29–119

108TH CONGRESS EXEC. RPT.

2d Session " ! SENATE 108–11

TAXATION CONVENTION AND PROTOCOL WITH THE

GOVERNMENT OF SRI LANKA

MARCH 18, 2004.—Ordered to be printed

Filed under authority of the order of the Senate of March 12, 2004.

Mr. LUGAR, from the Committee on Foreign Relations,

submitted the following

REPORT

[To accompany Treaty Docs. 99–10 and 108–9]

The Committee on Foreign Relations, to which was referred the

Convention between the Government of the United States of America and the Government of the Democratic Socialist Republic of Sri

Lanka for the Avoidance of Double Taxation and the Prevention of

Fiscal Evasion with Respect to Taxes on Income, signed at Colombo

on March 14, 1985, and the Protocol amending the Convention, together with an Exchange of Notes, signed at Washington on September 20, 2002, having considered the same, reports favorably

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

CONTENTS

Page

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

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

III. Summary ........................................................................................................ 2

IV. Entry Into Force and Termination ............................................................... 3

V. Committee Action .......................................................................................... 4

VI. Committee Comments ................................................................................... 4

VII. Budget Impact ................................................................................................ 13

VIII. Explanation of Proposed Treaty ................................................................... 13

IX. Resolution of Ratification .............................................................................. 13

I. PURPOSE

The principal purposes of the proposed income tax treaty between the United States and Sri Lanka are to reduce or eliminate

double taxation of income earned by residents of either country

2

from sources within the other country and to prevent avoidance or

evasion of the taxes of the two countries. The proposed treaty also

is intended to continue to promote close economic cooperation between the two countries and to eliminate possible barriers to trade

and investment caused by overlapping taxing jurisdictions of the

two countries.

II. BACKGROUND

The proposed treaty between the United States and Sri Lanka

was signed at Colombo on March 14, 1985 but has not entered into

force. The proposed treaty was not acted on by the Senate at the

time because changes made to U.S. international tax rules by the

Tax Reform Act of 1986 necessitated some modifications to the

agreement. The proposed protocol to amend that treaty was signed

at Washington on September 20, 2002. The United States and Sri

Lanka exchanged notes on the same day to provide clarification

with respect to the application of the proposed treaty. Unless otherwise specified, the proposed treaty, the proposed protocol, and the

notes are hereinafter referred to collectively as the ‘‘proposed treaty.’’

The Convention was sent to the Senate for advice and consent

to its ratification on October 2, 1985 (see Treaty Doc. 99–10). The

proposed protocol was sent to the Senate for advice and consent to

its ratification on October 28, 2003 (see Treaty Doc. 108–9). The

Committee on Foreign Relations held a public hearing on the proposed treaty on February 25, 2004.

III. SUMMARY

The proposed treaty is similar to other recent U.S. income tax

treaties, the 1996 U.S. model income tax treaty (‘‘U.S. model’’), the

1992 model income tax treaty of the Organization for Economic Cooperation and Development, as updated (‘‘OECD model’’), and the

1980 United Nations Model Double Taxation Convention Between

Developed and Developing Countries, as amended in 2001 (‘‘U.N.

model’’). However, the proposed treaty contains certain substantive

deviations from these treaties and models.

As in other U.S. tax treaties, the purposes of the treaty 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. For example, the proposed treaty contains provisions under which each country generally agrees not to tax business income derived from sources within that country by residents of the other country unless the business activities in the taxing country are substantial enough to constitute a permanent establishment (Article 7). Similarly, the proposed treaty contains ‘‘commercial visitor’’ exemptions under which

residents of one country performing personal services in the other

country will not be required to pay tax in the other country unless

their contact with the other country exceeds specified minimums

(Articles 15, 16, and 18). The proposed treaty provides that dividends, interest, royalties, and certain capital gains derived by a

resident of either country from sources within the other country

generally may be taxed by both countries (Articles 10, 11, 12, and

3

13); however, the rate of tax that the source country may impose

on a resident of the other country on dividends, interest, and royalties may be limited or eliminated by the proposed treaty (Articles

10, 11, and 12).

In situations in which the country of source retains the right

under the proposed treaty to tax income derived by residents of the

other country, the proposed treaty generally provides for relief from

the potential double taxation through the allowance by the country

of residence of a tax credit for certain foreign taxes paid to the

other country (Article 24).

