

to this departure from general policy and the criteria applied in so 

doing. And in addition to any concerns that there might be about 

preserving the sovereignty of the United States and the rights of 

its taxpayers, the risk of increased administrative burden should 

also be considered. 

This concludes my testimony. I would be pleased to answer any 

questions that the members might have. 

[The prepared statement of Mr. Barthold follows:] 

PREPARED STATEMENT OF THOMAS A. BARTHOLD 1

My name is Thomas A. Barthold. I am Chief of Staff of the Joint Committee on 

Taxation. It is my pleasure to present the testimony of the staff of the Joint Committee on Taxation today concerning the proposed income tax treaties with Chile, 

Hungary, and Poland, the proposed tax protocols with Japan, Luxembourg, Spain 

and Switzerland, and the proposed protocol amending the multilateral mutual 

administrative assistance treaty. 

OVERVIEW

The Joint Committee staff has prepared pamphlets covering each of the proposed 

treaties and protocols.2 The pamphlets provide detailed descriptions of the proposed 

treaties and protocols, including, in the case of the income tax treaties and protocols, comparisons with the United States Model Income Tax Convention of November 15, 2006 (‘‘U.S. Model treaty’’), which reflects preferred U.S. tax treaty policy, 

and with other recent U.S. tax treaties. The pamphlets also provide detailed discussions of issues raised by the proposed treaties and protocols. We consulted with the 

Treasury Department and with the staff of your committee in analyzing the proposed treaties and protocols and in preparing the pamphlets. 

The principal purposes of the proposed income tax treaties and protocols are to 

reduce or eliminate double taxation of income earned by residents of either country 

from sources within the other country and to prevent avoidance or evasion of the 

taxes of the two countries. The proposed income tax treaties and protocols also are 

intended to promote close economic cooperation between the treaty countries and to 

eliminate possible barriers to trade and investment caused by overlapping taxing 

jurisdictions of the treaty countries. As in other U.S. income tax treaties, these objectives principally are achieved through each country’s agreement to limit, in certain specified situations, its right to tax income derived from its territory by residents of the other country. 

The principal purpose of the multilateral mutual assistance treaty is to promote 

increased cooperation in tax administration and enforcement among the parties to 

the treaty. 

The proposed protocol with Japan amends an existing treaty, last amended by a 

protocol signed November 6, 2003. The proposed protocol with Spain would amend 

an existing tax treaty signed on February 22, 1990, and its protocol. The proposed 

treaty with Poland would replace an existing income tax treaty signed on October 

8, 1974. The proposed treaty with Hungary would replace an existing income tax 

treaty signed in 1979. The proposed protocol with Luxembourg would amend an 

existing tax treaty that was signed in 1996. The proposed protocol with Switzerland 

would amend an existing tax treaty and previous protocol that were both signed in 

1996. The proposed treaty with Chile is the first income tax treaty with that nation. 

The last proposed protocol under consideration by your committee amends the multilateral mutual administrative assistance in tax matters agreement that the United 

States ratified in 1991. 

My testimony today will first provide an article-by-article summary of the principal features of the proposed protocol with Japan. My testimony will also address 

the extent to which the U.S. Model treaty continues to represent U.S. tax policy, 

as reflected in the issues related to benefits conferred under the various agreements 

pending with your committee and issues related to mutual administrative assistance. With respect to the former, these issues include the limitation-on-benefits provisions in the treaties with Spain, Chile, and Hungary; zero-withholding for parentsubsidiary dividends in Spain, Japan; and the commitment included in the proposed 

protocol with Spain to negotiate toward an agreement between Puerto Rico and 

Spain. With respect to the latter, the issues are the exchange of information modernization included in all of the agreements, including the expansion of the multilateral mutual administrative assistance agreement; the mandatory arbitration 


rfrederick on DSK6VPTVN1PROD with HEARING
46 

provisions of the protocols with Switzerland, Spain, and Japan; and the expanded 

collection assistance agreed upon with Japan. 

ARTICLE-BY-ARTICLE SUMMARY OF PROPOSED PROTOCOL WITH JAPAN

The proposed protocol with Japan includes the following significant changes to the 

existing treaty. 

Article II provides that companies that are resident in both Japan and the United 

States (dual resident companies) will not be considered resident of either jurisdiction for purposes of the treaty. As a result, the treaty benefits available to such companies are limited to those that are available to nonresidents. 

Article III reduces the thresholds for exemption from source-country taxation of 

dividends from subsidiaries resident in one country to a parent corporation resident 

in the other treaty country. Under the proposed protocol, ownership of 50 percent 

or more, rather than ownership of more than 50 percent, qualifies. Article III also 

reduces the required holding period for elimination of source-country taxation on 

such dividends to the 6-month period ending on the date on which entitlement to 

the dividends is determined. Both the ownership standard and the holding period 

thresholds depart from recent U.S. tax treaties that provided zero-rate withholding 

contingent upon a 12-month holding period and 80-percent ownership. 

Article IV replaces Article 11 of the existing treaty, regarding taxation of crossborder interest payments (interest payments arising in one treaty country to residents of the other treaty country). First, the proposed protocol brings the tax treatment of cross-border interest payments into closer alignment with the rules 

described in the U.S. Model treaty and exempts such interest from source-country 

taxation. The interest remains subject to tax in the residence country. Antiabuse 

provisions are also provided that permit source-country taxation, notwithstanding 

the above rule, for contingent interest payments and payments with respect to ownership in entities used for securitization of real estate mortgages. 

Article V revises the definition of real property in Article 13 of the existing treaty 

to conform more closely to the U.S. Model treaty. 

Article VII repeals Article 20 of the existing treaty, which provides certain benefits to researchers and teachers from one jurisdiction when they are temporarily 

present in the other jurisdiction, consistent with modern treaty policy of both the 

United States and Japan. A conforming change is made by Article I to paragraph 

5 of Article 1 of the existing treaty. 

Article IX revises the rules regarding foreign tax credits to conform to changes 

in Japanese statutory rules for relief from double taxation. The changes reflect the 

recent adoption of a participation exemption system in Japan. 

Article X revises the nondiscrimination rules of Article 24 of the existing treaty 

to reflect the changes to Article 11, as summarized above. 

Article XI provides mandatory and binding arbitration in mutual agreement procedure cases pending before the competent authorities without resolution for 2 years 

or more. The provision is similar in scope and process to that found in recent treaties and in the proposed protocol with Spain that is also pending before the committee. The new article includes procedures to ensure confidentiality of taxpayer 

information and the mutual agreement process are included, as well as rules for the 

selection of members of the arbitration panel to avoid conflicts of interest. The taxpayer is permitted an opportunity to participate in the proceeding in the form of 

a presentation of views and reasoning. Each competent authority is permitted to 

provide views, reasoning and its proposed solution to each issue. The panel must 

reach a determination that selects the proposed solution of one of the competent 

authorities. That determination is not accorded precedential value and does not 

include a rationale or other reasoning. 

The article prescribes standards similar but not identical to those found in recent 

treaties with Belgium, France, Germany, and Canada, and is a departure from the 

U.S. Model treaty. First, it does not require the presenter of the case to have filed 

a return with each of the two jurisdictions. It also may expedite the schedule on 

which a taxpayer who seeks a bilateral advanced pricing agreement may contest a 

proposed adjustment that is related to the subject of the pending request for a pricing agreement, thus compelling arbitration if the competent authorities do not reach 

agreement on the bilateral advanced pricing agreement. The proposed article also 

departs from the U.S. Model treaty general rules limiting participation of the taxpayer in any mutual agreement proceedings by allowing the taxpayer who presents 

a case to submit a position paper directly to the arbitration panel. 

Article XII of the proposed protocol modernizes the exchange of information provisions of Article 26. The revised exchange of information provisions conform to modern standards similar to those in the U.S. Model treaty and the OECD Model treaty. 


rfrederick on DSK6VPTVN1PROD with HEARING
47 

Unlike the U.S. Model treaty, the proposed protocol includes a specific provision 

that the obligation to exchange information does not override domestic law privilege 

that attaches to confidential communications. 

Article XIII expands the mutual collection assistance available under Article 27 

to include taxes not otherwise covered by the treaty, and to permit collection assistance against one’s own nationals on behalf of the other jurisdiction in cases of fraudulent conduct by the citizen. The provision abrogates the Revenue Rule, a common 

law doctrine against providing collection assistance to which the United States has 

generally adhered. The changes to the scope of collection assistance are similar to 

those in treaties with only five other countries: France, Netherlands, Sweden, Canada, and Denmark. There is no comparable provision in the U.S. Model treaty, and 

the United States expressly reserved with respect to a similar provision that is included in the OECD Multilateral treaty that is also pending before this committee. 

The article requires the competent authorities to negotiate limitations on the extent 

to which such assistance will be sought or provided, in order to assure that administrative burden is not unfairly imposed on either jurisdiction. 

Article XIV amends the 2003 Protocol to provide rules for the implementation of 

both arbitration and collection provisions, as well as conforming changes. 

THE EXTENT TO WHICH THE U.S. MODEL TREATY CONTINUES

TO REFLECT U.S. TAX POLICY

The most recent U.S. Model treaty was published in 2006. A number of U.S. 

income tax treaties and protocols to earlier treaties have entered into force since 

then. Significant deviations from the U.S. Model treaty have, understandably, proliferated. This proliferation can be expected to continue as the U.S. State Department and Treasury Department negotiate new income tax treaties and protocols. 

