ants appealed.

The U.S. Court of Appeals for the Third Circuit held on June 15, 1976, that Federal jurisdiction was properly invoked and the evidence established that the corporate defendant was liable. It stated:

.. The fraudulent scheme was conceived in the United States by American citizens, involved stock in an American corporation traded on American over-the-counter exchange, and an American securities broker from his office in New Jersey was responsible for the wrongful omissions. Moreover, on policy grounds the interest of the United States in regulating the conduct of its broker-dealers in this country and enhancing world confidence in its securities market is ample justification for applying the securities laws. We conclude that Federal jurisdiction was properly invoked.

In view of the fact that the bad faith or vexatious conduct of defendants did not occur during the litigation process, the Appeals Court found that the award of attorney fees was improper.

Tax Treaties and Agreements

U.S.-Republic of Korea

On June 4, 1976, the United States and the Republic of Korea signed a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and the encouragement of international trade and investment. The convention establishes maximum rates of withholding tax in the source country on income payments flowing between the two countries. The rate of withholding tax on portfolio dividends is limited to 15 percent, while on dividends paid by a subsidiary to a parent corporation the rate of tax may not exceed 10 percent. The maximum rate of withholding tax on interest is 12 percent except that interest derived by the government of one state or by its local authorities or instrumentalities is exempt from withholding at the source. Royalties are subject in general to a 15 percent maximum rate of tax. However, the tax on literary and artistic royalties, including motion picture royalties, is limited to 10 percent.

An unusual provision permits a special exemption from U.S. social security taxes for Korean residents who are temporarily present in Guam. The Koreans believed that a similar exemption for Philippine residents temporarily present in Guam provided an unfair advantage to Philippine residents and the firms which hire them. The convention provides the exemption for Korean residents only so long as the statutory exemption is in effect for Philippine residents.

The convention was submitted to the Senate for advice and consent to ratification on September 3, 1976. It was not acted upon in the 94th Congress.

See S. Ex. P, 94th Cong., 2d Sess.

U.S.-Philippines

The United States and the Philippines, on October 1, 1976, signed a convention with respect to taxes on income, aimed at identifying clearly the tax interests of the two countries so as to avoid double taxation and make difficult the illegal evasion of taxation. It deals principally with Federal income taxes in the case of the United States and with generally equivalent income taxes in the case of the Philippines, although the nondiscrimination article applies to taxes of every kind imposed at the national, State, or local level.

The maximum rate of withholding tax under the treaty is 25 percent on portfolio dividends and 20 percent on dividends paid to a parent corporation owning 10 percent or more of the voting shares. The 20 percent limit applies as well to the additional Philippine tax on profits of U.S. corporations derived through Philippine branches. The treaty provides a maximum tax at the source of 15 percent on interest in general, 10 percent on public bond issues, and an exemption of interest paid to the Government of one of the contracting states or an instrumentality thereof, or interest on debt guaranteed or insured by that Government or instrumentality. In the case of royalties, the treaty provides a limit of 15 percent at the source for the United States. The Philippine tax at source is also limited to 15 percent provided that the paying corporation is registered with the Board of Investments and engages in preferred areas of activity. In other cases the Philippine tax is limited to 25 percent or to a lower rate if a lower rate applies on comparable payments to residents of third states.

The taxation of business profits derived by a resident of the other country is governed by the standard treaty concept that tax liability will arise only to the extent that the profits are attributable to a "permanent establishment" in the taxing country. There is not the usual reciprocal exemption of shipping and airline profits. The Philippines agreed to reduce their statutory tax from 2 1/2 to 1 1/2 percent of gross receipts on outbound traffic and to provide that the tax may not exceed the lower of the 1 1/2 percent rate or any lower tax agreed to with a third country. The United States accepted this provision with respect to shipping profits but excluded U.S. airlines from the provision at the request of the airlines.

Notes interpreting article 23 (2) of the treaty were signed on November 24, 1976. They extended U.S. approval to the Philippine practice of permitting a foreign tax deduction to Philippine citizens abroad, rather than a foreign tax credit, so long as the rates of tax currently in effect remain unchanged.

The treaty was submitted to the Senate on Jan. 19, 1977, for advice and consent to ratification (S. Ex. C, 95th Cong., 1st Sess.).

U.S.-Romania

A treaty with respect to taxes on income came into force between the United States and Romania on February 26, 1976 (TIAS 8228; 27 UST 165), effective with respect to income of calendar years or taxable years beginning on or after January 1, 1974. As to the basic provisions governing the taxation of business income, personal service income, and real property income, as well as the administrative provisions for exchanging tax information and resolving taxpayer complaints, the treaty is similar, in all substantive respects, to conventions recently concluded between the United States and Western European countries.

For additional information concerning the U.S.-Romania treaty, see the 1973 Digest, pp. 388-389, and S. Ex. B, 93d Cong., 2d Sess.

U.S.-United Kingdom

On April 13, 1976, the United States and the United Kingdom exchanged notes amending the income tax convention between the two countries signed on December 31, 1975 (see the 1975 Digest, p. 635), to extend certain benefits under the convention to dual resident corporations and to broaden the tax exemption for containers used in international traffic. The notes also restated provisions on associated enterprises and investment or holding companies. The convention as thus modified was transmitted to the Senate for advice and consent to ratification on June 24, 1976.