The proposed treaty contains the standard provision (the ‘‘saving

clause’’) included in U.S. tax treaties pursuant to which each country retains the right to tax its residents and citizens as if the treaty

had not come into effect (Article 1). In addition, the proposed treaty

contains the standard provision providing that the treaty may not

be applied to deny any taxpayer any benefits the taxpayer would

be entitled to under the domestic law of a country or under any

other agreement between the two countries (Article 1).

The proposed treaty also contains a detailed limitation-on-benefits provision to prevent the inappropriate use of the treaty by

third-country residents (Article 23).

IV. ENTRY INTO FORCE AND TERMINATION

A. ENTRY INTO FORCE

The proposed treaty will enter into force upon the exchange of instruments of ratification. With respect to each country, the proposed treaty will be effective with respect to taxes withheld at

source for amounts paid or credited on or after the first day of the

second month following the date on which the proposed treaty enters into force. With respect to other taxes, the proposed treaty will

be effective for taxable periods beginning on or after the first day

of January of the year in which the proposed treaty enters into

force.

The Technical Explanation states that the provisions of Article

26 (Mutual Agreement Procedure) and Article 27 (Exchange of Information) of the proposed treaty will have effect from the date of

entry into force of the proposed treaty, without regard to the taxable or chargeable period to which the matter relates.

B. TERMINATION

The proposed treaty will remain in force until terminated by either country. Either country may terminate the proposed treaty,

after the expiration of a period of five years from the date of its

entry into force, by giving six months prior written notice of termination to the other country through diplomatic channels. In such

case, with respect to each country, a termination is effective with

respect to taxes withheld at source for amounts paid or credited on

or after the first day of January next following the expiration of the

six-month notice period. With respect to other taxes, a termination

is effective for taxable periods beginning on or after the first day

of January next following the expiration of the six-month notice period.

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1The transcript of this hearing will be forthcoming as a separate committee print.

2Letter dated July 5, 1995 from the Department of the Treasury to the Senate Foreign Relations Committee, as quoted in the Report of the Senate Foreign Relations Committee on the Income Tax Convention with Ukraine, Exec. Rept. 104–5, August 10, 1995.

V. COMMITTEE ACTION

The Committee on Foreign Relations held a public hearing on the

proposed treaty with Sri Lanka on February 25, 2004. The hearing

was chaired by Senator Lugar.1 The committee considered the proposed treaty on March 4, 2004, and ordered the proposed treaty

with Sri Lanka favorably reported by a vote of 19 in favor and 0

against. Ayes: Senators Lugar, Hagel, Chafee, Allen, Brownback,

Enzi, Voinovich, Alexander, Coleman, Sununu, Biden, Sarbanes,

Dodd, Kerry, Feingold, Boxer, Nelson, Rockefeller, and Corzine.

VI. COMMITTEE COMMENTS

On balance, the Committee on Foreign Relations believes that

the proposed treaty with Sri Lanka is in the interest of the United

States and urges that the Senate act promptly to give advice and

consent to ratification. The committee has taken note of certain

issues raised by the proposed treaty and believes that the following

comments may be useful to the Treasury Department officials in

providing guidance on these matters should they arise in the

course of future treaty negotiations.

A. STABILITY OF SRI LANKAN LAW

In the past, the Treasury Department has maintained that a

country’s political situation should be a factor in determining

whether to build stronger economic ties with that country. As the

Treasury Department explained in a letter to the Senate Foreign

Relations Committee:

A country’s political situation is a factor that is considered in determining whether to build stronger economic

ties with that country. When consideration of this and

other factors leads to a policy of building stronger economic ties with a particular country, a tax treaty becomes

a logical part of that policy. One of a treaty’s main purposes is to foster the competitiveness of U.S. firms that

enter the treaty partner’s market place. As long as it is

U.S. policy to encourage U.S. firms to compete in these

market places, it is in the interest of the United States to

enter tax treaties.