Earlier this year, the Treasury Department proposed several revisions and additions 

to the U.S. Model and announced its goal of completing its revision of the U.S. 

Model treaty this year.3 The following discussion identifies areas in which the pending protocols differ from the current U.S. Model treaty. First, I address those issues 

related to benefits conferred under the various agreements pending with your committee, and second, the issues related to mutual administrative assistance, specifically exchange of information and mutual collection assistance. 

A. Issues Related to the Benefits Provided to Relieve Double Taxation 

Attribution of profits in treaty with Poland 

In the proposed treaty with Poland, Article 7 (Business Profits) is the first United 

States treaty to adopt rules for the taxation by a treaty country of the business profits of an enterprise located in the other treaty country that is based on the language 

of Article 7 (Business Profits) of the OECD Model treaty. Although the language 

used in the OECD Model treaty differs from the U.S. Model treaty, the policy 

toward, and implementation of, the business profits article under the two models 

are substantively similar. The committee may wish to ask the Treasury Department 

whether the use of the OECD Model treaty Article 7 in the Polish treaty represents 

a change in U.S. income tax treaty policy. One area in which the U.S. Model treaty 

and that of the OECD differ is the inclusion of an antiabuse measure. The U.S. 

Model treaty, paragraph 7, and the proposed treaty, paragraph 5, include an 

antiabuse provision treating income or gain attributable to a permanent establishment as taxable in the treaty country where the permanent establishment is 

located, even if the payment is deferred until after such permanent establishment 

has ceased to exist. The OECD Model treaty does not include a similar provision 

and the United States reserved the right to amend Article 7 to provide for taxation 

of income or gain even if payments are deferred until after the permanent establishment has ceased to exist.4 The committee may wish to ask the Treasury Department 

if they believe this provision is adequate to prevent the avoidance of tax on income 

attributable to a permanent establishment when that permanent establishment is 

no longer in existence. 

Limitation-on-benefits provisions in treaties with Hungary, Chile, Poland, and 

Spain 

Like the U.S. Model treaty, the proposed revisions to the treaties with Chile, Hungary, Poland, and Spain include extensive limitation-on-benefits rules (Chile, Article 

24; Hungary, Article 22; Poland, Article 22; Spain, Article IX of the proposed protocol, amending Article 17 of the existing treaty) that are intended to prevent thirdcountry residents from benefiting inappropriately from a treaty that generally 

grants benefits only to residents of the two treaty countries. This practice is commonly referred to as ‘‘treaty shopping.’’ With the inclusion of modern limitation-onVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00047 Fmt 6601 Sfmt 6621 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
48 

benefits rules, the proposed treaties with Hungary and Poland represent a significant opportunity to mitigate treaty shopping. The present treaties with Hungary 

and Poland are two of only seven U.S. income tax treaties that do not include any 

limitation-on-benefits rules.5 The lack of any limitation-on-benefits rules in combination with provisions for complete exemption from withholding on interest payments from one treaty country to the other treaty country present attractive opportunities for treaty shopping.6 For example, a November 2007 report prepared by the 

Treasury Department at the request of Congress suggests that the income tax treaty 

with Hungary has increasingly been used for treaty-shopping purposes as the 

United States adopted modern limitation-on-benefits provisions in its other treaties. 

In 2004, U.S. corporations that were at least 25-percent foreign owned made $1.2 

billion in interest payments to related parties in Hungary, the seventh-largest 

amount of interest paid to related parties in any single country.7

Earlier this year, a possible revision of Article 22 (Limitation on Benefits) of the 

U.S. Model treaty was published for public comment. Although the limitation-onbenefits rules in the proposed treaties with Chile, Hungary, Poland, and Spain are 

similar to the rules in other recent and proposed U.S. income tax treaties and protocols and in the U.S. Model treaty, they are not uniform. Your committee may wish 

to inquire about certain differences among these agreements, the underlying rationale for the differences and the extent to which they align with the policies in the 

U.S. Model treaty or its proposed revision. The principal differences from the U.S. 

Model treaty are the inclusion of the headquarters company category of qualified 

person, the derivative benefits rule, and the antiabuse rule for triangular arrangements, and with respect to Spain, the standard for exercise of competent authority 

discretion to grant treaty benefits to persons or with respect to income not otherwise 

eligible. 

As in the U.S. Model treaty, in the pending protocols, a recognized stock exchange 

includes certain exchanges specified in the treaty as well as any other stock exchange agreed upon by the competent authorities of the treaty countries. Your committee may wish to explore the rationale underlying the identification of recognized 

stock exchanges for purposes of limitations of benefits, and the criteria the Treasury 

Department considers when negotiating over the definition of a recognized stock 

exchange. 

The derivative benefits rules may grant treaty benefits to a treaty-country resident company in circumstances in which the company itself would not qualify for 

treaty benefits under any of the other limitation-on-benefits provisions. Like other 

recent treaties, including those with Canada and Iceland as well as several European treaty countries, the proposed treaties with Poland, Spain, and Hungary 

include a derivative benefits rule. Under the derivative benefits rule, a treaty-country company receives treaty benefits for an item of income if the company’s owners 

(referred to in the proposed treaty as equivalent beneficiaries) reside in a country 

that is in the same trading bloc as the treaty country and would have been entitled 

to the same benefits for the income had those owners derived the income directly. 

The definition of equivalent beneficiary differs in the proposed agreements. With respect to Spain, a party whose ownership interest is held indirectly is not an equivalent beneficiary unless the intermediate owner also qualifies as an equivalent beneficiary, similar to the rule in the proposed revision to the U.S. Model treaty. The 

Chile treaty, like the existing U.S. Model treaty, does not include derivative benefits 

rules. 

The proposed treaties with Chile and Hungary include special antiabuse rules intended to deny treaty benefits in certain circumstances in which a Chilean or Hungarian resident company earns U.S.-source income attributable to a third-country 

permanent establishment and is subject to little or no tax in the third jurisdiction 

and (as applicable) Chile or Hungary. A rule on triangular arrangements is not 

included in the U.S. Model treaty, but similar antiabuse rules are included in other 

recent treaties and protocols. 

With respect to the headquarters company rule, the committee may wish to 

explore the rationale for granting benefits to an entity that is not otherwise eligible 

for benefits. The proposed treaties with Chile and Hungary and the proposed protocols with Spain and Poland allow full treaty benefits for an entity that functions 

as a headquarters company, but does not satisfy the other categories of persons entitled to full treaty benefits. In doing so, they conform to U.S. income tax treaties in 

force with Austria, Australia, Belgium, the Netherlands, and Switzerland but not 

the U.S. Model treaty. The conditions for qualifying as a headquarters company 

include requirements intended to ensure that the headquarters company performs 

substantial supervisory and administrative functions for a group of companies, including its multinational nature, that the headquarters company is subject to the 

same income tax rules in its country of residence as would apply to a company enVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00048 Fmt 6601 Sfmt 6621 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
49 

gaged in the active conduct of a trade or business in that country; and that the 

headquarters company has independent authority in carrying out its supervisory 

and administrative functions. 

Finally, the committee may wish to inquire whether it is appropriate to grant discretion to competent authorities to extend treaty benefits to persons not otherwise 

entitled to such benefits, and, if so, the standard for exercise of any such authority. 

As in the U.S. Model and other recently negotiated treaties with modern limitations 

on benefits articles, the proposed treaty with Poland includes a grant of discretion 

to the competent authority to extend otherwise unavailable treaty benefits to a 

party that is not otherwise entitled to treaty benefits if the competent authority 

determines that the organization or operation of the person claiming benefits did 

not have as a principal purpose the obtaining of treaty benefits. By contrast, the 

proposed protocol with Spain requires that the competent authority evaluate the extent to which the resident of the other country met any of the criteria under other 

provisions in the article, without regard to motivation. 

The committee may wish to inquire of the Treasury Department about the alternative formulations of the standard for discretion to extend tax treaty benefits that 

have been proposed as part of Action Plan on Base Erosion and Profit Shifting, 

undertaken by the Organisation for Economic Co-operation and Development 

(‘‘OECD’’) at the request of the G20.8

Mandatory arbitration in treaties with Japan, Spain, and Switzerland 

In addition to the proposed protocol with Japan, the protocols amending the Swiss 

and Spanish treaties also include revisions to the mutual agreement procedures to 

require competent authorities to resort to binding arbitration if unable to reach a 

resolution within a specified period of time. Although tax treaties traditionally have 

not included a mechanism to ensure resolution of disputes, the addition of mandatory procedures for binding arbitration as part of the mutual agreement procedures 

has become increasingly frequent in recent years. The U.S. tax treaties currently 

in effect with Belgium, Germany, France, and Canada include such provisions. Mandatory binding arbitration is provided upon request of the taxpayer in paragraph 

5 of Article 25 (Mutual Agreement Procedure) of the OECD Model treaty. Following 

its 2-year study on base erosion and profit shifting, the OECD concluded that the 

inclusion of mandatory binding arbitration is necessary to achieve the goal of the 

mutual agreement procedures, which generally encourage, but do not require, dispute resolution by the competent authorities.9

In considering the proposed protocols, the committee may wish to consider the 

extent to which the inclusion of mandatory arbitration rules and the particular features of the arbitration provisions in the proposed protocols now represent the 

United States policy regarding mandatory binding arbitration. In particular, the 

committee may wish to inquire about the criteria on which the Treasury Department determines whether to include such provisions in a particular treaty, the 

appropriate scope of issues eligible for determination by binding arbitration, the 

absence of precedential value of arbitration determinations, the role of the taxpayer 

in an arbitration proceeding and how to ensure adequate oversight of the use of 

mandatory arbitration. 

