of containers) used in international traffic as taxable only in that country. On the other hand, the proposed treaty provides such treatment only if the containers are used in connection with the operation by the lessor of ships or aircraft in international traffic. If the containers are not so used, the proposed treaty treats the resulting profits as royalty income.

(11) With respect to the article dealing with associated enterprises or related persons, the proposed treaty omits the U.S. model treaty provision stating that the treaty is not intended to limit any law in either country which permits the distribution, apportionment, or allocation of income, deductions, credits, or allowances between non-independent persons when necessary to prevent evasion of taxes or to clearly reflect the income of those persons. Such a provision generally clarifies that the United States retains the right to apply its intercompany pricing rules (sec. 482 of the Internal Revenue Code of 1986 (the "Code")) and its rules relating to the allocation of deductions (Code secs. 861, 862, and 863, and applicable regulations). However, the Treasury Department has made it clear that the United States retains the right under the proposed treaty to apply its intercompany pricing rules, including the "commensurate with income" standard for arm's-length pricing, notwithstanding the omission of the provision.

(12) The U.S. model treaty and many U.S. income tax treaties generally limit to five and 15 percent, respectively, the rates of source country tax on gross dividends paid to "direct" investors (that is, substantial corporate investors) and "portfolio" investors (that is, investors other than direct investors) resident in the other country. By contrast, the proposed treaty allows source country tax at the rates of 15 and 25 percent, respectively, on dividends paid to direct investors and to portfolio investors resident in the other country. Some U.S. income tax treaties contain similar dividend withholding rates for direct investors.

(13) The proposed treaty permits tax to be imposed at the withholding rate of 25 percent on dividends paid by a Regulated Investment Company (RIC) regardless of whether the RIC dividends are paid to a direct or portfolio investor. The proposed treaty permits unrestricted U.S. withholding tax on dividends paid by a real estate investment trust (REIT), unless the dividend is beneficially owned by an individual Indian resident holding a less-than-10-percent interest in the REIT. The Senate recently gave advice and consent to protocols with France and Belgium on the understanding that provisions be negotiated with those countries permitting withholding rates on RIČ and REIT dividends higher than the rates provided for in general by the U.S. treaties with those countries.

(14) The proposed treaty generally limits the tax at source on gross interest to 15 percent; interest paid to a bank or other financial institution is subject to tax at the rate of 10 percent. Interest income of the Governments of the countries (including political subdivisions), or others on certain government-related or government-approved debt claims, is exempt from source country tax. Under the U.S. model, by contrast, interest is generally exempt from source country withholding tax. The U.S. model position often is not achieved in treaties with developing countries.

Indian residents generally will receive U.S. source interest on portfolio indebtedness free of U.S. tax in any event, because of the repeal in 1984 of the U.S. gross withholding tax on interest paid on portfolio indebtedness held by foreign persons. However, U.S. resi dents generally are subject to Indian tax (limited to 15 or 10 per cent under the treaty) on Indian source interest on similar indebtedness.

(15) The proposed treaty generally limits the tax at source on gross royalties to 15 percent in the case of royalties in respect of intellectual or intangible property, including movie royalties, and 10 percent in the case of royalties in respect of industrial, commer cial, or scientific equipment. Royalties paid by a private party that would be subject to the 15-percent rate are subject to a temporary 20-percent rate for a period of 5 years. The U.S. model exempts royalties from source country tax.

(16) The proposed treaty provides treatment of certain "fees for included services" similar to the treatment of royalties. (See discussion under "Committee Comments," Part VI, following.)

(17) The proposed treaty permits each country to tax capital gains in accordance with the provisions of its own domestic laws, except for gains that are exempt under the Shipping and Air Transport article of the proposed treaty. The U.S. model treaty, on the other hand, permits only limited source country taxation of capital gains.

(18) The proposed treaty generally allows imposition of the U.S. branch-level profits and interest taxes. The proposed treaty permits India to impose a corresponding tax burden on Indian permanent establishments of U.S. corporations. The proposed treaty expressly prohibits the imposition of second-level withholding taxes on dividends paid by corporations resident in the other treaty country.

(19) The proposed treaty allows source country taxation of independent personal services income if the worker is present in the source country for more than 90 days in a taxable year. Under the U.S. model, independent personal services income of a nonresident is taxable only if the nonresident has available a fixed base in the source country. This provision in the proposed treaty is also found in the United Nations model treaty and in other U.S. treaties with developing countries.

(20) Compensation derived as a member of the crew of a ship or aircraft operated in international traffic by an enterprise of the United States or India may be taxed in that country. This treatment is unlike that in the U.S. model treaty which permits tax only by a crew member's residence country, but similar to the OECD and the United Nations model treaties.

(21) The proposed treaty, like the OECD model treaty, allows directors' fees derived by a resident of one country, in the individual's capacity as a member of the board of directors of a company which is a resident of the other country, to be taxed in that other country if the fees are for services rendered in that other country. The U.S. model treaty, on the other hand, generally treats directors' fees as personal service income. Under the U.S. model treaty (and the proposed treaty), the country where the recipient resides generally has primary taxing jurisdiction over personal service income.