On August 26, 1976, the two countries signed a protocol of amendment designed principally to clarify the application of the convention to dual resident corporations. This was transmitted to the Senate on September 22, 1976. The Senate did not take action on the convention, as amended, during the 94th Congress.

See S. Ex. K and S. Ex. Q, 94th Cong., 2d Sess.

The Department of the Treasury announced on July 28, 1976, in response to inquiries, that the 1945 income tax convention between the United States and the United Kingdom (TIAS 1546; 60 Stat. 1377; 12 Bevans 671) was not applicable to Southern Rhodesia or to Yemen. It had been extended in 1959 to Southern Rhodesia (then part of the Federation of Rhodesia and Nyasaland) but had not applied to Southern Rhodesia since January 1, 1974. The extension of the treaty to Southern Rhodesia was terminated by the United States, effective January 1, 1974, by diplomatic note to the Government of the United Kingdom in accordance with the procedure established in the convention.

The U.S.-United Kingdom income tax treaty had been extended in 1959 to the People's Democratic Republic of Yemen (then part of

Aden) but had been inapplicable to the People's Democratic Republic of Yemen since that country became independent on November 30, 1967. The Government of Yemen did not take the necessary steps to affirm that it was assuming the obligations of the convention.

For the Treasury Dept. notice, see Fed. Reg., Vol. 41, No. 147, July 29, 1976, p. 31578. See also Dept. of State File L/T.

U.S.-Chile

By an exchange of notes dated December 29 and 31, 1975 (TIAS 8252; 27 UST 1371), the United States and Chile concluded an agreement granting, on a reciprocal basis, relief from double taxation on earnings derived from the operation of aircraft. Upon receipt by the United States of a further note dated January 30, 1976, from the Government of Chile, stating that it had fulfilled its constitutional procedures, the agreement became effective with respect to taxable years beginning January 1, 1975.

The U.S. Internal Revenue Code authorizes exemption from U.S. income tax of foreign aircraft registered under the laws of countries which grant an equivalent exemption to U.S. citizens and corporations. Specifically, both section 872 (b) (2) defining gross income for tax purposes of nonresident aliens, and section 883 (2) defining the same for foreign corporations connected with U.S. business, state:

(2) Aircraft of Foreign Registry. Earnings derived from the operations of aircraft registered under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States. If the foreign country has a similar statutory provision, it is adequate for U.S. purposes to submit to the Internal Revenue Service a certified translation of relevant sections of the foreign country's law. However, the United States prefers a formal agreement so as to avoid an interpretation by U.S. authorities of a foreign country's tax laws. The exchange of notes with Chile constitutes such an agreement. U.S.-India

The United States and India concluded a similar agreement granting the international airlines of the two countries exemption from tax on their earnings on the basis of reciprocity, by an exchange of notes on November 26, 1976. It was effective for taxable years beginning on or after January 1, 1976. For the purpose of exempting from double income tax the earnings from operation of aircraft in international traffic, the term "operation of aircraft" means the business of transportation by air of persons, livestock, goods or mail, carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other

enterprises, the incidental lease of aircraft, and any other activity directly connected with such transportation. The exemption also applies in respect of participation in pools of any kind regarding air transport. Interest on funds connected with the operation of aircraft in international traffic is regarded as income from the operation of such aircraft.

85 Foreign Assets Control

Delivery of U.S. Checks and Warrants

Vietnam and Cambodia

The Department of the Treasury announced on April 8, 1976, that on the basis of information available to it, including advice from the Department of State, the Secretary of the Treasury had determined that postal, transportation and banking facilities in general, and local conditions in all of Vietnam and in Cambodia, were such that there was not a reasonable assurance that the payee of a check or warrant drawn against funds of the United States, or any agency or instrumentality thereof, would actually receive such a check or warrant and be able to negotiate it for full value. Accordingly, the Treasury Department revised its regulations at 31 Code of Federal Regulations Part 211, on delivery of checks and warrants to addresses outside the United States, its territories and possessions, so as to add North and South Viet-Nam and Cambodia to the list of restricted areas to which such a check or warrant may not be sent from the United States for delivery. Prior notice and public procedure were not deemed necessary for the revisions since they involved a foreign affairs function of the United States.

For the text of the regulations as revised, see Fed. Reg., Vol. 41, No. 74, Apr. 15, 1976, pp. 15846-15847.

§ 6

Debt Rescheduling

Bilateral Agreements

U.S.-Bangladesh and U.S.-Pakistan

The United States entered into a debt rescheduling agreement with Bangladesh on March 3, 1976 (TIAS 8423; 27 UST; entered into force May 11, 1976), and one with Pakistan on March 4, 1976 (TIAS 8447; 27 UST; entered into force May 12, 1976).

Under the agreement with Bangladesh, Bangladesh assumed the performance of all payment obligations pertaining to $85.1 million in principal amount due the Agency for International Development. This is to be repaid over 40 years, including a 15-year grace period. Interest will accrue at 1.6 percent per annum. Bangladesh also