Regardless of whether the Treasury Department expects mandatory arbitration to 

become a standard feature in all future U.S. tax treaties, the committee may wish 

to inquire about the experience to date in the four treaties with such provisions currently in effect, and whether the Treasury Department intends to develop and publish a standardized set of arbitration principles and procedures for inclusion in a 

revision to the U.S. Model treaty. 

Zero-withholding on parent-subsidiary dividends in treaties with Spain and 

Japan 

When certain conditions are satisfied, the proposed protocol with Spain eliminates 

withholding tax on dividends paid by a company that is resident in one treaty country to a company that is a resident of the other treaty country and that owns at 

least 80 percent of the stock of the dividend-paying company (often referred to as 

‘‘direct dividends’’). The elimination of withholding tax on direct dividends is intended to reduce the tax barriers to direct investment between the two treaty countries. The proposed protocol with Japan broadens the scope of companies eligible for 

zero-withholding under the existing treaty by reducing the ownership and holding 

period thresholds for eliminating of withholding on dividends. 

Until 2003, no U.S. income tax treaty provided for a complete exemption from dividend withholding tax, and the U.S. Model treaty does not provide an exemption. 

By contrast, many bilateral income tax treaties of other countries eliminate withholding taxes on direct dividends between treaty countries, and the European Union 


rfrederick on DSK6VPTVN1PROD with HEARING
50 

(‘‘EU’’) Parent-Subsidiary Directive repeals withholding taxes on intra-EU direct 

dividends. Recent U.S. income tax treaties and protocols with Australia, Japan, 

Mexico, the Netherlands, Sweden, the United Kingdom, Belgium, Denmark, Finland, Germany, France, and New Zealand include zero-rate provisions. The Senate 

ratified those treaties and protocols in 2003 (Australia, Mexico, United Kingdom), 

2004 (Japan, Netherlands), 2006 (Sweden), 2007 (Belgium, Denmark, Finland, and 

Germany), 2009 (France), and 2010 (New Zealand). The proposed protocol with 

Spain therefore would bring to 13 the number of U.S. income tax treaties that provide a zero rate for direct dividends. 

Because zero-rate provisions are a relatively recent but now prominent development in U.S. income tax treaty practice, the committee may wish to consider possible costs and benefits of zero-rate provisions such as revenue considerations and 

diminishing of barriers to cross-border investment; the Treasury Department’s criteria for determining when a zero-rate provision is appropriate; and certain specific 

features of zero-rate provisions such as ownership thresholds, holding-period 

requirements, the treatment of indirect ownership, and heightened limitation-onbenefits requirements. These issues have been described in detail in connection with 

the committee’s previous consideration of proposed income tax treaties and protocols 

that have included zero-rate provisions.10

Although zero-rate provisions for direct dividends have become a common feature 

of U.S. income tax treaties signed in the last decade, the U.S. Model treaty does 

not provide a zero rate for direct dividends. In previous testimony before the committee, the Treasury Department has indicated that zero-rate provisions should be 

allowed only under treaties that have restrictive limitation-on-benefits rules and 

that provide comprehensive information exchange. Even in those treaties, according 

to previous Treasury Department statements, dividend withholding tax should be 

eliminated only on the basis of an evaluation of the overall balance of benefits under 

the treaty. Every recent U.S. income tax treaty or protocol has included restrictive 

limitation-on-benefits provisions and comprehensive information exchange provisions. The committee therefore may wish to inquire into whether there are other 

particular considerations that the Treasury Department will now take into account 

in deciding whether to negotiate for zero-rate direct dividend provisions in future 

income tax treaties and protocols. The committee also may wish to ask whether any 

new U.S model income tax treaty might eliminate withholding tax on direct dividends and, if it would not so provide, why it would not. 

Developments in substantive foreign tax laws of Chile, Poland, and Spain 

Based on our own research and on assistance from foreign law specialists of the 

Global Legal Research Center of the Library of Congress’ Law Library, we understand that there have been potentially noteworthy changes in the income tax laws 

of Chile, Poland, and Spain since the Foreign Relations Committee last considered 

the proposed agreements with those countries in 2014. 

In Chile, the corporate-shareholder income tax, which is fully integrated by means 

of a shareholder-level credit for corporate tax paid on distributed profits, has been 

the subject of reform legislation scheduled to take effect in 2017. Under this reform, 

a shareholder of a Chilean corporation who is a resident of a country with which 

Chile does not have an income tax treaty will be credited with 65 percent, rather 

than 100 percent, of corporate tax paid on distributed profits. We understand that 

the Government of Spain has also enacted legislation that, among other things, 

reduces the corporate tax rate and modifies depreciation rules. Finally, we understand that the Government of Poland has enacted changes to the individual income 

tax and corporate income tax. 

The committee may wish to inquire whether the Treasury Department believes 

that the proposed agreements appropriately accommodate these internal law developments. 

B. Administrative Assistance Issues 

Mutual collection assistance with Japan 

The proposed protocol with Japan departs from the U.S. Model Article 26 

(Exchange of Information and Administrative Assistance) in providing for assistance 

in the collection of revenue claims of the other contracting state beyond those 

amounts required to ensure that treaty benefits are respected and limited to those 

entitled to them under the terms of the treaty. The committee may wish to explore 

the basis for agreeing to this departure from general U.S. policy and the criteria 

applied in determining to do so. For example, the committee may seek assurances 

as to the nature of safeguards protecting the rights of persons whose U.S. tax debts 

may be subject to collection in Japan and the extent to which persons with Japanese 


rfrederick on DSK6VPTVN1PROD with HEARING
51 

tax debts can be assumed to have had adequate opportunities for review of the merits of the underlying claim may also warrant inquiry. 

The infrequency of such provisions is consistent with the revenue rule doctrine, 

which can be traced to the centuries-long tradition based on Lord Mansfield’s statement, ‘‘For no country ever takes notice of the revenue laws of another.’’ 11 Although 

its vitality and scope have been questioned, most recently in Pasquantino v. United 

States,12 the doctrine remains a cornerstone of all common law jurisdictions, as well 

as many others. In determining whether to honor a judgment of a foreign court, 

U.S. courts generally do not accord comity to tax or penal judgments of a foreign 

court.13

In addition to the concerns about preserving the sovereignty of the United States 

and the rights of its taxpayers, the risk of increased administrative burden may also 

be considered. The agreement includes requirements that the authorities reach 

agreement to limit the volume of such requests and share costs of the program. 

Exchange of information issues in all pending protocols 

Tax treaties establish the scope of information that can be exchanged between 

treaty countries. Exchange of information provisions first appeared in the late 

1930s,14 and are now included in all double tax conventions to which the United 

States is a party. A broad international consensus has coalesced around the issue 

of bank transparency for tax purposes and strengthened in recent years, in part due 

to events involving one of Switzerland’s largest banks, UBS AG, the global financial 

crisis, and the general increase in globalization. Greater attention to all means of 

restoring integrity and stability to financial institutions has led to greater efforts 

to reconcile the conflicts between jurisdictions, particularly between jurisdictions 

with strict bank secrecy and those seeking information to enforce their own tax 

laws.15 As a result, the committee may wish to inquire as to whether the U.S. Model 

treaty published in 2006 remains the appropriate standard by which to measure an 

effective exchange of information program. 

Although the United States has long had bilateral income tax treaties in force 

with Hungary, Luxembourg, and Switzerland, the United States has engaged in relatively limited exchange of information under these tax treaties. With Luxembourg 

and Switzerland, the limitations stem from strict bank secrecy rules in those jurisdictions. The proposed protocols with Luxembourg and Switzerland are a response 

to that history as well as part of the international trend in exchange of information. 

The pamphlets prepared by the Joint Committee staff provide detailed overviews 

of the information exchange articles in each of the pending protocols. They also 

describe the extent to which those articles differ from the U.S. Model treaty’s rules 

on information exchange. The pamphlets published on May 20, 2011, describing the 

agreements with Hungary, Luxembourg, and Switzerland included detail about several practical issues relating to information exchange under income tax treaties. We 

addressed those issues in testimony with respect to those agreements and others in 

2014. Since then, additional developments relevant to exchange of information with 

Luxembourg and Switzerland have occurred. 

Here I wish to highlight first those issues related to the effectiveness of information exchange under income tax treaties that are common to all of the pending protocols under consideration today, and second, issues specific to the proposed protocols with Luxembourg and Switzerland and recent developments. 

Effectiveness of U.S. information exchange agreements in general 

Today, I will briefly note three issues: automatic exchange of information, the 

ability of the United States to provide information about beneficial ownership of foreign-owned entities, and the limitations on specific requests for information. 

The committee may wish to explore issues related to ‘‘routine exchange of information.’’ In this type of exchange, also referred to as ‘‘automatic exchange of information,’’ the treaty countries identify categories of information that are consistently 

relevant to the tax administration of the receiving treaty country and agree to share 

such information on an ongoing basis, without the need for a specific request. The 

type of information, when it will be provided, and how frequently it will be provided 

are determined by the respective Competent Authorities after consultation. In particular, the committee may wish to inquire about (1) the extent to which the United 

States presently engages in automatic exchange of taxpayer-specific information, (2) 

practical hurdles to greater use of automatic exchange, and (3) whether it anticipates significant changes in that practice with the ratification of the documents 

presently before the committee. 

