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[Senate Hearing 110-305]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 110-305

                                TREATIES

=======================================================================

                                HEARING

                               BEFORE THE

                     COMMITTEE ON FOREIGN RELATIONS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 17, 2007

                               __________

       Printed for the use of the Committee on Foreign Relations

  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html

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                     COMMITTEE ON FOREIGN RELATIONS

                JOSEPH R. BIDEN, Jr., Delaware, Chairman
CHRISTOPHER J. DODD, Connecticut     RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts         CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin       NORM COLEMAN, Minnesota
BARBARA BOXER, California            BOB CORKER, Tennessee
BILL NELSON, Florida                 JOHN E. SUNUNU, New Hampshire
BARACK OBAMA, Illinois               GEORGE V. VOINOVICH, Ohio
ROBERT MENENDEZ, New Jersey          LISA MURKOWSKI, Alaska
BENJAMIN L. CARDIN, Maryland         JIM DeMINT, South Carolina
ROBERT P. CASEY, Jr., Pennsylvania   JOHNNY ISAKSON, Georgia
JIM WEBB, Virginia                   DAVID VITTER, Louisiana
                   Antony J. Blinken, Staff Director
            Kenneth A. Myers, Jr., Republican Staff Director

                                  (ii)

                            C O N T E N T S

                              ----------                              
                                                                   Page

Barthold, Thomas A., acting chief of staff, Joint Committee on 
  Taxation, U.S. Congress, Washington, DC........................    16
    Prepared statement...........................................    18
Boland, Lois E., Director of the Office on International 
  Relations, U.S. Patent and Trademark Office, Department of 
  Commerce, Washington, DC.......................................    25
    Prepared statement...........................................    26
    Response to question submitted by Senator Joseph R. Biden, 
      Jr., concerning ABA letter.................................    54
    Responses to questions submitted by Senator Joseph R. Biden, 
      Jr.........................................................    56
Harrington, John, International Tax Counsel, Office of the 
  International Tax Counsel, Department of the Treasury, 
  Washington, DC.................................................     4
    Prepared statement...........................................     6
    Responses to questions submitted by Senator Joseph R. Biden, 
      Jr.........................................................    59
Lucchesi, Janice, chairwoman, Organization for International 
  Investment, Washington, DC.....................................    43
    Prepared statement...........................................    44
Lugar, Hon. Richard G., U.S. Senator from Indiana, prepared 
  statement......................................................     3
Menendez, Hon. Robert, U.S. Senator from New Jersey, opening 
  statement......................................................     1
Reinsch, Hon. William A., president, National Foreign Trade 
  Council, Washington, DC........................................    38
    Prepared statement...........................................    40
Scholz, Wesley, Director of the Office of Investment Affairs, 
  Department of State, Washington, DC............................    28
    Prepared statement...........................................    30

              Additional Material Submitted for the Record

American Intellectual Property Law Association (AIPLA), 
  Arlington, VA, letter to committee.............................    50
Drewsen, Alan C., executive director, International Trademark 
  Association, New York, NY, prepared statement..................    48
Krupka, Pamela Banner, chair, Section of Intellectual Property 
  Law, American Bar Association, Chicago, IL, letter to committee    53

                                 (iii)

 
                                TREATIES

                              ----------                              

                         TUESDAY, JULY 17, 2007

                                       U.S. Senate,
                            Committee on Foreign Relations,
                                                    Washington, DC.
[Treaty Doc. 109-18: Protocol Amending the Convention Between 
the United States and Finland for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion With Respect to 
Taxes on Income and on Capital; Treaty Doc. 109-19: Protocol 
Amending the Convention Between the United States and Denmark 
for the Avoidance of Double Taxation and the Prevention of 
Fiscal Evasion With Respect to Taxes on Income; Treaty Doc. 
109-20: Protocol Amending the Convention Between the United 
States and 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; Treaty Doc. 110-3: 
Convention Between the United States and Belgium for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion With Respect to Taxes on Income and Accompanying 
Protocol; Treaty Doc. 109-12: Patent Law Treaty and Regulations 
Under the Patent Law Treaty; Treaty Doc. 109-21: The Geneva Act 
of the Hague Agreement Concerning the International 
Registration of Industrial Designs; Treaty Doc. 110-2: The 
Singapore Treaty on the Law of Trademarks; and Treaty Doc. 109-
8: Protocol to the 1951 Treaty of Friendship, Commerce, and 
Navigation Between the United States and Denmark.]
                                ------                                

    The committee met, pursuant to notice, at 2:30 p.m., in 
room SD-419, Dirksen Senate Office Building, Hon. Robert 
Menendez, presiding.
    Present: Senators Menendez and Lugar.

           OPENING STATEMENT OF HON. ROBERT MENENDEZ,
                  U.S. SENATOR FROM NEW JERSEY

    Senator Menendez. This hearing will come to order.
    Let me welcome our witnesses and distinguished guests to 
the Foreign Relations Committee's hearing. I appreciate the 
work of the ranking member of the committee, and I am delighted 
to--delighted--to hold this hearing on three protocols amending 
existing tax treaties with Finland, Denmark, and Germany, a new 
tax treaty with Belgium, three intellectual property treaties 
and one separate protocol with Denmark.
    As you know, we have a very ambitious agenda, with full 
witness panels, so I'll keep this statement brief.
    I will say for the purposes of proceeding, there is a vote 
to take place at 2:45. It is the Chair's intention to start the 
testimony of witnesses, to go as close as possible into that 
vote, and then we may adjourn for approximately 20 minutes, 25 
minutes or so, while that vote is finishing and certain matters 
take place on the floor.
    The United States currently has 58 bilateral income tax 
treaties that cover 66 countries. This network covers the vast 
majority of foreign trade and investment of U.S. companies. 
These treaties help establish a framework that allows 
international trade and investment to flourish, and, therefore, 
help bolster economic relationships between the United States 
and countries that are already close trade and investment 
partners.
    These bilateral tax treaties are the primary means for 
eliminating unnecessary barriers to cross-border trade and 
investment. They accomplish this through providing greater 
certainty to taxpayers, dividing taxing rights between the two 
jurisdictions so the taxpayer is not subject to double 
taxation, reducing the risks of excessive taxation, and by 
ensuring that taxpayers will not be subject to discriminatory 
taxation in the foreign jurisdiction.
    As we live in an increasingly globalized world, it is 
crucial to take steps to harmonize the tax systems of two 
countries which will benefit from these treaties. But these 
treaties will benefit not only U.S. enterprises, but help the 
U.S. economy grow and increase U.S. employment. Ultimately, I 
believe these treaties will contribute to strengthening the 
rule of law and improving the quality of life.
    With reference to these tax treaties, we'll first look at 
the protocols amending provisions of existing income tax 
treaties with Finland, Denmark, and Germany. We have a strong 
alliance with these nations, and encourage and engage in 
significant cross-border activity.
    In 2005, Finland and Denmark combined to import 4.2 billion 
dollars' worth of goods from the United States, and exported a 
combined 9.4 billion dollars' worth of goods to the United 
States. In 2006, Germany, alone, imported $34.2 billion in 
goods and exported 8.48 billion dollars' worth of goods to the 
United States. These new protocols will stimulate even more 
growth as they work to avoid double taxation and prevent fiscal 
evasion with respect to taxes.
    Our next agreement is a new tax treaty with Belgium. The 
value of trade between the United States and Belgium is large, 
with the United States exporting $18.7 billion of goods and 
importing $13 billion in goods in 2005. This treaty will also 
help stimulate more economic growth between our two nations.
    We also have before us three specific intellectual property 
treaties, a patent law treaty, the Geneva Act of the Hague 
Agreement, concerning the international registration of 
industrial designs, and the Singapore treaty on the law of 
trademarks. These three treaties are multilateral instruments 
that would harmonize and improve the administration of 
international intellectual property rights. Part of this would 
be to achieve by--would be achieved by reducing some of the 
bureaucratic obstacles by introducing innovative measures such 
as electronic filing.
    However, it has been frustrating that it took so long for 
the implementing legislation to come out of the U.S. Patent and 
Trade Office for these intellectual property treaties, and I 
want to be clear that I expect the Senate and Judiciary 
Committee to have a chance to carefully review it before voting 
on the treaty in committee.
    And, finally, we will look at the protocol to the Treaty of 
Friendship, Commerce, and Navigation with Denmark. The protocol 
is very short. Its entire purpose is to provide a legal basis 
for issuing treaty investor--E-2--visas to Danish investors who 
wish to enter the United States on a reciprocal basis.
    We are joined today by a distinguished panel of witnesses 
who will help us evaluate the treaties and protocols before us.
    In our first panel, from the Treasury Department, we 
welcome Mr. John Harrington, the Acting International Tax 
Counsel; also, Mr. Tom Barthold, the chief of staff of the 
Joint Committee on Taxation; Mr. Lois Boland, the Director of 
the Office of International Relations at the United States 
Patent and Trademark Office; and Mr. Wesley Scholz, Director of 
the Office of Investment Affairs for the Department of State.
    We will also have a second panel. I'll introduce them at 
that time. The committee looks forward to the insight and 
analysis of all of our witnesses.
    And, finally, let me thank Senator Biden's staff, 
especially Avril Haines, who has helped us out tremendously in 
preparing for this hearing.
    With that, let me recognize the ranking member of the full 
committee for any comments he wishes to make.
    Senator Lugar.
    Senator Lugar. Thank you very much, Mr. Chairman. Thank you 
for chairing this important hearing.
    I'd like to ask that my statement be made a part of the 
record.
    Senator Menendez. Without objection.
    Senator Lugar. I've simply cited the good work of the last 
two Congresses in approving tax agreements with a number of 
countries, and other intellectual property agreements. The very 
strong panel we have today will affirm the value of the 
treaties that we're going to consider. I'm supportive of these 
and am grateful we have come to a hearing to discuss 
opportunities for action.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Lugar follows:]

 Prepared Statement of Hon. Richard G. Lugar, U.S. Senator From Indiana

    I appreciate the opportunity to evaluate the Patent Law Treaty; the 
Geneva Act on the Registration of Industrial Designs; the Singapore 
Treaty on Trademarks; protocols amending the existing tax treaties with 
Germany, Finland, and Denmark; and a tax treaty update with Belgium. 
All of these agreements seek to improve our commercial relationships 
with valued trade and investment partners.
    During the last two Congresses, this committee and the full Senate 
approved tax agreements with Mexico, Australia, the United Kingdom, 
Japan, Sri Lanka, the Netherlands, Barbados, France, Bangladesh, and 
Sweden. I encourage the administration to continue its successful 
pursuit of treaties that strengthen the American economy by helping our 
businesses access foreign markets and by providing incentives for 
foreign companies to create more jobs in the United States.
    As the United States considers how to maintain economic growth, it 
is important that we eliminate impediments that prevent our companies 
from fully accessing international markets. These impediments may come 
in the form of regulatory barriers, taxes, tariffs, or unfair 
treatment. In the case of taxes, we should work to ensure that 
companies pay their fair share, while not being unfairly taxed twice on 
the same revenue. Tax treaties are intended to prevent double taxation 
so that companies are not inhibited from doing business overseas. As 
the U.S. moves to keep the economy growing and to increase U.S. 
employment, international tax policies that promote foreign direct 
investment in the United States are critically important.
    The intellectual property treaties before us are also important 
components of our global economic policy. One of the key benefits of 
safeguarding intellectual property is preserving innovation. Businesses 
and inventors must have incentives to undertake the investments needed 
to create new products. Theft of American intellectual property results 
in competitive disadvantages to U.S. industries and job losses for 
American workers.
    International counterfeiting and piracy have increased dramatically 
in recent years. In addition to the direct impact on the sales and 
profits of the subject industries, there is also significant harm and 
deception to consumers who believe they are purchasing legitimate 
goods. We should work to enhance standards and improve the protection 
of patents, industrial designs, and trademarks.
    The agreements we are considering are important to commercial 
relationships, which advance domestic economic growth and employment. 
But I would emphasize that these agreements also have diplomatic value. 
Cooperation on the commercial front enhances our ability to work with 
nations on other matters.
    I thank the witnesses for their testimony, and I look forward to 
expeditious consideration of each of these agreements by the committee 
and the full Senate.

    Senator Menendez. Thank you, Senator Lugar.
    With that, let me start with John Harrington. We're asking 
that all of your statements--all of your full statements be 
included in the record, and we're asking you to summarize your 
written testimony, in the interest of time, to about 7 minutes.
    So, with that--Mr. Harrington.

STATEMENT OF JOHN HARRINGTON, INTERNATIONAL TAX COUNSEL, OFFICE 
 OF THE INTERNATIONAL TAX COUNSEL, DEPARTMENT OF THE TREASURY, 
                         WASHINGTON, DC

    Mr. Harrington. Thank you, Mr. Chairman.
    Mr. Chairman, Ranking Member Lugar, and distinguished 
members of the committee, I appreciate the opportunity to 
appear today before you to recommend favorable action on the 
four tax agreements that are pending before this committee.
    I have a written statement that I ask, per your previous 
statement, be made part of the record.
    Senator Menendez. Without objection.
    Mr. Harrington. The agreements before the committee today, 
with Belgium, Denmark, Finland, and Germany, serve to further 
the goals of our tax treaty network and improve longstanding 
treaty relationships. All four agreements reduce withholding 
tax rates for dividends that they meet certain ownership and 
holding-period requirements. All four agreements include 
updated limitation-on-benefits provisions and other changes to 
reflect U.S. law and tax treaty policy. In addition, the 
proposed new treaty with Belgium and the proposed protocol with 
Germany provide, in certain circumstances, for arbitration.
    Because my written statements and the technical 
explanations provide detailed explanations of the provisions of 
the agreements, I would like to describe briefly the more 
significant features of those agreements.
    Finland. The proposed protocol with Finland amends the 
current convention, which entered into force in 1990. The 
proposed protocol makes a number of changes to the dividend 
article of the current convention, including eliminating the 
source-country withholding tax on dividends meeting certain 
ownership and holding-period requirements and on dividends to 
pension funds. It also eliminates source-country withholding 
tax on royalties. It updates the limitation-on-benefits article 
of the current convention, the rules for taxing former citizens 
and former long-term residents, and the exchange-of-information 
provisions.
    Denmark. The proposed protocol with Denmark closely follows 
the recent protocol with Sweden and the proposed protocol with 
Finland with respect to dividends and limitation on benefits. 
It amends the current convention to update the rules for taxing 
former citizens and former long-term residents.
    Germany. The proposed protocol amends the current 
convention concluded in 1989. The proposed protocol eliminates 
the source-country withholding tax on many intercompany 
dividends. The proposed protocol also eliminates withholding 
tax on dividends to pension funds and significantly improves 
the current convention's treatment of pensions. It amends the 
current convention to update the rules for taxing former 
citizens and former long-term residents, strengthens the 
treaty's limitation-on-benefits article, and adopts the U.S. 
model treaty approach to attribution of profits to a permanent 
establishment.
    The proposed protocol provides for arbitration of certain 
cases that have not been resolved by the competent authorities 
within a specified time period, generally 2 years from the 
commencement of the case. Consistent with the current mutual 
agreement procedure, the taxpayer can terminate arbitration at 
any time by withdrawing its request for competent authority 
assistance. The taxpayer also retains the right to litigate in 
lieu of accepting the result of arbitration, just as it would 
be entitled to litigate in lieu of accepting the result of a 
negotiation under the mutual agreement procedure.
    Belgium. The proposed income tax convention and 
accompanying protocol with Belgium would replace the current 
convention, which entered into force in 1970. The new proposed 
treaty would eliminate the withholding tax on interest payments 
and many intercompany dividends. The new treaty also eliminates 
withholding tax on dividends to pension funds and updates the 
current convention's treatment of pensions. It addresses 
taxation of former citizens and former long-term residents, 
strengthens limitation on benefits, and adopts the U.S. model 
treaty approach to attribution of profits to a permanent 
establishment.
    Of particular note is the greatly strengthened information 
exchange article. The information exchange article of the 
proposed treaty specifically addresses a number of problems 
that have prevented effective information exchange under the 
existing convention. The new provision makes clear that Belgium 
is obligated to provide the United States with such 
information, including bank information, as is necessary to 
carry out the treaty in our domestic law.
    Like the proposed protocol with Germany, the proposed 
treaty provides for arbitration of certain cases before the 
competent authorities. The arbitration provision and procedures 
adopted in the proposed treaty follow closely the approach in 
the proposed protocol with Germany, with the exceptions that, 
one, the scope of the arbitration process covers all issues 
within the purview of the competent authorities, and, two, the 
process must be completed within 6 months.
    In both agreements, the mandatory arbitration provision is 
designed to achieve the benefit of an arbitration provision 
with the least disruption to the process of competent authority 
negotiations.
    Before closing, I would like to note that we continue to 
maintain a very active calendar of tax treaty negotiations. A 
key priority is updating the few remaining U.S. tax treaties 
that provide for low withholding tax rates, but do not include 
limitation-on-benefits provisions.
    Let me repeat our appreciation for the committee's interest 
in these agreements and in the U.S. tax treaty network. We are 
also grateful for the assistance and cooperation of the staffs 
of your committee and of the Joint Committee on Taxation in the 
tax treaty process.
    I'd also like to recognize the tireless work of the 
Treasury team--Jesse Eggert, Henry Louie, Gretchen Sierra, 
David Sotos, and especially Detta Kissel.
    We urge the committee and the Senate to take prompt and 
favorable action on all of these agreements. I'd be happy to 
answer any questions that you have.
    [The prepared statement of Mr. Harrington follows:]

   Prepared Statement of John Harrington, International Tax Counsel, 
 Office of the International Tax Counsel, Department of the Treasury, 
                             Washington, DC

