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With respect to personal service income, treaties generally provide that a resident of one country who is temporarily present in the other for the purpose of providing personal services, either in a dependent (employee) or independent (contractor non-employee) capacity, will not be subject to tax in the host country unless certain threshold tests are met, generally including a specified physical presence there during the taxable year.

Treaties provide for reduced rates of withholding tax at source on investment income (dividends, interest and royalties) by the host country so that the aggregate tax burden on the investor will not exceed that which he would pay if he invested at home. Source country taxation of certain classes of capital gains of nonresidents is also restricted.

Treaties assure non-discriminatory treatment under the tax laws of one country for residents of the other or for corporations of the first country owned by residents of the other. In a tax treaty, nondiscrimination means national treatment. That is, simply stated, the tax burden in one country on a resident of the other should not exceed the burden on its own residents in similar circumstances.

Treaties also authorize consultation and exchange of information between the tax authorities of the two countries both as to matters of tax evasion and to prevent cases of double taxation.

U.S. TAX TREATY POLICY

In addition to the general features of all tax treaties, there are certain particular features which the United States includes in its tax treaties. The most important of these is the so-called "saving clause" under which the United States preserves its full statutory right (with certain necessary exceptions) to tax its residents and its citizens, wherever resident, or their worldwide income, consistent with our internal law.

U.S. tax treaties also include anti-abuse provisions designed to prevent residents of third countries from channeling investments into the United States through the treaty country, thereby deriving treaty benefits to which they are not justifiably entitled. These provisions act to deny treaty benefits (i.e., exemption or reduction of source basis tax in the United States) in such circumstances. Thus, if a resident of a third country establishes a corporation in the treaty country to make his investment in the United States, under appropriate circumstances the anti-abuse provisions would permit the United States to impose its full statutory tax on payments to such a corporation.

It is established U.S. tax treaty policy to include such anti-abuse provisions in tax treaties. The present Model and the draft proposed Model reflect experience gained in negotiating from the 1977 Model. The proposed provision is tighter than that in the 1977 Model though it may well be modified before it is published in final form, on the basis of comments from the public. Even after it is made final I would expect that it will be modified in the course of the negotiation of particular treaties to reflect the U.S. negotiators' perceptions of the potential for abuse in that treaty as well as

the needs of the treaty partner. I wish the Committee to understand that this Administration views a tax treaty, in essence, as a contract between two countries designed to benefit directly the residents of those two countries, and not indirectly residents of third countries. Anti-abuse provisions, therefore, will be employed wherever necessary, and in the form appropriate to the circumstances, to assure that U.S. treaties extend U.S. tax benefits consistent with this overall policy.

The United States also now preserves in our new treaties the statutory right granted by Congress last year to tax gains of a resident of the treaty partner on the disposition of real property in the United States and of shares in a U.S. corporation which holds U.S. property. The treaties before you today (with the exception of the treaty with the Philippines) contain provisions that reflect, in part, the new Internal Revenue Code (Code) sections. However, certain of the new Code provisions, such as those contained in section 897(i), provide the exclusive remedy for nondiscrimination, and thereby prevail over these proposed treaties in that regard.

United States treaties also provide, as do treaties of many other countries, that a treaty cannot serve to deny benefits to a taxpayer which are available under the internal law. Thus, for example, if a treaty provides that an item of income may be taxed by the United States, the United States can exercise that right only if, and to the extent that, the taxing right is also provided for in the Code.

REVENUE EFFECT

In addition to focusing on matters of double taxation, tax policy and tax administration, U.S. negotiators also consider the revenue impact of tax treaties. Tax treaties have two basic and offsetting effects on U.S. (and foreign) tax revenues. Each country reduces its tax on income from sources in that country derived by residents of the other. This generates a revenue loss. With respect to income of its residents from sources in the other country, the first country is obligated to credit the taxes of the other. Where the United States is the residence country, this in general merely confirms the credit already provided for by the Code. Thus, the commitment by the United States to grant a credit does not in the normal case result in a revenue loss. To the contrary, because of reductions by the other country in source basis taxation of the income of U.S. residents, foreign tax credits will be reduced and U.S. revenues will generally increase. The net revenue effect will, of course, depend on the relative magnitudes of these opposite effects.

Where, as is frequently the case, the United States is a net capital exporter in a particular bilateral relationship, the flow of investment income back to the United States can generally be expected to exceed the flow of income payments to the other country from the United States. Since reductions in tax at source are generally reciprocal, the U.S. revenue gain from reduced foreign tax credits resulting from reductions in source basis tax in the other country can be expected to exceed the U.S. revenue loss from reductions in U.S. source basis taxation.

Where possible, we attempt to measure the net revenue impact of a tax treaty. This is generally possible, however, only for some issues in treaties with our largest treaty partners, where data are available. In such cases, we take into account the revenue impact as one element in our policy determinations. In most cases, however, data are not available in sufficient detail to permit the measurement of revenue effects. In these cases where, in any event, the magnitudes are likely to be small, our negotiating positions are primarily premised to achieving the broad objectives of avoiding double taxation and assisting the Internal Revenue Service (IRS) in the administration of the tax laws.

DEVELOPING COUNTRY TAX TREATIES

Eight of the treaties before you today are with developing countries. This represents a major step forward in our income tax treaty program. To date, we have very few treaties in force with developing countries. In the past, these countries have been reluctant to enter into tax treaties with the United States, largely because of our inability to agree to the inclusion of an explicit incentive for U.S. investment in the treaty partner. In recent years, as reflected in today's agenda, an increasing number of developing countries have accepted the view that an income tax treaty with the United States can be a valuable tool in a campaign to attract investment, even in the absence of an explicit investment incentive. The Administration believes that it is important for these treaties to be brought into force as quickly as possible, both in order to improve economic relations with these countries and strengthen their development process, and to encourage other developing countries to negotiate treaties with the United States.

It has long been recognized that tax treaties between developed and developing countries pose particular kinds of problems that are not adequately dealt with in the OECD and U.S. Models, which were designed for treaties between developed countries. In that regard, the United Nations convened a Group of Experts in 1968 to study this problem. The United States has been an active participant in this Group, whose work culminated in 1980 with the publication of a Model Income Tax Treaty between Developed and Developing Countries. Though this Model is based, in form, on the OECD Model, it deviates in many significant respects, as I will indicate.

The essence of the developing country treaty problem can be summarized as follows. In the typical bilateral economic relationship between a developed and a developing country, capital, technology and services flow in substantial part to the developing country and the income therefrom flows in large part from the developing country to the developed country. In a standard OECDtype tax treaty, it is the source country which makes the major revenue sacrifice. This places the developing country on the horns of a dilemma. It recognizes that it must reduce its frequently high source basis taxation in order to attract and hold foreign capital and technology, but it cannot afford the revenue sacrifice which would result from entering into a standard income tax treaty.

The solution typically sought by developing countries, as reflected in the U.N. Model, is to reduce source basis taxation to some extent, though not to the extent of the standard models, and to ask the developed country to compensate the developing country for the revenue cost which is incurred by providing an incentive in the treaty for their residents to invest in the developing country. The incentive typically sought is the so-called "tax sparing credit," more properly "a credit for taxes spared" by the developing country. Under this type of a provision, a developed country, like the United States, which avoids international double taxation by means of a foreign tax credit, would give a credit for the developing country taxes which would have been paid but which were reduced or eliminated as a result of either a statutory provision granting a tax holiday to attract foreign capital, or under a provision contained in the treaty.

Historically, the United States has not extended such provisions to developing countries. Though this is not the appropriate time to discuss tax sparing or other incentives at length, it should be noted that the Senate has, over the years, rejected any efforts to grant such incentives which reduce by treaty the U.S. tax liability of U.S. investors.

The United States has, however, responded in its treaty policy to the other concern of developing countries-their need to conserve scarce revenues. When the provisions contained in these treaties with developing countries that are before you today are compared with the U.S. Model, it may be seen that we are prepared to be quite flexible in adapting the Model provisions to the needs of developing countries. In effect, Treasury has followed the approaches taken in the UN Model.

Tax Treaties: Hearing before the Sen. Comm. on For. Relations, 97th Cong., 1st sess. (1981), pp. 7-11.

The Committee on Foreign Relations reported the income tax convention with Malta favorably, subject to an amendment to Article 10, Dividends, that corrected a technical error in stating the 50 percent of gross income test applicable to company establishments in the taxing country. See, S. Ex. Rept. 97-30, 97th Cong., 1st sess. (1981), pp. 15-16.

On Nov. 18, 1981, the Senate adopted the Committee's recommended resolution of advice and consent to ratification to the convention, including the recommended amendment (and an understanding in regard to access to information exchanged under the convention). Cong. Rec., Vol. 127, Pt. 21 (1981), p. 27895.

On Dec. 3, 1981, President Reagan ratified the Agreement, subject to the amendment and understanding, which the Republic of Malta also ratified. Instruments of ratification and a related exchange of notes were exchanged at Valletta on May 18, 1982, and the Agreement accordingly entered into force on that date. TIAS 10567. Among other tax treaties transmitted during 1980 by President Carter to the Senate for advice and consent to ratification were:

(1) the Convention Between the Government of the United States of America and the Government of Jamaica for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, and a related exchange of notes, signed at Kingston on May 21, 1980, S. Ex. O, 96th Cong., 2d sess. (1980), reported at S. Ex. Rept. 97-40, 97th Cong., 1st sess. (1981), together with a Protocol thereto, signed July 17, 1981 at Kingston and transmitted under Treaty Doc. 97-17, 97th Cong., 1st sess. (1981); on Dec. 16, 1981, the Senate voted its advice and consent to the Convention

and its amending Protocol, subject to a reservation and an understanding, Cong. Rec., Vol. 127, Pt. 24 (1981), p. 32014. TIAS 10206, 10207; entered into force, Dec. 29, 1981. (2) the Convention Between the Government of the United States of America and the Government of the Arab Republic of Egypt for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Cairo on Aug. 24, 1980, S. Ex. U, 96th Cong., 2d sess. (1980), reported at S. Ex. Rept. 97-27, 97th Cong., 1st sess. (1981); on Nov. 18, 1981, the Senate voted its advice and consent to the Convention, subject to an understanding and a reservation, Cong. Rec., Vol. 127, Pt. 21 (1981), p. 27894. TIAS 10149; entered into force, Dec. 31, 1981.

(3) the Protocol Amending the Convention of December 3, 1971 Between the United States of America and the Kingdom of Norway for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Property (TIAS 7474), signed at Oslo, Sept. 19, 1980, S. Ex. Z, 96th Cong., 2d sess. (1980), reported at S. Ex. Rept. 97-32, 97th Cong., 1st sess. (1981); on Nov. 18, 1981, the Senate voted its advice and consent to ratification of the Protocol subject to an understanding, Cong. Rec., Vol. 127, Pt. 21 (1981), p. 27895. TIAS 10205; entered into force, Dec. 15, 1981.

§5

Foreign Assets Control

Extension of Authorities Under the

Trading With the Enemy Act

In a memorandum for the Secretary of State and the Secretary of the Treasury, dated September 8, 1980, President Carter informed them of his determination that the extension for one year, until September 14, 1981, of the exercise of certain authorities under the Trading With the Enemy Act, scheduled to terminate on September 14, 1980, was in the national interest.

The President's action, taken pursuant to the authority of section 101(b) of Public Law 95-223, approved December 28, 1977, 91 Stat. 1625, 50 U.S.C. App. 5 note, extended the exercise of the authorities under the Trading With the Enemy Act with respect to countries affected by: (1) the Foreign Assets Control Regulations, 31 CFR Part 500; (2) the Transaction Control Regulations, 31 CFR Part 505; (3) the Cuban Assets Control Regulations, 31 CFR Part 515; and (4) the Foreign Funds Control Regulations, 31 CFR Part 520.

Fed. Reg., Vol. 45, No. 177, Sept. 10, 1980, p. 59549; 3 CFR, 1980 Comp. (Jan. 1, 1981), pp. 334-335.

The President's notifications of his determination to the Speaker of the House and to the President of the Senate are referenced at Cong. Rec., Vol. 126, Pt. 19 (1980), pp. 24914, 25075.

P.L. 95-223, approved Dec. 28, 1977, 91 Stat. 1625, eliminated (in sec. 101(a) of its Title I (Amendments to the Trading with the Enemy Act), 50 U.S.C. App. 5 nt.) a national emergency other than war as a basis for exercise of certain authority under the Trading with the Enemy Act. Sec. 101(b) provided that, notwithstanding the amendment made by sec. 101(a), Presidential authorities being exercised under sec. 5(b) of the Trading with the Enemy Act with respect to a country on July 1, 1977, as a result of a national emergency declared by the President before that date, might continue to be exercised with respect to such country, except that, unless extended, exercise of such authorities would terminate (subject to the savings provisions in sec.

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