[Senate Hearing 110-305]
[From the U.S. Government Publishing Office]
S. Hrg. 110-305
TREATIES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JULY 17, 2007
__________
Printed for the use of the Committee on Foreign Relations
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
index.html
U.S. GOVERNMENT PRINTING OFFICE
41-103 PDF WASHINGTON DC: 2008
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800 Fax: (202) 512-2250 Mail Stop SSOP,
Washington, DC 20402-0001
COMMITTEE ON FOREIGN RELATIONS
JOSEPH R. BIDEN, Jr., Delaware, Chairman
CHRISTOPHER J. DODD, Connecticut RICHARD G. LUGAR, Indiana
JOHN F. KERRY, Massachusetts CHUCK HAGEL, Nebraska
RUSSELL D. FEINGOLD, Wisconsin NORM COLEMAN, Minnesota
BARBARA BOXER, California BOB CORKER, Tennessee
BILL NELSON, Florida JOHN E. SUNUNU, New Hampshire
BARACK OBAMA, Illinois GEORGE V. VOINOVICH, Ohio
ROBERT MENENDEZ, New Jersey LISA MURKOWSKI, Alaska
BENJAMIN L. CARDIN, Maryland JIM DeMINT, South Carolina
ROBERT P. CASEY, Jr., Pennsylvania JOHNNY ISAKSON, Georgia
JIM WEBB, Virginia DAVID VITTER, Louisiana
Antony J. Blinken, Staff Director
Kenneth A. Myers, Jr., Republican Staff Director
(ii)
C O N T E N T S
----------
Page
Barthold, Thomas A., acting chief of staff, Joint Committee on
Taxation, U.S. Congress, Washington, DC........................ 16
Prepared statement........................................... 18
Boland, Lois E., Director of the Office on International
Relations, U.S. Patent and Trademark Office, Department of
Commerce, Washington, DC....................................... 25
Prepared statement........................................... 26
Response to question submitted by Senator Joseph R. Biden,
Jr., concerning ABA letter................................. 54
Responses to questions submitted by Senator Joseph R. Biden,
Jr......................................................... 56
Harrington, John, International Tax Counsel, Office of the
International Tax Counsel, Department of the Treasury,
Washington, DC................................................. 4
Prepared statement........................................... 6
Responses to questions submitted by Senator Joseph R. Biden,
Jr......................................................... 59
Lucchesi, Janice, chairwoman, Organization for International
Investment, Washington, DC..................................... 43
Prepared statement........................................... 44
Lugar, Hon. Richard G., U.S. Senator from Indiana, prepared
statement...................................................... 3
Menendez, Hon. Robert, U.S. Senator from New Jersey, opening
statement...................................................... 1
Reinsch, Hon. William A., president, National Foreign Trade
Council, Washington, DC........................................ 38
Prepared statement........................................... 40
Scholz, Wesley, Director of the Office of Investment Affairs,
Department of State, Washington, DC............................ 28
Prepared statement........................................... 30
Additional Material Submitted for the Record
American Intellectual Property Law Association (AIPLA),
Arlington, VA, letter to committee............................. 50
Drewsen, Alan C., executive director, International Trademark
Association, New York, NY, prepared statement.................. 48
Krupka, Pamela Banner, chair, Section of Intellectual Property
Law, American Bar Association, Chicago, IL, letter to committee 53
(iii)
TREATIES
----------
TUESDAY, JULY 17, 2007
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
[Treaty Doc. 109-18: Protocol Amending the Convention Between
the United States and Finland for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion With Respect to
Taxes on Income and on Capital; Treaty Doc. 109-19: Protocol
Amending the Convention Between the United States and Denmark
for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion With Respect to Taxes on Income; Treaty Doc.
109-20: Protocol Amending the Convention Between the United
States and Germany for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion With Respect to Taxes on Income
and Capital and to Certain Other Taxes; Treaty Doc. 110-3:
Convention Between the United States and Belgium for the
Avoidance of Double Taxation and the Prevention of Fiscal
Evasion With Respect to Taxes on Income and Accompanying
Protocol; Treaty Doc. 109-12: Patent Law Treaty and Regulations
Under the Patent Law Treaty; Treaty Doc. 109-21: The Geneva Act
of the Hague Agreement Concerning the International
Registration of Industrial Designs; Treaty Doc. 110-2: The
Singapore Treaty on the Law of Trademarks; and Treaty Doc. 109-
8: Protocol to the 1951 Treaty of Friendship, Commerce, and
Navigation Between the United States and Denmark.]
------
The committee met, pursuant to notice, at 2:30 p.m., in
room SD-419, Dirksen Senate Office Building, Hon. Robert
Menendez, presiding.
Present: Senators Menendez and Lugar.
OPENING STATEMENT OF HON. ROBERT MENENDEZ,
U.S. SENATOR FROM NEW JERSEY
Senator Menendez. This hearing will come to order.
Let me welcome our witnesses and distinguished guests to
the Foreign Relations Committee's hearing. I appreciate the
work of the ranking member of the committee, and I am delighted
to--delighted--to hold this hearing on three protocols amending
existing tax treaties with Finland, Denmark, and Germany, a new
tax treaty with Belgium, three intellectual property treaties
and one separate protocol with Denmark.
As you know, we have a very ambitious agenda, with full
witness panels, so I'll keep this statement brief.
I will say for the purposes of proceeding, there is a vote
to take place at 2:45. It is the Chair's intention to start the
testimony of witnesses, to go as close as possible into that
vote, and then we may adjourn for approximately 20 minutes, 25
minutes or so, while that vote is finishing and certain matters
take place on the floor.
The United States currently has 58 bilateral income tax
treaties that cover 66 countries. This network covers the vast
majority of foreign trade and investment of U.S. companies.
These treaties help establish a framework that allows
international trade and investment to flourish, and, therefore,
help bolster economic relationships between the United States
and countries that are already close trade and investment
partners.
These bilateral tax treaties are the primary means for
eliminating unnecessary barriers to cross-border trade and
investment. They accomplish this through providing greater
certainty to taxpayers, dividing taxing rights between the two
jurisdictions so the taxpayer is not subject to double
taxation, reducing the risks of excessive taxation, and by
ensuring that taxpayers will not be subject to discriminatory
taxation in the foreign jurisdiction.
As we live in an increasingly globalized world, it is
crucial to take steps to harmonize the tax systems of two
countries which will benefit from these treaties. But these
treaties will benefit not only U.S. enterprises, but help the
U.S. economy grow and increase U.S. employment. Ultimately, I
believe these treaties will contribute to strengthening the
rule of law and improving the quality of life.
With reference to these tax treaties, we'll first look at
the protocols amending provisions of existing income tax
treaties with Finland, Denmark, and Germany. We have a strong
alliance with these nations, and encourage and engage in
significant cross-border activity.
In 2005, Finland and Denmark combined to import 4.2 billion
dollars' worth of goods from the United States, and exported a
combined 9.4 billion dollars' worth of goods to the United
States. In 2006, Germany, alone, imported $34.2 billion in
goods and exported 8.48 billion dollars' worth of goods to the
United States. These new protocols will stimulate even more
growth as they work to avoid double taxation and prevent fiscal
evasion with respect to taxes.
Our next agreement is a new tax treaty with Belgium. The
value of trade between the United States and Belgium is large,
with the United States exporting $18.7 billion of goods and
importing $13 billion in goods in 2005. This treaty will also
help stimulate more economic growth between our two nations.
We also have before us three specific intellectual property
treaties, a patent law treaty, the Geneva Act of the Hague
Agreement, concerning the international registration of
industrial designs, and the Singapore treaty on the law of
trademarks. These three treaties are multilateral instruments
that would harmonize and improve the administration of
international intellectual property rights. Part of this would
be to achieve by--would be achieved by reducing some of the
bureaucratic obstacles by introducing innovative measures such
as electronic filing.
However, it has been frustrating that it took so long for
the implementing legislation to come out of the U.S. Patent and
Trade Office for these intellectual property treaties, and I
want to be clear that I expect the Senate and Judiciary
Committee to have a chance to carefully review it before voting
on the treaty in committee.
And, finally, we will look at the protocol to the Treaty of
Friendship, Commerce, and Navigation with Denmark. The protocol
is very short. Its entire purpose is to provide a legal basis
for issuing treaty investor--E-2--visas to Danish investors who
wish to enter the United States on a reciprocal basis.
We are joined today by a distinguished panel of witnesses
who will help us evaluate the treaties and protocols before us.
In our first panel, from the Treasury Department, we
welcome Mr. John Harrington, the Acting International Tax
Counsel; also, Mr. Tom Barthold, the chief of staff of the
Joint Committee on Taxation; Mr. Lois Boland, the Director of
the Office of International Relations at the United States
Patent and Trademark Office; and Mr. Wesley Scholz, Director of
the Office of Investment Affairs for the Department of State.
We will also have a second panel. I'll introduce them at
that time. The committee looks forward to the insight and
analysis of all of our witnesses.
And, finally, let me thank Senator Biden's staff,
especially Avril Haines, who has helped us out tremendously in
preparing for this hearing.
With that, let me recognize the ranking member of the full
committee for any comments he wishes to make.
Senator Lugar.
Senator Lugar. Thank you very much, Mr. Chairman. Thank you
for chairing this important hearing.
I'd like to ask that my statement be made a part of the
record.
Senator Menendez. Without objection.
Senator Lugar. I've simply cited the good work of the last
two Congresses in approving tax agreements with a number of
countries, and other intellectual property agreements. The very
strong panel we have today will affirm the value of the
treaties that we're going to consider. I'm supportive of these
and am grateful we have come to a hearing to discuss
opportunities for action.
Thank you, Mr. Chairman.
[The prepared statement of Senator Lugar follows:]
Prepared Statement of Hon. Richard G. Lugar, U.S. Senator From Indiana
I appreciate the opportunity to evaluate the Patent Law Treaty; the
Geneva Act on the Registration of Industrial Designs; the Singapore
Treaty on Trademarks; protocols amending the existing tax treaties with
Germany, Finland, and Denmark; and a tax treaty update with Belgium.
All of these agreements seek to improve our commercial relationships
with valued trade and investment partners.
During the last two Congresses, this committee and the full Senate
approved tax agreements with Mexico, Australia, the United Kingdom,
Japan, Sri Lanka, the Netherlands, Barbados, France, Bangladesh, and
Sweden. I encourage the administration to continue its successful
pursuit of treaties that strengthen the American economy by helping our
businesses access foreign markets and by providing incentives for
foreign companies to create more jobs in the United States.
As the United States considers how to maintain economic growth, it
is important that we eliminate impediments that prevent our companies
from fully accessing international markets. These impediments may come
in the form of regulatory barriers, taxes, tariffs, or unfair
treatment. In the case of taxes, we should work to ensure that
companies pay their fair share, while not being unfairly taxed twice on
the same revenue. Tax treaties are intended to prevent double taxation
so that companies are not inhibited from doing business overseas. As
the U.S. moves to keep the economy growing and to increase U.S.
employment, international tax policies that promote foreign direct
investment in the United States are critically important.
The intellectual property treaties before us are also important
components of our global economic policy. One of the key benefits of
safeguarding intellectual property is preserving innovation. Businesses
and inventors must have incentives to undertake the investments needed
to create new products. Theft of American intellectual property results
in competitive disadvantages to U.S. industries and job losses for
American workers.
International counterfeiting and piracy have increased dramatically
in recent years. In addition to the direct impact on the sales and
profits of the subject industries, there is also significant harm and
deception to consumers who believe they are purchasing legitimate
goods. We should work to enhance standards and improve the protection
of patents, industrial designs, and trademarks.
The agreements we are considering are important to commercial
relationships, which advance domestic economic growth and employment.
But I would emphasize that these agreements also have diplomatic value.
Cooperation on the commercial front enhances our ability to work with
nations on other matters.
I thank the witnesses for their testimony, and I look forward to
expeditious consideration of each of these agreements by the committee
and the full Senate.
Senator Menendez. Thank you, Senator Lugar.
With that, let me start with John Harrington. We're asking
that all of your statements--all of your full statements be
included in the record, and we're asking you to summarize your
written testimony, in the interest of time, to about 7 minutes.
So, with that--Mr. Harrington.
STATEMENT OF JOHN HARRINGTON, INTERNATIONAL TAX COUNSEL, OFFICE
OF THE INTERNATIONAL TAX COUNSEL, DEPARTMENT OF THE TREASURY,
WASHINGTON, DC
Mr. Harrington. Thank you, Mr. Chairman.
Mr. Chairman, Ranking Member Lugar, and distinguished
members of the committee, I appreciate the opportunity to
appear today before you to recommend favorable action on the
four tax agreements that are pending before this committee.
I have a written statement that I ask, per your previous
statement, be made part of the record.
Senator Menendez. Without objection.
Mr. Harrington. The agreements before the committee today,
with Belgium, Denmark, Finland, and Germany, serve to further
the goals of our tax treaty network and improve longstanding
treaty relationships. All four agreements reduce withholding
tax rates for dividends that they meet certain ownership and
holding-period requirements. All four agreements include
updated limitation-on-benefits provisions and other changes to
reflect U.S. law and tax treaty policy. In addition, the
proposed new treaty with Belgium and the proposed protocol with
Germany provide, in certain circumstances, for arbitration.
Because my written statements and the technical
explanations provide detailed explanations of the provisions of
the agreements, I would like to describe briefly the more
significant features of those agreements.
Finland. The proposed protocol with Finland amends the
current convention, which entered into force in 1990. The
proposed protocol makes a number of changes to the dividend
article of the current convention, including eliminating the
source-country withholding tax on dividends meeting certain
ownership and holding-period requirements and on dividends to
pension funds. It also eliminates source-country withholding
tax on royalties. It updates the limitation-on-benefits article
of the current convention, the rules for taxing former citizens
and former long-term residents, and the exchange-of-information
provisions.
Denmark. The proposed protocol with Denmark closely follows
the recent protocol with Sweden and the proposed protocol with
Finland with respect to dividends and limitation on benefits.
It amends the current convention to update the rules for taxing
former citizens and former long-term residents.
Germany. The proposed protocol amends the current
convention concluded in 1989. The proposed protocol eliminates
the source-country withholding tax on many intercompany
dividends. The proposed protocol also eliminates withholding
tax on dividends to pension funds and significantly improves
the current convention's treatment of pensions. It amends the
current convention to update the rules for taxing former
citizens and former long-term residents, strengthens the
treaty's limitation-on-benefits article, and adopts the U.S.
model treaty approach to attribution of profits to a permanent
establishment.
The proposed protocol provides for arbitration of certain
cases that have not been resolved by the competent authorities
within a specified time period, generally 2 years from the
commencement of the case. Consistent with the current mutual
agreement procedure, the taxpayer can terminate arbitration at
any time by withdrawing its request for competent authority
assistance. The taxpayer also retains the right to litigate in
lieu of accepting the result of arbitration, just as it would
be entitled to litigate in lieu of accepting the result of a
negotiation under the mutual agreement procedure.
Belgium. The proposed income tax convention and
accompanying protocol with Belgium would replace the current
convention, which entered into force in 1970. The new proposed
treaty would eliminate the withholding tax on interest payments
and many intercompany dividends. The new treaty also eliminates
withholding tax on dividends to pension funds and updates the
current convention's treatment of pensions. It addresses
taxation of former citizens and former long-term residents,
strengthens limitation on benefits, and adopts the U.S. model
treaty approach to attribution of profits to a permanent
establishment.
Of particular note is the greatly strengthened information
exchange article. The information exchange article of the
proposed treaty specifically addresses a number of problems
that have prevented effective information exchange under the
existing convention. The new provision makes clear that Belgium
is obligated to provide the United States with such
information, including bank information, as is necessary to
carry out the treaty in our domestic law.
Like the proposed protocol with Germany, the proposed
treaty provides for arbitration of certain cases before the
competent authorities. The arbitration provision and procedures
adopted in the proposed treaty follow closely the approach in
the proposed protocol with Germany, with the exceptions that,
one, the scope of the arbitration process covers all issues
within the purview of the competent authorities, and, two, the
process must be completed within 6 months.
In both agreements, the mandatory arbitration provision is
designed to achieve the benefit of an arbitration provision
with the least disruption to the process of competent authority
negotiations.
Before closing, I would like to note that we continue to
maintain a very active calendar of tax treaty negotiations. A
key priority is updating the few remaining U.S. tax treaties
that provide for low withholding tax rates, but do not include
limitation-on-benefits provisions.
Let me repeat our appreciation for the committee's interest
in these agreements and in the U.S. tax treaty network. We are
also grateful for the assistance and cooperation of the staffs
of your committee and of the Joint Committee on Taxation in the
tax treaty process.
I'd also like to recognize the tireless work of the
Treasury team--Jesse Eggert, Henry Louie, Gretchen Sierra,
David Sotos, and especially Detta Kissel.
We urge the committee and the Senate to take prompt and
favorable action on all of these agreements. I'd be happy to
answer any questions that you have.
[The prepared statement of Mr. Harrington follows:]
Prepared Statement of John Harrington, International Tax Counsel,
Office of the International Tax Counsel, Department of the Treasury,
Washington, DC
Mr. Chairman, Ranking Member Lugar, and distinguished members of
the committee, I appreciate the opportunity to appear today at this
hearing to recommend, on behalf of the administration, favorable action
on four tax agreements that are pending before this committee. We
appreciate the committee's interest in these agreements and in the U.S.
tax treaty network, as demonstrated by the scheduling of this hearing.
This administration is dedicated to eliminating unnecessary
barriers to cross-border trade and investment. The primary means for
eliminating tax barriers to trade and investment are bilateral tax
treaties. Tax treaties eliminate barriers by providing greater
certainty to taxpayers regarding their potential liability to tax in
the foreign jurisdiction; by allocating taxing rights between the two
jurisdictions so that the taxpayer is not subject to double taxation;
by reducing the risk of excessive taxation that may arise because of
high gross-basis withholding taxes; and by ensuring that taxpayers will
not be subject to discriminatory taxation in the foreign jurisdiction.
The international network of over 2,500 bilateral tax treaties has
established a stable framework that allows international trade and
investment to flourish. The success of this framework is evidenced by
the fact that countless cross-border transactions, from an individual's
investment in a few shares of a foreign company to a multibillion
dollar purchase of a foreign operating company, take place each year,
with only a relatively few disputes regarding the allocation of tax
revenues between governments.
To ensure that our tax treaties cannot be used inappropriately, we
continually monitor our existing network of tax treaties to make sure
that each treaty continues to serve its intended purposes and is not
being exploited for unintended purposes. A tax treaty reflects a
balance of benefits that is struck when the treaty is negotiated and
that can be affected by future developments. In some cases, changes in
law or policy in one or both of the treaty partners may make it
possible to increase the benefits provided by the treaty; in these
cases, negotiation of a new or revised agreement may be very
beneficial. In other cases, developments in one or both countries, or
international developments more generally, may require a revisiting of
the agreement to prevent exploitation and eliminate unintended and
inappropriate consequences; in these cases, it may be necessary to
modify or even terminate the agreement. Both in setting our overall
negotiation priorities and in negotiating individual agreements, our
focus is on ensuring that our tax treaty network fulfills its goals of
facilitating cross-border trade and investment and preventing fiscal
evasion.
The agreements before the committee today with Belgium, Denmark,
Finland, and Germany serve to further the goals of our tax treaty
network and improve longstanding treaty relationships. We urge the
committee and the Senate to take prompt and favorable action on all of
these agreements.
purposes and benefits of tax treaties
Tax treaties set out clear ground rules that govern tax matters
relating to trade and investment between the two countries. A tax
treaty is intended to mesh the tax systems of the two countries so that
there is little potential for dispute regarding the amount of tax that
should be paid to each country. The goal is to ensure that taxpayers do
not end up caught in the middle between two governments, each of which
claims taxing jurisdiction over the same income. A treaty with clear
rules addressing the most likely areas of disagreement minimizes the
time the two governments (and taxpayers) spend in resolving individual
disputes.
One of the primary functions of tax treaties is to provide
certainty to taxpayers regarding the threshold question with respect to
international taxation: Whether a taxpayer's cross-border activities
will subject it to taxation by two or more countries. Tax treaties
answer this question by establishing the minimum level of economic
activity that must be engaged in within a country by a resident of the
other country before the first country may tax any resulting business
profits. In general terms, tax treaties provide that if the branch
operations in a foreign country have sufficient substance and
continuity, the country where those activities occur will have primary
(but not exclusive) jurisdiction to tax. In other cases, where the
operations in the foreign country are relatively minor, the home
country retains the sole jurisdiction to tax its residents.
Tax treaties protect taxpayers from potential double taxation
through the allocation of taxing rights between the two countries. This
allocation takes several forms. First, the treaty has a mechanism for
resolving the issue of residence in the case of a taxpayer that
otherwise would be considered to be a resident of both countries.
Second, with respect to each category of income, the treaty assigns the
``primary'' right to tax to one country, usually (but not always) the
country in which the income arises (the ``source'' country), and the
``residual'' right to tax to the other country, usually (but not
always) the country of residence of the taxpayer (the ``residence''
country). Third, the treaty provides rules for determining which
country will be treated as the source country for each category of
income. Finally, the treaty provides rules limiting the amount of tax
that the source country can impose on each category of income and
establishes the obligation of the residence country to eliminate double
taxation that otherwise would arise from the exercise of concurrent
taxing jurisdiction by the two countries.
As a complement to these substantive rules regarding allocation of
taxing rights, tax treaties provide a mechanism for dealing with
disputes or questions of application that arise after the treaty enters
into force. In such cases, designated tax authorities of the two
governments--known as the ``competent authorities'' in tax treaty
parlance--are to consult and reach an agreement under which the
taxpayer's income is allocated between the two taxing jurisdictions on
a consistent basis, thereby preventing the double taxation that might
otherwise result. The U.S. competent authority under our tax treaties
is the Secretary of the Treasury. That function has been delegated to
the Deputy Commissioner of the Internal Revenue Service, Large and Mid-
Size Business (International).
In addition to reducing potential double taxation, tax treaties
also reduce potential ``excessive'' taxation by reducing withholding
taxes that are imposed at source. Under U.S. domestic law, payments to
non-U.S. persons of dividends and royalties, as well as certain
payments of interest, are subject to withholding tax equal to 30
percent of the gross amount paid. Most of our trading partners impose
similar levels of withholding tax on these types of income. This tax is
imposed on a gross, rather than net, amount. Because the withholding
tax does not take into account expenses incurred in generating the
income, the taxpayer that bears the burden of withholding tax
frequently will be subject to an effective rate of tax that is
significantly higher than the tax rate that would be applicable to net
income in either the source or residence country. The taxpayer may be
viewed, therefore, as suffering ``excessive'' taxation. Tax treaties
alleviate this burden by setting maximum levels for the withholding tax
that the treaty partners may impose on these types of income or by
providing for exclusive residence-country taxation of such income
through the elimination of source-country withholding tax. Because of
the excessive taxation that withholding taxes can represent, the United
States seeks to include in tax treaties provisions that substantially
reduce or eliminate source-country withholding taxes.
Tax treaties also include provisions intended to ensure that cross-
border investors do not suffer discrimination in the application of the
tax laws of the other country. This is similar to a basic investor
protection provided in other types of agreements, but the
nondiscrimination provisions of tax treaties are specifically tailored
to tax matters and, therefore, are the most effective means of
addressing potential discrimination in the tax context. The relevant
tax treaty provisions explicitly prohibit types of discriminatory
measures that once were common in some tax systems. At the same time,
tax treaties clarify the manner in which possible discrimination is to
be tested in the tax context. Particular rules are needed here, for
example, to reflect the fact that foreign persons that are subject to
tax in the host country only on certain income may not be in the same
position as domestic taxpayers that may be subject to tax in such
country on all their income.
In addition to these core provisions, tax treaties include
provisions dealing with more specialized situations, such as rules
coordinating the pension rules of the tax systems of the two countries
or addressing the treatment of Social Security benefits and alimony and
child-support payments in the cross-border context. These provisions
are becoming increasingly important as more individuals move between
countries or otherwise are engaged in cross-border activities. While
these matters may not involve substantial tax revenue from the
perspective of the two governments, rules providing clear and
appropriate treatment are very important to the affected taxpayers.
Tax treaties also include provisions related to tax administration.
A key element of U.S. tax treaties is the provision addressing the
exchange of information between the tax authorities. Under tax
treaties, the competent authority of one country may request from the
other competent authority such information as may be relevant for the
proper administration of the first country's tax laws; the information
provided pursuant to the request is subject to the strict
confidentiality protections that apply to taxpayer information. Because
access to information from other countries is critically important to
the full and fair enforcement of the U.S. tax laws, information
exchange is a priority for the United States in its tax treaty program.
If a country has bank-secrecy rules that would operate to prevent or
seriously inhibit the appropriate exchange of information under a tax
treaty, we will not conclude a tax treaty with that country. Indeed,
the need for appropriate information exchange provisions is one of the
treaty matters that we consider non-negotiable.
tax treaty negotiating priorities and process
The United States has a network of 58 income tax treaties covering
66 countries. This network covers the vast majority of foreign trade
and investment of U.S. businesses. In establishing our negotiating
priorities, our primary objective is the conclusion of tax treaties or
protocols that will provide the greatest economic benefit to the United
States and to U.S. taxpayers. We communicate regularly with the U.S.
business community, seeking input regarding the areas in which treaty
network expansion and improvement efforts should be focused and
information regarding practical problems encountered under particular
treaties and particular tax regimes.
The primary constraint on the size of our tax treaty network may be
the complexity of the negotiations themselves. The various functions
performed by tax treaties, and most particularly the need to mesh the
particular tax systems of the two treaty partners, make the negotiation
process exacting and time-consuming. Accordingly, it frequently will
make more sense for the United States to negotiate an update to an
existing agreement, rather than to negotiate a new tax treaty.
Numerous features of the treaty partner's particular tax
legislation and its interaction with U.S. domestic tax rules must be
considered in negotiating a treaty or protocol. Examples include
whether the country eliminates double taxation through an exemption
system or a credit system, the country's treatment of partnerships and
other transparent entities, and how the country taxes contributions to
pension funds, earnings of the funds, and distributions from the funds.
Moreover, a country's fundamental tax policy choices are reflected
not only in its tax legislation but also in its tax treaty positions.
These choices differ significantly from country to country, with
substantial variation even across countries that seem to have quite
similar economic profiles. A treaty negotiation must take into account
all of these aspects of the particular treaty partner's tax system and
treaty policies to arrive at an agreement that accomplishes the United
States tax treaty objectives.
Obtaining the agreement of our treaty partners on provisions of
importance to the United States sometimes requires concessions on our
part. Similarly, the other country sometimes must make concessions to
obtain our agreement on matters that are critical to it. In most cases,
the process of give-and-take produces a document that is the best tax
treaty that is possible with that country. In other cases, we may reach
a point where it is clear that it will not be possible to reach an
acceptable agreement. In those cases, we simply stop negotiating with
the understanding that negotiations might restart if circumstances
change. Each treaty that we present to the Senate represents not only
the best deal that we believe we can achieve with the particular
country, but also constitutes an agreement that we believe is in the
best interests of the United States.
In some situations, the right result may be no tax treaty at all or
may be a substantially curtailed form of tax agreement. With some
countries a tax treaty may not be appropriate because of the
possibility of abuse. With other countries there simply may not be the
type of cross-border tax issues that are best resolved by treaty. For
example, if a country does not impose significant income taxes, there
is little possibility of double taxation of cross-border income, and an
agreement that is focused on the exchange of tax information may be the
most appropriate agreement. Alternatively, a bifurcated approach may be
appropriate in situations where a country has a special preferential
tax regime for certain parts of the economy that is different from the
tax rules generally applicable to the country's residents. In those
cases, the residents benefiting from the preferential regime may not
face potential double taxation and so should not be entitled to the
reductions in U.S. withholding taxes accorded by a tax treaty, while a
full treaty relationship might be useful and appropriate to avoid
double taxation in the case of the residents who do not receive the
benefit of the preferential regime.
Prospective treaty partners must evidence a clear understanding of
what their obligations would be under the treaty, including those with
respect to information exchange, and must demonstrate that they would
be able to fulfill those obligations. Sometimes a tax treaty may not be
appropriate because a potential treaty partner is unable to do so. In
other cases, a tax treaty may be inappropriate because the potential
treaty partner is not willing to agree to particular treaty provisions
that are needed to address real tax problems that have been identified
by U.S. businesses operating there.
A high priority for improving our overall treaty network is
continued focus on prevention of ``treaty shopping.'' The U.S.
commitment to including comprehensive limitation on benefits provisions
is one of the keys to improving our overall treaty network. Our tax
treaties are intended to provide benefits to residents of the United
States and residents of the particular treaty partner on a reciprocal
basis. The reductions in source-country taxes agreed to in a particular
treaty mean that U.S. persons pay less tax to that country on income
from their investments there and residents of that country pay less
U.S. tax on income from their investments in the United States. Those
reductions and benefits are not intended to flow to residents of a
third country. If third-country residents are able to exploit one of
our tax treaties to secure reductions in U.S. tax, the benefits would
flow only in one direction as third-country residents would enjoy U.S.
tax reductions for their U.S. investments, but U.S. residents would not
enjoy reciprocal tax reductions for their investments in that third
country. Moreover, such third-country residents may be securing
benefits that are not appropriate in the context of the interaction
between their home country's tax systems and policies and those of the
United States. This use of tax treaties is not consistent with the
balance of the deal negotiated. Preventing this exploitation of our tax
treaties is critical to ensuring that the third country will sit down
at the table with us to negotiate on a reciprocal basis, so that we can
secure for U.S. persons the benefits of reductions in source-country
tax on their investments in that country.
consideration of arbitration
Tax treaties cannot facilitate cross-border investment and provide
a more stable investment environment unless the agreement is
effectively implemented by the tax administrations of the two
countries. Under our tax treaties, when a U.S. taxpayer becomes
concerned about implementation of the treaty, the taxpayer can bring
the matter to the U.S. competent authority who seeks to resolve the
matter with the competent authority of the treaty partner. The
competent authorities will work cooperatively to resolve genuine
disputes as to the appropriate application of the treaty.
The U.S. competent authority has a good track record in resolving
disputes. Even in the most cooperative bilateral relationships,
however, there will be instances in which the competent authorities
will not be able to reach a timely and satisfactory resolution.