Moreover, in countries where an unstable political climate may result in rapid and unforeseen changes in economic and fiscal policy, a tax treaty can be especially valuable to U.S. companies, as the tax treaty may restrain the

government from taking actions that would adversely impact U.S. firms, and provide a forum to air grievances that

otherwise would be unavailable.2

Background of Political Developments in Sri Lanka

The government of Sri Lanka is a constitutional democracy. For

approximately the past 20 years, the country has experienced periVerDate 11-MAY-2000 16:26 Mar 18, 2004 Jkt 000000 PO 00000 Frm 00004 Fmt 6659 Sfmt 6602 SLANKA SFORELA1 PsN: SFORELA1
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3Press Statement by Adam Ereli, Deputy Spokesman, United States Department of State, Sri

Lanka: Deputy Secretary Armitage’s Meeting with Minister for Economic Reform, Science, And

Technology Milinda Moragoda, December 29, 2003.

ods of significant conflict involving a separatist group that has been

declared by the United States to be a terrorist organization. In recent years, the Norwegian government has facilitated a peace process designed to resolve this conflict. In November 2003, while the

Sri Lankan prime minister was in Washington seeking support for

the peace process, the Sri Lankan president removed three cabinet

ministers, suspended parliament, and imposed martial law. In February 2004, the Sri Lankan president dissolved parliament and set

April 2, 2004 for the next general election. The State Department

has recently stated that Sri Lanka is currently experiencing a ‘‘domestic political crisis.’’ 3

Issues

Several issues arise in the consideration of a tax treaty with a

government that is experiencing political instability. One issue is

that it may be difficult to identify correctly the other country’s competent authority in situations where there are competing claims as

to who is authorized to exercise legislative, executive, or judicial

authority. Another issue is the extent to which any political instability also causes uncertainty as to the precise nature of the substantive law of that country. These uncertainties may make it difficult to administer the treaty.

A more specific issue arises in the context of the exchange-of-information provisions of the proposed treaty (Article 27). The exchange-of-information provision requires that information that is

exchanged shall be treated as secret by the receiving country in the

same manner as information obtained under its local laws and may

only be disclosed to persons involved in the assessment, collection,

or administration of taxes covered by the provision. Several concerns may arise with respect to the utilization of this provision

with a government that is experiencing political instability. First,

it may be more difficult to assess whether confidentiality will be respected when the information is initially exchanged. Second, it may

be more difficult to assess the possibility that inappropriate use

will be made in the future of the exchanged information. Third, the

country receiving the information could weaken (or potentially

eliminate) the confidentiality protections under its local laws,

which would concomitantly weaken or eliminate those protections

for exchanged information. However, these issues involving exchange of information may be dealt with by the United States competent authority in administering the provisions of the proposed

treaty.

Committee Conclusions

The committee has considered the political situation in Sri Lanka

and its implications for the proposed treaty. The committee recognizes the benefits this treaty would provide to U.S. taxpayers and

the positive effect the treaty could have on the Sri Lankan economic environment. On balance, the committee believes that it is

appropriate to proceed with the consideration of this proposed treaty and recommends its ratification.

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B. DEVELOPING COUNTRY CONCESSIONS

The proposed treaty contains a number of developing country

concessions, some of which are found in other U.S. income tax treaties with developing countries. The most significant of these concessions are listed below.

Definition of Permanent Establishment

The proposed treaty departs from the U.S. model treaty by providing for relatively broad source-basis taxation. In particular, the

proposed treaty’s permanent establishment article permits the

country in which business activities are performed to tax these activities in a broader range of circumstances than would be permitted under the U.S. model.

For example, under the proposed treaty, a building site, a construction or assembly project, or an installation or drilling rig or

ship used for the exploration of natural resources constitutes a permanent establishment if such project, or activity relating to such

installation, rig, or ship, as the case may be, continues for more

than 183 days. The U.S. model uses a threshold of 12 months. The

proposed treaty also provides that the furnishing of services (e.g.,

consulting services) by an enterprise through employees or other

personnel engaged for such purpose constitutes a permanent establishment if the activity continues within the country for an aggregate of more than 183 days in any 12-month period. The U.S.

model provides that these activities give rise to a permanent establishment only if conducted through a fixed place of business or by

a dependent agent.

In addition, the proposed treaty provides that, except in the case

of reinsurance, an insurance enterprise of one treaty country will

be deemed to have a permanent establishment in the other treaty

country if it collects premiums or insures risks situated in the

other treaty country through a person other than an independent

agent. The proposed treaty also provides that if the activities of an

agent are devoted wholly or almost wholly on behalf of an enterprise, and the transactions between the enterprise and the agent

do not conform to arm’s-length conditions, then the agent may

cause the enterprise to have a permanent establishment in the

country in which the agent’s activities are performed. In addition,

the proposed treaty provides that if a dependent agent maintains

in one treaty country a stock of goods or merchandise from which

the agent regularly fills orders or makes deliveries on behalf of an

enterprise of the other treaty country, and additional activities conducted in the source country on behalf of the enterprise have contributed to the conclusion of the sale of such goods or merchandise,

then the enterprise is deemed to have a permanent establishment

in the source country. These provisions all expand source-basis taxation beyond what is provided in the U.S. model.

