U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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" SENATE ! 108TH CONGRESS

1st Session 

TREATY DOC. 

2003

108–14

TAXATION CONVENTION WITH JAPAN

M E S S A G E

FROM

THE PRESIDENT OF THE UNITED STATES

TRANSMITTING

CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED 

STATES OF AMERICA AND THE GOVERNMENT OF JAPAN FOR 

THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION 

OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, 

SIGNED AT WASHINGTON ON NOVEMBER 6, 2003, TOGETHER 

WITH A PROTOCOL AND AN EXCHANGE OF NOTES (THE ‘‘CONVENTION’’)

DECEMBER 9, 2003.—Convention was read the first time, and together 

with the accompanying papers, referred to the Committee on Foreign 

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


E:\Seals\Congress.#13
(III)

LETTER OF TRANSMITTAL

THE WHITE HOUSE, December 9, 2003. 

To the Senate of the United States: 

I transmit herewith, for Senate advice and consent to ratification, the Convention between the Government of the United States 

of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to 

Taxes on Income, signed at Washington on November 6, 2003, together with a Protocol and an exchange of notes (the ‘‘Convention’’). 

I also transmit, for the information of the Senate, the report of the 

Department of State concerning the Convention. 

This Convention would replace the Convention between the 

United States of America and Japan for the Avoidance of Double 

Taxation and the Prevention of Fiscal Evasion with respect to 

Taxes on Income, signed at Tokyo on March 8, 1971. 

This Convention, which is similar to tax treaties between the 

United States and other developed nations, provides rules specifying the circumstances under which income that arises in one of 

the countries and is derived by residents of the other country may 

be taxed by the country in which income arises, providing for maximum source-country withholding tax rates that may be applied to 

various types of income and providing for protection from double 

taxation of income. The proposed Convention also provides rules 

designed to ensure that the benefits of the Convention are not 

available to persons that are engaged in treaty shopping. Also included in the proposed Convention are rules necessary for administering the Convention. 

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

consent to the ratification of the Convention. 

GEORGE W. BUSH. 

(V)

LETTER OF SUBMITTAL 

DEPARTMENT OF STATES, Washington, 

November 21, 2003. 

The PRESIDENT, The White House. 

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

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

of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to 

Taxes on Income, signed at Washington on November 6, 2003, together with a Protocol and an exchange of notes (‘‘the Convention’’). 

This Convention would replace the current convention between 

the United States and Japan that was signed at Tokyo on March 

8, 1971. This proposed Convention generally follows the pattern of 

the U.S. Model Income Tax Convention while incorporating some 

features of recent U.S. tax treaties with other developed countries. 

There are, however, as with all bilateral income tax conventions, 

some variations from these norms. In the proposed Convention, 

these differences reflect particular aspects of Japanese law and 

treaty policy, and the interaction of U.S. and Japanese tax law. 

The proposed Convention provides rules specifying the circumstances under which income that arises in one of the countries 

and is derived by residents of the other country may be taxed by 

the country in which income arises (the ‘‘source’’ country), providing for maximum source-country withholding tax rates that may 

be applied to various types of income and providing for protection 

from double taxation of income. The proposed Convention also provides rules designed to ensure that the benefits of the Convention 

are not available to persons that are engaged in treaty shopping. 

Also included in the proposed Convention are rules necessary for 

administering the Convention. 

The maximum source-country withholding tax rates on investment income provided in the proposed Convention (Article 10) are 

significantly lower than those in the existing convention. Direct investment dividends and portfolio dividends are subject to maximum 

source-country withholding tax rates of 5 and 10 percent, respectively. Further, the proposed Convention provides for the elimination of source-country withholding tax for dividends received 

from certain controlled (e.g., more than 50-percent-owned) corporate subsidiaries and dividends received by pension funds. Dividends paid by non-taxable conduit entities, such as U.S. Regulated 

Investment Companies and Real Estate Investment Trusts and cerVerDate jul 14 2003 23:24 Dec 10, 2003 Jkt 029118 PO 00000 Frm 00007 Fmt 7633 Sfmt 7633 E:\HR\OC\TD014.XXX TD014
VI

tain similar Japanese entities, are subject to special rules to ensure 

the appropriate treatment under the Convention of income earned 

through such entities. 