Moreover, as the number and complexity of cross-border transactions
increases, so does the number and complexity of cross-border tax
disputes. Accordingly, we have considered ways to equip the U.S.
competent authority with additional tools to resolve disputes promptly,
including the possible use of arbitration in the competent authority
process.
The first U.S. tax agreement that contemplates arbitration is the
current U.S.-Germany income tax treaty, signed in 1989. Tax treaties
with several other countries, including Canada, Mexico, and the
Netherlands, incorporate authority for establishing voluntary binding
arbitration procedures based on the provision in the U.S.-Germany
treaty. Although we believe that the presence of these voluntary
arbitration provisions may have provided some limited assistance in
reaching mutual agreements, it has become clear that the ability to
enter into voluntary arbitration does not provide sufficient incentive
to resolve problem cases in a timely fashion.
Over the past few years, we have carefully considered and studied
mandatory arbitration procedures. In particular, we examined the
experience of countries that adopted mandatory binding arbitration
provisions with respect to tax matters. Many of them report that the
prospect of impending mandatory arbitration creates a significant
incentive to compromise before commencement of the process. Based on
our review of the U.S. experience with arbitration in other areas of
the law, the success of other countries with arbitration in the tax
area, and the overwhelming support of the business community, we
concluded that mandatory binding arbitration as the final step in the
competent authority process can be an effective and appropriate tool to
facilitate mutual agreement under U.S. tax treaties.
Two of the agreements before the committee (Germany and Belgium)
adopt an expedited approach to mandatory arbitration designed to
achieve the benefit of an arbitration provision with the least
disruption to the process of competent authority negotiation. Thus, the
mandatory arbitration process is formulated as part of the mutual
agreement procedure rather than as a separate, extrajudicial procedure.
As in the current mutual agreement procedure, a U.S. taxpayer
presents its problem to the competent authority and participates in
formulating the position the U.S. competent authority will take in
discussions with the treaty partner. Under the new arbitration
provisions, if the competent authorities cannot come to resolution
within 2 years, the competent authorities must present the issue to an
arbitration board for resolution unless both competent authorities
agree that the case is not suitable for arbitration. The arbitration
board can resolve the issue only by choosing the position of one of the
competent authorities. That position is adopted as the agreement of the
competent authorities and is treated like any other mutual agreement
(i.e., one that has been negotiated) under the treaty.
Because the arbitration board can only choose between the positions
of each competent authority, the expectation is that the differences
between the positions of the competent authorities will tend to narrow
as the case moves closer to arbitration. If the arbitration provision
is successful, difficult issues will be resolved without resort to
arbitration. Thus, it is our expectation that these arbitration
provisions will be rarely utilized, but that their presence will
encourage the competent authorities to take approaches to their
negotiations that result in mutually agreeable conclusions.
The arbitration process adopted in the agreements with Germany and
Belgium is mandatory and binding with respect to the competent
authorities. However, consistent with the negotiation process under the
mutual agreement procedure, the taxpayer can terminate the arbitration
at any time by withdrawing its request for competent authority
assistance. Moreover, the taxpayer retains the right to litigate the
matter in lieu of accepting the result of the arbitration, just as it
would be entitled to litigate in lieu of accepting the result of a
negotiation under the mutual agreement procedure.
Arbitration is a growing and developing field, and there are many
forms of arbitration from which to choose. We intend to continue to
study other arbitration provisions and to monitor the performance of
the provisions in the agreements with Belgium and Germany once
ratified. Although the competent authorities of these countries
generally work well with our competent authority, we believe that these
proposed arbitration provisions will supplement and reinforce the
current competent authority process in those treaties and will
facilitate negotiation of arbitration provisions with other countries
with which we need to bolster the competent authority process.
In short, the goal is to craft, in a manner acceptable to each
appropriate treaty partner, an effective mechanism to facilitate the
ordinary process of negotiation under the treaty's mutual agreement
procedure.
discussion of proposed new treaty and protocols
I now would like to discuss the four agreements that have been
transmitted for the Senate's consideration. We have submitted a
Technical Explanation of each agreement that contains detailed
discussions of the provisions of each treaty or protocol. These
Technical Explanations serve as an official guide to each agreement.
Before describing specific aspects of each agreement, I would like
to point out one item shared by all four agreements: The elimination of
source-country withholding tax on certain intercompany dividends. As we
have stated previously to this committee, we believe that the
elimination of source-country taxation of dividends should be
considered only on a case-by-case basis. It is not the U.S. model
position because we do not believe that it is appropriate in every
treaty. Consideration of such a provision in a treaty is appropriate
only if the treaty contains antitreaty-shopping rules and an
information exchange provision that meet the highest standards. In
addition to these prerequisites, the overall balance of the treaty must
be considered. We believe that these conditions and considerations are
met in all four agreements, and that the United States and U.S.
taxpayers will benefit significantly from the elimination of the
withholding tax in each agreement.
finland
The proposed protocol with Finland was signed in Helsinki on May
31, 2006, and amends the current Convention, which entered into force
in 1990. The most significant provisions in this agreement relate to
dividends, royalties, antiabuse provisions, and exchange of
information. The protocol also makes a number of necessary updates to
the current Convention and brings the Convention more in line with
recent agreements with other Nordic countries.
The proposed protocol makes a number of changes to the dividend
article of the current Convention. As mentioned above, the proposed
protocol eliminates the source-country withholding tax on many
intercompany dividends. In general, a company receiving a dividend must
have a substantial interest in the distributing corporation for a 12-
month period and meet special limitation on benefits provisions to
qualify for the exemption from withholding tax. The proposed protocol
also eliminates the source-country withholding tax on dividends paid to
pension funds. This provision is necessary to eliminate the double
taxation that occurs when tax is imposed on distributions to pension
funds that cannot be credited or used against further tax in the hands
of the beneficiaries of the fund. The proposed protocol also updates
the dividend article to incorporate policies reflected in the U.S.
model provision, such as those regarding real estate investment trusts
(REITs).
The proposed protocol makes a significant change to the royalty
article of the current Convention. The current Convention allows the
source country to withhold on royalty payments with respect to certain
types of property to residents of the other treaty partner, but limits
the withholding rate to a maximum of 5 percent. The proposed protocol
eliminates source-country withholding on royalties payments regardless
of the type of intellectual property involved, bringing the Convention
in line with the U.S. model treaty.
The proposed protocol makes a number of changes to the limitation
on benefits article of the current Convention. It tightens the
limitation on benefits rules applicable to publicly traded companies to
ensure a closer nexus between the company and its residence country
through regional trading or local management and control. The protocol
further tightens the limitation on benefits provision by including a
so-called ``triangular provision'' adopted in many U.S. treaties with
countries that exempt income earned in third countries. Under the
provision, the United States need not allow full treaty benefits to a
Finnish enterprise with respect to certain income exempt from Finnish
tax and attributable to a permanent establishment in a third state if
the income is not subject to a sufficient level of tax in the third
state. The proposed protocol also includes a provision adopted in U.S.
agreements with many European countries that allows a company resident
in one of the contracting states to qualify for treaty benefits in the
other state if the company is substantially owned by third-country
residents that would themselves qualify for equivalent benefits under
their own treaties with the other state.
The proposed protocol includes other antiabuse rules. It extends
the provision in the current Convention that preserves the U.S. right
to tax certain former citizens, also to cover certain former long-term
residents, and updates the provision to reflect changes in U.S. law.
The proposed protocol conforms the interest article in the current
Convention to the U.S. model treaty by including special contingent
interest and real estate mortgage investment conduit (REMIC) exceptions
to the elimination of withholding tax on interest payments.
The proposed protocol also includes several other important
administrative and technical modifications. Significantly, it updates
the exchange of information provisions to specify the obligation to
obtain and provide information held by financial institutions, and to
otherwise reflect U.S. model standards in this area.
Once ratified by the Senate, the proposed protocol will enter into
force upon the exchange of instruments of ratification. For taxes
withheld at source, the proposed protocol will generally have effect
within 2 months after entry into force. However, if such instruments
are exchanged before December 31, 2007, the countries agreed to
eliminate withholding taxes for intercompany dividends and dividends to
pension funds for dividends derived on or after January 1, 2007. With
respect to other taxes, the protocol will have effect January first of
the year following the year in which the protocol enters into force.
denmark
The proposed protocol with Denmark was signed in Copenhagen on May
2, 2006. The proposed protocol closely follows the recent protocol with
Sweden, which entered into force in 2006, and the proposed protocol
with Finland, described above, with respect to dividends and limitation
on benefits.
As noted above, the proposed protocol amends the dividend article
to eliminate the withholding tax on intercompany dividends when a
company meets certain ownership and limitation on benefits
requirements. In addition, the proposed protocol conforms to current
U.S. tax treaty policy by eliminating withholding tax on dividends to
pension funds. The provisions of the current Convention applicable to
regulated investment companies (RICs) and REITs are updated to apply
reciprocally, should Denmark and the United States agree that certain
Danish companies are similar to U.S. RICs and REITs. In addition, the
proposed protocol includes other updates to the dividend article,
including a definition of ``diversified'' to clarify the application of
the REIT provisions adopted in 1999.
The proposed protocol makes changes to the limitation on benefits
provision to tighten the publicly traded test, consistent with the
policy reflected in the U.S. model treaty. It also tightens the
limitation on benefits provision by adopting a triangular provision
similar to the provision adopted in the proposed protocol with Finland
and in many other U.S. tax treaties; the provision would deny full U.S.
treaty benefits to Danish enterprises with respect to certain income
exempt from tax in Denmark. The protocol continues the special rules
applicable to Danish taxable nonstock corporations. A Danish taxable
nonstock corporation is a vehicle used to prevent takeovers of
operating companies through control of voting shares, with public
shareholders receiving most rights to dividends of the operating
company. Because of the constraints applicable to such corporations,
the structure is not likely to be subject to treaty shopping abuses.
The proposed protocol also amends the current Convention to address
individuals who have expatriated. The new language better reflects the
current statutory language regarding the taxation of former citizens
and long-term residents of the United States. The provision now states
that the United States may, for the period of 10 years following the
loss of such status, tax such individuals in accordance with the laws
of the United States.
Following Senate ratification, the proposed protocol will enter
into force upon the receipt of the later of the notifications that the
requirements for entry into force have been met in each country. It
will have effect within 2 months of entry into force for taxes withheld
at source. With respect to other taxes, the proposed protocol will have
effect January first of the year following the year in which the
protocol enters into force.
germany
The proposed protocol was signed in Berlin on June 1, 2006, and
amends the current Convention, concluded in 1989. The most significant
provisions in this agreement relate to taxation of cross-border
dividend payments, coordination of pension rules, and adoption of
mandatory arbitration as part of the mutual agreement procedure. The
proposed protocol also makes a number of changes to reflect changes in
U.S. and German law, and to bring the Convention into closer conformity
with current U.S. tax treaty policy.
As mentioned above, the proposed protocol eliminates the source-
country withholding tax on many intercompany dividends. The proposed
protocol also eliminates withholding tax on cross-border dividend
payments to pension funds.
The proposed protocol updates the current Convention's treatment of
pensions. It removes barriers to the flow of personal services between
the United States and Germany that could otherwise result from
discontinuities in the laws of the two countries regarding the
deductibility of pension contributions. Like the U.S. model treaty, an
individual employed in one country who participates in a pension plan
in the other may, subject to certain conditions, be allowed in his
country of employment to deduct contributions to his plan in the other
country. Because significant changes in German law will phase in over
time to allow Germany to tax distributions of retirement income rather
than taxing contributions and accretions to pension funds, the United
States has agreed to consult with Germany in the future (but not before
January 1, 2013) to provide for limited source-based taxation of
certain distributions of retirement income. As discussed above, the
proposed protocol provides for mandatory arbitration of certain cases
that have not been resolved by the competent authorities within a
specified period, generally 2 years from the commencement of the case.
This provision is the first of its kind in a U.S. tax treaty. Under the
protocol, the arbitration process may be used to reach an agreement
with respect to certain issues relating to residence, permanent
establishment, business profits, associated enterprises, and royalties.
The arbitration board must deliver a determination within 9 months of
the appointment of the Chair of the Board. Consistent with the current
mutual agreement procedure, the taxpayer can terminate arbitration at
any time by withdrawing its request for competent authority assistance.
The taxpayer also retains the right to litigate in lieu of accepting
the result of the arbitration, just as it would be entitled to litigate
in lieu of accepting the result of a negotiation under the mutual
agreement procedure.
The proposed protocol makes a number of changes to the current
Convention to reflect legislative changes since 1989 and current treaty
policy. For example, the proposed protocol provides that former
citizens or long-term residents of the United States may for the period
of 10 years following the loss of such status be taxed in accordance
with the laws of the United States, makes technical changes to the
article dealing with the elimination of double taxation, significantly
strengthens the treaty's limitation on benefits provisions, and adopts
the U.S. model treaty approach to attribution of profits to a permanent
establishment.
Once ratified by the Senate, the proposed protocol will enter into
force upon the exchange of instruments of ratification. For taxes
withheld at source, the proposed protocol will generally have effect
January first of the year in which it enters into force. With respect
to other taxes, the protocol generally will have effect January first
of the year following the year in which the protocol enters into force.
Special effective date rules apply to arbitration in the mutual
agreement process, taxation of income from government service, and
coordination of the treaty's nondiscrimination provisions with those of
nontax agreements. The taxpayer may elect to apply the current
Convention, as unmodified by the proposed protocol, for the year
following these effective dates.
belgium
The proposed income tax Convention and accompanying protocol (the
proposed treaty) with Belgium was negotiated to replace the current
Convention, concluded in 1970 and amended by protocol in 1987 (the
existing Convention). The proposed treaty makes a number of changes to
conform to changes in U.S. law and to reflect current U.S. tax treaty
policy, particularly with respect to exchange of information.
Highlights of the proposed treaty are discussed under appropriate
headings below.
a. Taxation of Investment Income
The proposed treaty is similar to the other agreements before the
committee in that it eliminates the withholding tax on many
intercompany dividends. The proposed treaty eliminates withholding tax
on dividends paid by a U.S. company to a Belgian company with respect
to a significant (80 percent or more) and long-term (12 month or more)
interest, and only if the Belgian company meets special limitation on
benefits provisions. Unlike the other agreements, a U.S. company need
only own 10 percent or more of a Belgian company to receive such
benefits with respect to intercompany dividends. This difference
reflects the different tax treaty policy of the countries and Belgian
domestic tax initiatives. Consistent with the existing Convention, the
proposed treaty generally allows for taxation at source of 5 percent on
direct dividends (i.e., where a 10-percent-ownership threshold is met)
and 15 percent on all other dividends that do not qualify for the zero
rate. The proposed treaty also provides for a withholding rate of zero
on cross-border dividend payments to pension funds. The proposed treaty
also updates the dividend article to incorporate policies reflected in
the U.S. model provision, such as those regarding RICs and REITs.
Agreeing to eliminate withholding tax on dividends was key to
achieving our important policy goal of improving exchange of
information with Belgium. In the proposed treaty, the United States
reserves the right to terminate this exemption if it is determined that
Belgium has not complied with its obligations under the new provisions
included in article 24 (Mutual Agreement Procedure) and article 25
(Exchange of Information and Administrative Assistance) of the proposed
treaty. If the United States terminates the provision eliminating the
withholding tax on dividends, then, as discussed below, Belgium's
obligation to provide information held by a bank or other financial
institution pursuant to the new exchange of information provision would
also terminate.
The proposed treaty generally eliminates source-country withholding
taxes on cross-border interest payments. This is a substantial
improvement over the existing Convention, which provides for a general
withholding tax rate of 15 percent on such payments, with certain
exceptions. Consistent with U.S. tax treaty policy, source-country tax
may be imposed on certain contingent interest and payments from a U.S.
REMIC.
Consistent with the existing Convention, the proposed treaty
provides that royalties generally may not be taxed at source.
The taxation of capital gains under the proposed treaty generally
follows the format of the U.S. model treaty. Gains derived from the
sale of real property and from real property interests may be taxed by
the state in which the property is located. Likewise, gains from the
sale of personal property forming part of a permanent establishment
situated in a contracting state may be taxed in that state. All other
gains, including gains from the alienation of ships, boats, aircraft,
and containers used in international traffic and gains from the sale of
stock in a corporation, are taxable only in the state of residence of
the seller.
b. Taxation of Business Income
The proposed treaty changes the rules in the existing Convention by
adopting the U.S. model approach to attribution of profits to a
permanent establishment. The proposed treaty generally defines a
``permanent establishment'' in a manner consistent with the U.S. model
treaty.
The proposed treaty preserves the U.S. right to impose its branch
profits tax on U.S. branches of Belgian corporations. The proposed
treaty also accommodates a provision of U.S. domestic law that
attributes to a permanent establishment income that is earned during
the life of the permanent establishment but not received until after
the permanent establishment no longer exists.
The proposed treaty updates the existing Convention with respect to
international transport. It provides, consistent with the U.S. model
treaty, for exclusive residence-country taxation of profits from
international transport by ships and aircraft. This reciprocal
exemption extends to income from the rental of ships and aircraft on a
full basis, as well as income from rentals on a time or voyage basis if
the ship or aircraft is operated in international traffic by the lessee
or the income is incidental to income from the operation of ships or
aircraft in international traffic by the lessor. Income from other
rentals of ships or aircraft is treated as business profits under
article 7. As such, this class of income is taxable only in the country
of residence of the beneficial owner of the income unless the income is
attributable to a permanent establishment in the other country, in
which case it is taxable in that country on a net basis. In addition,
as provided in the U.S. model treaty, only the country of residence may
tax profits from the maintenance or rental of containers used in
international traffic.
c. Taxation of Personal Services Income
The rules for the taxation of income from the performance of
personal services under the proposed treaty are similar to those under
the U.S. model treaty and the existing Convention.
d. Arbitration
Like the proposed protocol with Germany, the proposed treaty
provides for mandatory arbitration of certain cases before the
competent authorities. The arbitration provision and procedures adopted
in the proposed treaty follow closely the approach in the proposed
protocol with Germany, except that Belgium and the United States agreed
that the scope of the arbitration process would cover all issues within
the purview of the competent authority and that the process must be
completed in 6 months. The agreement with Belgium reflects both
countries' recognition of the positive role arbitration can play in
facilitating agreement between the competent authorities.
e. Pensions
The proposed treaty also updates the existing Convention's
treatment of pensions. The proposed treaty removes barriers to the flow
of personal services between the countries that could otherwise result
from discontinuities in the laws of the countries regarding the
deductibility of pension contributions. The proposed treaty generally
allows a deduction in the country where an individual is employed for
payments made to a plan resident in the other country, if the structure
and legal requirements of such plans in the two countries are similar.
Similarly, if a resident of one of the countries participates in a
pension plan established in the other country, the country of residence
will not tax the income of the pension plan with respect to that
resident until a distribution is made from the pension plan. The
pension provision in the proposed treaty recognizes that triangular
cases may increasingly arise due to the flows of services within Europe
and the North American Free Trade Agreement (NAFTA) countries, and
provides for beneficial treatment of contributions and accretions into
certain funds in comparable third states. A comparable third state is a
member state of the European Union or the European Economic Area,
Switzerland, or a party to NAFTA, provided that treaty provisions with
that third state provide certain reciprocal benefits and satisfactory
information exchange.
f. Anti-Abuse Provisions
The proposed treaty also strengthens the limitation on benefits
provision and brings it into closer conformity with current U.S. treaty
policy. This updated provision is designed to deny ``treaty shoppers''
the benefits of the proposed treaty. Like some of U.S. treaties, the
proposed treaty also allows treaty benefits to certain companies
functioning as headquarters for multinational groups if certain
conditions are met.
The proposed treaty preserves the U.S. right to tax individuals who
expatriated for tax purposes. The proposed treaty updates this
provision to reflect legislative changes since 1987. Accordingly, the
proposed treaty provides that a former citizen or long-term resident of
the United States may, for the period of 10 years following the loss of
such status, be taxed in accordance with the laws of the United States.
g. Exchange of Information
The information exchange provision of the proposed treaty
specifically addresses a number of problems that have prevented
effective information exchange under the existing Convention. The new
provision makes clear that Belgium is obligated to provide the United
States with such information as is necessary to carry out the
provisions of the proposed treaty and the domestic laws of the parties.
Further, information can be obtained and provided by Belgium whether or
not Belgium needs the information for its own tax purposes. The
Treasury Department is satisfied that under this provision Belgium is
able to provide adequate tax information, including bank information,
to the United States.
Finally, as discussed above, if the United States terminates the
dividend-withholding-exemption provision, then Belgium will no longer
be required to provide information held by a bank or other financial
institution.
h. Entry Into Force
Following Senate ratification, the proposed treaty will enter into
force upon the exchange of instruments of ratification and notification
through diplomatic channels. For taxes withheld at source, the proposed
treaty will generally have effect within 2 months after entry into
force. With respect to other taxes, the proposed treaty will have
effect January first of the year following the year in which the
proposed treaty enters into force. Special effective date rules apply
to the limitation on benefits provision relating to headquarters
companies, arbitration in the mutual agreement process and exchange of
information. In general, the taxpayer may elect to extend the
application of the existing Convention (in its entirety) to the 12-
month period following the effective dates of this proposed treaty.
However, the election does not affect the effective date of the new
exchange of information provisions.
treaty program priorities
We continue to maintain a very active calendar of tax treaty
negotiations. We recently signed treaties with Bulgaria and Iceland. We
have substantially completed work with Canada and Norway, and we
currently are in ongoing negotiations with Chile and Hungary. We also
expect to announce soon the onset of other negotiations.
A key continuing priority is updating the few remaining U.S. tax
treaties that provide for low withholding tax rates but do not include
the limitation on benefits provisions needed to protect against the
possibility of treaty shopping. We also have undertaken exploratory
discussions with several countries in Asia and South America that we
hope will lead to productive negotiations later in 2007 or 2008.
conclusion
Mr. Chairman and Ranking Member Lugar, let me conclude by thanking
you for the opportunity to appear before the committee to discuss the
administration's efforts with respect to the four agreements under
consideration. We appreciate the committee's continuing interest in the
tax treaty program, and the members and staff for devoting time and
attention to the review of these new agreements. We are also grateful
for the assistance and cooperation of the staffs of this committee and
of the Joint Committee on Taxation in the tax treaty process.
On behalf of the administration, we urge the committee to take
prompt and favorable action on the agreements before you today.
Senator Menendez. Thank you, Mr. Harrington. I want to
thank you, because you did that in 5 minutes.
Mr. Barthold.
STATEMENT OF THOMAS A. BARTHOLD, ACTING CHIEF OF STAFF, JOINT
COMMITTEE ON TAXATION, U.S. CONGRESS, WASHINGTON, DC
Mr. Barthold. Mr. Harrington lays down quite the challenge.
It's my pleasure to present the testimony of the staff of
the Joint Committee on Taxation today concerning the proposed
income tax treaty with Belgium and the proposed income tax
protocols with Denmark, Finland, and Germany.
The Joint Committee staff has prepared detailed pamphlets
covering the proposed treaties and protocols which provide
descriptions of the treaties and protocols, include comparisons
to the current U.S. model income tax convention of November
2006, and make comparison to other recent U.S. tax treaties.
They also provide, for your consideration, some discussion of
issues that the committee may wish to consider in its
deliberations.
I will try to highlight a couple of key features of the
proposed treaty and protocols, and certain issues that they may
raise.
The Joint Committee staff, over the past couple of
Congresses, and your committee, has noted a drift away from the
1996 Treasury model treaty, in terms of treaties that were
brought before the Senate. And, in that regard, it's important
to note that, in November 2006, the Treasury Department
released a new model income tax treaty. As a general matter,
the 2006 U.S. model treaty incorporates the key developments in
U.S. income tax treaty policy that have been reflected in
recent U.S. income tax treaties, and the proposed treaty and
protocols before you today are generally consistent with the
provisions found in that 2006 model treaty.
Let me highlight a couple of areas from the model treaty.
First of all, limitation on benefits. One area in which the
proposed treaty and protocols are generally consistent with the
new 2006 model treaty is the inclusion in all four proposed
instruments of comprehensive limitation-on-benefits provisions.
These provisions reflect significant changes in U.S. treaty
policy and are generally intended to make it more difficult for
third-country residents to benefit inappropriately from a
treaty between the two countries.
The limitation-on-benefits provisions of the proposed
treaties and protocols are generally similar to one another.
However, there are a couple of significant differences. One
that I'd like to note is that the public trading test in the
limitation-on-benefits provision in the proposed protocol with
Germany may be satisfied only if the principal class of a
company's shares is primarily traded on a recognized stock
exchange located in the company's country of residence, while
the test for the other three countries may be satisfied by
trading on a regional exchange. That, no doubt, is an outgrowth
of the substantial stock exchange in Frankfurt and much smaller
exchanges in the countries of Finland, Denmark, and Belgium.
Another area to note, relative to the U.S. model treaty,
and a significant difference between the U.S. model and the
proposed treaty and protocols, is the zero rate of withholding
tax on certain intercompany dividends provided under all four
of the proposed treaties.
Until 2003, no United States income tax treaty provided for
complete exemption from dividend withholding; however, recent
United States income tax treaties and protocols with Australia,
Japan, Mexico, the Netherlands, Sweden, and the United Kingdom
all include zero-rate provisions.
The zero-rate provision of the proposed treaty and
protocols generally provide a zero rate of withholding tax on
certain dividends received by a parent company from a
subsidiary that is at least 80-percent owned by the parent.
Eligibility for the zero rate is contingent on satisfaction of
more stringent limitation-on-benefit requirements than
generally apply under the proposed treaty and protocols.
However, the zero-rate provision in the proposed treaty
with Belgium includes two unique features that might be worth
the committee's note. First, the required ownership threshold
for dividends paid by Belgian companies to U.S. companies is 10
percent rather than 80 percent. And, second, the provision
allows the United States to terminate that zero-rate provision
for dividends paid by U.S. companies if Belgium fails to comply
with certain obligations under the exchange-of-information and
mutual-agreement provisions. Basically, if, within a 5-to-6-
year period, Belgium does not put in place provisions providing
for exchange of information, the United States can terminate
this treaty benefit.
The model treaty does not include a zero-rate provision. In
previous testimony before the committee, the Treasury
Department has indicated that zero-rate provisions should be
allowed only under treaties that have restrictive limitation-
on-benefit rules and provide comprehensive information
exchange. The Treasury has also stated that granting a zero
rate on a dividend withholding tax should also be based on an
evaluation of the overall balance of benefits under the treaty.
So, the committee may wish to consider what overall balance
considerations might prompt the Treasury Department not to seek
a zero-rate provision in a treaty that has limitation-on-
benefits and information and exchange provisions meeting the
highest standards, such as those found in the new 2006 U.S.
model treaty.
The other major point to highlight in two of the agreements
before you today, and noted by my friend John Harrington, is
the provision in the Belgium Treaty and the proposed protocol
with Germany for mandatory and binding arbitration. This
provision is not included in the U.S. model. We have seen
worldwide movement toward arbitration provisions. The OECD
model treaty provides for arbitration provisions. The European
Union has provided for arbitration provisions in transfer
pricing cases within the European Union. However, the
information that would help clarify whether there is a problem
with the competent-authority process under the U.S. treaty
network, as well as information that would help identify the
extent of the problem and its root causes, is not really
publicly available. Consequently, if unresolved competent
authority proceedings are a problem for the United States, it
is difficult to determine whether mandatory and binding
arbitration would solve it.
The committee may wish to assess the basis for the Treasury
Department, or taxpayers, to believe that, in fact, that there
is a problem with the current resolution of disputes through
the competent-authority process. For example, are the problems
that are identified pervasive or idiosyncratic to the specific
countries or specific tax issues?
Also, there are many potential variations in arbitration
methodology. The two that you are considering today follow
what's known in the United States as the baseball arbitration
model. But the proposed arbitration could take many other
forms, such as what's known as the independent-opinion
approach, under which the board is presented with facts and
arguments and then draws its own conclusion. Another option
that could be considered is the provision of taxpayer
involvement in the proceedings. Also, some people have noted,
in the proposed agreements, that there is an absence of
feedback to the competent authorities regarding the rationale
for the board's determination.
Arbitration provisions are new to the United States treaty
network. I believe it will take time to ascertain whether these
procedures are effective or to determine if unexpected problems
arise. In the meantime, it would be not unreasonable to expect
that the Treasury Department or other trading partners may seek
similar provisions in future agreements. So, the committee may
wish to better understand how the Treasury Department intends
to monitor the competent-authority function, as well as the
arbitration developments, and what data might be relevant to
helping the committee determine, in fact, if these procedures
do improve the efficient case resolution under the competent-
authority process.
Sorry for exceeding my time, and I stand willing to answer
any questions that the committee might have.
[The prepared statement of Mr. Barthold follows:]
Prepared Statement of Thomas A. Barthold, Acting Chief of Staff, Joint
Committee on Taxation, U.S. Congress, Washington, DC \1\
My name \1\ is Thomas A. Barthold. I am acting chief of staff of
the Joint Committee on Taxation. It is my pleasure to present the
testimony of the staff of the Joint Committee on Taxation today
concerning the proposed income tax treaty with Belgium and the proposed
income tax protocols with Denmark, Finland, and Germany.
---------------------------------------------------------------------------
\1\ This document may be cited as follows: Joint Committee on
Taxation, Testimony of the Staff of the Joint Committee on Taxation
Before the Senate Committee on Foreign Relations Hearing on the
Proposed Tax Treaty with Belgium and the Proposed Tax Protocols with
Denmark, Finland, and Germany (JCX-51-07), July 17, 2007. This
publication can also be found at www.house.gov/jct.
---------------------------------------------------------------------------
overview
As in the past, the Joint Committee staff has prepared pamphlets
covering the proposed treaty and protocols. The pamphlets provide
detailed descriptions of the proposed treaty and protocols, including
comparisons with the United States Model Income Tax Convention of
November 15, 2006 (``2006 U.S. model treaty''), which reflects
preferred U.S. tax treaty policy, and with other recent U.S. tax
treaties.\2\ The pamphlets also provide detailed discussions of issues
raised by the proposed treaty and protocols. We consulted with the
Treasury Department and with the staff of your committee in analyzing
the proposed treaty and protocols and in preparing the pamphlets.