    Mr. Chairman, Ranking Member Lugar, and distinguished members of 
the committee, I appreciate the opportunity to appear today at this 
hearing to recommend, on behalf of the administration, favorable action 
on four tax agreements that are pending before this committee. We 
appreciate the committee's interest in these agreements and in the U.S. 
tax treaty network, as demonstrated by the scheduling of this hearing.
    This administration is dedicated to eliminating unnecessary 
barriers to cross-border trade and investment. The primary means for 
eliminating tax barriers to trade and investment are bilateral tax 
treaties. Tax treaties eliminate barriers by providing greater 
certainty to taxpayers regarding their potential liability to tax in 
the foreign jurisdiction; by allocating taxing rights between the two 
jurisdictions so that the taxpayer is not subject to double taxation; 
by reducing the risk of excessive taxation that may arise because of 
high gross-basis withholding taxes; and by ensuring that taxpayers will 
not be subject to discriminatory taxation in the foreign jurisdiction. 
The international network of over 2,500 bilateral tax treaties has 
established a stable framework that allows international trade and 
investment to flourish. The success of this framework is evidenced by 
the fact that countless cross-border transactions, from an individual's 
investment in a few shares of a foreign company to a multibillion 
dollar purchase of a foreign operating company, take place each year, 
with only a relatively few disputes regarding the allocation of tax 
revenues between governments.
    To ensure that our tax treaties cannot be used inappropriately, we 
continually monitor our existing network of tax treaties to make sure 
that each treaty continues to serve its intended purposes and is not 
being exploited for unintended purposes. A tax treaty reflects a 
balance of benefits that is struck when the treaty is negotiated and 
that can be affected by future developments. In some cases, changes in 
law or policy in one or both of the treaty partners may make it 
possible to increase the benefits provided by the treaty; in these 
cases, negotiation of a new or revised agreement may be very 
beneficial. In other cases, developments in one or both countries, or 
international developments more generally, may require a revisiting of 
the agreement to prevent exploitation and eliminate unintended and 
inappropriate consequences; in these cases, it may be necessary to 
modify or even terminate the agreement. Both in setting our overall 
negotiation priorities and in negotiating individual agreements, our 
focus is on ensuring that our tax treaty network fulfills its goals of 
facilitating cross-border trade and investment and preventing fiscal 
evasion.
    The agreements before the committee today with Belgium, Denmark, 
Finland, and Germany serve to further the goals of our tax treaty 
network and improve longstanding treaty relationships. We urge the 
committee and the Senate to take prompt and favorable action on all of 
these agreements.
                 purposes and benefits of tax treaties
    Tax treaties set out clear ground rules that govern tax matters 
relating to trade and investment between the two countries. A tax 
treaty is intended to mesh the tax systems of the two countries so that 
there is little potential for dispute regarding the amount of tax that 
should be paid to each country. The goal is to ensure that taxpayers do 
not end up caught in the middle between two governments, each of which 
claims taxing jurisdiction over the same income. A treaty with clear 
rules addressing the most likely areas of disagreement minimizes the 
time the two governments (and taxpayers) spend in resolving individual 
disputes.
    One of the primary functions of tax treaties is to provide 
certainty to taxpayers regarding the threshold question with respect to 
international taxation: Whether a taxpayer's cross-border activities 
will subject it to taxation by two or more countries. Tax treaties 
answer this question by establishing the minimum level of economic 
activity that must be engaged in within a country by a resident of the 
other country before the first country may tax any resulting business 
profits. In general terms, tax treaties provide that if the 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 its residents.
    Tax treaties protect taxpayers from potential double taxation 
through the allocation of taxing rights between the two countries. This 
allocation takes several forms. First, the treaty has a mechanism for 
resolving the issue of residence in the case of a taxpayer that 
otherwise would be considered to be a resident of both countries. 
Second, with respect to each category of income, the treaty assigns the 
``primary'' right to tax to one country, usually (but not always) the 
country in which the income arises (the ``source'' country), and the 
``residual'' right to tax to the other country, usually (but not 
always) the country of residence of the taxpayer (the ``residence'' 
country). Third, the treaty provides rules for determining which 
country will be treated as the source country for each category of 
income. Finally, the treaty provides rules limiting the amount of tax 
that the source country can impose on each category of income and 
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.
    As a complement to these substantive rules regarding allocation of 
taxing rights, tax treaties provide a mechanism for dealing with 
disputes or questions of application that arise after the treaty enters 
into force. In such cases, designated tax authorities of the two 
governments--known as the ``competent authorities'' in tax treaty 
parlance--are to consult and reach an agreement under which the 
taxpayer's income is allocated between the two taxing jurisdictions on 
a consistent basis, thereby preventing the double taxation that might 
otherwise result. The U.S. competent authority under our tax treaties 
is the Secretary of the Treasury. That function has been delegated to 
the Deputy Commissioner of the Internal Revenue Service, Large and Mid-
Size Business (International).
    In addition to reducing potential double taxation, tax treaties 
also reduce potential ``excessive'' taxation by reducing withholding 
taxes that are imposed at source. Under U.S. domestic law, payments to 
non-U.S. persons of dividends and royalties, as well as certain 
payments of interest, are subject to withholding tax equal to 30 
percent of the gross amount paid. Most of our trading partners impose 
similar levels of withholding tax on these types of income. This tax is 
imposed on a gross, rather than net, amount. Because the withholding 
tax does not take into account expenses incurred in generating the 
income, the taxpayer that bears the burden of withholding tax 
frequently will be subject to an effective rate of tax that is 
significantly higher than the tax rate that would be applicable to net 
income in either the source or residence country. The taxpayer may be 
viewed, therefore, as suffering ``excessive'' taxation. Tax treaties 
alleviate this burden by setting maximum levels for the withholding tax 
that the treaty partners may impose on these types of income or by 
providing for exclusive residence-country taxation of such income 
through the elimination of source-country withholding tax. Because of 
the excessive taxation that withholding taxes can represent, the United 
States seeks to include in tax treaties provisions that substantially 
reduce or eliminate source-country withholding taxes.
    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 types of discriminatory 
measures that once were common in some tax systems. At the same time, 
tax treaties clarify the manner in which possible discrimination is to 
be tested in the tax context. Particular rules are needed here, for 
example, to reflect the fact that foreign persons that are subject to 
tax in the host country only on certain income may not be in the same 
position as domestic taxpayers that may be subject to tax in such 
country on all their income.
    In addition to these core provisions, tax treaties include 
provisions dealing with more specialized situations, such as rules 
coordinating the pension rules of the tax systems of the two countries 
or addressing the treatment of Social Security benefits and alimony and 
child-support payments in the cross-border context. These provisions 
are becoming increasingly important as more individuals move between 
countries or otherwise are engaged in cross-border activities. While 
these matters may not involve substantial tax revenue from the 
perspective of the two governments, rules providing clear and 
appropriate treatment are very important to the affected taxpayers.
    Tax treaties also include provisions related to tax administration. 
A key element of U.S. tax treaties is the provision addressing the 
exchange of information between the tax authorities. Under tax 
treaties, the competent authority of one country may request from the 
other competent authority such information as may be relevant for the 
proper administration of the first country's tax laws; the information 
provided pursuant to the request is subject to the strict 
confidentiality protections that apply to taxpayer information. Because 
access to information from other countries is critically important to 
the full and fair enforcement of the U.S. tax laws, information 
exchange is a priority for the United States in its tax treaty program. 
If a country has bank-secrecy rules that would operate to prevent or 
seriously inhibit the appropriate exchange of information under a tax 
treaty, we will not conclude a tax treaty with that country. Indeed, 
the need for appropriate information exchange provisions is one of the 
treaty matters that we consider non-negotiable.
             tax treaty negotiating priorities and process
    The United States has a network of 58 income tax treaties covering 
66 countries. This network covers the vast majority of foreign trade 
and investment of U.S. businesses. In establishing our negotiating 
priorities, our primary objective is the conclusion of tax treaties or 
protocols that will provide the greatest economic benefit to the United 
States and to U.S. taxpayers. We communicate regularly with the U.S. 
business community, seeking input regarding the areas in which treaty 
network expansion and improvement efforts should be focused and 
information regarding practical problems encountered under particular 
treaties and particular tax regimes.
    The primary constraint on the size of our tax treaty network may be 
the complexity of the negotiations themselves. The various functions 
performed by tax treaties, and most particularly the need to mesh the 
particular tax systems of the two treaty partners, make the negotiation 
process exacting and time-consuming. Accordingly, it frequently will 
make more sense for the United States to negotiate an update to an 
existing agreement, rather than to negotiate a new tax treaty.
    Numerous features of the treaty partner's particular tax 
legislation and its interaction with U.S. domestic tax rules must be 
considered in negotiating a treaty or protocol. Examples include 
whether the country eliminates double taxation through an exemption 
system or a credit system, the country's treatment of partnerships and 
other transparent entities, and how the country taxes contributions to 
pension funds, earnings of the funds, and distributions from the funds.
    Moreover, a country's fundamental tax policy choices are reflected 
not only in its tax legislation but also in its tax treaty positions. 
These choices differ significantly from country to country, with 
substantial variation even across countries that seem to have quite 
similar economic profiles. A treaty negotiation must take into account 
all of these aspects of the particular treaty partner's tax system and 
treaty policies to arrive at an agreement that accomplishes the United 
States tax treaty objectives.
    Obtaining the agreement of our treaty partners on provisions of 
importance to the United States sometimes requires concessions on our 
part. Similarly, the other country sometimes must make concessions to 
obtain our agreement on matters that are critical to it. In most cases, 
the process of give-and-take produces a document that is the best tax 
treaty that is possible with that country. In other cases, we may reach 
a point where it is clear that it will not be possible to reach an 
acceptable agreement. In those cases, we simply stop negotiating with 
the understanding that negotiations might restart if circumstances 
change. Each treaty that we present to the Senate represents not only 
the best deal that we believe we can achieve with the particular 
country, but also constitutes an agreement that we believe is in the 
best interests of the United States.
    In some situations, the right result may be no tax treaty at all or 
may be a substantially curtailed form of tax agreement. With some 
countries a tax treaty may not be appropriate because of the 
possibility of abuse. With other countries there simply may not be the 
type of cross-border tax issues that are best resolved by treaty. For 
example, if a country does not impose significant income taxes, there 
is little possibility of double taxation of cross-border income, and an 
agreement that is focused on the exchange of tax information may be the 
most appropriate agreement. Alternatively, a bifurcated approach may be 
appropriate in situations where a country has a special preferential 
tax regime for certain parts of the economy that is different from the 
tax rules generally applicable to the country's residents. In those 
cases, the residents benefiting from the preferential regime may not 
face potential double taxation and so should not be entitled to the 
reductions in U.S. withholding taxes accorded by a tax treaty, while a 
full treaty relationship might be useful and appropriate to avoid 
double taxation in the case of the residents who do not receive the 
benefit of the preferential regime.
    Prospective treaty partners must evidence a clear understanding of 
what their obligations would be under the treaty, including those with 
respect to information exchange, and must demonstrate that they would 
be able to fulfill those obligations. Sometimes a tax treaty may not be 
appropriate because a potential treaty partner is unable to do so. In 
other cases, a tax treaty may be inappropriate because the potential 
treaty partner is not willing to agree to particular treaty provisions 
that are needed to address real tax problems that have been identified 
by U.S. businesses operating there.
    A high priority for improving our overall treaty network is 
continued focus on prevention of ``treaty shopping.'' The U.S. 
commitment to including comprehensive limitation on benefits provisions 
is one of the keys to improving our overall treaty network. Our tax 
treaties are intended to provide benefits to residents of the United 
States and residents of the particular treaty partner on a reciprocal 
basis. The reductions in source-country taxes agreed to in a particular 
treaty mean that U.S. persons pay less tax to that country on income 
from their investments there and residents of that country pay less 
U.S. tax on income from their investments in the United States. Those 
reductions and benefits are not intended to flow to residents of a 
third country. If third-country residents are able to exploit one of 
our tax treaties to secure reductions in U.S. tax, the benefits would 
flow only in one direction as third-country residents would enjoy U.S. 
tax reductions for their U.S. investments, but U.S. residents would not 
enjoy reciprocal tax reductions for their investments in that third 
country. Moreover, such third-country residents may be securing 
benefits that are not appropriate in the context of the interaction 
between their home country's tax systems and policies and those of the 
United States. This use of tax treaties is not consistent with the 
balance of the deal negotiated. 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 that we can 
secure for U.S. persons the benefits of reductions in source-country 
tax on their investments in that country.
                      consideration of arbitration
    Tax treaties cannot facilitate cross-border investment and provide 
a more stable investment environment unless the agreement is 
effectively implemented by the tax administrations of the two 
countries. Under our tax treaties, when a U.S. taxpayer becomes 
concerned about implementation of the treaty, the taxpayer can bring 
the matter to the U.S. competent authority who seeks to resolve the 
matter with the competent authority of the treaty partner. The 
competent authorities will work cooperatively to resolve genuine 
disputes as to the appropriate application of the treaty.
    The U.S. competent authority has a good track record in resolving 
disputes. Even in the most cooperative bilateral relationships, 
however, there will be instances in which the competent authorities 
will not be able to reach a timely and satisfactory resolution. 
Moreover, as the number and complexity of cross-border transactions 
increases, so does the number and complexity of cross-border tax 
disputes. Accordingly, we have considered ways to equip the U.S. 
competent authority with additional tools to resolve disputes promptly, 
including the possible use of arbitration in the competent authority 
process.
    The first U.S. tax agreement that contemplates arbitration is the 
current U.S.-Germany income tax treaty, signed in 1989. Tax treaties 
with several other countries, including Canada, Mexico, and the 
Netherlands, incorporate authority for establishing voluntary binding 
arbitration procedures based on the provision in the U.S.-Germany 
treaty. Although we believe that the presence of these voluntary 
arbitration provisions may have provided some limited assistance in 
reaching mutual agreements, it has become clear that the ability to 
enter into voluntary arbitration does not provide sufficient incentive 
to resolve problem cases in a timely fashion.
    Over the past few years, we have carefully considered and studied 
mandatory arbitration procedures. In particular, we examined the 
experience of countries that adopted mandatory binding arbitration 
provisions with respect to tax matters. Many of them report that the 
prospect of impending mandatory arbitration creates a significant 
incentive to compromise before commencement of the process. Based on 
our review of the U.S. experience with arbitration in other areas of 
the law, the success of other countries with arbitration in the tax 
area, and the overwhelming support of the business community, we 
concluded that mandatory binding arbitration as the final step in the 
competent authority process can be an effective and appropriate tool to 
facilitate mutual agreement under U.S. tax treaties.
    Two of the agreements before the committee (Germany and Belgium) 
adopt an expedited approach to mandatory arbitration designed to 
achieve the benefit of an arbitration provision with the least 
disruption to the process of competent authority negotiation. Thus, the 
mandatory arbitration process is formulated as part of the mutual 
agreement procedure rather than as a separate, extrajudicial procedure.
    As in the current mutual agreement procedure, a U.S. taxpayer 
presents its problem to the competent authority and participates in 
formulating the position the U.S. competent authority will take in 
discussions with the treaty partner. Under the new arbitration 
provisions, if the competent authorities cannot come to resolution 
within 2 years, the competent authorities must present the issue to an 
arbitration board for resolution unless both competent authorities 
agree that the case is not suitable for arbitration. The arbitration 
board can resolve the issue only by choosing the position of one of the 
competent authorities. That position is adopted as the agreement of the 
competent authorities and is treated like any other mutual agreement 
(i.e., one that has been negotiated) under the treaty.
    Because the arbitration board can only choose between the positions 
of each competent authority, the expectation is that the differences 
between the positions of the competent authorities will tend to narrow 
as the case moves closer to arbitration. If the arbitration provision 
is successful, difficult issues will be resolved without resort to 
arbitration. Thus, it is our expectation that these arbitration 
provisions will be rarely utilized, but that their presence will 
encourage the competent authorities to take approaches to their 
negotiations that result in mutually agreeable conclusions.
    The arbitration process adopted in the agreements with Germany and 
Belgium is mandatory and binding with respect to the competent 
authorities. However, consistent with the negotiation process under the 
mutual agreement procedure, the taxpayer can terminate the arbitration 
at any time by withdrawing its request for competent authority 
assistance. Moreover, the taxpayer retains the right to litigate the 
matter in lieu of accepting the result of the arbitration, just as it 
would be entitled to litigate in lieu of accepting the result of a 
negotiation under the mutual agreement procedure.
    Arbitration is a growing and developing field, and there are many 
forms of arbitration from which to choose. We intend to continue to 
study other arbitration provisions and to monitor the performance of 
the provisions in the agreements with Belgium and Germany once 
ratified. Although the competent authorities of these countries 
generally work well with our competent authority, we believe that these 
proposed arbitration provisions will supplement and reinforce the 
current competent authority process in those treaties and will 
facilitate negotiation of arbitration provisions with other countries 
with which we need to bolster the competent authority process.
    In short, the goal is to craft, in a manner acceptable to each 
appropriate treaty partner, an effective mechanism to facilitate the 
ordinary process of negotiation under the treaty's mutual agreement 
procedure.
            discussion of proposed new treaty and protocols
    I now would like to discuss the four agreements that have been 
transmitted for the Senate's consideration. We have submitted a 
Technical Explanation of each agreement that contains detailed 
discussions of the provisions of each treaty or protocol. These 
Technical Explanations serve as an official guide to each agreement.
    Before describing specific aspects of each agreement, I would like 
to point out one item shared by all four agreements: The elimination of 
source-country withholding tax on certain intercompany dividends. As we 
have stated previously to this committee, we believe that the 
elimination of source-country taxation of dividends should be 
considered only on a case-by-case basis. It is not the U.S. model 
position because we do not believe that it is appropriate in every 
treaty. Consideration of such a provision in a treaty is appropriate 
only if the treaty contains antitreaty-shopping rules and an 
information exchange provision that meet the highest standards. In 
addition to these prerequisites, the overall balance of the treaty must 
be considered. We believe that these conditions and considerations are 
met in all four agreements, and that the United States and U.S. 
taxpayers will benefit significantly from the elimination of the 
withholding tax in each agreement.
                                finland
    The proposed protocol with Finland was signed in Helsinki on May 
31, 2006, and amends the current Convention, which entered into force 
in 1990. The most significant provisions in this agreement relate to 
dividends, royalties, antiabuse provisions, and exchange of 
information. The protocol also makes a number of necessary updates to 
the current Convention and brings the Convention more in line with 
recent agreements with other Nordic countries.
    The proposed protocol makes a number of changes to the dividend 
article of the current Convention. As mentioned above, the proposed 
protocol eliminates the source-country withholding tax on many 
intercompany dividends. In general, a company receiving a dividend must 
have a substantial interest in the distributing corporation for a 12-
month period and meet special limitation on benefits provisions to 
qualify for the exemption from withholding tax. The proposed protocol 
also eliminates the source-country withholding tax on dividends paid to 
pension funds. This provision is necessary to eliminate the double 
taxation that occurs when tax is imposed on distributions to pension 
funds that cannot be credited or used against further tax in the hands 
of the beneficiaries of the fund. The proposed protocol also updates 
the dividend article to incorporate policies reflected in the U.S. 
model provision, such as those regarding real estate investment trusts 
(REITs).
    The proposed protocol makes a significant change to the royalty 
article of the current Convention. The current Convention allows the 
source country to withhold on royalty payments with respect to certain 
types of property to residents of the other treaty partner, but limits 
the withholding rate to a maximum of 5 percent. The proposed protocol 
eliminates source-country withholding on royalties payments regardless 
of the type of intellectual property involved, bringing the Convention 
in line with the U.S. model treaty.
    The proposed protocol makes a number of changes to the limitation 
on benefits article of the current Convention. It tightens the 
limitation on benefits rules applicable to publicly traded companies to 
ensure a closer nexus between the company and its residence country 
through regional trading or local management and control. The protocol 
further tightens the limitation on benefits provision by including a 
so-called ``triangular provision'' adopted in many U.S. treaties with 
countries that exempt income earned in third countries. Under the 
provision, the United States need not allow full treaty benefits to a 
Finnish enterprise with respect to certain income exempt from Finnish 
tax and attributable to a permanent establishment in a third state if 
the income is not subject to a sufficient level of tax in the third 
state. The proposed protocol also includes a provision adopted in U.S. 
agreements with many European countries that allows a company resident 
in one of the contracting states to qualify for treaty benefits in the 
other state if the company is substantially owned by third-country 
residents that would themselves qualify for equivalent benefits under 
their own treaties with the other state.
    The proposed protocol includes other antiabuse rules. It extends 
the provision in the current Convention that preserves the U.S. right 
to tax certain former citizens, also to cover certain former long-term 
residents, and updates the provision to reflect changes in U.S. law. 
The proposed protocol conforms the interest article in the current 
Convention to the U.S. model treaty by including special contingent 
interest and real estate mortgage investment conduit (REMIC) exceptions 
to the elimination of withholding tax on interest payments.
    The proposed protocol also includes several other important 
administrative and technical modifications. Significantly, it updates 
the exchange of information provisions to specify the obligation to 
obtain and provide information held by financial institutions, and to 
otherwise reflect U.S. model standards in this area.
    Once ratified by the Senate, the proposed protocol will enter into 
force upon the exchange of instruments of ratification. For taxes 
withheld at source, the proposed protocol will generally have effect 
within 2 months after entry into force. However, if such instruments 
are exchanged before December 31, 2007, the countries agreed to 
eliminate withholding taxes for intercompany dividends and dividends to 
pension funds for dividends derived on or after January 1, 2007. With 
respect to other taxes, the protocol will have effect January first of 
the year following the year in which the protocol enters into force.
                                denmark
    The proposed protocol with Denmark was signed in Copenhagen on May 
2, 2006. The proposed protocol closely follows the recent protocol with 
Sweden, which entered into force in 2006, and the proposed protocol 
with Finland, described above, with respect to dividends and limitation 
on benefits.
    As noted above, the proposed protocol amends the dividend article 
to eliminate the withholding tax on intercompany dividends when a 
company meets certain ownership and limitation on benefits 
requirements. In addition, the proposed protocol conforms to current 
U.S. tax treaty policy by eliminating withholding tax on dividends to 
pension funds. The provisions of the current Convention applicable to 
regulated investment companies (RICs) and REITs are updated to apply 
reciprocally, should Denmark and the United States agree that certain 
Danish companies are similar to U.S. RICs and REITs. In addition, the 
proposed protocol includes other updates to the dividend article, 
including a definition of ``diversified'' to clarify the application of 
the REIT provisions adopted in 1999.
    The proposed protocol makes changes to the limitation on benefits 
provision to tighten the publicly traded test, consistent with the 
policy reflected in the U.S. model treaty. It also tightens the 
limitation on benefits provision by adopting a triangular provision 
similar to the provision adopted in the proposed protocol with Finland 
and in many other U.S. tax treaties; the provision would deny full U.S. 
treaty benefits to Danish enterprises with respect to certain income 
exempt from tax in Denmark. The protocol continues the special rules 
applicable to Danish taxable nonstock corporations. A Danish taxable 
nonstock corporation is a vehicle used to prevent takeovers of 
operating companies through control of voting shares, with public 
shareholders receiving most rights to dividends of the operating 
company. Because of the constraints applicable to such corporations, 
the structure is not likely to be subject to treaty shopping abuses.
    The proposed protocol also amends the current Convention to address 
individuals who have expatriated. The new language better reflects the 
current statutory language regarding the taxation of former citizens 
and long-term residents of the United States. The provision now states 
that the United States may, for the period of 10 years following the 
loss of such status, tax such individuals in accordance with the laws 
of the United States.
    Following Senate ratification, the proposed protocol will enter 
into force upon the receipt of the later of the notifications that the 
requirements for entry into force have been met in each country. It 
will have effect within 2 months of entry into force for taxes withheld 
at source. With respect to other taxes, the proposed protocol will have 
effect January first of the year following the year in which the 
protocol enters into force.
                                germany
    The proposed protocol was signed in Berlin on June 1, 2006, and 
amends the current Convention, concluded in 1989. The most significant 
provisions in this agreement relate to taxation of cross-border 
dividend payments, coordination of pension rules, and adoption of 
mandatory arbitration as part of the mutual agreement procedure. The 
proposed protocol also makes a number of changes to reflect changes in 
U.S. and German law, and to bring the Convention into closer conformity 
with current U.S. tax treaty policy.
    As mentioned above, the proposed protocol eliminates the source-
country withholding tax on many intercompany dividends. The proposed 
protocol also eliminates withholding tax on cross-border dividend 
payments to pension funds.
    The proposed protocol updates the current Convention's treatment of 
pensions. It removes barriers to the flow of personal services between 
the United States and Germany that could otherwise result from 
discontinuities in the laws of the two countries regarding the 
deductibility of pension contributions. Like the U.S. model treaty, an 
individual employed in one country who participates in a pension plan 
in the other may, subject to certain conditions, be allowed in his 
country of employment to deduct contributions to his plan in the other 
country. Because significant changes in German law will phase in over 
time to allow Germany to tax distributions of retirement income rather 
than taxing contributions and accretions to pension funds, the United 
States has agreed to consult with Germany in the future (but not before 
January 1, 2013) to provide for limited source-based taxation of 
certain distributions of retirement income. As discussed above, the 
proposed protocol provides for mandatory arbitration of certain cases 
that have not been resolved by the competent authorities within a 
specified period, generally 2 years from the commencement of the case. 
This provision is the first of its kind in a U.S. tax treaty. Under the 
protocol, the arbitration process may be used to reach an agreement 
with respect to certain issues relating to residence, permanent 
establishment, business profits, associated enterprises, and royalties. 
The arbitration board must deliver a determination within 9 months of 
the appointment of the Chair of the Board. Consistent with the current 
mutual agreement procedure, the taxpayer can terminate arbitration at 
any time by withdrawing its request for competent authority assistance. 
The taxpayer also retains the right to litigate in lieu of accepting 
the result of the arbitration, just as it would be entitled to litigate 
in lieu of accepting the result of a negotiation under the mutual 
agreement procedure.
    The proposed protocol makes a number of changes to the current 
Convention to reflect legislative changes since 1989 and current treaty 
policy. For example, the proposed protocol provides that former 
citizens or long-term residents 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, makes technical changes to the 
article dealing with the elimination of double taxation, significantly 
strengthens the treaty's limitation on benefits provisions, and adopts 
the U.S. model treaty approach to attribution of profits to a permanent 
establishment.
    Once ratified by the Senate, the proposed protocol will enter into 
force upon the exchange of instruments of ratification. For taxes 
withheld at source, the proposed protocol will generally have effect 
January first of the year in which it enters into force. With respect 
to other taxes, the protocol generally will have effect January first 
of the year following the year in which the protocol enters into force. 
Special effective date rules apply to arbitration in the mutual 
agreement process, taxation of income from government service, and 
coordination of the treaty's nondiscrimination provisions with those of 
nontax agreements. The taxpayer may elect to apply the current 
Convention, as unmodified by the proposed protocol, for the year 
following these effective dates.
                                belgium
    The proposed income tax Convention and accompanying protocol (the 
proposed treaty) with Belgium was negotiated to replace the current 
Convention, concluded in 1970 and amended by protocol in 1987 (the 
existing Convention). The proposed treaty makes a number of changes to 
conform to changes in U.S. law and to reflect current U.S. tax treaty 
policy, particularly with respect to exchange of information. 
Highlights of the proposed treaty are discussed under appropriate 
headings below.
a. Taxation of Investment Income
    The proposed treaty is similar to the other agreements before the 
committee in that it eliminates the withholding tax on many 
intercompany dividends. The proposed treaty eliminates withholding tax 
on dividends paid by a U.S. company to a Belgian company with respect 
to a significant (80 percent or more) and long-term (12 month or more) 
interest, and only if the Belgian company meets special limitation on 
benefits provisions. Unlike the other agreements, a U.S. company need 
only own 10 percent or more of a Belgian company to receive such 
benefits with respect to intercompany dividends. This difference 
reflects the different tax treaty policy of the countries and Belgian 
domestic tax initiatives. Consistent with the existing Convention, the 
proposed treaty generally allows for taxation at source of 5 percent on 
direct dividends (i.e., where a 10-percent-ownership threshold is met) 
and 15 percent on all other dividends that do not qualify for the zero 
rate. The proposed treaty also provides for a withholding rate of zero 
on cross-border dividend payments to pension funds. The proposed treaty 
also updates the dividend article to incorporate policies reflected in 
the U.S. model provision, such as those regarding RICs and REITs.
    Agreeing to eliminate withholding tax on dividends was key to 
achieving our important policy goal of improving exchange of 
information with Belgium. In the proposed treaty, the United States 
reserves the right to terminate this exemption if it is determined that 
Belgium has not complied with its obligations under the new provisions 
included in article 24 (Mutual Agreement Procedure) and article 25 
(Exchange of Information and Administrative Assistance) of the proposed 
treaty. If the United States terminates the provision eliminating the 
withholding tax on dividends, then, as discussed below, Belgium's 
obligation to provide information held by a bank or other financial 
institution pursuant to the new exchange of information provision would 
also terminate.
    The proposed treaty generally eliminates source-country withholding 
taxes on cross-border interest payments. This is a substantial 
improvement over the existing Convention, which provides for a general 
withholding tax rate of 15 percent on such payments, with certain 
exceptions. Consistent with U.S. tax treaty policy, source-country tax 
may be imposed on certain contingent interest and payments from a U.S. 
REMIC.
    Consistent with the existing Convention, the proposed treaty 
provides that royalties generally may not be taxed at source.
    The taxation of capital gains under the proposed treaty generally 
follows the format of the U.S. model treaty. Gains derived from the 
sale of real property and from real property interests may be taxed by 
the state in which the property is located. Likewise, gains from the 
sale of personal property forming part of a permanent establishment 
situated in a contracting state may be taxed in that state. All other 
gains, including gains from the alienation of ships, boats, aircraft, 
and containers used in international traffic and gains from the sale of 
stock in a corporation, are taxable only in the state of residence of 
the seller.
b. Taxation of Business Income
    The proposed treaty changes the rules in the existing Convention by 
adopting the U.S. model approach to attribution of profits to a 
permanent establishment. The proposed treaty generally defines a 
``permanent establishment'' in a manner consistent with the U.S. model 
treaty.
    The proposed treaty preserves the U.S. right to impose its branch 
profits tax on U.S. branches of Belgian 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 not received until after 
the permanent establishment no longer exists.
    The proposed treaty updates the existing Convention with respect to 
international transport. It provides, consistent with the U.S. model 
treaty, for exclusive residence-country taxation of profits from 
international transport by ships and aircraft. This reciprocal 
exemption extends to income from the rental of ships and aircraft on a 
full basis, as well as income from rentals on a time or voyage basis if 
the ship or aircraft is operated in international traffic by the lessee 
or the income is incidental to income from the operation of ships or 
aircraft in international traffic by the lessor. Income from other 
rentals of ships or aircraft is treated as business profits under 
article 7. As such, this class of income is taxable only in the country 
of residence of the beneficial owner of the income unless the income is 
attributable to a permanent establishment in the other country, in 
which case it is taxable in that country on a net basis. In addition, 
as provided in the U.S. model treaty, only the country of residence may 
tax profits from the maintenance or rental of containers used in 
international traffic.
c. Taxation of Personal Services Income
    The rules for the taxation of income from the performance of 
personal services under the proposed treaty are similar to those under 
the U.S. model treaty and the existing Convention.
d. Arbitration
    Like the proposed protocol with Germany, the proposed treaty 
provides for mandatory arbitration of certain cases before the 
competent authorities. The arbitration provision and procedures adopted 
in the proposed treaty follow closely the approach in the proposed 
protocol with Germany, except that Belgium and the United States agreed 
that the scope of the arbitration process would cover all issues within 
the purview of the competent authority and that the process must be 
completed in 6 months. The agreement with Belgium reflects both 
countries' recognition of the positive role arbitration can play in 
facilitating agreement between the competent authorities.
e. Pensions
    The proposed treaty also updates the existing Convention's 
treatment of pensions. The proposed treaty removes barriers to the flow 
of personal services between the countries that could otherwise result 
from discontinuities in the laws of the countries regarding the 
deductibility of pension contributions. The proposed treaty generally 
allows a deduction in the country where an individual is employed for 
payments made to a plan resident in the other country, if the structure 
and legal requirements of such plans in the two countries are similar. 
Similarly, if a resident of one of the countries participates in a 
pension plan established in the other country, the country of residence 
will not tax the income of the pension plan with respect to that 
resident until a distribution is made from the pension plan. The 
pension provision in the proposed treaty recognizes that triangular 
cases may increasingly arise due to the flows of services within Europe 
and the North American Free Trade Agreement (NAFTA) countries, and 
provides for beneficial treatment of contributions and accretions into 
certain funds in comparable third states. A comparable third state is a 
member state of the European Union or the European Economic Area, 
Switzerland, or a party to NAFTA, provided that treaty provisions with 
that third state provide certain reciprocal benefits and satisfactory 
information exchange.
f. Anti-Abuse Provisions
    The proposed treaty also strengthens the limitation on benefits 
provision and brings it into closer conformity with current U.S. treaty 
policy. This updated provision is designed to deny ``treaty shoppers'' 
the benefits of the proposed treaty. Like some of U.S. treaties, the 
proposed treaty also allows treaty benefits to certain companies 
functioning as headquarters for multinational groups if certain 
conditions are met.
    The proposed treaty preserves the U.S. right to tax individuals who 
expatriated for tax purposes. The proposed treaty updates this 
provision to reflect legislative changes since 1987. Accordingly, the 
proposed treaty provides 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.
g. Exchange of Information
    The information exchange provision of the proposed treaty 
specifically addresses a number of problems that have prevented 
effective information exchange under the existing Convention. The new 
provision makes clear that Belgium is obligated to provide the United 
States with such information as is necessary to carry out the 
provisions of the proposed treaty and the domestic laws of the parties. 
Further, information can be obtained and provided by Belgium whether or 
not Belgium needs the information for its own tax purposes. The 
Treasury Department is satisfied that under this provision Belgium is 
able to provide adequate tax information, including bank information, 
to the United States.
    Finally, as discussed above, if the United States terminates the 
dividend-withholding-exemption provision, then Belgium will no longer 
be required to provide information held by a bank or other financial 
institution.
h. Entry Into Force
    Following Senate ratification, the proposed treaty will enter into 
force upon the exchange of instruments of ratification and notification 
through diplomatic channels. For taxes withheld at source, the proposed 
treaty will generally have effect within 2 months after entry into 
force. With respect to other taxes, the proposed treaty will have 
effect January first of the year following the year in which the 
proposed treaty enters into force. Special effective date rules apply 
to the limitation on benefits provision relating to headquarters 
companies, arbitration in the mutual agreement process and exchange of 
information. In general, the taxpayer may elect to extend the 
application of the existing Convention (in its entirety) to the 12-
month period following the effective dates of this proposed treaty. 
However, the election does not affect the effective date of the new 
exchange of information provisions.
                       treaty program priorities
    We continue to maintain a very active calendar of tax treaty 
negotiations. We recently signed treaties with Bulgaria and Iceland. We 
have substantially completed work with Canada and Norway, and we 
currently are in ongoing negotiations with Chile and Hungary. We also 
expect to announce soon the onset of other negotiations.
    A key continuing priority is updating the few remaining U.S. tax 
treaties that provide for low withholding tax rates but do not include 
the limitation on benefits provisions needed to protect against the 
possibility of treaty shopping. We also have undertaken exploratory 
discussions with several countries in Asia and South America that we 
hope will lead to productive negotiations later in 2007 or 2008.
                               conclusion
    Mr. Chairman and Ranking Member Lugar, let me conclude by thanking 
you for the opportunity to appear before the committee to discuss the 
administration's efforts with respect to the four agreements under 
consideration. We appreciate the committee's continuing interest in the 
tax treaty program, and the members and staff for devoting time and 
attention to the review of these new agreements. We are also grateful 
for the assistance and cooperation of the staffs of this committee and 
of the Joint Committee on Taxation in the tax treaty process.
    On behalf of the administration, we urge the committee to take 
prompt and favorable action on the agreements before you today.

    Senator Menendez. Thank you, Mr. Harrington. I want to 
thank you, because you did that in 5 minutes.
    Mr. Barthold.

 STATEMENT OF THOMAS A. BARTHOLD, ACTING CHIEF OF STAFF, JOINT 
      COMMITTEE ON TAXATION, U.S. CONGRESS, WASHINGTON, DC

    Mr. Barthold. Mr. Harrington lays down quite the challenge.
    It's my pleasure to present the testimony of the staff of 
the Joint Committee on Taxation today concerning the proposed 
income tax treaty with Belgium and the proposed income tax 
protocols with Denmark, Finland, and Germany.
    The Joint Committee staff has prepared detailed pamphlets 
covering the proposed treaties and protocols which provide 
descriptions of the treaties and protocols, include comparisons 
to the current U.S. model income tax convention of November 
2006, and make comparison to other recent U.S. tax treaties. 
They also provide, for your consideration, some discussion of 
issues that the committee may wish to consider in its 
deliberations.
    I will try to highlight a couple of key features of the 
proposed treaty and protocols, and certain issues that they may 
raise.
    The Joint Committee staff, over the past couple of 
Congresses, and your committee, has noted a drift away from the 
1996 Treasury model treaty, in terms of treaties that were 
brought before the Senate. And, in that regard, it's important 
to note that, in November 2006, the Treasury Department 
released a new model income tax treaty. As a general matter, 
the 2006 U.S. model treaty incorporates the key developments in 
U.S. income tax treaty policy that have been reflected in 
recent U.S. income tax treaties, and the proposed treaty and 
protocols before you today are generally consistent with the 
provisions found in that 2006 model treaty.
    Let me highlight a couple of areas from the model treaty.
    First of all, limitation on benefits. One area in which the 
proposed treaty and protocols are generally consistent with the 
new 2006 model treaty is the inclusion in all four proposed 
instruments of comprehensive limitation-on-benefits provisions. 
These provisions reflect significant changes in U.S. treaty 
policy and are generally intended to make it more difficult for 
third-country residents to benefit inappropriately from a 
treaty between the two countries.
    The limitation-on-benefits provisions of the proposed 
treaties and protocols are generally similar to one another. 
However, there are a couple of significant differences. One 
that I'd like to note is that the public trading test in the 
limitation-on-benefits provision in the proposed protocol with 
Germany may be satisfied only if the principal class of a 
company's shares is primarily traded on a recognized stock 
exchange located in the company's country of residence, while 
the test for the other three countries may be satisfied by 
trading on a regional exchange. That, no doubt, is an outgrowth 
of the substantial stock exchange in Frankfurt and much smaller 
exchanges in the countries of Finland, Denmark, and Belgium.
    Another area to note, relative to the U.S. model treaty, 
and a significant difference between the U.S. model and the 
proposed treaty and protocols, is the zero rate of withholding 
tax on certain intercompany dividends provided under all four 
of the proposed treaties.
    Until 2003, no United States income tax treaty provided for 
complete exemption from dividend withholding; however, recent 
United States income tax treaties and protocols with Australia, 
Japan, Mexico, the Netherlands, Sweden, and the United Kingdom 
all include zero-rate provisions.
    The zero-rate provision of the proposed treaty and 
protocols generally provide a zero rate of withholding tax on 
certain dividends received by a parent company from a 
subsidiary that is at least 80-percent owned by the parent. 
Eligibility for the zero rate is contingent on satisfaction of 
more stringent limitation-on-benefit requirements than 
generally apply under the proposed treaty and protocols.
    However, the zero-rate provision in the proposed treaty 
with Belgium includes two unique features that might be worth 
the committee's note. First, the required ownership threshold 
for dividends paid by Belgian companies to U.S. companies is 10 
percent rather than 80 percent. And, second, the provision 
allows the United States to terminate that zero-rate provision 
for dividends paid by U.S. companies if Belgium fails to comply 
with certain obligations under the exchange-of-information and 
mutual-agreement provisions. Basically, if, within a 5-to-6-
year period, Belgium does not put in place provisions providing 
for exchange of information, the United States can terminate 
this treaty benefit.
    The model treaty does not include a zero-rate provision. 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-benefit rules and provide comprehensive information 
exchange. The Treasury has also stated that granting a zero 
rate on a dividend withholding tax should also be based on an 
evaluation of the overall balance of benefits under the treaty. 
So, the committee may wish to consider what overall balance 
considerations might prompt the Treasury Department not to seek 
a zero-rate provision in a treaty that has limitation-on-
benefits and information and exchange provisions meeting the 
highest standards, such as those found in the new 2006 U.S. 
model treaty.
    The other major point to highlight in two of the agreements 
before you today, and noted by my friend John Harrington, is 
the provision in the Belgium Treaty and the proposed protocol 
with Germany for mandatory and binding arbitration. This 
provision is not included in the U.S. model. We have seen 
worldwide movement toward arbitration provisions. The OECD 
model treaty provides for arbitration provisions. The European 
Union has provided for arbitration provisions in transfer 
pricing cases within the European Union. However, the 
information that would help clarify whether there is a problem 
with the competent-authority process under the U.S. treaty 
network, as well as information that would help identify the 
extent of the problem and its root causes, is not really 
publicly available. Consequently, if unresolved competent 
authority proceedings are a problem for the United States, it 
is difficult to determine whether mandatory and binding 
arbitration would solve it.
    The committee may wish to assess the basis for the Treasury 
Department, or taxpayers, to believe that, in fact, that there 
is a problem with the current resolution of disputes through 
the competent-authority process. For example, are the problems 
that are identified pervasive or idiosyncratic to the specific 
countries or specific tax issues?
    Also, there are many potential variations in arbitration 
methodology. The two that you are considering today follow 
what's known in the United States as the baseball arbitration 
model. But the proposed arbitration could take many other 
forms, such as what's known as the independent-opinion 
approach, under which the board is presented with facts and 
arguments and then draws its own conclusion. Another option 
that could be considered is the provision of taxpayer 
involvement in the proceedings. Also, some people have noted, 
in the proposed agreements, that there is an absence of 
feedback to the competent authorities regarding the rationale 
for the board's determination.
    Arbitration provisions are new to the United States treaty 
network. I believe it will take time to ascertain whether these 
procedures are effective or to determine if unexpected problems 
arise. In the meantime, it would be not unreasonable to expect 
that the Treasury Department or other trading partners may seek 
similar provisions in future agreements. So, the committee may 
wish to better understand how the Treasury Department intends 
to monitor the competent-authority function, as well as the 
arbitration developments, and what data might be relevant to 
helping the committee determine, in fact, if these procedures 
do improve the efficient case resolution under the competent-
authority process.
    Sorry for exceeding my time, and I stand willing to answer 
any questions that the committee might have.
    [The prepared statement of Mr. Barthold follows:]

Prepared Statement of Thomas A. Barthold, Acting Chief of Staff, Joint 
        Committee on Taxation, U.S. Congress, Washington, DC \1\

