VII. BUDGET IMPACT

The Committee has been informed by the staff of the Joint Committee on Taxation that the proposed treaty is estimated to have a minimal negative effect on annual budget receipts.

VIII. EXPLANATION OF TREATY PROVISIONS

Set forth below is a detailed, article-by-article explanation of the proposed income tax treaty and, where applicable, the proposed protocol between the United States and Tunisia.

ARTICLE 1. PERSONAL SCOPE

As a general rule, the proposed treaty applies to residents of the United States or Tunisia or of both countries. For purposes of the proposed treaty, the definition of a resident of the United States or Tunisia is set forth in the article on fiscal domicile (Article 4). There are certain exceptions to the general application of the proposed treaty to residents of the United States or Tunisia. For example, the article dealing with general rules of taxation (Article 22) provides, among other things, that either country reserves the right to tax its citizens (and in certain cases former citizens) or residents in accordance with its domestic laws as if the proposed treaty was not in effect. In addition, other provisions of the proposed treaty, such as provisions related to exchange of information. and administrative assistance (Article 26) and the source rule for interest payments (Article 11(6)), may apply to persons not specified in Article 1.

ARTICLE 2. TAXES COVERED

In the case of the United States, the proposed treaty applies to the Federal income taxes imposed under the Code. It does not apply, however, to the accumulated earnings tax, the personal holding company tax, or social security taxes. In addition, the proposed treaty generally does not apply to non-income taxes such as excise, unemployment, estate, or gift taxes. Likewise, state and local taxes generally are not covered by the proposed treaty.

In the case of Tunisia, the treaty applies to the following taxes: the tax on industrial and commercial profits; the tax on corporations; the tax on capital gains on real property; the tax on profits of non-commercial professions; the tax on wages, salaries, and pensions; the agricultural tax; the tax on dividends; the tax on income from credits, deposits, guarantees and current accounts; the personal income tax; and the extraordinary tax for national solidarity.

The proposed treaty contains a provision generally found in U.S. income tax treaties to the effect that it also will apply to any identical or substantially similar taxes that either country may subsequently impose.

• The excise tax imposed on insurance premiums paid to foreign insurers is not covered under the proposed treaty, although this is a covered tax under the U.S. model treaty, as well as under some recent U.S. income tax treaties. The preferred U.S. treaty position for some countries does not include coverage of this excise tax.

Additionally, the non-discrimination provisions of the proposed treaty (Article 24) apply to all taxes of every kind imposed at the national, state, or local level by the United States or Tunisia.

ARTICLE 3. GENERAL DEFINITIONS

The proposed treaty contains some of the standard definitions found in most U.S. income tax treaties.

The term "person" is defined to include an individual, a company, an estate, a trust, or any other body of persons. As explained in the Treasury Department's Technical Explanation of the proposed treaty, a partnership is included in this definition under the phrase "any other body of persons.'

The term "company" means any body corporate or any entity that is treated as a body corporate for tax purposes.

The terms "enterprise of a Contracting State" and "enterprise of the other Contracting States" mean, respectively, an enterprise carried on by a resident of one of the treaty countries and an enterprise carried on by a resident of the other treaty country.

The U.S. competent authority is the Secretary of the Treasury or his delegate. The U.S. competent authority function has been delegated to the Commissioner of Internal Revenue, who has redelegated the authority to the Assistant Commissioner (International) of the IRS. On interpretive issues, the latter acts with the concurrence of the Associate Chief Counsel (International) of the IRS.

The Tunisian competent authority is the Minister of Finance, or his representative.

For purposes of the proposed treaty, the "United States" means the United States of America. When used in a geographical sense, the term includes the fifty States, the District of Columbia, and the area adjacent to the U.S. territorial sea over which, in accordance with international law, the United States may exercise rights with respect to the natural resources of the seabed and marine subsoil. The definition is intended to cover the U.S. continental shelf consistent with the definition of continental shelf contained in section 638 of the Code. The Committee understands, as explained in the Technical Explanation, that the term "United States" does not include Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or territory.

The term "Tunisia" means the Republic of Tunisia. When used in a geographical sense, the term includes the territory of the Republic of Tunisia and the area adjacent to the Tunisia territorial sea over which, in accordance with international law, Tunisia may exercise rights with respect to the natural resources of the seabed and marine subsoil.

The proposed treaty defines "international traffic" as any transport by a ship or aircraft, except where the transport is solely between places in the other treaty country. Accordingly, with respect to a Tunisian enterprise, purely domestic transport in the United States is excluded from this definition.

The proposed treaty provides that any term which it does not define is to have the meaning it has under the applicable law of the country applying the proposed treaty, unless the context otherwise requires. According to the Technical Explanation, if the mean

ing of an undefined term under one country's law is different from its meaning under the other country's law, or is not readily determinable under either country's law, the competent authorities of the two countries may establish a common meaning for the undefined term.

ARTICLE 4. FISCAL DOMICILE

The assignment of a country of residence is important because the benefits of the proposed treaty generally are available only to a "resident" of one of the countries as that term is defined by the proposed treaty. Furthermore, double taxation is often avoided by the proposed treaty assigning one of the countries as the country of residence where, under the laws of the countries, a person is a resident of both.

Under U.S. law, residence of an individual is important because a resident alien is taxed on his or her worldwide income, whereas a nonresident alien is taxed only on U.S. source income and on income that is effectively connected with a U.S. trade or business. A company is a resident of the United States if it is organized in the United States. Under the standards for determining residence provided under U.S. law, an individual who spends substantial time in the United States in any year or over a three-year period generally is a U.S. resident. A permanent resident for immigration purposes also is a U.S. resident. The standards for determining residence provided under U.S. law do not alone determine the residence of a U.S. citizen for the purpose of any U.S. tax treaty (such as a treaty that benefits residents, rather than citizens, of the United States).