---------------------------------------------------------------------------
\2\ Joint Committee on Taxation, ``Explanation of Proposed Income
Tax Treaty Between the United States and Belgium'' (JCX-45-07), July
13, 2007; Joint Committee on Taxation, ``Explanation of Proposed
Protocol to the Income Tax Treaty Between the United States and
Denmark'' (JCX-46-07), July 13, 2007; Joint Committee on Taxation,
``Explanation of Proposed Protocol to the Income Tax Treaty Between the
United States and Germany'' (JCX-47-07), July 13, 2007; Joint Committee
on Taxation, ``Explanation of Proposed Protocol to the Income Tax
Treaty Between the United States and Finland'' (JCX-48-07), July 13,
2007.
---------------------------------------------------------------------------
The principal purposes of the treaty and protocols are to reduce or
eliminate double taxation of income earned by residents of either
country from sources within the other country and to prevent avoidance
or evasion of the taxes of the two countries. The proposed treaty and
protocols also are intended to promote close economic cooperation
between the treaty countries and to eliminate possible barriers to
trade and investment caused by overlapping taxing jurisdictions of the
treaty countries. As in other U.S. tax treaties, these objectives
principally are achieved through each country's agreement to limit, in
certain specified situations, its right to tax income derived from its
territory by residents of the other country.
The proposed treaty with Belgium would replace an existing treaty
signed in 1970 and modified by a protocol signed in 1987. The proposed
protocol with Denmark would amend an existing tax treaty that was
signed in 1999. The proposed protocol with Finland would make several
modifications to an existing treaty that was signed in 1989. The
proposed protocol with Germany would update the existing treaty and
protocol that were signed in 1989.
My testimony today will highlight some of the key features of the
proposed treaty and protocols and certain issues that they raise.
u.s. model treaty
As a general matter, U.S. model tax treaties provide a framework
for U.S. tax treaty policy and a starting point for tax treaty
negotiations with our treaty partners. These models provide helpful
information to taxpayers, the Congress, and foreign governments as to
U.S. policies on tax treaty matters. Periodically updating the U.S.
model tax treaty to reflect changes, revisions, developments, and the
viewpoints of Congress with regard to U.S. tax treaty policy ensures
that the model treaties remain meaningful and relevant. In November
2006, the Treasury Department released a new model income tax treaty;
the U.S. model income tax treaty had not been updated since 1996.\3\ As
a general matter, the 2006 U.S. model treaty incorporates the key
developments in U.S. income tax treaty policy that are reflected in
recent U.S. income tax treaties. The proposed treaty and protocols that
are the subject of this hearing are generally consistent with the
provisions found in the 2006 U.S. model treaty. However, there are some
key differences from the 2006 U.S. model treaty that I will discuss.
---------------------------------------------------------------------------
\3\ For a comparison of the 2006 U.S. model income tax treaty with
its 1996 predecessor, see Joint Committee on Taxation, ``Comparison of
the United States Model Income Tax Convention of September 15, 1996
with the United States Model Income Tax Convention of November 15,
2006'' (JCX-27-07), May 8, 2007.
---------------------------------------------------------------------------
Limitation-on-benefits provisions
One area in which the proposed treaty and protocols are generally
consistent with the 2006 U.S. model treaty is the inclusion in all four
proposed instruments of a comprehensive limitation-on-benefits
provision. The limitation-on-benefits provision of the 2006 U.S. model
treaty reflects significant changes to the limitation-on-benefits
provision of the United States Model Income Tax Convention of September
15, 1996. These changes generally are intended to make it more
difficult for third country residents to benefit inappropriately from a
treaty between two countries.
When a resident of one country derives income from another country,
the internal tax rules of the two countries may cause that income to be
taxed in both countries. One purpose of a bilateral income tax treaty
is to allocate taxing rights for cross-border income and thereby to
prevent double taxation of residents of the treaty countries. Although
a bilateral income tax treaty is intended to apply only to residents of
the two treaty countries, residents of third countries may attempt to
benefit from a treaty by engaging in treaty shopping. This treaty
shopping may involve organizing in a treaty country a corporation that
is entitled to the benefits of the treaty or engaging in income-
stripping transactions with a treaty-country resident. Limitation-on-
benefits provisions are intended to deny treaty benefits in certain
cases of treaty shopping.
The limitation-on-benefits provisions in the proposed treaty and
protocols are generally similar to the limitation-on-benefits
provisions in one another, in recent U.S. tax treaties, and in the 2006
U.S. model treaty. However, there are some differences. First, the
public trading test in the limitation-on-benefits provision in the
proposed protocol with Germany may be satisfied only if the principal
class of a company's shares is primarily traded on a recognized stock
exchange located in the company's country of residence. This rule is
the same as the rule in the 2006 U.S. model treaty. The public trading
tests in the proposed treaty with Belgium and in the proposed protocols
with Denmark and Finland may be satisfied by trading on a stock
exchange located in a company's country of residence or in one of
various other countries that are considered to be part of the economic
area that includes the applicable treaty country. Second, the proposed
treaty and the three proposed protocols include so-called derivative
benefits rules intended to grant treaty benefits to a treaty country
resident if the resident's owners would have been entitled to the same
benefits if the income had flowed directly to them. Third, the proposed
treaty and the three proposed protocols include rules intended to
foreclose eligibility for treaty benefits for certain triangular
arrangements, arrangements in which income such as interest on a loan
is lightly taxed because it is derived by a third-country permanent
establishment of a treaty country resident. The 2006 U.S. model treaty
does not include special derivative benefits rules or rules for
triangular arrangements.
The proposed treaty with Belgium and the proposed protocols with
Denmark and Germany have special limitation-on-benefits rules that are
not included in the 2006 U.S. model treaty. The proposed treaty with
Belgium includes rules intended to allow treaty benefits to certain
treaty country residents that function as headquarters companies.
Although the 2006 U.S. model treaty does not include special
limitation-on-benefits rules for headquarters companies, similar rules
have been included in U.S. income tax treaties with Australia and the
Netherlands. The proposed protocol with Denmark includes rules intended
to allow treaty benefits to certain Danish taxable nonstock
corporations and to Danish companies owned by taxable nonstock
corporations. Taxable nonstock corporations are entities designed to
preserve control of certain Danish operating companies through control
of the companies' voting stock. The proposed protocol with Germany
includes special rules for determining whether certain German
investment vehicles are entitled to treaty benefits.
``Zero-rate'' dividend provisions
One significant difference between the 2006 U.S. model treaty and
the proposed treaty and protocols is the ``zero rate'' of withholding
tax on certain intercompany dividends provided under all four of the
proposed instruments. Until 2003, no U.S. income tax treaty provided
for a complete exemption from dividend withholding tax, and the 2006
U.S. model treaty and the 2005 Model Convention on Income and Capital
of the Organisation for Economic Cooperation and Development (``OECD'')
do not provide an exemption. By contrast, many bilateral income tax
treaties of other countries eliminate withholding taxes on direct
dividends between treaty countries, and the European Union (``EU'')
Parent-Subsidiary Directive repeals withholding taxes on intra-EU
direct dividends. The directive's required ownership threshold for
qualification for zero withholding is 15 percent in 2007. Recent U.S.
income tax treaties and protocols with Australia, Japan, Mexico, the
Netherlands, Sweden, and the United Kingdom include zero-rate
provisions. The Senate ratified those treaties and protocols in 2003
(Australia, Mexico, United Kingdom), 2004 (Japan, Netherlands), and
2006 (Sweden). The zero-rate provisions in those treaties are similar
to the provisions in the proposed treaty and protocols.
In general, the dividend articles of the proposed treaty and
protocols provide a maximum source-country withholding tax rate of 15
percent and a reduced 5-percent maximum rate for dividends received by
a company owning at least 10 percent of the dividend-paying company.
The proposed treaty and protocols generally provide a zero rate of
withholding tax on certain dividends received by a parent company from
a subsidiary that is at least 80 percent owned by the parent.
Eligibility for this zero rate is contingent on satisfaction of more
stringent limitation-on-benefits requirements than generally apply
under the proposed treaty and protocols. A zero rate also generally is
available under the proposed treaty and protocols for dividends
received by a pension fund. The treaty and protocols also include
special rules for dividends received from U.S. regulated investment
companies and real estate investment trusts. These special rules
generally are similar to provisions included in other recent U.S.
treaties and protocols.
The zero-rate provision in the proposed treaty with Belgium
includes two unique features. First, the required ownership threshold
for dividends paid by Belgian companies to U.S. companies is 10 percent
rather than 80 percent. Second, the provision allows the United States
to terminate the zero-rate provision for dividends paid by U.S.
companies if Belgium fails to comply with certain obligations under the
exchange-of-information and mutual-agreement procedure provisions. The
zero rate for dividends paid by U.S.-resident companies will terminate
for amounts paid or credited on or after January 1 of the 6th year
following the year in which the proposed treaty enters into force
unless by June 30 of the preceding year the U.S. Treasury Secretary, on
the basis of a report of the IRS Commissioner, certifies to the U.S.
Senate that Belgium has satisfactorily complied with its obligations
under article 25 (Exchange of Information and Administrative
Assistance). The United States also may terminate the zero-rate
provision for dividends paid by U.S. companies if the United States
determines that Belgium's actions under article 24 (Mutual Agreement
Procedure) and article 25 (Exchange of Information and Administrative
Assistance) have materially altered the balance of benefits of the
proposed treaty. If the United States terminates the zero-rate
provision, Belgium will not be required to comply with exchange-of-
information rules specifically requiring the treaty countries to
provide information held by banks and other financial institutions and
by nominees and persons acting in agency or fiduciary capacities.
Notwithstanding the fact that zero-rate provisions are common in
recent U.S. treaties, the 2006 U.S. model treaty does not include a
zero-rate provision, nor do recent treaties with Bangladesh and Sri
Lanka nor the recent protocol with France. In previous testimony before
the committee, the Treasury Department has indicated that zero-rate
provisions should be allowed only under treaties that have restrictive
limitation-on-benefits rules and that provide comprehensive information
exchange. Even in those treaties, according to previous Treasury
Department statements, dividend withholding tax should be eliminated
only based on an evaluation of the overall balance of benefits under
the treaty. Looking beyond the four treaty relationships directly at
issue, the committee may wish to consider what overall balance
considerations might prompt the Treasury Department not to seek a zero-
rate provision in a treaty that has limitation-on-benefits and
information-exchange provisions meeting the highest standards, such as
those found in the 2006 U.S. model treaty.
mandatory and binding arbitration provisions
One new feature of the proposed treaty with Belgium and the
proposed protocol with Germany is the mandatory and binding arbitration
provision. The provision does not appear in the 2006 U.S. model treaty
or in any existing U.S. tax treaty. However, the use of mandatory and
binding arbitration procedures in tax disputes between countries is not
a completely novel concept. Earlier this year, the OECD Committee on
Fiscal Affairs adopted proposed changes to its model treaty and
commentary that incorporate a mandatory and binding arbitration
procedure, some elements of which are generally similar to those of the
proposed treaty and protocol. In addition, the EU has adopted certain
mandatory and binding arbitration procedures that are applicable to
transfer pricing disputes between 15 of the oldest members of the EU.
There have been statements made by the European Commission that the EU
mandatory arbitration procedure is not working as well as it is
supposed to, for reasons that need to be further explored.
Judging from the actions taken by the OECD and the EU, unresolved
competent authority proceedings appear to be a multinational
occurrence. However, the information that would help clarify whether
this phenomenon represents a problem for the U.S. competent authority
program, as well as the information that would identify the extent of
the problem and its root causes, is not publicly available.
Consequently, if unresolved competent authority proceedings are a
problem for the United States, it is difficult to determine whether
mandatory and binding arbitration would solve it. The committee may
wish to assess the basis for the Treasury Department, or taxpayers, to
believe that there is a problem with the current resolution of disputes
through the competent authority process. Are problems that have been
identified pervasive or idiosyncratic to specific countries or tax
issues?
As a general matter, it is beneficial to resolve tax disputes
effectively and efficiently. The new arbitration procedures are
intended to ensure that the mutual agreement procedures proceed
according to a schedule and that all cases will be resolved within a
limited time period. There are many potential variations of the
arbitration methodology, however, and the committee may wish to
consider the rationale for some of the choices made by the United
States and its treaty partners and whether those chosen methodologies
help to resolve the perceived problem. For example, the proposed
arbitration procedures utilize the ``last best offer'' method. Under
the ``last best offer'' method (also informally called ``baseball
arbitration'' because it is similar to the arbitration method used to
resolve major league baseball salary disputes), each of the treaty
countries submits to the arbitration board (``board'') a proposed
resolution describing its proposed disposition of the specific amounts
of income, expense, or taxation at issue in the case (and a supporting
position paper), and the board is required to adopt one of the proposed
resolutions submitted by the treaty countries. The determination of the
board is binding upon the treaty countries in the case, but does not
state a rationale and has no precedential value. The last best-offer
approach is intended to induce the competent authorities to moderate
their positions, including before arbitration proceedings would
commence, thus increasing the possibility of a negotiated settlement.
The proposed arbitration procedures do not adopt the ``independent
opinion'' approach, under which the board is presented with the facts
and arguments of the parties based on applicable law and then reaches
its own independent decision based upon a written, reasoned analysis of
the facts involved and applicable legal sources. Other examples of
choices made are the lack of provision for taxpayer involvement in the
arbitration proceedings and the absence of feedback to the competent
authorities regarding the rationale for the board's determination.
The proposed mandatory and binding arbitration procedures are new
to the United States treaty network. It will take time to ascertain if
these procedures are effective or if unexpected problems arise.
Meanwhile, the Treasury Department or other trading partners may seek
to negotiate treaty provisions with current or future treaty partners
that are similar, in whole or in part, to the arbitration procedures of
the proposed treaty and protocol. The committee may wish to better
understand how the Treasury Department intends to monitor the competent
authority function, as well as arbitration developments with respect to
other countries, to determine the overall effects of the new
arbitration procedures on the mutual agreement process. The committee
may wish to consider what types of information are needed to measure
whether, regardless of whether they are availed of, the proposed
arbitration procedures result in more efficient case resolution, both
before and during arbitration, and whether they enhance the quality of
the outcome of the competent authority cases. In addition, the
committee may wish to inquire as to whether and under what
circumstances the Treasury Department intends to pursue similar
provisions in other treaties.
belgium
The proposed treaty replaces the existing treaty (signed in 1970)
and protocol (signed in 1987). In addition to the inclusion of a
comprehensive limitation-on-benefits provision, a zero-rate dividend
provision, and a mandatory and binding arbitration provision, as
previously discussed, the proposed treaty has several other key
features.
The proposed treaty contains provisions under which each country
generally agrees not to tax business income derived from sources within
that country by residents of the other country unless the business
activities in the taxing country are substantial enough to constitute a
permanent establishment (article 7). Similarly, the proposed treaty
contains certain exemptions under which residents of one country
performing personal services in the other country will not be required
to pay tax in the other country unless their contact with the other
country exceeds specified minimums (articles 14 and 16).
The proposed treaty provides that, subject to certain rules and
exceptions, interest and royalties derived by a resident of either
country from sources within the other country may be taxed only by the
residence country (articles 11 and 12).
In situations in which the country of source retains the right
under the proposed treaty to tax income derived by residents of the
other country, the proposed treaty generally provides for relief from
the potential double taxation through the allowance by the country of
residence of a tax credit for certain foreign taxes paid to the other
country (article 22).
The proposed treaty contains the standard provision (the ``saving
clause'') included in U.S. tax treaties pursuant to which each country
retains the right to tax its residents and citizens as if the treaty
had not come into effect (article 1). This provision also allows the
United States to tax certain former citizens and long-term residents
regardless of whether the termination of citizenship or residency had
as one of its principal purposes the avoidance of tax. The provision
generally allows the United States to apply special tax rules under
section 877 of the Code as amended in 1996 and 2004. In addition, the
proposed treaty contains the standard provision providing that the
treaty may not be applied to deny any taxpayer any benefits to which
the taxpayer would be entitled under the domestic law of a country or
under any other agreement between the two countries (article 1).
The proposed treaty adds to the present treaty certain provisions
regarding cross-border contributions to, and benefit accruals of,
pension plans (article 17). These rules are intended to remove barriers
to the flow of personal services between the two countries that could
otherwise result from discontinuities under the laws of each country
and are similar to provisions included in other recent U.S. treaties
and protocols, including the 2006 U.S. model treaty.
The proposed treaty (article 19) generally provides that students,
teachers, business trainees, and researchers visiting the other treaty
country are exempt from host country taxation on certain types of
payments received.
The proposed treaty provides authority for the two countries to
exchange information (article 25) and assist in the collection of tax
(article 26) in order to carry out the provisions of the proposed
treaty.
denmark
The proposed protocol makes a few modifications to the 1999 treaty,
in addition to the adoption of the comprehensive limitation-on-benefits
provision and the zero-rate dividends provision previously discussed.
The proposed protocol expands the saving clause provision in
article 1 (Personal Scope) of the existing treaty to allow the United
States to tax certain former citizens and long-term residents
regardless of whether their termination of citizenship of residency has
as one of its principal purposes the avoidance of tax. This provision
generally allows the United States to apply special tax rules under
section 877 of the Code as amended in 1996 and 2004.
The proposed protocol amends article 19 (Government Service) of the
existing treaty to correct a drafting error that inappropriately
expands the scope of an exception to the general rule governing the
taxation of certain government pensions.
finland
The proposed protocol makes several modifications to the 1989
treaty, in addition to the adoption of the comprehensive limitation-on-
benefits provision and the zero-rate dividends provision previously
discussed.
The proposed protocol expands the saving clause provision in
article 1 (Personal Scope) of the existing treaty to allow the United
States to tax certain former citizens and long-term residents
regardless of whether the termination of citizenship or residency had
as one of its principal purposes the avoidance of tax. This provision
generally allows the United States to apply special tax rules under
section 877 of the Code as amended in 1996 and 2004. The proposed
protocol makes coordinating changes to article 23 (Elimination of
Double Taxation) with respect to foreign tax credits allowed for former
U.S. citizens and long-term residents.
The proposed protocol also adds to article 1 (Personal Scope) of
the existing treaty rules included in recent U.S. treaties and the 2006
U.S. model treaty related to fiscally transparent entities.
The proposed protocol amends article 4 (Residence) of the existing
treaty to clarify which persons are residents of a treaty country and
to more closely reflect the provisions included in the 2006 U.S. model
treaty and recent U.S. income tax treaties.
The proposed protocol modifies article 11 (Interest) and article 12
(Royalties) of the existing treaty. It adds to article 11 two new
exceptions to the general prohibition on source-country taxation of
interest income, one for contingent interest and the other for interest
that is an excess inclusion with respect to a residual interest in a
real estate mortgage investment conduit. It amends article 12 by
deleting a paragraph that permits source-country taxation of royalties
that are beneficially owned by a resident of the other treaty country
and that are received as consideration for the use of patents and
trademarks or for information concerning industrial, commercial, or
scientific experience.
The proposed protocol replaces article 26 (Exchange of Information)
of the existing treaty with new exchange-of-information rules that are
largely similar to the exchange-of-information rules included in the
2006 U.S. model treaty.
The proposed protocol will enter into force upon the exchange of
instruments of ratification. If the proposed protocol enters into force
before December 31, 2007, the dividend withholding tax provisions will
have effect for income derived on or after January 1, 2007.
germany
The proposed protocol makes several modifications to the 1989
treaty and protocol, in addition to the adoption of the comprehensive
limitation-on-benefits provision, the zero-rate dividends provision,
and the mandatory and binding arbitration provision previously
discussed.
The proposed protocol expands the saving clause provision in
article 1 (General Scope) of the existing treaty to allow the United
States to tax certain former citizens and long-term residents
regardless of whether the termination of citizenship or residency had
as one of its principal purposes the avoidance of tax. This provision
generally allows the United States to apply special tax rules under
section 877 of the Code as amended in 1996 and 2004. The proposed
protocol also updates the existing treaty to include the rules in the
2006 U.S. model treaty related to fiscally transparent entities.
The proposed protocol amends article 4 (Residence) of the existing
treaty to clarify which persons are residents of a treaty country. The
proposed protocol specifically addresses the residence of the two
treaty countries (and subdivisions and local authorities thereof), U.S.
citizens and aliens lawfully admitted for permanent residence in the
United States, and certain investment funds.
The proposed protocol modifies article 7 (Business Profits) in two
important respects. First, the protocol modifies article 7 to provide
that income derived from independent personal services (i.e., income
from the performance of professional services and of other activities
of an independent character) is included within the meaning of the term
``business profits.'' Accordingly, the treatment of such income is
governed by article 7 rather than by present treaty article 14
(Independent Personal Services), which the proposed protocol deletes.
In addition, paragraph 4 of article XVI provides that the OECD Transfer
Pricing Guidelines apply by analogy in determining the profits
attributable to a permanent establishment under article 7. These new
rules are similar to provisions included in other recent U.S. treaties
and protocols, including the 2006 U.S model treaty.
The proposed protocol adds to the present treaty article 11
(Interest) two new exceptions to the general prohibition on source-
country taxation of interest income; one for contingent interest and
the other for interest that is an excess inclusion with respect to a
residual interest in a real estate mortgage investment conduit.
The proposed protocol adds to the present treaty article 18A
(Pension Plans). Article 18A includes new rules related to cross-border
pension contributions and benefit accruals. These rules are intended to
remove barriers to the flow of personal services between the two
countries that could otherwise result from discontinuities under the
laws of each country regarding the deductibility of pension
contributions and the taxation of a pension plan's earnings and
accretions in value. These new rules are similar to provisions included
in other recent U.S. treaties and protocols, including the 2006 U.S
model treaty.
The proposed protocol replaces article 19 (Government Service) of
the existing treaty with a new article that more closely reflects the
government service provisions included in the 2006 U.S. model treaty
and recent U.S. income tax treaties.
The proposed protocol modifies article 20 (Visiting Professors and
Teachers; Students and Trainees) of the existing treaty to provide that
professors or teachers who visit the other treaty country for a period
that exceeds 2 years do not retroactively lose their exemption from
host-country income tax. The proposed protocol increases the amount of
the exemption from host-country tax for students and trainees who
receive certain types of payments.
The proposed protocol replaces article 23 (Relief From Double
Taxation) of the present treaty with a new article providing updated
rules for the relief of double taxation. Among other changes, the new
article 23 provides special rules for the tax treatment in both treaty
counties of certain types of income derived from U.S. sources by U.S.
citizens who are resident in Germany.
The proposed protocol updates article 17 (Artistes and Athletes)
and article 20 (Visiting Professors and Teachers; Students and
Trainees) of the existing treaty to reflect Germany's use of the euro.
The proposed protocol provides for the entry into force of the
proposed protocol. The provisions of the proposed protocol are
generally effective on a prospective basis. However, the provisions of
the proposed protocol with respect to withholding taxes are effective
for amounts paid or credited on or after the first day of January of
the year in which the proposed protocol enters into force.
conclusion
These provisions and issues are all discussed in more detail in the
Joint Committee staff pamphlets on the proposed treaty and protocols. I
am happy to answer any questions that the committee may have at this
time or in the future.
Senator Menendez. Thank you.
Turning to the intellectual property treaties, Ms. Boland.
STATEMENT OF LOIS E. BOLAND, DIRECTOR OF THE OFFICE ON
INTERNATIONAL RELATIONS, U.S. PATENT AND TRADEMARK OFFICE,
DEPARTMENT OF COMMERCE, WASHINGTON, DC
Ms. Boland. Mr. Chairman, Senator Lugar, thank you for this
opportunity to discuss, and urge support for, ratification of
three important intellectual property treaties.
These treaties involve patent, design patent, and trademark
protection. They are similar, in that each will serve to
streamline and simplify procedures for American innovators and
businesses, especially independent inventors and small business
desiring to protect their intellectual property abroad.
The first is a treaty on industrial designs, commonly
referred to as the Hague Agreement. It provides a streamlined
protection system for American owners of industrial designs
who, by filing a single standardized application at the United
States Patent and Trademark Office, in English, can apply for
design protection in each country that is party to the act.
Currently, a U.S. design applicant must file separate
applications for protection in each country in which protection
is sought.
In terms of benefits, we anticipate that the centralized
registration procedure under the treaty will result in cost
savings to American industrial designowners and lead to fewer
processing mistakes and delays on the part of both the
applicant and the relevant foreign patent offices.
Mr. Chairman, a draft implementing bill for the treaty's
provisions will be sent to the Hill this week. It will require
a number of limited changes in the U.S. design patent law,
including providing limited rights to design patentees between
publication and grant dates and extending the design patent
term from 14 to 15 years from grant.
The second treaty, the Patent Law Treaty, or PLT, promotes
patent protection by codifying, streamlining, and reducing the
costs associated with obtaining and maintaining patents
throughout the world. Because patents are territorial,
inventors need to seek a patent in each country in which they
desire protection. Differences in the formal requirements of a
patent application in each country or region make filing patent
applications complex and expensive. The PLT will help U.S.
businesses and independent inventors by simplifying the process
of obtaining patent protection, and thereby, reduce associated
costs. It sets forth, with one exception, the maximum formal
requirements that parties to the treaty may impose on patent
applicants and patentees.
The PLT also standardizes requirements for obtaining a
filing date and provides that applicants cannot be required to
hire representation for the act of filing an application or
paying certain fees.
The President has recommended that a reservation to the PLT
be included in the U.S. instrument of ratification that
clarifies that the United States will maintain its law relating
to unity of invention. A few minor amendments to the U.S.
patent law will be necessary in order to implement the PLT,
relating to application filing dates, time limits, and priority
rights. Draft legislation implementing those changes was
forwarded to the Hill yesterday.
The third treaty is the Singapore Treaty on the Law of
Trademarks, or the Singapore Treaty. This treaty updates and
improves the world Intellectual Property Organization Trademark
Law Treaty of 1994 by allowing its contracting parties to move
to a totally electronic filing and processing system. It also
establishes an assembly to oversee matters concerning the
treaty, provides relief for missed deadlines, and expands the
TLT to apply to trademarks consisting of nonvisible signs.
Most significantly, the Singapore Treaty addresses the No.
1 complaint by U.S. businesses concerning trademark
registrations in other countries; namely, trademark license
recordal requirements. Many countries that require recordal of
trademark license contracts require certified signatures of
both parties, a certified copy of the entire license agreement,
and various other formalities not strictly necessary for the
act of recording the license. Those requirements are
burdensome, time-consuming, and costly for U.S. businesses.
Also, in a number of countries, failure to record can result in
the loss of the underlying trademark registration. The United
States does not require recordal of trademark licenses.
The Singapore Treaty imposes limits on these license
recordal requirements, as well as on the penalties associated
with a failure to record. These limitations will greatly
benefit American entities doing business in foreign countries.
Ratification of the Singapore Treaty will not require
implementing legislation, because U.S. law and practice is
already in full compliance with the provisions of the treaty.
Mr. Chairman, in summary, these three treaties will help
American businesses establish, maintain, and protect their
intellectual property abroad. On behalf of the administration,
we respectfully urge ratification and thank you for your
consideration.
[The prepared statement of Ms. Boland follows:]
Prepared Statement of Lois E. Boland, Director, Office of International
Relations, U.S. Patent and Trademark Office, Department of Commerce,
Washington, DC
Chairman Biden, Ranking Member Lugar, and members of the committee,
thank you for this opportunity to appear before you to discuss and urge
support for ratification of three important intellectual property
treaties. These treaties, while addressing three different types of
intellectual property, are similar in that they each will serve to
streamline and simplify procedures for American innovators and
businesses seeking to protect their intellectual property abroad.
geneva act of the hague agreement
Mr. Chairman, the first treaty is the ``Geneva Act of the Hague
Agreement Concerning the International Registration of Industrial
Designs.'' It is commonly referred to as the ``Geneva Act of the Hague
Agreement'' or ``Hague Agreement.''
This treaty promotes the ability of American design owners to
protect their industrial designs by allowing them to obtain
multinational design protection through a single international
application procedure. It provides a streamlined design protection
system for American owners of industrial designs who, by filing a
single standardized application at the United States Patent and
Trademark Office (USPTO), in English, can apply for design protection
in each country that is Party to the Act. Similarly, renewal of a
design registration in each Party to the Act may be made by filing a
single request along with payment of the appropriate fees at the
International Bureau of the World Intellectual Property Organization
(WIPO).
Currently, a U.S. design applicant must file separate applications
for design protection in each country. We anticipate that the
centralized registration procedure under the Hague Agreement will
result in cost savings to American industrial design owners and lead to
fewer processing mistakes and delays on the part of both the applicant
and the relevant foreign patent offices.
The United States is one of relatively few countries that provide
for a substantive examination of design applications with respect to
novelty and nonobviousness. The Hague Agreement was negotiated with the
needs of those examining offices, such as the USPTO, in mind. The USPTO
will maintain its substantive examination process for design patent
applications under the Hague Agreement.
However, the implementation of the Hague Agreement does require a
number of limited changes in U.S. design patent law including (1)
providing limited rights to patent applicants between the date that
their international design application is published and the date on
which they are granted a U.S. patent based on that application, (2)
extending the patent term for designs from 14 to 15 years from grant
and (3) allowing the USPTO to use a published international design
registration as a basis for rejecting a subsequently filed patent
application that is directed at the same or similar subject matter.
Mr. Chairman, the administration will be forwarding recommended
implementing legislation in the near future.
patent law treaty
The second treaty, the Patent Law Treaty, or ``PLT,'' promotes
patent protection by codifying, harmonizing, and reducing the costs of
taking the steps necessary for obtaining and maintaining patents
throughout the world. The provisions set forth in the PLT will
safeguard American commercial interests by making it easier for our
patent applicants and owners to protect their intellectual property
worldwide.
In today's innovation-based, global economy, a patent is an
important tool to protect a company's intellectual contributions, and
is one of its most important commercial assets. A global patent
portfolio can be expensive, however, to establish and maintain. This is
because patents are only enforceable in the country or region in which
they are granted. Because patents are territorial, inventors need to
seek patent protection in each country in which they desire patent
protection. As a result, differences in formal requirements of a patent
application in each country (or region) can make filing patent
applications complex and expensive. The PLT will help U.S. businesses
and independent inventors by simplifying the process of obtaining
patent protection and, thereby, reduce the associated cost.
The PLT addresses procedural requirements of a patent application,
and generally sets forth the maximum procedural requirements that can
be imposed. It standardizes requirements for obtaining a filing date,
and provides that applicants cannot be required to hire representation
for the act of filing an application or to pay certain fees. The PLT
does not limit the United States from providing patent requirements
that are more favorable to the patent applicant or patent owner than
those set forth in the PLT or from prescribing requirements that are
provided for in our substantive law relating to patents.