    My name \1\ is Thomas A. Barthold. I am acting 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 treaty with Belgium and the proposed 
income tax protocols with Denmark, Finland, and Germany.
---------------------------------------------------------------------------
    \1\ This 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 Treaty with Belgium and the Proposed Tax Protocols with 
Denmark, Finland, and Germany (JCX-51-07), July 17, 2007. This 
publication can also be found at www.house.gov/jct.
---------------------------------------------------------------------------
                                overview
    As in the past, the Joint Committee staff has prepared pamphlets 
covering the proposed treaty and protocols. The pamphlets provide 
detailed descriptions of the proposed treaty and protocols, including 
comparisons with the United States Model Income Tax Convention of 
November 15, 2006 (``2006 U.S. model treaty''), which reflects 
preferred U.S. tax treaty policy, and with other recent U.S. tax 
treaties.\2\ The pamphlets also provide detailed discussions of issues 
raised by the proposed treaty and protocols. We consulted with the 
Treasury Department and with the staff of your committee in analyzing 
the proposed treaty and protocols and in preparing the pamphlets.
---------------------------------------------------------------------------
    \2\ Joint Committee on Taxation, ``Explanation of Proposed Income 
Tax Treaty Between the United States and Belgium'' (JCX-45-07), July 
13, 2007; Joint Committee on Taxation, ``Explanation of Proposed 
Protocol to the Income Tax Treaty Between the United States and 
Denmark'' (JCX-46-07), July 13, 2007; 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; Joint Committee 
on Taxation, ``Explanation of Proposed Protocol to the Income Tax 
Treaty Between the United States and Finland'' (JCX-48-07), July 13, 
2007.
---------------------------------------------------------------------------
    The principal purposes of the treaty 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 treaty 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. tax treaties, these objectives 
principally are achieved through each country's agreement to limit, in 
certain specified situations, its right to tax income derived from its 
territory by residents of the other country.
    The proposed treaty with Belgium would replace an existing treaty 
signed in 1970 and modified by a protocol signed in 1987. The proposed 
protocol with Denmark would amend an existing tax treaty that was 
signed in 1999. The proposed protocol with Finland would make several 
modifications to an existing treaty that was signed in 1989. The 
proposed protocol with Germany would update the existing treaty and 
protocol that were signed in 1989.
    My testimony today will highlight some of the key features of the 
proposed treaty and protocols and certain issues that they raise.
                           u.s. model treaty
    As a general matter, U.S. model tax treaties provide a framework 
for U.S. tax treaty policy and a starting point for tax treaty 
negotiations with our treaty partners. These models provide helpful 
information to taxpayers, the Congress, and foreign governments as to 
U.S. policies on tax treaty matters. Periodically updating the U.S. 
model tax treaty to reflect changes, revisions, developments, and the 
viewpoints of Congress with regard to U.S. tax treaty policy ensures 
that the model treaties remain meaningful and relevant. In November 
2006, the Treasury Department released a new model income tax treaty; 
the U.S. model income tax treaty had not been updated since 1996.\3\ As 
a general matter, the 2006 U.S. model treaty incorporates the key 
developments in U.S. income tax treaty policy that are reflected in 
recent U.S. income tax treaties. The proposed treaty and protocols that 
are the subject of this hearing are generally consistent with the 
provisions found in the 2006 U.S. model treaty. However, there are some 
key differences from the 2006 U.S. model treaty that I will discuss.
---------------------------------------------------------------------------
    \3\ For a comparison of the 2006 U.S. model income tax treaty with 
its 1996 predecessor, see Joint Committee on Taxation, ``Comparison of 
the United States Model Income Tax Convention of September 15, 1996 
with the United States Model Income Tax Convention of November 15, 
2006'' (JCX-27-07), May 8, 2007.
---------------------------------------------------------------------------
Limitation-on-benefits provisions
    One area in which the proposed treaty and protocols are generally 
consistent with the 2006 U.S. model treaty is the inclusion in all four 
proposed instruments of a comprehensive limitation-on-benefits 
provision. The limitation-on-benefits provision of the 2006 U.S. model 
treaty reflects significant changes to the limitation-on-benefits 
provision of the United States Model Income Tax Convention of September 
15, 1996. These changes generally are intended to make it more 
difficult for third country residents to benefit inappropriately from a 
treaty between two countries.
    When a resident of one country derives income from another country, 
the internal tax rules of the two countries may cause that income to be 
taxed in both countries. One purpose of a bilateral income tax treaty 
is to allocate taxing rights for cross-border income and thereby to 
prevent double taxation of residents of the treaty countries. Although 
a bilateral income tax treaty is intended to apply only to residents of 
the two treaty countries, residents of third countries may attempt to 
benefit from a treaty by engaging in treaty shopping. This treaty 
shopping may involve organizing in a treaty country a corporation that 
is entitled to the benefits of the treaty or engaging in income-
stripping transactions with a treaty-country resident. Limitation-on-
benefits provisions are intended to deny treaty benefits in certain 
cases of treaty shopping.
    The limitation-on-benefits provisions in the proposed treaty and 
protocols are generally similar to the limitation-on-benefits 
provisions in one another, in recent U.S. tax treaties, and in the 2006 
U.S. model treaty. However, there are some differences. First, the 
public trading test in the limitation-on-benefits provision in the 
proposed protocol with Germany may be satisfied only if the principal 
class of a company's shares is primarily traded on a recognized stock 
exchange located in the company's country of residence. This rule is 
the same as the rule in the 2006 U.S. model treaty. The public trading 
tests in the proposed treaty with Belgium and in the proposed protocols 
with Denmark and Finland may be satisfied by trading on a stock 
exchange located in a company's country of residence or in one of 
various other countries that are considered to be part of the economic 
area that includes the applicable treaty country. Second, the proposed 
treaty and the three proposed protocols include so-called derivative 
benefits rules intended to grant treaty benefits to a treaty country 
resident if the resident's owners would have been entitled to the same 
benefits if the income had flowed directly to them. Third, the proposed 
treaty and the three proposed protocols include rules intended to 
foreclose eligibility for treaty benefits for certain triangular 
arrangements, arrangements in which income such as interest on a loan 
is lightly taxed because it is derived by a third-country permanent 
establishment of a treaty country resident. The 2006 U.S. model treaty 
does not include special derivative benefits rules or rules for 
triangular arrangements.
    The proposed treaty with Belgium and the proposed protocols with 
Denmark and Germany have special limitation-on-benefits rules that are 
not included in the 2006 U.S. model treaty. The proposed treaty with 
Belgium includes rules intended to allow treaty benefits to certain 
treaty country residents that function as headquarters companies. 
Although the 2006 U.S. model treaty does not include special 
limitation-on-benefits rules for headquarters companies, similar rules 
have been included in U.S. income tax treaties with Australia and the 
Netherlands. The proposed protocol with Denmark includes rules intended 
to allow treaty benefits to certain Danish taxable nonstock 
corporations and to Danish companies owned by taxable nonstock 
corporations. Taxable nonstock corporations are entities designed to 
preserve control of certain Danish operating companies through control 
of the companies' voting stock. The proposed protocol with Germany 
includes special rules for determining whether certain German 
investment vehicles are entitled to treaty benefits.
``Zero-rate'' dividend provisions
    One significant difference between the 2006 U.S. model treaty and 
the proposed treaty and protocols is the ``zero rate'' of withholding 
tax on certain intercompany dividends provided under all four of the 
proposed instruments. Until 2003, no U.S. income tax treaty provided 
for a complete exemption from dividend withholding tax, and the 2006 
U.S. model treaty and the 2005 Model Convention on Income and Capital 
of the Organisation for Economic Cooperation and Development (``OECD'') 
do not provide an exemption. By contrast, many bilateral income tax 
treaties of other countries eliminate withholding taxes on direct 
dividends between treaty countries, and the European Union (``EU'') 
Parent-Subsidiary Directive repeals withholding taxes on intra-EU 
direct dividends. The directive's required ownership threshold for 
qualification for zero withholding is 15 percent in 2007. Recent U.S. 
income tax treaties and protocols with Australia, Japan, Mexico, the 
Netherlands, Sweden, and the United Kingdom include zero-rate 
provisions. The Senate ratified those treaties and protocols in 2003 
(Australia, Mexico, United Kingdom), 2004 (Japan, Netherlands), and 
2006 (Sweden). The zero-rate provisions in those treaties are similar 
to the provisions in the proposed treaty and protocols.
    In general, the dividend articles of the proposed treaty and 
protocols provide a maximum source-country withholding tax rate of 15 
percent and a reduced 5-percent maximum rate for dividends received by 
a company owning at least 10 percent of the dividend-paying company. 
The proposed treaty and protocols generally provide a zero rate of 
withholding tax on certain dividends received by a parent company from 
a subsidiary that is at least 80 percent owned by the parent. 
Eligibility for this zero rate is contingent on satisfaction of more 
stringent limitation-on-benefits requirements than generally apply 
under the proposed treaty and protocols. A zero rate also generally is 
available under the proposed treaty and protocols for dividends 
received by a pension fund. The treaty and protocols also include 
special rules for dividends received from U.S. regulated investment 
companies and real estate investment trusts. These special rules 
generally are similar to provisions included in other recent U.S. 
treaties and protocols.
    The zero-rate provision in the proposed treaty with Belgium 
includes two unique features. First, the required ownership threshold 
for dividends paid by Belgian companies to U.S. companies is 10 percent 
rather than 80 percent. Second, the provision allows the United States 
to terminate the zero-rate provision for dividends paid by U.S. 
companies if Belgium fails to comply with certain obligations under the 
exchange-of-information and mutual-agreement procedure provisions. The 
zero rate for dividends paid by U.S.-resident companies will terminate 
for amounts paid or credited on or after January 1 of the 6th year 
following the year in which the proposed treaty enters into force 
unless by June 30 of the preceding year the U.S. Treasury Secretary, on 
the basis of a report of the IRS Commissioner, certifies to the U.S. 
Senate that Belgium has satisfactorily complied with its obligations 
under article 25 (Exchange of Information and Administrative 
Assistance). The United States also may terminate the zero-rate 
provision for dividends paid by U.S. companies if the United States 
determines that Belgium's actions under article 24 (Mutual Agreement 
Procedure) and article 25 (Exchange of Information and Administrative 
Assistance) have materially altered the balance of benefits of the 
proposed treaty. If the United States terminates the zero-rate 
provision, Belgium will not be required to comply with exchange-of-
information rules specifically requiring the treaty countries to 
provide information held by banks and other financial institutions and 
by nominees and persons acting in agency or fiduciary capacities.
    Notwithstanding the fact that zero-rate provisions are common in 
recent U.S. treaties, the 2006 U.S. model treaty does not include a 
zero-rate provision, nor do recent treaties with Bangladesh and Sri 
Lanka nor the recent protocol with France. 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 based on an evaluation of the overall balance of benefits under 
the treaty. Looking beyond the four treaty relationships directly at 
issue, the committee may wish to consider what overall balance 
considerations might prompt the Treasury Department not to seek a zero-
rate provision in a treaty that has limitation-on-benefits and 
information-exchange provisions meeting the highest standards, such as 
those found in the 2006 U.S. model treaty.
              mandatory and binding arbitration provisions
    One new feature of the proposed treaty with Belgium and the 
proposed protocol with Germany is the mandatory and binding arbitration 
provision. The provision does not appear in the 2006 U.S. model treaty 
or in any existing U.S. tax treaty. However, the use of mandatory and 
binding arbitration procedures in tax disputes between countries is not 
a completely novel concept. Earlier this year, the OECD Committee on 
Fiscal Affairs adopted proposed changes to its model treaty and 
commentary that incorporate a mandatory and binding arbitration 
procedure, some elements of which are generally similar to those of the 
proposed treaty and protocol. In addition, the EU has adopted certain 
mandatory and binding arbitration procedures that are applicable to 
transfer pricing disputes between 15 of the oldest members of the EU. 
There have been statements made by the European Commission that the EU 
mandatory arbitration procedure is not working as well as it is 
supposed to, for reasons that need to be further explored.
    Judging from the actions taken by the OECD and the EU, unresolved 
competent authority proceedings appear to be a multinational 
occurrence. However, the information that would help clarify whether 
this phenomenon represents a problem for the U.S. competent authority 
program, as well as the information that would identify the extent of 
the problem and its root causes, is not publicly available. 
Consequently, if unresolved competent authority proceedings are a 
problem for the United States, it is difficult to determine whether 
mandatory and binding arbitration would solve it. The committee may 
wish to assess the basis for the Treasury Department, or taxpayers, to 
believe that there is a problem with the current resolution of disputes 
through the competent authority process. Are problems that have been 
identified pervasive or idiosyncratic to specific countries or tax 
issues?
    As a general matter, it is beneficial to resolve tax disputes 
effectively and efficiently. The new arbitration procedures are 
intended to ensure that the mutual agreement procedures proceed 
according to a schedule and that all cases will be resolved within a 
limited time period. There are many potential variations of the 
arbitration methodology, however, and the committee may wish to 
consider the rationale for some of the choices made by the United 
States and its treaty partners and whether those chosen methodologies 
help to resolve the perceived problem. For example, the proposed 
arbitration procedures utilize the ``last best offer'' method. Under 
the ``last best offer'' method (also informally called ``baseball 
arbitration'' because it is similar to the arbitration method used to 
resolve major league baseball salary disputes), each of the treaty 
countries submits to the arbitration board (``board'') a proposed 
resolution describing its proposed disposition of the specific amounts 
of income, expense, or taxation at issue in the case (and a supporting 
position paper), and the board is required to adopt one of the proposed 
resolutions submitted by the treaty countries. The determination of the 
board is binding upon the treaty countries in the case, but does not 
state a rationale and has no precedential value. The last best-offer 
approach is intended to induce the competent authorities to moderate 
their positions, including before arbitration proceedings would 
commence, thus increasing the possibility of a negotiated settlement. 
The proposed arbitration procedures do not adopt the ``independent 
opinion'' approach, under which the board is presented with the facts 
and arguments of the parties based on applicable law and then reaches 
its own independent decision based upon a written, reasoned analysis of 
the facts involved and applicable legal sources. Other examples of 
choices made are the lack of provision for taxpayer involvement in the 
arbitration proceedings and the absence of feedback to the competent 
authorities regarding the rationale for the board's determination.
    The proposed mandatory and binding arbitration procedures are new 
to the United States treaty network. It will take time to ascertain if 
these procedures are effective or if unexpected problems arise. 
Meanwhile, the Treasury Department or other trading partners may seek 
to negotiate treaty provisions with current or future treaty partners 
that are similar, in whole or in part, to the arbitration procedures of 
the proposed treaty and protocol. The committee may wish to better 
understand how the Treasury Department intends to monitor the competent 
authority function, as well as arbitration developments with respect to 
other countries, to determine the overall effects of the new 
arbitration procedures on the mutual agreement process. The committee 
may wish to consider what types of information are needed to measure 
whether, regardless of whether they are availed of, the proposed 
arbitration procedures result in more efficient case resolution, both 
before and during arbitration, and whether they enhance the quality of 
the outcome of the competent authority cases. In addition, the 
committee may wish to inquire as to whether and under what 
circumstances the Treasury Department intends to pursue similar 
provisions in other treaties.
                                belgium
    The proposed treaty replaces the existing treaty (signed in 1970) 
and protocol (signed in 1987). In addition to the inclusion of a 
comprehensive limitation-on-benefits provision, a zero-rate dividend 
provision, and a mandatory and binding arbitration provision, as 
previously discussed, the proposed treaty has several other key 
features.
    The proposed treaty contains provisions under which each country 
generally agrees not to tax business income derived from sources within 
that country by residents of the other country unless the business 
activities in the taxing country are substantial enough to constitute a 
permanent establishment (article 7). Similarly, the proposed treaty 
contains certain exemptions under which residents of one country 
performing personal services in the other country will not be required 
to pay tax in the other country unless their contact with the other 
country exceeds specified minimums (articles 14 and 16).
    The proposed treaty provides that, subject to certain rules and 
exceptions, interest and royalties derived by a resident of either 
country from sources within the other country may be taxed only by the 
residence country (articles 11 and 12).
    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 22).
    The proposed treaty contains the standard provision (the ``saving 
clause'') included in U.S. tax treaties pursuant to which each country 
retains the right to tax its residents and citizens as if the treaty 
had not come into effect (article 1). This provision also allows the 
United States to tax certain former citizens and long-term residents 
regardless of whether the termination of citizenship or residency had 
as one of its principal purposes the avoidance of tax. The provision 
generally allows the United States to apply special tax rules under 
section 877 of the Code as amended in 1996 and 2004. In addition, the 
proposed treaty contains the standard provision providing that the 
treaty may not be applied to deny any taxpayer any benefits to which 
the taxpayer would be entitled under the domestic law of a country or 
under any other agreement between the two countries (article 1).
    The proposed treaty adds to the present treaty certain provisions 
regarding cross-border contributions to, and benefit accruals of, 
pension plans (article 17). These rules are intended to remove barriers 
to the flow of personal services between the two countries that could 
otherwise result from discontinuities under the laws of each country 
and are similar to provisions included in other recent U.S. treaties 
and protocols, including the 2006 U.S. model treaty.
    The proposed treaty (article 19) generally provides that students, 
teachers, business trainees, and researchers visiting the other treaty 
country are exempt from host country taxation on certain types of 
payments received.
    The proposed treaty provides authority for the two countries to 
exchange information (article 25) and assist in the collection of tax 
(article 26) in order to carry out the provisions of the proposed 
treaty.
                                denmark
    The proposed protocol makes a few modifications to the 1999 treaty, 
in addition to the adoption of the comprehensive limitation-on-benefits 
provision and the zero-rate dividends provision previously discussed.
    The proposed protocol expands the saving clause provision in 
article 1 (Personal Scope) of the existing treaty to allow the United 
States to tax certain former citizens and long-term residents 
regardless of whether their termination of citizenship of residency has 
as one of its principal purposes the avoidance of tax. This provision 
generally allows the United States to apply special tax rules under 
section 877 of the Code as amended in 1996 and 2004.
    The proposed protocol amends article 19 (Government Service) of the 
existing treaty to correct a drafting error that inappropriately 
expands the scope of an exception to the general rule governing the 
taxation of certain government pensions.
                                finland
    The proposed protocol makes several modifications to the 1989 
treaty, in addition to the adoption of the comprehensive limitation-on-
benefits provision and the zero-rate dividends provision previously 
discussed.
    The proposed protocol expands the saving clause provision in 
article 1 (Personal Scope) of the existing treaty to allow the United 
States to tax certain former citizens and long-term residents 
regardless of whether the termination of citizenship or residency had 
as one of its principal purposes the avoidance of tax. This provision 
generally allows the United States to apply special tax rules under 
section 877 of the Code as amended in 1996 and 2004. The proposed 
protocol makes coordinating changes to article 23 (Elimination of 
Double Taxation) with respect to foreign tax credits allowed for former 
U.S. citizens and long-term residents.
    The proposed protocol also adds to article 1 (Personal Scope) of 
the existing treaty rules included in recent U.S. treaties and the 2006 
U.S. model treaty related to fiscally transparent entities.
    The proposed protocol amends article 4 (Residence) of the existing 
treaty to clarify which persons are residents of a treaty country and 
to more closely reflect the provisions included in the 2006 U.S. model 
treaty and recent U.S. income tax treaties.
    The proposed protocol modifies article 11 (Interest) and article 12 
(Royalties) of the existing treaty. It adds to article 11 two new 
exceptions to the general prohibition on source-country taxation of 
interest income, one for contingent interest and the other for interest 
that is an excess inclusion with respect to a residual interest in a 
real estate mortgage investment conduit. It amends article 12 by 
deleting a paragraph that permits source-country taxation of royalties 
that are beneficially owned by a resident of the other treaty country 
and that are received as consideration for the use of patents and 
trademarks or for information concerning industrial, commercial, or 
scientific experience.
    The proposed protocol replaces article 26 (Exchange of Information) 
of the existing treaty with new exchange-of-information rules that are 
largely similar to the exchange-of-information rules included in the 
2006 U.S. model treaty.
    The proposed protocol will enter into force upon the exchange of 
instruments of ratification. If the proposed protocol enters into force 
before December 31, 2007, the dividend withholding tax provisions will 
have effect for income derived on or after January 1, 2007.
                                germany
    The proposed protocol makes several modifications to the 1989 
treaty and protocol, in addition to the adoption of the comprehensive 
limitation-on-benefits provision, the zero-rate dividends provision, 
and the mandatory and binding arbitration provision previously 
discussed.
    The proposed protocol expands the saving clause provision in 
article 1 (General Scope) of the existing treaty to allow the United 
States to tax certain former citizens and long-term residents 
regardless of whether the termination of citizenship or residency had 
as one of its principal purposes the avoidance of tax. This provision 
generally allows the United States to apply special tax rules under 
section 877 of the Code as amended in 1996 and 2004. The proposed 
protocol also updates the existing treaty to include the rules in the 
2006 U.S. model treaty related to fiscally transparent entities.
    The proposed protocol amends article 4 (Residence) of the existing 
treaty to clarify which persons are residents of a treaty country. The 
proposed protocol specifically addresses the residence of the two 
treaty countries (and subdivisions and local authorities thereof), U.S. 
citizens and aliens lawfully admitted for permanent residence in the 
United States, and certain investment funds.
    The proposed protocol modifies article 7 (Business Profits) in two 
important respects. First, the protocol modifies article 7 to provide 
that income derived from independent personal services (i.e., income 
from the performance of professional services and of other activities 
of an independent character) is included within the meaning of the term 
``business profits.'' Accordingly, the treatment of such income is 
governed by article 7 rather than by present treaty article 14 
(Independent Personal Services), which the proposed protocol deletes. 
In addition, paragraph 4 of article XVI provides that the OECD Transfer 
Pricing Guidelines apply by analogy in determining the profits 
attributable to a permanent establishment under article 7. These new 
rules are similar to provisions included in other recent U.S. treaties 
and protocols, including the 2006 U.S model treaty.
    The proposed protocol adds to the present treaty article 11 
(Interest) two new exceptions to the general prohibition on source-
country taxation of interest income; one for contingent interest and 
the other for interest that is an excess inclusion with respect to a 
residual interest in a real estate mortgage investment conduit.
    The proposed protocol adds to the present treaty article 18A 
(Pension Plans). Article 18A includes new rules related to cross-border 
pension contributions and benefit accruals. These rules are intended to 
remove barriers to the flow of personal services between the two 
countries that could otherwise result from discontinuities under the 
laws of each country regarding the deductibility of pension 
contributions and the taxation of a pension plan's earnings and 
accretions in value. These new rules are similar to provisions included 
in other recent U.S. treaties and protocols, including the 2006 U.S 
model treaty.
    The proposed protocol replaces article 19 (Government Service) of 
the existing treaty with a new article that more closely reflects the 
government service provisions included in the 2006 U.S. model treaty 
and recent U.S. income tax treaties.
    The proposed protocol modifies article 20 (Visiting Professors and 
Teachers; Students and Trainees) of the existing treaty to provide that 
professors or teachers who visit the other treaty country for a period 
that exceeds 2 years do not retroactively lose their exemption from 
host-country income tax. The proposed protocol increases the amount of 
the exemption from host-country tax for students and trainees who 
receive certain types of payments.
    The proposed protocol replaces article 23 (Relief From Double 
Taxation) of the present treaty with a new article providing updated 
rules for the relief of double taxation. Among other changes, the new 
article 23 provides special rules for the tax treatment in both treaty 
counties of certain types of income derived from U.S. sources by U.S. 
citizens who are resident in Germany.
    The proposed protocol updates article 17 (Artistes and Athletes) 
and article 20 (Visiting Professors and Teachers; Students and 
Trainees) of the existing treaty to reflect Germany's use of the euro.
    The proposed protocol provides for the entry into force of the 
proposed protocol. The provisions of the proposed protocol are 
generally effective on a prospective basis. However, the provisions of 
the proposed protocol with respect to withholding taxes are effective 
for amounts paid or credited on or after the first day of January of 
the year in which the proposed protocol enters into force.
                               conclusion
    These provisions and issues are all discussed in more detail in the 
Joint Committee staff pamphlets on the proposed treaty and protocols. I 
am happy to answer any questions that the committee may have at this 
time or in the future.

    Senator Menendez. Thank you.
    Turning to the intellectual property treaties, Ms. Boland.

    STATEMENT OF LOIS E. BOLAND, DIRECTOR OF THE OFFICE ON 
  INTERNATIONAL RELATIONS, U.S. PATENT AND TRADEMARK OFFICE, 
             DEPARTMENT OF COMMERCE, WASHINGTON, DC

    Ms. Boland. Mr. Chairman, Senator Lugar, thank you for this 
opportunity to discuss, and urge support for, ratification of 
three important intellectual property treaties.
    These treaties involve patent, design patent, and trademark 
protection. They are similar, in that each will serve to 
streamline and simplify procedures for American innovators and 
businesses, especially independent inventors and small business 
desiring to protect their intellectual property abroad.
    The first is a treaty on industrial designs, commonly 
referred to as the Hague Agreement. It provides a streamlined 
protection system for American owners of industrial designs 
who, by filing a single standardized application at the United 
States Patent and Trademark Office, in English, can apply for 
design protection in each country that is party to the act. 
Currently, a U.S. design applicant must file separate 
applications for protection in each country in which protection 
is sought.
    In terms of benefits, we anticipate that the centralized 
registration procedure under the treaty will result in cost 
savings to American industrial designowners and lead to fewer 
processing mistakes and delays on the part of both the 
applicant and the relevant foreign patent offices.
    Mr. Chairman, a draft implementing bill for the treaty's 
provisions will be sent to the Hill this week. It will require 
a number of limited changes in the U.S. design patent law, 
including providing limited rights to design patentees between 
publication and grant dates and extending the design patent 
term from 14 to 15 years from grant.
    The second treaty, the Patent Law Treaty, or PLT, promotes 
patent protection by codifying, streamlining, and reducing the 
costs associated with obtaining and maintaining patents 
throughout the world. Because patents are territorial, 
inventors need to seek a patent in each country in which they 
desire protection. Differences in the formal requirements of a 
patent application in each country or region make filing patent 
applications complex and expensive. The PLT will help U.S. 
businesses and independent inventors by simplifying the process 
of obtaining patent protection, and thereby, reduce associated 
costs. It sets forth, with one exception, the maximum formal 
requirements that parties to the treaty may impose on patent 
applicants and patentees.
    The PLT also standardizes requirements for obtaining a 
filing date and provides that applicants cannot be required to 
hire representation for the act of filing an application or 
paying certain fees.
    The President has recommended that a reservation to the PLT 
be included in the U.S. instrument of ratification that 
clarifies that the United States will maintain its law relating 
to unity of invention. A few minor amendments to the U.S. 
patent law will be necessary in order to implement the PLT, 
relating to application filing dates, time limits, and priority 
rights. Draft legislation implementing those changes was 
forwarded to the Hill yesterday.
    The third treaty is the Singapore Treaty on the Law of 
Trademarks, or the Singapore Treaty. This treaty updates and 
improves the world Intellectual Property Organization Trademark 
Law Treaty of 1994 by allowing its contracting parties to move 
to a totally electronic filing and processing system. It also 
establishes an assembly to oversee matters concerning the 
treaty, provides relief for missed deadlines, and expands the 
TLT to apply to trademarks consisting of nonvisible signs.
    Most significantly, the Singapore Treaty addresses the No. 
1 complaint by U.S. businesses concerning trademark 
registrations in other countries; namely, trademark license 
recordal requirements. Many countries that require recordal of 
trademark license contracts require certified signatures of 
both parties, a certified copy of the entire license agreement, 
and various other formalities not strictly necessary for the 
act of recording the license. Those requirements are 
burdensome, time-consuming, and costly for U.S. businesses. 
Also, in a number of countries, failure to record can result in 
the loss of the underlying trademark registration. The United 
States does not require recordal of trademark licenses.
    The Singapore Treaty imposes limits on these license 
recordal requirements, as well as on the penalties associated 
with a failure to record. These limitations will greatly 
benefit American entities doing business in foreign countries.
    Ratification of the Singapore Treaty will not require 
implementing legislation, because U.S. law and practice is 
already in full compliance with the provisions of the treaty.
    Mr. Chairman, in summary, these three treaties will help 
American businesses establish, maintain, and protect their 
intellectual property abroad. On behalf of the administration, 
we respectfully urge ratification and thank you for your 
consideration.
    [The prepared statement of Ms. Boland follows:]

Prepared Statement of Lois E. Boland, Director, Office of International 
 Relations, U.S. Patent and Trademark Office, Department of Commerce, 
                             Washington, DC

    Chairman Biden, Ranking Member Lugar, and members of the committee, 
thank you for this opportunity to appear before you to discuss and urge 
support for ratification of three important intellectual property 
treaties. These treaties, while addressing three different types of 
intellectual property, are similar in that they each will serve to 
streamline and simplify procedures for American innovators and 
businesses seeking to protect their intellectual property abroad.
                   geneva act of the hague agreement
    Mr. Chairman, the first treaty is the ``Geneva Act of the Hague 
Agreement Concerning the International Registration of Industrial 
Designs.'' It is commonly referred to as the ``Geneva Act of the Hague 
Agreement'' or ``Hague Agreement.''
    This treaty promotes the ability of American design owners to 
protect their industrial designs by allowing them to obtain 
multinational design protection through a single international 
application procedure. It provides a streamlined design protection 
system for American owners of industrial designs who, by filing a 
single standardized application at the United States Patent and 
Trademark Office (USPTO), in English, can apply for design protection 
in each country that is Party to the Act. Similarly, renewal of a 
design registration in each Party to the Act may be made by filing a 
single request along with payment of the appropriate fees at the 
International Bureau of the World Intellectual Property Organization 
(WIPO).
    Currently, a U.S. design applicant must file separate applications 
for design protection in each country. We anticipate that the 
centralized registration procedure under the Hague Agreement will 
result in cost savings to American industrial design owners and lead to 
fewer processing mistakes and delays on the part of both the applicant 
and the relevant foreign patent offices.
    The United States is one of relatively few countries that provide 
for a substantive examination of design applications with respect to 
novelty and nonobviousness. The Hague Agreement was negotiated with the 
needs of those examining offices, such as the USPTO, in mind. The USPTO 
will maintain its substantive examination process for design patent 
applications under the Hague Agreement.
    However, the implementation of the Hague Agreement does require a 
number of limited changes in U.S. design patent law including (1) 
providing limited rights to patent applicants between the date that 
their international design application is published and the date on 
which they are granted a U.S. patent based on that application, (2) 
extending the patent term for designs from 14 to 15 years from grant 
and (3) allowing the USPTO to use a published international design 
registration as a basis for rejecting a subsequently filed patent 
application that is directed at the same or similar subject matter.
    Mr. Chairman, the administration will be forwarding recommended 
implementing legislation in the near future.
                           patent law treaty
    The second treaty, the Patent Law Treaty, or ``PLT,'' promotes 
patent protection by codifying, harmonizing, and reducing the costs of 
taking the steps necessary for obtaining and maintaining patents 
throughout the world. The provisions set forth in the PLT will 
safeguard American commercial interests by making it easier for our 
patent applicants and owners to protect their intellectual property 
worldwide.
    In today's innovation-based, global economy, a patent is an 
important tool to protect a company's intellectual contributions, and 
is one of its most important commercial assets. A global patent 
portfolio can be expensive, however, to establish and maintain. This is 
because patents are only enforceable in the country or region in which 
they are granted. Because patents are territorial, inventors need to 
seek patent protection in each country in which they desire patent 
protection. As a result, differences in formal requirements of a patent 
application in each country (or region) can make filing patent 
applications complex and expensive. The PLT will help U.S. businesses 
and independent inventors by simplifying the process of obtaining 
patent protection and, thereby, reduce the associated cost.
    The PLT addresses procedural requirements of a patent application, 
and generally sets forth the maximum procedural requirements that can 
be imposed. It standardizes requirements for obtaining a filing date, 
and provides that applicants cannot be required to hire representation 
for the act of filing an application or to pay certain fees. The PLT 
does not limit the United States from providing patent requirements 
that are more favorable to the patent applicant or patent owner than 
those set forth in the PLT or from prescribing requirements that are 
provided for in our substantive law relating to patents.
    The PLT sets forth, with one exception, maximum formal requirements 
that Parties to the PLT may impose on patent applicants and patentees. 
Otherwise, Parties are free to provide requirements that, from the 
viewpoint of applicants and owners, are more favorable than PLT 
requirements. The one exception to this freedom is the filing date 
provision, which is both a maximum and a minimum, i.e., a ``filing date 
standard.''
    Because the USPTO assesses that implementing a provision of the PLT 
requiring ``unity of invention''--a standard that is substantively at 
odds with the corresponding U.S. standard--would require a substantive 
and impractical change to our patent law, the President has recommended 
that the following reservation be included in the U.S. instrument of 
ratification, as allowed by the treaty: ``Pursuant to Article 23, the 
United States declares that Article 6(1) shall not apply to any 
requirement relating to unity of invention applicable under the Patent 
Cooperation Treaty to an international application.''
    Upon entry into force, the PLT will simplify the formal procedures 
[or ``requirements''] and reduce associated costs for patent applicants 
and owners of patents in obtaining and preserving their rights in 
inventions in many countries of the world.
    A few amendments to the U.S. patent law will be necessary in order 
to implement the PLT. Minor changes in title 35, United States Code, 
will be required relating to: (a) Patent application filing dates, (b) 
relief in respect of time limits and reinstatement of rights and (c) 
the restoration of the priority right.
    Mr. Chairman, the administration forwarded the recommended 
implementing legislation yesterday.
               singapore treaty on the law of trademarks
    The third intellectual property treaty is the Singapore Treaty on 
the Law of Trademarks or the ``Singapore Treaty.'' This treaty updates 
and improves the World Intellectual Property Organization Trademark Law 
Treaty of 1994 (TLT) that harmonizes formalities and simplifies 
procedures for registering and renewing trademarks.
    Consistent with the USPTO's e-government efforts, the Singapore 
Treaty updates TLT by allowing its Contracting Parties to move to a 
totally electronic filing and processing system. The Singapore Treaty 
also establishes an Assembly to oversee matters concerning the treaty; 
provides relief measures for deadlines missed by the trademark 
applicant or registrant; and expands the TLT to apply to trademarks 
consisting of nonvisible signs, in line with Free Trade Agreements 
entered into by the United States.
    Most significantly, the Singapore Treaty also addresses the No. 1 
complaint by U.S. businesses concerning trademark registrations in 
other countries; namely, trademark license recordal requirements. Many 
countries that record trademark license contracts require certified 
signatures of both parties, a certified copy of the entire license 
agreement, and various other formality requirements that may not be 
strictly necessary for the act of recording the license. Certainly 
these requirements are burdensome, time-consuming and costly for 
businesses having to record those trademark licenses. Moreover, in a 
number of countries, failure to record a license contract with a 
government agency can result in invalidation of the underlying 
trademark registration. The Singapore Treaty imposes limits on license 
recordal requirements as well as on those penalties associated with the 
failure to record licenses in order to simplify and reduce costs 
associated with this formality laden recordal process for U.S. 
businesses as well as to minimize the damage that may emanate from a 
failure to record licenses in those countries that are party to the 
treaty. The United States does not require recordal of trademark 
licenses.
    Mr. Chairman, ratification of the Singapore Treaty will not require 
implementing legislation because U.S. law is already in compliance with 
the provisions of the treaty.
                               conclusion
    Mr. Chairman, in summary, these three treaties will help American 
businesses establish, maintain, and protect their intellectual property 
abroad. On behalf of the administration, we respectfully urge 
ratification. Thank you for your consideration.