Source Basis Taxation

Additional concessions to source basis taxation in the proposed

treaty include a maximum rate of source country tax on dividends

(15 percent) that is higher than that provided in the U.S. model

treaty; and broader source country taxation of personal services inVerDate 11-MAY-2000 16:26 Mar 18, 2004 Jkt 000000 PO 00000 Frm 00006 Fmt 6659 Sfmt 6602 SLANKA SFORELA1 PsN: SFORELA1
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come (especially directors’ fees) and income of artistes and athletes

than that allowed by the U.S. model treaty.

Taxation of Business Profits

Unlike the U.S. model, the proposed treaty does not permit a

permanent establishment to deduct payments that it makes to the

head office, or any other office, of the enterprise that includes the

permanent establishment if such payments constitute: (1) royalties,

fees or other similar payments in return for the use of patents,

know-how or other rights; (2) commissions or other charges for specific services performed or for management; or (3) interest on loans

to the permanent establishment. Similarly, such payments made to

the permanent establishment by the head office or other office of

the enterprise that includes the permanent establishment are not

taken into account in determining the taxable business profits of

the permanent establishment.

Other Concessions to Source-Basis Taxation

In several instances, the proposed treaty allows higher rates of

source-country tax than the U.S. model allows. The proposed treaty

allows a maximum rate of source-country tax of 15 percent on dividends, which is consistent with the U.S. model, but it does not reduce this maximum rate to five percent in cases in which the

shareholder owns at least 10 percent of the voting stock of the dividend-paying company, as the U.S. model does. The proposed treaty

also allows source-country taxation of interest at a maximum rate

of 10 percent, whereas the U.S. model generally does not permit

source-country taxation of interest. Similarly, the proposed treaty

allows source-country taxation of royalties at a maximum rate of

10 percent and certain equipment rentals at a maximum rate of

five percent, whereas the U.S. model generally does not permit

source-country taxation of such royalties and rental fees. The proposed treaty also allows the source country a non-exclusive right to

tax ‘‘other income’’ (i.e., income not specifically dealt with in other

provisions of the treaty), whereas the U.S. model provides for exclusive residence-based taxation of such income.

In addition, the proposed treaty permits source-country taxation

of income derived by a resident of the other treaty country from the

performance of independent personal services if the resident is

present in the source country for a total of more than 183 days during any 12-month period, even if such income is not attributable to

a fixed base or permanent establishment, as the U.S. model would

require.

Grants

The proposed treaty includes a provision providing favorable

treatment for grants received by a U.S. resident company from the

government of Sri Lanka for purposes of investment promotion and

economic development in Sri Lanka. The provision provides for the

exclusion from income and from earnings and profits for U.S. tax

purposes of a cash grant or similar payment by the government of

Sri Lanka to a U.S. resident in respect of a wholly owned enterprise in Sri Lanka, or to a company resident in Sri Lanka that is

wholly owned by a U.S. resident. No similar provision is found in

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the U.S. model treaty, nor is any similar provision included in any

U.S. bilateral tax treaty other than the U.S.-Israel treaty.

Issues

One purpose of the proposed treaty is to reduce tax barriers to

direct investment by U.S. firms in Sri Lanka. The practical effect

of the developing-country concessions could be greater Sri Lankan

taxation (or less U.S. taxation) of activities of U.S. firms in Sri

Lanka than would be the case under the rules of either the U.S.

or OECD model treaties.

There is a risk that the inclusion of these developing country

concessions in the proposed treaty could result in additional pressure on the United States to include them in future treaties negotiated with developing countries. However, these precedents already exist in the UN model treaty, and a number of existing U.S.

income tax treaties with developing countries already include similar concessions. Such concessions arguably are necessary in order

to obtain treaties with developing countries. Tax treaties with developing countries can be in the interest of the United States because they provide developing country tax relief for U.S. investors

and a clearer framework within which the taxation of U.S. investors will take place.