The PLT sets forth, with one exception, maximum formal requirements
that Parties to the PLT may impose on patent applicants and patentees.
Otherwise, Parties are free to provide requirements that, from the
viewpoint of applicants and owners, are more favorable than PLT
requirements. The one exception to this freedom is the filing date
provision, which is both a maximum and a minimum, i.e., a ``filing date
standard.''
Because the USPTO assesses that implementing a provision of the PLT
requiring ``unity of invention''--a standard that is substantively at
odds with the corresponding U.S. standard--would require a substantive
and impractical change to our patent law, the President has recommended
that the following reservation be included in the U.S. instrument of
ratification, as allowed by the treaty: ``Pursuant to Article 23, the
United States declares that Article 6(1) shall not apply to any
requirement relating to unity of invention applicable under the Patent
Cooperation Treaty to an international application.''
Upon entry into force, the PLT will simplify the formal procedures
[or ``requirements''] and reduce associated costs for patent applicants
and owners of patents in obtaining and preserving their rights in
inventions in many countries of the world.
A few amendments to the U.S. patent law will be necessary in order
to implement the PLT. Minor changes in title 35, United States Code,
will be required relating to: (a) Patent application filing dates, (b)
relief in respect of time limits and reinstatement of rights and (c)
the restoration of the priority right.
Mr. Chairman, the administration forwarded the recommended
implementing legislation yesterday.
singapore treaty on the law of trademarks
The third intellectual property treaty is the Singapore Treaty on
the Law of Trademarks or the ``Singapore Treaty.'' This treaty updates
and improves the World Intellectual Property Organization Trademark Law
Treaty of 1994 (TLT) that harmonizes formalities and simplifies
procedures for registering and renewing trademarks.
Consistent with the USPTO's e-government efforts, the Singapore
Treaty updates TLT by allowing its Contracting Parties to move to a
totally electronic filing and processing system. The Singapore Treaty
also establishes an Assembly to oversee matters concerning the treaty;
provides relief measures for deadlines missed by the trademark
applicant or registrant; and expands the TLT to apply to trademarks
consisting of nonvisible signs, in line with Free Trade Agreements
entered into by the United States.
Most significantly, the Singapore Treaty also addresses the No. 1
complaint by U.S. businesses concerning trademark registrations in
other countries; namely, trademark license recordal requirements. Many
countries that record trademark license contracts require certified
signatures of both parties, a certified copy of the entire license
agreement, and various other formality requirements that may not be
strictly necessary for the act of recording the license. Certainly
these requirements are burdensome, time-consuming and costly for
businesses having to record those trademark licenses. Moreover, in a
number of countries, failure to record a license contract with a
government agency can result in invalidation of the underlying
trademark registration. The Singapore Treaty imposes limits on license
recordal requirements as well as on those penalties associated with the
failure to record licenses in order to simplify and reduce costs
associated with this formality laden recordal process for U.S.
businesses as well as to minimize the damage that may emanate from a
failure to record licenses in those countries that are party to the
treaty. The United States does not require recordal of trademark
licenses.
Mr. Chairman, ratification of the Singapore Treaty will not require
implementing legislation because U.S. law is already in compliance with
the provisions of the treaty.
conclusion
Mr. Chairman, in summary, these three treaties will help American
businesses establish, maintain, and protect their intellectual property
abroad. On behalf of the administration, we respectfully urge
ratification. Thank you for your consideration.
Senator Menendez. Thank you very much.
Mr. Scholz, how much time to you need? I don't want to
shortchange you. It's just the vote is well underway, and I
wanted to get a sense of--5, 7 minutes?
Mr. Scholz. Approximately 3 minutes, Mr. Chairman.
Senator Menendez. Three minutes? Then, I'd love to hear you
now. [Laughter.]
STATEMENT OF WESLEY SCHOLZ, DIRECTOR OF THE OFFICE OF
INVESTMENT AFFAIRS, DEPARTMENT OF STATE, WASHINGTON, DC
Mr. Scholz. Thank you, Mr. Chairman. And thank you for the
opportunity to testify before the Senate Foreign Relations
Committee as the administration seeks advice and consent of the
Senate to the ratification of the protocol to our Treaty of
Friendship, Commerce, and Navigation with Denmark.
The protocol will establish the legal basis by which the
United States may issue treaty investor visas, also known as E-
2 visas, to qualified nationals of Denmark under the FCN
Treaty.
United States investors interested in investing in Denmark
are already eligible for Danish visas that offer comparable
benefits to those that would be accorded to nationals of
Denmark by this protocol. The United States has a longstanding
policy of openness to foreign investment. As President Bush
stated on May 10 of this year, a free and open international
investment regime is vital for a stable and growing economy
both here at home and throughout the world.
Foreign investment in the United States strengthens our
economy and improves productivity, provides good jobs, and
spurs healthy competition. Americans have prospered as foreign
companies have put their money to work here in the United
States. Foreign companies in the United States employed more
than 5 million U.S. workers in 2005, providing 4.5 percent of
all private sector employment in the United States. Visas for
investors facilitate investment in the United States.
The United States and Denmark have a strong and growing
economic relationship. According to Department of Commerce
statistics, the stock of Danish direct investment in the United
States totaled over $7 billion at the end of 2006. And United
States direct investment in Denmark amounted to about $5.8
billion.
The protocol will facilitate Danish investment in the
United States by making Danish investors who invest substantial
capital in the United States eligible for consideration to
receive treaty investor visas under the Immigration and
Nationality Act. The principal substantive article of the
protocol provides that nationals of either contracting party
shall be permitted, subject to the laws relating to entry and
sojourn of aliens, to enter the territories of the other party
and to remain there for the purpose of developing and directing
the operations of an enterprise in which they have invested, or
in which they are actively in the process of investing, a
substantial amount of capital.
Although most U.S. FCN treaties contain a provision
qualifying the treaty partner's nationals for E-2 visas, the
United States-Denmark FCN Treaty does not. The protocol is
intended to overcome this deficiency.
Denmark is a close ally, and our relations with Denmark are
excellent. Despite its small geographic size and population of
only 5.4 million people, Denmark plays an important role in the
international community and is an effective friend and ally
within NATO, the European Union, and the United Nations. It has
engaged fully in the world events, while maintaining a strong
Atlantic perspective. With forces deployed in Iraq,
Afghanistan, and Kosovo, Denmark is active in peacekeeping and
stabilization operations, and is also one of the largest per-
capita donors of foreign aid.
Regionally, Denmark serves as a vital gateway to other
Nordic and Baltic states, and Copenhagen is a key regional
transportation hub. The United States is Denmark's largest non-
EU trading partner. American-made aircraft, machinery,
computers, and other products comprise about 6 percent of
Denmark's total imports.
In conclusion, the administration wishes to thank the
committee for its consideration of the protocol, and we urge
you to report it favorably to the full Senate for action.
Thank you.
[The prepared statement of Mr. Scholz follows:]
Prepared Statement of Wesley S. Scholz, Director, Office of Investment
Affairs, Department of State, Washington, DC
Mr. Chairman, thank you for the opportunity to testify before the
Foreign Relations Committee as the administration seeks advice and
consent of the Senate to ratification of the Protocol to our Treaty of
Friendship, Commerce, and Navigation (FCN) with Denmark. The protocol
will establish the legal basis by which the United States may issue
treaty-investor visas--also known as ``E-2'' visas--to qualified
nationals of Denmark under the FCN Treaty. United States investors
interested in investing in Denmark are already eligible for Danish
visas that offer comparable benefits to those that would be accorded
nationals of Denmark interested in investing in the United States under
E-2 visa status.
The United States has a longstanding policy of openness to foreign
investment. As President Bush stated on May 10, ``A free and open
international investment regime is vital for a stable and growing
economy, both here at home and throughout the world.'' Foreign
investment in the United States strengthens our economy, improves
productivity, provides good jobs, and spurs healthy competition.
Americans have prospered as foreign companies have put their money to
work here. Foreign companies in the United States employed more than 5
million U.S. workers in 2005, providing 4.5 percent of all private
sector employment in the United States. Visas for investors facilitate
investment in the United States.
The United States and Denmark have a strong and growing economic
relationship. According to Department of Commerce statistics, Danish
direct investment in the United States on a historical cost basis
totaled over $7 billion at the end of 2006, and U.S. direct investment
in Denmark amounted to about $5.8 billion. U.S. investments in Denmark
accounted for 11 percent of total foreign direct investment stock in
that country in 2005, making the United States the second-largest
source of foreign investment in Denmark. Approximately 375 U.S.
companies have subsidiaries in Denmark, of which several are regional
headquarters. Economic sectors that are host to major U.S. direct
investment in Denmark include telecommunications, information
technology, biotechnology, oil exploration, financial services, and
facility services.
The Protocol will facilitate Danish investment in the United States
by making Danish investors, who invest substantial capital in the
United States, eligible for consideration to receive treaty investor
visas under the Immigration and Nationality Act (INA). The relevant
provision of the INA, section 101(a)(15)(E)(ii), permits issuance of an
E-2 visa only to a nonimmigrant who is ``entitled to enter the United
States under and in pursuance of the provisions of a treaty of commerce
and navigation between the United States and the foreign state of which
he is a national . . . solely to develop and direct the operation of an
enterprise in which he has invested, or of an enterprise in which he is
actively in the process of investing, a substantial amount of
capital.''
The principal substantive article of the Protocol provides that
``[n]ationals of either Contracting Party shall be permitted, subject
to the laws relating to the entry and sojourn of aliens, to enter the
territories of the other Party and to remain therein for the purpose of
developing and directing the operations of an enterprise in which they
have invested, or in which they are actively in the process of
investing, a substantial amount of capital.''
Although most U.S. FCN treaties contain a provision qualifying the
treaty partner's nationals for E-2 visas, the U.S.-Denmark FCN Treaty
does not. The protocol is intended to overcome this deficiency. The
protocol reflects language found in the INA and other U.S. FCN
treaties--including more than a dozen modern FCN treaties--and
investment treaties generally. European countries whose nationals are
already eligible for E-2 visas include, for example, the United
Kingdom, Germany, France, Italy, the Netherlands, Belgium, Norway, and
Sweden.
Denmark is a close ally and our relations with Denmark are
excellent. Despite its small geographic size and population of only 5.4
million people, Denmark plays a significant role in the international
community and is an effective friend and ally within NATO, the European
Union, and the United Nations. It is engaged fully in world events,
while maintaining a strong Atlantic perspective. With forces deployed
in Iraq, Afghanistan, and Kosovo, Denmark is active in peacekeeping and
stabilization operations and is also one of the largest per capita
donors of foreign aid. Regionally, Denmark serves as a vital gateway to
the other Nordic and Baltic States and Copenhagen is a key regional
transportation hub. The United States is Denmark's largest non-EU
trading partner. American-made aircraft, machinery, computers, and
other products comprise about 6 percent of Denmark's total imports.
In conclusion, the administration wishes to thank the committee for
its consideration of the protocol and we urge you to report it
favorably to the full Senate for action. I would be happy to answer any
questions you may have.
Senator Menendez. Thank you very much.
Thank you all.
The committee is going to stand in recess, subject to the
call of the Chair, which I would expect would be about 20 to 25
minutes. I do have questions for this panel, so I'm going to
ask you to stay. And, after that, any other members show up and
have questions, we will then proceed to the second panel.
Until then, the committee in recess.
[Recess.]
Senator Menendez. The committee will be back in order.
Let me thank you all for your patience.
Mr. Harrington, what's your view of the arbitration
provisions in the German and Belgium agreements? Do you see
them being used as a model for future agreements with other
countries?
Mr. Harrington. Thank you, Mr. Chairman.
We do believe that arbitration can be an effective tool to
strengthen the mutual agreement procedures. Before I go too
much further, I think it might be helpful to step back and note
that the term ``arbitration'' probably means different things
to different people. The process that we've designed, and
that's in both the treaty with Belgium and with the protocol
with Germany, is tailored to do a fairly narrow job, and that's
to help the competent authorities reach agreement in cases
where they've had trouble resolving an issue, and to do it on
an expedited basis. So, the process allows each competent
authority to make a final offer, and it allows the arbitration
board to pick between these two final offers. The board's
determination effectively becomes the competent authorities'
agreement. The taxpayer treats that as any other decision of
the competent authority and decides whether he wants to accept
the decision or litigate or otherwise follow the normal
procedures he has under domestic rules.
So, to our minds, this really is a way of facilitating
agreement between the competent authorities, resolving disputes
between the tax authorities. So, we think that what's in the
Germany and the Belgium agreements is beneficial.
Also, as Mr. Barthold mentioned in his testimony,
arbitration generically is becoming increasingly an issue. It's
in the OECD model. He mentioned, for example, in the EU
context, in transfer pricing, it exists. So, we do expect, in
the context of treaties, that either the United States or the
other country is going to raise arbitration on a going-forward
basis. What we've designed is intended to resolve those
disputes. We're hopeful that this is something that will lead
to greater dispute resolution. So, it's something that we
believe will help resolve disputes in the future by following
that approach.
Senator Menendez. Is there a view that, by virtue of having
the arbitration provisions, there will be an incentive to
actually settle, without necessarily having to go to
arbitration itself?
Mr. Harrington. Yes, Mr. Chairman. I think it goes back to
Mr. Barthold's question about how you measure the success of
arbitration. I mean, how do you measure whether it's working or
not? On one measure, it could be quite successful, even if it's
never invoked. The experience that we've heard from other
countries that have arbitration currently, is that it
effectively lights a fire under the tax authorities to reach an
agreement. If they're like me, they're not going to want
someone else to make the decision. They'd rather resolve it
themselves. So, in that sense, the expectation is that, in the
vast majority of cases, because effectively the arbitrator
would choose between two choices, it really should lead to the
competent authorities moving closer to each other prior to
arbitration.
Another potential effect of success, that isn't easily
measured, is that it might actually lead to, potentially, more
disputes being brought to the competent authorities. Currently,
taxpayers might not bring disputes to the competent authorities
because they're not sure the disputes are going to get
resolved--it might be an area where there historically hasn't
been resolution. If they know that there is going to be
resolution, it might actually result in their bringing more
potential disagreements. In that sense, it's probably bad from
a pure resource sort of standpoint because it means more
disputes, but it also means less double taxation, more
resolution for taxpayers. So, I think that's potentially a
positive thing from an overall reduction in double taxation.
Senator Menendez. Well, to both you and Mr. Barthold, in
order to know which way this is going to work, presuming the
treaties are passed by the Senate, is there a mechanism by
which we're going to be judging whether or not this is a
successful provision that we might want to see more universally
applied, whether they're being resolved before actually going
to arbitration or seeing the other consequence that you just
described?
Mr. Barthold. Well, Mr. Chairman, I had tried to lay out
our staff's thoughts on arbitration in three broad points. One,
what are the problems that we see? Then, what is the process
that we are going to do? In other words, what type of
arbitration? And does that process fit the problems that we
see? And then, that might guide us, in part, as to how we
assess it. Our staff has heard comment that some people see
problems in terms of length of resolution. Under the proposed
process arbitration takes place at a certain point in times and
then there is a certain period of time by which a resolution
has to occur. That means that there is an end to the process.
If that is the sole source of the problem, then one might
be able to easily assess the benefit of the arbitration
procedure just by saying: Has resolution of questions that
arise been sped up, compared to where there is no arbitration?
If, however, the problems are in the interpretation of law,
it might be more difficult to assess whether we think the
arbitration procedure leads to the right solution. It will lead
to a solution, because you do have to have resolution--the
arbitration board has to say this position or that position.
But we'd have to think, I think, a little bit more about how to
assess whether it gets to, sort of, a right solution, in a more
legal sense.
Senator Menendez. Do you have any comment on that, Mr.
Harrington?
Mr. Harrington. Yes. I would just say that we are keenly
interested in monitoring the implementation of the arbitration
provision. On one level, as with any provision of the treaty,
as we gain more experience with anything that's new, we'll find
certain refinements are necessary. And so, from that
standpoint, I think we're very much interested in making sure
that the provisions that we have work; and, if they don't work,
how we can modify them, and make them work better. As part of
that process, we will monitor the types of cases that go to
arbitration, how they're resolved, whether the cases raise more
factual or legal issues, things like that. Since the whole
point is to increase the efficient, effective resolution of
cases in the mutual agreement procedure before they reach
arbitration, we'll discuss, with the competent authority, ways
to assess if the provision is working as intended. You may get
different answers under different treaties, but we are keenly
interested in making sure that the arbitration process does
operate properly.
Senator Menendez. Now let me raise one other set of
questions with both of you before I turn to the intellectual
property treaties. And don't get nervous, because, when I
raised this with staff, I was told that it makes a lot of
people nervous just to even raise it; I'm not suggesting it for
these treaties, but I think it's worthy of discussion; and that
is, as I understand it, taxpayers themselves have no
participation or say in the arbitration processes, as it's
devised presently, is that correct? It's the authorities that
deal with each other, but not the taxpayer----
Mr. Harrington. Yes.
Senator Menendez [continuing]. Themselves.
Mr. Harrington. Yes. The provisions that are in the United
States agreements with Belgium and Germany, they are between
the competent authorities. They don't have specific rules for
dealing with taxpayers.
Senator Menendez. Well, one of the questions I raised
before this hearing was, why don't we consider the possibility
of taxpayer participation in the arbitration proceedings,
since, at the end of the day, I assume that they would make the
most compelling case, since they are the ones who are
ultimately going to have to put forth the resources that would
be decided. And so, what are the benefits and drawbacks of
taxpayer participation? I'd invite either one of you to answer
that question.
Mr. Harrington. To a certain extent, that would depend on
the design of the arbitration provision. If you were talking
about a quasi-judicial arbitration that looked more like a
court proceeding, then you would expect a lot more involvement
in those sorts of situations.
The provision that we've designed in these treaties--
because it's an extension of the competent-authority process--
builds on the taxpayer involvement in the competent authority
process. Typically, a dispute under the tax treaty comes up
because the taxpayer has determined that one of the governments
isn't taxing consistently with the treaty. So, it goes to the
competent authority. In the United States, the U.S. taxpayer is
going to typically go to the U.S. competent authority and say
``This other country isn't engaging properly.'' The U.S.
taxpayer will provide information to the competent authority.
The competent authority takes that into account in presenting
its case to the other competent authority. So, there is
taxpayer involvement with the competent authorities. But, in
this particular arbitration process because it's, as was
referred to earlier as baseball arbitration where effectively
each competent authority makes one particular offer, you really
only can have two parties involved making that particular
offer. For example, if you have a third offer involved, you
potentially would have a dispute with the three arbitrators.
They might come up with three different decisions. So, again,
this is very much a function of the design that it really needs
to be between the competent authorities.
Plainly, we do want taxpayer involvement. We want the
taxpayer to help with the facts; they can help get the right
answer. But, at the end of the day, we have to have a situation
that, one, is going to work in the context of the treaty, and,
two, is also one that, depending on the circumstances, is
acceptable to treaty partners. Some treaty partners are much
more amenable to something that looks very much like the
current system, less so to something that looks like it's a
different sort of procedure than what they have experienced.
We've certainly seen that anecdotally when it's come up before.
So, our hope is to have as much taxpayer involvement as we can,
but still within the context of the competent-authority
process.
Senator Menendez. Well, I know we're not necessarily
talking about these treaties, but it's something that I think
was an interest by some of us to look at. We believe that the
taxpayer can play a more significant role than, certainly,
these provisions call for right now, and still provide for a
basis under which countries would still seek to enter into such
an agreement. So, that's something we'll be discussing with you
in the future.
But, let me turn to Ms. Boland. Let me ask you: Which other
countries do you find the United States intellectual
propertyholders most often seek protection of their
intellectual property rights? And are these countries a party
to the three intellectual property treaties we're considering
today?
Ms. Boland. Thank you, Mr. Chairman.
I think that, in general, U.S. rightholders seek protection
in Europe, either regionally or country by country--Japan,
Russia, and some of the emerging markets in Asia, such as China
and the Republic of Korea. I think that we have a little bit of
a different situation for each of the treaties. For the Hague
agreement, there are 23 countries that have joined the treaty,
so--to date--where the only--what we would say, important
players, from the U.S. perspective, are France, Spain, and
Switzerland. The European community has indicated that it
intends to join the agreement, and, once they do join the
agreement, it will be a major benefit for U.S. rightholders to
have the European community, as a bloc, in the agreement.
Japan and Canada, for the Hague, have indicated, informally
to us in our discussions with them, bilaterally, that, once we
join the Hague, they will follow suit.
For the Patent Law Treaty, 14 countries have joined the
treaty. Most of those countries are rather small and not
significant, in terms of trading partners with the United
States, but the United Kingdom and Denmark have joined the
treaties. Again, they are small, but they are important players
for our rightholders.
For the PLT, many countries are waiting for the U.S. lead
on this treaty, and we have had informal discussions with many
of those countries, and they will likely follow our lead once
we join.
On the Singapore TLT, that treaty was only concluded last
March 2006, and only one country has joined the treaty:
Singapore. They hosted the diplomatic conference. We view the
Singapore Treaty as providing significant advantages relative
to the underlying trademark law treaty of 1994. We expect a
number of the signatories to that agreement to sign on. And,
again, it is our belief that a number of our major and minor
trading parties will join each of these treaties once we do.
Thank you.
Senator Menendez. Let me ask you this. What are some of the
most significant barriers that we still find as it relates to
promoting the protection of intellectual property throughout
the world today? And is WIPO moving us toward meeting those
challenges? Are we meeting those challenges? And if so, how?
Ms. Boland. Thank you, again.
In terms of barriers to protection, I think that I'd like
to look at that, as you said, in two parts. Domestically, the
United States Patent and Trademark Office is very, very much
involved with rightholders in the United States and other
government agencies. We're involved in a very large educational
program for independent inventors, small businesses, creators,
and innovators throughout the entire country, to provide them
with the information they need to protect their intellectual
property, both in the United States and internationally. Some
of these efforts are part of our STOP effort, which is an
interagency effort--the acronym stands for Strategy Targeting
Organized Piracy. We think that we have done a good job with
these programs, and there are many other initiatives within the
STOP initiative that basically encourages businesses to
integrate IP into their business strategy from the beginning.
For our businesses and our American companies, I think
we've done a pretty good job. Internationally, it's a bit more
of a challenge. We have worked very closely with some of the
more progressive voices in Asia on IP issues and IP
enforcement. Obviously, Japan has got a lot at stake. We've
worked very closely with them on many of the issues that we
commonly face in Asia. We've also worked very, very closely
with the European Union on initiatives within Europe, in terms
of what's at stake there.
Turning to WIPO, unfortunately there are many voices
throughout the world that are challenging our assumptions about
the value of IP and its relationship to economic and
technological growth. We have been fighting a number of battles
at WIPO in Geneva, basically just holding back the voices of
opposition to the promotion and enhancement of IP protection
throughout the world. There is not much going on, in terms of
further norm-setting at WIPO right now, but we are--have been
very actively involved in all of the various committees there,
and we are trying to hold back the forces--the anti-IP forces
that we confront at WIPO.
Senator Menendez. So, it sounds like we're in a defensive
posture.
Ms. Boland. Unfortunately, that is the case for much of the
discussion that takes place at WIPO right now, yes.
Senator Menendez. Well, this is one of the most significant
things, I think, for the United States, obviously, in a world
in which we are challenged for human capital by the vast
changes in technology that have largely erased the boundaries
of mankind. It seems that, for the United States, intellectual
property is going to be the single-biggest asset that it's
going to have to preserve, protect, and defend in world trade.
And I hope we're going to be robust about it. I'm sure the
subcommittee that I chair is going to be looking at that quite
significantly in the days ahead.
Last, I just want to ask you one final question. A lot of
these treaties talk about moving toward electronic filing. And,
I'm wondering, do we anticipate a time in which we would only
accept trademark filings through an electronic platform? And,
if so, what do we foresee that timeframe being?
Ms. Boland. Thank you. In terms of electronic filing in the
trademark world, the USPTO can report a great success there. As
of our latest stats on electronic filing for trademark
applications, we have about 96 percent of applications coming
in the door electronically. That's a great success. This recent
Singapore Trademark Law Treaty provides us with the capability
of mandating electronic filing only. It doesn't require us to
do that, but it provides us with that ability. At the present
time, we do not plan to mandate electronic filing only. It may
be something that we'll reconsider 5 or 10 years down the road,
but we think that the level of electronic filing in the area of
trademarks is almost as high as it can possibly be, and that
the small percentage that are coming in on paper is very
manageable for the USPTO.
In the area of patents, we've made a big push for
electronic filing over the last several years, and we had been
able to get the percentage up to--about 48 percent of
applications coming in the door are now filed electronically.
We hope for further improvements as time goes on. But, again,
in terms of the PLT it has similar ability to mandate
electronic filing. Our current thinking is not to adopt that at
the current time, but we may revisit it at some point in the
future.
Senator Menendez. Is it that you seek not to adopt it
because it's such a small percent, on the one case, or is it
simply because you don't have the ability to do that in a
reasonable timeframe?
Ms. Boland. No; in the area of patents, I think it's a
matter of coming up with an electronic filing solution that is
finally starting to show very significant numbers. And I think
that there will always be some segment of the filing population
that may not have the capability to electronically file. We
would have to come up with a mechanism to accommodate that for
them. I'm thinking of, perhaps, independent inventors; some
small businesses may not have that capability. So, we have to
deal with that policy decision within the office, of mandating
electronic filing and then going ahead and making some
accommodations for those that do not have that capability.
Thank you.
Senator Menendez. All right.
And, Mr. Scholz, I don't want you to feel lonely there,
after all this time. I just have two questions for you. What
prompted this particular negotiation for this Protocol, with
the Danish proposal? And who benefits, in terms of U.S.
business?
Mr. Scholz. Thank you, Mr. Chairman.
The rationale behind the amendment was that most of our
post-World War II FCN treaties do include this provision. There
are a few treaties that do not. The others that come to mind
are Ireland, Finland, Greece, and Israel. And, in researching
the issue, we've been unable to determine precisely why the
decision was made not to include this provision at the time the
treaty was negotiated in 1951. But, since then, there has been
interest on the part of the Danes in including the provision in
the treaty, as we did earlier with Finland and Ireland, and we
decided to negotiate a protocol that would provide for visa
eligibility for E-2 visas at that time.
In terms of the businesses that would benefit from that
here in the United States, I'm not really in a position to
speak to specific companies in that regard. I noted, generally,
that----
Senator Menendez. I meant sectors, not specific----
Mr. Scholz. Oh, sectors.
Senator Menendez. Yes.
Mr. Scholz. Well, primarily, most Danish investment in the
United States is in the manufacturing sector. I could give you
a few examples of investments. I think that, in Colorado,
there's a facility that produces wind turbines for wind energy
generation. There are--there's some biotechnology investment,
as well. I think, even in New Jersey, there is a Danish company
involved in pharmaceuticals. But it's generally in the
manufacturing sector.
Senator Menendez. How about the dairy sector?
Mr. Scholz. I'm not aware of a specific investment, at this
time, in the dairy sector.
Senator Menendez. OK.
And one last question. Is the Government of Denmark
providing temporary visas, at this point, to United States
investors?
Mr. Scholz. Yes; they do. They----
Senator Menendez. They do.
Mr. Scholz. Without the entry into force of this protocol,
they are providing access to U.S. investors. U.S. investors can
get a residency permit for a year. That's extendable for
another year. And, after that period, they can get even longer
extensions.
Senator Menendez. All right. Well, thank you. Thank you, to
all of you, for your information and your testimonies. We're
going to keep the record open for 2 days, should any Senator
wish to submit questions for the record. If they do, we ask you
to respond to it expeditiously.
We thank you for your testimony. And we'll excuse this
panel.
Let me introduce and ask our next panel to begin to come
forward. For our second panel, we want to welcome Mr. Bill
Reinsch, the president of the National Foreign Trade Council;
Ms. Janice Lucchesi, who is the vice president of tax at Akzo
Nobel and chairman of the Organization for International
Investment.
We look forward to your insights. Let me assure you that
your full statement will be entered into the record, and we'd
ask you to summarize your statement in approximately 5 minutes.
Mr. Reinsch.
STATEMENT OF HON. WILLIAM A. REINSCH, PRESIDENT, NATIONAL
FOREIGN TRADE COUNCIL, WASHINGTON, DC
Mr. Reinsch. Thank you, Mr. Chairman.
The National Foreign Trade Council appreciates the
chairman's action in scheduling this hearing, and we strongly
urge the committee to reaffirm the United States historic
opposition to double taxation by giving its full support to the
pending tax treaty protocol agreements with Germany, Finland,
Denmark, and the Belgium tax treaty and protocol.
The NFTC, organized in 1914, is an association of some 300
U.S. businesses engaged in international trade and investment.
Our membership covers the full spectrum of industrial,
commercial, financial, and service activities, and we seek to
foster an environment in which U.S. companies can be dynamic
and effective competitors in the international business arena.
To achieve this goal, American businesses must be able to
participate fully in business activities throughout the world
through the export of goods, services, technology, and
entertainment, and through direct investment in facilities
abroad. As global competition grows ever more intense, it is
vital to the health of U.S. enterprises that they be free from
excessive foreign taxes or double taxation and impediments to
the flow of capital that can serve as barriers to full
participation in the international marketplace. Foreign trade
is fundamental to the economic growth of U.S. companies. Tax
treaties are a crucial component of the framework that is
necessary to allow that growth. That is why we have long
supported the expansion and strengthening of the U.S. tax
treaty network and why we are here to recommend the
ratification of the tax protocols and treaties that are before
you.
While we are not aware of any opposition to the treaties
under consideration, the NFTC, as a general cautionary note,
urges the committee to reject any opposition to the agreements
based on the presence or absence of a single provision. No
process as complex as the negotiation of a full-scale tax
treaty will be able to produce an agreement that will
completely satisfy every possible constituency, and no such
result should be expected. Tax treaty relationships arise from
delicate negotiations aimed at resolving conflicts between the
tax laws and policies of the negotiating countries. The
resulting compromises always reflect a series of concessions by
both countries from their preferred positions. Recognizing
this, but also cognizant of the vital role tax treaties play in
creating a level playing field, where enterprise is engaged in
international commerce, the NFTC believes that treaties should
be evaluated on the basis of their overall effect. In other
words, agreements should be judged on whether they encourage
international trade and investment between the United States
and another country. An agreement that meets this standard will
provide the guidance enterprises need in planning for the
future, provide nondiscriminatory treatment for U.S. traders
and investors, and meet an appropriate level of acceptability
in comparison with the preferred U.S. position and express
goals of the business community.
