was signed on October 4, 1989. Presently, there is no income tax treaty in effect between the United States and Tunisia.

The proposed treaty was transmitted to the Senate for advice and consent to its ratification on March 13, 1986. The supplementary protocol was transmitted to the Senate for advice and consent to its ratification on January 24, 1990. The proposed treaty and supplementary protocol were the subject of a hearing before the Committee on Foreign Relations on June 14, 1990.

III. SUMMARY

The proposed treaty and protocol are similar to other recent U.S. income tax treaties, the 1981 proposed U.S. model income tax treaty (the "U.S. model"), and the model income tax treaty of the Organization for Economic Cooperation and Development (the "OECD model"). However, there are certain deviations from those documents.

As in other U.S. tax treaties, the objectives of the proposed treaty are achieved principally by each country agreeing to limit, in certain specified situations, its right to tax income derived from its territory by residents of the other country. For example, the proposed treaty provides that a country will not tax business income derived from sources within that country by residents of the other country unless the business activities in the first country are substantial enough to constitute a permanent establishment or fixed base (Articles 7 and 14). Similarly, the proposed treaty contains "commercial visitor" exemptions under which residents of one country performing personal services in the other country are not required to pay tax in the other country unless their contact with that other country exceeds specified minimums (Articles 14, 15, 17, and 20). The proposed treaty provides that dividends, interest, royalties, and certain gains derived by a resident of either country from sources within the other country generally are taxable by both countries (Articles 10, 11, 12, and 13). However, dividends, interest, and royalties received by a resident of one country from sources within the other country generally are to be taxed by the source country on a restricted basis (Articles 10, 11, and 12). In situations where the country of source retains the right under the proposed treaty to tax income derived by residents of the other country, relief from the potential double taxation generally is provided for by the country of residence allowing a foreign tax credit (Article 23).

Like other U.S. tax treaties, the proposed treaty contains a "saving clause" (Article 22(2)). Under this provision, the United States generally retains the right to tax its citizens and residents as if the treaty had not come into effect. In addition, the proposed treaty contains the standard provision that it does not apply to deny a taxpayer any benefits he is entitled to under the domestic law of the country or under any other agreement between the two countries (Article 22(1)); that is, the treaty only applies to the benefit of taxpayers.

The proposed treaty also contains a non-discrimination provision (Article 24) and provides for administrative cooperation and exchange of information between the tax authorities of the two coun

: tries to avoid double taxation and to prevent fiscal evasion with respect to income taxes (Article 26).

The proposed treaty differs in certain respects from other U.S. income tax treaties and from the U.S. model and OECD model treaties. Some of these differences are as follows:

(1) The U.S. excise tax on insurance premiums paid to a foreign insurer is not covered by the proposed treaty. Although this is consistent with several older U.S. tax treaties, the U.S. model and some recent U.S. treaties, such as the treaties with the United Kingdom, France, and Hungary, generally cover this excise tax. In addition, the excise taxes imposed with respect to private foundations are not covered by the proposed treaty, although they are covered by the U.S. model.

(2) Under the U.S. model, the term "United States" is defined as the United States of America, but does not include any U.S. possession or territory. The proposed treaty's definition of this term extends beyond the definition stated in the U.S. model to include those parts of the adjacent seas over which the United States may, in accordance with international law, exercise rights with respect to the natural resources of the seabed and marine subsoil. However, the U.S. model definition is understood to also include these territories.

(3) U.S. citizens who are not treated as U.S. residents under the proposed treaty's residence rules (Article 4) generally are not covered by the proposed treaty. The U.S. model does cover such nonresident U.S. citizens; however, the United States rarely has been able to negotiate coverage for them in its income tax treaties. The proposed treaty treats the governments of the two countries as treaty country residents (i.e., it extends treaty benefits to each government), whereas the U.S. model makes no mention of the respective treaty countries' governments in its article on residence.