Committee Conclusions

The committee is concerned that developing country concessions

not be viewed as the starting point for future negotiations with developing countries. It must be clearly recognized that several of the

rules of the proposed treaty represent substantial concessions by

the United States, and that such concessions must be met with

substantial concessions by the treaty partner. Thus, future negotiations with developing countries should not assume, for example,

that the definition of permanent establishment provided in this

treaty will necessarily be available in every case; rather, such a

definition will be only adopted in the context of an agreement that

satisfactorily addresses the concerns of the United States.

C. EDUCATION AND TRAINING

Under the proposed treaty, U.S. taxpayers who are visiting Sri

Lanka and individuals who immediately prior to visiting the

United States were resident in Sri Lanka will be exempt from income tax in the host country on certain payments received if the

purpose of their visit is to engage in full-time education or to engage in full-time training. The exempt payments are limited to

those payments the individual may receive for his or her maintenance, education or training as long as such payments are from

sources outside the host country. In the case of an individual engaged primarily in training or education, but who is an employee

of a person resident in his or her home country or who is participating in a program of the government of the host country or of an

international organization, a different exemption applies. Such an

individual is exempt from host country tax on up to $6,000 of personal service income. The exemption from income tax in the host

country applies only for a period of one year or less.

9

Issues

Full-time students and persons engaged in full-time training

The proposed treaty generally has the effect of exempting payments received for the maintenance, education, and training of fulltime students and persons engaged in full-time training as a visitor

from the United States to Sri Lanka or as a visitor from Sri Lanka

to the United States from the income tax of both the United States

and Sri Lanka. This conforms to the U.S. model with respect to

students and generally conforms to the OECD model provisions

with respect to students and trainees.

This provision generally would have the effect of reducing the

cost of such education and training received by visitors. This may

encourage individuals in both countries to consider study abroad in

the other country. Such cross-border visits by students and trainees

may foster the advancement of knowledge and redound to the benefit of residents of both countries.

The proposed treaty applies a different standard when the visiting individual is an employee of a person in his or her home country or participates in a program sponsored by the government of

the host country or of an international organization. For such an

individual, exemption is not provided for payments from outside

the host country for maintenance, education, and training; rather,

such an individual may exempt, for the period of one year, up to

$6,000 in personal services income from tax in the host country. In

this regard the proposed treaty departs from the U.S. and OECD

model treaties. The U.S. model limits exemptions for payments of

maintenance, education, and training for one year in the case of

business trainees but does not provide any exemption related to

personal services income. The OECD model does not limit the duration of exemption for payments for maintenance, education, and

training for business trainees and does not provide any exemption

related to personal services income.

Depending upon the costs of maintenance, education, and training, the dollar value of the exemption to non-employee visitors may

be greater than the dollar value of the exemption for employee (or

program participant) visitors. By potentially subjecting such payments for maintenance, education, and training as well as all personal services income received to host country income tax in the

case of visits by employees or program participants engaged in visits of greater than one year in duration, the cost for such cross-border visitors of engaging in education or training programs of longer

duration would be increased. It could be argued that the training

or education of an employee relates primarily to specific job skills

of value to the individual or the individual’s employer rather than

enhancing general knowledge and cross-border understanding, as

may be the case in the education or training of a non-employee visitor. This could provide a rationale for providing more open-ended

treaty benefits in the case of non-employee students and trainees

as opposed to employees. However, if employment provides the underlying rationale for disparate treaty benefits, it may be questioned as to why training requiring one year or less is preferred to

training that requires a longer visit to the host country. As such,

the proposed treaty would favor certain types of training arrangeVerDate 11-MAY-2000 16:26 Mar 18, 2004 Jkt 000000 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 SLANKA SFORELA1 PsN: SFORELA1
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4The treaties with Italy, Slovenia, and Venezuela, each considered in 1999, the treaty with

the United Kingdom, considered in 2003, and the proposed treaty with Japan contain provisions

exempting the remuneration of visiting teachers and professors from host country income taxation. The treaties with Denmark, Estonia, Latvia, and Lithuania, also considered in 1999, did

not contain such an exemption, but did contain a more limited exemption for visiting researchers. The protocols with Australia and Mexico, ratified in 2003, did not include such exemptions.

ments over others. Further, if employment provides the underlying

rationale for disparate treaty benefits, why participants in a host

country or international organization sponsored program of education or training would be treated like employees is less easily discerned.