We want to emphasize how important treaties are in
creating, implementing, and preserving an international
consensus on avoiding double taxation, particularly with
respect to transactions between related entities. The tax laws
in most countries impose withholding taxes, frequently at high
rates, on payments of dividends, interest, and royalties to
foreigners and treaties are the mechanism by which these taxes
are lowered, on a bilateral basis.
If U.S. enterprises cannot enjoy the reduced foreign
withholding rates offered by a tax treaty, noncreditable high
levels of foreign withholding tax leave them at a competitive
disadvantage relative to traders and investors from other
countries that do enjoy the treaty benefits of reduced
withholding taxes. Tax treaties serve
to prevent this barrier to U.S. participation in international
commerce.
If U.S. businesses are going to maintain a competitive
position around the world, we need a tax treaty policy that
protects them from multiple or excessive levels of foreign tax
on cross-border investments, particularly if their competitors
already enjoy such protection. The United States has lagged
behind other developed countries in eliminating this
withholding tax and leveling the playing field for cross-border
investment.
The NFTC has consistently urged adjustment of U.S. tax
treaty policies to allow for a zero withholding rate on
related-entity dividends, and we congratulate the Treasury for
making further progress in these protocols in the treaty. These
agreements make an important contribution toward improving the
economic competitiveness of U.S. companies. Indeed, the
protocols bolster and improve upon the standards set in the
United Kingdom, Australia, and Mexican agreements ratified just
over 2 years ago, as well as the more recent Japanese tax
treaty.
We thank the committee for its prior support of this
evolution in U.S. tax treaty policy, and we strongly urge you
to continue that support by ratifying all four of these
treaties and protocols.
The existence of a withholding tax on cross-border patent--
parent subsidiary dividends, even at the 5-percent rate
previously typical in U.S. treaties, has served as a tariff-
like impediment to cross-border investment flows. These
withholding taxes are imposed in addition to the income taxes
already paid, and often result in a lower return compared to
the comparable investment of a foreign competitor. Tax treaties
are designed to prevent this distortion in the investment
decisionmaking process by reducing the multiple taxation of
profits within a corporate group, and they serve to prevent the
hurdle to U.S. participation in international commerce.
Eliminating the withholding tax on cross-border dividends means
that U.S. companies with stakes in German, Finish, Danish, and
Belgian companies will now be able to meet their foreign
competitors on a level playing field.
The German protocol provides for mandatory arbitration of
certain cases that cannot be resolved by the competent
authorities within a specified period of time. This provision
is the first of its kind in a U.S. tax treaty. The provision is
limited in its scope with respect to the cases eligible for
mandatory arbitration. The Belgium tax treaty includes a more
broadly defined mandatory arbitration provision. The Belgium
treaty provision covers all cases where the competent
authorities cannot reach agreement.
NFTC member companies review tax treaty arbitration as a
tool to strengthen, not replace, the existing treaty dispute
resolution procedures conducted by the competent authorities.
The existing procedures work well to resolve the great majority
of disputes with a great majority of treaty partners, but they
are not always adequate to address the most problematic cases
and relationships.
We commend the ongoing efforts of the IRS to refine and
improve the operation of the competent-authority process under
treaties to make it a more efficient and reliable means of
avoiding double taxation. The inclusion of the arbitration
provisions in the German tax protocol and the Belgium tax
treaty will greatly facilitate the mutual agreement procedures
in all competent authority cases.
Finally, Mr. Chairman, we are grateful to you and to the
members of the committee for giving international economic
relations prominence in the committee's agenda, particularly
when the demands upon the committee's time are so pressing. We
would also like to express our appreciation for the efforts of
both majority and minority staff which have enabled this
hearing to be held at this time. We commend the committee for
its commitment to proceed with ratification of these agreements
as expeditiously as possible.
Thank you.
[The prepared statement of Hon. Reinsch follows:]
Prepared Statement of Hon. William A. Reinsch, President, National
Foreign Trade Council, Washington, DC
Mr. Chairman and members of the committee, the National Foreign
Trade Council (NFTC) is pleased to recommend ratification of the
treaties and protocols under consideration by the committee today. We
appreciate the chairman's actions in scheduling this hearing, and we
strongly urge the committee to reaffirm the United States historic
opposition to double taxation by giving its full support to the pending
tax treaty protocol agreements with Germany, Finland, and Denmark, and
the Belgium tax treaty and protocol.
The NFTC, organized in 1914, is an association of some 300 U.S.
business enterprises engaged in all aspects of international trade and
investment. Our membership covers the full spectrum of industrial,
commercial, financial, and service activities, and we seek to foster an
environment in which U.S. companies can be dynamic and effective
competitors in the international business arena. To achieve this goal,
American businesses must be able to participate fully in business
activities throughout the world through the export of goods, services,
technology, and entertainment, and through direct investment in
facilities abroad. As global competition grows ever more intense, it is
vital to the health of U.S. enterprises and to their continuing ability
to contribute to the U.S. economy that they be free from excessive
foreign taxes or double taxation and impediments to the flow of capital
that can serve as barriers to full participation in the international
marketplace. Foreign trade is fundamental to the economic growth of
U.S. companies. Tax treaties are a crucial component of the framework
that is necessary to allow that growth and balanced competition.
This is why the NFTC has long supported the expansion and
strengthening of the U.S. tax treaty network and why we are here today
to recommend ratification of the tax protocols with Germany, Finland,
Denmark, and the tax treaty and protocol with Belgium.
general comments on tax treaty policy
While we are not aware of any opposition to the treaties under
consideration, the NFTC, as it has done in the past as a general
cautionary note, urges the committee to reject any opposition to the
agreements based on the presence or absence of a single provision. No
process as complex as the negotiation of a full-scale tax treaty will
be able to produce an agreement that will completely satisfy every
possible constituency, and no such result should be expected. Tax
treaty relationships arise from difficult and sometimes delicate
negotiations aimed at resolving conflicts between the tax laws and
policies of the negotiating countries. The resulting compromises always
reflect a series of concessions by both countries from their preferred
positions. Recognizing this, but also cognizant of the vital role tax
treaties play in creating a level playing field for enterprises engaged
in international commerce, the NFTC believes that treaties should be
evaluated on the basis of their overall effect. In other words,
agreements should be judged on whether they encourage international
flows of trade and investment between the United States and the other
country. An agreement that meets this standard will provide the
guidance enterprises need in planning for the future, provide
nondiscriminatory treatment for U.S. traders and investors as compared
to those of other countries, and meet an appropriate level of
acceptability in comparison with the preferred U.S. position and
expressed goals of the business community.
Comparisons of a particular treaty's provisions with the U.S. model
or with other treaties do not provide an appropriate basis for
analyzing a treaty's value. U.S. negotiators are to be applauded for
achieving agreements that reflect as well as these treaties do the U.S.
model and the views of the U.S. business community.
The NFTC wishes to emphasize how important treaties are in
creating, implementing, and preserving an international consensus on
the desirability of avoiding double taxation, particularly with respect
to transactions between related entities. The tax laws of most
countries impose withholding taxes, frequently at high rates, on
payments of dividends, interest, and royalties to foreigners, and
treaties are the mechanism by which these taxes are lowered on a
bilateral basis. If U.S. enterprises cannot enjoy the reduced foreign
withholding rates offered by a tax treaty, noncreditable high levels of
foreign withholding tax leave them at a competitive disadvantage
relative to traders and investors from other countries that do enjoy
the treaty benefits of reduced withholding taxes. Tax treaties serve to
prevent this barrier to U.S. participation in international commerce.
If U.S. businesses are going to maintain a competitive position
around the world, we need a treaty policy that protects them from
multiple or excessive levels of foreign tax on cross-border
investments, particularly if their competitors already enjoy that
advantage. The United States has lagged behind other developed
countries in eliminating this withholding tax and leveling the playing
field for cross-border investment. The European Union (EU) eliminated
the tax on intra-EU, parent-subsidiary dividends over a decade ago, and
dozens of bilateral treaties between foreign countries have also
followed that route. The majority of OECD countries now have bilateral
treaties in place that provide for a zero rate on parent-subsidiary
dividends.
Tax treaties also provide other features that are vital to the
competitive position of U.S. businesses. For example, by prescribing
internationally agreed thresholds for the imposition of taxation by
foreign countries on inbound investment, and by requiring foreign tax
laws to be applied in a nondiscriminatory manner to U.S. enterprises,
treaties offer a significant measure of certainty to potential
investors. Another extremely important benefit which is available
exclusively under tax treaties is the mutual agreement procedure. This
bilateral administrative mechanism avoids double taxation on cross-
border transactions.
The United States, together with many of its treaty partners, has
worked long and hard through the OECD and other fora to promote
acceptance of the arm's-length standard for pricing transactions
between related parties. The worldwide acceptance of this standard,
which is reflected in the intricate treaty network covering the United
States and dozens of other countries, is a tribute to governments'
commitment to prevent conflicting income measurements from leading to
double taxation and resulting distortions and barriers for healthy
international trade. Treaties are a crucial element in achieving this
goal, because they contain an expression of both governments'
commitment to the arm's length standard and provide the only available
bilateral mechanism, the competent authority procedure, to resolve any
disputes about the application of the standard in practice.
We recognize that determination of the appropriate arm's-length
transfer price for the exchange of goods and services between related
entities is sometimes a complex task that can lead to good faith
disagreements between well-intentioned parties. Nevertheless, the
points of international agreement on the governing principles far
outnumber any points of disagreement. Indeed, after decades of close
examination, governments around the world agree that the arm's length
principle is the best available standard for determining the
appropriate transfer price, because of both its economic neutrality and
its ability to be applied by taxpayers and revenue authorities alike.
The NFTC strongly supports the efforts of the Internal Revenue
Service and the Treasury to promote continuing international consensus
on the appropriate transfer pricing standards, as well as innovative
procedures for implementing that consensus. We applaud the continued
growth of the APA program, which is designed to achieve agreement
between taxpayers and revenue authorities on the proper pricing
methodology to be used, before disputes arise. We commend the ongoing
efforts of the IRS to refine and improve the operation of the competent
authority process under treaties, to make it a more efficient and
reliable means of avoiding double taxation.
The NFTC also wishes to reaffirm its support for the existing
procedure by which Treasury consults on a regular basis with this
committee, the tax-writing committees, and the appropriate
congressional staffs concerning tax treaty issues and negotiations and
the interaction between treaties and developing tax legislation. We
encourage all participants in such consultations to give them a high
priority. We also commend this committee for scheduling tax treaty
hearings so soon after receiving the agreements from the executive
branch. Doing so enables improvements in the treaty network to enter
into effect as quickly as possible.
We would also like to reaffirm our view, frequently voiced in the
past, that Congress should avoid occasions of overriding the U.S. tax
treaty commitments that are approved by this committee by subsequent
domestic legislation. We believe that consultation, negotiation, and
mutual agreement upon changes, rather than unilateral legislative
abrogation of treaty commitments, better supports the mutual goals of
treaty partners.
agreements before the committee
The German, Finnish, and Danish protocols, and the Belgian tax
treaty that are before the committee today update agreements between
the United States and these countries that were signed many years ago.
The protocols improve conventions that have stimulated increased
investment, greater transparency, and a stronger economic relationship
between our countries.
The NFTC has consistently urged adjustment of U.S. treaty policies
to allow for a zero withholding rate on related-entity dividends, and
we congratulate the Treasury for making further progress in these
protocols and treaty. These agreements make an important contribution
toward improving the economic competitiveness of U.S. companies.
Indeed, the protocols bolster and improve upon the standard set in the
United Kingdom, Australian, and Mexican agreements ratified just over 2
years ago, as well as the more recent Japanese tax treaty, by lowering
the ownership threshold required to receive the benefit of the zero
dividend withholding rate from 100 to 80 percent. We thank the
committee for its prior support of this evolution in U.S. tax treaty
policy and we strongly urge you to continue that support by approving
all four of these tax treaties and protocols.
The existence of a withholding tax on cross-border, parent-
subsidiary dividends, even at the 5-percent rate previously typical in
U.S. treaties, has served as a tariff-like impediment to cross-border
investment flows. These withholding taxes are imposed in addition to
the income taxes already paid and often result in a lower return
compared to the comparable investment of a foreign competitor. Tax
treaties are designed to prevent this distortion in the investment
decisionmaking process by reducing the multiple taxation of profits
within a corporate group, and they serve to prevent the hurdle to U.S.
participation in international commerce. Eliminating the withholding
tax on cross-border dividends means that U.S. companies with stakes in
German, Finnish, Danish, and Belgian companies will now be able to meet
their foreign competitors on a level playing field. The German protocol
would apply with respect to withholding taxes paid or credited on or
after January 1 of the year in which the protocol comes into force. The
other three protocols are effective upon ratification.
Additionally, important safeguards included in these protocols
prevent ``treaty shopping.'' In order to qualify for the lowered rates
specified by the treaties, companies must meet certain requirements so
that foreigners whose governments have not negotiated a tax treaty with
Germany, Finland, Denmark, Belgium, or the United States cannot free-
ride on this treaty. Similarly, provisions in the sections on
dividends, interest, and royalties prevent arrangements by which a U.S.
company is used as a conduit to do the same. Extensive provisions in
the treaties are intended to ensure that the benefits of the treaty
accrue only to those for which they are intended. All four of the tax
treaties and protocols contain good limitations on benefits provision.
The German protocol provides for mandatory arbitration of certain
cases that cannot be resolved by the competent authorities within a
specified period of time. This provision is the first of its kind in a
U.S. tax treaty. The provision is limited in its scope with respect to
the cases eligible for mandatory arbitration. The Belgium tax treaty
includes a more broadly defined mandatory arbitration provision. The
Belgium treaty provision covers all cases where the competent
authorities cannot reach agreement. NFTC member companies view tax
treaty arbitration as a tool to strengthen, not replace, the existing
treaty dispute resolution procedures conducted by the competent
authorities. The existing procedures work well to resolve the great
majority of disputes with the great majority of treaty partners, but
they are not always adequate to address the most problematic cases and
relationships. The inclusion of the arbitration provisions in the
German tax protocol and the Belgium tax treaty will greatly facilitate
the mutual agreement procedures in all competent authority cases.
in conclusion
Finally, the NFTC is grateful to the chairman and the members of
the committee for giving international economic relations prominence in
the committee's agenda, particularly when the demands upon the
committee's time are so pressing. We would also like to express our
appreciation for the efforts of both majority and minority staff which
have enabled this hearing to be held at this time.
We commend the committee for its commitment to proceed with
ratification of these important agreements as expeditiously as
possible.
Senator Menendez. Thank you. Ms. Lucchesi.
STATEMENT OF JANICE LUCCHESI, CHAIRWOMAN, ORGANIZATION FOR
INTERNATIONAL INVESTMENT, WASHINGTON, DC
Ms. Lucchesi. Thank you for the opportunity to appear
before you today to support, on behalf of the Organization for
International Investment, or OFII, prompt ratification of the
proposed protocols to the United States income tax treaties
with Germany, Denmark, and Finland, and the new proposed income
tax treaty with Belgium, all pending before the committee.
OFII is an association representing the interest of U.S.
subsidiaries of companies based abroad, which I will refer to
as ``insourcing companies.''
OFII has over 160 member companies, which range from
midsized businesses to some of the largest employers in the
United States, such as Honda, HSBC, Sony, AEGON Insurance,
Nestle, Unilever, and L'Oreal.
Collectively, insourcing companies employ over 5 million
Americans, pay 32 percent higher compensation than all U.S.
firms, support 19 percent of all U.S. exports, and, in 2006,
reinvested $80 billion in profits back into the U.S. economy.
For both foreign and U.S. multinationals, income tax
treaties such as the agreements before you today promote
business and employment opportunities in each country, protect
against discrimination, provide a common and consistent set of
rules aimed at fair taxation, as well as provide a mechanism
for eliminating the potential for double taxation. The prompt
ratification of these agreements will signal to insourcing
companies that their continued investment in job creation in
the United States is to be encouraged.
The U.S. Treasury Department is to be commended for its
dedication and drive to maintain and expand our network of
bilateral income tax treaties with our major trading partners,
and assuring that these agreements remain current and relevant
in an ever changing global fiscal and economic environment.
The agreements pending before you today contain important
improvements over our current income tax treaties with Belgium,
Denmark, Finland, and Germany, reflecting the most current
United States international tax policies.
Beginning with the 2001 new income tax convention with the
United Kingdom, the United States has advanced a policy of
eliminating the withholding tax on direct investment dividends.
The four agreements before you today are a further and
meaningful step in extending that policy to most of the United
States major European trading partners.
Elimination of the withholding tax removes a significant
impediment to direct foreign investment. It also assures that
United States corporations receive the same benefit from
dividends paid by their subsidiaries in Europe as European
corporations receive from dividends paid by their subsidiaries
throughout Europe.
The agreements with Germany and Belgium also make
significant strides in addressing potential inefficiencies when
employees are on assignment away from their home country,
assuring that pension benefits are preserved and the tax
treatment of contributions to, income earned by, and payments
from, pension plans are not distorted by reason of employee
transfers abroad.
Finally, we welcome and endorse a provision reflected in
the agreements with Germany and Belgium, the addition of
arbitration as a means of improving the dispute resolution
process. Tax treaties cannot resolve every instance of
potential double taxation. In recognition of this, our treaties
have consistently included a mutual agreement article allowing
taxpayers to request that, where the actions of one or both tax
authorities results, or could result, in double taxation, the
two authorities meet, with a view to eliminating potential
double taxation.
This mechanism most commonly comes into play in the area of
transfer pricing. The United States experience resolving in--
with resolving these double taxation disputes under the mutual
agreement article has been mixed. The process is often lengthy
and expensive, and the tax authorities may have basic
differences that impede agreement. The United States has been a
leader in this dispute resolution process, and would greatly
benefit from a more disciplined approach.
A process that provides for submission of specific issues
to binding arbitration if the two tax authorities are not able
to resolve the matter within a reasonable period would be a
welcome improvement to the bilateral dispute resolution
process.
In conclusion, OFII appreciates this opportunity to
register its strong support for the agreements pending before
your committee today. I thank the committee for this
opportunity to provide this input, and am happy to answer any
questions you may have.
[The prepared statement of Ms. Lucchesi follows:]
Prepared Statement of Janice Lucchesi, Chairwoman of the Board,
Organization for International Investment (OFII), Washington, DC
Mr. Chairman, ranking member and members of the committee, thank
you for the opportunity to appear before you today to support, on
behalf of the Organization for International Investment (``OFII''),
prompt ratification of the proposed protocols to the United States
income tax treaties with Germany, Denmark, and Finland, and the new
proposed income tax treaty with Belgium, all pending before this
committee.
OFII is an association representing the interests of U.S.
subsidiaries of companies based abroad which I will refer to as
``insourcing'' companies. OFII has over 160 member companies, which
range from mid-sized businesses to some of the largest employers in the
United States, such as Honda, HSBC, Sony, AEGON Insurance, Nestle,
Unilever, and L'Oreal.
Collectively, insourcing companies employ over 5 million Americans,
pay 32 percent higher compensation than all U.S. firms, support 19
percent of all U.S exports, and in 2006 reinvested $80 billion in
profits back into the U.S. economy.
For both foreign and U.S. multinationals, income tax treaties, such
as the agreements before you today, promote business and employment
opportunities in each country, protect against discrimination, provide
a common and consistent set of rules aimed at fair taxation, as well as
provide a mechanism for eliminating the potential for double taxation.
The prompt ratification of these agreements will signal to insourcing
companies that their continued investment and job creation in the
United States is to be encouraged.
The U.S. Treasury Department is to be commended for its dedication
and drive to maintain and expand our network of bilateral income tax
treaties with our major trading partners and assuring that these
agreements remain current and relevant in an ever-changing global
fiscal and economic environment. The agreements pending before you
today contain important improvements over our current income tax
treaties with Belgium, Denmark, Finland, and Germany, reflecting the
most current U.S. international tax policies.
Beginning with the 2001 new income tax convention with the United
Kingdom, the United States has advanced a policy of eliminating the
withholding tax on direct investment dividends. The four agreements
before you today are a further and meaningful step in extending that
policy to most of the United States major European trading partners.
Elimination of the withholding tax removes a significant impediment to
direct foreign investment. It also assures that United States
corporations receive the same benefit from dividends paid by their
subsidiaries in Europe as European corporations receive from dividends
paid by their subsidiaries throughout Europe.
The agreements with Germany and Belgium also make significant
strides in addressing potential inefficiencies when employees are on
assignment away from their home country, assuring that pension benefits
are preserved and the tax treatment of contributions to, income earned
by, and payments from, pension plans are not distorted by reason of
employee transfers abroad.
Finally, we welcome and endorse a provision reflected in the
agreements with Germany and Belgium--the addition of arbitration as a
means of improving the dispute resolution process. Tax treaties cannot
resolve every instance of potential double taxation. In recognition of
this, our treaties have consistently included a ``Mutual Agreement''
article allowing taxpayers to request that, where the action of one or
both tax authorities results or could result in double taxation, the
two tax authorities meet with a view to eliminating the potential
double taxation. This mechanism most commonly comes into play in the
area of transfer pricing. The United States experience with resolving
these double taxation disputes under the Mutual Agreement article has
been mixed. The process is often lengthy and expensive and the tax
authorities may have basic differences that impede agreement. The
United States has been a leader in this dispute resolution process and
would greatly benefit from a more disciplined approach. A process that
provides for submission of specific issues to binding arbitration if
the two tax authorities are not able to resolve the matter within a
reasonable period would be a welcome improvement to the bilateral
dispute resolution process.
In conclusion, OFII appreciates this opportunity to register its
strong support for the agreements pending before your committee today.
I thank the committee for the opportunity to provide this input and
am happy to answer any questions you may have.
Senator Menendez. Thank you.
Let me ask both of you, are there any provisions in these
agreements that would particularly be beneficial to specific
U.S. industries doing businesses in these countries; in
Germany, Belgium, Finland, or Denmark--that you can think of?
Ms. Lucchesi. Specific industries?
Senator Menendez. The provisions in the agreements that are
going to be particularly beneficial to some specific U.S.
industries.
Mr. Reinsch. Mr. Chairman, I think our answer to that
question would be: No; we're not aware of any particular sector
that might benefit more than another on these treaties.
Ms. Lucchesi. Yes; I agree with him.
Senator Menendez. OK. Clearly, there have been advocates
for these treaties within the private sector, have there not?
Mr. Reinsch. Well, our memberships are different. Our
members are, for the most part, large multinational companies
with a U.S. base and U.S. headquarters. If you look at our tax
committee, which is the group that does most of the work on
this, it would be companies that you've heard of, like Procter
& Gamble, a number of the oil companies, other manufacturers,
some banks and financial services institutions, and some high-
tech companies.
Senator Menendez. Let me ask you this. What are some of the
most significant barriers created by tax systems, that still
remain, to cross-border investment?
Ms. Lucchesi. Still remain----
Senator Menendez. That still remain----
Ms. Lucchesi [continuing]. Without the----
Senator Menendez. Not in these agreements, necessarily, but
in general, since we have the benefit of your expertise here,
as we're looking prospectively.
Ms. Lucchesi. I think a--the prospect of double taxation,
in terms of everyday trade--so, that's in transfer price--there
is not an agreement among our major trading partners on exactly
what is a fair transfer price. So, in my experience, we've
spent a lot of time in discussions with various tax authorities
over, ``What was the price that the U.S. company should have
charged a European country for a good?'' and vice versa.
Mr. Reinsch. I think, in our case I'd certainly agree with
that. Our members have focused, also, on countries with whom we
don't have either up-to-date or any tax treaties, and there are
some rather significant economies, most notably Canada and
Brazil, with whom we don't have tax treaties, and we are very
anxious to see this kind of process put into place with respect
to them. There have been negotiations going on with the
Canadians that I believe are nearly complete, and I hope you'll
be presented with that document soon. That would be good news.
Senator Menendez. I was just going to ask you: Are we on
the right path, in both cases, in terms of trying to address
those barriers?
Mr. Reinsch. With Canada, we are very much on the right
path, and I hope it will be submitted to the Senate soon.
With Brazil, I can report, based only on the last 4 or 5
months, that I think we are now on an appropriate path. The
Brazilian Government has reflected, recently--meaning in the
spring of this year--a much stronger interest in negotiating an
agreement than they have in the past. And they've done so, in
part, because they have a number of Brazilian companies that
are very interested in having the treaty as well, so it makes
the interest bilateral, rather than unilateral.
Senator Menendez. How significant is the arbitration
provisions that you've both cited in your testimony? Are they
precedent-
setting? Are they something we're going to likely look forward
to seeing in other agreements? Is it something that we want to
see in other agreements?
Mr. Reinsch. I would hope that they would be precedent-
setting; and we would like to see them in other agreements. I
think, in general, to save the committee's time, I would
subscribe, for the most part, to Mr. Harrington's----
Senator Menendez. At this----
Mr. Reinsch [continuing]. Analysis.
Senator Menendez [continuing]. Point, you're just saving my
time.
Mr. Reinsch. Well, I----
[Laughter.]
Mr. Reinsch [continuing]. I was trying to generalize.
Senator Menendez. And I'm asking the questions, so don't
hesitate to give me a full answer.
Mr. Reinsch. I think I would subscribe largely to Mr.
Harrington's analysis, Mr. Chairman. We don't see them as being
frequently invoked. We see their existence as an incentive to
the competent authorities to work things out. We are, in
general, happy with the competent-authority process. There have
been, and occasionally are--it varies over time and by
individual country--cases where the competent-authority process
is either prolonged or doesn't produce a resolution. We think
having the arbitration process, if you will, hanging over their
heads will lead to better--and more efficient--competent-
authority work, which is a fine outcome. And, failing that, the
arbitration process is also a fine outcome, from our point of
view.
Ms. Lucchesi. Yes. I concur. It certainly adds to
certainty. In an area where there aren't many certainties, this
is going to reduce some element of the risk of double taxation.
Senator Menendez. Let me pick your brain about the question
I asked earlier about--prospectively--about the taxpayer
participation. How do you view that?
Mr. Reinsch. I was thinking about that as you raised it,
Mr. Chairman. It's a novel thought. I think the idea to my
companies that they might have some influence with the tax
authorities is one that I'm sure they'll want to give some
thought to. It's kind of a new idea.
I am advised that right now they are, in general, satisfied
with the relationship they have with the U.S. competent
authority, and are satisfied that their point of view is taken
into account and considered as part of the process now. So,
they don't feel alienated or separated from the process now,
even though they are not, as you pointed out, precisely part of
it.
That said, I think that there might be something to be
said, prospectively, for looking at that question, and I'd be
pleased to go back to my members and then report the results to
the committee staff for your consideration.
Senator Menendez. I'd love to hear their response to that.
Seems to me that formalizing their participation guarantees
that the competent authority will take their views and concerns
as a essential part of the process, versus the possibility of
it. Anyhow, we'd love to hear the response.
And, last, are there any provisions or changes that the
updated treaties before us today do not include that you think,
moving forward,, subject to the call of the Chair.]should be
considered as we look, prospectively?
Mr. Reinsch. The----
Senator Menendez. If you had a magic wand?
Mr. Reinsch. Well, they're all different, and--I'm not the
best person to get into the weeds, although we would be happy
to get into the weeds later on, if you'd like--I think, in
general, we're satisfied with these, certainly. The provision I
could simply flag is--that has historically been the most
important to my members--has been the zero withholding
provision, which is why we are particularly supportive of these
treaties. To the extent that that could be obtained in future
treaties, and that it could be obtained as broadly as possible,
we would be even more enthusiastic.
Ms. Lucchesi. There is--there's a provision that's in the
German and Belgium treaties that is not in the other two and is
not in many of our other treaties, relating to pension
benefits, where both of the--both the United States and Germany
and Belgium agree that they will not tax the pension earnings
of the--that the U.S. national might make when he's overseas
and remains a part of the U.S. pension plan, and vice versa.
And they explicitly state that certain pension plans will be
deemed to be acceptable plans, so there's no need to go to
competent authority to get your pension plan blessed, there's
just a per se list of acceptable pension plans. And, from a
company that wants to transfer employees throughout the world,
this is critical, because it is--obviously, in the end, it is
the company that's going to pay the tax cost. If I remain in my
U.S. pension plan and transfer to the Netherlands, that's a--
and the United States taxes the--my earnings--and the
Netherlands taxes my earnings, obviously my company is going to
pay for that. So, these--the German and Belgium treaties are
really to be applauded for containing this provision, and we
would love to see that in other treaties, as well.
Senator Menendez. Well, thank you for your testimony.
Seeing no other member of the committee, the record will
remain open for 2 days so that committee members may submit
additional questions to the witnesses. I ask if that you, in
fact, receive such questions, that you respond to them
expeditiously.
Senator Menendez. If no one has any additional comments,
the hearing is adjourned.
[Whereupon, at 4:22 p.m., the hearing was adjourned.]
----------
Additional Material Submitted for the Record
Prepared Statement of Alan C. Drewsen, Executive Director,
International Trademark Association, New York, NY
Mr. Chairman, the International Trademark Association (INTA)
appreciates this opportunity to express its views on the Singapore
Treaty on the Law of Trademarks which replaces the Trademark Law Treaty
of 1994 to which the United States is a signatory. On behalf of our
members, we respectfully ask the committee to give this revision of the
World Intellectual Property Organization Trademark Law Treaty of 1994
its favorable consideration.
The International Trademark Association is a not-for-profit
membership association of more than 5,000 trademark owners and
professionals dedicated to the support and advancement of trademarks
and related intellectual property (``IP'') as elements of fair and
effective national and international commerce. INTA works closely with
government and judicial authorities around the world to promote the
development and application of trademark law.
The Singapore Treaty is the product of worldwide growth in e-
commerce and provides consistent rules for electronic filing of
trademark applications, as well as further simplification and
streamlining of administrative procedures. The modernization of the
1994 treaty reflects developments in technology and trademark practice.
INTA wishes to draw the committee's attention to the following key
changes all of which constitute improvement over the 1994 treaty:
1. Creation of an Assembly
An assembly of contracting parties has been created with the power
to deal with matters concerning the development of the treaty. This
consists of amending the treaty regulations, including the Model
International Forms and performing other functions as appropriate to
implement the provisions of the treaty.
2. Trademark License Recordal Provisions
Provisions relating to trademark license recordal establish maximum
requirements for the requests for recordal, amendment, or cancellation.