(4) Both the proposed treaty and the U.S. model provide that a person who is taxable under the laws of a country by reason of that person's residence is considered a resident of that country for treaty purposes. The proposed treaty limits the application of this rule, however, in the case of certain persons who are treated as U.S. residents under the Code. That provision states that a U.S. citizen or an alien admitted to the United States for permanent residence (i.e., a "green card" holder) is considered a resident of the United States for purposes of the proposed treaty only if that individual has a substantial presence, a permanent home, or an habitual abode in the United States.

(5) The U.S. model specifies that in the case of income earned by a pass-through entity (such as a partnership, estate, or trust), the entity will be treated as a resident of a treaty country only to the extent that the income derived by the entity is subject to tax in that country as the income of a resident, either in the hands of the entity or in the hands of the entity's partners or beneficiaries. The proposed treaty omits this language, but it is understood by the Committee that a similar rule will apply to income derived by partnerships. The Committee further understands that a similar rule regarding income earned by trusts or estates is not relevant to the proposed treaty because those entities are not recognized under Tunisian law.

(6) Under the U.S. model, a dual resident corporation is automatically considered a resident of the country under whose laws it was created and is, thus, entitled to only the treaty benefits that other corporate residents of that country receive.1 By contrast, the proposed treaty provides that the determination of a single country of residence with respect to a dual resident company is effected through mutual agreement by the competent authorities of the two countries.

(7) The definition of a "permanent establishment" in the proposed treaty is broader, in certain respects, than the corresponding definitions in the U.S. model, the OECD model, and in many existing U.S. treaties. For example, the proposed treaty treats as a permanent establishment a building site, construction, assembly, or installation project, or an installation, drilling rig, or ship used for the exploration or exploitation of natural resources (or supervisory activities in connection therewith) that lasts for more than 183 days during any 365-day period. The U.S. and OECD models provide for a 12-month period before a permanent establishment is created in such cases (except that both models are silent with respect to certain related supervisory activities). Similar provisions reducing the 12-month threshold are found in some other U.S. tax treaties.

(8) The proposed treaty contains a provision, not found in either the U.S. or OECD model treaties, stating that an insurance company which is a resident of one of the countries is treated as having a permanent establishment in the other country if it uses an employee or other representative (other than a broker or independent agent acting in his or her ordinary course of business) in such other country for the purposes of receiving premiums from, or insuring risks in, that other country.

(9) The proposed treaty omits the standard treaty provision that provides investors in real property in the country not of their residence with an election to be taxed on a net basis with respect to income from such investments. Current U.S. law independently provides a net-basis taxation election to foreign persons (Code secs. 871(d) and 882(d)). Based on the Treasury's Technical Explanation, the Committee understands that, as a general rule, Tunisian law provides for taxation of income from real property on a net basis as well.

(10) The proposed treaty does not contain a definition of the term "business profits," although certain categories of business profits are defined in various articles. Many U.S. treaties and the U.S. model define business profits to include income from rental of tangible personal property and from rental or licensing of films or tapes. The proposed treaty, as amended by the proposed protocol, includes payments for the use of, or the right to use, industrial, commercial, or scientific equipment as royalties, which generally are subject to a 10-percent source-country withholding tax imposed on a gross basis. Furthermore, income from rental or licensing of films or tapes also is treated as royalties under the proposed treaty

1 Under the OECD model, a dual resident corporation is considered a resident of the country in which its place of effective management is situated.

and protocol, subject to a 15-percent source-country withholding tax.

(11) The proposed treaty, the U.S. model, and the OECD model each permit a reasonable allocation to a permanent establishment of certain expenses (e.g., general and administrative expenses) incurred by worldwide operations of the person having the permanent establishment. Although the U.S. model makes specific reference to the allowance of deductions for certain general and administrative, research and development, and interest expenses, whether incurred in the country in which the permanent establishment is situated or otherwise, the proposed treaty and the OECD model specifically mention only general and administrative expenses in this context. In addition, unlike the two model treaties, but like the U.N. model, the proposed treaty specifically provides that no deduction is allowed with respect to amounts (other than reimbursements for actual expenses) paid by the permanent establishment to its home office or to any of its other offices as royalties, fees, etc.; in return for the use of patents or other rights; or as a commission for specific services performed or for management; or as interest on moneys lent to the permanent establishment. The proposed treaty also provides a reciprocal rule so that no consideration is given to the same types of payments made by the home office to the permanent establishment.

