tribution would consist of $5 million in emergency refugee funds for the Afghan relief program of the United Nations High Commissioner for Refugees (UNHCR) (an immediate cash contribution of $3 million and shipment of $2 million more in relief supplies) and of $300,000 in grant aid for voluntary agency efforts.

The new United States pledge was made in response to a worldwide appeal issued by the High Commissioner for $25 million in food and $30 million in cash, totaling $55 million, to help care for a refugee population, projected at 500,000 over the next year.

An initial United States contribution to the High Commissioner, made through the United Nations World Food Program, had consisted of more than 17,000 metric tons of food commodities, largely wheat, valued at $6.1 million; and a minimum of $10 million had been projected for allocation from the supplemental appropriation for Public Law 480 (Food for Peace), then pending before the Congress. With the new pledge, the United States contribution would total more than $21 million, nearly 40 percent of the United Nations appeal.

The White House announcement stated:

We are considering still other humanitarian steps we can take to help UNHCR and the Government of Pakistan to care for these unfortunate Afghan people who have been forced to flee their homes and now suffer from cold and hunger because of the brutal Soviet invasion and occupation of their homeland. More help is needed, and we call on all other humanitarian-minded countries to join this effort.

Weekly Comp. of Pres. Docs., Vol. 16. No. 5, Feb. 4, 1980, p. 256; Dept. of State Bulletin, Vol. 80, No. 2037, Apr. 1980, p. 62.

By mid-1980 more than one million Afghans had fled their country.

On June 19, 1980, the President issued Proclamation 4765, "Afghanistan Relief Week", in which he proclaimed the week of July 21 through July 27, 1980, as Afghanistan Relief Week, and urged Americans to join with international relief agencies in assisting and helping the Afghan refugees in their struggle for survival.

3 CFR, 1980 Comp. (Jan. 1, 1981), pp. 67-68; Dept. of State Bulletin, Vol. 80, No. 2041, Aug. 1980, p. 72.

Technical Assistance

Caribbean and Pacific Territories

Public Law 96-597, approved December 24, 1980, 94 Stat. 3477, authorized appropriations for American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the Trust Territory of the Pacific Islands, and the Virgin Islands.

Several provisions under Title VI of the act were directed toward the economic betterment of these insular areas, among them section 601, providing for general technical assistance, including agricultural assistance and food for the peoples from Eniwetok Atoll and Bikini Atoll as well as the extension of agricultural programs administered by the Department of Agriculture to all Caribbean and Pacific Territories of the United States. Section 601 read, in part:

SEC. 601. GENERAL TECHNICAL ASSISTANCE.-(a) The Secretary of the Interior is authorized to extend to the governments of American Samoa, Guam, the Northern Mariana Islands, the Virgin Islands, and the Trust Territory of the Pacific Islands, and their agencies and instrumentalities, with or without reimbursement, technical assistance on subjects within the responsibility of the respective territorial governments. . . . Technical assistance may include research, planning assistance, studies, and demonstration projects.

(b) The Secretary of the Interior is further authorized to provide technical assistance to, and maintenance of agricultural plantings and physical facilities for, the peoples from Enewetok [sic] Atoll and Bikini Atoll, as well as for the purchase of food and equipment and for the transportation of such food, equipment and persons as he deems necessary and appropriate until such areas produce sufficient food to fully sustain the residents after resettlement. This provision shall not cease to be applicable either before or after the termination of the trusteeship without the express approval of the United States Congress.

On April 21, 1980, President Carter forwarded to the Senate for advice and consent to ratification, the Agreement between the United States of America and the Republic of Malta with Respect to Taxes on Income, with a related exchange of notes, signed at Valletta on March 21, 1980.

The President explained in his letter of transmittal that the treaty followed the pattern of the United States model income tax convention for the most part, although there were some deviations from the model to accommodate Malta's status as a developing country.

In an accompanying letter of submittal to the President, dated April 10, 1980, Secretary of State Cyrus R. Vance reported:

In the Treaty, business profits of an enterprise of one country may be taxed by the other only if they are attributable to a per

manent establishment in the other country. However, the definition of a permanent establishment is somewhat more broadly drawn in the Treaty than in the model convention. Similarly, with respect to independent personal service income, an individual who is a resident of one State may be taxed by the other on the income from personal services performed in the other State only if certain tests are met. However, the time threshold is shorter in the Treaty than in the model, and a dollar threshold is added.

Maximum rates of tax are established for the taxation by the source country of dividends, interest and royalties. With respect to dividends, the rules for United States taxation of United States source dividends are the same as in the model (15 percent in general, but 5 percent on subsidiary dividends). The rule for Maltese tax on Maltese source dividends is different, to take account that Malta's corporation and shareholder taxes are fully integrated. The Treaty provides that the tax payable to Malta on such dividends shall not exceed that chargeable on the paying company, although it may be lower, depending on the Maltese tax status of the United States shareholder.

Interest and royalties are both taxable at the source at a maximum rate of 12.5 percent, except that interest received by a Contracting State and cultural royalties are exempt at the source. As with dividends, Malta's tax may be below the specified limits, depending on the tax status in Malta of the United States income recipient.

The Treaty contains the usual rules relating to real property income, shipping income, capital gains, the treatment of entertainers, students, teachers, pensioners and government employees, nondiscrimination and administrative cooperation.