The inability of the United States to provide information about beneficial ownership of entities formed in the United States has been criticized in the past and led 

to pressure to eliminate policies that provide foreign persons with the ability to shelVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00051 Fmt 6601 Sfmt 6621 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
52 

ter income.16 Because the information obtained through information exchange relationships with other jurisdictions has been central to recent successful IRS enforcement efforts against offshore tax evasion, the Treasury Department has included in 

its budgets for fiscal years 2015 and 2016 a proposal to address the perceived shortcoming by requiring certain financial institutions to report the account balance (including, in the case of a cash value insurance contract or annuity contract, the cash 

value or surrender value) for all financial accounts maintained at a U.S. office and 

held by foreign persons.17 The committee may wish to explore the extent to which 

either the existing U.S. know-your-customer rules or the corporate formation and 

ownership standards prevent the United States from providing information about 

beneficial ownership on a reciprocal basis with its treaty countries. The committee 

may also consider whether there are steps to take that would help refute the perception that the United States permits States to operate as tax havens and that would 

help the United States better respond to information requests from treaty countries 

who suspect that their own citizens and residents may be engaging in illegal activities through U.S. corporations and limited liability companies.18

The committee may wish to inquire as to the extent to which a request that a 

treaty country provide information in response to a John Doe summons 19 is a specific request within the meaning of the Article 26, and whether protracted litigation 

similar to that which occurred in the UBS litigation 20 can be avoided or shortened. 

A ‘‘specific’’ request refers to an exchange which occurs when one treaty country provides information to the other treaty country in response to a specific request by 

the latter country for information that is relevant to an ongoing investigation of a 

particular tax matter. One problem with specific exchange has been that some 

treaty countries have declined to exchange information in response to specific requests intended to identify limited classes of persons.21 Your committee may wish 

to seek assurances that, under the proposed treaties and protocols, treaty countries 

are required to exchange information in response to specific requests that are comparable to John Doe summonses under domestic law.22

Information exchange with Luxembourg and Switzerland 

The existing treaties with Luxembourg and Switzerland include exchange of information articles that do not comply with the U.S. Model treaty, the terms of U.S. 

tax treaties currently in force, or the international norms on transparency. To date, 

neither jurisdiction has achieved a satisfactory rating under the peer review process 

of the Global Forum on Transparency and Exchange of Information, the international body organized within the OECD to conduct its work on exchange of information standards (‘‘Global Forum’’). The peer review is conducted in two phases: 

Phase I evaluates the legal and regulatory aspects of exchange, that is, whether or 

not the domestic law and administrative structures exist in a jurisdiction to enable 

it to exchange information. In Phase II, the peer review evaluates the actual practice of exchange of information.23 Both jurisdictions have made progress in addressing the deficiencies, according to the Global Forum, but neither has yet been rated 

to be compliant or largely compliant. 

Switzerland 

The exchange of information article in the 1951 U.S.-Swiss treaty was limited to 

‘‘prevention of fraud or the like.’’ Under the treaty, Switzerland applied a principle 

of dual criminality, requiring that the purpose for which the information was sought 

also be a valid purpose under local law. Because ‘‘fraud or the like’’ was limited to 

nontax crimes in Switzerland, information on civil or criminal tax cases was not 

available. The provision was substantially revised for the present treaty, signed in 

1996, and accompanied by a contemporaneous protocol that elaborated on the terms 

used in the exchange of information article. That 1996 Protocol was intended to 

broaden the circumstances under which tax authorities could exchange information 

to include tax fraud or fraudulent conduct, both civil and criminal. It provided a definition at paragraph 10 of ‘‘tax fraud’’ to mean ‘‘fraudulent conduct that causes or 

is intended to cause an illegal and substantial reduction in the amount of tax paid 

to a contracting state.’’ In practice, exchange apparently remained limited, leading 

the competent authorities to negotiate a subsequent memorandum of understanding 

that included numerous examples of the facts upon which a treaty country may base 

its suspicions of fraud to support a request to exchange information.24

The proposed protocol, by replacing Article 26 (Exchange of Information and 

Administrative Assistance) of the present treaty and amending paragraph 10 of the 

1996 Protocol, closely adheres to the principles announced by Switzerland. It also 

conforms to the standards, if not the language, of the exchange of information provisions in the U.S. Model treaty in many respects. As a result, the proposed protocol 

may facilitate greater exchange of information than has occurred in the past, chiefly 


rfrederick on DSK6VPTVN1PROD with HEARING
53 

by eliminating the present treaty requirement that the requesting treaty country 

establish tax fraud or fraudulent conduct or the like as a basis for exchange of information and providing that domestic bank secrecy laws and lack of a domestic interest in the requested information are not possible grounds for refusing to provide requested information. Lack of proof of fraud, lack of a domestic interest in the information requested, and Swiss bank secrecy laws were cited by Swiss authorities in 

declining to exchange information. The proposed protocol attempts to ensure that 

subsequent changes in domestic law cannot be relied upon to prevent access to the 

information by including in the proposed protocol a self-executing statement that 

the competent authorities are empowered to obtain access to the information notwithstanding any domestic legislation to the contrary. 

Nevertheless, there are several areas in which questions about the extent to 

which the exchange of information article in the proposed protocol may prove effective are warranted. The proposed revisions to paragraph 10 of the 1996 Protocol 

reflect complete adoption of the first element listed above in the Swiss negotiating 

position, ‘‘limitation of administrative assistance to individual cases and thus no 

fishing expeditions.’’ The limitation poses issues regarding (1) the extent to which 

the Swiss will continue to reject requests that do not name the taxpayer as a result 

of the requirement that a taxpayer be ‘‘typically’’ identified by name, and (2) the 

standard of relevance to be applied to requests for information, in light of the caveat 

against ‘‘fishing expeditions.’’ In addition, the appropriate interpretation of the scope 

of purposes for which exchanged information may be used may be unnecessarily limited by comments in the Technical Explanation. In particular, although paragraph 

2 of Article 26 (Exchange of Information), as modified by the proposed protocol, generally prohibits persons who receive information exchanged under the article from 

using the information for purposes other than those related to the administration, 

assessment, or collection of taxes covered by the treaty, the paragraph also allows 

the information to be used for other purposes so long as the laws of both the United 

States and Switzerland permit that use and the competent authority of the 

requested country consents to that use. The Technical Explanation, however, states 

that one treaty country (for example, the United States) will seek the other treaty 

country’s (for example, Switzerland’s) consent under this expanded use provision 

only to the extent that use is allowed under the provisions of the U.S.-Switzerland 

Mutual Legal Assistance Treaty that entered into force in 1977. 

The extent to which Swiss commitment to transparency in practice is consistent 

with international norms remains the subject of inquiry by the Global Forum, 

despite the apparent adoption of the OECD standards on administrative assistance 

in tax matters in 2009,25 when it simultaneously announced key elements that it 

would require as conditions to be met in any new agreements. The Swiss conditions 

established by the Federal Council limited administrative assistance to individual 

cases and only in response to a specific and justified request. Although Switzerland 

is considered by the OECD to be a jurisdiction that has fully committed to the 

transparency standards of the OECD, the OECD report on Phase I of its peer review 

of Switzerland states that the Swiss authorities’ initial insistence on imposing identification requirements as a predicate for exchange of information was inconsistent 

with the international standards and that additional actions would be needed to 

permit the review process to proceed to Phase II. Those actions include bringing a 

significant number of its agreements into line with the standards and taking action 

to confirm that all new agreements are interpreted in line with the standard. On 

October 1, 2015, the Global Forum launched the Phase II peer review of Switzerland, signaling that the actions taken by Switzerland to improve its transparency 

with respect to tax matters since the Phase I report have satisfied the Global 

Forum. 

According to advice we received from foreign law specialists at the Global Legal 

Research Center of the Library of Congress’ Law Library, the actions taken by the 

Swiss since the initial unfavorable Phase I peer review include its agreement to the 

international standards on automatic exchange, expansion of its information 

exchange network, amendment of existing agreements to conform to the international transparency norms, and revision of domestic law to ensure the ability of 

tax authorities to comply with the exchange of information obligations and safeguards required in its bilateral and multilateral agreements. A report of the recently launched Phase II peer review is expected in 2016. 

Luxembourg 

The proposed protocol with Luxembourg, by replacing Article 28 (Exchange of 

Information and Administrative Assistance) of the 1996 treaty, is consistent with 

both the OECD and U.S. Model treaties. There are several areas in which questions 

are warranted about the extent to which the new article as revised in the proposed 


rfrederick on DSK6VPTVN1PROD with HEARING
54 

protocol may prove effective. These questions arise not from the language in the proposed protocol itself but from the mutual understandings reflected in diplomatic 

notes exchanged at the time the protocol was signed. Potential areas of concern are 

found in statements in the diplomatic notes concerning (1) the obligation to ensure 

tax authority access to information about beneficial ownership of juridical entities 

and financial institutions, other than publicly traded entities, to the extent that 

such information is of a type that is within the possession or control of someone 

within the territorial jurisdiction, (2) the requirement that all requests must provide 

the identity of the person under investigation, (3) the standard of relevance to be 

applied in stating a purpose for which the information is sought, and (4) the requirement that requests include a representation that all other means of obtaining 

the information have been attempted, except to the extent that to do so would cause 

disproportionate difficulties. 