Interest generally is subject to a maximum source country withholding tax rate of 10 percent under the proposed Convention (Article 11), as under the existing convention. However, the proposed 

Convention provides for the elimination of the source-country withholding tax for the following categories of interest that are subject 

in the existing convention to the provisions allowing the maximum 

10 percent withholding tax rate: interest received by banks (including investment banks), insurance companies, registered securities 

dealers, or other financial institutions; interest received by pension 

funds; and interest earned on sales of equipment or merchandise 

on credit. Interest derived by each of the Governments of the two 

countries and certain instrumentalities of those Governments, as 

well as interest on debt guaranteed by Government agencies, also 

is exempt from source-country withholding tax. The provisions of 

the proposed Convention generally applicable to interest do not 

apply to excess inclusions with respect to residual interests in Real 

Estate Mortgage Interest Conduits. 

Royalties are exempt from source-country withholding tax under 

the proposed Convention (Article 12), as they are under the U.S. 

Model and recent U.S. tax treaties with developed countries. The 

existing convention provides for a maximum source-country withholding tax rate of 10 percent on royalties. 

As with the U.S. Model, but unlike the existing convention, the 

proposed Convention (Article 21) provides that income other than 

the income specifically described in the Convention is exempt from 

source-country taxation. 

The taxation of gains under the proposed Convention (Article 13) 

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 pertaining to a fixed base or forming part 

of a permanent establishment situated in a country may be taxed 

in that country. The proposed Convention also includes a narrow 

provision providing that a country may, in certain circumstances, 

tax gains derived from the sale of shares in financial institutions 

that have benefited from a substantial bail-out by the Government 

of 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 not described above, 

are taxable only in the country of residence of the seller. 

As with the U.S. Model, the proposed Convention (Article 7) provides generally that one country may tax the business profits of a 

resident of the other country only if such profits are attributable 

to a permanent establishment located in the first country. The proposed Convention also provides that income that is earned during 

the life of a permanent establishment, but is deferred and not received until after the permanent establishment no longer exists, is 

attributable to the permanent establishment, as under U.S. domestic law. As do all recent U.S. tax treaties, the proposed Convention 

preserves the right of the United States to impose its branch taxes 

in addition to the basic corporate tax on the business income of a 

VII

branch. As in some U.S. tax treaties, the proposed Convention provides that the United States generally will not impose the excise 

tax on insurance policies issued by foreign insurers if the policy 

premiums are derived by a Japanese enterprise, unless the risks 

covered by such premiums are reinsured with persons that are subject to the excise tax. 

Consistent with the U.S. Model, the proposed Convention (Article 

8) permits only the country of residence to tax profits from the 

international operation of ships or aircraft and income from the 

use, maintenance or rental of containers used in international traffic. This reciprocal exemption also extends to income from the rental of ships and aircraft if the rental income is incidental to income 

from the operation of ships and aircraft in international traffic. 

However, income from the international rental of ships and aircraft 

that is not incidental to operation of ships and aircraft in international traffic is treated as business profits and therefore is subject to tax by the source country only if it is attributable to a permanent establishment in that country. 

The taxation of income from the performance of personal services 

under the proposed Convention (Articles 14 through 16) is essentially the same as that under recent U.S. tax treaties with developed countries. Unlike the U.S. Model, but consistent with the 

OECD Model Income Tax Convention, under the proposed Convention, income from independent personal services is categorized as 

business profits and is therefore subject to tax in a country only if 

it is attributable to a permanent establishment in that country. Accordingly, the proposed Convention contains no separate article regarding the treatment of independent personal services. This update simplifies the Convention. The rules for the taxation of pensions, annuities, and support payments included in the proposed 

Convention (Article 17) provide generally that pensions and annuities may only be taxed by the country of residence of the recipient 

of such payments, and that support payments may only be taxed 

by the country of residence of the payor, or in some circumstances 

not at all. These rules generally are consistent with, although less 

comprehensive than, the comparable rules in the U.S. Model. The 

Convention includes specific provisions for income earned by government employees, students and teachers (Articles 18 through 20). 