Importantly, nonrecordal of a license shall not affect the validity of
the registration of the mark which is the subject of the license or the
protection of that mark. Recordal of a license may not be required as a
condition for the use of a mark by a licensee to be deemed to
constitute use by the holder in proceedings relating to the
acquisition, maintenance, and enforcement of marks. Recordal of a
license may also not be required as a condition for a licensee to join
infringement proceedings initiated by the holder or to obtain
infringement damages through such proceedings, although any state or
intergovernmental organization may still declare through a reservation
that it requires license recordal as a condition in this regard.
These provisions will simplify and reduce costs in many countries
where the formalities of the recordal process are obstacles to cost-
effective trademark protection. On the other hand, the treaty addresses
the situation where failure to record licenses poses unacceptable risk
for U.S. trademark owners.
3. Relief Measures When Time Limits Are Missed
Three possible types of relief measures are provided in cases in
which a time limit has been missed for an action in a procedure
relating to an application or registration. These include: (i)
Extension of the time limit; (ii) continued processing; and (iii)
reinstatement of rights if the trademark office finds that the failure
to meet the time limit occurred despite due care taken, or if the
failure was unintentional.
4. Electronic Communications
In response to the increasing automation and adoption of electronic
filing systems by trademark offices since 1994, the Singapore Treaty
allows contracting parties to choose the means of transmittal of
communications and to determine if they will accept paper, electronic,
or other forms of communications. This is an especially important
matter for the U.S. Patent and Trademark Office (PTO), which has
expanded its automation capacity during the filing process.
5. Expanded Scope of Marks Covered
The Singapore Treaty may be generally applied to all signs
registrable under the national law of any contracting party, including
nonvisible signs such as sounds and smells, in addition to
nontraditional marks such as three-dimensional marks and holograms.
6. Supplementary Resolution to the Singapore Treaty
In addition to the main text and regulations to the Singapore
Treaty, the diplomatic conference also adopted a supplementary
resolution that states that contracting parties are not obliged to
register the ``new types of marks'' mentioned in the regulations to the
treaty, or implement electronic filing or other automated systems.
Mr. Chairman, ratification of the Singapore Treaty will improve the
ability of U.S. trademark owners to protect their intellectual property
throughout the world. Upon entry into force, this will simplify formal
procedures and reduce associated costs for trademark applicants and
governments. We urge the committee to report the Singapore Treaty
favorably.
______
Letter Submitted as a Prepared Statement of the American Intellectual
Property Law Association (AIPLA), Arlington, VA
AIPLA,
Arlington, VA, July 23, 2007.
Hon. Joseph R. Biden, Jr.,
Chairman, Committee on Foreign Relations,
U.S. Senate, Dirksen Senate Office Building, Washington, DC.
Dear Mr. Chairman: The American Intellectual Property Law
Association (AIPLA) is pleased to present its views on the Singapore
Treaty on the Law of Trademarks adopted on March 28, 2006, in
Singapore, the Geneva Act of the Hague Agreement Concerning the
International Registration of Industrial Designs adopted on July 2,
1999, in Geneva, and the Patent Law Treaty and Regulations Under the
Patent Law Treaty adopted on June 1, 2000, in Geneva.
AIPLA is a national bar association of more than 16,000 members
engaged in private and corporate practice, in government service, and
in the academic community. AIPLA represents a diverse spectrum of
individuals, companies, and institutions involved directly or
indirectly in the practice of patent, trademark, copyright, and unfair
competition law, as well as other fields of law affecting intellectual
property. Our members represent both owners and users of intellectual
property.
The treaties captioned above concern three discrete aspects of
intellectual property law: Trademarks, industrial designs, and patents.
All three treaties, however, recognize the need to streamline the
protection of intellectual property rights and to remove legal
complexity and procedural difficulty in obtaining and maintaining such
rights. To the extent those goals may be accomplished should the United
States adhere to these treaties, all rights holders, and in particular
small entities in the United States, will be better able to participate
in the growing global economy with sound, cost-effective intellectual
property protection.
We note that, while all three of the above referenced treaties have
been referred to the Senate for its advice and consent, no implementing
legislation has been published. In the case of the Singapore Treaty, we
believe that the United States currently complies with the treaty
provisions and that no implementing legislation would be required to
implement it. Regarding the two Geneva treaties, however, implementing
legislation would be required and, while we are able to offer our
general views on these treaties, we must reserve final judgment until
we are able to review the specific proposed implementing legislation.
singapore treaty on the law of trademarks
The Singapore Treaty on the Law of Trademarks (the Singapore
Treaty) was adopted in Singapore on March 28, 2006, and forwarded to
the Senate for its advice and consent on May 3, 2007. Ratification and
implementation of this treaty will significantly benefit U.S. trademark
owners conducting business globally. We, therefore, urge the committee
to support ratification of the Singapore Treaty.
The Singapore Treaty builds upon and updates the Trademark Law
Treaty of 1994, to which the United States is a party. The 1994 treaty
harmonized formalities and simplified procedures in applying,
registering, and renewing trademarks, by establishing maximum
requirements that Contracting Parties can impose on trademark
applicants and holders. The Singapore Treaty maintains this focus, but
has a wider scope of application and addresses new developments in the
field of communication technology.
The Singapore Treaty applies to all types of marks registrable
under the law of a given Contracting Party. The treaty allows
Contracting Parties the freedom to choose the means of communication
with their trademark offices, and introduces relief measures for missed
time limits and errors in recording trademark licenses. Other
provisions of the Singapore Treaty closely follow the Trademark Law
Treaty. Such common procedural standards would create a level playing
field for all parties that invest in branded goods. Moreover, the
Singapore Treaty creates a dynamic regulatory framework for brand
rights and, unlike the Trademark Law Treaty, establishes an Assembly of
the Contracting Parties that can review administrative details, a
feature of great practical importance for brand owners.
The Singapore Treaty addresses the burdensome license recordal
requirements in some countries that make it difficult for trademark
licensors and licensees to enforce trademark rights. In many cases,
failure to record a license results in invalidation of the trademark
registration. The Singapore Treaty's license recordal provisions reduce
the formalities that trademark owners are subject to when doing
business with a Contracting Party that requires recordal, and mitigate
the damaging effects that can result from failure to record a license
in those jurisdictions.
Unlike the Trademark Law Treaty, the Singapore Treaty allows
Contracting Parties the freedom to choose the form and means of
transmittal of communications, i.e., whether they accept communications
on paper, communications in electronic form, or any other mode of
communication. This allows national and regional trademark offices to
move to electronic systems for receiving and processing trademark
applications, permitting such offices to take advantage of electronic
communication systems as an efficient and cost-saving alternative to
paper communications. The Singapore Treaty also maintains a very
important provision of the Trademark Law Treaty, namely that the
authentication, certification, or attestation of any signature on paper
communications cannot be required. Contracting Parties remain free to
determine whether and how they wish to implement a system of
authentication of electronic communications.
The treaty protects applicants from failures to comply with time
limits by requiring Contracting Parties to provide at least one of the
following forms of relief: An extension of time to comply, the
opportunity to continue processing, or a reinstatement of rights. Such
mandatory relief would mitigate drastic penalties resulting from mere
failure to meet a specific time limit.
The Singapore Treaty, in contrast to the Trademark Law Treaty,
applies generally to marks that can be registered under the law of a
Contracting Party. Never before have nontraditional marks been
explicitly recognized in an international instrument dealing with
trademark law. The treaty is applicable to all types of marks,
including nontraditional visible marks such as holograms, three-
dimensional marks, color, position, and movement marks, and nonvisible
marks such as sound, olfactory, or taste and feel marks. The
Regulations provide for the mode of representation of these marks in
applications, which may include nongraphic or photographic
reproductions.
The Singapore Treaty creates an Assembly of the Contracting
Parties, introducing a degree of flexibility in the definition and
refinement of administrative procedures to be implemented by national
trademark offices. We anticipate that future developments in trademark
registration procedures and practice will warrant amendment of those
details. The assembly is endowed with powers to modify the Regulations
and the Model International Forms, where necessary, and it can also
deal--at a preliminary level--with questions relating to future
development of the treaty.
As outlined above, ratification of this treaty by the United States
and other nations will significantly benefit U.S. trademark owners
conducting business globally. Ratification will simplify procedures for
both national and regional offices and for applicants, reducing
transaction costs and minimizing inadvertent loss of valuable rights.
AIPLA supports ratification by the United States of the Singapore
Treaty on the Law of Trademarks.
geneva act of the hague agreement concerning the international
registration of industrial designs
The Geneva Act of the Hague Agreement (the Agreement) was adopted
in Geneva on July 2, 1999, and forwarded to the Senate for its advice
and consent on November 13, 2006. Ratification and implementation of
this Agreement would provide industrial designers in the United States
with access to an international legal framework through which they may
obtain protection for their designs in multiple countries by filing a
single application. We therefore urge the committee to support
ratification of the Agreement.
The Hague Agreement for the International Protection of Industrial
Designs (the ``Hague Agreement'') includes three international
treaties: The London Act (1934), the Hague Act (1960), and the Geneva
Act (1999). A Contracting Party may ratify any or all of the three
treaties. The most recent of these, the Geneva Act, became operational
on April 4, 2004. This Agreement contains provisions that meet the
needs of countries, like the United States, that undertake novelty
examinations of industrial designs. Many of the provisions of the
Agreement were specifically negotiated to accommodate these needs, as
were the Regulations and Administrative Instructions.
The primary benefit of the Agreement would be that U.S. designers
could obtain multinational industrial design protection with a single
application, instead of filing individual applications in each country
of interest. Consequently, the Agreement is cost effective and
efficient; creating opportunities that would not otherwise exist for an
enterprise with a limited budget for legal protection. The Agreement,
therefore, affords right holders great flexibility in targeting
national, regional, or global markets for particular goods.
U.S. design owners would be able to file for design registration in
any number of the Contracting Parties with a single standardized
application in English. The application could be filed at either the
United States Patent and Trademark Office (USPTO) or the International
Bureau of the World Intellectual Property Organization (WIPO). In a
similar manner, renewal of the design registration in each Contracting
Party could be made by filing a single request, along with payment of
the appropriate fees, with the International Bureau. The filing date of
the international design application would be the date the application
was received by either the International Bureau or the USPTO.
The International Bureau would normally publish the international
registration within 6 months of the registration date. The
international registration would have the same effect in the USPTO as a
regularly filed national application under U.S. law. The international
registration would be effective for a period of 5 years from the date
of the registration, and could be renewed for additional 5-year terms.
The Agreement contemplates that Contracting Parties may make
declarations with respect to a variety of Agreement articles. The
Department of State has recommended to the Senate that United States
ratification be accompanied by nine such declarations. As a whole, we
believe that the advantages of the Agreement are such that they far
outweigh any concerns that we have about any particular proposed
declaration. We do note, however, that the eighth declaration,
authorized by rule 13(4) of the Agreement, allows the USPTO to notify
the WIPO Director General that the law of the United States requires a
security clearance and that the prescribed 1-month period during which
the patent office of a Contracting Party is required to forward an
application to the International Bureau shall be replaced by a period
of 6-months to provide time for a security review of the application.
While we appreciate that a design application may occasionally give
rise to a need for such a security review, we believe that such
instances are rare and that a 6-month delay in providing the
application to the International Bureau is excessive. We would prefer
that the eighth declaration be withdrawn, or that the proposed 6-month
delay be shortened.
As a whole, however, we believe that designers in the United States
should have access to an international legal framework through which
they may obtain protection for their industrial designs in multiple
countries by filing a single application, and that the Agreement
provides such a framework.
AIPLA supports ratification by the United States of the Geneva Act
of the Hague Agreement Concerning the International Registration of
Industrial Designs.
patent law treaty and regulations under the patent law treaty
The Patent Law Treaty (the PLT) was adopted in Geneva on June 1,
2000, entered into force on April 28, 2005, and was forwarded to the
Senate for its advice and consent on September 5, 2006. The PLT
harmonizes and streamlines formal procedures in respect of national and
regional patent applications and patents, reducing or eliminating
formalities and potential loss of rights. Such procedural
simplification can only benefit U.S. inventors. We, therefore, urge the
committee to support ratification of the Patent Law Treaty.
The PLT sets forth the maximum procedural requirements that a
Contracting Party may impose on patent applicants, and dictates
standardized requirements for obtaining a filing date. The grant of a
filing date is essential for establishing priority for the grant of a
patent and for the prior art applicable for determining the
patentability of an invention. It is also relevant to claiming a right
of priority under the Paris Convention as well as to the calculation of
the term of patent protection. The PLT sets up requirements for
obtaining a filing date and procedures to avoid loss of the filing date
because of a failure to comply with formal requirements. In principle,
the patent office of any Contracting Party is required to accord a
filing date to an application on the basis of three elements: (i) An
indication that what was filed is intended to be a patent application;
(ii) indications that identify the applicant and allow the applicant to
be contacted; and (iii) a part that appears to be a description of the
invention. No additional elements may be required to receive a filing
date.
The PLT establishes a single internationally standardized set of
formal requirements for national and regional applications. To avoid
having international ``double standards,'' the formal requirements in
respect of international applications under the PCT are incorporated
into the PLT, wherever appropriate. The PLT provides for the
establishment of several Model International Forms that have to be
accepted by the patent offices of all Contracting Parties. Using the
Model International Forms assures applicants and other parties that no
patent office may refuse the communication because of noncompliance
with a formal requirement.
To reduce any unnecessary burden on applicants, the PLT provides
that evidence in support of the formal contents of an application,
declarations of priority, or authentication of translations may only be
required where a patent office has a reasonable doubt as to the
veracity of the indications or the accuracy of the translation
submitted by the applicant. A Contracting Party may not require a copy
or a certified copy of an earlier application if it was filed with the
patent office of that Contracting Party or if it could obtain the copy
or the certification from other patent offices through a digital
library that is accepted for that purpose. Multinational projects are
now underway to expand such digital libraries that, in combination with
this treaty provision, would largely eliminate the burdensome exchange
of paper certified copies of prior applications.
The PLT provides three types of relief from failure to comply with
certain formal requirements. The first is an extension of procedural
time limits where an applicant or owner requests the extension prior to
the expiration of the time limit; the second is an extension of such
time limits where an applicant or owner requests the extension after
the expiration of the unobserved time limit; and the third is continued
processing. A Contracting Party is not obliged to provide the first
type of extension; however, it must provide either the second type of
extension or continued processing. Relief under these provisions is
limited to noncompliance with a time limit fixed by a patent office,
not to time limits fixed by legislation. The PLT also provides
safeguard provisions for situations where an applicant or owner might
lose rights with respect to an application or patent for failure to
meet a time limit. Reinstatement of such rights is applicable to all
time limits, including time limits set by legislation. The PLT also
provides for the correction and addition of priority claims and
restoration of priority rights where an application is filed after the
expiration of the 12-month priority period, and where an applicant
cannot submit a copy of an earlier application within 16 months from
the priority date because of a delay in the patent office with which
the earlier application was filed.
The PLT would facilitate implementation of electronic filing of
applications and other communications, to the advantage of both patent
offices and their users, while ensuring the coexistence of both paper
and electronic communications. Applicants would be allowed to file
applications and communications on paper, at least for the purposes of
acquiring a filing date and complying with a time limit.
The Department of State Letter of Submittal noted that United
States law does not contain a ``unity of invention'' requirement, and
that the USPTO advises that it considers this a substantive patent law
matter that it does not recommend changing. Accordingly, the Department
of State recommended that the following reservation be included in the
U.S. instrument of ratification: ``Pursuant to Article 23, the United
States declares that Article 6(1) shall not apply to any requirement
relating to unity of invention applicable under the Patent Cooperation
Treaty to an international application.'' AIPLA strongly opposes this
reservation and favors acceptance by the USPTO of the unity of
invention standard as a ``best practice'' for all purposes, including
those implicated in international applications. Ratification of the
Patent Law Treaty, however, even with the proposed reservation
regarding unity of invention, will streamline and harmonize formal
procedures in respect of national and regional patent applications and
patents.
AIPLA supports ratification by the United States of the Patent Law
Treaty and Regulations under the Patent Law Treaty.
Thank you for your consideration of our views on these important
treaties.
Sincerely,
Michael Kirk,
Executive Director, AIPLA.
______
American Bar Association,
Section of Intellectual Property Law,
Chicago, IL, September 6, 2007.
Hon. Joseph R. Biden, Jr.,
Chairman, Committee on Foreign Relations,
U.S. Senate, Washington, DC.
Dear Mr. Chairman: I am writing to express the views of the Section
of Intellectual Property Law of the American Bar Association on the
Patent Law Treaty and Regulations Under Patent Law Treaty (``the
Treaty''). These views have not been submitted to the ABA House of
Delegates or Board of Governors, and should not be considered to be
views of the Association. The Treaty was completed in Geneva on June 1,
2000. The President transmitted the treaty to the Senate on September
5, 2006, recommending that the treaty be ratified, with a reservation.
(Treaty Document No.109-12) We recommend that the treaty be ratified
without reservation.
The Intellectual Property Law Section of the American Bar
Association is the world's largest organization of Intellectual
Property Professionals with approximately 19,000 members, including
lawyers, associates and law students. In recognition of the importance
of patent law, the ABA established the Section in 1894 as the first ABA
section to deal with a special branch of the law. This Section has
contributed significantly to the development of the American system for
the protection of Intellectual Property rights. The Section is composed
of lawyers of diverse backgrounds who represent patent owners, accused
infringers, individual inventors, large and small corporations, and
universities and research institutions, all across a wide range of
technologies and industries.
We understand that the Committee is currently considering
ratification of the treaty, and that a hearing was held in connection
with such ratification on July 17. Our Section is extremely pleased
with such consideration and we encourage the Senate to proceed with
such ratification.
We note that, in transmitting the treaty to the Senate, the
President recommended that a reservation be taken under Article A23 of
the treaty which reservation would prevent the Unity of Invention
Standard as set forth in the Patent Cooperation Treaty to be applicable
to national applications filed in the United States Patent and
Trademark Office.
The Section of Intellectual Property Law opposes such reservation.
While the United States Patent Office had previously committed itself
to accept a Unity of Invention Standard and has undertaken numerous
studies in that regard, thus far the office has not implemented the
Unity of Invention Standard. Such Unity of Invention Standard is
already effective in International applications filed with the United
States Patent office, as well as in substantially all national and
regional patent offices around the world. It would make prosecution of
patent applications more uniform in the United States Patent Office and
would reduce costs and burdens on patent applicants. We therefore
encourage the Senate to ratify the Patent Law Treaty without such
reservation so that the Unity of Invention Standard as set forth in the
Patent Cooperation Treaty would be applicable to national applications
filed in the USPTO.
We would be pleased to provide additional information in connection
with the above should such be requested.
Respectfully submitted,
Pamela Banner Krupka,
Chair, Section of Intellectual Property Law,
American Bar Association.
______
Response of Lois Boland to Followup Question Submitted by Senator Biden
Concerning the Above ABA Letter of September 6, 2007, About Treaty Doc.
109-12
Question. The American Bar Association's Section of Intellectual
Property Law wrote to the committee in support of U.S. ratification of
the Patent Law Treaty and Regulations Under the Patent Law Treaty (the
``PLT'') in a letter dated September 6, 2007, but in so doing, also
expressed its strong opposition to the reservation recommended by the
executive branch, which is in the report on the treaty prepared by the
Department of State (Treaty Doc. 109-12, p.9).
The letter states in relevant part as follows:
We note that, in transmitting the Treaty to the Senate, the
President recommended that a reservation be taken under Article
23 of the Treaty which reservation would prevent the Unity of
Invention Standard as set forth in the Patent Cooperation
Treaty to be applicable to national applications filed in the
United States Patent and Trademark Office.
The Section of Intellectual Property Law opposes such
reservation. While the United States Patent Office had
previously committed itself to accept a Unity of Invention
Standard and has undertaken numerous studies in that regard,
thus far the Office has not implemented the Unity of Invention
Standard. Such Unity of Invention Standard is already effective
in International applications filed with the United States
Patent Office, as well as in substantially all national and
regional patent offices around the world. It would make
prosecution of patent applications more uniform in the United
States Patent Office and would reduce costs and burdens on
patent applicants. We therefore encourage the Senate to ratify
the Patent Law Treaty without such reservation so that the
Unity of Invention Standard as set forth in the Patent
Cooperation Treaty would be applicable to national applications
filed in the USPTO.
Please explain why, in light of these comments, this reservation is
necessary. Also, please indicate whether the USPTO previously committed
itself to accepting a Unity of Invention Standard, as suggested in the
letter quoted above.
Answer. The proposed United States reservation under Article 23 of
the Patent Law Treaty (PLT) is necessary to maintain current
flexibilities in managing United States Patent and Trademark Office
(USPTO) workload. If the United States were to adopt the Unity of
Invention requirement right now, the rule change would necessitate an
increased level of fees to cover a higher workload burden, and
moreover, would lead to higher pendency rates for patent issuance.
As explained by the USPTO in a 2003 Request for Comments on the
Unity of Invention standard:
The Unity of Invention standard is a component of many
foreign patent laws and is also used in international search
and preliminary examination proceedings conducted pursuant to
the PCT.
United States restriction practice is based on 35 U.S.C. 121,
which provides that: ``[i]f two or more independent and
distinct inventions are claimed in one application, the
Director may require the application to be restricted to one of
the inventions.'' This allows examiners to limit applicants to
one set of patentably indistinct inventions per application.
The USPTO may ``restrict'' the application to one set of
patentably indistinct inventions: (1) If the application
includes multiple independent and patentably distinct sets of
inventions, and (2) if there is an undue burden to examine more
than one invention in the same application. Restriction
practice was designed to balance the interest of granting an
applicant reasonable breadth of protection in a single patent
against the burden on the USPTO of examining multiple
inventions in a single application.
Current USPTO policy allows for restriction between related
inventions as well as between independent inventions. However,
if the USPTO adopts a Unity of Invention standard, restriction
would, as a general rule, no longer be permitted between
certain related inventions that currently may be restricted
under United States restriction practice. Some examples of
related inventions that are often filed together and typically
can be restricted under current United States practice before a
prior art search is conducted, but do not lack unity under the
Unity of Invention standard, include: (1) A process, and the
apparatus for carrying out the process; (2) a process for
making a product, and the product made; (3) an apparatus, and
the product made by the apparatus; (4) a product, and the
process of using the product.
A lack of Unity of Invention is different from restriction
practice in some major aspects. Unity of Invention is
practiced, with slight variations, in PCT applications and in
applications examined by the European Patent Office (EPO) and
the Japan Patent Office (JPO). The primary consideration for
establishing Unity of Invention is that the claims are entitled
to be examined in a single application if the claims are so
linked together as to form a single general inventive concept,
premised on the concept of a common feature (referred to as a
``special technical feature'' in the context of PCT Rule 13)
that can be present in multiple inventions within a single
application. As long as the same or corresponding common
feature is found in each claim and that common feature makes a
contribution over the prior art, the claims comply with the
requirement for Unity of Invention. If the inventions lack a
common feature that makes a contribution over the prior art,
then a holding of lack of Unity of Invention would be proper.
The determination of whether an invention makes a contribution
over the prior art can effectively be done only after a prior
art search for the common feature has been performed.
``Request for Comments on the Study of the Changes Needed to
Implement a Unity of Invention Standard in the United States,'' 1271
Off. Gaz. Pat. Office 98 (June 17, 2003), 68 Fed. Reg. 27536 (May 20,
2003).
The Patent Cooperation Treaty does use a ``unity of invention''
standard. Since at least July 1, 1987, the USPTO has examined
international patent applications and PCT national stage applications
with this standard. However, this is different than how domestically
filed patent applications are examined for the efficiency reasons
explained above.
The USPTO has not committed itself to adoption of the ``unity of
invention'' standard, but instead indicated it would consider adoption
of the standard. See ``USPTO Study on Restriction Reforms,'' http://
www.uspto.gov/web/patents/greenpaper.pdf (2005); ``Study of Alternative
Fee Structures,'' 1239 OG 155 (October 24, 2000), 65 Fed. Reg. 58746
(October 2, 2000); ``Request for Comments on Patent Law Treaty,'' 65
Fed. Reg. 12515 (March 9, 2000), ``Unity of Invention and Patent
Cooperation Treaty,'' 52 Fed. Reg. 20038, May 28, 1987 (Final
Rulemaking). The USPTO is continuing to review the ``unity of
invention'' standard, and what, if any, changes need to be made to the
fee structure to accommodate adoption of that standard. But at this
point, there does not appear to be consensus that adoption of this
standard for all applications is appropriate. See ``USPTO Strategic
Plan 2007-2012'' at 36 (``The USPTO studied changes needed to adopt a
unity standard, including solicitation of public comments. A `Green
Paper' was published for comment in June 2005. Based on the comments,
no consensus was reached on the Green Paper options, and the USPTO
expects to conclude the study.'') http://www.uspto.gov/web/offices/com/
strat2007/.
At this time, it is important to maintain flexibility and allow the
USPTO to continue to use the ``unity of invention'' standard only for
international applications and applications that enter the national
stage from the PCT.
______
Responses of Lois Boland to Questions Submitted by Senator Joseph R.
Biden, Jr.
Question. Did the U.S. Patent and Trademark Office consult with the
committee during the course of negotiations on the Singapore Trademark
Treaty, the Patent Law Treaty, or the Geneva Act of the Hague
Convention?
Answer. The U.S. Patent and Trademark Office (USPTO) had public
hearings before the Diplomatic Conferences for the Patent Law Treaty
and the Geneva Act of the Hague Agreement, and consulted with many
people in the process of preparing for the negotiations for all three
treaties. See, e.g., ``Request for Comments on Patent Law Treaty,'' 65
Fed. Reg. 12515-12517, and ``Notice of Public Hearing and Request for
Comments on the Proposed New Act of the Hague Agreement Concerning the
International Registration of Industrial Designs,'' 64 Fed. Reg. 19135-
19139.
Question. In the treaty transmittal packages (109-12; 109-21; and
110-2), the administration recommended a reservation to accompany
ratification of the Patent Law Treaty and a number of Declarations to
accompany ratification of the Geneva Act of the Hague Agreement. The
administration did not suggest the inclusion of any reservations,
understandings, or declarations to accompany ratification of the
Singapore Treaty. Does the administration stand by these
recommendations?
Answer. Yes, the reservation for the FLT is appropriate for the
reasons stated in the report of the Department of State accompanying
the President's letter of transmittal to the Senate for that treaty.
The declarations for the Geneva Act are also appropriate for the
reasons stated in the letter of transmittal. However, the text of the
declaration under Article 7(2) and Rule 12(3) of the Geneva Act
included fee amounts for the individual designation fees for the United
States that, while accurate when the original ratification package was
drafted, were later amended. We will replace the outdated fee amounts
with the current fee amounts in the text of the resolution for advice
and consent of the Senate on the ratification of the Geneva Act of the
Hague Agreement. Last, no reservation or declaration is recommended for
the Singapore Treaty.
Question. Are there any other international agreements that promote
the protection of intellectual property to which the United States is
currently not a party, that you think we should be party to?
Answer. The USPTO, in conjunction with other USG agencies,
regularly reviews treaties concerning the protection and enforcement of
intellectual property rights to which the United States is not a party
with a view to considering the merits of joining a particular treaty.
To the extent that a treaty to which the United States is not party
offers real benefits to American businesses, innovators, and inventors,
and does not seem to present any significant downsides for the United
States, we would start the process of considering accession to such a
treaty in consultation with other relevant agencies, including the
State Department and USTR.
We have not identified any multilateral or plurilateral treaties
concerning the protection and enforcement of intellectual property
rights to which the United States should become a party at this time.
The United States has recently signed bilateral free trade
agreements with four countries (the Republic of Korea, Colombia, Peru,
and Panama). These agreements all contain provisions to enhance the
protection and enforcement of intellectual property rights. The
administration looks forward to working with the Congress to seek
approval of these agreements in accordance with the Trade Promotion Act
of 2002.
Question. Which countries would you say are most effective--and
which ones are the most ineffective--at enforcing piracy of
intellectual property? What have you found to be the best mechanisms
for enforcing intellectual property protections?
Answer. Most effective--certainly the United States, the EU, and
Australia.
Some of the countries that are not addressing IP challenges most
effectively are identified in U.S. Trade Representative's (USTR) annual
Special 301 report. The 2007 report takes note of enforcement progress
in Brazil, for example, and Bulgaria, Croatia, and Latvia were removed
from the Special 301 Watch List due to progress in those countries. The
2007 report also notes countries that have the most significant
problems with effective IPR protection and enforcement, such as China,
Russia, Argentina, India, and Ukraine, where the IP enforcement regimes
require important improvements.
USTR and other USG agencies utilize a variety of mechanisms for
promoting strong intellectual property regimes around the world. As
mentioned above, the Special 301 report is an annual review of the
global state of intellectual property rights protection and
enforcement. In addition, IP issues are addressed in the context of the
World Trade Organization (WTO) and bilateral Free Trade Agreements
(FTAs), as both of these provide for regular bilateral engagement and
have dispute settlement mechanisms for addressing concerns about
implementation of the IP obligations of those agreements. For example,
earlier this year, the United States initiated dispute settlement
proceedings with China in the WTO on IP enforcement and related market
access issues. The WTO accession process provides another avenue for
addressing IP concerns. This exercise provides an opportunity for the
United States to ensure that acceding countries comply with its
obligations under the WTO Agreement on Trade Related Aspects of
Intellectual Property Rights (TRIPS), including with respect to IP
enforcement, upon that country's accession to the WTO. This has been
the case with Russia and others, with whom we continue to work
aggressively to ensure that they can meet their WTO TRIPS obligations
and their bilateral commitments upon accession. We also note that U.S.
trade preference programs such as the Generalized System of
Preferences, the Andean Trade Preferences Act, the Caribbean Basin
Initiative and the African Growth and Opportunity Act, contain
eligibility criteria pertaining to the protection and enforcement of
intellectual property rights. Finally, IPR protection and enforcement
figure regularly and prominently in the context of ongoing diplomatic
and trade policy engagements with many U.S. trading partners.
Question. When asked during the hearing about what the most
significant barriers are that relate to the protection of intellectual
property throughout the world today, you mentioned, among other things,
the work that the U.S. Patent and Trademark Office is doing with ``the
more progressive voices on IP issues and IP enforcement'' on ``many of
the issues we commonly face in Asia.'' Can you go into greater detail
regarding that cooperative work?