The Global Forum’s Phase II peer review of Luxembourg’s implementation of 

transparency and information exchange standards reported in 2013 that Luxembourg was noncompliant with OECD standards. Based on the research assistance 

from foreign law specialists of the Global Legal Research Center of the Library of 

Congress’ Law Library, we understand that Luxembourg has undertaken significant 

action to address the deficiencies identified in the earlier peer review report. These 

measures include ratification of the OECD Multilateral agreement that is pending 

before this committee, implementation of various directives of the European Union, 

and enactment of legislation in 2014 explicitly intended to remedy a number of criticisms of the Global Forum report.26 It has also ratified a number of bilateral agreements that include exchange of information provisions that comply with the international norms. Based on these measures, the Global Forum agreed to conduct a 

supplementary peer review, which was launched on January 16, 2015. The results 

of that review are not yet known. 

Expansion of the OECD Multilateral mutual administrative assistance agreement 

One of the most significant changes to the multilateral convention made by the 

proposed protocol is the opening of membership in the convention to states that are 

neither OECD nor Council of Europe members. The signatories include a number 

of countries who are not members of G20,27 the OECD or the Council of Europe: 

Colombia, Costa Rica, Ghana, Guatemala, and Tunisia. All members of G20 are 

among the signatories. Those members of G20 who are not also members of either 

the OECD or Council of Europe include Argentina, Brazil, India, Indonesia, Saudi 

Arabia, and South Africa. Thus, on the one hand, the inclusive standard for permitting nations to participate has opened the multilateral convention to a number of 

significant trade partners of the United States. On the other hand, it requires the 

United States to initiate an exchange of information program with jurisdictions with 

which it has not previously entered into a bilateral relationship. Among the signatories that have neither a tax treaty nor a TIEA with the United States are Albania, 

Andorra, Croatia, Ghana, Nigeria, Saudi Arabia, and Singapore. 

The extent to which any of those states are jurisdictions with which the United 

States has previously participated in an exchange of information program and 

whether the program has operated satisfactorily are areas in which the committee 

may wish to inquire. To the extent that they are jurisdictions with whom the United 

States has no exchange of information program under a bilateral agreement, the 

committee may wish to inquire about the extent to which the United States has 

been able to satisfy itself that each jurisdiction is an appropriate partner for exchange of information. The committee may also wish to inquire whether the expanded exchange of information requirements will be manageable. 

The committee may also wish to inquire about the circumstances under which the 

United States would object to accession by a nonmember state, as contemplated 

under the procedures for securing the unanimous consent of the governing body of 

the treaty before the agreement may enter into effect with respect to that nonmember state. For example, in explaining its general standards for considering 

entry into a bilateral agreement with a jurisdiction, Treasury has stated, ‘‘ . . . 

prior to entering into an information exchange agreement with another jurisdiction, 

the Treasury Department and the IRS closely review the foreign jurisdiction’s legal 

framework for maintaining the confidentiality of taxpayer information. In order to 

conclude an information exchange agreement with another country, the Treasury 

Department and the IRS must be satisfied that the foreign jurisdiction has the necessary legal safeguards in place to protect exchanged information and that adequate 

penalties apply to any breach of that confidentiality.’’ 28


rfrederick on DSK6VPTVN1PROD with HEARING
55 

CONCLUSION

The matters that I have described in this testimony are addressed in more detail 

in the Joint Committee staff pamphlets on the proposed treaties and protocols. I am 

happy to answer any questions that your committee may have at this time or in 

the future. 

———————— 

Notes 

1This document may be cited as follows: Joint Committee on Taxation, ‘‘Testimony of the Staff 

of the Joint Committee on Taxation Before the Senate Committee on Foreign Relations Hearing 

on the Proposed Tax Treaties with Chile, Hungary, and Poland the Proposed Tax Protocols with 

Luxembourg, Switzerland, Spain, and Japan, and the Proposed Protocol Amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters’’ (JCX–137–15), October 

29, 2015. This document is available on the Internet at http://www.jct.gov. 2 Joint Committee on Taxation, ‘‘Explanation of Proposed Protocol Amending the Income Tax 

Treaty Between the United States and Japan’’ (JCX–XX–15), October XX, 2015; Joint Committee on Taxation, ‘‘Explanation of Proposed Income Tax Treaty Between the United States 

and Hungary’’ (JCX–32–11), May 20, 2011; Joint Committee on Taxation, ‘‘Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and Luxembourg’’ (JCX– 

30–11), May 20, 2011; Joint Committee on Taxation, ‘‘Explanation of Proposed Protocol to the 

Income Tax Treaty Between the United States and Switzerland’’ (JCX–31–11), May 20, 2011; 

Joint Committee on Taxation, ‘‘Explanation of Proposed Protocol Amending the Multilateral 

Convention on Mutual Administrative Assistance in Tax Matters’’ (JCX–9–14), February 21, 

2014; Joint Committee on Taxation, ‘‘Explanation of Proposed Income Tax Treaty Between the 

United States and Chile’’ (JCX–10–14), February 24, 2014. Joint Committee on Taxation, ‘‘Explanation of Proposed Income Tax Treaty Between the United States and Poland’’ (JCX–68–14), 

June 17, 2014; and Joint Committee on Taxation, ‘‘Explanation of Proposed Protocol to the Income Tax Treaty Between the United States and Spain’’ (JCX–67–14), June 17, 2014. The pamphlets describing the proposed treaty with Hungary and the proposed protocols with Luxembourg and Switzerland were prepared in connection with a Committee on Foreign Relations 

hearing held on June 7, 2011. The pamphlet describing the proposed treaty with Chile was prepared in connection with the hearing of the Committee on February 26, 2014. The pamphlets 

describing the proposed treaty with Poland and the proposed protocol with Spain were prepared 

in connection with the hearing on June 19, 2014. 3Full text of the proposed rules published on May 20, 2015, at the Resource Center, Department of Treasury, available at http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/ 

international.aspx. 4See Commentaries to the OECD Model treaty, paragraph 79. 

5The other income tax treaties without limitation-on-benefits rules are the ones with Greece 

(1953), Pakistan (1959), the Philippines (1982), Romania (1976), and the U.S.S.R (1976). Following the dissolution of the U.S.S.R., the income tax treaty with the U.S.S.R. applies to the 

countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikstan, Turkmenistan, and Uzbekistan. 6The income tax treaty with Greece also provides for complete exemption from withholding 

on interest, although it contains restrictions that limit the availability of the exemption, such 

that a Greek company receiving interest from a U.S. company does not qualify for the exemption 

if it controls, directly or indirectly, more than 50 percent of the U.S. company. 7Department of the Treasury, ‘‘Report to the Congress on Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties’’ (Nov. 28, 2007). The report states that, as of 2004, it does 

not appear that the U.S.-Poland income tax treaty has been extensively exploited by third-country residents. Although the report also focused on Iceland to the same extent as Hungary, a 

2007 Income Tax Convention with Iceland that includes a modern limitation-on-benefits provision has since taken effect. 8OECD, ‘‘Preventing the Granting of Treaty Benefits in Inappropriate Circumstances Action 

6–2015 Final Report,’’ (October 5, 2015), available at http://www.oecd-ilibrary.org/taxation/preventing-the-granting-of-treaty-benefits-in-inappropriate-circumstances-action-6-2015-final-reportl9789264241695-en. 9OECD, ‘‘Making Dispute Resolution Mechanisms More Effective, Action 14–2015 Final 

Report, OECD/G20 Base Erosion and Profit-Shifting Project,’’ OECD Publishing, Paris. 10See, for example, Joint Committee on Taxation, ‘‘Explanation of Proposed Protocol to the 

Income Tax Treaty Between the United States and Germany’’ (JCX–47–07), July 13, 2007, pp. 

82–84. 11 Holman v. Johnson, 98 The English Reporter 1120 (King’s Bench 1775), cited in AG of Canada v. R.J. Reynolds Tobacco Holdings, Inc., 268 F.3d 103, cert. denied, 537 U.S. 1000 (2002). 12 544 U.S. 349; 125 S. Ct. 1766; 161 L. Ed. 2d 619 (2005). 13 ‘‘Restatement (Third) of the Foreign Relations Law of the United States,’’ secs. 483 (1987), 

stating ‘‘Courts in the United States are not required to recognize or to enforce judgments for 

the collection of taxes, fines, or penalties rendered by the courts of other states.’’ The principle 

is permissive, not a requirement. 14 Article XV of the U.S.-Sweden Double Tax Convention, signed on March 23, 1939. 15See, Joint Committee on Taxation, ‘‘Description of Revenue Provisions Contained in the 

President’s Fiscal Year 2010 Budget Proposal; Part Three: Provisions Related to the Taxation 

of Cross-Border Income and Investment’’ (JCS–4–09), September 2009. Section VI of that pamphlet provides an overview of the international efforts to address these issues. 16Financial Action Task Force, IMF, ‘‘Summary of the Third Mutual Evaluation Report on 

Anti-Money Laundering and Combating the Financing of Terrorism United States of America,’’ 


rfrederick on DSK6VPTVN1PROD with HEARING
56 

pp. 10–11 (June 23, 2006); Government Accountability Office, ‘‘Company Formations: Minimal 

Ownership Information Is Collected and Available,’’ a report to the Permanent Subcommittee 

on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate 

GAO–06–376 (April 2006); Government Accountability Office, ‘‘Suspicious Banking Activities: 