    Senator Menendez. Thank you very much.
    Mr. Scholz, how much time to you need? I don't want to 
shortchange you. It's just the vote is well underway, and I 
wanted to get a sense of--5, 7 minutes?
    Mr. Scholz. Approximately 3 minutes, Mr. Chairman.
    Senator Menendez. Three minutes? Then, I'd love to hear you 
now. [Laughter.]

     STATEMENT OF WESLEY SCHOLZ, DIRECTOR OF THE OFFICE OF 
    INVESTMENT AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, DC

    Mr. Scholz. Thank you, Mr. Chairman. And thank you for the 
opportunity to testify before the Senate Foreign Relations 
Committee as the administration seeks advice and consent of the 
Senate to the ratification of the protocol to our Treaty of 
Friendship, Commerce, and Navigation with Denmark.
    The protocol will establish the legal basis by which the 
United States may issue treaty investor visas, also known as E-
2 visas, to qualified nationals of Denmark under the FCN 
Treaty.
    United States investors interested in investing in Denmark 
are already eligible for Danish visas that offer comparable 
benefits to those that would be accorded to nationals of 
Denmark by this protocol. The United States has a longstanding 
policy of openness to foreign investment. As President Bush 
stated on May 10 of this year, a free and open international 
investment regime is vital for a stable and growing economy 
both here at home and throughout the world.
    Foreign investment in the United States strengthens our 
economy and improves productivity, provides good jobs, and 
spurs healthy competition. Americans have prospered as foreign 
companies have put their money to work here in the United 
States. Foreign companies in the United States employed more 
than 5 million U.S. workers in 2005, providing 4.5 percent of 
all private sector employment in the United States. Visas for 
investors facilitate investment in the United States.
    The United States and Denmark have a strong and growing 
economic relationship. According to Department of Commerce 
statistics, the stock of Danish direct investment in the United 
States totaled over $7 billion at the end of 2006. And United 
States direct investment in Denmark amounted to about $5.8 
billion.
    The protocol will facilitate Danish investment in the 
United States by making Danish investors who invest substantial 
capital in the United States eligible for consideration to 
receive treaty investor visas under the Immigration and 
Nationality Act. The principal substantive article of the 
protocol provides that nationals of either contracting party 
shall be permitted, subject to the laws relating to entry and 
sojourn of aliens, to enter the territories of the other party 
and to remain there for the purpose of developing and directing 
the operations of an enterprise in which they have invested, or 
in which they are actively in the process of investing, a 
substantial amount of capital.
    Although most U.S. FCN treaties contain a provision 
qualifying the treaty partner's nationals for E-2 visas, the 
United States-Denmark FCN Treaty does not. The protocol is 
intended to overcome this deficiency.
    Denmark is a close ally, and our relations with Denmark are 
excellent. Despite its small geographic size and population of 
only 5.4 million people, Denmark plays an important role in the 
international community and is an effective friend and ally 
within NATO, the European Union, and the United Nations. It has 
engaged fully in the world events, while maintaining a strong 
Atlantic perspective. With forces deployed in Iraq, 
Afghanistan, and Kosovo, Denmark is active in peacekeeping and 
stabilization operations, and is also one of the largest per-
capita donors of foreign aid.
    Regionally, Denmark serves as a vital gateway to other 
Nordic and Baltic states, and Copenhagen is a key regional 
transportation hub. The United States is Denmark's largest non-
EU trading partner. American-made aircraft, machinery, 
computers, and other products comprise about 6 percent of 
Denmark's total imports.
    In conclusion, the administration wishes to thank the 
committee for its consideration of the protocol, and we urge 
you to report it favorably to the full Senate for action.
    Thank you.
    [The prepared statement of Mr. Scholz follows:]

Prepared Statement of Wesley S. Scholz, Director, Office of Investment 
              Affairs, Department of State, Washington, DC

    Mr. Chairman, thank you for the opportunity to testify before the 
Foreign Relations Committee as the administration seeks advice and 
consent of the Senate to ratification of the Protocol to our Treaty of 
Friendship, Commerce, and Navigation (FCN) with Denmark. The protocol 
will establish the legal basis by which the United States may issue 
treaty-investor visas--also known as ``E-2'' visas--to qualified 
nationals of Denmark under the FCN Treaty. United States investors 
interested in investing in Denmark are already eligible for Danish 
visas that offer comparable benefits to those that would be accorded 
nationals of Denmark interested in investing in the United States under 
E-2 visa status.
    The United States has a longstanding policy of openness to foreign 
investment. As President Bush stated on May 10, ``A free and open 
international investment regime is vital for a stable and growing 
economy, both here at home and throughout the world.'' Foreign 
investment in the United States strengthens our economy, improves 
productivity, provides good jobs, and spurs healthy competition. 
Americans have prospered as foreign companies have put their money to 
work here. Foreign companies in the United States employed more than 5 
million U.S. workers in 2005, providing 4.5 percent of all private 
sector employment in the United States. Visas for investors facilitate 
investment in the United States.
    The United States and Denmark have a strong and growing economic 
relationship. According to Department of Commerce statistics, Danish 
direct investment in the United States on a historical cost basis 
totaled over $7 billion at the end of 2006, and U.S. direct investment 
in Denmark amounted to about $5.8 billion. U.S. investments in Denmark 
accounted for 11 percent of total foreign direct investment stock in 
that country in 2005, making the United States the second-largest 
source of foreign investment in Denmark. Approximately 375 U.S. 
companies have subsidiaries in Denmark, of which several are regional 
headquarters. Economic sectors that are host to major U.S. direct 
investment in Denmark include telecommunications, information 
technology, biotechnology, oil exploration, financial services, and 
facility services.
    The Protocol will facilitate Danish investment in the United States 
by making Danish investors, who invest substantial capital in the 
United States, eligible for consideration to receive treaty investor 
visas under the Immigration and Nationality Act (INA). The relevant 
provision of the INA, section 101(a)(15)(E)(ii), permits issuance of an 
E-2 visa only to a nonimmigrant who is ``entitled to enter the United 
States under and in pursuance of the provisions of a treaty of commerce 
and navigation between the United States and the foreign state of which 
he is a national . . . solely to develop and direct the operation of an 
enterprise in which he has invested, or of an enterprise in which he is 
actively in the process of investing, a substantial amount of 
capital.''
    The principal substantive article of the Protocol provides that 
``[n]ationals of either Contracting Party shall be permitted, subject 
to the laws relating to the entry and sojourn of aliens, to enter the 
territories of the other Party and to remain therein for the purpose of 
developing and directing the operations of an enterprise in which they 
have invested, or in which they are actively in the process of 
investing, a substantial amount of capital.''
    Although most U.S. FCN treaties contain a provision qualifying the 
treaty partner's nationals for E-2 visas, the U.S.-Denmark FCN Treaty 
does not. The protocol is intended to overcome this deficiency. The 
protocol reflects language found in the INA and other U.S. FCN 
treaties--including more than a dozen modern FCN treaties--and 
investment treaties generally. European countries whose nationals are 
already eligible for E-2 visas include, for example, the United 
Kingdom, Germany, France, Italy, the Netherlands, Belgium, Norway, and 
Sweden.
    Denmark is a close ally and our relations with Denmark are 
excellent. Despite its small geographic size and population of only 5.4 
million people, Denmark plays a significant role in the international 
community and is an effective friend and ally within NATO, the European 
Union, and the United Nations. It is engaged fully in world events, 
while maintaining a strong Atlantic perspective. With forces deployed 
in Iraq, Afghanistan, and Kosovo, Denmark is active in peacekeeping and 
stabilization operations and is also one of the largest per capita 
donors of foreign aid. Regionally, Denmark serves as a vital gateway to 
the other Nordic and Baltic States and Copenhagen is a key regional 
transportation hub. The United States is Denmark's largest non-EU 
trading partner. American-made aircraft, machinery, computers, and 
other products comprise about 6 percent of Denmark's total imports.
    In conclusion, the administration wishes to thank the committee for 
its consideration of the protocol and we urge you to report it 
favorably to the full Senate for action. I would be happy to answer any 
questions you may have.

    Senator Menendez. Thank you very much.
    Thank you all.
    The committee is going to stand in recess, subject to the 
call of the Chair, which I would expect would be about 20 to 25 
minutes. I do have questions for this panel, so I'm going to 
ask you to stay. And, after that, any other members show up and 
have questions, we will then proceed to the second panel.
    Until then, the committee in recess.
    [Recess.]
    Senator Menendez. The committee will be back in order.
    Let me thank you all for your patience.
    Mr. Harrington, what's your view of the arbitration 
provisions in the German and Belgium agreements? Do you see 
them being used as a model for future agreements with other 
countries?
    Mr. Harrington. Thank you, Mr. Chairman.
    We do believe that arbitration can be an effective tool to 
strengthen the mutual agreement procedures. Before I go too 
much further, I think it might be helpful to step back and note 
that the term ``arbitration'' probably means different things 
to different people. The process that we've designed, and 
that's in both the treaty with Belgium and with the protocol 
with Germany, is tailored to do a fairly narrow job, and that's 
to help the competent authorities reach agreement in cases 
where they've had trouble resolving an issue, and to do it on 
an expedited basis. So, the process allows each competent 
authority to make a final offer, and it allows the arbitration 
board to pick between these two final offers. The board's 
determination effectively becomes the competent authorities' 
agreement. The taxpayer treats that as any other decision of 
the competent authority and decides whether he wants to accept 
the decision or litigate or otherwise follow the normal 
procedures he has under domestic rules.
    So, to our minds, this really is a way of facilitating 
agreement between the competent authorities, resolving disputes 
between the tax authorities. So, we think that what's in the 
Germany and the Belgium agreements is beneficial.
    Also, as Mr. Barthold mentioned in his testimony, 
arbitration generically is becoming increasingly an issue. It's 
in the OECD model. He mentioned, for example, in the EU 
context, in transfer pricing, it exists. So, we do expect, in 
the context of treaties, that either the United States or the 
other country is going to raise arbitration on a going-forward 
basis. What we've designed is intended to resolve those 
disputes. We're hopeful that this is something that will lead 
to greater dispute resolution. So, it's something that we 
believe will help resolve disputes in the future by following 
that approach.
    Senator Menendez. Is there a view that, by virtue of having 
the arbitration provisions, there will be an incentive to 
actually settle, without necessarily having to go to 
arbitration itself?
    Mr. Harrington. Yes, Mr. Chairman. I think it goes back to 
Mr. Barthold's question about how you measure the success of 
arbitration. I mean, how do you measure whether it's working or 
not? On one measure, it could be quite successful, even if it's 
never invoked. The experience that we've heard from other 
countries that have arbitration currently, is that it 
effectively lights a fire under the tax authorities to reach an 
agreement. If they're like me, they're not going to want 
someone else to make the decision. They'd rather resolve it 
themselves. So, in that sense, the expectation is that, in the 
vast majority of cases, because effectively the arbitrator 
would choose between two choices, it really should lead to the 
competent authorities moving closer to each other prior to 
arbitration.
    Another potential effect of success, that isn't easily 
measured, is that it might actually lead to, potentially, more 
disputes being brought to the competent authorities. Currently, 
taxpayers might not bring disputes to the competent authorities 
because they're not sure the disputes are going to get 
resolved--it might be an area where there historically hasn't 
been resolution. If they know that there is going to be 
resolution, it might actually result in their bringing more 
potential disagreements. In that sense, it's probably bad from 
a pure resource sort of standpoint because it means more 
disputes, but it also means less double taxation, more 
resolution for taxpayers. So, I think that's potentially a 
positive thing from an overall reduction in double taxation.
    Senator Menendez. Well, to both you and Mr. Barthold, in 
order to know which way this is going to work, presuming the 
treaties are passed by the Senate, is there a mechanism by 
which we're going to be judging whether or not this is a 
successful provision that we might want to see more universally 
applied, whether they're being resolved before actually going 
to arbitration or seeing the other consequence that you just 
described?
    Mr. Barthold. Well, Mr. Chairman, I had tried to lay out 
our staff's thoughts on arbitration in three broad points. One, 
what are the problems that we see? Then, what is the process 
that we are going to do? In other words, what type of 
arbitration? And does that process fit the problems that we 
see? And then, that might guide us, in part, as to how we 
assess it. Our staff has heard comment that some people see 
problems in terms of length of resolution. Under the proposed 
process arbitration takes place at a certain point in times and 
then there is a certain period of time by which a resolution 
has to occur. That means that there is an end to the process.
    If that is the sole source of the problem, then one might 
be able to easily assess the benefit of the arbitration 
procedure just by saying: Has resolution of questions that 
arise been sped up, compared to where there is no arbitration?
    If, however, the problems are in the interpretation of law, 
it might be more difficult to assess whether we think the 
arbitration procedure leads to the right solution. It will lead 
to a solution, because you do have to have resolution--the 
arbitration board has to say this position or that position. 
But we'd have to think, I think, a little bit more about how to 
assess whether it gets to, sort of, a right solution, in a more 
legal sense.
    Senator Menendez. Do you have any comment on that, Mr. 
Harrington?
    Mr. Harrington. Yes. I would just say that we are keenly 
interested in monitoring the implementation of the arbitration 
provision. On one level, as with any provision of the treaty, 
as we gain more experience with anything that's new, we'll find 
certain refinements are necessary. And so, from that 
standpoint, I think we're very much interested in making sure 
that the provisions that we have work; and, if they don't work, 
how we can modify them, and make them work better. As part of 
that process, we will monitor the types of cases that go to 
arbitration, how they're resolved, whether the cases raise more 
factual or legal issues, things like that. Since the whole 
point is to increase the efficient, effective resolution of 
cases in the mutual agreement procedure before they reach 
arbitration, we'll discuss, with the competent authority, ways 
to assess if the provision is working as intended. You may get 
different answers under different treaties, but we are keenly 
interested in making sure that the arbitration process does 
operate properly.
    Senator Menendez. Now let me raise one other set of 
questions with both of you before I turn to the intellectual 
property treaties. And don't get nervous, because, when I 
raised this with staff, I was told that it makes a lot of 
people nervous just to even raise it; I'm not suggesting it for 
these treaties, but I think it's worthy of discussion; and that 
is, as I understand it, taxpayers themselves have no 
participation or say in the arbitration processes, as it's 
devised presently, is that correct? It's the authorities that 
deal with each other, but not the taxpayer----
    Mr. Harrington. Yes.
    Senator Menendez [continuing]. Themselves.
    Mr. Harrington. Yes. The provisions that are in the United 
States agreements with Belgium and Germany, they are between 
the competent authorities. They don't have specific rules for 
dealing with taxpayers.
    Senator Menendez. Well, one of the questions I raised 
before this hearing was, why don't we consider the possibility 
of taxpayer participation in the arbitration proceedings, 
since, at the end of the day, I assume that they would make the 
most compelling case, since they are the ones who are 
ultimately going to have to put forth the resources that would 
be decided. And so, what are the benefits and drawbacks of 
taxpayer participation? I'd invite either one of you to answer 
that question.
    Mr. Harrington. To a certain extent, that would depend on 
the design of the arbitration provision. If you were talking 
about a quasi-judicial arbitration that looked more like a 
court proceeding, then you would expect a lot more involvement 
in those sorts of situations.
    The provision that we've designed in these treaties--
because it's an extension of the competent-authority process--
builds on the taxpayer involvement in the competent authority 
process. Typically, a dispute under the tax treaty comes up 
because the taxpayer has determined that one of the governments 
isn't taxing consistently with the treaty. So, it goes to the 
competent authority. In the United States, the U.S. taxpayer is 
going to typically go to the U.S. competent authority and say 
``This other country isn't engaging properly.'' The U.S. 
taxpayer will provide information to the competent authority. 
The competent authority takes that into account in presenting 
its case to the other competent authority. So, there is 
taxpayer involvement with the competent authorities. But, in 
this particular arbitration process because it's, as was 
referred to earlier as baseball arbitration where effectively 
each competent authority makes one particular offer, you really 
only can have two parties involved making that particular 
offer. For example, if you have a third offer involved, you 
potentially would have a dispute with the three arbitrators. 
They might come up with three different decisions. So, again, 
this is very much a function of the design that it really needs 
to be between the competent authorities.
    Plainly, we do want taxpayer involvement. We want the 
taxpayer to help with the facts; they can help get the right 
answer. But, at the end of the day, we have to have a situation 
that, one, is going to work in the context of the treaty, and, 
two, is also one that, depending on the circumstances, is 
acceptable to treaty partners. Some treaty partners are much 
more amenable to something that looks very much like the 
current system, less so to something that looks like it's a 
different sort of procedure than what they have experienced. 
We've certainly seen that anecdotally when it's come up before. 
So, our hope is to have as much taxpayer involvement as we can, 
but still within the context of the competent-authority 
process.
    Senator Menendez. Well, I know we're not necessarily 
talking about these treaties, but it's something that I think 
was an interest by some of us to look at. We believe that the 
taxpayer can play a more significant role than, certainly, 
these provisions call for right now, and still provide for a 
basis under which countries would still seek to enter into such 
an agreement. So, that's something we'll be discussing with you 
in the future.
    But, let me turn to Ms. Boland. Let me ask you: Which other 
countries do you find the United States intellectual 
propertyholders most often seek protection of their 
intellectual property rights? And are these countries a party 
to the three intellectual property treaties we're considering 
today?
    Ms. Boland. Thank you, Mr. Chairman.
    I think that, in general, U.S. rightholders seek protection 
in Europe, either regionally or country by country--Japan, 
Russia, and some of the emerging markets in Asia, such as China 
and the Republic of Korea. I think that we have a little bit of 
a different situation for each of the treaties. For the Hague 
agreement, there are 23 countries that have joined the treaty, 
so--to date--where the only--what we would say, important 
players, from the U.S. perspective, are France, Spain, and 
Switzerland. The European community has indicated that it 
intends to join the agreement, and, once they do join the 
agreement, it will be a major benefit for U.S. rightholders to 
have the European community, as a bloc, in the agreement.
    Japan and Canada, for the Hague, have indicated, informally 
to us in our discussions with them, bilaterally, that, once we 
join the Hague, they will follow suit.
    For the Patent Law Treaty, 14 countries have joined the 
treaty. Most of those countries are rather small and not 
significant, in terms of trading partners with the United 
States, but the United Kingdom and Denmark have joined the 
treaties. Again, they are small, but they are important players 
for our rightholders.
    For the PLT, many countries are waiting for the U.S. lead 
on this treaty, and we have had informal discussions with many 
of those countries, and they will likely follow our lead once 
we join.
    On the Singapore TLT, that treaty was only concluded last 
March 2006, and only one country has joined the treaty: 
Singapore. They hosted the diplomatic conference. We view the 
Singapore Treaty as providing significant advantages relative 
to the underlying trademark law treaty of 1994. We expect a 
number of the signatories to that agreement to sign on. And, 
again, it is our belief that a number of our major and minor 
trading parties will join each of these treaties once we do.
    Thank you.
    Senator Menendez. Let me ask you this. What are some of the 
most significant barriers that we still find as it relates to 
promoting the protection of intellectual property throughout 
the world today? And is WIPO moving us toward meeting those 
challenges? Are we meeting those challenges? And if so, how?
    Ms. Boland. Thank you, again.
    In terms of barriers to protection, I think that I'd like 
to look at that, as you said, in two parts. Domestically, the 
United States Patent and Trademark Office is very, very much 
involved with rightholders in the United States and other 
government agencies. We're involved in a very large educational 
program for independent inventors, small businesses, creators, 
and innovators throughout the entire country, to provide them 
with the information they need to protect their intellectual 
property, both in the United States and internationally. Some 
of these efforts are part of our STOP effort, which is an 
interagency effort--the acronym stands for Strategy Targeting 
Organized Piracy. We think that we have done a good job with 
these programs, and there are many other initiatives within the 
STOP initiative that basically encourages businesses to 
integrate IP into their business strategy from the beginning.
    For our businesses and our American companies, I think 
we've done a pretty good job. Internationally, it's a bit more 
of a challenge. We have worked very closely with some of the 
more progressive voices in Asia on IP issues and IP 
enforcement. Obviously, Japan has got a lot at stake. We've 
worked very closely with them on many of the issues that we 
commonly face in Asia. We've also worked very, very closely 
with the European Union on initiatives within Europe, in terms 
of what's at stake there.
    Turning to WIPO, unfortunately there are many voices 
throughout the world that are challenging our assumptions about 
the value of IP and its relationship to economic and 
technological growth. We have been fighting a number of battles 
at WIPO in Geneva, basically just holding back the voices of 
opposition to the promotion and enhancement of IP protection 
throughout the world. There is not much going on, in terms of 
further norm-setting at WIPO right now, but we are--have been 
very actively involved in all of the various committees there, 
and we are trying to hold back the forces--the anti-IP forces 
that we confront at WIPO.
    Senator Menendez. So, it sounds like we're in a defensive 
posture.
    Ms. Boland. Unfortunately, that is the case for much of the 
discussion that takes place at WIPO right now, yes.
    Senator Menendez. Well, this is one of the most significant 
things, I think, for the United States, obviously, in a world 
in which we are challenged for human capital by the vast 
changes in technology that have largely erased the boundaries 
of mankind. It seems that, for the United States, intellectual 
property is going to be the single-biggest asset that it's 
going to have to preserve, protect, and defend in world trade. 
And I hope we're going to be robust about it. I'm sure the 
subcommittee that I chair is going to be looking at that quite 
significantly in the days ahead.
    Last, I just want to ask you one final question. A lot of 
these treaties talk about moving toward electronic filing. And, 
I'm wondering, do we anticipate a time in which we would only 
accept trademark filings through an electronic platform? And, 
if so, what do we foresee that timeframe being?
    Ms. Boland. Thank you. In terms of electronic filing in the 
trademark world, the USPTO can report a great success there. As 
of our latest stats on electronic filing for trademark 
applications, we have about 96 percent of applications coming 
in the door electronically. That's a great success. This recent 
Singapore Trademark Law Treaty provides us with the capability 
of mandating electronic filing only. It doesn't require us to 
do that, but it provides us with that ability. At the present 
time, we do not plan to mandate electronic filing only. It may 
be something that we'll reconsider 5 or 10 years down the road, 
but we think that the level of electronic filing in the area of 
trademarks is almost as high as it can possibly be, and that 
the small percentage that are coming in on paper is very 
manageable for the USPTO.
    In the area of patents, we've made a big push for 
electronic filing over the last several years, and we had been 
able to get the percentage up to--about 48 percent of 
applications coming in the door are now filed electronically. 
We hope for further improvements as time goes on. But, again, 
in terms of the PLT it has similar ability to mandate 
electronic filing. Our current thinking is not to adopt that at 
the current time, but we may revisit it at some point in the 
future.
    Senator Menendez. Is it that you seek not to adopt it 
because it's such a small percent, on the one case, or is it 
simply because you don't have the ability to do that in a 
reasonable timeframe?
    Ms. Boland. No; in the area of patents, I think it's a 
matter of coming up with an electronic filing solution that is 
finally starting to show very significant numbers. And I think 
that there will always be some segment of the filing population 
that may not have the capability to electronically file. We 
would have to come up with a mechanism to accommodate that for 
them. I'm thinking of, perhaps, independent inventors; some 
small businesses may not have that capability. So, we have to 
deal with that policy decision within the office, of mandating 
electronic filing and then going ahead and making some 
accommodations for those that do not have that capability.
    Thank you.
    Senator Menendez. All right.
    And, Mr. Scholz, I don't want you to feel lonely there, 
after all this time. I just have two questions for you. What 
prompted this particular negotiation for this Protocol, with 
the Danish proposal? And who benefits, in terms of U.S. 
business?
    Mr. Scholz. Thank you, Mr. Chairman.
    The rationale behind the amendment was that most of our 
post-World War II FCN treaties do include this provision. There 
are a few treaties that do not. The others that come to mind 
are Ireland, Finland, Greece, and Israel. And, in researching 
the issue, we've been unable to determine precisely why the 
decision was made not to include this provision at the time the 
treaty was negotiated in 1951. But, since then, there has been 
interest on the part of the Danes in including the provision in 
the treaty, as we did earlier with Finland and Ireland, and we 
decided to negotiate a protocol that would provide for visa 
eligibility for E-2 visas at that time.
    In terms of the businesses that would benefit from that 
here in the United States, I'm not really in a position to 
speak to specific companies in that regard. I noted, generally, 
that----
    Senator Menendez. I meant sectors, not specific----
    Mr. Scholz. Oh, sectors.
    Senator Menendez. Yes.
    Mr. Scholz. Well, primarily, most Danish investment in the 
United States is in the manufacturing sector. I could give you 
a few examples of investments. I think that, in Colorado, 
there's a facility that produces wind turbines for wind energy 
generation. There are--there's some biotechnology investment, 
as well. I think, even in New Jersey, there is a Danish company 
involved in pharmaceuticals. But it's generally in the 
manufacturing sector.
    Senator Menendez. How about the dairy sector?
    Mr. Scholz. I'm not aware of a specific investment, at this 
time, in the dairy sector.
    Senator Menendez. OK.
    And one last question. Is the Government of Denmark 
providing temporary visas, at this point, to United States 
investors?
    Mr. Scholz. Yes; they do. They----
    Senator Menendez. They do.
    Mr. Scholz. Without the entry into force of this protocol, 
they are providing access to U.S. investors. U.S. investors can 
get a residency permit for a year. That's extendable for 
another year. And, after that period, they can get even longer 
extensions.
    Senator Menendez. All right. Well, thank you. Thank you, to 
all of you, for your information and your testimonies. We're 
going to keep the record open for 2 days, should any Senator 
wish to submit questions for the record. If they do, we ask you 
to respond to it expeditiously.
    We thank you for your testimony. And we'll excuse this 
panel.
    Let me introduce and ask our next panel to begin to come 
forward. For our second panel, we want to welcome Mr. Bill 
Reinsch, the president of the National Foreign Trade Council; 
Ms. Janice Lucchesi, who is the vice president of tax at Akzo 
Nobel and chairman of the Organization for International 
Investment.
    We look forward to your insights. Let me assure you that 
your full statement will be entered into the record, and we'd 
ask you to summarize your statement in approximately 5 minutes.
    Mr. Reinsch.