Teachers and professors

The proposed treaty is consistent with the U.S. model in which

no such exemption would be provided for the remuneration of visiting teachers, professors, or academic researchers. While this is

the position of the U.S. model, an exemption for visiting teachers

and professors has been included in many bilateral tax treaties. Of

the more than 50 bilateral income tax treaties in force, 30 include

provisions exempting from host country taxation the income of a

visiting individual engaged in teaching or research at an educational institution, and an additional 10 treaties provide a more

limited exemption from taxation in the host county for a visiting

individual engaged in research. Four of the most recently ratified

income tax treaties and the proposed treaty with Japan include

such a provision.

The effect of such exemptions for the remuneration of visiting

teachers, professors, and academic researchers generally is to make

such cross-border visits more attractive financially. Increasing the

financial reward may serve to encourage cross-border visits by academics. Such cross-border visits by academics for teaching and research may foster the advancement of knowledge and redound to

the benefit of residents of both countries. On the other hand, such

an exemption from income tax may be seen as unfair when compared to persons engaged in other occupations whose occupation or

employment may cause them to relocate temporarily abroad. Such

exemptions for remuneration of teachers, professors, and academic

researchers could be said to violate the principle of horizontal equity by treating otherwise similarly economically situated taxpayers differently.

Committee Conclusions

The committee notes that the special rules for certain students

and trainees differ from the U.S. and OECD model treaties. The

committee also notes that while the treatment of visiting teachers

and professors under the proposed treaty is consistent with the

U.S. model, it is inconsistent with other U.S. tax treaties in force.4

The committee encourages the Treasury Department to develop criteria for determining under what circumstances the inclusion of

these special provisions is appropriate and to consult with the committee regarding these criteria.

11

5Testimony of Barbara M. Angus, International Tax Counsel, United States Department of

the Treasury, before the Senate Committee on Foreign Relations on Pending Income Tax Agreements, February 25, 2004.

D. DISCLOSURE OF INFORMATION IN CONNECTION WITH OVERSIGHT OF

THE TAX SYSTEM

The proposed treaty provides that the two competent authorities

will exchange such information as is necessary to carry out the provisions of the proposed treaty or of the domestic laws of the two

countries concerning all national taxes insofar as the taxation

thereunder is not contrary to the proposed treaty, as well as to prevent fiscal evasion. Any information exchanged under the proposed

treaty is treated as secret in the same manner as information obtained under the domestic laws of the country receiving the information.

The exchanged information may be disclosed only to persons or

authorities (including courts and administrative bodies) involved in

the assessment, collection, or administration of, the enforcement or

prosecution in respect of, or the determination of appeals in relation to, the taxes to which the proposed treaty applies. Such persons or authorities must use the information for such purposes

only. Exchanged information may be disclosed in public court proceedings or in judicial decisions.

Unlike the U.S. model and unlike virtually all recent U.S. tax

treaties, the proposed treaty does not include a specific reference

to disclosure of exchanged information to persons or authorities engaged in the oversight of the tax system (e.g., the tax-writing committees of Congress and the General Accounting Office). This lacuna could present a serious impediment to legislative branch oversight of the operation of the proposed treaty. The Treasury Department explained this omission as follows:

The matter of access of information in connection with

oversight by the GAO and certain Congressional committees was discussed during the course of the negotiations,

and it was agreed with Sri Lanka that the language included in the provision allowed the necessary disclosures.

Therefore, a specific reference to oversight was not considered necessary. Nevertheless, an outstanding clarifying

this issue might be helpful in order to eliminate any

doubt.5

Committee Conclusions

The committee proposes an understanding as part of the resolution of ratification to make clear that information exchanged under

the treaty may be disclosed to appropriate congressional committees and the General Accounting Office. Although the negotiating

history of the treaty indicates that this issue was discussed in the

negotiations and that Sri Lanka agreed that Article 27 permitted

such disclosure, the committee believes it useful to add this understanding in order to ensure that there is no doubt on this matter.

The committee has not defined the term ‘‘appropriate congressional

committees.’’ The committee intends that it be given a broad reading and apply to any committees that, under applicable U.S. law

or regulation, are authorized to have access to tax information in

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connection with their role in overseeing the administration of U.S.

tax law.