Possible Money Laundering by U.S. Corporations Formed for Russian Entities,’’ GAO–01–120 

(October 31, 2006). 17 A description and analysis of the complete proposal can be found in Joint Committee on 

Taxation, ‘‘Description of Certain Revenue Provisions Contained in the President’s Fiscal Year 

2015 Budget Proposal’’ (JCS–2–14), December 2014, at pages 184–190. See also Joint Committee 

on Taxation, ‘‘Description of Certain Revenue Provisions Contained in the President’s Fiscal 

Year 2016 Budget Proposal’’ (JCS–2–15), September 2015, at page 248. 18 E.g., the ‘‘Incorporation Transparency and Law Enforcement Assistance Act,’’ S. 569, 111th 

Congress (2009), would require States to obtain and periodically update beneficial ownership information from persons who seek to form a corporation or limited liability company. 19When the existence of a possibly noncompliant taxpayer is known but not his identity, as 

in the case of holders of offshore bank accounts or investors in particular abusive transactions, 

the IRS is able to issue a summons to learn the identity of the taxpayer, but must first meet 

greater statutory requirements, to guard against fishing expeditions. Prior to issuance of the 

summons intended to learn the identity of unnamed ‘‘John Does,’’ the United States must seek 

judicial review in an ex parte proceeding. In its application and supporting documents, the 

United States must establish that the information sought pertains to an ascertainable group of 

persons, that there is a reasonable basis to believe that taxes have been avoided, and that the 

information is not otherwise available. 20See, United States v. UBS AG, Civil No. 09–20423 (S.D. Fla.), enforcing a ‘‘John Doe summons’’ which requested the identities of U.S. persons believed to have accounts at UBS in Switzerland. On August 19, 2009, the United States and UBS announced an agreement (approved 

by the Swiss Parliament on June 17, 2010) under which UBS provided the requested information. 21For example, a petition to enforce a John Doe summons served by the United States on 

UBS, AG was filed on February 21, 2009, accompanied by an affidavit of Barry B. Shott, the 

U.S. competent authority for the United States-Switzerland income tax treaty. Paragraph 16 of 

that affidavit notes that Switzerland had traditionally taken the position that a specific request 

must identify the taxpayer. See United States v. UBS AG, Civil No. 09-20423 (S.D. Fla.). On 

August 19, 2009, after extensive negotiations between the Swiss and U.S. Governments, the 

United States and UBS announced that UBS had agreed to provide information on over 4,000 

U.S. persons with accounts at UBS. 22 Under a John Doe summons, the U.S. Internal Revenue Service (‘‘IRS’’) asks for information 

to identify unnamed ‘‘John Doe’’ taxpayers. The IRS may issue a John Doe summons only with 

judicial approval, and judicial approval is given only if there is a reasonable basis to believe 

that taxes have been avoided and that the information sought pertains to an ascertainable 

group of taxpayers and is not otherwise available. 23 Certain OECD conclusions about information exchange with Luxembourg and Switzerland 

are noted below. The OECD peer reviews of Chile and Hungary found that although those jurisdictions generally are compliant with OECD standards, each country had certain deficiencies 

preventing fully effective information exchange. 24 ‘‘Mutual Agreement of January 23, 2003, Regarding the Administration of Article 26 (Exchange of Information) of the Swiss-U.S. Tax Convention of October 2, 1996,’’ reprinted at paragraph 9106, ‘‘Tax Treaties,’’ (CCH 2005). 25See ‘‘Switzerland to adopt OECD standard on administrative assistance in fiscal matters,’’ 

Federal Department of Finance, FDF (March 13, 2009), available at http://www.efd.admin.ch/ 

dokumentation/medieninformationen/00467/index.html?lang=en&msg-id=25863 (last accessed 

March 1, 2011). 26Law of November 25, 2014: New applicable procedure with respect to exchange of information on request, amending the Law of March 31, 2010. 27G20, or the Group of Twenty, is a forum for international economic cooperation among the 

member countries and the European Union. The leaders of the members meet annually, while 

finance and banking regulators meet more frequently throughout the year. They work closely 

with a number of international organizations, including the OECD. 28Preamble to Treas. Reg. 1.6049–4(b)(5). T.D. 9584, April 12, 2012. 

Senator ISAKSON. Thank you, and thanks to both of you for your 

testimony today. 

Mr. Stack, are there any provisions in the treaties being considered today that would override current U.S. domestic tax laws requiring protection of taxpayer information? Or are these treaties 

consistent with U.S. domestic law? 

Mr. STACK. Senator, these treaties are consistent with U.S. domestic law and do not override U.S. domestic law in connection 

with the treatment of confidential information. 

Senator ISAKSON. I think I heard you in your testimony refer to 

the perception of Swiss bank accounts being a safe haven in the 

past. Was that a perception or was that true? And does, in fact, the 


rfrederick on DSK6VPTVN1PROD with HEARING
57 

treaty limit that being a safe haven so there is more transparency 

on deposits in Switzerland? 

Mr. STACK. Well, let me answer this way, Senator. In a report 

from this committee, when the Swiss treaty was reported out, the 

committee took note of the difficulties faced in 2008 and 2009 by 

the IRS and the Department of Justice in obtaining information 

needed to enforce U.S. tax laws against U.S. persons who utilized 

the services of UBS AG back then, a multinational bank based in 

Switzerland. 

What we expect, and this, again, was reported by the Senate 

committee, expect that the proposed protocol, including in particular the express provision making clear that a country’s bank secrecy laws cannot prevent the exchange of tax information requested pursuant to a treaty, should put the Government of Switzerland in a position to prevent recurrence of such an incident in 

the future. 

So without directly saying whether it was a haven or not, we had 

a difficulty. The difficulty was the old treaty required a showing of 

fraud, or the like, before the Swiss would give us information. The 

new treaty to which they have agreed says the United States just 

needs to demonstrate that the information sought is foreseeably 

relevant to a tax investigation. The Swiss treaty says ‘‘may be relevant.’’ And that is going to make it easier for us to hunt down tax 

cheats that might be hiding assets in Switzerland. 

Senator ISAKSON. That would be a consistent standard with domestic U.S. law, if it was a domestic case. Is that not right? 

Mr. STACK. Yes, Senator. The treaty standard is actually taken 

from our statutory standard in section 7602, which authorizes the 

IRS to inspect books and records that ‘‘may be relevant to a tax inquiry.’’ So the standard that is in the treaty and the standard that 

is in our statutes are coterminous. 

Senator ISAKSON. I would assume, when you refer to limited cooperation in the Japan treaty and others in terms of the collection 

of taxes, that that is a step forward in collecting taxes that might 

be owed to the United States. 

Mr. STACK. It is, Senator. It is. I would add that we are very 

careful before we agree to enter into mutual assistance and collection in our treaties, simply because we do not want to put a disproportionate burden on the IRS to be spending more effort collecting taxes for the other jurisdiction than the other jurisdiction 

might be helping us collect. So we do a very careful balancing. 

So while we are happy to have this in our Japan treaty, I would 

not say that this will necessarily become the standard, since we 

weigh it on a case-by-case basis. 

But, yes, you are correct. It will assist us in this case in collecting taxes from people in Japan who owe the U.S. taxes. 

Senator ISAKSON. As I understand it, the tax rate on tax treaty 

participants in Chile is 27 percent, and the tax rate in Chile on 

nonparticipants in a tax treaty is 35 percent. Is that correct? I have 

been told that is correct. 

Mr. STACK. I would just say, I mean, there are different flows 

that might have different rates. I would just say that, under the 

treaty, we are reducing all of the withholding rates on payments 

out of Chile that otherwise might have applied in the absence of 


rfrederick on DSK6VPTVN1PROD with HEARING
58 

the treaty, although because they have a unique corporate tax system, we have given them some more time to be able to collect a 

withholding tax on shareholders on dividends out of Chile. 

But generally speaking, the treaty participants get a reduced 

rate, a better rate than nontreaty participants investing in a country. 

Senator ISAKSON. Assuming my numbers are correct at 35 percent and 27 percent, an American company competing in Chile and 

earning money from a country that does not have a treaty with 

Chile would be at an 8 percent disadvantage competing in the 

country. Would that not be correct? 

Mr. STACK. Yes. If the point is that if we do not have our Chilean 

treaty, our companies can be at a disadvantage with companies 

that do have a treaty with Chile, that would be correct, yes. 

Senator ISAKSON. That is what I am trying to get into the record. 

Mr. STACK. Thank you. 

Senator ISAKSON. Mr. Barthold, one of the stated goals of entering into a tax treaty is to prevent tax avoidance and tax evasion. 

A primary tool used to prevent tax avoidance is the exchange of information between countries and revenue authorities. 

The United States has used exchange of information for decades 

in its tax treaties. Is that correct? 

Mr. BARTHOLD. Yes, it is, Mr. Chairman. 

Senator ISAKSON. That has resulted in better collection. Is that 

correct? 

Mr. BARTHOLD. The Internal Revenue Service believes that it has 

aided in their collection of liabilities that are owed, sir, yes. 

Senator ISAKSON. Can you tell us, for the record, the assurances 

that the information of domestic U.S. taxpayers, how they are protected in these treaties, in terms of the privacy information they 

would otherwise have protected in the United States? 

Mr. BARTHOLD. The treaties do not grant access to taxpayer 

records that are beyond what is provided in U.S. law. Under code 

section 6103, there is strict protection on the ability of anyone to 

access taxpayer information, except for tax administration purposes. That is mainly within the Internal Revenue Service. 