   STATEMENT OF HON. WILLIAM A. REINSCH, PRESIDENT, NATIONAL 
             FOREIGN TRADE COUNCIL, WASHINGTON, DC

    Mr. Reinsch. Thank you, Mr. Chairman.
    The National Foreign Trade Council appreciates the 
chairman's action in scheduling this hearing, and we strongly 
urge the committee to reaffirm the United States historic 
opposition to double taxation by giving its full support to the 
pending tax treaty protocol agreements with Germany, Finland, 
Denmark, and the Belgium tax treaty and protocol.
    The NFTC, organized in 1914, is an association of some 300 
U.S. businesses engaged in international trade and investment. 
Our membership covers the full spectrum of industrial, 
commercial, financial, and service activities, and we seek to 
foster an environment in which U.S. companies can be dynamic 
and effective competitors in the international business arena. 
To achieve this goal, American businesses must be able to 
participate fully in business activities throughout the world 
through the export of goods, services, technology, and 
entertainment, and through direct investment in facilities 
abroad. As global competition grows ever more intense, it is 
vital to the health of U.S. enterprises that they be free from 
excessive foreign taxes or double taxation and impediments to 
the flow of capital that can serve as barriers to full 
participation in the international marketplace. Foreign trade 
is fundamental to the economic growth of U.S. companies. Tax 
treaties are a crucial component of the framework that is 
necessary to allow that growth. That is why we have long 
supported the expansion and strengthening of the U.S. tax 
treaty network and why we are here to recommend the 
ratification of the tax protocols and treaties that are before 
you.
    While we are not aware of any opposition to the treaties 
under consideration, the NFTC, as a general cautionary note, 
urges the committee to reject any opposition to the agreements 
based on the presence or absence of a single provision. No 
process as complex as the negotiation of a full-scale tax 
treaty will be able to produce an agreement that will 
completely satisfy every possible constituency, and no such 
result should be expected. Tax treaty relationships arise from 
delicate negotiations aimed at resolving conflicts between the 
tax laws and policies of the negotiating countries. The 
resulting compromises always reflect a series of concessions by 
both countries from their preferred positions. Recognizing 
this, but also cognizant of the vital role tax treaties play in 
creating a level playing field, where enterprise is engaged in 
international commerce, the NFTC believes that treaties should 
be evaluated on the basis of their overall effect. In other 
words, agreements should be judged on whether they encourage 
international trade and investment between the United States 
and another country. An agreement that meets this standard will 
provide the guidance enterprises need in planning for the 
future, provide nondiscriminatory treatment for U.S. traders 
and investors, and meet an appropriate level of acceptability 
in comparison with the preferred U.S. position and express 
goals of the business community.
    We want to emphasize how important treaties are in 
creating, implementing, and preserving an international 
consensus on avoiding double taxation, particularly with 
respect to transactions between related entities. The tax laws 
in most countries impose withholding taxes, frequently at high 
rates, on payments of dividends, interest, and royalties to 
foreigners and treaties are the mechanism by which these taxes 
are lowered, on a bilateral basis.
    If U.S. enterprises cannot enjoy the reduced foreign 
withholding rates offered by a tax treaty, noncreditable high 
levels of foreign withholding tax leave them at a competitive 
disadvantage relative to traders and investors from other 
countries that do enjoy the treaty benefits of reduced 
withholding taxes. Tax treaties serve
to prevent this barrier to U.S. participation in international 
commerce.
    If U.S. businesses are going to maintain a competitive 
position around the world, we need a tax treaty policy that 
protects them from multiple or excessive levels of foreign tax 
on cross-border investments, particularly if their competitors 
already enjoy such protection. The United States has lagged 
behind other developed countries in eliminating this 
withholding tax and leveling the playing field for cross-border 
investment.
    The NFTC has consistently urged adjustment of U.S. tax 
treaty policies to allow for a zero withholding rate on 
related-entity dividends, and we congratulate the Treasury for 
making further progress in these protocols in the treaty. These 
agreements make an important contribution toward improving the 
economic competitiveness of U.S. companies. Indeed, the 
protocols bolster and improve upon the standards set in the 
United Kingdom, Australia, and Mexican agreements ratified just 
over 2 years ago, as well as the more recent Japanese tax 
treaty.
    We thank the committee for its prior support of this 
evolution in U.S. tax treaty policy, and we strongly urge you 
to continue that support by ratifying all four of these 
treaties and protocols.
    The existence of a withholding tax on cross-border patent--
parent subsidiary dividends, even at the 5-percent rate 
previously typical in U.S. treaties, has served as a tariff-
like impediment to cross-border investment flows. These 
withholding taxes are imposed in addition to the income taxes 
already paid, and often result in a lower return compared to 
the comparable investment of a foreign competitor. Tax treaties 
are designed to prevent this distortion in the investment 
decisionmaking process by reducing the multiple taxation of 
profits within a corporate group, and they serve to prevent the 
hurdle to U.S. participation in international commerce. 
Eliminating the withholding tax on cross-border dividends means 
that U.S. companies with stakes in German, Finish, Danish, and 
Belgian companies will now be able to meet their foreign 
competitors on a level playing field.
    The German protocol provides for mandatory arbitration of 
certain cases that cannot be resolved by the competent 
authorities within a specified period of time. This provision 
is the first of its kind in a U.S. tax treaty. The provision is 
limited in its scope with respect to the cases eligible for 
mandatory arbitration. The Belgium tax treaty includes a more 
broadly defined mandatory arbitration provision. The Belgium 
treaty provision covers all cases where the competent 
authorities cannot reach agreement.
    NFTC member companies review tax treaty arbitration as a 
tool to strengthen, not replace, the existing treaty dispute 
resolution procedures conducted by the competent authorities. 
The existing procedures work well to resolve the great majority 
of disputes with a great majority of treaty partners, but they 
are not always adequate to address the most problematic cases 
and relationships.
    We commend the ongoing efforts of the IRS to refine and 
improve the operation of the competent-authority process under 
treaties to make it a more efficient and reliable means of 
avoiding double taxation. The inclusion of the arbitration 
provisions in the German tax protocol and the Belgium tax 
treaty will greatly facilitate the mutual agreement procedures 
in all competent authority cases.
    Finally, Mr. Chairman, we are grateful to you and to the 
members of the committee for giving international economic 
relations prominence in the committee's agenda, particularly 
when the demands upon the committee's time are so pressing. We 
would also like to express our appreciation for the efforts of 
both majority and minority staff which have enabled this 
hearing to be held at this time. We commend the committee for 
its commitment to proceed with ratification of these agreements 
as expeditiously as possible.
    Thank you.
    [The prepared statement of Hon. Reinsch follows:]

  Prepared Statement of Hon. William A. Reinsch, President, National 
                 Foreign Trade Council, Washington, DC

    Mr. Chairman and members of the committee, the National Foreign 
Trade Council (NFTC) is pleased to recommend ratification of the 
treaties and protocols under consideration by the committee today. We 
appreciate the chairman's actions in scheduling this hearing, and we 
strongly urge the committee to reaffirm the United States historic 
opposition to double taxation by giving its full support to the pending 
tax treaty protocol agreements with Germany, Finland, and Denmark, and 
the Belgium tax treaty and protocol.
    The NFTC, organized in 1914, is an association of some 300 U.S. 
business enterprises engaged in all aspects of international trade and 
investment. Our membership covers the full spectrum of industrial, 
commercial, financial, and service activities, and we seek to foster an 
environment in which U.S. companies can be dynamic and effective 
competitors in the international business arena. To achieve this goal, 
American businesses must be able to participate fully in business 
activities throughout the world through the export of goods, services, 
technology, and entertainment, and through direct investment in 
facilities abroad. As global competition grows ever more intense, it is 
vital to the health of U.S. enterprises and to their continuing ability 
to contribute to the U.S. economy that they be free from excessive 
foreign taxes or double taxation and impediments to the flow of capital 
that can serve as barriers to full participation in the international 
marketplace. Foreign trade is fundamental to the economic growth of 
U.S. companies. Tax treaties are a crucial component of the framework 
that is necessary to allow that growth and balanced competition.
    This is why the NFTC has long supported the expansion and 
strengthening of the U.S. tax treaty network and why we are here today 
to recommend ratification of the tax protocols with Germany, Finland, 
Denmark, and the tax treaty and protocol with Belgium.
                 general comments on tax treaty policy
    While we are not aware of any opposition to the treaties under 
consideration, the NFTC, as it has done in the past as a general 
cautionary note, urges the committee to reject any opposition to the 
agreements based on the presence or absence of a single provision. No 
process as complex as the negotiation of a full-scale tax treaty will 
be able to produce an agreement that will completely satisfy every 
possible constituency, and no such result should be expected. Tax 
treaty relationships arise from difficult and sometimes delicate 
negotiations aimed at resolving conflicts between the tax laws and 
policies of the negotiating countries. The resulting compromises always 
reflect a series of concessions by both countries from their preferred 
positions. Recognizing this, but also cognizant of the vital role tax 
treaties play in creating a level playing field for enterprises engaged 
in international commerce, the NFTC believes that treaties should be 
evaluated on the basis of their overall effect. In other words, 
agreements should be judged on whether they encourage international 
flows of trade and investment between the United States and the other 
country. An agreement that meets this standard will provide the 
guidance enterprises need in planning for the future, provide 
nondiscriminatory treatment for U.S. traders and investors as compared 
to those of other countries, and meet an appropriate level of 
acceptability in comparison with the preferred U.S. position and 
expressed goals of the business community.
    Comparisons of a particular treaty's provisions with the U.S. model 
or with other treaties do not provide an appropriate basis for 
analyzing a treaty's value. U.S. negotiators are to be applauded for 
achieving agreements that reflect as well as these treaties do the U.S. 
model and the views of the U.S. business community.
    The NFTC wishes to emphasize how important treaties are in 
creating, implementing, and preserving an international consensus on 
the desirability of avoiding double taxation, particularly with respect 
to transactions between related entities. The tax laws of most 
countries impose withholding taxes, frequently at high rates, on 
payments of dividends, interest, and royalties to foreigners, and 
treaties are the mechanism by which these taxes are lowered on a 
bilateral basis. If U.S. enterprises cannot enjoy the reduced foreign 
withholding rates offered by a tax treaty, noncreditable high levels of 
foreign withholding tax leave them at a competitive disadvantage 
relative to traders and investors from other countries that do enjoy 
the treaty benefits of reduced withholding taxes. Tax treaties serve to 
prevent this barrier to U.S. participation in international commerce.
    If U.S. businesses are going to maintain a competitive position 
around the world, we need a treaty policy that protects them from 
multiple or excessive levels of foreign tax on cross-border 
investments, particularly if their competitors already enjoy that 
advantage. The United States has lagged behind other developed 
countries in eliminating this withholding tax and leveling the playing 
field for cross-border investment. The European Union (EU) eliminated 
the tax on intra-EU, parent-subsidiary dividends over a decade ago, and 
dozens of bilateral treaties between foreign countries have also 
followed that route. The majority of OECD countries now have bilateral 
treaties in place that provide for a zero rate on parent-subsidiary 
dividends.
    Tax treaties also provide other features that are vital to the 
competitive position of U.S. businesses. For example, by prescribing 
internationally agreed thresholds for the imposition of taxation by 
foreign countries on inbound investment, and by requiring foreign tax 
laws to be applied in a nondiscriminatory manner to U.S. enterprises, 
treaties offer a significant measure of certainty to potential 
investors. Another extremely important benefit which is available 
exclusively under tax treaties is the mutual agreement procedure. This 
bilateral administrative mechanism avoids double taxation on cross-
border transactions.
    The United States, together with many of its treaty partners, has 
worked long and hard through the OECD and other fora to promote 
acceptance of the arm's-length standard for pricing transactions 
between related parties. The worldwide acceptance of this standard, 
which is reflected in the intricate treaty network covering the United 
States and dozens of other countries, is a tribute to governments' 
commitment to prevent conflicting income measurements from leading to 
double taxation and resulting distortions and barriers for healthy 
international trade. Treaties are a crucial element in achieving this 
goal, because they contain an expression of both governments' 
commitment to the arm's length standard and provide the only available 
bilateral mechanism, the competent authority procedure, to resolve any 
disputes about the application of the standard in practice.
    We recognize that determination of the appropriate arm's-length 
transfer price for the exchange of goods and services between related 
entities is sometimes a complex task that can lead to good faith 
disagreements between well-intentioned parties. Nevertheless, the 
points of international agreement on the governing principles far 
outnumber any points of disagreement. Indeed, after decades of close 
examination, governments around the world agree that the arm's length 
principle is the best available standard for determining the 
appropriate transfer price, because of both its economic neutrality and 
its ability to be applied by taxpayers and revenue authorities alike.
    The NFTC strongly supports the efforts of the Internal Revenue 
Service and the Treasury to promote continuing international consensus 
on the appropriate transfer pricing standards, as well as innovative 
procedures for implementing that consensus. We applaud the continued 
growth of the APA program, which is designed to achieve agreement 
between taxpayers and revenue authorities on the proper pricing 
methodology to be used, before disputes arise. We commend the ongoing 
efforts of the IRS to refine and improve the operation of the competent 
authority process under treaties, to make it a more efficient and 
reliable means of avoiding double taxation.
    The NFTC also wishes to reaffirm its support for the existing 
procedure by which Treasury consults on a regular basis with this 
committee, the tax-writing committees, and the appropriate 
congressional staffs concerning tax treaty issues and negotiations and 
the interaction between treaties and developing tax legislation. We 
encourage all participants in such consultations to give them a high 
priority. We also commend this committee for scheduling tax treaty 
hearings so soon after receiving the agreements from the executive 
branch. Doing so enables improvements in the treaty network to enter 
into effect as quickly as possible.
    We would also like to reaffirm our view, frequently voiced in the 
past, that Congress should avoid occasions of overriding the U.S. tax 
treaty commitments that are approved by this committee by subsequent 
domestic legislation. We believe that consultation, negotiation, and 
mutual agreement upon changes, rather than unilateral legislative 
abrogation of treaty commitments, better supports the mutual goals of 
treaty partners.
                    agreements before the committee
    The German, Finnish, and Danish protocols, and the Belgian tax 
treaty that are before the committee today update agreements between 
the United States and these countries that were signed many years ago. 
The protocols improve conventions that have stimulated increased 
investment, greater transparency, and a stronger economic relationship 
between our countries.
    The NFTC has consistently urged adjustment of U.S. treaty policies 
to allow for a zero withholding rate on related-entity dividends, and 
we congratulate the Treasury for making further progress in these 
protocols and treaty. These agreements make an important contribution 
toward improving the economic competitiveness of U.S. companies. 
Indeed, the protocols bolster and improve upon the standard set in the 
United Kingdom, Australian, and Mexican agreements ratified just over 2 
years ago, as well as the more recent Japanese tax treaty, by lowering 
the ownership threshold required to receive the benefit of the zero 
dividend withholding rate from 100 to 80 percent. We thank the 
committee for its prior support of this evolution in U.S. tax treaty 
policy and we strongly urge you to continue that support by approving 
all four of these tax treaties and protocols.
    The existence of a withholding tax on cross-border, parent-
subsidiary dividends, even at the 5-percent rate previously typical in 
U.S. treaties, has served as a tariff-like impediment to cross-border 
investment flows. These withholding taxes are imposed in addition to 
the income taxes already paid and often result in a lower return 
compared to the comparable investment of a foreign competitor. Tax 
treaties are designed to prevent this distortion in the investment 
decisionmaking process by reducing the multiple taxation of profits 
within a corporate group, and they serve to prevent the hurdle to U.S. 
participation in international commerce. Eliminating the withholding 
tax on cross-border dividends means that U.S. companies with stakes in 
German, Finnish, Danish, and Belgian companies will now be able to meet 
their foreign competitors on a level playing field. The German protocol 
would apply with respect to withholding taxes paid or credited on or 
after January 1 of the year in which the protocol comes into force. The 
other three protocols are effective upon ratification.
    Additionally, important safeguards included in these protocols 
prevent ``treaty shopping.'' In order to qualify for the lowered rates 
specified by the treaties, companies must meet certain requirements so 
that foreigners whose governments have not negotiated a tax treaty with 
Germany, Finland, Denmark, Belgium, or the United States cannot free-
ride on this treaty. Similarly, provisions in the sections on 
dividends, interest, and royalties prevent arrangements by which a U.S. 
company is used as a conduit to do the same. Extensive provisions in 
the treaties are intended to ensure that the benefits of the treaty 
accrue only to those for which they are intended. All four of the tax 
treaties and protocols contain good limitations on benefits provision.
    The German protocol provides for mandatory arbitration of certain 
cases that cannot be resolved by the competent authorities within a 
specified period of time. This provision is the first of its kind in a 
U.S. tax treaty. The provision is limited in its scope with respect to 
the cases eligible for mandatory arbitration. The Belgium tax treaty 
includes a more broadly defined mandatory arbitration provision. The 
Belgium treaty provision covers all cases where the competent 
authorities cannot reach agreement. NFTC member companies view tax 
treaty arbitration as a tool to strengthen, not replace, the existing 
treaty dispute resolution procedures conducted by the competent 
authorities. The existing procedures work well to resolve the great 
majority of disputes with the great majority of treaty partners, but 
they are not always adequate to address the most problematic cases and 
relationships. The inclusion of the arbitration provisions in the 
German tax protocol and the Belgium tax treaty will greatly facilitate 
the mutual agreement procedures in all competent authority cases.
                             in conclusion
    Finally, the NFTC is grateful to the chairman and the members of 
the committee for giving international economic relations prominence in 
the committee's agenda, particularly when the demands upon the 
committee's time are so pressing. We would also like to express our 
appreciation for the efforts of both majority and minority staff which 
have enabled this hearing to be held at this time.
    We commend the committee for its commitment to proceed with 
ratification of these important agreements as expeditiously as 
possible.

    Senator Menendez. Thank you. Ms. Lucchesi.

  STATEMENT OF JANICE LUCCHESI, CHAIRWOMAN, ORGANIZATION FOR 
            INTERNATIONAL INVESTMENT, WASHINGTON, DC

    Ms. Lucchesi. Thank you for the opportunity to appear 
before you today to support, on behalf of the Organization for 
International Investment, or OFII, prompt ratification of the 
proposed protocols to the United States income tax treaties 
with Germany, Denmark, and Finland, and the new proposed income 
tax treaty with Belgium, all pending before the committee.
    OFII is an association representing the interest of U.S. 
subsidiaries of companies based abroad, which I will refer to 
as ``insourcing companies.''
    OFII has over 160 member companies, which range from 
midsized businesses to some of the largest employers in the 
United States, such as Honda, HSBC, Sony, AEGON Insurance, 
Nestle, Unilever, and L'Oreal.
    Collectively, insourcing companies employ over 5 million 
Americans, pay 32 percent higher compensation than all U.S. 
firms, support 19 percent of all U.S. exports, and, in 2006, 
reinvested $80 billion in profits back into the U.S. economy.
    For both foreign and U.S. multinationals, income tax 
treaties such as the agreements before you today promote 
business and employment opportunities in each country, protect 
against discrimination, provide a common and consistent set of 
rules aimed at fair taxation, as well as provide a mechanism 
for eliminating the potential for double taxation. The prompt 
ratification of these agreements will signal to insourcing 
companies that their continued investment in job creation in 
the United States is to be encouraged.
    The U.S. Treasury Department is to be commended for its 
dedication and drive to maintain and expand our network of 
bilateral income tax treaties with our major trading partners, 
and assuring that these agreements remain current and relevant 
in an ever changing global fiscal and economic environment.
    The agreements pending before you today contain important 
improvements over our current income tax treaties with Belgium, 
Denmark, Finland, and Germany, reflecting the most current 
United States international tax policies.
    Beginning with the 2001 new income tax convention with the 
United Kingdom, the United States has advanced a policy of 
eliminating the withholding tax on direct investment dividends. 
The four agreements before you today are a further and 
meaningful step in extending that policy to most of the United 
States major European trading partners.
    Elimination of the withholding tax removes a significant 
impediment to direct foreign investment. It also assures that 
United States corporations receive the same benefit from 
dividends paid by their subsidiaries in Europe as European 
corporations receive from dividends paid by their subsidiaries 
throughout Europe.
    The agreements with Germany and Belgium also make 
significant strides in addressing potential inefficiencies when 
employees are on assignment away from their home country, 
assuring that pension benefits are preserved and the tax 
treatment of contributions to, income earned by, and payments 
from, pension plans are not distorted by reason of employee 
transfers abroad.
    Finally, we welcome and endorse a provision reflected in 
the agreements with Germany and Belgium, the addition of 
arbitration as a means of improving the dispute resolution 
process. Tax treaties cannot resolve every instance of 
potential double taxation. In recognition of this, our treaties 
have consistently included a mutual agreement article allowing 
taxpayers to request that, where the actions of one or both tax 
authorities results, or could result, in double taxation, the 
two authorities meet, with a view to eliminating potential 
double taxation.
    This mechanism most commonly comes into play in the area of 
transfer pricing. The United States experience resolving in--
with resolving these double taxation disputes under the mutual 
agreement article has been mixed. The process is often lengthy 
and expensive, and the tax authorities may have basic 
differences that impede agreement. The United States has been a 
leader in this dispute resolution process, and would greatly 
benefit from a more disciplined approach.
    A process that provides for submission of specific issues 
to binding arbitration if the two tax authorities are not able 
to resolve the matter within a reasonable period would be a 
welcome improvement to the bilateral dispute resolution 
process.
    In conclusion, OFII appreciates this opportunity to 
register its strong support for the agreements pending before 
your committee today. I thank the committee for this 
opportunity to provide this input, and am happy to answer any 
questions you may have.
    [The prepared statement of Ms. Lucchesi follows:]

    Prepared Statement of Janice Lucchesi, Chairwoman of the Board, 
    Organization for International Investment (OFII), Washington, DC

    Mr. Chairman, ranking member and members of the committee, thank 
you for the opportunity to appear before you today to support, on 
behalf of the Organization for International Investment (``OFII''), 
prompt ratification of the proposed protocols to the United States 
income tax treaties with Germany, Denmark, and Finland, and the new 
proposed income tax treaty with Belgium, all pending before this 
committee.
    OFII is an association representing the interests of U.S. 
subsidiaries of companies based abroad which I will refer to as 
``insourcing'' companies. OFII has over 160 member companies, which 
range from mid-sized businesses to some of the largest employers in the 
United States, such as Honda, HSBC, Sony, AEGON Insurance, Nestle, 
Unilever, and L'Oreal.
    Collectively, insourcing companies employ over 5 million Americans, 
pay 32 percent higher compensation than all U.S. firms, support 19 
percent of all U.S exports, and in 2006 reinvested $80 billion in 
profits back into the U.S. economy.
    For both foreign and U.S. multinationals, income tax treaties, such 
as the agreements before you today, promote business and employment 
opportunities in each country, protect against discrimination, provide 
a common and consistent set of rules aimed at fair taxation, as well as 
provide a mechanism for eliminating the potential for double taxation. 
The prompt ratification of these agreements will signal to insourcing 
companies that their continued investment and job creation in the 
United States is to be encouraged.
    The U.S. Treasury Department is to be commended for its dedication 
and drive to maintain and expand our network of bilateral income tax 
treaties with our major trading partners and assuring that these 
agreements remain current and relevant in an ever-changing global 
fiscal and economic environment. The agreements pending before you 
today contain important improvements over our current income tax 
treaties with Belgium, Denmark, Finland, and Germany, reflecting the 
most current U.S. international tax policies.
    Beginning with the 2001 new income tax convention with the United 
Kingdom, the United States has advanced a policy of eliminating the 
withholding tax on direct investment dividends. The four agreements 
before you today are a further and meaningful step in extending that 
policy to most of the United States major European trading partners. 
Elimination of the withholding tax removes a significant impediment to 
direct foreign investment. It also assures that United States 
corporations receive the same benefit from dividends paid by their 
subsidiaries in Europe as European corporations receive from dividends 
paid by their subsidiaries throughout Europe.
    The agreements with Germany and Belgium also make significant 
strides in addressing potential inefficiencies when employees are on 
assignment away from their home country, assuring that pension benefits 
are preserved and the tax treatment of contributions to, income earned 
by, and payments from, pension plans are not distorted by reason of 
employee transfers abroad.
    Finally, we welcome and endorse a provision reflected in the 
agreements with Germany and Belgium--the addition of arbitration as a 
means of improving the dispute resolution process. Tax treaties cannot 
resolve every instance of potential double taxation. In recognition of 
this, our treaties have consistently included a ``Mutual Agreement'' 
article allowing taxpayers to request that, where the action of one or 
both tax authorities results or could result in double taxation, the 
two tax authorities meet with a view to eliminating the potential 
double taxation. This mechanism most commonly comes into play in the 
area of transfer pricing. The United States experience with resolving 
these double taxation disputes under the Mutual Agreement article has 
been mixed. The process is often lengthy and expensive and the tax 
authorities may have basic differences that impede agreement. The 
United States has been a leader in this dispute resolution process and 
would greatly benefit from a more disciplined approach. A process that 
provides for submission of specific issues to binding arbitration if 
the two tax authorities are not able to resolve the matter within a 
reasonable period would be a welcome improvement to the bilateral 
dispute resolution process.
    In conclusion, OFII appreciates this opportunity to register its 
strong support for the agreements pending before your committee today.
    I thank the committee for the opportunity to provide this input and 
am happy to answer any questions you may have.

    Senator Menendez. Thank you.
    Let me ask both of you, are there any provisions in these 
agreements that would particularly be beneficial to specific 
U.S. industries doing businesses in these countries; in 
Germany, Belgium, Finland, or Denmark--that you can think of?
    Ms. Lucchesi. Specific industries?
    Senator Menendez. The provisions in the agreements that are 
going to be particularly beneficial to some specific U.S. 
industries.
    Mr. Reinsch. Mr. Chairman, I think our answer to that 
question would be: No; we're not aware of any particular sector 
that might benefit more than another on these treaties.
    Ms. Lucchesi. Yes; I agree with him.
    Senator Menendez. OK. Clearly, there have been advocates 
for these treaties within the private sector, have there not?
    Mr. Reinsch. Well, our memberships are different. Our 
members are, for the most part, large multinational companies 
with a U.S. base and U.S. headquarters. If you look at our tax 
committee, which is the group that does most of the work on 
this, it would be companies that you've heard of, like Procter 
& Gamble, a number of the oil companies, other manufacturers, 
some banks and financial services institutions, and some high-
tech companies.
    Senator Menendez. Let me ask you this. What are some of the 
most significant barriers created by tax systems, that still 
remain, to cross-border investment?
    Ms. Lucchesi. Still remain----
    Senator Menendez. That still remain----
    Ms. Lucchesi [continuing]. Without the----
    Senator Menendez. Not in these agreements, necessarily, but 
in general, since we have the benefit of your expertise here, 
as we're looking prospectively.
    Ms. Lucchesi. I think a--the prospect of double taxation, 
in terms of everyday trade--so, that's in transfer price--there 
is not an agreement among our major trading partners on exactly 
what is a fair transfer price. So, in my experience, we've 
spent a lot of time in discussions with various tax authorities 
over, ``What was the price that the U.S. company should have 
charged a European country for a good?'' and vice versa.
    Mr. Reinsch. I think, in our case I'd certainly agree with 
that. Our members have focused, also, on countries with whom we 
don't have either up-to-date or any tax treaties, and there are 
some rather significant economies, most notably Canada and 
Brazil, with whom we don't have tax treaties, and we are very 
anxious to see this kind of process put into place with respect 
to them. There have been negotiations going on with the 
Canadians that I believe are nearly complete, and I hope you'll 
be presented with that document soon. That would be good news.
    Senator Menendez. I was just going to ask you: Are we on 
the right path, in both cases, in terms of trying to address 
those barriers?
    Mr. Reinsch. With Canada, we are very much on the right 
path, and I hope it will be submitted to the Senate soon.
    With Brazil, I can report, based only on the last 4 or 5 
months, that I think we are now on an appropriate path. The 
Brazilian Government has reflected, recently--meaning in the 
spring of this year--a much stronger interest in negotiating an 
agreement than they have in the past. And they've done so, in 
part, because they have a number of Brazilian companies that 
are very interested in having the treaty as well, so it makes 
the interest bilateral, rather than unilateral.
    Senator Menendez. How significant is the arbitration 
provisions that you've both cited in your testimony? Are they 
precedent-
setting? Are they something we're going to likely look forward 
to seeing in other agreements? Is it something that we want to 
see in other agreements?
    Mr. Reinsch. I would hope that they would be precedent-
setting; and we would like to see them in other agreements. I 
think, in general, to save the committee's time, I would 
subscribe, for the most part, to Mr. Harrington's----
    Senator Menendez. At this----
    Mr. Reinsch [continuing]. Analysis.
    Senator Menendez [continuing]. Point, you're just saving my 
time.
    Mr. Reinsch. Well, I----
    [Laughter.]
    Mr. Reinsch [continuing]. I was trying to generalize.
    Senator Menendez. And I'm asking the questions, so don't 
hesitate to give me a full answer.
    Mr. Reinsch. I think I would subscribe largely to Mr. 
Harrington's analysis, Mr. Chairman. We don't see them as being 
frequently invoked. We see their existence as an incentive to 
the competent authorities to work things out. We are, in 
general, happy with the competent-authority process. There have 
been, and occasionally are--it varies over time and by 
individual country--cases where the competent-authority process 
is either prolonged or doesn't produce a resolution. We think 
having the arbitration process, if you will, hanging over their 
heads will lead to better--and more efficient--competent-
authority work, which is a fine outcome. And, failing that, the 
arbitration process is also a fine outcome, from our point of 
view.
    Ms. Lucchesi. Yes. I concur. It certainly adds to 
certainty. In an area where there aren't many certainties, this 
is going to reduce some element of the risk of double taxation.
    Senator Menendez. Let me pick your brain about the question 
I asked earlier about--prospectively--about the taxpayer 
participation. How do you view that?
    Mr. Reinsch. I was thinking about that as you raised it, 
Mr. Chairman. It's a novel thought. I think the idea to my 
companies that they might have some influence with the tax 
authorities is one that I'm sure they'll want to give some 
thought to. It's kind of a new idea.
    I am advised that right now they are, in general, satisfied 
with the relationship they have with the U.S. competent 
authority, and are satisfied that their point of view is taken 
into account and considered as part of the process now. So, 
they don't feel alienated or separated from the process now, 
even though they are not, as you pointed out, precisely part of 
it.
    That said, I think that there might be something to be 
said, prospectively, for looking at that question, and I'd be 
pleased to go back to my members and then report the results to 
the committee staff for your consideration.
    Senator Menendez. I'd love to hear their response to that. 
Seems to me that formalizing their participation guarantees 
that the competent authority will take their views and concerns 
as a essential part of the process, versus the possibility of 
it. Anyhow, we'd love to hear the response.
    And, last, are there any provisions or changes that the 
updated treaties before us today do not include that you think, 
moving forward,, subject to the call of the Chair.]should be 
considered as we look, prospectively?
    Mr. Reinsch. The----
    Senator Menendez. If you had a magic wand?
    Mr. Reinsch. Well, they're all different, and--I'm not the 
best person to get into the weeds, although we would be happy 
to get into the weeds later on, if you'd like--I think, in 
general, we're satisfied with these, certainly. The provision I 
could simply flag is--that has historically been the most 
important to my members--has been the zero withholding 
provision, which is why we are particularly supportive of these 
treaties. To the extent that that could be obtained in future 
treaties, and that it could be obtained as broadly as possible, 
we would be even more enthusiastic.
    Ms. Lucchesi. There is--there's a provision that's in the 
German and Belgium treaties that is not in the other two and is 
not in many of our other treaties, relating to pension 
benefits, where both of the--both the United States and Germany 
and Belgium agree that they will not tax the pension earnings 
of the--that the U.S. national might make when he's overseas 
and remains a part of the U.S. pension plan, and vice versa. 
And they explicitly state that certain pension plans will be 
deemed to be acceptable plans, so there's no need to go to 
competent authority to get your pension plan blessed, there's 
just a per se list of acceptable pension plans. And, from a 
company that wants to transfer employees throughout the world, 
this is critical, because it is--obviously, in the end, it is 
the company that's going to pay the tax cost. If I remain in my 
U.S. pension plan and transfer to the Netherlands, that's a--
and the United States taxes the--my earnings--and the 
Netherlands taxes my earnings, obviously my company is going to 
pay for that. So, these--the German and Belgium treaties are 
really to be applauded for containing this provision, and we 
would love to see that in other treaties, as well.
    Senator Menendez. Well, thank you for your testimony.
    Seeing no other member of the committee, the record will 
remain open for 2 days so that committee members may submit 
additional questions to the witnesses. I ask if that you, in 
fact, receive such questions, that you respond to them 
expeditiously.
    Senator Menendez. If no one has any additional comments, 
the hearing is adjourned.
    [Whereupon, at 4:22 p.m., the hearing was adjourned.]
                              ----------                              

              Additional Material Submitted for the Record

      Prepared Statement of Alan C. Drewsen, Executive Director, 
           International Trademark Association, New York, NY

    Mr. Chairman, the International Trademark Association (INTA) 
appreciates this opportunity to express its views on the Singapore 
Treaty on the Law of Trademarks which replaces the Trademark Law Treaty 
of 1994 to which the United States is a signatory. On behalf of our 
members, we respectfully ask the committee to give this revision of the 
World Intellectual Property Organization Trademark Law Treaty of 1994 
its favorable consideration.
    The International Trademark Association is a not-for-profit 
membership association of more than 5,000 trademark owners and 
professionals dedicated to the support and advancement of trademarks 
and related intellectual property (``IP'') as elements of fair and 
effective national and international commerce. INTA works closely with 
government and judicial authorities around the world to promote the 
development and application of trademark law.
    The Singapore Treaty is the product of worldwide growth in e-
commerce and provides consistent rules for electronic filing of 
trademark applications, as well as further simplification and 
streamlining of administrative procedures. The modernization of the 
1994 treaty reflects developments in technology and trademark practice.
    INTA wishes to draw the committee's attention to the following key 
changes all of which constitute improvement over the 1994 treaty:
1. Creation of an Assembly
    An assembly of contracting parties has been created with the power 
to deal with matters concerning the development of the treaty. This 
consists of amending the treaty regulations, including the Model 
International Forms and performing other functions as appropriate to 
implement the provisions of the treaty.
2. Trademark License Recordal Provisions
    Provisions relating to trademark license recordal establish maximum 
requirements for the requests for recordal, amendment, or cancellation. 
Importantly, nonrecordal of a license shall not affect the validity of 
the registration of the mark which is the subject of the license or the 
protection of that mark. Recordal of a license may not be required as a 
condition for the use of a mark by a licensee to be deemed to 
constitute use by the holder in proceedings relating to the 
acquisition, maintenance, and enforcement of marks. Recordal of a 
license may also not be required as a condition for a licensee to join 
infringement proceedings initiated by the holder or to obtain 
infringement damages through such proceedings, although any state or 
intergovernmental organization may still declare through a reservation 
that it requires license recordal as a condition in this regard.
    These provisions will simplify and reduce costs in many countries 
where the formalities of the recordal process are obstacles to cost-
effective trademark protection. On the other hand, the treaty addresses 
the situation where failure to record licenses poses unacceptable risk 
for U.S. trademark owners.
3. Relief Measures When Time Limits Are Missed
    Three possible types of relief measures are provided in cases in 
which a time limit has been missed for an action in a procedure 
relating to an application or registration. These include: (i) 
Extension of the time limit; (ii) continued processing; and (iii) 
reinstatement of rights if the trademark office finds that the failure 
to meet the time limit occurred despite due care taken, or if the 
failure was unintentional.
4. Electronic Communications
    In response to the increasing automation and adoption of electronic 
filing systems by trademark offices since 1994, the Singapore Treaty 
allows contracting parties to choose the means of transmittal of 
communications and to determine if they will accept paper, electronic, 
or other forms of communications. This is an especially important 
matter for the U.S. Patent and Trademark Office (PTO), which has 
expanded its automation capacity during the filing process.
5. Expanded Scope of Marks Covered
    The Singapore Treaty may be generally applied to all signs 
registrable under the national law of any contracting party, including 
nonvisible signs such as sounds and smells, in addition to 
nontraditional marks such as three-dimensional marks and holograms.
6. Supplementary Resolution to the Singapore Treaty
    In addition to the main text and regulations to the Singapore 
Treaty, the diplomatic conference also adopted a supplementary 
resolution that states that contracting parties are not obliged to 
register the ``new types of marks'' mentioned in the regulations to the 
treaty, or implement electronic filing or other automated systems.
    Mr. Chairman, ratification of the Singapore Treaty will improve the 
ability of U.S. trademark owners to protect their intellectual property 
throughout the world. Upon entry into force, this will simplify formal 
procedures and reduce associated costs for trademark applicants and 
governments. We urge the committee to report the Singapore Treaty 
favorably.
                                 ______
                                 