Answer. One area of cooperative work is the ``STOP'' initiative.
The ``Strategy Targeting Organized Piracy'' is an interagency effort
with both domestic and international components--including educational
outreach; a STOP hotline (1-866-999-HALT), handled by USPTO; USPTO and
U.S. Customs and Border Protection cooperation on trademark
registrations and notifications; international efforts in Asia and
Europe; and partnerships with the private sector.
Internationally, the USPTO has been working diligently with
progressive voices on IP issues and IP enforcement, such as Japan,
Korea, Singapore, and the European Community to explain the
relationship between high levels of intellectual property protection
and enforcement and economic and technological development. This is
particularly true in the meetings for treaties administered by the
World Intellectual Property Organization (WIPO), where the United
States regularly consults with these ``progressive voices'' to promote
IP and IP enforcement, and to, where possible, work together to develop
shared positions.
In addition to working together with like-minded countries to
improve the IP system within WIPO, the United States is working
cooperatively, as well as independently, to provide training related to
IP. For example, the USPTO will be working together with Singapore to
deliver a training program on patents in that country in November, and
over this year has worked with the governments of China, Thailand,
Vietnam, Hong Kong, and India to train judges, prosecutors, customs
officials, police, IP Office staff, and many others. USPTO also
coordinates closely with the Asia-Pacific Economic Cooperation (APEC)
and the Association of Southeast Asian Nations (ASEAN) to provide IP-
related capacity-building and technical assistance in the region.
Question. Article 30 of the Geneva Act of the Hague Agreement
provides that Declarations made at the time of ratification may be
withdrawn at any time by a notification addressed to the Director
General of the World Intellectual Property Organization. Is it likely
or anticipated that any of the declarations that the executive branch
has recommended might ultimately be withdrawn by the United States?
Answer. The Declarations explicitly authorized under the Geneva Act
of the Hague Agreement are intended to accommodate some countries, such
as the United States, that have requirements that are different from
those of other countries. For example, in the United States a patent
application, such as for a design patent, is required to have a claim
in order to receive a filing date, but most other countries do not
require such a claim. Therefore, we have recommended that the United
States declare that its law requires such a claim. If the U.S. design
patent laws were changed in the future to remove that requirement, then
the corresponding Declaration could be withdrawn. At this time, we have
no information on the likelihood of any such changes.
Question. Article 22(1) of the Singapore Trademark Treaty provides
that the Regulations annexed to the treaty cover: (1) Matters which
this treaty expressly provides to be ``prescribed in the Regulations'';
(2) any details useful in the implementation of the provisions of this
treaty; (3) any administrative requirements, matters, or procedures;
and (4) Model International Forms.
a. Can you explain the meaning of the vague phrase used in
Article 22(1)(a)(ii) (``any details useful in the
implementation of the provisions of this Treaty'')? In
particular, the language appears to provide that anything that
might be considered to be in furtherance of the implementation
of the treaty could be included in the Regulations, which is
quite broad. Can you explain whether there are any limitations
on this phrase, whether discussed during the negotiations or
otherwise?
Answer. The phrase ``any details useful in the implementation of
the provisions of this Treaty'' does provide for any details (i.e.,
refining points) that may be considered helpful in furtherance of
implementation of the treaty. The phrase is limited by the other
articles of the treaty insofar as such details must implement treaty
provisions. This language is very common in the more recent WIPO
treaties--the same phrase appears in intellectual property treaties to
which the United States is already a party: Article 17(1)(ii) of the
1994 Trademark Law Treaty (which the Singapore Trademark Treaty is
revising), Article 58(1)(iii) of the Patent Cooperation Treaty (PCT)
and Article 12(1)(iii) of the Budapest Treaty on the International
Recognition of the Deposit of Microorganisms for the Purpose of Patent
Procedure. It is also included in Article 24(1)(ii) of the Geneva Act
of the Hague Agreement and Article 14(1)(a)(ii) of the Patent Law
Treaty (PLT).
The rationale for such language in the Singapore Treaty, along with
the other cited treaties, is to ensure flexibility in the operational
aspects of the treaties. The PCT and Hague Agreements, for example,
provide for international filing systems at WIPO for patents and
designs, respectively. The implementation of such systems is extremely
technical and could be subject to change based on experiences over time
as to what practices are successful or not, as well as based on changes
in technology. The regulations governing the details for implementation
of these systems may need to respond to such changes in behavior based
on lessons learned over time or technological developments.
The PLT and Singapore Treaty involve very technical formalities
that focus on what national patent and trademark offices can and cannot
require of applicants and registrants. Practices of users and practices
of offices change, particularly as technologies change, and the
implementing regulations for the treaties need to adapt in order to
remain viable, responsive, and relevant. In order to make these
treaties viable in the future--without having to renegotiate them every
5-10 years--the regulations must be able to adapt to future realities
and situations that we may not even contemplate now.
The very technical nature of these treaties, as well as the
provisions of the treaties themselves, provide an inherent limitation
on any implementing regulations the Assembly can consider: The
regulations cannot exceed and can only implement the treaties'
provisions.
b. Do you agree that the list in Article 22(1) regarding the
content of the Regulations is exclusive and that, as a result,
any proposed amendment to the Regulations that would go beyond
the list provided for in Article 22(1) could not be done
through a decision of the Assembly, but would instead require
an amendment to the treaty, pursuant to Article 25?
Answer. Yes; the treaty outlines what can be included in the
Regulations and thus, the scope of the Regulations cannot exceed the
bounds set by Article 22. A proposed amendment to the Regulations that
exceeds the scope of Article 22 would not be in the power of the
Assembly to effect. In that case, a proposal to amend the treaty
pursuant to Article 25 would be required.
Question. Articles 22 and 23 of the Singapore Trademark Treaty make
clear that the Assembly can amend the Regulations to the treaty and can
do so, under certain circumstances, through a tacit amendment procedure
(unless the particular amendment is one that requires unanimity under
Article 22(3), amendments to the Regulations can be accomplished by a
vote of three-fourths of the votes cast in the Assembly). Without any
restrictions on this process, it would seem possible for a member of
the Assembly to propose an amendment to the Regulations at a meeting,
and if three-fourths of the members vote in favor of it (assuming there
is quorum), the amendment could enter into force for all States
immediately thereafter. Can you explain the process of amending the
Regulations as you envision it under the Singapore Trademark Treaty,
with a particular focus on whether there are any restrictions on that
process that would prevent the scenario described above? Do you expect
the Rules of Procedure that the Assembly is to establish under Article
23(7) to provide restrictions on the amendment process? If so, what
sorts of restrictions do you expect to see included in the Rules of
Procedure?
Answer. Providing the Assembly to a particular treaty with the
ability, under certain circumstances, to amend that treaty's
Regulations in this manner is common in WIPO treaties. For example, a
similar procedure is included in WIPO treaties to which the United
States is a party: The Patent Cooperation Treaty and the Budapest
Treaty on the International Recognition of the Deposit of
Microorganisms for the Purpose of Patent Procedure. A similar procedure
is also found in the Geneva Act of the Hague Agreement and in the
Patent Law Treaty (PLT).
At WIPO, the process of making amendments to regulations usually
includes discussions in working group meetings well in advance of an
Assembly meeting. Moreover, a common practice in WIPO bodies is to take
decisions only by consensus. Specifically, Article 23(4)(a) of the
Singapore Treaty requires that the Singapore Assembly ``shall endeavor
to take its decisions by consensus.'' This language is also included in
the PLT and the Geneva Act of the Hague Agreement. The fact is that in
all WIPO bodies, if a proposal does not find consensus support, the
proposal is nearly always withdrawn, rather than moved to a vote. For
that reason, an amendment of the Singapore Treaty Regulations by way of
a three-fourths vote would likely only occur in extraordinary
circumstances.
Also, since the Regulations cover only technical implementation or
administrative provisions, any amendment to the Regulations would
likely be simple to implement through change in practice at the USPTO
or, in some cases, rulemaking. Generally, there are no provisions in
the Singapore Treaty Regulations at present that would, if changed,
require an amendment to a U.S. statute.
______
Responses of John Harrington to Questions From Senator Joseph R. Biden,
Jr.
Question 1. Please provide an overview of the current process by
which the U.S. Department of Treasury consults with private-sector
organizations, including professional organizations, on tax treaties.
Please provide an overview of the process by which the Department
incorporates any input provided by such organizations into U.S. tax
policy. Can you describe specific examples of where input from the
public has been incorporated into your negotiating strategy and
ultimately the text of tax treaties negotiated? Do you have, or have
you considered establishing, a federal advisory committee, consistent
with the requirements of the Federal Advisory Committee Act, on
international tax policy? Have you asked for public comments on the
2006 U.S. Model Tax Treaty and its accompanying technical explanation?
If not, why not?
Answer. The Treasury Department uses many sources of information to
form its tax treaty policy and priorities. Because the major goal of
tax treaties is to reduce double or excessive taxation, the Treasury
Department relies on taxpayer input in identifying countries with which
tax treaties are needed and with which existing tax treaties need to be
improved.
Comments and suggestions that we have received from taxpayers and
taxpayer groups have been instrumental in setting tax treaty policy and
priorities. In certain cases, in response to comments we have modified
or refined our negotiating positions as reflected in specific model
treaty provisions. For example, the current model treaty language in
Article 10(4), regarding dividends from Real Estate Investment Trusts
(REITs), resulted from discussions with the REIT industry, including
the National Association of Real Estate Investment Trusts. In other
cases, in light of taxpayer input, we have adopted a particular
provision in treaties in which it was appropriate to include the
provision. For example, the ``Zero Dividend Withholding Coalition,'' a
broad-based group of U.S.- and non-U.S.-based multinational companies,
called for a change in tax treaty policy with respect to dividends in
its 1999 paper, ``Zero Withholding on Direct Dividends: Policy
Arguments for a New U.S. Treaty Model.'' More recently, the National
Foreign Trade Counsel in its paper ``NFTC Tax Treaty Project: Towards a
U.S. Tax Treaty Policy for the Future: Issues and Recommendations''
(May 26, 2005), called for the adoption of arbitration provisions.
Mandatory arbitration provisions were included in two of the agreements
before the committee.
We publicized the release of the 2006 Model Income Tax Convention
and Model Technical Explanation, issuing a press release and posting
the documents on the Treasury Department Web site. We have received
formal and informal comments in response to the release of the model
treaty and technical explanation. Staff of the Office of the
International Tax Counsel regularly participate in conferences in which
staff discuss tax treaty issues, including the model tax treaty, and
solicit feedback on the model tax treaty and tax treaty policy in
general.
The Treasury Department has been very appreciative of the formal
and informal comments that it receives from taxpayers and from trade
associations, such as the NFTC, regarding tax treaty provisions and tax
treaty priorities. In addition, professional associations, such as the
New York State Bar Association Tax Section, have raised questions and
provided analysis that we have considered, and continue to consider.
All of this input has been very helpful in the tax treaty area, and we
are satisfied with the quality and level of input received.
From a broader international tax policy standpoint, the Treasury
Department has been carefully considering views from a variety of
sources. For example, the Secretary recently hosted a conference on
Business Taxation and Global Competitiveness, which invited a wide
range of experts and affected taxpayers to discuss the effect of
current tax policy on competitiveness. Accordingly, we have not found
it necessary to establish a Federal advisory committee regarding
international tax policy to elicit public comments.
Question 2. How many people were employed by the Office of the
International Tax Counsel to work on tax treaties and related issues 10
years ago? How many people are employed by the Office to work on tax
treaties and related issues now? Has the workload over the last 10
years increased?
Answer. In 1997, 10 attorneys were part of the Office of the
International Tax Counsel. None worked on tax treaties exclusively, but
nearly all attorneys devoted part of their time to working on tax
treaties and related issues. Currently, there are seven attorneys in
the Office of the International Tax Counsel, all of whom work to some
extent on tax treaty and related issues.
Although the number of attorneys in the Office of the International
Tax Counsel is currently slightly lower than it was 10 years ago, the
commitment to tax treaty negotiation and guidance remains strong. Since
1997, a Deputy International Tax Counsel position has been created that
focuses nearly exclusively on tax treaty issues. In addition, there is
a Deputy Assistant Secretary (International Tax Affairs) position with
responsibility for treaty matters.
Because the tax treaty workload is affected by multiple factors, it
is difficult to generalize about changes in resources and outputs. In
particular, snapshot comparisons can be misleading. For example, some
tax treaty negotiations are more time-consuming than others. Important
tax treaty related work at the Organization for Economic Cooperation
and Development (OECD) ebbs and flows as well, affecting resources that
can be used for bilateral negotiations. In short, the Office of the
International Tax Counsel devoted significant resources to its tax
treaty program 10 years ago and continues to devote significant
resources today.
Question 3. As you know, the N.Y. State Bar Association's Tax
Section recommended in its report on the 2006 U.S. Model Tax Treaty
that the Treasury Department expand the Technical Explanation of the
model to include an explanation of the changes to U.S. Tax Treaty
policy reflected in the model, the reasons for those changes, and the
relationship between the provisions of the model and current U.S. tax
law. In addition, practitioners have noted that it might be beneficial
for the Department to publish more guidance on tax issues associated
with the application of the various tax treaties that are currently in
force. What is your view regarding these recommendations? Are these
recommendations not being acted upon because of a shortage of
resources?
Answer. The New York State Bar Association's Tax Section, in its
April 2007 report, raises the question whether the Treasury Department
should produce and publish an explanation of the changes to U.S. tax
treaty policy reflected in updates to the model income tax convention,
the reasons for those changes, and the relationship between the
provisions of the model income tax convention and current U.S. tax law.
The Office of the International Tax Counsel is considering this and
other recommendations made by the New York State Bar Association's Tax
Section in its report.
The press release accompanying the release of the 2006 U.S. Model
Income Tax Convention and Model Technical Explanation notes that the
U.S. Model Income Tax Convention is used as a starting point in
bilateral treaty negotiations with other countries. The Treasury
Department makes this starting point public by periodically updating
and releasing its model income tax convention. The issuance of a new
model income tax convention becomes necessary when the cumulative
effect of changes in tax law and tax treaty policy has made our ``old''
model tax treaty no longer an appropriate starting point.
The 2006 Model Income Tax Convention is consistent with our most
recent tax treaties and reflects changes in U.S. domestic law and tax
treaty policy since the U.S. model was last updated in September 1996.
It is not clear how an explanation of the changes to U.S. tax treaty
policy, the reasons for those changes, and the relationship between the
different articles of the model and U.S. tax law is helpful in light of
the role of the model income tax convention and technical explanation
as a starting point in bilateral tax treaty negotiations. Nonetheless,
we are cognizant of the interest in such additional information, and we
continue to weigh whether and how historical and explanatory
information could be provided without inadvertently creating
uncertainty or confusion with respect to previously negotiated
agreements.
We also recognize the importance of providing published guidance
with respect to income tax treaties. The following treaty-related
guidance has been published in the Internal Revenue Bulletin in the
last 3 years:
Announcement 2007-05, 2007-36 I.R.B. 540 (Mutual agreement
concerning the eligibility of certain pension and other
employee benefit arrangements for benefits under U.S.-
Netherlands treaty);
Announcement 2006-86, 2006-45 I.R.B. 842 (Mutual agreement
concerning the elimination of double taxation as a result of
the interaction of the U.K. nonresident company group relief
rules and the U.S. dual consolidated loss rules);
Notice 2006-101, 2006-47 I.R.B. 930 (Guidance on U.S. income
tax treaties that meet the requirements of section
1(h)(11)(C)(i)(II));
Announcement 2006-21, 2006-1 C.B. 703 (Mutual agreement
concerning the treatment under the U.S.-Spain treaty of limited
liability companies, S corporations, and other business
entities treated as partnerships or disregarded entities for
U.S. tax purposes);
Announcement 2006-19, 2006-1 C.B. 674 (Mutual agreement
concerning the treatment under the U.S.-Ireland treaty of Irish
common contractual funds);
Announcement 2006-20, 2006-1 C.B. 675 (Notification of self
certification of United States and Japanese resident investment
banks, pursuant to section E of the U.S.-Japan investment bank
Memorandum of Understanding or MOU);
Announcement 2006-6, 2006-1 C.B. 340 (MOU regarding the term
``investment bank'' in the U.S.-Japan treaty);
Announcement 2006-7, 2006-1 C.B. 342 (MOU providing
guidelines and procedures to resolve factual disagreements
under the mutual agreement article of the U.S.-Canada treaty);
Announcement 2006-8, 2006-1 C.B. 344 (Mutual agreement
concerning the treatment of fiscally transparent entities under
the U.S.-Mexico income tax treaty);
Announcement 2005-72, 2005-41 I.R.B. 692 (Mutual agreement
concerning the treatment of fiscally transparent entities under
the U.S.-Mexico income tax treaty);
Announcement 2005-30, 2005-1 C.B. 988 (Mutual agreement
concerning the eligibility of certain U.K. pension arrangements
for benefits under Article 10 of the U.S.-U.K. treaty);
Announcement 2005-22, 2005-1 C.B. 826 (Mutual agreement
concerning the treatment of scholarships under the U.S.-Austria
treaty);
Announcement 2005-17, 2005-1 C.B. 673 (Mutual agreement
concerning the treatment under the U.S.-New Zealand treaty of
income derived through certain fiscally transparent entities);
Announcement 2005-3, 2005-1 C.B. 270 (Mutual agreement
concerning the eligibility of pension arrangements for benefits
under the U.S.-Switzerland treaty);
Announcement 2004-60, 2004-2 C.B. 43 (Guidance on effective
dates under the U.S.-Japan treaty); and
Rev. Rul. 2004-76, 2004-2 C.B. 111 (Guidance clarifying the
ability of dual resident corporations to choose between two
U.S. treaties).
We are currently working on additional guidance in the tax treaty
area regarding beneficial ownership and other issues.
Question 4. The 1996 U.S. Model Tax Treaty includes provisions in
Article 2, which require the competent authorities of the Contracting
States to notify each other of relevant changes in their domestic tax
law and any official published materials concerning the application of
the relevant tax treaty. The 2006 U.S. Model Tax Treaty no longer
contains these provisions. This change in the Model Tax Treaty is
reflected in the Belgian Tax Treaty currently under consideration. The
existing income tax treaty with Belgium, which was concluded in 1970,
contains the 1996 model information-sharing provisions in Article 2.
The new treaty does not include such information-sharing provisions.
Can you explain why this is a beneficial development? Wouldn't a
blanket information-sharing provision of the type included in the prior
tax treaty model be particularly useful in treaties that contain
binding arbitration provisions such as those included in the Belgian
Tax Treaty and the German Protocol, given that the arbitration boards
in these two treaties are instructed to apply after the text of the
treaty and ``any agreed commentaries or explanations of the Contracting
States'' when interpreting the treaty, ``the laws of the Contracting
States to the extent they are not inconsistent with each other''?
Answer. Article 2, paragraph 4 of the 2006 U.S. Model Income Tax
Convention requires the competent authorities to notify each other of
any change in law that significantly affects obligations under the
convention. Unlike the 1996 U.S. model provision, the provision in the
2006 U.S. model no longer requires notification of any other published
material regarding the convention. This change to Article 2 of the U.S.
model is similar to the corresponding provisions in other model tax
treaties, such as the OECD and U.N. models, and in recent U.S. tax
treaties, such as the new conventions with the U.K. and Japan. The ease
with which published materials can be obtained (e.g., through the
Internet) has made this formal and--if required for any published
material--burdensome exchange requirement superfluous. Thus, all
important information must continue to be exchanged, but the competent
authorities are no longer required to provide to each other readily
available material that has no significant impact on the treaty or the
taxes covered by the treaty.
We do not believe that an arbitration provision recreates the need
for a broader provision requiring exchange of published materials.
Appropriate exchange is important in the mutual agreement procedure
generally, whether the competent authorities are negotiating or whether
the case is in arbitration. Further, the countries have a
responsibility to deal with each other in good faith and, therefore, to
disclose all relevant published interpretations during a mutual
agreement procedure (MAP) proceeding. Nor have we found the narrower
2006 U.S. Model Income Tax Convention language to be an issue in
practice, particularly since the taxpayer and each country have an
interest in researching and raising any relevant tax laws and published
interpretations during a MAP proceeding and since advances in
technology and other developments have made international tax research
easier.
Question 5. Have we in the past ever shared our technical
explanations with our treaty partners? If so, was this done as a matter
of course with every country we concluded a tax treaty with, or only
with some countries? If only with some countries, what criteria were
employed when making the decision to share a particular technical
explanation? What is our current practice? Please explain the reasoning
behind our current practice. Do you expect to maintain the current
practice with no changes?
Answer. There have been periods in the past when the Treasury
Department regularly shared technical explanations with treaty partners
at some point before the technical explanations were released to the
public. This was generally done, however, as a courtesy, and the treaty
partner was under no obligation to agree with, or even to read, the
technical explanations. Our recent practice has been to refer the
prospective treaty partner to the model treaty and technical
explanation posted on the Treasury Department Web site and to refer to
the technical explanation of the model treaty during negotiations when
appropriate to achieve a common understanding. Although we would be
willing to share drafts of the treaty-specific technical explanation
with any treaty partner before public release, treaty partners
typically do not ask to see it. There are of course exceptions. For
example, in 2002, the U.K. commented on the technical explanation to
the new U.S.-U.K. treaty prior to its release, in part because the
treaty contained some provisions that had not yet been interpreted by
either party (and thus were not reflected in a published technical
explanation). In addition, Canada routinely requests to adopt an agreed
technical explanation.
Because this case-by-case approach to sharing technical
explanations has worked well in practice, we expect to maintain it for
the foreseeable future.
Question 6. The German Protocol differs from the recently updated
U.S. Model Tax Treaty with respect to the taxation of Social Security
benefits. The Model Tax Treaty provides that Social Security benefits
are taxable in the ``source'' country (i.e., the country that pays the
benefit); however, Article VIII of the German Protocol provides that
Social Security benefits paid in one treaty country to a resident of
the other treaty country shall be taxable in the other country, and
taxed as if they were provided by the country of residence. The Joint
Declaration signed on June 1, 2006, reflects an understanding that
this, among other things, will be the subject of consultations on or
after January 2013.
a. Recognizing that the German Protocol maintains the status
quo with respect to the current German Tax Treaty, can you
explain the reason for deviating from the Model Tax Treaty with
Germany?
b. In the Joint Declaration it is made clear that the
renegotiation of this provision is intended to make it possible
for ``[b]enefits paid under the Social Security legislation of
a Contracting State [to be] taxed by that Contracting State. .
. .'' Is it correct to assume that, in future negotiations,
Treasury will additionally seek to cut back on the ability of
the country of residence to tax such Social Security benefits
in order to avoid double taxation of Social Security benefits?
Answer. Like other departures from the U.S. model, the provision on
taxation of Social Security benefits in the U.S.-Germany tax treaty was
the result of the negotiation process. We plainly would have preferred
exclusive source country taxation of Social Security benefits, in
accord with the U.S. model, but this provision was one of many items
being negotiated in the agreement, and its resolution is reflected in
the overall balance of the agreement.
The Joint Declaration with Germany takes a significant step in
moving the U.S.-Germany Tax Treaty closer to the U.S. model position on
the taxation of Social Security benefits. It provides that the
countries will enter into consultations to amend the proposed agreement
to allow for source country taxation of Social Security benefits. If
both the source and residence country are able to tax Social Security
benefits, the residence country would provide a foreign tax credit to
avoid double taxation of such income.
Question 7. In Article 3 of the 1996 U.S. Model Tax Treaty, the
term ``qualified governmental entity'' was explicitly defined and the
definition made clear that such entities included noncommercial
entities and governmental pension funds. The 2006 U.S. Model Tax Treaty
no longer uses the term ``qualified governmental entity'' and deals
separately with pension funds, but as a result, it appears that under
the new Model Tax Treaty, for example, a Federal or U.S. State
noncommercial entity that is not a pension fund that receives dividends
in a treaty-partner country by virtue of an investment made in that
country, could have those dividends taxed by the other treaty country.
Is this correct? If so, is this an issue you intend to address in
future treaties?
Answer. The 1996 U.S. Model Income Tax Convention included a
definition of ``qualified governmental entities'' (QGEs). The
definition encompassed certain noncommercial entities wholly owned by a
Contracting State or a political subdivision or local authority, as
well governmental pension funds. The definition of QGE was primarily
relevant for purposes of Article 4 (Residence) (clarifying that QGEs
are residents), Article 10 (Dividends) (providing a reciprocal
exemption from dividend withholding taxes for QGEs), and Article 22
(Limitation on Benefits) (providing that QGEs are entitled to all
treaty benefits).
The term QGE was not included in previous U.S. models or in the
OECD model. Although the term was introduced to facilitate certain
clarifications (e.g., to Article 4 that the government of each State,
as well as any political subdivision or local authority thereof, is a
resident of that State), the Treasury Department found in practice that
it was more straightforward to incorporate the desired clarifications
directly into the articles on residence and limitation on benefits.
Accordingly, the 2006 U.S. Model Income Tax Convention eliminates the
use of the term QGE, with Article 4 and Article 22 referring directly
to the Contracting States and their political subdivisions and local
authorities.
With respect to dividends, the problem of potential unrelieved
double taxation is most relevant with respect to pension funds. Pension
funds normally cannot benefit from a foreign tax credit (because they
do not normally pay tax) and their beneficiaries generally cannot claim
a foreign tax credit when they receive the pension (because the
character of the underlying income does not pass through upon
distribution and the distribution is generally made many years after
the foreign tax would have been imposed). Accordingly, in the absence
of an exemption for pension funds, dividends would almost certainly be
subject to unrelieved double taxation. The 2006 U.S. Model Treaty,
therefore, provides in paragraph 3 of Article 10 (Dividends) that
dividends received by a pension fund generally may not be taxed in the
Contracting State of which the company paying the dividend is a
resident.
It is possible that a Federal or U.S. State noncommercial entity
that (a) is not a pension fund and (b) receives dividends in a treaty-
partner country by virtue of an investment made in that country could
have those dividends taxed by the other treaty country. The definition
of a QGE was excluded from the 2006 U.S. Model Tax Treaty, however,
only after an assessment of where the potential for unrelieved double
taxation was most acute (with respect to pension funds) and a
recognition of our limited success in negotiating broader coverage.
Nevertheless, we will of course consider all input we receive with
respect to changes in the 2006 U.S. Model Income Tax Convention and
take that input into account in future negotiations.
Question 8. Both the German Protocol and the Belgian Tax Treaty
include provisions related to cross-border pension contributions and
earnings, which generally track Article 18 (2) and (3) of the 2006 U.S.
Model Tax Treaty and prevent the taxation of pension contributions and
earnings when an individual participates in a pension plan established
in one country while performing services in the other, provided certain
requirements are met. One such requirement is that the competent
authority in the country where the services are performed must agree
that the pension plan ``generally corresponds'' to a pension plan in
that country. For purposes of this requirement, the German Protocol
helpfully identifies in Article XVI(16) specific types of plans in the
United States and in Germany that qualify, making it unnecessary to
obtain a specific ruling from the competent authorities with respect to
the pension plans that have been identified. This ``preapproval'' of
certain plans would streamline what can be a cumbersome process and
thus is a welcome development to taxpayers. The Belgian Treaty does not
follow the example of the German Protocol of identifying prequalified
plans in the treaty; however, the Department makes clear in the
Technical Explanation (on p. 60) that there will be further discussions
on this matter with Belgium, at which time the countries will hopefully
``agree upon a list of pension plans that are acceptable.'' Have the
negotiations on this agreed list of eligible pension plans begun? Do
you have a sense of when an agreement will be concluded? Do you
anticipate that this agreement will be an international agreement,
reportable under the Case Act (1 U.S.C. Sec. 112b)?
Answer. During the negotiations of the U.S.-Belgium Tax Treaty, the
countries were not able to enter into an advance agreement as to which
types of pension plans will be considered to ``generally correspond''
to plans in the other country for purposes of the pension contribution
provisions in Article 17. However, U.S. and Belgian tax authorities
have exchanged lists of the types of plans that they believe should be
covered. Each country has provided the lists to the official who will
be its competent authority under the tax treaty, with the expectation
that a generally applicable competent authority agreement will be
entered into under Article 24 of the new treaty shortly after the
treaty enters into force. The usual procedure is to post the text of
the competent authority agreement on the IRS' Web site and to publish
it in the Internal Revenue Bulletin.
We would not expect to report the agreed list of acceptable pension
plans under the Case Act, as we would consider it an ``implementing
agreement'' specifically contemplated by the treaty.
Question 9. There are features of the arbitration provision that
are included in both the German and Belgian Tax Protocols, which might
be improved upon in future instruments, or varied, depending on who our
treaty partner is and of course, what their concerns and requirements
are in the context of each negotiation. While recognizing that the
Department has only partial control over the final text of negotiated
arbitration provisions, the following questions are intended to further
our dialog on the subject of arbitration and explore options that may
be appropriate for future treaties:
9a. The Belgian and German arbitration models provide that
``[t]he determination reached by an arbitration board in the
proceeding shall be limited to a determination regarding the
amount of income, expense, or tax reportable to the Contracting
States'' and that the board ``shall not state a rationale.''
What do you consider to be the benefits and drawbacks of
allowing an arbitration board to produce a reasoned opinion
when deciding a case under a tax treaty? Have you considered
the option of allowing arbitration boards to provide reasoned
advisory opinions that are strictly advisory, which would not
be legally binding on future arbitration boards, but could
nevertheless be considered helpful to competent authorities and
taxpayers who want to understand the thinking of the
arbitrators in coming to a decision?
Answer. The arbitration process in the proposed U.S.-Belgium treaty
and U.S.-Germany protocol is an extension of the competent authority
process, and is meant to increase the efficiency and effectiveness of
that process. The arbitration process in those two agreements is a
simplified arbitration process invoked to overcome a stalemate between
the competent authorities in the negotiation of an agreement under the
normal mutual agreement procedure (MAP) available under the treaty. The
result of this simplified arbitration process is still a MAP agreement,
which has all the same features, and retains all the same rights for
the taxpayer, as a MAP agreement reached solely by competent authority
negotiation. MAP agreements are confidential and in general do not
provide a rationale for the agreement reached. A MAP agreement reached
through arbitration will be confidential to the same extent as a MAP
agreement reached purely through negotiation, and the redactions
necessary to maintain this confidentiality may limit the utility to the
public of a reasoned opinion of the arbiters.