The exchange of notes sets forth certain understandings reached between the two Governments as follows:

(1) Although the United States is unable to accept the inclusion in the Treaty of additional provisions which would create incentives to promote the flow of investment to Malta, the Government of the United States would be prepared, should circumstances change, to reopen discussions with a view to including such provisions in the Treaty.

(2) Profits from the operation of a ship in international waters to which paragraph (5) of Article 8 (Shipping and Air Transport) applies shall be deemed to constitute profits to which the provisions of Article 7 (Business Profits) shall apply.

(3) The Treaty provides for a tax rate limit of 121⁄2 percent on gross interest and gross royalties. Malta will apply the 122 percent limitation by multiplying the total tax chargeable by a fraction having the net interest or royalty, respectively, as its numerator and the total income as its denominator. Malta will bring to charge [i.e., subject to tax] the interest and royalty income as part of the total income of the recipient which is subject to Malta tax after allowance of expenses proved to have been incurred in the production of that income.

S. Ex. E. 96th Cong.. 2d sess. (1980), pp. v-vi.

Hearings were held on September 24, 1981, on the Agreement, ante, and a number of other tax treaties.

John E. Chapoton, Assistant Secretary of the Treasury, Tax Policy, appeared as the principal witness for the Department of the Treasury, which had negotiated all of the treaties over a period of several years, principally during 1980. Assistant Secretary Chapoton emphasized that the treaties were endorsed by the Reagan Administration. He then reviewed the factors that had led to their negotiation, as well as the general structure and function of income tax treaties, particularly those with developed countries, and specific issues addressed in income tax treaties with developing countries. Portions follow:

*

THE PURPOSE OF TAX TREATIES

The treaties under consideration today include three full or partial renegotiations of existing treaties and seven new treaties. The basis on which decisions are made to enter into a new treaty relationship with a particular country, or to revise or replace an existing treaty, can be summarized as follows:

With respect to initial negotiations, and for the reasons which are outlined below, we seek to have a tax treaty with all of our major trading partners. Our existing treaty network, as well as several of the treaties currently pending, illustrate that we enter into treaties with countries with which we have meaningful economic relations. In addition, for other reasons, described below, we seek to have a tax treaty with jurisdictions that do not constitute major trading partners. This is illustrated by several of the treaties currently pending. Negotiations with these countries may have been initiated for one or more reasons: (1) As our economic relations with a given country expand, we will propose negotiations, especially to reduce tax problems experienced by those American firms which are deriving income from that country. (2) We may have an interest in opening markets in a country, which can be facilitated by the presence of a treaty. (3) We may enter into a treaty with a country, particularly a developing country, in response to both economic and foreign policy considerations, in an effort to promote the economic development of the other country. (4) The impetus for discussions may have come from the other country which perceives a need for a tax treaty with the United States. (5) There may be instances where, because of a prior treaty relationship, possibly through the extension of a U.S. treaty to an overseas territory of our treaty partner, we feel some obligation to maintain a treaty relationship which we might not otherwise initiate.

With respect to renegotiations, if tax treaties become static, they may cease to serve their intended purposes, or do so poorly, as economic conditions, tax systems and the nature of business and commercial relations change. Thus, we frequently find it necessary to renegotiate existing treaties. In fact, we devote a major

part of our treaty negotiating resources to the revision or replacement of our existing treaties.

*

THE NATURE OF TAX TREATIES

Due in large part to the work of the Organization for Economic Cooperation and Development (OECD) in developing a Model Income Tax Treaty, the general form and structure of income tax treaties has become largely standardized. The United States first published a model treaty in 1976 which was replaced by a new Model in 1977. A draft revision of the 1977 Model was recently released for public comment and will be finalized after comments have been considered. The 1977 Model, as well as the draft revised Model, follows the pattern of the OECD Model, and forms the starting point for the United States in tax treaty negotiations. This is not to say that all tax treaties are identical. The Model must be adapted, in each case, to reflect the particular policy needs of each country, the economic and commercial relations between the two countries, the need to mesh the provisions of two different tax systems and, finally, the levels of economic development of the two treaty partners.

Despite the inevitable differences among tax treaties, it is possible to describe the general principles and approaches embodied in all tax treaties:

Income tax treaties reduce the prospect of double taxation of international flows of income. In general, with respect to any particular item of income, the country in which the income arises the source country-is required by the treaty, under specified circumstances, to reduce or eliminate its tax in favor of the tax in the country of residence of the recipient. In return, the country of which the taxpayer is a resident is obligated to relieve double taxation with respect to the tax which is imposed in the source country, by allowing a credit or exempting the income, as the case may be. As under internal law, United States treaties use the credit mechanism. In the normal treaty relationship there are flows of income in both directions. Each country, therefore, will give up tax on income from sources in its country and each country will provide a credit with respect to income of its residents from sources in the other country.

Treaties permit the establishment of common definitions of terms and of rules for allocating income and expenses. They also provide rules for determining a single country of residence for persons subject to the treaty who might otherwise be considered a resident of both countries under their respective internal laws.

With respect to business profits, treaties provide that a resident of one country who engages in business in the other may be taxed by the host country only to the extent that the nonresident's business venture has made a substantial economic penetration into the host country by virtue of having a "permanent establishment" there. Income from international shipping and air transport is normally treated differently from other business profits by providing that only the country of residence of the operator may tax, regardless of whether there is a permanent establishment in the other country.