The proposed Convention contains rules coordinating the treatment of income earned through entities that are subject to tax in 

one country but are treated as fiscally transparent entities in the 

other country (Article 4). These rules reach results consistent with 

the rules in the U.S. Model and in recent U.S. tax treaties. 

The proposed Convention (Article 22) contains comprehensive 

rules designed to ensure that the benefits of the Convention are not 

available to persons that are engaged in treaty shopping. The provisions are similar to those found in the U.S. Model and in all recent U.S. tax treaties, with refinements to accommodate Japanese 

laws and practices. In addition, the proposed Convention provides 

rules with respect to categories of investment income (dividends on 

preferred stock, interest, royalties, and other income) designed to 

prevent the use of conduit arrangements to derive treaty benefits. 

Under the proposed Convention (Article 1), the United States retains for a period of ten years its right to tax former citizens and 

VIII

longterm residents whose loss of citizenship or long-term resident 

status had, as one of its principal purposes, the avoidance of tax.

Like the existing convention, the proposed Convention contains 

special rules to account for the Japanese remittance tax system 

(Article 4). Unlike the United States, Japan taxes certain Japanese 

residents on non-Japanese-source income only when that income is 

repatriated to Japan. To account for this system, a Japanese resident taxed on a remittance basis may obtain the benefits of the 

proposed Convention only upon remittance of the income in question. 

The proposed Convention provides relief from double taxation in 

a manner consistent with the U.S. Model. The proposed Convention 

also contains a re-sourcing rule to ensure that a U.S. resident can 

obtain a U.S. foreign tax credit for Japanese taxes paid when the 

Convention assigns to Japan primary taxing rights over an item of 

gross income. A comparable rule applies for purposes of the Japanese foreign tax credit. Although the U.S. Model does not contain 

a re-sourcing rule, the existing convention contains rules for the 

sourcing of income and re-sourcing rules are included in many U.S. 

tax treaties. 

The proposed Convention provides for non-discriminatory treatment (i.e., national treatment) by one country of residents and nationals of the other (Article 24). Also included in the proposed Convention are rules necessary for administering the Convention, including rules for the resolution of disputes under the Convention, 

as well as provisions on the exchange of information and on assistance in collection of taxes (Articles 25 through 27). The proposed 

Convention contains a provision not contained in the U.S. Model 

specifically providing for consultation upon a substantial change by 

one country in its laws relevant to the Convention (Article 29). 

The proposed Convention will enter into force upon the exchange 

of instruments of ratification (Article 30). The Convention will be 

applicable, with respect of taxes withheld at source: for amounts 

taxable (in the case of Japan) or paid or credited (in the case of the 

United States) on or after July 1 of the calendar year in which the 

Convention enters into force if the Convention enters into force before April 1 of a calendar year; or for amounts taxable (in the case 

of Japan) or paid or credited (in the case of the United States) on 

or after January 1 of the calendar year next following the year in 

which the Convention enters into force if the Convention enters 

into force after March 31 of a calendar year. The Convention will 

be applicable with respect to other taxes for any taxable year (in 

the case of Japan) and for taxable periods (in the case of the 

United States) beginning on or after January 1 of the calendar year 

next following that in which the Convention enters into force. The 

proposed Convention contains a rule under which persons may 

elect to continue to apply the provisions of the existing convention 

for one additional year. Special provisions are included in the proposed Convention that allow teachers and students who are receiving benefits under the provisions applicable to teachers and students in the existing convention to continue to receive those benefits until the end of the period for such benefits under the existing 

convention. 

IX

The new Convention will remain in force until terminated by one 

of the countries (Article 31). Either country may terminate the 

Convention after 5 years from the date on which the Convention 

enters into force by giving at least six months prior notice through 

diplomatic channels. 

A technical memorandum explaining in detail the provisions of 

the proposed Convention will be prepared by the Department of the 

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

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

Respectfully submitted, 

COLIN L. POWELL.

(1)


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