E. U.S. MODEL TAX TREATY DIVERGENCE

It has been longstanding practice for the Treasury Department

to maintain, and update as necessary, a model income tax treaty

that reflects the current policies of the United States pertaining to

income tax treaties. The current U.S. policies on income tax treaties are contained in the U.S. model. Some of the purposes of the

U.S. model are explained by the Treasury Department in its Technical Explanation of the U.S. model:

[T]he Model is not intended to represent an ideal United

States income tax treaty. Rather, a principal function of

the Model is to facilitate negotiations by helping the negotiators identify differences between income tax policies in

the two countries. In this regard, the Model can be especially valuable with respect to the many countries that are

conversant with the OECD Model.... Another purpose

of the Model and the Technical Explanation is to provide

a basic explanation of U.S. treaty policy for all interested

parties, regardless of whether they are prospective treaty

partners.

U.S. model tax treaties provide a framework for U.S. treaty policy. These models provide helpful information to taxpayers, the

Congress, and foreign governments as to U.S. policies on often complicated treaty matters. For purposes of clarity and transparency in

this area, the U.S. model tax treaties should reflect the most current positions on U.S. treaty policy. Periodically updating the U.S.

model tax treaties to reflect changes, revisions, developments, and

the viewpoints of Congress with regard to U.S. treaty policy would

ensure that the model treaties remain meaningful and relevant.

With assistance from the staff of the Joint Committee on Taxation, the Senate Committee on Foreign Relations reviews tax treaties negotiated and signed by the Treasury Department before advice and consent to ratification by the full Senate is considered.

The U.S. model is important as part of this review process because

it helps the Senate determine the Administration’s most recent

treaty policy and understand the reasons for diverging from the

U.S. model in a particular tax treaty. To the extent that a particular tax treaty adheres to the U.S. model, transparency of the

policies encompassed in the tax treaty is increased and the risk of

technical flaws and unintended consequences resulting from the

tax treaty is reduced.

Committee Conclusions

The committee recognizes that tax treaties often diverge from the

U.S. model due to, among other things, the unique characteristics

of the legal and tax systems of treaty partners, the outcome of negotiations with treaty partners, and recent developments in U.S.

treaty policy. However, even without taking into account the central features of tax treaties that predictably diverge from the U.S.

model (e.g., withholding rates, limitation on benefits), the technical

provisions of recent U.S. tax treaties have diverged substantively

13

6Testimony of Barbara M. Angus, International Tax Counsel, United States Department of

the Treasury, before the Senate Committee on Foreign Relations on Pending Income Tax Agreements, February 25, 2004.

from the U.S. model with increasing frequency. The proposed treaty continues this apparent pattern, which may be indicative of a

growing obsolescence of the U.S. model. The important purposes

served by the U.S. model tax treaty are undermined if that model

does not accurately reflect current U.S. positions and the committee notes with approval the intention of the Treasury Department to update the U.S. model treaty and strongly encourages the

Treasury Department to complete the update in the coming year.6

In the process of revising the U.S. model, the committee expects

the Treasury Department to consult with the committee generally,

and specifically regarding the potential implications for U.S. trade

and revenue of the policies and provisions reflected in the new

model.

VII. BUDGET IMPACT

The committee has been informed by the staff of the Joint Committee on Taxation that the withholding tax changes and other provisions of the proposed treaty are estimated to cause a negligible

change in Federal budget receipts during the fiscal year 2004-2013

budget period, based solely on the amount and type of historical income flows between Sri Lanka and the United States.

VIII. EXPLANATION OF PROPOSED TREATY

A detailed, article-by-article explanation of the proposed income

tax treaty between the United States and Sri Lanka can be found

in the pamphlet of the Joint Committee on Taxation entitled Explanation of Proposed Income Tax Treaty Between the United States

and Sri Lanka (JCS-2–04), February 19, 2004.

IX. RESOLUTION OF RATIFICATION

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

That the Senate advise and consent to the ratification of the Convention between the Government of the United States of America

and the Government of the Democratic Socialist Republic of Sri

Lanka for the Avoidance of Double Taxation and the Prevention of

Fiscal Evasion with Respect to Taxes on Income, signed at Colombo

on March 14, 1985 (Treaty Doc. 99–10), and the Protocol amending

the Convention, together with an Exchange of Notes, signed at

Washington on September 20, 2002 (Treaty Doc. 108–9), subject to

the understanding that the authorities to which information may

be disclosed under Article 27 include appropriate congressional

committees and the General Accounting Office.

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