In general, the main benefit of a reasoned opinion of the arbiters
is that it would provide greater transparency regarding the decision
made by the arbiters. This greater transparency would come at a
significant cost, however. Requiring a written explanation would delay
the resolution of the dispute because the arbiters would have to agree
not only on which country's position was the better of the two but also
the reasons for the decision. In addition, documents submitted in the
process would be more lengthy and more time-consuming to produce
because the parties would need to argue for a particular rationale (as
the rationale given could affect other cases or the particular
taxpayer's future behavior) in addition to arguing that they reached
the more reasonable result in eliminating double taxation given the
facts and the law.
Further, the written explanations would create, at least
informally, an additional body of law to that created by the
governments and domestic courts. This could create confusion in cases
where the reasoned opinion conflicted with judicial opinions or
published guidance by the governments. For those reasons, prospective
treaty partners may view the production of a reasoned arbiters' opinion
as a reason not to agree to have arbitration be part of the MAP
procedure.
The primary goal of the arbitration process in the U.S.-Belgium
treaty and U.S.-Germany Protocol is speedy resolution of a dispute
between the competent authorities regarding the granting of relief to a
taxpayer suffering double taxation. Speedy and efficient resolution of
the dispute is essential because the only cases going to arbitration
are those in which the competent authorities could not agree within 2
years. Accordingly, many of the features present in a judicial-style
arbitration process, such as the production of a reasoned opinion, are
contrary to the purpose of the adoption of arbitration in this case.
Nonetheless, we recognize that obtaining at least informal feedback
from the arbiters could be helpful to the competent authorities and
taxpayers, and we will continue to consider whether informal
opportunities for feedback should be pursued. We also recognize that
the proposed arbitration process is not the only way to resolve
disputes between the competent authorities, and we will continue to
consider alternatives to the process as we monitor its use and the
receptivity of treaty partners to this and other approaches.
9b. The Belgian and German arbitration models provide that
the arbitration board's decision shall ``have no precedential
value.'' Have you considered whether it would be useful in the
context of some treaty relationships, particularly more
contentious ones, to provide the arbitration board's decisions
with precedential value?
Answer. With respect to Belgium and Germany, we expect the
existence of the arbitration process to narrow the areas for
disagreement between the competent authorities and to facilitate
agreement within 2 years. Thus, we expect to have few cases go to
arbitration.
With respect to future treaty partners, if we believe that the
arbitration process may become a common dispute resolution mechanism
with a specific treaty partner, we would consider whether precedential
decisions would be appropriate in that treaty context. It is clearly
possible that, in certain treaty relationships, there could be value to
precedential arbitration decisions that play a role in reducing future
disputes in particular subject areas sufficient to overcome the
disadvantages inherent in giving precedential value to the board's
decision (which we assume would need to be accompanied by a reasoned
opinion).
In considering whether to allow precedential decisions, we would
have to give great weight to the concerns of ceding to an arbitration
panel the authority to bind the United States not only to a particular
result but also to a particular interpretation and application of a
specific treaty, especially if taxpayers begin to apply released
decisions to analogous situations and analogous provisions in other
treaties (and especially as third-country treaty partners would not
themselves be bound by these opinions). In addition, our primary goal
in proposing the arbitration process is the prompt, efficient relief of
contentious double taxation cases. The production of reasoned
decisions, whether precedential or not, is likely to take longer than
the approach taken in the agreements with Belgium and Germany that
provides a result-only decision with no precedential value. In any
case, based on preliminary discussions with other treaty partners, it
appears that the result-only approach taken in the agreements with
Belgium and Germany is more likely to find acceptance with treaty
partners with whom the United States has more difficult discussions
than an approach that would result in precedential opinions. However,
we will continue to consider modifications as we monitor the use of the
arbitration provision, particularly with respect to countries with
which we have difficulties in resolving disputes.
9c. In your testimony, you remarked that Treasury views the
arbitration mechanism as providing competent authorities with
an incentive to resolve existing disputes, rather than have
those disputes be subject to the determination of an
arbitration board. The existing examples of binding arbitration
provisions appear at least informally to support your thesis
outside the scope of transfer pricing double tax cases, yet
existing examples of binding arbitration provide for reasoned
decisions that are binding on future arbitral boards. Do you
think that a model that provides that the arbitral tribunal's
decisions shall have ``no precedential value'' will create the
same incentive to settle a case prior to arbitration as
existing examples in which the decisions have precedential
value? If so, why?
Answer. We adopted mandatory arbitration incorporating the last-
best offer approach in the proposed agreements with Belgium and Germany
because the Treasury Department believes that mechanism is most likely
to encourage the competent authorities to resolve the case before it
reaches arbitration. Because under last-best offer arbitration one of
the two proposed resolutions will be chosen, the Treasury Department
believes it encourages the competent authorities to be more reasonable
in their negotiations and resolve a case on their own. In the context
of the last-best offer approach, we do not believe that precedential
opinions would increase the incentive to reach agreement. Further,
because the arbiters must choose between one of the two offers made by
the competent authorities, decisions of previous panels are likely to
be of limited value in resolving a specific dispute, even if they
relate to the same subject matter.
Nonetheless, we will continue to search for ways to increase the
effectiveness of the process, which is in the best interest of all the
affected parties.
9d. Can you explain precisely how you expect to monitor the
success of the arbitration provisions that are contained in the
German and Belgian tax treaties?
Answer. The goal of the arbitration provision is to increase the
efficient and effective resolution of double taxation cases in the
mutual agreement procedure (MAP) before they reach arbitration and to
assure their efficient and effective resolution if they reach
arbitration. As with other treaty provisions, as we gain more
experience with the arbitration provision, we may find that certain
refinements of the process are needed. In particular, we have been
carefully considering means of monitoring the implementation of the
arbitration provision. Accordingly, we expect to use the following data
to assess the arbitration process adopted in the agreements with
Germany and Belgium.
1. Extent to which double taxation relieved/amount of time needed to
relieve double taxation
A primary purpose of our income tax conventions is to prevent
double taxation. Accordingly, the competent authorities use the MAP to
settle disputes regarding, for example, how to allocate income so that
the profits of a taxpayer (or affiliated group) are not taxed twice. In
measuring the effectiveness of the MAP, we currently look at (1) the
degree to which the taxpayer was relieved from double taxation, and (2)
the amount of time it takes to conclude the procedure.
We believe that these measures should also apply to evaluate the
performance of the arbitration phase of the MAP. Therefore, we intend
to measure the effect of the arbitration provision on reaching timely
and effective resolutions in the MAP process, both with respect to
cases that go to arbitration and in negotiations in general.
2. Number of cases that go to arbitration/types of cases that go to
arbitration
We plan to track the number of times the arbitration provision is
invoked and the types of cases. Because the arbitration provision is to
encourage mutual agreement by the competent authorities, we would
generally view extensive use of this provision unfavorably. One
possible exception to this general view might be where there is
significant use but it involves only one particular treaty country, or
a particular type of case with a country, so long as there is a
downward trend in the use of the provision.
3. Number of cases entering competent authority
Another measure of success of the arbitration provision would be
the effect of the provision on the number of cases entering competent
authority. With some treaty partners, an increase in the number of
cases that go to the competent authorities may signal an increase in
taxpayer confidence that double taxation issues will be effectively and
efficiently resolved.
9e. How many disputes have been subject to the existing
Mutual Agreement Procedures of the treaties with Germany and
Belgium over the last 10 years? Please break this information
down by year and by subject matter.
Answer.
------------------------------------------------------------------------
No. cases Allocation
Fiscal year received of income Other
------------------------------------------------------------------------
Belgium:
1997...................... 1 1 --
1998...................... 1 1 --
1999...................... 2 2 --
2000...................... 4 4 --
2001...................... 0 -- --
2002...................... 2 1 1
2003...................... 1 1 --
2004...................... 0 -- --
2005...................... 3 3 --
2006...................... 2 1 1
2007...................... 1 1 --
Germany:
1997...................... 5 3 2
1998...................... 4 3 1
1999...................... 5 5 --
2000...................... 17 9 8
2001...................... 8 5 3
2002...................... 9 6 3
2003...................... 14 3 11
2004...................... 14 7 7
2005...................... 19 10 9
2006...................... 16 4 12
2007...................... 19 8 11
------------------------------------------------------------------------
Because of the Record Retention Act's restriction on the
maintenance of records for more than 6 years, information from the
1990s is incomplete. It seems likely that there were a few more cases
with Germany than are reflected in the information that is currently
available.
The ``Allocation of Income'' cases consist almost entirely of
transfer-pricing issues. A survey of the existing cases indicates that
most issues in the ``Other'' category concern whether business
activities are associated with permanent establishments and/or the
amount of business profits attributable to permanent establishments.
However, the ``Other'' category also includes issues such as the
sourcing of stock options, qualification of organizations as exempt,
the residency of taxpayers, and issues arising under the estate and
gift tax treaty.
9f. You noted in your testimony that taxpayer input into the
arbitration process would be difficult in light of the ``last
best offer'' structure of the mechanism, which provides that
the arbiters select from the two options proposed by the
competent authorities involved. I do not, however, find this to
be convincing. For example, taxpayer information might be
usefully supplied in support of one of the options proposed by
a competent authority. Can you identify any other drawbacks to
providing for taxpayer participation in the arbitration
process?
Answer. The arbitration provision in the agreements with Belgium
and Germany is designed to be an extension of the competent authority
negotiation process that will provide for more effective and efficient
resolution of cases in which a taxpayer is experiencing double
taxation. In general, although a competent authority negotiation is a
government-to-government process, taxpayers may be, and often are, very
involved.
During the development of the issues in the case and during the
actual competent authority negotiation process, the taxpayer can
provide significant and very helpful input to the competent
authorities, and the United States seeks and encourages such taxpayer
input. The taxpayer is especially helpful in presenting the facts, but
the taxpayer also may present legal arguments to the competent
authority to assist in the resolution of its case.
If the case goes to arbitration under the proposed agreement, the
taxpayer's position on the matter will be taken into account by the
U.S. competent authority, who may enlist additional assistance from the
taxpayer throughout the process.
We believe that the proposed arbitration process, which allows for
taxpayer input to the same extent permitted in the general mutual
agreement procedure, strikes the appropriate balance between allowing
taxpayer input, while maintaining the efficiency and effectiveness of
the process. Nevertheless, we will continue to search for ways to
increase the effectiveness of the process, in the best interest of all
the affected parties, including potential opportunities for additional
taxpayer input.
9g. The Belgian and German arbitration models allow the
taxpayer to opt out of the arbitral process at any time,
including after a decision has been rendered by the arbitration
board. What do you consider to be the benefits and drawbacks of
the ability of taxpayers to opt out throughout the process?
Answer. In general, mutual agreement proceedings are initiated at
the request of the taxpayer, and the taxpayer retains the right to
rescind its request during negotiation. Moreover, the taxpayer can
reject a negotiated and concluded mutual agreement procedure (MAP)
agreement and pursue its remedies in court.
The arbitration process included in the agreements with Belgium and
Germany is an extension of the standard MAP and is meant to increase
the efficiency and effectiveness of that process by providing a
mechanism for resolution of cases that could not be concluded by
negotiation. As such, the arbitration process is not meant to limit in
any way the rights of the taxpayer to reject a MAP agreement and pursue
remedies in court. That is, the arbitration process is intended to
produce an effective and efficient resolution of a taxpayer's case
through a MAP agreement, with the taxpayer retaining all rights,
whether the agreement is produced through traditional negotiation or
through arbitration.
9h. The Belgian and German arbitration models provide that
in establishing an arbitration board, each Contracting State
appoints a member and then those two members appoint a third
member, who will serve as the chair of the board. This
structure appears to permit Contracting States to appoint as
arbiters government employees, who would likely be perceived as
lacking independence and objectivity. Have you considered
alternative mechanisms for the appointment of arbiters, which
would further promote the appearance of an independent and
impartial proceeding? Please describe the various alternatives
you've considered and include the perceived benefits and
drawbacks of each mechanism.
Answer. During the development of the proposed arbitration
mechanism, we carefully considered the appropriate criteria and
qualifications for potential arbiters. We considered the possibility of
appointing professional arbiters such as those affiliated with the
American Arbitration Association or the International Centre for
Settlement of Investment Disputes, who would likely be perceived as
independent. However, such persons would be very unlikely to have the
extensive technical knowledge of international tax law, particularly
tax treaties, necessary to make an informed decision in the issues most
likely to arise in a mutual agreement procedure case. We concluded it
was better to provide for an arbitration panel consisting of taxation
experts, particularly in light of the objective of issuing an
expeditious decision.
We also considered the possibility of identifying a list of
potential arbiters, from among whom the board would be jointly selected
by the competent authorities. This alternative is available under the
European Union Arbitration Convention, and at least on the surface
seems to hold out a possibility of both independence and ease of
selection. However, we have heard reports of difficulties in keeping
the list up-to-date, assuring the appropriate level of technical
knowledge of the arbiters on the list, and agreeing on multiple
arbiters from the list to decide a particular case. We have provided,
nevertheless, in the agreements with Belgium and Germany for a
nonexclusive list developed by the competent authorities of individuals
with familiarity in international tax matters who may potentially serve
as the third member and chair of the board. In general, the mechanism
agreed upon with Belgium and Germany allows each government to appoint
a member of the panel, after which those members choose a third-country
chair. The mechanism provides for an alternative chair appointment
procedure in the event of a disagreement between the two board members
on choice of a chair.
A government may in fact choose to appoint to the board a person in
the government's employ, and might do so if concerned about expertise
in the specific issue or about potential costs of arbitration. We
recognize that an arbiter who is a government employee may not be
perceived as independent. We also recognize that selection of a
government employee carries risks for the government because such
person might have less credibility with the third-country chair of the
panel and, thus, may actually reduce the likelihood that the board will
adopt that government's position.
We will monitor the operation of the arbitration process, including
the selection of the board, and expect to have further discussions with
our treaty partners concerning the issue, with a view toward achieving
the best balance of the concerns expressed and providing to taxpayers
an efficient and effective resolution of their double taxation cases.
9i. The Belgian and German arbitration models lay out the
sources to be used by each arbitration board when interpreting
relevant treaty provisions in a particular dispute.
Specifically, both instruments provide that the arbitration
board shall apply in descending order of priority (a) the
provisions of the treaty; (b) any agreed commentaries or
explanations of the Contracting States concerning the
convention; (c) the laws of the Contracting States to the
extent they are not inconsistent with each other; and (d) any
OECD Commentary, Guidelines or Reports regarding relevant
analogous portions of the OECD Model Tax Convention. This list
is perhaps similar, but is not fully consistent with, the
customary international law rules of treaty interpretation as
laid out in the Vienna Convention on the Law of Treaties, which
the United States has consistently stated it applies when
interpreting treaties to which it is a party.\1\ In the future,
might you consider referring to the Vienna Convention rules for
treaty interpretation, rather than the list provided for in the
German and Belgian treaties?
---------------------------------------------------------------------------
\1\ See S. Exec. Doc L, 92nd Cong. (1971) (stating that the Vienna
Convention on the Law of Treaties is generally recognized as the
authoritative guide to current treaty law and practice). See also Brief
for the United States as Amicus Curiae at 8, Domingues v. Nev., 528
U.S. 963 (1999) (noting that ``[m]ost provisions of the Vienna
Convention, including Articles 31 and 32 on matters of treaty
interpretation, are declaratory of customary international law'').
Answer. The list of authorities in the proposed agreements reflects
the documents that the U.S. competent authority has found most useful
in its own tax treaty interpretation. However, we will continue to
monitor the process and search for ways to increase its effectiveness,
keeping in mind customary international law rules of treaty
interpretation as reflected in the Vienna Convention, including an
---------------------------------------------------------------------------
assessment of the utility of the list of authorities.
9j. The Belgian and German arbitration models provide that
the arbitration board may adopt any procedures necessary for
the conduct of its business, provided that the procedures are
not inconsistent with the treaty. The procedural rules adopted
and used by an arbitration tribunal are crucial to the
operation of every proceeding and can have an enormous impact
on whether the arbitral process is fair and a reasonable
outcome reached. As a result, many international agreements
that provide for binding arbitration, choose the rules of
procedure applicable to any arbitration proceedings beforehand,
as in the case of many of our trade agreements. Have you
considered doing so in future tax treaties?
Answer. During negotiation of the proposed agreements with Belgium
and Germany, consideration was given to identifying additional rules of
procedure for use by the arbitration board. However, after studying the
details of the rules commonly used in commercial arbitration, we
concluded that most of these rules relate to evidentiary procedures not
relevant to the simplified arbitration format proposed in the
agreements with Belgium and Germany, primarily because the decision of
the arbitration board is to be based upon a record rather than a
presentation of evidence. Accordingly, it seemed more prudent in these
cases to allow flexibility to the arbitration board to formulate
procedural rules that might be necessary to its particular case. As
experience is gained under the proposed agreements, we will consider
whether more procedural guidance for the arbitration boards is
necessary.
Question 10. Your office has discussed with the committee the
possibility of concluding targeted tax protocols with other countries
that would focus on problem areas, such as ``treaty shopping.'' Can you
tell us whether you anticipate concluding targeted protocols that would
provide for binding arbitration? If so, with which countries should the
United States seek to conclude such targeted protocols?
Answer. In general, we strongly prefer that a protocol to amend an
existing tax treaty address all pressing issues with respect to the
treaty relationship. However, if there is an urgent matter that can be
resolved by entering into a protocol, and no other urgent matters need
to be resolved in an existing tax treaty, a targeted protocol may be
appropriate. ``Treaty shopping'' is the clearest example of an instance
in which a targeted protocol may be appropriate. With respect to
binding arbitration, if there were an immediate need to provide
competent authority with this tool for resolving disputes with a
particular country, and if there were no other urgent issues to update,
we would consider pursuing a targeted protocol.
Question 11. In the dividend, interest, and royalty articles of the
2006 U.S. Model Tax Treaty, the phrase ``effectively connected with''
is used when referring to the level of attachment that the underlying
property must have with a permanent establishment for purposes of
determining whether the dividend, interest, and royalty articles apply,
or whether Article 7 will apply instead. This phrase replaces the 1996
Model Tax Treaty phrase ``attributable to.'' The Belgium Tax Treaty
currently pending on the committee's calendar, uses the new model
language (``effectively connected with'') in all three of those
articles. The dividend article of the Belgium Tax Treaty currently in
force uses the language ``forms part of the business property of the
permanent establishment.'' Are there substantive differences between
(a) that language, (b) ``attributable to,'' and (c) ``effectively
connected with'' (and if so, what are the differences)?
Answer. The United States has used these three formulations
interchangeably. See, for example, the language of Article 10(6) of the
1996 Model Income Tax Convention (which uses the ``attributable to''
formulation) and the 1996 model technical explanation to Article 10(6)
(which explains the ``attributable to'' language by using the words
``forms part of the business property of the permanent
establishment''). The 2006 U.S. Model Income Tax Convention adopts the
``effectively connected with'' formulation, bringing the U.S. Model
Income Tax Convention language in closer conformity with standard tax
treaty usage. See, for example, the OECD and U.N. models. The concepts
and coverage of these three formulations are intended to be the same.
Question 12. Section 6103 of the Internal Revenue Code generally
prohibits the disclosure of tax returns and other tax return
information with certain narrow exceptions. In fact, the willful
violation of this section and the disclosure of such information is
punishable as a felony. The concerns that prompted this law are also
relevant in the context of any arbitration proceedings that may occur
pursuant to the German Protocol or Belgium Tax Treaty, since
individuals under those circumstances will also have access to personal
taxpayer information that would otherwise be covered by section 6103.
Can you explain how the Department intends to protect against the
disclosure of tax returns and other tax return information during the
course of arbitration proceedings? Both treaties provide that all
members of the arbitration boards and their staffs are to agree to
abide by, and be subject to, specific confidentiality and nondisclosure
requirements and any applicable domestic laws of the treaty countries
involved. Can the Department enforce criminal charges against board
members or staff who improperly disclose information in violation of
such agreements and domestic law requirements if they are not U.S.
citizens or employees of the U.S. Government and remain outside of the
United States?
Answer. Both the German protocol and the Belgian tax treaty provide
that no information relating to an arbitration proceeding may be
disclosed by members of the arbitration board or their staffs, or by
either competent authority, except as permitted by treaty and the
domestic laws of the Contracting States. In addition, both agreements
provide that all information relating to the arbitration proceeding is
to be considered to be information exchanged between the Contracting
States (that is, information subject to the provisions of the exchange
of information article regarding disclosure). The German protocol and
the Belgian tax treaty further provide that all members of the
arbitration board and their staffs must agree in statements sent to
each of the Contracting States in confirmation of their appointment to
the arbitration board to abide by and be subject to the confidentiality
and nondisclosure provisions of the exchange of information article and
the applicable domestic laws of the Contracting States, with the most
restrictive condition to apply in the event of a conflict.
The German protocol and the Belgian tax treaty authorize the
competent authorities to develop rules and procedures to conduct
arbitration proceedings. Pursuant to that authorization, the U.S.
competent authority and its counterparts in Germany and Belgium will
develop the details of the contractual arrangement between the
competent authorities and the members of an arbitration board. We
expect this arrangement to take the form of a memorandum of
understanding (MOU) between the competent authorities and the members
of the arbitration board. Pursuant to such MOU, the engagement of
members of arbitration boards will be structured within the framework
of section 6103(n) of the Internal Revenue Code, which authorizes the
disclosure of returns and return information in connection with the
contractual procurement of services for purposes of tax administration.
Persons to whom returns or return information are disclosed under the
authority of section 6103(n) are prohibited under section 6103(a) from
redisclosing such taxpayer information and are subject to the full
range of statutory penalties and remedies provided for unauthorized
disclosures (see, for example, sections 7213 and 7431 of the Internal
Revenue Code). Pursuant to Treasury regulations promulgated under
section 6103(n), a contract between the Internal Revenue Service and a
person to whom returns or return information may be disclosed under
section 6103(n) is required to contain detailed conditions and
provisions with respect to safeguarding such returns or return
information. These conditions and provisions include specific
requirements regarding data protection and security as well as a
requirement that the contractor provide written notice to its officers
and employees of the statutory penalties that will apply in the event
of any further disclosure by the officer or employee. MOUs with the
members of arbitration boards constituted pursuant to the German
protocol and the Belgian tax treaty would accordingly include such
conditions and provisions.
Under section 7213 of the Internal Revenue Code, the willful
unauthorized disclosure of returns or return information is a criminal
offense. It is anticipated that MOUs with the members of arbitration
boards constituted pursuant to the German protocol and the Belgian tax
treaty will include provisions requiring the members of the arbitration
board to submit to the jurisdiction of a U.S. court. Such jurisdiction
would also enable taxpayers to pursue civil actions for damages against
an arbitration board member, under section 7431 of the Internal Revenue
Code, for the willful or negligent unauthorized disclosure of returns
or return information.
Question 13. What are the most significant barriers created by tax
systems that still remain to cross-border investment? To what extent
will these issues be addressed in future tax treaties?
Answer. The Treasury Department examines the U.S. tax treaty
network on an ongoing basis to determine where significant barriers to
cross-border investment exist.
With respect to countries with which we do not have a tax treaty,
the most significant barriers to cross-border investment are typically
high withholding tax rates and instances in which the United States and
the other country disagree as to which country has primary taxing
rights (e.g., the two countries disagree as to source of the income or
the residence of the taxpayer). Negotiation of a tax treaty, if
possible, would reduce those barriers. The Treasury Department,
therefore, works to establish new treaty relationships in order to
reduce withholding rates, facilitate cross-border business activity,
and provide mechanisms for collaboration between tax authorities in
order to minimize double taxation.
With respect to countries with which we have a tax treaty, the
existing tax treaty may have withholding tax rates higher than the U.S.
model rates or the existing tax treaty may have become outdated due to
changes in U.S. or foreign law or treaty policy, inadvertently creating
obstacles to cross-border investment. In those cases, the Treasury
Department seeks to renegotiate treaties to reduce withholding rates,
update the provisions in the treaty, and reduce double taxation by
improving coordination between tax authorities.
At the same time, as we negotiate to reduce barriers, we also
negotiate to improve information exchange relationships and to prevent
treaty shopping and other tax treaty abuse.
Question 14. Do you believe that these tax treaties will have any
impact on worker flow between the United States and any of these
countries?
Answer. One of the goals of a tax treaty is to reduce tax-related
impediments to the mobility of labor to enable companies to employ U.S.
workers overseas on a competitive basis. U.S. tax treaties contain
several provisions that generally enhance the mobility of U.S.
individuals, including rules that set thresholds for foreign taxation
of U.S. individuals working abroad and rules that mitigate the
potential double taxation consequences of U.S. taxation of U.S.
citizens and residents on their worldwide income. Tax treaties also
typically provide rules to coordinate the tax treatment of pension
plans, and the agreements with Germany and Belgium further provide
rules coordinating deductibility of cross-border pension contributions.
Accordingly, we believe that these agreements, especially the Germany
protocol and the Belgium tax treaty, will provide greater flexibility
to U.S. individuals who seek to work in those countries.
Question15. What are the criteria used to determine if a particular
country is a suitable candidate for updating a tax treaty, or
negotiating a new one, with the United States?
Answer. The United States enters into tax treaties to resolve
issues of double or excessive taxation, and to permit proper
administration of U.S. tax law. To identify potential treaty partners,
the Treasury Department relies heavily on input from the U.S. business
community about particular countries and circumstances in which U.S.
investments are being subjected to double or excessive taxation.
For updating an existing tax treaty, the primary issues are the
extent to which the existing tax treaty is out of date and the
likelihood of obtaining favorable changes to the existing tax treaty.
For entering into negotiations with a country with which we do not
have a tax treaty, the primary issues are the extent of double or
excessive taxation, the extent to which a tax treaty would be able to
address those problems, and whether the possible treaty partner can
agree to provisions necessary to the United States. With some countries
(e.g., a country that does not impose significant income taxes), a tax
treaty will not be appropriate, either because of the possibility of
abuse of the treaty or because of the lack of cross-border tax issues
that are best resolved by a tax treaty. In addition, if a potential
treaty partner cannot agree to appropriate exchange of information
provisions or limitation on benefits provisions or insists on terms
(such as tax-sparing) that we cannot accept, it will not be fruitful to
enter into negotiations. Often, preliminary meetings are necessary to
determine whether a particular country would be an appropriate partner
to a tax treaty.
Question 16. Last year, this committee and the full Senate approved
tax treaties with Sweden, France, and Bangladesh. Can you explain how
these agreements have affected trade and investment between the United
States and each of these countries?
Answer. The impact of tax treaties on trade and investment is
difficult to measure. In addition, given that the protocols with Sweden
and France were merely updates to existing treaties, the effects on
trade and investment of those agreements may be even more difficult to
assess. We believe that all three agreements have encouraged greater
trade and investment with the United States. At the same time, we
recognize the Joint Committee on Taxation's assessment that the larger
macroeconomic outlook will have a greater impact on future cross-border
trade and investment than the tax treaties will.
Question 17. With which other countries are treaties or protocols
currently being negotiated and what are the anticipated timelines for
completion?
Answer. An agreement with Bulgaria was signed in February 2007. The
Treasury Department has also recently reached agreements with Canada,
Iceland, and Norway, and all three agreements are going through the
necessary process to prepare them for signature.
The Treasury Department continues to prioritize its efforts to
update the few remaining U.S. tax treaties that provide for low
withholding tax rates but do not include the limitation on benefits
provisions needed to protect against the possibility of treaty
shopping. In furtherance of this goal, we have scheduled negotiations
with Hungary and Poland.
In addition, the Treasury Department is negotiating agreements with
Chile and the Republic of Korea. We are also undertaking exploratory
discussions with several countries in Asia and South America that we
hope will lead to productive negotiations later this year or next year.
Completion of all of these negotiations will be dependent on
reaching agreement on a number of key issues, which differ for each
negotiation. As a result, it is difficult to provide an anticipated
timeline for completion. However, we hope to conclude these agreements
as soon as possible.
Clarification Response by John Harrington to Question 9(i) From Senator
Biden
Question. One of the questions posed after the July 17 hearing,
Question 9(i), related to the arbitration provisions that are included
in both the German and Belgian Tax Treaties. Specifically, the question
focused on the fact that the interpretive rules to be applied by an
arbitration board are not fully consistent with the interpretive rules
laid out in Articles 31 and 32 of the Vienna Convention on the Law of
Treaties, which reflect customary international law regarding treaty
interpretation.
The question posed was--given the inconsistency--``might you
consider [in future treaties with arbitration clauses] referring to the
Vienna Convention rules for treaty interpretation, rather than the list
provided for in the German and Belgian Treaties?'' The United States
would, as a matter of international law, apply the Vienna Convention
rules on treaty interpretation unless the treaty itself dictated
otherwise, and thus, it would seem sensible to have the arbitration
board do the same.
In response to the question, you stated as follows:
The list of authorities in the proposed agreements reflects
the documents that the U.S. competent authority has found most
useful in its own tax treaty interpretation. However, we will
continue to monitor the process and search for ways to increase
its effectiveness, keeping in mind customary international law
rules of treaty interpretation as reflected in the Vienna
Convention, including an assessment of the utility of the list
of authorities.
While the list of authorities in the two treaties may be useful in
interpreting tax treaty terms, this answer is not fully responsive to
the question and suggests that you do not view Articles 31 and 32 of
the Vienna Convention on the Law of Treaties as reflecting the rule
under which tax treaties are interpreted.
Do you view the customary international law rules of treaty
interpretation reflected in the Vienna Convention as applicable to tax
treaties?
If the answer to this question is ``no,'' please explain why and
state your view of the applicable rule for interpreting tax treaties.
Answer. Yes. In the absence of an agreement to the contrary by the
States Parties concerned, the United States generally views the
customary international law rules of treaty interpretation, as
reflected in the Vienna Convention on the Law of Treaties, as
applicable to treaties, including tax treaties. The arbitration
provisions in the proposed agreements with Germany and Belgium contain
references to many interpretive materials that would be considered
under the relevant provisions of the Vienna Convention on the Law of
Treaties. The types of interpretive materials referenced in the
proposed agreements with Germany and Belgium, along with the technical
explanations prepared by the Treasury Department and other documents
submitted to the Senate as part of the ratification process, generally
inform the U.S. view of the meaning of tax treaties. As we move forward
on arbitration provisions in future agreements, we are considering
appropriate means to reflect customary international law rules of
treaty interpretation.