As part of their treaty process, and Mr. Stack can address this 

further, before there is any exchange of information, the Treasury 

and the Internal Revenue Service assure themselves that there are 

comparable rights or that disclosures are not permitted that are beyond what is permitted under U.S. domestic law. 

Senator ISAKSON. Are there any penalties for unauthorized release of private information by any of these treaties? I mean, a 

country that accidentally or intentionally released private information, is there a penalty within the treaty provided for that? Or is 

there an enforcement mechanism to give them a motivation to be 

sure they do not do that? 

Mr. BARTHOLD. I am not sure. There are not penalties on countries, per se. There is potentially penalty on our side, on the United 

States person, if we are party to an unauthorized disclosure. So 

Mr. Stack might be at risk. 

Senator ISAKSON. Okay. So I understand breaking the treaty is 

probably the penalty you have. If you break the treaty, you can always dissolve the treaty. Is that correct? 


rfrederick on DSK6VPTVN1PROD with HEARING
59 

Mr. BARTHOLD. You could abrogate the treaty. That would be the 

basis for the administration to abrogate. 

Senator ISAKSON. That is the ultimate enforcement mechanism, 

because these treaties are mutually beneficial to the countries. 

Mr. BARTHOLD. That is the idea behind the treaty. 

Senator ISAKSON. Thank you both for your testimony. 

Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

When you said Mr. Stack is at risk, you meant that the Treasury 

Department would be at risk? 

Mr. BARTHOLD. It can actually be specific individuals, Senator 

Menendez. 

Senator MENENDEZ. Okay. 

Mr. Stack, you have to watch out here. 

First of all, I want to thank you, Mr. Stack, and your colleagues 

at Treasury for the immense work that has gone into negotiating 

these treaties and preparing them for consideration. For most of 

this, this is the second round that we have been at this. I know 

that when I was chairman, I wanted to push these through. Chairman Corker has also expressed a great deal of interest in trying 

to break the logjam here. I hope we can work with him to achieve 

that. 

Mr. Barthold, to you and your colleagues, thanks for your analysis and the questions that you posed in the pamphlets that you 

provided to the staff, which were incredibly helpful. I saw them, 

and I think they are incredibly helpful in addressing the treaties. 

So just a few questions. I really want to develop a record here 

for when we have a debate on the floor to be able to refer to it, 

because, from my knowledge, this is largely being impeded by one 

or two colleagues who have somewhat of a different view. 

To both of you, since Japan is really the only new treaty that we 

will be considering before the committee, could you highlight any 

notable departures, if there are any, from the United States model 

or any unique aspects of the Japan treaty that we should be aware 

of? 

Mr. BARTHOLD. I noted a couple directly in my oral testimony, 

Senator Menendez, and Mr. Stack partially addressed both of 

those. 

One was the mutual assistance. I mean, it is not provided for. 

It is somewhat unusual. And as I noted, its position in the Japan 

treaty is somewhat at odds with the reservation that the United 

States has taken with respect to the OECD multilateral mutual assistance treaty. 

The other, I think, most notable departure from what we have 

been doing recently, and, of course, from the model, is the mandatory and binding arbitration. So it is not part of our model. It 

might be part of a new model treaty that the Treasury is developing. 

But I also noted that within this protocol there are slightly different provisions of how it will operate than in the four operative 

mandatory and binding arbitration provisions that we have. 

One item of note is the ability of the taxpayer involved to participate in the arbitration by submitting a position paper directly to 

the panel. 


rfrederick on DSK6VPTVN1PROD with HEARING
60 

Senator MENENDEZ. Mr. Stack, your observations? And could you 

address yourself to the utility of the mandatory arbitration procedures that we have in this? 

Mr. STACK. Yes, Senator. 

Mandatory arbitration has garnered the support, mandatory 

binding arbitration, of many countries around the world as part of 

the work we just finished at the OECD in connection with base erosion and profit-shifting. Many, many countries are hoping to move 

forward in including provisions on mandatory binding arbitration 

in treaties going forward. 

Why? Well, I think the reigning view is that it is a tremendous 

help to resolving cases if both of the competent authorities know 

that, at the end of the day, their distinct positions will be presented to a neutral arbitrator. 

You may, or may not, be aware that we use a particular type of 

arbitration in our tax treaties, which is sometimes called baseball 

arbitration or last best offer. What that means is that the arbitrator must choose only between the positions given by the two 

countries with respect to the tax issue before it. The feeling is that 

this helps the tax administration move toward a more reasonable 

position because they know that, at the end of the day, the arbitrator is bound to choose only one of the two government positions. 

It is also the hope with arbitration that when the entire tax administration of a country is aware that, at the end of the day, some 

neutral party is going to decide which country has the better claim 

to the income, that this could improve administration throughout 

the governments that we deal with. 

So the goal of an arbitration provision is often said not to have 

an arbitration but to simply help the system more easily resolve 

cases as we go through the process. 

Senator MENENDEZ. I can see that. When I was mayor and negotiating with police and fire unions, we had a very similar process. 

It brought people to a much more reasonable offer, because they 

wanted to be closer to the offer that the arbitrator would choose at 

the end of the day. 

Mr. Barthold, let me ask you, with reference to my understanding that these treaties, in essence, the reason that we pursue 

them is in large part to lower the tax burden of U.S. companies or 

firms operating abroad. Could you give us a sense of how this does 

that? 

Mr. BARTHOLD. There are a number of different ways. Countries 

impose withholding taxes on cross-border distributions, such as the 

point I noted on the zero rate on a distribution of a dividend from 

a subsidiary to a parent, which is provided anew at a zero rate 

under the Spanish treaty, and the eligible companies have been expanded for the zero rate under the Japanese treaty. 

The default in American law is a 30 percent withholding rate on 

a payment out of the United States. Other countries have comparable rates on payments out of their countries into the United 

States. So in the treaties, we mutually agreed to lower those rates. 

While such taxes might be creditable under the different tax systems of those countries, sometimes tax credits are not always currently available because of foreign tax credit limitations. So you 

have a direct effect of lowering the tax rate on earnings by U.S. enVerDate Sep 11 2014 01:13 Feb 12, 2016 Jkt 059119 PO 00000 Frm 00060 Fmt 6601 Sfmt 6602 E:\HR\OC\ER001.XXX ER001

rfrederick on DSK6VPTVN1PROD with HEARING
61 

terprises that are earned abroad when they are paid back in that 

situation. 

Some other situations that arise are that it is possible that the 

income tax base of a foreign country is somewhat different than the 

income tax base in the United States. And so it might be the perception of both countries’ tax administrators that there is some 

part of income that is earned that they get to tax. That is the clear 

case of double taxation, and a primary purpose of the treaties is 

to try to lay out a number of specific instances where, no, this is 

yours, and this is mine, so that you eliminate clear cases of double 

taxation. 

Senator MENENDEZ. Mr. Chairman, I have a question or two left, 

but I am happy to wait for the next round. 

Senator ISAKSON. Go ahead. 

Senator MENENDEZ. Okay. 

Mr. Stack, my understanding is that Treasury typically 

prioritizes the negotiation of new tax treaties partially based on 

where U.S. individuals and businesses stand to see the most benefit from reducing, for example, double taxation. What kind of support is there in the business community for ratification of these 

treaties? 

Mr. STACK. There is extraordinary support. I think in the opening you mentioned some letters coming in from business groups. 

And in our prior hearings, Senator, as you may recall, the National 

Foreign Trade Council and the Organization for International Investment came here and testified. 

So we have felt nothing but very strong support from the business community, because they would very much like the benefits 

that Mr. Barthold mentioned in terms of cross-border investment. 

Senator MENENDEZ. And then two final sets of questions. One is, 

I understand the Spain protocol includes a provision that requires 

the United States and Spain to begin negotiations within 6 months 

from the protocol entering into force to conclude an agreement to 

avoid double taxation on investments between Puerto Rico and 

Spain. Given that Puerto Rico administers its own tax system but 

cannot enter into treaties, how is Treasury planning to work with 

its Spanish counterparts to extend the benefits of the protocol to 

Puerto Rico? 

Mr. STACK. Thank you, Senator. Just for the record, paragraph 

3 of the protocol commits the contracting states to initiate discussions as soon as possible but no later than 6 months after the entry 

into force of the 2013 protocol regarding the conclusion of an appropriate agreement to avoid double taxation on investments between 

Puerto Rico and Spain. I believe, as we discussed in prior hearings, 

the United States actually has reached out and worked with both 

Puerto Rico and Spain in advance of that deadline, since obviously 

the treaty has not yet entered into force. 

The concept of how to handle the double tax issues between 

Puerto Rico and Spain raises complex legal and political questions. 

In our involvement to date, we are seeking to see if the agreement 

referenced in the protocol could be somehow handled by both Spain 

and Puerto Rico via a statutory approach where, for example, Puerto Rico could lessen withholding taxes on investments in Spain, 


rfrederick on DSK6VPTVN1PROD with HEARING
62 

and vice versa. This is an analogy to the process undertaken by 

Guam. 

We will return to this issue in full once the agreement is in force 

and with respect to the discussions we started and continue them 

as well. 

Senator MENENDEZ. Finally, one of, if not the biggest hurdle that 

I understand some of my colleagues have in supporting this, is 

something that the chairman started off with you, and that is the 

question of information exchange and privacy, and other issues 

which in part you touched upon. 