 Letter Submitted as a Prepared Statement of the American Intellectual 
            Property Law Association (AIPLA), Arlington, VA

                                                     AIPLA,
                                      Arlington, VA, July 23, 2007.
Hon. Joseph R. Biden, Jr.,
Chairman, Committee on Foreign Relations,
U.S. Senate, Dirksen Senate Office Building, Washington, DC.
    Dear Mr. Chairman: The American Intellectual Property Law 
Association (AIPLA) is pleased to present its views on the Singapore 
Treaty on the Law of Trademarks adopted on March 28, 2006, in 
Singapore, the Geneva Act of the Hague Agreement Concerning the 
International Registration of Industrial Designs adopted on July 2, 
1999, in Geneva, and the Patent Law Treaty and Regulations Under the 
Patent Law Treaty adopted on June 1, 2000, in Geneva.
    AIPLA is a national bar association of more than 16,000 members 
engaged in private and corporate practice, in government service, and 
in the academic community. AIPLA represents a diverse spectrum of 
individuals, companies, and institutions involved directly or 
indirectly in the practice of patent, trademark, copyright, and unfair 
competition law, as well as other fields of law affecting intellectual 
property. Our members represent both owners and users of intellectual 
property.
    The treaties captioned above concern three discrete aspects of 
intellectual property law: Trademarks, industrial designs, and patents. 
All three treaties, however, recognize the need to streamline the 
protection of intellectual property rights and to remove legal 
complexity and procedural difficulty in obtaining and maintaining such 
rights. To the extent those goals may be accomplished should the United 
States adhere to these treaties, all rights holders, and in particular 
small entities in the United States, will be better able to participate 
in the growing global economy with sound, cost-effective intellectual 
property protection.
    We note that, while all three of the above referenced treaties have 
been referred to the Senate for its advice and consent, no implementing 
legislation has been published. In the case of the Singapore Treaty, we 
believe that the United States currently complies with the treaty 
provisions and that no implementing legislation would be required to 
implement it. Regarding the two Geneva treaties, however, implementing 
legislation would be required and, while we are able to offer our 
general views on these treaties, we must reserve final judgment until 
we are able to review the specific proposed implementing legislation.
               singapore treaty on the law of trademarks
    The Singapore Treaty on the Law of Trademarks (the Singapore 
Treaty) was adopted in Singapore on March 28, 2006, and forwarded to 
the Senate for its advice and consent on May 3, 2007. Ratification and 
implementation of this treaty will significantly benefit U.S. trademark 
owners conducting business globally. We, therefore, urge the committee 
to support ratification of the Singapore Treaty.
    The Singapore Treaty builds upon and updates the Trademark Law 
Treaty of 1994, to which the United States is a party. The 1994 treaty 
harmonized formalities and simplified procedures in applying, 
registering, and renewing trademarks, by establishing maximum 
requirements that Contracting Parties can impose on trademark 
applicants and holders. The Singapore Treaty maintains this focus, but 
has a wider scope of application and addresses new developments in the 
field of communication technology.
    The Singapore Treaty applies to all types of marks registrable 
under the law of a given Contracting Party. The treaty allows 
Contracting Parties the freedom to choose the means of communication 
with their trademark offices, and introduces relief measures for missed 
time limits and errors in recording trademark licenses. Other 
provisions of the Singapore Treaty closely follow the Trademark Law 
Treaty. Such common procedural standards would create a level playing 
field for all parties that invest in branded goods. Moreover, the 
Singapore Treaty creates a dynamic regulatory framework for brand 
rights and, unlike the Trademark Law Treaty, establishes an Assembly of 
the Contracting Parties that can review administrative details, a 
feature of great practical importance for brand owners.
    The Singapore Treaty addresses the burdensome license recordal 
requirements in some countries that make it difficult for trademark 
licensors and licensees to enforce trademark rights. In many cases, 
failure to record a license results in invalidation of the trademark 
registration. The Singapore Treaty's license recordal provisions reduce 
the formalities that trademark owners are subject to when doing 
business with a Contracting Party that requires recordal, and mitigate 
the damaging effects that can result from failure to record a license 
in those jurisdictions.
    Unlike the Trademark Law Treaty, the Singapore Treaty allows 
Contracting Parties the freedom to choose the form and means of 
transmittal of communications, i.e., whether they accept communications 
on paper, communications in electronic form, or any other mode of 
communication. This allows national and regional trademark offices to 
move to electronic systems for receiving and processing trademark 
applications, permitting such offices to take advantage of electronic 
communication systems as an efficient and cost-saving alternative to 
paper communications. The Singapore Treaty also maintains a very 
important provision of the Trademark Law Treaty, namely that the 
authentication, certification, or attestation of any signature on paper 
communications cannot be required. Contracting Parties remain free to 
determine whether and how they wish to implement a system of 
authentication of electronic communications.
    The treaty protects applicants from failures to comply with time 
limits by requiring Contracting Parties to provide at least one of the 
following forms of relief: An extension of time to comply, the 
opportunity to continue processing, or a reinstatement of rights. Such 
mandatory relief would mitigate drastic penalties resulting from mere 
failure to meet a specific time limit.
    The Singapore Treaty, in contrast to the Trademark Law Treaty, 
applies generally to marks that can be registered under the law of a 
Contracting Party. Never before have nontraditional marks been 
explicitly recognized in an international instrument dealing with 
trademark law. The treaty is applicable to all types of marks, 
including nontraditional visible marks such as holograms, three-
dimensional marks, color, position, and movement marks, and nonvisible 
marks such as sound, olfactory, or taste and feel marks. The 
Regulations provide for the mode of representation of these marks in 
applications, which may include nongraphic or photographic 
reproductions.
    The Singapore Treaty creates an Assembly of the Contracting 
Parties, introducing a degree of flexibility in the definition and 
refinement of administrative procedures to be implemented by national 
trademark offices. We anticipate that future developments in trademark 
registration procedures and practice will warrant amendment of those 
details. The assembly is endowed with powers to modify the Regulations 
and the Model International Forms, where necessary, and it can also 
deal--at a preliminary level--with questions relating to future 
development of the treaty.
    As outlined above, ratification of this treaty by the United States 
and other nations will significantly benefit U.S. trademark owners 
conducting business globally. Ratification will simplify procedures for 
both national and regional offices and for applicants, reducing 
transaction costs and minimizing inadvertent loss of valuable rights.
    AIPLA supports ratification by the United States of the Singapore 
Treaty on the Law of Trademarks.
    geneva act of the hague agreement concerning the international 
                   registration of industrial designs
    The Geneva Act of the Hague Agreement (the Agreement) was adopted 
in Geneva on July 2, 1999, and forwarded to the Senate for its advice 
and consent on November 13, 2006. Ratification and implementation of 
this Agreement would provide industrial designers in the United States 
with access to an international legal framework through which they may 
obtain protection for their designs in multiple countries by filing a 
single application. We therefore urge the committee to support 
ratification of the Agreement.
    The Hague Agreement for the International Protection of Industrial 
Designs (the ``Hague Agreement'') includes three international 
treaties: The London Act (1934), the Hague Act (1960), and the Geneva 
Act (1999). A Contracting Party may ratify any or all of the three 
treaties. The most recent of these, the Geneva Act, became operational 
on April 4, 2004. This Agreement contains provisions that meet the 
needs of countries, like the United States, that undertake novelty 
examinations of industrial designs. Many of the provisions of the 
Agreement were specifically negotiated to accommodate these needs, as 
were the Regulations and Administrative Instructions.
    The primary benefit of the Agreement would be that U.S. designers 
could obtain multinational industrial design protection with a single 
application, instead of filing individual applications in each country 
of interest. Consequently, the Agreement is cost effective and 
efficient; creating opportunities that would not otherwise exist for an 
enterprise with a limited budget for legal protection. The Agreement, 
therefore, affords right holders great flexibility in targeting 
national, regional, or global markets for particular goods.
    U.S. design owners would be able to file for design registration in 
any number of the Contracting Parties with a single standardized 
application in English. The application could be filed at either the 
United States Patent and Trademark Office (USPTO) or the International 
Bureau of the World Intellectual Property Organization (WIPO). In a 
similar manner, renewal of the design registration in each Contracting 
Party could be made by filing a single request, along with payment of 
the appropriate fees, with the International Bureau. The filing date of 
the international design application would be the date the application 
was received by either the International Bureau or the USPTO.
    The International Bureau would normally publish the international 
registration within 6 months of the registration date. The 
international registration would have the same effect in the USPTO as a 
regularly filed national application under U.S. law. The international 
registration would be effective for a period of 5 years from the date 
of the registration, and could be renewed for additional 5-year terms.
    The Agreement contemplates that Contracting Parties may make 
declarations with respect to a variety of Agreement articles. The 
Department of State has recommended to the Senate that United States 
ratification be accompanied by nine such declarations. As a whole, we 
believe that the advantages of the Agreement are such that they far 
outweigh any concerns that we have about any particular proposed 
declaration. We do note, however, that the eighth declaration, 
authorized by rule 13(4) of the Agreement, allows the USPTO to notify 
the WIPO Director General that the law of the United States requires a 
security clearance and that the prescribed 1-month period during which 
the patent office of a Contracting Party is required to forward an 
application to the International Bureau shall be replaced by a period 
of 6-months to provide time for a security review of the application. 
While we appreciate that a design application may occasionally give 
rise to a need for such a security review, we believe that such 
instances are rare and that a 6-month delay in providing the 
application to the International Bureau is excessive. We would prefer 
that the eighth declaration be withdrawn, or that the proposed 6-month 
delay be shortened.
    As a whole, however, we believe that designers in the United States 
should have access to an international legal framework through which 
they may obtain protection for their industrial designs in multiple 
countries by filing a single application, and that the Agreement 
provides such a framework.
    AIPLA supports ratification by the United States of the Geneva Act 
of the Hague Agreement Concerning the International Registration of 
Industrial Designs.
     patent law treaty and regulations under the patent law treaty
    The Patent Law Treaty (the PLT) was adopted in Geneva on June 1, 
2000, entered into force on April 28, 2005, and was forwarded to the 
Senate for its advice and consent on September 5, 2006. The PLT 
harmonizes and streamlines formal procedures in respect of national and 
regional patent applications and patents, reducing or eliminating 
formalities and potential loss of rights. Such procedural 
simplification can only benefit U.S. inventors. We, therefore, urge the 
committee to support ratification of the Patent Law Treaty.
    The PLT sets forth the maximum procedural requirements that a 
Contracting Party may impose on patent applicants, and dictates 
standardized requirements for obtaining a filing date. The grant of a 
filing date is essential for establishing priority for the grant of a 
patent and for the prior art applicable for determining the 
patentability of an invention. It is also relevant to claiming a right 
of priority under the Paris Convention as well as to the calculation of 
the term of patent protection. The PLT sets up requirements for 
obtaining a filing date and procedures to avoid loss of the filing date 
because of a failure to comply with formal requirements. In principle, 
the patent office of any Contracting Party is required to accord a 
filing date to an application on the basis of three elements: (i) An 
indication that what was filed is intended to be a patent application; 
(ii) indications that identify the applicant and allow the applicant to 
be contacted; and (iii) a part that appears to be a description of the 
invention. No additional elements may be required to receive a filing 
date.
    The PLT establishes a single internationally standardized set of 
formal requirements for national and regional applications. To avoid 
having international ``double standards,'' the formal requirements in 
respect of international applications under the PCT are incorporated 
into the PLT, wherever appropriate. The PLT provides for the 
establishment of several Model International Forms that have to be 
accepted by the patent offices of all Contracting Parties. Using the 
Model International Forms assures applicants and other parties that no 
patent office may refuse the communication because of noncompliance 
with a formal requirement.
    To reduce any unnecessary burden on applicants, the PLT provides 
that evidence in support of the formal contents of an application, 
declarations of priority, or authentication of translations may only be 
required where a patent office has a reasonable doubt as to the 
veracity of the indications or the accuracy of the translation 
submitted by the applicant. A Contracting Party may not require a copy 
or a certified copy of an earlier application if it was filed with the 
patent office of that Contracting Party or if it could obtain the copy 
or the certification from other patent offices through a digital 
library that is accepted for that purpose. Multinational projects are 
now underway to expand such digital libraries that, in combination with 
this treaty provision, would largely eliminate the burdensome exchange 
of paper certified copies of prior applications.
    The PLT provides three types of relief from failure to comply with 
certain formal requirements. The first is an extension of procedural 
time limits where an applicant or owner requests the extension prior to 
the expiration of the time limit; the second is an extension of such 
time limits where an applicant or owner requests the extension after 
the expiration of the unobserved time limit; and the third is continued 
processing. A Contracting Party is not obliged to provide the first 
type of extension; however, it must provide either the second type of 
extension or continued processing. Relief under these provisions is 
limited to noncompliance with a time limit fixed by a patent office, 
not to time limits fixed by legislation. The PLT also provides 
safeguard provisions for situations where an applicant or owner might 
lose rights with respect to an application or patent for failure to 
meet a time limit. Reinstatement of such rights is applicable to all 
time limits, including time limits set by legislation. The PLT also 
provides for the correction and addition of priority claims and 
restoration of priority rights where an application is filed after the 
expiration of the 12-month priority period, and where an applicant 
cannot submit a copy of an earlier application within 16 months from 
the priority date because of a delay in the patent office with which 
the earlier application was filed.
    The PLT would facilitate implementation of electronic filing of 
applications and other communications, to the advantage of both patent 
offices and their users, while ensuring the coexistence of both paper 
and electronic communications. Applicants would be allowed to file 
applications and communications on paper, at least for the purposes of 
acquiring a filing date and complying with a time limit.
    The Department of State Letter of Submittal noted that United 
States law does not contain a ``unity of invention'' requirement, and 
that the USPTO advises that it considers this a substantive patent law 
matter that it does not recommend changing. Accordingly, the Department 
of State recommended that the following reservation be included in the 
U.S. instrument of ratification: ``Pursuant to Article 23, the United 
States declares that Article 6(1) shall not apply to any requirement 
relating to unity of invention applicable under the Patent Cooperation 
Treaty to an international application.'' AIPLA strongly opposes this 
reservation and favors acceptance by the USPTO of the unity of 
invention standard as a ``best practice'' for all purposes, including 
those implicated in international applications. Ratification of the 
Patent Law Treaty, however, even with the proposed reservation 
regarding unity of invention, will streamline and harmonize formal 
procedures in respect of national and regional patent applications and 
patents.
    AIPLA supports ratification by the United States of the Patent Law 
Treaty and Regulations under the Patent Law Treaty.
    Thank you for your consideration of our views on these important 
treaties.
             Sincerely,
                                              Michael Kirk,
                                         Executive Director, AIPLA.
                                 ______
                                 
                          American Bar Association,
                      Section of Intellectual Property Law,
                                    Chicago, IL, September 6, 2007.
Hon. Joseph R. Biden, Jr.,
Chairman, Committee on Foreign Relations,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: I am writing to express the views of the Section 
of Intellectual Property Law of the American Bar Association on the 
Patent Law Treaty and Regulations Under Patent Law Treaty (``the 
Treaty''). These views have not been submitted to the ABA House of 
Delegates or Board of Governors, and should not be considered to be 
views of the Association. The Treaty was completed in Geneva on June 1, 
2000. The President transmitted the treaty to the Senate on September 
5, 2006, recommending that the treaty be ratified, with a reservation. 
(Treaty Document No.109-12) We recommend that the treaty be ratified 
without reservation.
    The Intellectual Property Law Section of the American Bar 
Association is the world's largest organization of Intellectual 
Property Professionals with approximately 19,000 members, including 
lawyers, associates and law students. In recognition of the importance 
of patent law, the ABA established the Section in 1894 as the first ABA 
section to deal with a special branch of the law. This Section has 
contributed significantly to the development of the American system for 
the protection of Intellectual Property rights. The Section is composed 
of lawyers of diverse backgrounds who represent patent owners, accused 
infringers, individual inventors, large and small corporations, and 
universities and research institutions, all across a wide range of 
technologies and industries.
    We understand that the Committee is currently considering 
ratification of the treaty, and that a hearing was held in connection 
with such ratification on July 17. Our Section is extremely pleased 
with such consideration and we encourage the Senate to proceed with 
such ratification.
    We note that, in transmitting the treaty to the Senate, the 
President recommended that a reservation be taken under Article A23 of 
the treaty which reservation would prevent the Unity of Invention 
Standard as set forth in the Patent Cooperation Treaty to be applicable 
to national applications filed in the United States Patent and 
Trademark Office.
    The Section of Intellectual Property Law opposes such reservation. 
While the United States Patent Office had previously committed itself 
to accept a Unity of Invention Standard and has undertaken numerous 
studies in that regard, thus far the office has not implemented the 
Unity of Invention Standard. Such Unity of Invention Standard is 
already effective in International applications filed with the United 
States Patent office, as well as in substantially all national and 
regional patent offices around the world. It would make prosecution of 
patent applications more uniform in the United States Patent Office and 
would reduce costs and burdens on patent applicants. We therefore 
encourage the Senate to ratify the Patent Law Treaty without such 
reservation so that the Unity of Invention Standard as set forth in the 
Patent Cooperation Treaty would be applicable to national applications 
filed in the USPTO.
    We would be pleased to provide additional information in connection 
with the above should such be requested.
            Respectfully submitted,
                              Pamela Banner Krupka,
               Chair, Section of Intellectual Property Law,
                                          American Bar Association.
                                 ______
                                 

Response of Lois Boland to Followup Question Submitted by Senator Biden 
Concerning the Above ABA Letter of September 6, 2007, About Treaty Doc. 
                                 109-12

    Question. The American Bar Association's Section of Intellectual 
Property Law wrote to the committee in support of U.S. ratification of 
the Patent Law Treaty and Regulations Under the Patent Law Treaty (the 
``PLT'') in a letter dated September 6, 2007, but in so doing, also 
expressed its strong opposition to the reservation recommended by the 
executive branch, which is in the report on the treaty prepared by the 
Department of State (Treaty Doc. 109-12, p.9).
    The letter states in relevant part as follows:

          We note that, in transmitting the Treaty to the Senate, the 
        President recommended that a reservation be taken under Article 
        23 of the Treaty which reservation would prevent the Unity of 
        Invention Standard as set forth in the Patent Cooperation 
        Treaty to be applicable to national applications filed in the 
        United States Patent and Trademark Office.

          The Section of Intellectual Property Law opposes such 
        reservation. While the United States Patent Office had 
        previously committed itself to accept a Unity of Invention 
        Standard and has undertaken numerous studies in that regard, 
        thus far the Office has not implemented the Unity of Invention 
        Standard. Such Unity of Invention Standard is already effective 
        in International applications filed with the United States 
        Patent Office, as well as in substantially all national and 
        regional patent offices around the world. It would make 
        prosecution of patent applications more uniform in the United 
        States Patent Office and would reduce costs and burdens on 
        patent applicants. We therefore encourage the Senate to ratify 
        the Patent Law Treaty without such reservation so that the 
        Unity of Invention Standard as set forth in the Patent 
        Cooperation Treaty would be applicable to national applications 
        filed in the USPTO.

    Please explain why, in light of these comments, this reservation is 
necessary. Also, please indicate whether the USPTO previously committed 
itself to accepting a Unity of Invention Standard, as suggested in the 
letter quoted above.

    Answer. The proposed United States reservation under Article 23 of 
the Patent Law Treaty (PLT) is necessary to maintain current 
flexibilities in managing United States Patent and Trademark Office 
(USPTO) workload. If the United States were to adopt the Unity of 
Invention requirement right now, the rule change would necessitate an 
increased level of fees to cover a higher workload burden, and 
moreover, would lead to higher pendency rates for patent issuance.
    As explained by the USPTO in a 2003 Request for Comments on the 
Unity of Invention standard:

          The Unity of Invention standard is a component of many 
        foreign patent laws and is also used in international search 
        and preliminary examination proceedings conducted pursuant to 
        the PCT.
          United States restriction practice is based on 35 U.S.C. 121, 
        which provides that: ``[i]f two or more independent and 
        distinct inventions are claimed in one application, the 
        Director may require the application to be restricted to one of 
        the inventions.'' This allows examiners to limit applicants to 
        one set of patentably indistinct inventions per application. 
        The USPTO may ``restrict'' the application to one set of 
        patentably indistinct inventions: (1) If the application 
        includes multiple independent and patentably distinct sets of 
        inventions, and (2) if there is an undue burden to examine more 
        than one invention in the same application. Restriction 
        practice was designed to balance the interest of granting an 
        applicant reasonable breadth of protection in a single patent 
        against the burden on the USPTO of examining multiple 
        inventions in a single application.
          Current USPTO policy allows for restriction between related 
        inventions as well as between independent inventions. However, 
        if the USPTO adopts a Unity of Invention standard, restriction 
        would, as a general rule, no longer be permitted between 
        certain related inventions that currently may be restricted 
        under United States restriction practice. Some examples of 
        related inventions that are often filed together and typically 
        can be restricted under current United States practice before a 
        prior art search is conducted, but do not lack unity under the 
        Unity of Invention standard, include: (1) A process, and the 
        apparatus for carrying out the process; (2) a process for 
        making a product, and the product made; (3) an apparatus, and 
        the product made by the apparatus; (4) a product, and the 
        process of using the product.
          A lack of Unity of Invention is different from restriction 
        practice in some major aspects. Unity of Invention is 
        practiced, with slight variations, in PCT applications and in 
        applications examined by the European Patent Office (EPO) and 
        the Japan Patent Office (JPO). The primary consideration for 
        establishing Unity of Invention is that the claims are entitled 
        to be examined in a single application if the claims are so 
        linked together as to form a single general inventive concept, 
        premised on the concept of a common feature (referred to as a 
        ``special technical feature'' in the context of PCT Rule 13) 
        that can be present in multiple inventions within a single 
        application. As long as the same or corresponding common 
        feature is found in each claim and that common feature makes a 
        contribution over the prior art, the claims comply with the 
        requirement for Unity of Invention. If the inventions lack a 
        common feature that makes a contribution over the prior art, 
        then a holding of lack of Unity of Invention would be proper. 
        The determination of whether an invention makes a contribution 
        over the prior art can effectively be done only after a prior 
        art search for the common feature has been performed.

    ``Request for Comments on the Study of the Changes Needed to 
Implement a Unity of Invention Standard in the United States,'' 1271 
Off. Gaz. Pat. Office 98 (June 17, 2003), 68 Fed. Reg. 27536 (May 20, 
2003).
    The Patent Cooperation Treaty does use a ``unity of invention'' 
standard. Since at least July 1, 1987, the USPTO has examined 
international patent applications and PCT national stage applications 
with this standard. However, this is different than how domestically 
filed patent applications are examined for the efficiency reasons 
explained above.
    The USPTO has not committed itself to adoption of the ``unity of 
invention'' standard, but instead indicated it would consider adoption 
of the standard. See ``USPTO Study on Restriction Reforms,'' http://
www.uspto.gov/web/patents/greenpaper.pdf (2005); ``Study of Alternative 
Fee Structures,'' 1239 OG 155 (October 24, 2000), 65 Fed. Reg. 58746 
(October 2, 2000); ``Request for Comments on Patent Law Treaty,'' 65 
Fed. Reg. 12515 (March 9, 2000), ``Unity of Invention and Patent 
Cooperation Treaty,'' 52 Fed. Reg. 20038, May 28, 1987 (Final 
Rulemaking). The USPTO is continuing to review the ``unity of 
invention'' standard, and what, if any, changes need to be made to the 
fee structure to accommodate adoption of that standard. But at this 
point, there does not appear to be consensus that adoption of this 
standard for all applications is appropriate. See ``USPTO Strategic 
Plan 2007-2012'' at 36 (``The USPTO studied changes needed to adopt a 
unity standard, including solicitation of public comments. A `Green 
Paper' was published for comment in June 2005. Based on the comments, 
no consensus was reached on the Green Paper options, and the USPTO 
expects to conclude the study.'') http://www.uspto.gov/web/offices/com/
strat2007/.
    At this time, it is important to maintain flexibility and allow the 
USPTO to continue to use the ``unity of invention'' standard only for 
international applications and applications that enter the national 
stage from the PCT.
                                 ______
                                 

 Responses of Lois Boland to Questions Submitted by Senator Joseph R. 
                               Biden, Jr.

    Question. Did the U.S. Patent and Trademark Office consult with the 
committee during the course of negotiations on the Singapore Trademark 
Treaty, the Patent Law Treaty, or the Geneva Act of the Hague 
Convention?

    Answer. The U.S. Patent and Trademark Office (USPTO) had public 
hearings before the Diplomatic Conferences for the Patent Law Treaty 
and the Geneva Act of the Hague Agreement, and consulted with many 
people in the process of preparing for the negotiations for all three 
treaties. See, e.g., ``Request for Comments on Patent Law Treaty,'' 65 
Fed. Reg. 12515-12517, and ``Notice of Public Hearing and Request for 
Comments on the Proposed New Act of the Hague Agreement Concerning the 
International Registration of Industrial Designs,'' 64 Fed. Reg. 19135-
19139.

    Question. In the treaty transmittal packages (109-12; 109-21; and 
110-2), the administration recommended a reservation to accompany 
ratification of the Patent Law Treaty and a number of Declarations to 
accompany ratification of the Geneva Act of the Hague Agreement. The 
administration did not suggest the inclusion of any reservations, 
understandings, or declarations to accompany ratification of the 
Singapore Treaty. Does the administration stand by these 
recommendations?

    Answer. Yes, the reservation for the FLT is appropriate for the 
reasons stated in the report of the Department of State accompanying 
the President's letter of transmittal to the Senate for that treaty. 
The declarations for the Geneva Act are also appropriate for the 
reasons stated in the letter of transmittal. However, the text of the 
declaration under Article 7(2) and Rule 12(3) of the Geneva Act 
included fee amounts for the individual designation fees for the United 
States that, while accurate when the original ratification package was 
drafted, were later amended. We will replace the outdated fee amounts 
with the current fee amounts in the text of the resolution for advice 
and consent of the Senate on the ratification of the Geneva Act of the 
Hague Agreement. Last, no reservation or declaration is recommended for 
the Singapore Treaty.

    Question. Are there any other international agreements that promote 
the protection of intellectual property to which the United States is 
currently not a party, that you think we should be party to?

    Answer. The USPTO, in conjunction with other USG agencies, 
regularly reviews treaties concerning the protection and enforcement of 
intellectual property rights to which the United States is not a party 
with a view to considering the merits of joining a particular treaty.
    To the extent that a treaty to which the United States is not party 
offers real benefits to American businesses, innovators, and inventors, 
and does not seem to present any significant downsides for the United 
States, we would start the process of considering accession to such a 
treaty in consultation with other relevant agencies, including the 
State Department and USTR.
    We have not identified any multilateral or plurilateral treaties 
concerning the protection and enforcement of intellectual property 
rights to which the United States should become a party at this time.
    The United States has recently signed bilateral free trade 
agreements with four countries (the Republic of Korea, Colombia, Peru, 
and Panama). These agreements all contain provisions to enhance the 
protection and enforcement of intellectual property rights. The 
administration looks forward to working with the Congress to seek 
approval of these agreements in accordance with the Trade Promotion Act 
of 2002.

    Question. Which countries would you say are most effective--and 
which ones are the most ineffective--at enforcing piracy of 
intellectual property? What have you found to be the best mechanisms 
for enforcing intellectual property protections?

    Answer. Most effective--certainly the United States, the EU, and 
Australia.
    Some of the countries that are not addressing IP challenges most 
effectively are identified in U.S. Trade Representative's (USTR) annual 
Special 301 report. The 2007 report takes note of enforcement progress 
in Brazil, for example, and Bulgaria, Croatia, and Latvia were removed 
from the Special 301 Watch List due to progress in those countries. The 
2007 report also notes countries that have the most significant 
problems with effective IPR protection and enforcement, such as China, 
Russia, Argentina, India, and Ukraine, where the IP enforcement regimes 
require important improvements.
    USTR and other USG agencies utilize a variety of mechanisms for 
promoting strong intellectual property regimes around the world. As 
mentioned above, the Special 301 report is an annual review of the 
global state of intellectual property rights protection and 
enforcement. In addition, IP issues are addressed in the context of the 
World Trade Organization (WTO) and bilateral Free Trade Agreements 
(FTAs), as both of these provide for regular bilateral engagement and 
have dispute settlement mechanisms for addressing concerns about 
implementation of the IP obligations of those agreements. For example, 
earlier this year, the United States initiated dispute settlement 
proceedings with China in the WTO on IP enforcement and related market 
access issues. The WTO accession process provides another avenue for 
addressing IP concerns. This exercise provides an opportunity for the 
United States to ensure that acceding countries comply with its 
obligations under the WTO Agreement on Trade Related Aspects of 
Intellectual Property Rights (TRIPS), including with respect to IP 
enforcement, upon that country's accession to the WTO. This has been 
the case with Russia and others, with whom we continue to work 
aggressively to ensure that they can meet their WTO TRIPS obligations 
and their bilateral commitments upon accession. We also note that U.S. 
trade preference programs such as the Generalized System of 
Preferences, the Andean Trade Preferences Act, the Caribbean Basin 
Initiative and the African Growth and Opportunity Act, contain 
eligibility criteria pertaining to the protection and enforcement of 
intellectual property rights. Finally, IPR protection and enforcement 
figure regularly and prominently in the context of ongoing diplomatic 
and trade policy engagements with many U.S. trading partners.

    Question. When asked during the hearing about what the most 
significant barriers are that relate to the protection of intellectual 
property throughout the world today, you mentioned, among other things, 
the work that the U.S. Patent and Trademark Office is doing with ``the 
more progressive voices on IP issues and IP enforcement'' on ``many of 
the issues we commonly face in Asia.'' Can you go into greater detail 
regarding that cooperative work?

    Answer. One area of cooperative work is the ``STOP'' initiative. 
The ``Strategy Targeting Organized Piracy'' is an interagency effort 
with both domestic and international components--including educational 
outreach; a STOP hotline (1-866-999-HALT), handled by USPTO; USPTO and 
U.S. Customs and Border Protection cooperation on trademark 
registrations and notifications; international efforts in Asia and 
Europe; and partnerships with the private sector.
    Internationally, the USPTO has been working diligently with 
progressive voices on IP issues and IP enforcement, such as Japan, 
Korea, Singapore, and the European Community to explain the 
relationship between high levels of intellectual property protection 
and enforcement and economic and technological development. This is 
particularly true in the meetings for treaties administered by the 
World Intellectual Property Organization (WIPO), where the United 
States regularly consults with these ``progressive voices'' to promote 
IP and IP enforcement, and to, where possible, work together to develop 
shared positions.
    In addition to working together with like-minded countries to 
improve the IP system within WIPO, the United States is working 
cooperatively, as well as independently, to provide training related to 
IP. For example, the USPTO will be working together with Singapore to 
deliver a training program on patents in that country in November, and 
over this year has worked with the governments of China, Thailand, 
Vietnam, Hong Kong, and India to train judges, prosecutors, customs 
officials, police, IP Office staff, and many others. USPTO also 
coordinates closely with the Asia-Pacific Economic Cooperation (APEC) 
and the Association of Southeast Asian Nations (ASEAN) to provide IP-
related capacity-building and technical assistance in the region.