(22) Under the proposed treaty, source country taxation of income derived by entertainers and athletes from their activities as such is permitted if the income exceeds $1,500 in a taxable year. The competent authorities of the countries may agree to increase the threshold in order to reflect economic or monetary developments. Under the U.S. model treaty, entertainers and athletes may not be taxed in the source country unless they earn more than $20,000 there during a taxable year. Many U.S. income tax treaties follow the U.S. model approach, although with a lower annual income threshold for taxation than the U.S. model contains. The OECD model treaty permits source country taxation of entertainers and athletes with no annual income threshold.

(23) The proposed treaty permits pensions paid by, or out of funds created by, a country or one of its political subdivisions or local authorities to an individual for services rendered to that country (or subdivision or authority) to be taxable generally only in that country. However, such pensions are taxable only in the other country if the individual is both a resident and a citizen of that other country. The U.S. model treaty allows exclusive taxing jurisdiction to the paying country in the case of payments to one of its citizens, but otherwise does not modify the usual treaty provisions applicable to nongovernmental payments. The provision in the proposed treaty follows the corresponding provision in the OECD and United Nations model treaties.

(24) Under the proposed treaty, a student or apprentice from one country who is studying in the other country is exempt from tax in the host country on payments received from outside the host country for education and maintenance. In the case of nonexempt income from grants, scholarships and employment, the student or apprentice is also allowed certain tax benefits available to hostcountry residents. The U.S. and OECD model treaties provide narrower relief.

(25) The proposed treaty also provides a host-country tax exemption for visiting professors, teachers, and research scholars. The exemption is available only if the visit does not exceed two years, and applies to research only if the research is conducted in the public interest. This exemption is found in several U.S. tax treaties, but not in the U.S. model treaty.

(26) The proposed treaty allows each country to tax any income not otherwise specifically dealt with under the treaty that arises from sources in that country or is attributable to a permanent establishment or fixed base in that country. This rule applies even if the country of residence does not tax the income. The U.S. model treaty, by contrast, gives the residence country the sole right to tax income not otherwise specifically dealt with under the treaty, regardless of the source of the income, unless the income is attributable to a permanent establishment or a fixed base in the other country. The rule of the proposed treaty is contained in the United Nations model treaty and in a number of existing U.S. income tax treaties.

(27) The proposed treaty contains a limitation on benefits (antitreaty shopping) article similar to the limitation on benefits articles contained in recent U.S. treaties and protocols and in the branch tax provisions of the Code.

(28) Income derived by a resident of one country that may be taxed in the other country under the proposed treaty is deemed to arise in that other country for purposes of the double taxation relief article of the proposed treaty. However, any statutory source rules that apply for the purpose of limiting the foreign tax credit generally take precedence over this source rule in determining the applicable relief from double taxation under the proposed treaty.

(29) The scope of the nondiscrimination article in the proposed treaty is limited to the taxes that are covered by the agreement (i.e., national-level income taxes). In this respect the proposed treaty's protection is narrower than that provided in the U.S. model treaty, which applies to all national, state, and local taxes.

(30) The proposed treaty generally requires persons seeking competent authority relief (under the mutual agreement procedure) to apply to the country of which they are residents or nationals within three years of the receipt of notice of the action resulting in taxation not in accordance with the treaty. Although no time limit is imposed in the U.S. model treaty, the three-year limit is consistent with the OECD and United Nations models.

(31) The proposed treaty's exchange of information provision generally follows that of the U.S. model, with some modifications based on the OECD and United Nations models. The U.S. model treaty provides that each country is to endeavor to collect taxes for the other country to the extent necessary to ensure that the treaty does not benefit persons not entitled to treaty benefits. The proposed treaty does not contain this collection assistance rule. The proposed treaty provides for routine exchange of information, as well as information exchange on request. The proposed treaty also contains a statement, not found in the U.S. model, that the competent authorities will develop conditions, methods, and techniques concerning the matters in respect of which information will be exchanged.

IV. ENTRY INTO FORCE AND TERMINATION

ENTRY INTO FORCE

The proposed treaty will enter into force when the instruments of ratification are exchanged. With respect to taxes withheld at source in the United States (on dividends, interest, royalties, and certain other payments to residents of India), the treaty will become effective for amounts paid or credited on or after the first day of January following the treaty's entry into force. With respect to other taxes imposed by the United States, the treaty will become effective for taxable periods beginning on or after the first day of January following the treaty's entry into force. With respect to taxes imposed by India, the treaty will become effective for income arising in any taxable year beginning on or after the first day of April following the calendar year during which the treaty enters into force.

TERMINATION

The proposed treaty will continue in force indefinitely, but either country may terminate it unilaterally by giving notice on or before

June 30th in any calendar year after the expiration of a period of five years from the date on which the treaty enters into force. A termination would be effective for amounts paid or credited on or after the first day of January following the notice of termination with respect to taxes withheld at source in the United States. With respect to other taxes imposed by the United States, a termination would be effective for taxable periods beginning on or after the first day of January following the notice of termination. With respect to taxes imposed by India, a termination would be effective for income arising in any taxable year beginning on or after the first day of April following the calendar year during which the notice of termination is given.

V. COMMITTEE ACTION

The Committee on Foreign Relations held a public hearing on the proposed India income tax treaty and protocol, and on other proposed tax treaties, on June 14, 1990, chaired by Senator Sarbanes. The Committee considered these proposed treaties on June 28, 1990, and ordered them favorably reported by a voice vote with certain understandings, 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 India, 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.1

The proposed treaty with India generally follows the U.S. model with respect to the treatment of shipping and air transport income,

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