I just want you, for the record, to talk about how standards on 

information exchange in these treaties have changed from previous 

treaties. Does the ‘‘may be relevant’’ standard in the treaties before 

us today represent a new standard not used in previous tax treaties? And in your view, is there any reason why people who have 

a foreign bank account should be treated any differently from a 

U.S. citizen who has a bank account in the United States? 

Mr. STACK. Thank you, Senator. 

As I mentioned in my opening statement, this is not a new 

standard. What has happened over time is sometimes it has been 

labeled ‘‘such information as is relevant,’’ ‘‘as may be relevant.’’ 

Over time, the OECD has adopted a phrase ‘‘foreseeably relevant,’’ 

which is what we tend to see in our current treaties. 

Each of these standards really are about a simple idea, which is 

that when another country is asking us for tax information, they 

must demonstrate that there is a link between the information 

sought and some actual tax investigation of a taxpayer, so that we 

can avoid what is called a fishing expedition where people can just 

come in and say give me all the information possible about this or 

that. 

The confusion in this space I think has been caused by the fact 

that Switzerland alone, out of 57 treaties, has a standard that said 

one country can only get information from the other if there is a 

demonstration of fraud or the like, a much higher standard before 

a tax authority could investigate assets of others abroad. 

But as I mentioned in the opening, the ‘‘may be relevant,’’ 

‘‘foreseeably relevant’’ has been in our model since 1996. The Senate has already ratified 14 treaties, I am told, since 1999 with a 

version of this standard in the treaty. 

In terms of the bank accounts, I would just say that there is no 

reason to treat someone with a foreign bank account, different from 

someone with a U.S. bank account when it comes to the ability of 

a tax authority to find out whether the person has been evading 

taxes. These information exchange provisions put people with foreign bank accounts on an equal footing with U.S. citizens who have 

bank accounts here in the United States. 

As I just mentioned earlier, under the code, the IRS has authority to seek information that ‘‘may be relevant or material.’’ The 

treaties before the committee today permit the IRS to request information that is foreseeably relevant, even if there is a variation 

in the phrasing. 

So in the tax treaty context, this standard and these provisions 

are critical to ensure that taxpayers cannot avoid their obligations 


rfrederick on DSK6VPTVN1PROD with HEARING
63 

by the simple device of shifting accounts overseas and getting better treatment than their U.S. resident counterparts. 

Senator MENENDEZ. Thank you very much. 

Senator ISAKSON. In light of the question originally asked by 

Senator Menendez, I will add to my unanimous consent record that 

the unanimous consent for the three letters that I introduced, one 

of those letters was from 77 United States companies, from CocaCola and Pepsi-Cola to Baxter and Caterpillar and everybody else 

in between, in favor of these treaties. 

Senator MENENDEZ. Is Coca-Cola from Georgia? 

Senator ISAKSON. Yes, they are a small bottling company in 

Georgia. Pepsi-Cola, their competitor, is on here, too, so we have 

competitors on there just alike. 

Secondly, I want to echo the compliments Senator Menendez 

made to you all on the information you supplied to the committee 

and the staff, and tell you that when we go into binding arbitration 

as a country, I am glad we have two people like you all on our side 

of the table and not on the other side. So thank you for your service 

to the country, and we will do everything we can to expedite the 

consideration of the treaties. 

If there are no further comments or questions, the hearing 

stands adjourned. 

[Whereupon, at 2:55 p.m., the hearing was adjourned.] 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

RESPONSE OF ROBERT STACK AND THOMAS A. BARTHOLD TO A QUESTION

SUBMITTED BY SENATOR CORY GARDNER

In 2014 testimony before this committee describing the purposes and benefits of 

tax treaties, Deputy Assistant Secretary of the Treasury for International Tax 

Affairs Robert Stack said that one purpose of tax treaties is to ‘‘reduce potential 

‘excessive’ taxation by reducing withholding taxes that are imposed at the source,’’ 

which ensures that a taxpayer is not ‘‘subject to an effective rate of tax that is significantly higher than the tax rate that would apply to net income in either the 

source or residence country.’’ In fact, the 2006 U.S. Model Income Tax Convention 

specifies a zero rate of withholding tax on interest payments as the standard goal. 

The current U.S.-Poland tax treaty, signed in 1974, has a zero rate of withholding 

tax on interest payments. In his 2014 testimony, Deputy Assistant Secretary Stack 

stated this treaty was one of three U.S. tax treaties, along with the Hungary treaty, 

that ‘‘provided an exemption from source-country withholding on interest payments 

but contained no protections against treaty shopping.’’ Treasury testified this year 

that the updated Poland and Hungary income tax treaties would now include comprehensive limitation-on-benefits provisions to avoid treaty shopping, ‘‘represent[ing] 

a major step forward in protecting the U.S. tax treaty network from abuse.’’ 

Our existing tax treaties with Poland and Hungary both have zero-rate withholding on interest payments, and the proposed new tax treaty with Hungary maintains that zero rate. The updated U.S.-Poland tax treaty, however, would actually 

increase the rate of withholding tax on interest to 5 percent. 

♦ Why, given that both treaties now have comprehensive limitation-of-benefits 

provisions that ‘‘represent a major step forward’’ in abuse protection, did the 

United States maintain a zero rate in the treaty with Hungary but not in the 

treaty with Poland? 

Answer. The tax treaty policy of the United States is generally to assign the 

exclusive taxation right on cross-border payments of interest to the country of residence of the payee of the interest. Poland has expressed that its current policy is 

to maintain a level of taxation at source on cross-border payments of interest. The 

proposed income tax treaty, as is the case with every bilateral tax treaty, therefore 

represents a negotiated overall package that both countries concluded was mutually 

acceptable. 


rfrederick on DSK6VPTVN1PROD with HEARING
64 

It should be noted that in the process of the negotiations the Treasury Department was able to secure a fairly low rate of withholding on interest (5 percent). In 

addition, the proposed treaty provides that interest paid: (1) by or to a governmental 

body; (2) in respect of a loan that is guaranteed or insured by a governmental body; 

(3) to a pension fund; or (4) to a bank, insurance company or other financial institution that is unrelated to the payor of the interest; shall nevertheless be exempt from 

withholding at source. The proposed income tax treaty with Hungary does not contain a positive rate of withholding on cross-border payments of interest because 

doing so is not the current tax treaty policy of either the United States or Hungary. 

JULY 1, 2015. 

Chairman Bob Corker, 

Senate Foreign Relations Committee, 

Dirksen Senate Office Building, 

Washington, DC. 

DEAR SENATOR CORKER The bilateral income tax treaties and protocols pending 

before the Senate Foreign Relations Committee are important to U.S. economic 

growth and U.S. trade and tax policy. For over eighty years, income tax treaties 

have played a critical role in fostering U.S. bilateral trade and investment and protecting U.S. businesses, large and small, from double taxation of the income they 

earn from selling goods and services in foreign markets. 

We ask for your support for these treaties and protocols and also ask for expeditious action on them by both the Senate Foreign Relations Committee and the Senate. 

Sincerely. 

ABB Incorporated 

AbbVie Pharmaceuticals 

Adobe 

Akzo Nobel Incorporated 

Amazon.com 

Applied Materials 

Baxter International Inc. 

Bayer Corporation 

BASF Corporation 

Bechtel Corporation 

BHP Billiton 

Braskem America, Inc. 

British American Tobacco 

BP plc 

Caterpillar Incorporated 

Chevron Corporation 

Chrysler Corporation 

CIGNA International 

Cisco Systems 

Coca-Cola Company 

ConocoPhillips, Inc. 

Daiichi Sankyo Inc. 

Dassault Systemes 

DHL North America 

DSM North America 

eBay, Inc. 

E.I.du Pont de Nemours & Co. 

ExxonMobil Corporation 

Fluor Corporation 

Ford Motor Company 

General Electric Company 

Google, Inc. 

Halliburton Company 

Hanesbrands Inc. 

Hercules Group 

Hewlett-Packard Company 

Honda 

Iberdrola USA 

International Business Machines 

Corporation 

Johnson & Johnson 

Magna International, Inc. 

Mars Incorporated 

McCormick & Company, Inc. 

Microsoft Corporation 

Michelin North America 

Nestle 

North American Stainless 

Novartis Corporation 

Occidental Petroleum 

Oracle Corporation 

Panasonic Corporation North America 

Pepsi-Cola Corporation 

Pernod Ricard USA 

Pfizer International Inc. 

Procter & Gamble 

Prudential Financial Inc. RELXGroup 

Ridgewood Group International, Ltd. 

Siemens Corporation 

SSAB Americas 

Sony Corporation of America 

Solvay America, Inc. 

Swiss Re Americas 

Syngenta 

Thomson Reuters 

Toyota 

Tupperware 

Tyco International 

UCB Inc. 

Umicore USA Inc. 

United Parcel Service, Inc. 

United Technologies 

Visa, Inc. 

Vodafone Group plc 

Walmart Stores, Inc. 

Zurich North America 


rfrederick on DSK6VPTVN1PROD with HEARING
65 


rfrederick on DSK6VPTVN1PROD with HEARINGChile1.eps
66 


rfrederick on DSK6VPTVN1PROD with HEARINGChile2.eps
67 


rfrederick on DSK6VPTVN1PROD with HEARINGScott1.eps
68 


rfrederick on DSK6VPTVN1PROD with HEARINGScott2.eps
69 

Æ 


rfrederick on DSK6VPTVN1PROD with HEARINGScott3.eps