(12) The proposed treaty does not contain the usual treaty provision stating that the treaty is not intended to limit any law of either country which permits the distribution, apportionment, or allocation of income, deductions, credits, or allowances between related persons if such law is necessary to prevent evasion of taxes or to clearly reflect the income of such persons. This provision generally serves as clarification that the United States retains the right to apply its intercompany pricing rules (Code sec. 482) and its rules relating to the allocation of deductions (Code secs. 861, 862, and 863, and applicable regulations). Notwithstanding the omission of the standard provision, it is understood by the Treasury that the United States retains the right under the proposed treaty to apply its internal law intercompany pricing and expense allocation rules. (13) The proposed treaty's limits on gross-basis dividend withholding taxes that the country of source may impose on dividends received by a resident of the other country differ from those of the U.S. model. Both treaties provide for two levels of limitation. With respect to the proposed treaty, these levels are 14 percent in the case of dividends paid to a 25-percent or more corporate owner, and 20 percent in other cases. These limitations contrast with the 5-percent limit on dividends paid to 10-percent or more corporate owners and the 15-percent limit on other dividends contained in the U.S. model.

Additionally, the proposed treaty sets forth special rules with respect to the application of the article on dividends to distributions by U.S. regulated investment companies (RICS) and real estate investment trusts (REITs). In the case of any dividends paid by an RIC to a corporation, a 20-percent gross basis withholding tax will apply, notwithstanding the level of ownership of the shareholder. In the case of dividends from an REIT, a 20-percent gross basis withholding tax rate applies if the recipient of the dividends is an

individual holding a less than 25-percent interest in the trust. In other cases, the rate of withholding tax applicable, under domestic law, to the underlying income of the REIT will apply (i.e., 30 percent).

(14) Generally, the proposed treaty, the U.S. model, and the OECD model all share a common definition of the term "dividends." 2 The proposed treaty further defines this term to include income from arrangements, including debt obligations, carrying the right to participate in profits, to the extent so characterized under the local law of the country in which the income arises.

(15) The proposed treaty generally allows imposition by one country of branch-level profits and interest taxes on corporations resident in the other country.

(16) The proposed treaty generally limits the rate of withholding tax at source on gross interest to 15 percent. As an exception to this general rule, interest is exempt from source-country taxation if it is derived by the governments of the countries, derived by financial institutions on certain long-term loans (i.e., obligations having maturities of seven years or more), or paid by the Tunisian Government to a U.S. resident in connection with loans extended to the Tunisian Government or its political subdivisions or local authorities. Under the U.S. model, all interest generally is exempt from source country withholding tax. The OECD model permits sourcecountry taxation of interest at a rate of up to 10 percent.

As a result of the repeal, in the Tax Reform Act of 1984 (the "1984 Act"), of the U.S. gross withholding tax on interest paid on portfolio indebtedness held by foreign persons, Tunisian residents generally are able to earn U.S. source interest on portfolio indebtedness free of U.S. tax, without regard to benefits provided by a treaty. U.S. residents, on the other hand, generally are subject to Tunisian tax on Tunisian source interest on similar indebtedness (limited to a rate of 15 percent by the treaty).

(17) The proposed treaty allows source-country taxation of royalties at rates ranging from 10 to 15 percent. Both the U.S. and OECD models exempt royalties from source-country tax.

The proposed treaty includes in the definition of royalties, payments of any kind received in consideration for the use of, or the right to use, industrial, commercial, or scientific equipment. Such payments are not treated as royalties under the U.S. model, although they are so treated under the OECD model. Rather, they generally are subject, under the U.S. model, to the provisions of the business profits article of that treaty (Article 7).

(18) The proposed treaty permits source-country taxation of income derived from the performance of independent personal services by an individual resident of the other country on the basis of that individual's physical presence in the source country for more than 183 days during any taxable year. The proposed treaty also permits source-country taxation of income derived from the performance of independent personal services by such a person if the

2 That definition is "income from shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident."