the other country. By contrast, the proposed treaty allows up to 15 percent source-country tax on dividends to all investors resident in the other country without regard to their level of ownership. Some U.S. income tax treaties contain similar dividend withholding rates for direct investors.

(14) The proposed treaty generally allows imposition of branchlevel profits and interest taxes, whereas the U.S. and OECD models do not.

(15) The proposed treaty generally limits the tax at source on gross interest to 15 percent. Interest beneficially derived by government of either country or their tax-exempt instrumentalities is exempt from source-country tax. By contrast, under the U.S. model all interest generally is exempt from source-country tax. The U.S. model position is often not achieved.

Due to the repeal in 1984 of the U.S. gross-basis withholding tax on interest paid on portfolio indebtedness held by foreign persons, Indonesian residents generally will receive U.S. source interest on portfolio indebtedness free of U.S. tax in any event. U.S. residents, though, generally will be subject to Indonesian tax (limited to 15 percent by the proposed treaty) on Indonesian source interest on similar indebtedness.

In addition, the proposed treaty permits each country to impose a branch-level interest tax on certain amounts of interest expense deducted by a permanent establishment located in that country of a corporation resident in the other country. The rate of branchlevel interest tax that may be imposed by a country is limited by the proposed treaty to 15 percent.

(16) The U.S. model and the OECD model generally permit only residence-based taxation of royalty income. Conversely, the proposed treaty allows the source country to also tax such income at a rate of no more than either 10 or 15 percent, depending upon the nature of the royalty. The 15-percent rate applies to income that qualifies as royalties under the general definition of royalties set forth in the U.S. model. The 10-percent rate applies to payments for the right to use industrial, commercial, or scientific equipment (other than ships, aircraft, or containers which are subject to only source-country tax under the applicable article of the proposed treaty (Article 9)). The latter category of income to which the 10percent rate applies generally is not considered royalty income under the U.S. model. Instead, the U.S. model rules applicable to business profits apply to such income.

(17) The capital gains articles of the U.S. model, the OECD model, and the proposed treaty generally provide for identical treatment except that under the proposed treaty, the source country is permitted to tax the capital gains of an individual resident of the other country if that individual is present in the source country for at least 120 days during the taxable year in which the gain occurs. Under the U.S. and OECD model treaties, no source-country tax is permitted in this case.

(18) The proposed treaty allows source-country taxation of income derived from the performance of independent personal services on the basis of physical presence in the source country for more than 120 days during any consecutive 12-month period. Neither the U.S. model nor the OECD model allow taxation of such

income on the basis of days of physical presence. Under these models, income derived from the performance of independent personal services by a nonresident is taxable in the source country only if the nonresident earns the income through a fixed base in that country.

(19) Under the proposed treaty, income from services performed as an employee in one country (the source country) by a resident of the other country is not taxable in the source country if three requirements are met: (a) the employee is present in the source country for less than 120 days during any consecutive 12-month period; (b) the individual's employer is not a resident of the source country; and (c) the compensation is not borne or reimbursed by a permanent establishment which the employer has in the source country. Under the U.S. model and the OECD model, the first requirement for source-country tax exemption is less stringent. According to these treaties, the employee may be present in the source country for up to 183 days during the taxable year before his or her income related to services performed in that country is subject to tax there.

(20) The proposed treaty allows the source country to tax entertainers and athletes who earn more than a total of $2,000 there during any consecutive 12-month period, without regard to the existence of a fixed base or other contacts with the source country. The comparable annual total in the U.S. model treaty is $20,000, and is measured on a taxable year basis. The OECD model, while also permitting source-country taxation of such income, does not provide a dollar threshold below which imposition of the tax would not be allowed. Many U.S. income tax treaties follow the U.S. model's taxable-year rule, but use a lower annual income threshold.

(21) The proposed treaty removes from the scope of the article on entertainers and athletes (Article 17) remuneration from activities conducted in one country (the "source country") by residents of the other country if their visit to the source country is substantially supported or sponsored by the other country and is certified by the competent authority of the other country as qualifying under this special provision. In such a case, the income is subject to either the business profits or independent personal services article, as appropriate. Neither the U.S. model nor the OECD model contains a similar provision.

(22) The exemption from host-country taxation provided under the proposed treaty to visiting students and trainees is broader than the corresponding exemptions provided in the U.S. and OECD models. The U.S. model exemption applies only to payments received from outside the host country for maintenance, education, study, research, or training. The proposed treaty exemption extends to, among other things, $2,000 per year of personal services income in the case of a student, and $7,500 per year of personal services income in the case of a trainee. The proposed treaty exemption is similar to that incorporated in a number of older U.S. income tax treaties.

(23) The proposed treaty includes an article that exempts certain income earned by teachers and researchers from tax in the country where such services are performed (the "source country") if the

persons providing those services are residents of the other country immediately prior to entering the source country (Article 20). The U.S. model contains no such provision.

(24) The proposed treaty allows both the United States and Indonesia to tax the private pension of an individual resident of one of the countries if that pension is in consideration of past employment performed within the other country (the "source country"). In such a case, the source country may not tax the income at a rate higher than 15 percent. The U.S. and OECD models permit only residence-country taxation of private pensions.

(25) The proposed treaty permits only the country of residence of the payor of alimony and child support payments to tax those payments if made to a resident of the other country. While the U.S. model contains the same rule with respect to taxation of child support payments, it allows only the country of residence of the recipient to tax payments of alimony.

(26) The U.S. model and the OECD model extend to the residence country the exclusive right to tax income not otherwise specifically dealt with under the respective treaties, unless the income is attributable to a permanent establishment or a fixed base in the other country. The proposed treaty does not contain a specific article dealing with other income, and provides as a general rule of taxation that a resident of one of the countries may be taxed by the other country on any income (and only on such income) from sources within that other country, subject to any specific limitations contained in the proposed treaty.

(27) The anti-treaty shopping provisions of the proposed treaty resemble to some extent those of the U.S. model. Certain differences exist between the two provisions, however. For example, the U.S. model requires more than 75 percent of the beneficial interest of a non-public company resident in one of the countries to be owned by individual residents of that country in order to qualify for treaty benefits. On the other hand, the proposed treaty reduces the ownership threshold to more than 50 percent; and those who must own the threshold percentage include not only individual residents of the country in which the company is resident, but also individual residents of the other country, U.S. citizens, public companies, and the governments of the two countries. A 50-percent threshold is also contained in the anti-treaty shopping provisions of section 884(e)(4) of the Code (relating to the branch-level profits and interest taxes), as well as in other recent treaties.

IV. DATE OF ENTRY INTO FORCE AND TERMINATION

ENTRY INTO FORCE

The proposed treaty is to be ratified and instruments of ratification exchanged in Washington, D.C. as soon as possible. The proposed treaty will enter into force one month after the exchange of the instruments of ratification. It takes effect with respect to taxes withheld at source in accordance with the articles on dividends, interest, and royalties (Articles 11, 12, and 13) for amounts paid or credited on or after the first day of the second month next following the date on which the proposed treaty enters into force. With respect to other taxes, the proposed treaty takes effect for calendar

or taxable years beginning on or after the January 1st of the year in which it enters into force.

TERMINATION

The proposed treaty is to remain in force indefinitely, but either country may terminate it at any time after five years from its entry into force by giving at least six months' prior notice through diplomatic channels. If a termination occurs, it is effective with respect to income of calendar or taxable years beginning (or, in the case of taxes payable at the source, payments made) on or after the January 1st next following the expiration of the six-month period.

V. COMMITTEE ACTION

The Committee on Foreign Relations held a public hearing on the proposed Indonesian income tax treaty and protocol, and on other proposed tax treaties, on June 14, 1990. The hearing was chaired by Senator Sarbanes. The Committee considered this proposed treaty on June 28, 1990, and ordered it favorably reported by a voice vote, with the recommendation that the Senate give its advice and consent to the ratification of the proposed treaty and protocol.

VI. COMMITTEE COMMENTS

TREATMENT OF INCOME FROM CONTAINER LEASING

During consideration of the proposed treaty with Indonesia, the Committee reviewed at length a provision in the treaty which deviates from the customary manner in which U.S. tax treaties generally treat income from container leasing. The U.S. model treaty provision pertaining to income from international shipping and air transport provides that such income is taxable only by the recipient's country of residence. Income from the use or maintenance of containers (i.e., container leasing income) is covered under this provision of the U.S. model as well. The treatment of container leasing income in most U.S. tax treaties follows the treatment specified in the U.S. model. Under the OECD model treaty, container leasing income (along with income from the rental of other equipment) is treated as royalty income which is exempt from taxation in the source country. (The United Nations model treaty treats such income as royalty income, but does not specify the rate of tax (if any) applicable to royalties in the source country.) In addition, the OECD subsequently published a view that container leasing income should be treated as ordinary business profits, which would be exempt from taxation in the source country unless there is a permanent establishment and the income is attributable to the permanent establishment, in which case the income would be subject only to net-basis taxation.2

The proposed treaty with Indonesia generally follows the U.S. model with respect to the treatment of shipping and air transport income, but excludes most container leasing income from this

2 Committee on Fiscal Affairs, OECD, The Taxation of Income Derived From the Leasing of Containers para. 15 (1985).

treatment. Instead, it generally treats such income as rental income under the royalty provisions. Specifically excluded from the definition of shipping and air transport income is income from the use or maintenance of containers and related equipment for the transportation of containers, unless that income is incidental to income derived from the operation of ships or aircraft in international traffic. Thus, for example, a U.S. company that operates ships or aircraft in international traffic and earns a relatively minor amount of income from the leasing of containers used in international traffic is exempt from Indonesian tax on that income under the proposed treaty. By contrast, a U.S. company whose sole operation involves the leasing of containers used in international transport is not granted the same exemption. Income from such operations is treated as royalty income under the proposed treaty, and to the extent that it is sourced in Indonesia may be subject to a gross-basis withholding tax in Indonesia at a rate of up to 10 per

cent.

The Committee understands that present Indonesian law permits Indonesia to impose a 20-percent gross-basis withholding tax on container leasing income. Inclusion of the provision in the proposed treaty that permits Indonesia to impose a 10-percent tax on certain U.S. persons could place those persons at a competitive disadvantage when compared to other persons who operate containers, but who are exempted by the proposed treaty from Indonesian tax on income derived therefrom.

Provisions regarding the treatment of container leasing income similar to the rules contained in the proposed treaty are currently in effect in two U.S. bilateral tax treaties (the U.S. tax treaties with Australia and New Zealand). At the time the Committee on Foreign Relations considered those treaties in 1983, it expressed concern that the departure from the U.S. model provision on shipping related income potentially could have an adverse effect on the U.S. container leasing industry.

In 1983, the Committee rejected the notion that a justifiable distinction could be made between container leasing income and income derived from other international transportation activities. The Committee also questioned at that time the appropriateness of placing taxpayers primarily engaged in container leasing activities at a competitive disadvantage vis-a-vis companies engaged in international shipping and air transport activities, inasmuch as such companies may also engage in container leasing as an incidental part of their business, or may otherwise earn income from the ownership of containers, in either case without being subject to source country withholding tax on their container income.

Ultimately, the Committee determined that the treaties with Australia and New Zealand were on balance in the interests of the United States, and because it was clear that a reservation on this point would have placed treaty ratification by the other parties in jeopardy, the Committee recommended that the Senate give its advice and consent to ratification. The Senate concurred in that judgment. However, the Committee felt quite strongly about the matter, and in its reports on these treaties included instructions to the Executive Branch to ensure that U.S. negotiators make every effort to include the U.S. model provision in all future treaties.