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Second Circuit, involved interpretation of the 1942 convention between the United States and Canada for the avoidance of double taxation and prevention of fiscal evasion in the case of income taxes (TS 983; 56 Stat. 1399; entered into force June 15, 1942), as modified and supplemented. The case came before the Court on appeal from a decision of the U.S. District Court for the Southern District of New York holding that the Internal Revenue Service (IRS) could not use its summons authority under 26 U.S.C. 7602 to obtain information from American-based corporations for the purpose of a Canadian tax investigation where there was no U.S. interest in the investigation or claim of U.S. tax indebtedness.

The Court of Appeals reversed, upholding the IRS contention that it was entitled under the 1942 tax convention to use its summons power to obtain information solely for a Canadian tax investigation. The Court objected to a narrow reading of the statute in the light of the broad purposes of the Treaty, as reflected in Article XIX regarding exchange of information and Article XXI on cooperation between the respective tax authorities. Said the Court:

. . It would totally frustrate the convention if we were now to hold that the examination process set forth in our Code is in any event unavailable because it can only be employed if there is an American tax liability. We think the fair reading of the Treaty is that if Canada is investigating the tax liability of one who is potentially delinquent to it, then the United States may utilize the same investigative techniques that it would employ if that person were under investigation here for a domestic tax liability. To do otherwise would negate the very purpose of the Treaty.

The Court relied also on the general rule that “treaties are to be broadly construed to enable the intent of the treaty to be enforced," as well as on 26 U.S.C. 7852(d), enacted after the treaty, which provides that no provision of the Internal Revenue Code shall apply where its application would be contrary to any treaty obligation in effect on the date of enactment of the Code.

To the appellees' contention that Canadian tax authorities are directed to furnish only such information as they can obtain under Canadian revenue laws, the Court held that a differing interpretation by Canada was not relevant to the U.S. interpretation, which had been approved by the Office of the Legal Adviser, Department of State, and the Office of International Tax Counsel, Department of the Treasury, and had been consistently maintained by the United States. Citing Charlton v. Kelly, 229 U.S. 447 (1913) and Factor v. Laubenheimer, 290 U.S. 276 (1933), the Court held it was the duty of the government and the courts to adhere to the government's own asserted obligations under the treaty as long as the treaty remained in force.

Appellees also sought to rely on Article 26 of the Model Treaty of the Organization for Economic Cooperation and Development (OECD), which states in effect that a state is not bound to go beyond its own internal laws and administrative practice in putting information at the disposal of the other party. The Court noted, however, that the January 1975 revised commentary to the Model Treaty stated that "types of administrative measures authorized for the purpose of the requested states' tax must be utilized even though invoked solely to provide information to the other contracting state.”


The United States and the Arab Republic of Egypt, on October 28, 1975, signed a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. The primary objective of the convention is to promote economic and cultural relations between the two countries and to foster a more rapid rate of economic development in Egypt by removing tax barriers to the flow of goods and investment and the movement of businessmen, technicians and scholars. It establishes rules for the taxation of business, personal service, and investment income earned by residents of one country from sources in the other. The convention is similar in most respects to other recent U.S. income tax treaties, but has variations with respect to dividends, personal services income, interest, and royalties which, in general, either reflect Egypt's status as a developing country by minimizing any adverse impact on Egypt, or which are designed to accommodate particular features of Egyptian law.

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


On November 20, 1975, the United States and Israel signed an income tax convention similar in most respects to other U.S. income tax treaties, but with some novel features. The article on grants provides that if Israel makes a cash grant to an American investor, and the grant is not in payment for goods or services and is not measured by the amount of profits or tax liability, the United States will treat the grant as a nontaxable contribution to capital. This confirms by treaty the treatment that would generally apply under U.S. law. Israel's compulsory loans are to be treated as taxes so that the United States will allow a foreign tax credit, on condition that when the loans are repaid, they are to be treated as a refund of taxes with appropriate adjustments to U.S. tax liability at that time.

On capital gains, Israel may tax the gain of a U.S. resident on the sale of the shares of stock in an Israeli corporation if the resident owns more than 50 percent of the voting power of the Israeli corporation and a majority of that corporation's business assets are located in Israel. The general withholding rate on interest would be 17.5 percent; interest derived by a financial institution would be taxed at a maximum rate of 10 percent; and interest derived, guaranteed, or insured by a government or agency thereof would be exempt by the other state. The maximum withholding rate on industrial royalties will be 15 percent, and that on copyright or film royalties would be 10 percent.

See S. Ex. C, 94th Cong., 1st Sess.


On December 26, 1975, a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital entered into force between the United States and Iceland, with effect for calendar years or taxable years beginning on or after January 1, 1976 (TIAS 8151; 26 UST 2004). The treaty is essentially like other recent treaties, but a special rule is provided in the nondiscrimination article under which Iceland will allow its deduction for dividends paid with respect to the income of a U.S. permanent establishment in Iceland. A provision dealing with certain treaty abuse situations provides that under appropriate circumstances, when a corporation furnishes the services of others, the income of that corporation will not be considered as industrial and commercial profits. The host country, therefore, can tax the income of such corporation whether or not the corporation has a permanent establishment there.


On December 30, 1975, the United States and the Soviet Union exchanged ratifications of a convention on matters of taxation (TIAS 8225; 26 UST) which, through a system of exemptions, is intended to largely insulate the entities and citizens of the respective parties from income tax in the other state. The convention entered into force, in conformity with its terms, on January 29, 1976, with effect from January 1, 1976.

See the 1973 Digest, p. 388, or S. Ex. T, 93d Cong., 1st Sess., for further description of the terms of the convention.

U.S.-United Kingdom

The United States and the United Kingdom, on December 31, 1975, signed a new income tax convention to replace the 1945 convention between the two countries (TIAS 1546; 60 Stat. 1377), as supplemented (TIAS 3165, 4124, 6089, 4141; 6 UST 37, 9 UST 1329, 17 UST 1254, 9 UST 1459). The new article on dividends represents a new approach to meshing, by treaty, two tax systems which differ sharply in their treatment of corporations and their shareholders. It is intended to mitigate discrimination against U.S. investors in the United Kingdom under the British "imputation system" under which a portion of the tax collected at the corporate level is refunded to a British shareholder to satisfy his tax liability on a dividend distribution.

Another new provision is found in the article on associated enterprises, which represents the first attempt to bind State and local taxing authorities by a substantive provision of the treaty (other than nondiscrimination). Under the rules of other tax conventions a State is prohibited from taking into account, in determining the tax liability of an enterprise doing business in that State, the income or expenses of related enterprises of the other State, or in other countries if those enterprises are not engaged in business in the State, except to the extent that intercompany transactions are not conducted on an arm's length basis. This treaty, for the first time, extends this limitation to State and local tax authorities with respect to enterprises controlled by United Kingdom residents. The treaty also clarifies the manner in which the United Kingdom may tax the U.S. source income of U.S. citizens residing in the United Kingdom and United Kingdom branches of U.S. corporations.

Dept. of State File L/T.

$ 5

Foreign Assets Control

Blocking of Foreign Assets

Cambodia and South Viet-Nam

On April 17, 1975, the Office of Foreign Assets Control, Department of the Treasury, blocked all financial and commercial transactions with Cambodia by persons subject to the jurisdiction of the United States unless first licensed by the Office of Foreign Assets Control. The action was taken under the Foreign Assets Control Regulations (Code of Federal Regulations, Title 31, Subtitle B, Ch. V, Part 500) and was approved by the National Security Council. It was followed by an instruction to domestic banks to block all Cambodian accounts immediately. The Department of the Treasury estimated the value of Cambodian short term assets in the United States as of December 1974 at $4 million, but stated that the value of other assets owned by Cambodians, including real estate and securities, was not known.

Under the Department's order, foreign subsidiaries of American firms were prohibited from trading with Cambodia without a license. The Department's announcement also noted that humanitarian relief sent by Americans to Cambodia required a license, regardless of what country it was being shipped from.

Sections 500.201(d) and 500.322 of the Foreign Assets Control Regulations were amended effective April 17, 1975, to reflect the blocking of Cambodian assets.

Dept. of the Treasury News, Apr. 18, 1975. Fed. Reg., Vol. 40, No. 76, Apr. 18, 1975, p. 17262

The Department of the Treasury announced on April 30, 1975, at the request of the Department of State, that Foreign Assets Control Regulations became effective that day with respect to South Viet-Nam. The effect of the Regulations was to prohibit all financial and commercial transactions with South Viet-Nam unless permitted by license by the Office of Foreign Assets Control, Department of the Treasury. The action included the blocking of South Vietnamese Government accounts in the United States and overseas, as well as all accounts of persons acting or purporting to act on behalf of South Viet-Nam who were not then in the United States. Accounts of private and official Vietnamese then in the United States were not affected. Accounts of South Viet Nam officials overseas who were no longer acting, or purporting to act, on behalf of South Viet-Nam were likewise not affected.

On the following day the Foreign Assets Control Office filed an amendment of Section 500.201 of the Foreign Assets Control Regulations (Code of Federal Regulations, Title 31, Subtitle B, Ch. V, Part 500) to reflect the April 30 blocking of South Viet Nam assets, as well as the blocking of Cambodian assets on April 17, 1975. It also announced that corresponding amendments were being made in Sections 500.204, 500.322, and 500.541, dealing respectively with importation of and dealings in certain merchandise, authorized trade territory, and certain transactions by persons in foreign countries. At the same time the Foreign Assets

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