    Question. Article 30 of the Geneva Act of the Hague Agreement 
provides that Declarations made at the time of ratification may be 
withdrawn at any time by a notification addressed to the Director 
General of the World Intellectual Property Organization. Is it likely 
or anticipated that any of the declarations that the executive branch 
has recommended might ultimately be withdrawn by the United States?

    Answer. The Declarations explicitly authorized under the Geneva Act 
of the Hague Agreement are intended to accommodate some countries, such 
as the United States, that have requirements that are different from 
those of other countries. For example, in the United States a patent 
application, such as for a design patent, is required to have a claim 
in order to receive a filing date, but most other countries do not 
require such a claim. Therefore, we have recommended that the United 
States declare that its law requires such a claim. If the U.S. design 
patent laws were changed in the future to remove that requirement, then 
the corresponding Declaration could be withdrawn. At this time, we have 
no information on the likelihood of any such changes.

    Question. Article 22(1) of the Singapore Trademark Treaty provides 
that the Regulations annexed to the treaty cover: (1) Matters which 
this treaty expressly provides to be ``prescribed in the Regulations''; 
(2) any details useful in the implementation of the provisions of this 
treaty; (3) any administrative requirements, matters, or procedures; 
and (4) Model International Forms.

   a. Can you explain the meaning of the vague phrase used in 
        Article 22(1)(a)(ii) (``any details useful in the 
        implementation of the provisions of this Treaty'')? In 
        particular, the language appears to provide that anything that 
        might be considered to be in furtherance of the implementation 
        of the treaty could be included in the Regulations, which is 
        quite broad. Can you explain whether there are any limitations 
        on this phrase, whether discussed during the negotiations or 
        otherwise?

    Answer. The phrase ``any details useful in the implementation of 
the provisions of this Treaty'' does provide for any details (i.e., 
refining points) that may be considered helpful in furtherance of 
implementation of the treaty. The phrase is limited by the other 
articles of the treaty insofar as such details must implement treaty 
provisions. This language is very common in the more recent WIPO 
treaties--the same phrase appears in intellectual property treaties to 
which the United States is already a party: Article 17(1)(ii) of the 
1994 Trademark Law Treaty (which the Singapore Trademark Treaty is 
revising), Article 58(1)(iii) of the Patent Cooperation Treaty (PCT) 
and Article 12(1)(iii) of the Budapest Treaty on the International 
Recognition of the Deposit of Microorganisms for the Purpose of Patent 
Procedure. It is also included in Article 24(1)(ii) of the Geneva Act 
of the Hague Agreement and Article 14(1)(a)(ii) of the Patent Law 
Treaty (PLT).
    The rationale for such language in the Singapore Treaty, along with 
the other cited treaties, is to ensure flexibility in the operational 
aspects of the treaties. The PCT and Hague Agreements, for example, 
provide for international filing systems at WIPO for patents and 
designs, respectively. The implementation of such systems is extremely 
technical and could be subject to change based on experiences over time 
as to what practices are successful or not, as well as based on changes 
in technology. The regulations governing the details for implementation 
of these systems may need to respond to such changes in behavior based 
on lessons learned over time or technological developments.
    The PLT and Singapore Treaty involve very technical formalities 
that focus on what national patent and trademark offices can and cannot 
require of applicants and registrants. Practices of users and practices 
of offices change, particularly as technologies change, and the 
implementing regulations for the treaties need to adapt in order to 
remain viable, responsive, and relevant. In order to make these 
treaties viable in the future--without having to renegotiate them every 
5-10 years--the regulations must be able to adapt to future realities 
and situations that we may not even contemplate now.
    The very technical nature of these treaties, as well as the 
provisions of the treaties themselves, provide an inherent limitation 
on any implementing regulations the Assembly can consider: The 
regulations cannot exceed and can only implement the treaties' 
provisions.

   b. Do you agree that the list in Article 22(1) regarding the 
        content of the Regulations is exclusive and that, as a result, 
        any proposed amendment to the Regulations that would go beyond 
        the list provided for in Article 22(1) could not be done 
        through a decision of the Assembly, but would instead require 
        an amendment to the treaty, pursuant to Article 25?

    Answer. Yes; the treaty outlines what can be included in the 
Regulations and thus, the scope of the Regulations cannot exceed the 
bounds set by Article 22. A proposed amendment to the Regulations that 
exceeds the scope of Article 22 would not be in the power of the 
Assembly to effect. In that case, a proposal to amend the treaty 
pursuant to Article 25 would be required.

    Question. Articles 22 and 23 of the Singapore Trademark Treaty make 
clear that the Assembly can amend the Regulations to the treaty and can 
do so, under certain circumstances, through a tacit amendment procedure 
(unless the particular amendment is one that requires unanimity under 
Article 22(3), amendments to the Regulations can be accomplished by a 
vote of three-fourths of the votes cast in the Assembly). Without any 
restrictions on this process, it would seem possible for a member of 
the Assembly to propose an amendment to the Regulations at a meeting, 
and if three-fourths of the members vote in favor of it (assuming there 
is quorum), the amendment could enter into force for all States 
immediately thereafter. Can you explain the process of amending the 
Regulations as you envision it under the Singapore Trademark Treaty, 
with a particular focus on whether there are any restrictions on that 
process that would prevent the scenario described above? Do you expect 
the Rules of Procedure that the Assembly is to establish under Article 
23(7) to provide restrictions on the amendment process? If so, what 
sorts of restrictions do you expect to see included in the Rules of 
Procedure?

    Answer. Providing the Assembly to a particular treaty with the 
ability, under certain circumstances, to amend that treaty's 
Regulations in this manner is common in WIPO treaties. For example, a 
similar procedure is included in WIPO treaties to which the United 
States is a party: The Patent Cooperation Treaty and the Budapest 
Treaty on the International Recognition of the Deposit of 
Microorganisms for the Purpose of Patent Procedure. A similar procedure 
is also found in the Geneva Act of the Hague Agreement and in the 
Patent Law Treaty (PLT).
    At WIPO, the process of making amendments to regulations usually 
includes discussions in working group meetings well in advance of an 
Assembly meeting. Moreover, a common practice in WIPO bodies is to take 
decisions only by consensus. Specifically, Article 23(4)(a) of the 
Singapore Treaty requires that the Singapore Assembly ``shall endeavor 
to take its decisions by consensus.'' This language is also included in 
the PLT and the Geneva Act of the Hague Agreement. The fact is that in 
all WIPO bodies, if a proposal does not find consensus support, the 
proposal is nearly always withdrawn, rather than moved to a vote. For 
that reason, an amendment of the Singapore Treaty Regulations by way of 
a three-fourths vote would likely only occur in extraordinary 
circumstances.
    Also, since the Regulations cover only technical implementation or 
administrative provisions, any amendment to the Regulations would 
likely be simple to implement through change in practice at the USPTO 
or, in some cases, rulemaking. Generally, there are no provisions in 
the Singapore Treaty Regulations at present that would, if changed, 
require an amendment to a U.S. statute.
                                 ______
                                 

Responses of John Harrington to Questions From Senator Joseph R. Biden, 
                                  Jr.

    Question 1. Please provide an overview of the current process by 
which the U.S. Department of Treasury consults with private-sector 
organizations, including professional organizations, on tax treaties. 
Please provide an overview of the process by which the Department 
incorporates any input provided by such organizations into U.S. tax 
policy. Can you describe specific examples of where input from the 
public has been incorporated into your negotiating strategy and 
ultimately the text of tax treaties negotiated? Do you have, or have 
you considered establishing, a federal advisory committee, consistent 
with the requirements of the Federal Advisory Committee Act, on 
international tax policy? Have you asked for public comments on the 
2006 U.S. Model Tax Treaty and its accompanying technical explanation? 
If not, why not?

    Answer. The Treasury Department uses many sources of information to 
form its tax treaty policy and priorities. Because the major goal of 
tax treaties is to reduce double or excessive taxation, the Treasury 
Department relies on taxpayer input in identifying countries with which 
tax treaties are needed and with which existing tax treaties need to be 
improved.
    Comments and suggestions that we have received from taxpayers and 
taxpayer groups have been instrumental in setting tax treaty policy and 
priorities. In certain cases, in response to comments we have modified 
or refined our negotiating positions as reflected in specific model 
treaty provisions. For example, the current model treaty language in 
Article 10(4), regarding dividends from Real Estate Investment Trusts 
(REITs), resulted from discussions with the REIT industry, including 
the National Association of Real Estate Investment Trusts. In other 
cases, in light of taxpayer input, we have adopted a particular 
provision in treaties in which it was appropriate to include the 
provision. For example, the ``Zero Dividend Withholding Coalition,'' a 
broad-based group of U.S.- and non-U.S.-based multinational companies, 
called for a change in tax treaty policy with respect to dividends in 
its 1999 paper, ``Zero Withholding on Direct Dividends: Policy 
Arguments for a New U.S. Treaty Model.'' More recently, the National 
Foreign Trade Counsel in its paper ``NFTC Tax Treaty Project: Towards a 
U.S. Tax Treaty Policy for the Future: Issues and Recommendations'' 
(May 26, 2005), called for the adoption of arbitration provisions. 
Mandatory arbitration provisions were included in two of the agreements 
before the committee.
    We publicized the release of the 2006 Model Income Tax Convention 
and Model Technical Explanation, issuing a press release and posting 
the documents on the Treasury Department Web site. We have received 
formal and informal comments in response to the release of the model 
treaty and technical explanation. Staff of the Office of the 
International Tax Counsel regularly participate in conferences in which 
staff discuss tax treaty issues, including the model tax treaty, and 
solicit feedback on the model tax treaty and tax treaty policy in 
general.
    The Treasury Department has been very appreciative of the formal 
and informal comments that it receives from taxpayers and from trade 
associations, such as the NFTC, regarding tax treaty provisions and tax 
treaty priorities. In addition, professional associations, such as the 
New York State Bar Association Tax Section, have raised questions and 
provided analysis that we have considered, and continue to consider. 
All of this input has been very helpful in the tax treaty area, and we 
are satisfied with the quality and level of input received.
    From a broader international tax policy standpoint, the Treasury 
Department has been carefully considering views from a variety of 
sources. For example, the Secretary recently hosted a conference on 
Business Taxation and Global Competitiveness, which invited a wide 
range of experts and affected taxpayers to discuss the effect of 
current tax policy on competitiveness. Accordingly, we have not found 
it necessary to establish a Federal advisory committee regarding 
international tax policy to elicit public comments.

    Question 2. How many people were employed by the Office of the 
International Tax Counsel to work on tax treaties and related issues 10 
years ago? How many people are employed by the Office to work on tax 
treaties and related issues now? Has the workload over the last 10 
years increased?

    Answer. In 1997, 10 attorneys were part of the Office of the 
International Tax Counsel. None worked on tax treaties exclusively, but 
nearly all attorneys devoted part of their time to working on tax 
treaties and related issues. Currently, there are seven attorneys in 
the Office of the International Tax Counsel, all of whom work to some 
extent on tax treaty and related issues.
    Although the number of attorneys in the Office of the International 
Tax Counsel is currently slightly lower than it was 10 years ago, the 
commitment to tax treaty negotiation and guidance remains strong. Since 
1997, a Deputy International Tax Counsel position has been created that 
focuses nearly exclusively on tax treaty issues. In addition, there is 
a Deputy Assistant Secretary (International Tax Affairs) position with 
responsibility for treaty matters.
    Because the tax treaty workload is affected by multiple factors, it 
is difficult to generalize about changes in resources and outputs. In 
particular, snapshot comparisons can be misleading. For example, some 
tax treaty negotiations are more time-consuming than others. Important 
tax treaty related work at the Organization for Economic Cooperation 
and Development (OECD) ebbs and flows as well, affecting resources that 
can be used for bilateral negotiations. In short, the Office of the 
International Tax Counsel devoted significant resources to its tax 
treaty program 10 years ago and continues to devote significant 
resources today.

    Question 3. As you know, the N.Y. State Bar Association's Tax 
Section recommended in its report on the 2006 U.S. Model Tax Treaty 
that the Treasury Department expand the Technical Explanation of the 
model to include an explanation of the changes to U.S. Tax Treaty 
policy reflected in the model, the reasons for those changes, and the 
relationship between the provisions of the model and current U.S. tax 
law. In addition, practitioners have noted that it might be beneficial 
for the Department to publish more guidance on tax issues associated 
with the application of the various tax treaties that are currently in 
force. What is your view regarding these recommendations? Are these 
recommendations not being acted upon because of a shortage of 
resources?

    Answer. The New York State Bar Association's Tax Section, in its 
April 2007 report, raises the question whether the Treasury Department 
should produce and publish an explanation of the changes to U.S. tax 
treaty policy reflected in updates to the model income tax convention, 
the reasons for those changes, and the relationship between the 
provisions of the model income tax convention and current U.S. tax law. 
The Office of the International Tax Counsel is considering this and 
other recommendations made by the New York State Bar Association's Tax 
Section in its report.
    The press release accompanying the release of the 2006 U.S. Model 
Income Tax Convention and Model Technical Explanation notes that the 
U.S. Model Income Tax Convention is used as a starting point in 
bilateral treaty negotiations with other countries. The Treasury 
Department makes this starting point public by periodically updating 
and releasing its model income tax convention. The issuance of a new 
model income tax convention becomes necessary when the cumulative 
effect of changes in tax law and tax treaty policy has made our ``old'' 
model tax treaty no longer an appropriate starting point.
    The 2006 Model Income Tax Convention is consistent with our most 
recent tax treaties and reflects changes in U.S. domestic law and tax 
treaty policy since the U.S. model was last updated in September 1996. 
It is not clear how an explanation of the changes to U.S. tax treaty 
policy, the reasons for those changes, and the relationship between the 
different articles of the model and U.S. tax law is helpful in light of 
the role of the model income tax convention and technical explanation 
as a starting point in bilateral tax treaty negotiations. Nonetheless, 
we are cognizant of the interest in such additional information, and we 
continue to weigh whether and how historical and explanatory 
information could be provided without inadvertently creating 
uncertainty or confusion with respect to previously negotiated 
agreements.
    We also recognize the importance of providing published guidance 
with respect to income tax treaties. The following treaty-related 
guidance has been published in the Internal Revenue Bulletin in the 
last 3 years:

   Announcement 2007-05, 2007-36 I.R.B. 540 (Mutual agreement 
        concerning the eligibility of certain pension and other 
        employee benefit arrangements for benefits under U.S.-
        Netherlands treaty);
   Announcement 2006-86, 2006-45 I.R.B. 842 (Mutual agreement 
        concerning the elimination of double taxation as a result of 
        the interaction of the U.K. nonresident company group relief 
        rules and the U.S. dual consolidated loss rules);
   Notice 2006-101, 2006-47 I.R.B. 930 (Guidance on U.S. income 
        tax treaties that meet the requirements of section 
        1(h)(11)(C)(i)(II));
   Announcement 2006-21, 2006-1 C.B. 703 (Mutual agreement 
        concerning the treatment under the U.S.-Spain treaty of limited 
        liability companies, S corporations, and other business 
        entities treated as partnerships or disregarded entities for 
        U.S. tax purposes);
   Announcement 2006-19, 2006-1 C.B. 674 (Mutual agreement 
        concerning the treatment under the U.S.-Ireland treaty of Irish 
        common contractual funds);
   Announcement 2006-20, 2006-1 C.B. 675 (Notification of self 
        certification of United States and Japanese resident investment 
        banks, pursuant to section E of the U.S.-Japan investment bank 
        Memorandum of Understanding or MOU);
   Announcement 2006-6, 2006-1 C.B. 340 (MOU regarding the term 
        ``investment bank'' in the U.S.-Japan treaty);
   Announcement 2006-7, 2006-1 C.B. 342 (MOU providing 
        guidelines and procedures to resolve factual disagreements 
        under the mutual agreement article of the U.S.-Canada treaty);
   Announcement 2006-8, 2006-1 C.B. 344 (Mutual agreement 
        concerning the treatment of fiscally transparent entities under 
        the U.S.-Mexico income tax treaty);
   Announcement 2005-72, 2005-41 I.R.B. 692 (Mutual agreement 
        concerning the treatment of fiscally transparent entities under 
        the U.S.-Mexico income tax treaty);
   Announcement 2005-30, 2005-1 C.B. 988 (Mutual agreement 
        concerning the eligibility of certain U.K. pension arrangements 
        for benefits under Article 10 of the U.S.-U.K. treaty);
   Announcement 2005-22, 2005-1 C.B. 826 (Mutual agreement 
        concerning the treatment of scholarships under the U.S.-Austria 
        treaty);
   Announcement 2005-17, 2005-1 C.B. 673 (Mutual agreement 
        concerning the treatment under the U.S.-New Zealand treaty of 
        income derived through certain fiscally transparent entities);
   Announcement 2005-3, 2005-1 C.B. 270 (Mutual agreement 
        concerning the eligibility of pension arrangements for benefits 
        under the U.S.-Switzerland treaty);
   Announcement 2004-60, 2004-2 C.B. 43 (Guidance on effective 
        dates under the U.S.-Japan treaty); and
   Rev. Rul. 2004-76, 2004-2 C.B. 111 (Guidance clarifying the 
        ability of dual resident corporations to choose between two 
        U.S. treaties).

    We are currently working on additional guidance in the tax treaty 
area regarding beneficial ownership and other issues.

    Question 4. The 1996 U.S. Model Tax Treaty includes provisions in 
Article 2, which require the competent authorities of the Contracting 
States to notify each other of relevant changes in their domestic tax 
law and any official published materials concerning the application of 
the relevant tax treaty. The 2006 U.S. Model Tax Treaty no longer 
contains these provisions. This change in the Model Tax Treaty is 
reflected in the Belgian Tax Treaty currently under consideration. The 
existing income tax treaty with Belgium, which was concluded in 1970, 
contains the 1996 model information-sharing provisions in Article 2. 
The new treaty does not include such information-sharing provisions. 
Can you explain why this is a beneficial development? Wouldn't a 
blanket information-sharing provision of the type included in the prior 
tax treaty model be particularly useful in treaties that contain 
binding arbitration provisions such as those included in the Belgian 
Tax Treaty and the German Protocol, given that the arbitration boards 
in these two treaties are instructed to apply after the text of the 
treaty and ``any agreed commentaries or explanations of the Contracting 
States'' when interpreting the treaty, ``the laws of the Contracting 
States to the extent they are not inconsistent with each other''?

    Answer. Article 2, paragraph 4 of the 2006 U.S. Model Income Tax 
Convention requires the competent authorities to notify each other of 
any change in law that significantly affects obligations under the 
convention. Unlike the 1996 U.S. model provision, the provision in the 
2006 U.S. model no longer requires notification of any other published 
material regarding the convention. This change to Article 2 of the U.S. 
model is similar to the corresponding provisions in other model tax 
treaties, such as the OECD and U.N. models, and in recent U.S. tax 
treaties, such as the new conventions with the U.K. and Japan. The ease 
with which published materials can be obtained (e.g., through the 
Internet) has made this formal and--if required for any published 
material--burdensome exchange requirement superfluous. Thus, all 
important information must continue to be exchanged, but the competent 
authorities are no longer required to provide to each other readily 
available material that has no significant impact on the treaty or the 
taxes covered by the treaty.
    We do not believe that an arbitration provision recreates the need 
for a broader provision requiring exchange of published materials. 
Appropriate exchange is important in the mutual agreement procedure 
generally, whether the competent authorities are negotiating or whether 
the case is in arbitration. Further, the countries have a 
responsibility to deal with each other in good faith and, therefore, to 
disclose all relevant published interpretations during a mutual 
agreement procedure (MAP) proceeding. Nor have we found the narrower 
2006 U.S. Model Income Tax Convention language to be an issue in 
practice, particularly since the taxpayer and each country have an 
interest in researching and raising any relevant tax laws and published 
interpretations during a MAP proceeding and since advances in 
technology and other developments have made international tax research 
easier.

    Question 5. Have we in the past ever shared our technical 
explanations with our treaty partners? If so, was this done as a matter 
of course with every country we concluded a tax treaty with, or only 
with some countries? If only with some countries, what criteria were 
employed when making the decision to share a particular technical 
explanation? What is our current practice? Please explain the reasoning 
behind our current practice. Do you expect to maintain the current 
practice with no changes?

    Answer. There have been periods in the past when the Treasury 
Department regularly shared technical explanations with treaty partners 
at some point before the technical explanations were released to the 
public. This was generally done, however, as a courtesy, and the treaty 
partner was under no obligation to agree with, or even to read, the 
technical explanations. Our recent practice has been to refer the 
prospective treaty partner to the model treaty and technical 
explanation posted on the Treasury Department Web site and to refer to 
the technical explanation of the model treaty during negotiations when 
appropriate to achieve a common understanding. Although we would be 
willing to share drafts of the treaty-specific technical explanation 
with any treaty partner before public release, treaty partners 
typically do not ask to see it. There are of course exceptions. For 
example, in 2002, the U.K. commented on the technical explanation to 
the new U.S.-U.K. treaty prior to its release, in part because the 
treaty contained some provisions that had not yet been interpreted by 
either party (and thus were not reflected in a published technical 
explanation). In addition, Canada routinely requests to adopt an agreed 
technical explanation.
    Because this case-by-case approach to sharing technical 
explanations has worked well in practice, we expect to maintain it for 
the foreseeable future.

    Question 6. The German Protocol differs from the recently updated 
U.S. Model Tax Treaty with respect to the taxation of Social Security 
benefits. The Model Tax Treaty provides that Social Security benefits 
are taxable in the ``source'' country (i.e., the country that pays the 
benefit); however, Article VIII of the German Protocol provides that 
Social Security benefits paid in one treaty country to a resident of 
the other treaty country shall be taxable in the other country, and 
taxed as if they were provided by the country of residence. The Joint 
Declaration signed on June 1, 2006, reflects an understanding that 
this, among other things, will be the subject of consultations on or 
after January 2013.

   a. Recognizing that the German Protocol maintains the status 
        quo with respect to the current German Tax Treaty, can you 
        explain the reason for deviating from the Model Tax Treaty with 
        Germany?
   b. In the Joint Declaration it is made clear that the 
        renegotiation of this provision is intended to make it possible 
        for ``[b]enefits paid under the Social Security legislation of 
        a Contracting State [to be] taxed by that Contracting State. . 
        . .'' Is it correct to assume that, in future negotiations, 
        Treasury will additionally seek to cut back on the ability of 
        the country of residence to tax such Social Security benefits 
        in order to avoid double taxation of Social Security benefits?

    Answer. Like other departures from the U.S. model, the provision on 
taxation of Social Security benefits in the U.S.-Germany tax treaty was 
the result of the negotiation process. We plainly would have preferred 
exclusive source country taxation of Social Security benefits, in 
accord with the U.S. model, but this provision was one of many items 
being negotiated in the agreement, and its resolution is reflected in 
the overall balance of the agreement.
    The Joint Declaration with Germany takes a significant step in 
moving the U.S.-Germany Tax Treaty closer to the U.S. model position on 
the taxation of Social Security benefits. It provides that the 
countries will enter into consultations to amend the proposed agreement 
to allow for source country taxation of Social Security benefits. If 
both the source and residence country are able to tax Social Security 
benefits, the residence country would provide a foreign tax credit to 
avoid double taxation of such income.

    Question 7. In Article 3 of the 1996 U.S. Model Tax Treaty, the 
term ``qualified governmental entity'' was explicitly defined and the 
definition made clear that such entities included noncommercial 
entities and governmental pension funds. The 2006 U.S. Model Tax Treaty 
no longer uses the term ``qualified governmental entity'' and deals 
separately with pension funds, but as a result, it appears that under 
the new Model Tax Treaty, for example, a Federal or U.S. State 
noncommercial entity that is not a pension fund that receives dividends 
in a treaty-partner country by virtue of an investment made in that 
country, could have those dividends taxed by the other treaty country. 
Is this correct? If so, is this an issue you intend to address in 
future treaties?

    Answer. The 1996 U.S. Model Income Tax Convention included a 
definition of ``qualified governmental entities'' (QGEs). The 
definition encompassed certain noncommercial entities wholly owned by a 
Contracting State or a political subdivision or local authority, as 
well governmental pension funds. The definition of QGE was primarily 
relevant for purposes of Article 4 (Residence) (clarifying that QGEs 
are residents), Article 10 (Dividends) (providing a reciprocal 
exemption from dividend withholding taxes for QGEs), and Article 22 
(Limitation on Benefits) (providing that QGEs are entitled to all 
treaty benefits).
    The term QGE was not included in previous U.S. models or in the 
OECD model. Although the term was introduced to facilitate certain 
clarifications (e.g., to Article 4 that the government of each State, 
as well as any political subdivision or local authority thereof, is a 
resident of that State), the Treasury Department found in practice that 
it was more straightforward to incorporate the desired clarifications 
directly into the articles on residence and limitation on benefits. 
Accordingly, the 2006 U.S. Model Income Tax Convention eliminates the 
use of the term QGE, with Article 4 and Article 22 referring directly 
to the Contracting States and their political subdivisions and local 
authorities.
    With respect to dividends, the problem of potential unrelieved 
double taxation is most relevant with respect to pension funds. Pension 
funds normally cannot benefit from a foreign tax credit (because they 
do not normally pay tax) and their beneficiaries generally cannot claim 
a foreign tax credit when they receive the pension (because the 
character of the underlying income does not pass through upon 
distribution and the distribution is generally made many years after 
the foreign tax would have been imposed). Accordingly, in the absence 
of an exemption for pension funds, dividends would almost certainly be 
subject to unrelieved double taxation. The 2006 U.S. Model Treaty, 
therefore, provides in paragraph 3 of Article 10 (Dividends) that 
dividends received by a pension fund generally may not be taxed in the 
Contracting State of which the company paying the dividend is a 
resident.
    It is possible that a Federal or U.S. State noncommercial entity 
that (a) is not a pension fund and (b) receives dividends in a treaty-
partner country by virtue of an investment made in that country could 
have those dividends taxed by the other treaty country. The definition 
of a QGE was excluded from the 2006 U.S. Model Tax Treaty, however, 
only after an assessment of where the potential for unrelieved double 
taxation was most acute (with respect to pension funds) and a 
recognition of our limited success in negotiating broader coverage. 
Nevertheless, we will of course consider all input we receive with 
respect to changes in the 2006 U.S. Model Income Tax Convention and 
take that input into account in future negotiations.

    Question 8. Both the German Protocol and the Belgian Tax Treaty 
include provisions related to cross-border pension contributions and 
earnings, which generally track Article 18 (2) and (3) of the 2006 U.S. 
Model Tax Treaty and prevent the taxation of pension contributions and 
earnings when an individual participates in a pension plan established 
in one country while performing services in the other, provided certain 
requirements are met. One such requirement is that the competent 
authority in the country where the services are performed must agree 
that the pension plan ``generally corresponds'' to a pension plan in 
that country. For purposes of this requirement, the German Protocol 
helpfully identifies in Article XVI(16) specific types of plans in the 
United States and in Germany that qualify, making it unnecessary to 
obtain a specific ruling from the competent authorities with respect to 
the pension plans that have been identified. This ``preapproval'' of 
certain plans would streamline what can be a cumbersome process and 
thus is a welcome development to taxpayers. The Belgian Treaty does not 
follow the example of the German Protocol of identifying prequalified 
plans in the treaty; however, the Department makes clear in the 
Technical Explanation (on p. 60) that there will be further discussions 
on this matter with Belgium, at which time the countries will hopefully 
``agree upon a list of pension plans that are acceptable.'' Have the 
negotiations on this agreed list of eligible pension plans begun? Do 
you have a sense of when an agreement will be concluded? Do you 
anticipate that this agreement will be an international agreement, 
reportable under the Case Act (1 U.S.C. Sec. 112b)?

    Answer. During the negotiations of the U.S.-Belgium Tax Treaty, the 
countries were not able to enter into an advance agreement as to which 
types of pension plans will be considered to ``generally correspond'' 
to plans in the other country for purposes of the pension contribution 
provisions in Article 17. However, U.S. and Belgian tax authorities 
have exchanged lists of the types of plans that they believe should be 
covered. Each country has provided the lists to the official who will 
be its competent authority under the tax treaty, with the expectation 
that a generally applicable competent authority agreement will be 
entered into under Article 24 of the new treaty shortly after the 
treaty enters into force. The usual procedure is to post the text of 
the competent authority agreement on the IRS' Web site and to publish 
it in the Internal Revenue Bulletin.
    We would not expect to report the agreed list of acceptable pension 
plans under the Case Act, as we would consider it an ``implementing 
agreement'' specifically contemplated by the treaty.

    Question 9. There are features of the arbitration provision that 
are included in both the German and Belgian Tax Protocols, which might 
be improved upon in future instruments, or varied, depending on who our 
treaty partner is and of course, what their concerns and requirements 
are in the context of each negotiation. While recognizing that the 
Department has only partial control over the final text of negotiated 
arbitration provisions, the following questions are intended to further 
our dialog on the subject of arbitration and explore options that may 
be appropriate for future treaties:

   9a. The Belgian and German arbitration models provide that 
        ``[t]he determination reached by an arbitration board in the 
        proceeding shall be limited to a determination regarding the 
        amount of income, expense, or tax reportable to the Contracting 
        States'' and that the board ``shall not state a rationale.'' 
        What do you consider to be the benefits and drawbacks of 
        allowing an arbitration board to produce a reasoned opinion 
        when deciding a case under a tax treaty? Have you considered 
        the option of allowing arbitration boards to provide reasoned 
        advisory opinions that are strictly advisory, which would not 
        be legally binding on future arbitration boards, but could 
        nevertheless be considered helpful to competent authorities and 
        taxpayers who want to understand the thinking of the 
        arbitrators in coming to a decision?

    Answer. The arbitration process in the proposed U.S.-Belgium treaty 
and U.S.-Germany protocol is an extension of the competent authority 
process, and is meant to increase the efficiency and effectiveness of 
that process. The arbitration process in those two agreements is a 
simplified arbitration process invoked to overcome a stalemate between 
the competent authorities in the negotiation of an agreement under the 
normal mutual agreement procedure (MAP) available under the treaty. The 
result of this simplified arbitration process is still a MAP agreement, 
which has all the same features, and retains all the same rights for 
the taxpayer, as a MAP agreement reached solely by competent authority 
negotiation. MAP agreements are confidential and in general do not 
provide a rationale for the agreement reached. A MAP agreement reached 
through arbitration will be confidential to the same extent as a MAP 
agreement reached purely through negotiation, and the redactions 
necessary to maintain this confidentiality may limit the utility to the 
public of a reasoned opinion of the arbiters.
    In general, the main benefit of a reasoned opinion of the arbiters 
is that it would provide greater transparency regarding the decision 
made by the arbiters. This greater transparency would come at a 
significant cost, however. Requiring a written explanation would delay 
the resolution of the dispute because the arbiters would have to agree 
not only on which country's position was the better of the two but also 
the reasons for the decision. In addition, documents submitted in the 
process would be more lengthy and more time-consuming to produce 
because the parties would need to argue for a particular rationale (as 
the rationale given could affect other cases or the particular 
taxpayer's future behavior) in addition to arguing that they reached 
the more reasonable result in eliminating double taxation given the 
facts and the law.
    Further, the written explanations would create, at least 
informally, an additional body of law to that created by the 
governments and domestic courts. This could create confusion in cases 
where the reasoned opinion conflicted with judicial opinions or 
published guidance by the governments. For those reasons, prospective 
treaty partners may view the production of a reasoned arbiters' opinion 
as a reason not to agree to have arbitration be part of the MAP 
procedure.
    The primary goal of the arbitration process in the U.S.-Belgium 
treaty and U.S.-Germany Protocol is speedy resolution of a dispute 
between the competent authorities regarding the granting of relief to a 
taxpayer suffering double taxation. Speedy and efficient resolution of 
the dispute is essential because the only cases going to arbitration 
are those in which the competent authorities could not agree within 2 
years. Accordingly, many of the features present in a judicial-style 
arbitration process, such as the production of a reasoned opinion, are 
contrary to the purpose of the adoption of arbitration in this case.
    Nonetheless, we recognize that obtaining at least informal feedback 
from the arbiters could be helpful to the competent authorities and 
taxpayers, and we will continue to consider whether informal 
opportunities for feedback should be pursued. We also recognize that 
the proposed arbitration process is not the only way to resolve 
disputes between the competent authorities, and we will continue to 
consider alternatives to the process as we monitor its use and the 
receptivity of treaty partners to this and other approaches.