Under the proposed treaty, the term "resident of a Contracting State" means the United States and Tunisia (or any political subdivision or local authority of either), and any person who under the laws of either the United States or Tunisia is subject to tax in that country by reason of his or her domicile, residence, place of management, place of incorporation, or any other criterion of a similar nature. The Committee understands that, as reflected in the Technical Explanation, a partnership is considered a resident of either country only to the extent that the income it derives is subject to tax as the income of a resident of the country. For example, if the share of Tunisian partners in the income of a partnership is only one-half, the United States would have to reduce its withholding tax on only one-half of the U.S. source income paid to the partnership.

Under this article of the proposed treaty, U.S. citizenship alone does not establish U.S. residency for treaty purposes. As a result, U.S. citizens residing overseas (in countries other than Tunisia) generally are not entitled to the benefits of the proposed treaty as U.S. residents. Only in very few U.S. income tax treaties has the United States negotiated coverage for nonresident U.S. citizens. The proposed treaty provides that Tunisia must treat a U.S. citizen or alien admitted to the United States for permanent residence (i.e., a U.S. “green card" holder) as a U.S. resident only if the individual has a substantial presence, permanent home, or habitual abode in the United States.

The fiscal domicile article also provides a set of "tie-breaker” rules to determine residence in the case of an individual who, under the basic residence rules, is considered a resident of both the United States and Tunisia. These rules are similar to those contained in the U.S. model treaty. Such a dual resident individual will be deemed to be a resident of the country in which he has a permanent home available to him. If this permanent home test is inconclusive because the individual has a permanent home in both countries, the individual's residence is deemed to be the country with which his personal and economic relations are closer, i.e., his "center of vital interests." If the country in which he has his center of vital interests cannot be determined, or if he does not have a permanent home available to him in either country, he shall be deemed to be a resident of the country in which he has an habitual abode. If the individual has an habitual abode in both countries or in neither of them, he shall be deemed to be a resident of the country of which he is a national. If he is a national of both countries or neither of them, the competent authorities of the countries are to settle the question of residence by mutual agreement.

In the case of a dual resident person other than an individual, the proposed treaty requires the competent authorities of the two countries to endeavor to settle the question by mutual agreement and to determine how the proposed treaty applies to that person. Dual residency may occur, for example, in the case of a corporation as a result of the differing standards for determining residency under the domestic laws of the United States and Tunisia. Under U.S. law, a corporation is considered a resident of the United States if it is organized or incorporated under the laws of the United States or of any State. By contrast, Tunisia treats any corporation, wherever organized or incorporated, as a resident of Tunisia if its place of effective management is in Tunisia. The Committee understands, based on information provided by the Treasury Department, that the U.S. competent authority has never agreed to treat a U.S.-incorporated company as a nonresident of the United States for treaty purposes, and as a matter of policy never would so agree.

ARTICLE 5. PERMANENT ESTABLISHMENT

The proposed treaty contains a definition of the term "permanent establishment" that, subject to certain modifications, generally follows the pattern of other recent U.S. income tax treaties, the U.S. model treaty, and the OECD model treaty.

The permanent establishment concept is one of the basic devices used in income tax treaties to limit the taxing jurisdiction of the host country and thus mitigate double taxation. Generally, a resident of one country is not taxable by the other country on its business profits unless those profits are attributable to a permanent establishment of the resident in that other country. In addition, the permanent establishment concept is used to determine whether the reduced rates of, or exemptions from, tax provided for dividends, interest, and royalties apply, or whether those amounts are taxed as business profits.

In general terms, under the proposed treaty, a permanent establishment is a fixed place of business through which a resident of one country engages in business in the other country. A permanent establishment includes (but is not limited to) a place of management, branch, office, factory, workshop, or a mine, oil or gas well, quarry, or other place of extraction of natural resources. A permanent establishment also includes a building site, construction, assembly, or installation project, or an installation, drilling rig, or ship used for the exploration or development of natural resources, or related supervisory activities, but only if the site, project, or activity lasts for more than 183 days in any 365-day period. This 183day rule differs from the 12-month rule of the U.S. model.

The general permanent establishment rule is modified to provide that a fixed place of business in one country which is only used by a resident of the other country for any or all of a number of specified activities does not constitute a permanent establishment. These activities include the use of facilities solely for storing, displaying, or delivering goods or merchandise belonging to the enterprise; the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, delivery, or processing by another enterprise; and the maintenance of a fixed place of business solely to purchase goods or merchandise, to collect information, or to carry on any other activity of a preparatory or auxiliary character (the Committee understands that these could include, for example, advertising, supplying information, or scientific research), for the enterprise. In addition, the maintenance of a fixed place of business solely for any combination of the activities listed in this paragraph does not constitute a permanent establishment as long as the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

If a resident of one country maintains an agent in the other country who has, and habitually exercises, the authority to conclude contracts in that other country in the name of the resident, then the resident generally is deemed to have a permanent establishment in that other country. This rule does not apply where the contracting authority is limited to those activities, such as storage, display, or delivery of merchandise (as described in the preceding paragraph) that are excluded from the definition of permanent establishment. The proposed treaty contains the usual provision that the agency rule does not apply if the agent is a broker, general commission agent, or other agent of independent status acting in the ordinary course of his or her business.

The fact that a company which is a resident of one country controls, or is controlled by, a company which is a resident of the other country or which is engaged in business in that other country (whether through a permanent establishment or otherwise) does not in and of itself constitute either company a permanent establishment of the other.

The proposed treaty provides a special rule for the determination. of the existence of a permanent establishment in the case of companies engaged in insurance activities. Generally, if an insurance company that is a resident of one of the countries earns premiums from, or insures risks in, the other country, then it is considered to