   9b. The Belgian and German arbitration models provide that 
        the arbitration board's decision shall ``have no precedential 
        value.'' Have you considered whether it would be useful in the 
        context of some treaty relationships, particularly more 
        contentious ones, to provide the arbitration board's decisions 
        with precedential value?

    Answer. With respect to Belgium and Germany, we expect the 
existence of the arbitration process to narrow the areas for 
disagreement between the competent authorities and to facilitate 
agreement within 2 years. Thus, we expect to have few cases go to 
arbitration.
    With respect to future treaty partners, if we believe that the 
arbitration process may become a common dispute resolution mechanism 
with a specific treaty partner, we would consider whether precedential 
decisions would be appropriate in that treaty context. It is clearly 
possible that, in certain treaty relationships, there could be value to 
precedential arbitration decisions that play a role in reducing future 
disputes in particular subject areas sufficient to overcome the 
disadvantages inherent in giving precedential value to the board's 
decision (which we assume would need to be accompanied by a reasoned 
opinion).
    In considering whether to allow precedential decisions, we would 
have to give great weight to the concerns of ceding to an arbitration 
panel the authority to bind the United States not only to a particular 
result but also to a particular interpretation and application of a 
specific treaty, especially if taxpayers begin to apply released 
decisions to analogous situations and analogous provisions in other 
treaties (and especially as third-country treaty partners would not 
themselves be bound by these opinions). In addition, our primary goal 
in proposing the arbitration process is the prompt, efficient relief of 
contentious double taxation cases. The production of reasoned 
decisions, whether precedential or not, is likely to take longer than 
the approach taken in the agreements with Belgium and Germany that 
provides a result-only decision with no precedential value. In any 
case, based on preliminary discussions with other treaty partners, it 
appears that the result-only approach taken in the agreements with 
Belgium and Germany is more likely to find acceptance with treaty 
partners with whom the United States has more difficult discussions 
than an approach that would result in precedential opinions. However, 
we will continue to consider modifications as we monitor the use of the 
arbitration provision, particularly with respect to countries with 
which we have difficulties in resolving disputes.

   9c. In your testimony, you remarked that Treasury views the 
        arbitration mechanism as providing competent authorities with 
        an incentive to resolve existing disputes, rather than have 
        those disputes be subject to the determination of an 
        arbitration board. The existing examples of binding arbitration 
        provisions appear at least informally to support your thesis 
        outside the scope of transfer pricing double tax cases, yet 
        existing examples of binding arbitration provide for reasoned 
        decisions that are binding on future arbitral boards. Do you 
        think that a model that provides that the arbitral tribunal's 
        decisions shall have ``no precedential value'' will create the 
        same incentive to settle a case prior to arbitration as 
        existing examples in which the decisions have precedential 
        value? If so, why?

    Answer. We adopted mandatory arbitration incorporating the last-
best offer approach in the proposed agreements with Belgium and Germany 
because the Treasury Department believes that mechanism is most likely 
to encourage the competent authorities to resolve the case before it 
reaches arbitration. Because under last-best offer arbitration one of 
the two proposed resolutions will be chosen, the Treasury Department 
believes it encourages the competent authorities to be more reasonable 
in their negotiations and resolve a case on their own. In the context 
of the last-best offer approach, we do not believe that precedential 
opinions would increase the incentive to reach agreement. Further, 
because the arbiters must choose between one of the two offers made by 
the competent authorities, decisions of previous panels are likely to 
be of limited value in resolving a specific dispute, even if they 
relate to the same subject matter.
    Nonetheless, we will continue to search for ways to increase the 
effectiveness of the process, which is in the best interest of all the 
affected parties.

   9d. Can you explain precisely how you expect to monitor the 
        success of the arbitration provisions that are contained in the 
        German and Belgian tax treaties?

    Answer. The goal of the arbitration provision is to increase the 
efficient and effective resolution of double taxation cases in the 
mutual agreement procedure (MAP) before they reach arbitration and to 
assure their efficient and effective resolution if they reach 
arbitration. As with other treaty provisions, as we gain more 
experience with the arbitration provision, we may find that certain 
refinements of the process are needed. In particular, we have been 
carefully considering means of monitoring the implementation of the 
arbitration provision. Accordingly, we expect to use the following data 
to assess the arbitration process adopted in the agreements with 
Germany and Belgium.

1. Extent to which double taxation relieved/amount of time needed to 
        relieve double taxation
    A primary purpose of our income tax conventions is to prevent 
double taxation. Accordingly, the competent authorities use the MAP to 
settle disputes regarding, for example, how to allocate income so that 
the profits of a taxpayer (or affiliated group) are not taxed twice. In 
measuring the effectiveness of the MAP, we currently look at (1) the 
degree to which the taxpayer was relieved from double taxation, and (2) 
the amount of time it takes to conclude the procedure.
    We believe that these measures should also apply to evaluate the 
performance of the arbitration phase of the MAP. Therefore, we intend 
to measure the effect of the arbitration provision on reaching timely 
and effective resolutions in the MAP process, both with respect to 
cases that go to arbitration and in negotiations in general.

2. Number of cases that go to arbitration/types of cases that go to 
        arbitration
    We plan to track the number of times the arbitration provision is 
invoked and the types of cases. Because the arbitration provision is to 
encourage mutual agreement by the competent authorities, we would 
generally view extensive use of this provision unfavorably. One 
possible exception to this general view might be where there is 
significant use but it involves only one particular treaty country, or 
a particular type of case with a country, so long as there is a 
downward trend in the use of the provision.

3. Number of cases entering competent authority
    Another measure of success of the arbitration provision would be 
the effect of the provision on the number of cases entering competent 
authority. With some treaty partners, an increase in the number of 
cases that go to the competent authorities may signal an increase in 
taxpayer confidence that double taxation issues will be effectively and 
efficiently resolved.

   9e. How many disputes have been subject to the existing 
        Mutual Agreement Procedures of the treaties with Germany and 
        Belgium over the last 10 years? Please break this information 
        down by year and by subject matter.

    Answer.

------------------------------------------------------------------------
                                  No. cases    Allocation
          Fiscal year             received      of income       Other
------------------------------------------------------------------------
Belgium:
    1997......................            1             1            --
    1998......................            1             1            --
    1999......................            2             2            --
    2000......................            4             4            --
    2001......................            0            --            --
    2002......................            2             1             1
    2003......................            1             1            --
    2004......................            0            --            --
    2005......................            3             3            --
    2006......................            2             1             1
    2007......................            1             1            --
Germany:
    1997......................            5             3             2
    1998......................            4             3             1
    1999......................            5             5            --
    2000......................           17             9             8
    2001......................            8             5             3
    2002......................            9             6             3
    2003......................           14             3            11
    2004......................           14             7             7
    2005......................           19            10             9
    2006......................           16             4            12
    2007......................           19             8            11
------------------------------------------------------------------------

    Because of the Record Retention Act's restriction on the 
maintenance of records for more than 6 years, information from the 
1990s is incomplete. It seems likely that there were a few more cases 
with Germany than are reflected in the information that is currently 
available.
    The ``Allocation of Income'' cases consist almost entirely of 
transfer-pricing issues. A survey of the existing cases indicates that 
most issues in the ``Other'' category concern whether business 
activities are associated with permanent establishments and/or the 
amount of business profits attributable to permanent establishments. 
However, the ``Other'' category also includes issues such as the 
sourcing of stock options, qualification of organizations as exempt, 
the residency of taxpayers, and issues arising under the estate and 
gift tax treaty.

   9f. You noted in your testimony that taxpayer input into the 
        arbitration process would be difficult in light of the ``last 
        best offer'' structure of the mechanism, which provides that 
        the arbiters select from the two options proposed by the 
        competent authorities involved. I do not, however, find this to 
        be convincing. For example, taxpayer information might be 
        usefully supplied in support of one of the options proposed by 
        a competent authority. Can you identify any other drawbacks to 
        providing for taxpayer participation in the arbitration 
        process?

    Answer. The arbitration provision in the agreements with Belgium 
and Germany is designed to be an extension of the competent authority 
negotiation process that will provide for more effective and efficient 
resolution of cases in which a taxpayer is experiencing double 
taxation. In general, although a competent authority negotiation is a 
government-to-government process, taxpayers may be, and often are, very 
involved.
    During the development of the issues in the case and during the 
actual competent authority negotiation process, the taxpayer can 
provide significant and very helpful input to the competent 
authorities, and the United States seeks and encourages such taxpayer 
input. The taxpayer is especially helpful in presenting the facts, but 
the taxpayer also may present legal arguments to the competent 
authority to assist in the resolution of its case.
    If the case goes to arbitration under the proposed agreement, the 
taxpayer's position on the matter will be taken into account by the 
U.S. competent authority, who may enlist additional assistance from the 
taxpayer throughout the process.
    We believe that the proposed arbitration process, which allows for 
taxpayer input to the same extent permitted in the general mutual 
agreement procedure, strikes the appropriate balance between allowing 
taxpayer input, while maintaining the efficiency and effectiveness of 
the process. Nevertheless, we will continue to search for ways to 
increase the effectiveness of the process, in the best interest of all 
the affected parties, including potential opportunities for additional 
taxpayer input.

   9g. The Belgian and German arbitration models allow the 
        taxpayer to opt out of the arbitral process at any time, 
        including after a decision has been rendered by the arbitration 
        board. What do you consider to be the benefits and drawbacks of 
        the ability of taxpayers to opt out throughout the process?

    Answer. In general, mutual agreement proceedings are initiated at 
the request of the taxpayer, and the taxpayer retains the right to 
rescind its request during negotiation. Moreover, the taxpayer can 
reject a negotiated and concluded mutual agreement procedure (MAP) 
agreement and pursue its remedies in court.
    The arbitration process included in the agreements with Belgium and 
Germany is an extension of the standard MAP and is meant to increase 
the efficiency and effectiveness of that process by providing a 
mechanism for resolution of cases that could not be concluded by 
negotiation. As such, the arbitration process is not meant to limit in 
any way the rights of the taxpayer to reject a MAP agreement and pursue 
remedies in court. That is, the arbitration process is intended to 
produce an effective and efficient resolution of a taxpayer's case 
through a MAP agreement, with the taxpayer retaining all rights, 
whether the agreement is produced through traditional negotiation or 
through arbitration.

   9h. The Belgian and German arbitration models provide that 
        in establishing an arbitration board, each Contracting State 
        appoints a member and then those two members appoint a third 
        member, who will serve as the chair of the board. This 
        structure appears to permit Contracting States to appoint as 
        arbiters government employees, who would likely be perceived as 
        lacking independence and objectivity. Have you considered 
        alternative mechanisms for the appointment of arbiters, which 
        would further promote the appearance of an independent and 
        impartial proceeding? Please describe the various alternatives 
        you've considered and include the perceived benefits and 
        drawbacks of each mechanism.

    Answer. During the development of the proposed arbitration 
mechanism, we carefully considered the appropriate criteria and 
qualifications for potential arbiters. We considered the possibility of 
appointing professional arbiters such as those affiliated with the 
American Arbitration Association or the International Centre for 
Settlement of Investment Disputes, who would likely be perceived as 
independent. However, such persons would be very unlikely to have the 
extensive technical knowledge of international tax law, particularly 
tax treaties, necessary to make an informed decision in the issues most 
likely to arise in a mutual agreement procedure case. We concluded it 
was better to provide for an arbitration panel consisting of taxation 
experts, particularly in light of the objective of issuing an 
expeditious decision.
    We also considered the possibility of identifying a list of 
potential arbiters, from among whom the board would be jointly selected 
by the competent authorities. This alternative is available under the 
European Union Arbitration Convention, and at least on the surface 
seems to hold out a possibility of both independence and ease of 
selection. However, we have heard reports of difficulties in keeping 
the list up-to-date, assuring the appropriate level of technical 
knowledge of the arbiters on the list, and agreeing on multiple 
arbiters from the list to decide a particular case. We have provided, 
nevertheless, in the agreements with Belgium and Germany for a 
nonexclusive list developed by the competent authorities of individuals 
with familiarity in international tax matters who may potentially serve 
as the third member and chair of the board. In general, the mechanism 
agreed upon with Belgium and Germany allows each government to appoint 
a member of the panel, after which those members choose a third-country 
chair. The mechanism provides for an alternative chair appointment 
procedure in the event of a disagreement between the two board members 
on choice of a chair.
    A government may in fact choose to appoint to the board a person in 
the government's employ, and might do so if concerned about expertise 
in the specific issue or about potential costs of arbitration. We 
recognize that an arbiter who is a government employee may not be 
perceived as independent. We also recognize that selection of a 
government employee carries risks for the government because such 
person might have less credibility with the third-country chair of the 
panel and, thus, may actually reduce the likelihood that the board will 
adopt that government's position.
    We will monitor the operation of the arbitration process, including 
the selection of the board, and expect to have further discussions with 
our treaty partners concerning the issue, with a view toward achieving 
the best balance of the concerns expressed and providing to taxpayers 
an efficient and effective resolution of their double taxation cases.

   9i. The Belgian and German arbitration models lay out the 
        sources to be used by each arbitration board when interpreting 
        relevant treaty provisions in a particular dispute. 
        Specifically, both instruments provide that the arbitration 
        board shall apply in descending order of priority (a) the 
        provisions of the treaty; (b) any agreed commentaries or 
        explanations of the Contracting States concerning the 
        convention; (c) the laws of the Contracting States to the 
        extent they are not inconsistent with each other; and (d) any 
        OECD Commentary, Guidelines or Reports regarding relevant 
        analogous portions of the OECD Model Tax Convention. This list 
        is perhaps similar, but is not fully consistent with, the 
        customary international law rules of treaty interpretation as 
        laid out in the Vienna Convention on the Law of Treaties, which 
        the United States has consistently stated it applies when 
        interpreting treaties to which it is a party.\1\ In the future, 
        might you consider referring to the Vienna Convention rules for 
        treaty interpretation, rather than the list provided for in the 
        German and Belgian treaties?
---------------------------------------------------------------------------
    \1\ See S. Exec. Doc L, 92nd Cong. (1971) (stating that the Vienna 
Convention on the Law of Treaties is generally recognized as the 
authoritative guide to current treaty law and practice). See also Brief 
for the United States as Amicus Curiae at 8, Domingues v. Nev., 528 
U.S. 963 (1999) (noting that ``[m]ost provisions of the Vienna 
Convention, including Articles 31 and 32 on matters of treaty 
interpretation, are declaratory of customary international law'').

    Answer. The list of authorities in the proposed agreements reflects 
the documents that the U.S. competent authority has found most useful 
in its own tax treaty interpretation. However, we will continue to 
monitor the process and search for ways to increase its effectiveness, 
keeping in mind customary international law rules of treaty 
interpretation as reflected in the Vienna Convention, including an 
---------------------------------------------------------------------------
assessment of the utility of the list of authorities.

   9j. The Belgian and German arbitration models provide that 
        the arbitration board may adopt any procedures necessary for 
        the conduct of its business, provided that the procedures are 
        not inconsistent with the treaty. The procedural rules adopted 
        and used by an arbitration tribunal are crucial to the 
        operation of every proceeding and can have an enormous impact 
        on whether the arbitral process is fair and a reasonable 
        outcome reached. As a result, many international agreements 
        that provide for binding arbitration, choose the rules of 
        procedure applicable to any arbitration proceedings beforehand, 
        as in the case of many of our trade agreements. Have you 
        considered doing so in future tax treaties?

    Answer. During negotiation of the proposed agreements with Belgium 
and Germany, consideration was given to identifying additional rules of 
procedure for use by the arbitration board. However, after studying the 
details of the rules commonly used in commercial arbitration, we 
concluded that most of these rules relate to evidentiary procedures not 
relevant to the simplified arbitration format proposed in the 
agreements with Belgium and Germany, primarily because the decision of 
the arbitration board is to be based upon a record rather than a 
presentation of evidence. Accordingly, it seemed more prudent in these 
cases to allow flexibility to the arbitration board to formulate 
procedural rules that might be necessary to its particular case. As 
experience is gained under the proposed agreements, we will consider 
whether more procedural guidance for the arbitration boards is 
necessary.

    Question 10. Your office has discussed with the committee the 
possibility of concluding targeted tax protocols with other countries 
that would focus on problem areas, such as ``treaty shopping.'' Can you 
tell us whether you anticipate concluding targeted protocols that would 
provide for binding arbitration? If so, with which countries should the 
United States seek to conclude such targeted protocols?

    Answer. In general, we strongly prefer that a protocol to amend an 
existing tax treaty address all pressing issues with respect to the 
treaty relationship. However, if there is an urgent matter that can be 
resolved by entering into a protocol, and no other urgent matters need 
to be resolved in an existing tax treaty, a targeted protocol may be 
appropriate. ``Treaty shopping'' is the clearest example of an instance 
in which a targeted protocol may be appropriate. With respect to 
binding arbitration, if there were an immediate need to provide 
competent authority with this tool for resolving disputes with a 
particular country, and if there were no other urgent issues to update, 
we would consider pursuing a targeted protocol.

    Question 11. In the dividend, interest, and royalty articles of the 
2006 U.S. Model Tax Treaty, the phrase ``effectively connected with'' 
is used when referring to the level of attachment that the underlying 
property must have with a permanent establishment for purposes of 
determining whether the dividend, interest, and royalty articles apply, 
or whether Article 7 will apply instead. This phrase replaces the 1996 
Model Tax Treaty phrase ``attributable to.'' The Belgium Tax Treaty 
currently pending on the committee's calendar, uses the new model 
language (``effectively connected with'') in all three of those 
articles. The dividend article of the Belgium Tax Treaty currently in 
force uses the language ``forms part of the business property of the 
permanent establishment.'' Are there substantive differences between 
(a) that language, (b) ``attributable to,'' and (c) ``effectively 
connected with'' (and if so, what are the differences)?

    Answer. The United States has used these three formulations 
interchangeably. See, for example, the language of Article 10(6) of the 
1996 Model Income Tax Convention (which uses the ``attributable to'' 
formulation) and the 1996 model technical explanation to Article 10(6) 
(which explains the ``attributable to'' language by using the words 
``forms part of the business property of the permanent 
establishment''). The 2006 U.S. Model Income Tax Convention adopts the 
``effectively connected with'' formulation, bringing the U.S. Model 
Income Tax Convention language in closer conformity with standard tax 
treaty usage. See, for example, the OECD and U.N. models. The concepts 
and coverage of these three formulations are intended to be the same.

    Question 12. Section 6103 of the Internal Revenue Code generally 
prohibits the disclosure of tax returns and other tax return 
information with certain narrow exceptions. In fact, the willful 
violation of this section and the disclosure of such information is 
punishable as a felony. The concerns that prompted this law are also 
relevant in the context of any arbitration proceedings that may occur 
pursuant to the German Protocol or Belgium Tax Treaty, since 
individuals under those circumstances will also have access to personal 
taxpayer information that would otherwise be covered by section 6103. 
Can you explain how the Department intends to protect against the 
disclosure of tax returns and other tax return information during the 
course of arbitration proceedings? Both treaties provide that all 
members of the arbitration boards and their staffs are to agree to 
abide by, and be subject to, specific confidentiality and nondisclosure 
requirements and any applicable domestic laws of the treaty countries 
involved. Can the Department enforce criminal charges against board 
members or staff who improperly disclose information in violation of 
such agreements and domestic law requirements if they are not U.S. 
citizens or employees of the U.S. Government and remain outside of the 
United States?

    Answer. Both the German protocol and the Belgian tax treaty provide 
that no information relating to an arbitration proceeding may be 
disclosed by members of the arbitration board or their staffs, or by 
either competent authority, except as permitted by treaty and the 
domestic laws of the Contracting States. In addition, both agreements 
provide that all information relating to the arbitration proceeding is 
to be considered to be information exchanged between the Contracting 
States (that is, information subject to the provisions of the exchange 
of information article regarding disclosure). The German protocol and 
the Belgian tax treaty further provide that all members of the 
arbitration board and their staffs must agree in statements sent to 
each of the Contracting States in confirmation of their appointment to 
the arbitration board to abide by and be subject to the confidentiality 
and nondisclosure provisions of the exchange of information article and 
the applicable domestic laws of the Contracting States, with the most 
restrictive condition to apply in the event of a conflict.
    The German protocol and the Belgian tax treaty authorize the 
competent authorities to develop rules and procedures to conduct 
arbitration proceedings. Pursuant to that authorization, the U.S. 
competent authority and its counterparts in Germany and Belgium will 
develop the details of the contractual arrangement between the 
competent authorities and the members of an arbitration board. We 
expect this arrangement to take the form of a memorandum of 
understanding (MOU) between the competent authorities and the members 
of the arbitration board. Pursuant to such MOU, the engagement of 
members of arbitration boards will be structured within the framework 
of section 6103(n) of the Internal Revenue Code, which authorizes the 
disclosure of returns and return information in connection with the 
contractual procurement of services for purposes of tax administration. 
Persons to whom returns or return information are disclosed under the 
authority of section 6103(n) are prohibited under section 6103(a) from 
redisclosing such taxpayer information and are subject to the full 
range of statutory penalties and remedies provided for unauthorized 
disclosures (see, for example, sections 7213 and 7431 of the Internal 
Revenue Code). Pursuant to Treasury regulations promulgated under 
section 6103(n), a contract between the Internal Revenue Service and a 
person to whom returns or return information may be disclosed under 
section 6103(n) is required to contain detailed conditions and 
provisions with respect to safeguarding such returns or return 
information. These conditions and provisions include specific 
requirements regarding data protection and security as well as a 
requirement that the contractor provide written notice to its officers 
and employees of the statutory penalties that will apply in the event 
of any further disclosure by the officer or employee. MOUs with the 
members of arbitration boards constituted pursuant to the German 
protocol and the Belgian tax treaty would accordingly include such 
conditions and provisions.
    Under section 7213 of the Internal Revenue Code, the willful 
unauthorized disclosure of returns or return information is a criminal 
offense. It is anticipated that MOUs with the members of arbitration 
boards constituted pursuant to the German protocol and the Belgian tax 
treaty will include provisions requiring the members of the arbitration 
board to submit to the jurisdiction of a U.S. court. Such jurisdiction 
would also enable taxpayers to pursue civil actions for damages against 
an arbitration board member, under section 7431 of the Internal Revenue 
Code, for the willful or negligent unauthorized disclosure of returns 
or return information.

    Question 13. What are the most significant barriers created by tax 
systems that still remain to cross-border investment? To what extent 
will these issues be addressed in future tax treaties?

    Answer. The Treasury Department examines the U.S. tax treaty 
network on an ongoing basis to determine where significant barriers to 
cross-border investment exist.
    With respect to countries with which we do not have a tax treaty, 
the most significant barriers to cross-border investment are typically 
high withholding tax rates and instances in which the United States and 
the other country disagree as to which country has primary taxing 
rights (e.g., the two countries disagree as to source of the income or 
the residence of the taxpayer). Negotiation of a tax treaty, if 
possible, would reduce those barriers. The Treasury Department, 
therefore, works to establish new treaty relationships in order to 
reduce withholding rates, facilitate cross-border business activity, 
and provide mechanisms for collaboration between tax authorities in 
order to minimize double taxation.
    With respect to countries with which we have a tax treaty, the 
existing tax treaty may have withholding tax rates higher than the U.S. 
model rates or the existing tax treaty may have become outdated due to 
changes in U.S. or foreign law or treaty policy, inadvertently creating 
obstacles to cross-border investment. In those cases, the Treasury 
Department seeks to renegotiate treaties to reduce withholding rates, 
update the provisions in the treaty, and reduce double taxation by 
improving coordination between tax authorities.
    At the same time, as we negotiate to reduce barriers, we also 
negotiate to improve information exchange relationships and to prevent 
treaty shopping and other tax treaty abuse.

    Question 14. Do you believe that these tax treaties will have any 
impact on worker flow between the United States and any of these 
countries?

    Answer. One of the goals of a tax treaty is to reduce tax-related 
impediments to the mobility of labor to enable companies to employ U.S. 
workers overseas on a competitive basis. U.S. tax treaties contain 
several provisions that generally enhance the mobility of U.S. 
individuals, including rules that set thresholds for foreign taxation 
of U.S. individuals working abroad and rules that mitigate the 
potential double taxation consequences of U.S. taxation of U.S. 
citizens and residents on their worldwide income. Tax treaties also 
typically provide rules to coordinate the tax treatment of pension 
plans, and the agreements with Germany and Belgium further provide 
rules coordinating deductibility of cross-border pension contributions. 
Accordingly, we believe that these agreements, especially the Germany 
protocol and the Belgium tax treaty, will provide greater flexibility 
to U.S. individuals who seek to work in those countries.

    Question15. What are the criteria used to determine if a particular 
country is a suitable candidate for updating a tax treaty, or 
negotiating a new one, with the United States?

    Answer. The United States enters into tax treaties to resolve 
issues of double or excessive taxation, and to permit proper 
administration of U.S. tax law. To identify potential treaty partners, 
the Treasury Department relies heavily on input from the U.S. business 
community about particular countries and circumstances in which U.S. 
investments are being subjected to double or excessive taxation.
    For updating an existing tax treaty, the primary issues are the 
extent to which the existing tax treaty is out of date and the 
likelihood of obtaining favorable changes to the existing tax treaty.
    For entering into negotiations with a country with which we do not 
have a tax treaty, the primary issues are the extent of double or 
excessive taxation, the extent to which a tax treaty would be able to 
address those problems, and whether the possible treaty partner can 
agree to provisions necessary to the United States. With some countries 
(e.g., a country that does not impose significant income taxes), a tax 
treaty will not be appropriate, either because of the possibility of 
abuse of the treaty or because of the lack of cross-border tax issues 
that are best resolved by a tax treaty. In addition, if a potential 
treaty partner cannot agree to appropriate exchange of information 
provisions or limitation on benefits provisions or insists on terms 
(such as tax-sparing) that we cannot accept, it will not be fruitful to 
enter into negotiations. Often, preliminary meetings are necessary to 
determine whether a particular country would be an appropriate partner 
to a tax treaty.

    Question 16. Last year, this committee and the full Senate approved 
tax treaties with Sweden, France, and Bangladesh. Can you explain how 
these agreements have affected trade and investment between the United 
States and each of these countries?

    Answer. The impact of tax treaties on trade and investment is 
difficult to measure. In addition, given that the protocols with Sweden 
and France were merely updates to existing treaties, the effects on 
trade and investment of those agreements may be even more difficult to 
assess. We believe that all three agreements have encouraged greater 
trade and investment with the United States. At the same time, we 
recognize the Joint Committee on Taxation's assessment that the larger 
macroeconomic outlook will have a greater impact on future cross-border 
trade and investment than the tax treaties will.

    Question 17. With which other countries are treaties or protocols 
currently being negotiated and what are the anticipated timelines for 
completion?

    Answer. An agreement with Bulgaria was signed in February 2007. The 
Treasury Department has also recently reached agreements with Canada, 
Iceland, and Norway, and all three agreements are going through the 
necessary process to prepare them for signature.
    The Treasury Department continues to prioritize its efforts to 
update the few remaining U.S. tax treaties that provide for low 
withholding tax rates but do not include the limitation on benefits 
provisions needed to protect against the possibility of treaty 
shopping. In furtherance of this goal, we have scheduled negotiations 
with Hungary and Poland.
    In addition, the Treasury Department is negotiating agreements with 
Chile and the Republic of Korea. We are also undertaking exploratory 
discussions with several countries in Asia and South America that we 
hope will lead to productive negotiations later this year or next year.
    Completion of all of these negotiations will be dependent on 
reaching agreement on a number of key issues, which differ for each 
negotiation. As a result, it is difficult to provide an anticipated 
timeline for completion. However, we hope to conclude these agreements 
as soon as possible.

Clarification Response by John Harrington to Question 9(i) From Senator 
                                 Biden

    Question. One of the questions posed after the July 17 hearing, 
Question 9(i), related to the arbitration provisions that are included 
in both the German and Belgian Tax Treaties. Specifically, the question 
focused on the fact that the interpretive rules to be applied by an 
arbitration board are not fully consistent with the interpretive rules 
laid out in Articles 31 and 32 of the Vienna Convention on the Law of 
Treaties, which reflect customary international law regarding treaty 
interpretation.
    The question posed was--given the inconsistency--``might you 
consider [in future treaties with arbitration clauses] referring to the 
Vienna Convention rules for treaty interpretation, rather than the list 
provided for in the German and Belgian Treaties?'' The United States 
would, as a matter of international law, apply the Vienna Convention 
rules on treaty interpretation unless the treaty itself dictated 
otherwise, and thus, it would seem sensible to have the arbitration 
board do the same.
    In response to the question, you stated as follows:

          The list of authorities in the proposed agreements reflects 
        the documents that the U.S. competent authority has found most 
        useful in its own tax treaty interpretation. However, we will 
        continue to monitor the process and search for ways to increase 
        its effectiveness, keeping in mind customary international law 
        rules of treaty interpretation as reflected in the Vienna 
        Convention, including an assessment of the utility of the list 
        of authorities.

    While the list of authorities in the two treaties may be useful in 
interpreting tax treaty terms, this answer is not fully responsive to 
the question and suggests that you do not view Articles 31 and 32 of 
the Vienna Convention on the Law of Treaties as reflecting the rule 
under which tax treaties are interpreted.
    Do you view the customary international law rules of treaty 
interpretation reflected in the Vienna Convention as applicable to tax 
treaties?
    If the answer to this question is ``no,'' please explain why and 
state your view of the applicable rule for interpreting tax treaties.

    Answer. Yes. In the absence of an agreement to the contrary by the 
States Parties concerned, the United States generally views the 
customary international law rules of treaty interpretation, as 
reflected in the Vienna Convention on the Law of Treaties, as 
applicable to treaties, including tax treaties. The arbitration 
provisions in the proposed agreements with Germany and Belgium contain 
references to many interpretive materials that would be considered 
under the relevant provisions of the Vienna Convention on the Law of 
Treaties. The types of interpretive materials referenced in the 
proposed agreements with Germany and Belgium, along with the technical 
explanations prepared by the Treasury Department and other documents 
submitted to the Senate as part of the ratification process, generally 
inform the U.S. view of the meaning of tax treaties. As we move forward 
on arbitration provisions in future agreements, we are considering 
appropriate means to reflect customary international law rules of 
treaty interpretation.

                                  

```