US International Tax Official Speaks On Pending Tax Agreements

by Mike Gofdrey, Tax-News.com, Washington

06 February 2006

Speaking before the Senate Committee on Foreign Relations last week, Patricia A. Brown, the Treasury's Deputy International Tax Counsel (Treaty Affairs) gave details on pending Income Tax Agreements.

She stated that:

"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 US tax treaty network, as demonstrated by the scheduling of this hearing," and continued:

"Three of the four agreements that are before you now are updates to relatively recent agreements. The fourth, the full treaty with Bangladesh, is an updated version of a 1980 treaty that never entered into force because of Senate concerns about several provisions. The Administration believes that these agreements with Bangladesh, France and Sweden will serve to further the goals of our tax treaty network. We urge the Committee and the Senate to take prompt and favorable action on all of these agreements."

With regard to talks currently underway between the US and Swedish authorities, Ms Brown announced that:

"The proposed Protocol amends the income tax treaty between the United States and Sweden that was signed in 1994. The most significant provisions in the Protocol relate to the treatment of dividends and limitation on benefits. The Protocol also rectifies a mistake that was made in the 1994 treaty that caused a great deal of hardship for a number of former employees of the US government. It also makes a number of necessary updates to the treaty."

"Like a number of recent agreements, the Protocol will eliminate the source-country withholding tax on most inter-company dividends and on dividends paid to pension funds. The provision dealing with inter-company dividends was very important to Sweden, because it had unilaterally eliminated its withholding tax on inter-company dividends."

With regard to the negotiations on the French Income Tax Protocol, the Deputy International Tax Counsel revealed that it will amend the 1994 income tax treaty between the United States and France, which entered into force in 1995.

"The primary impetus for the negotiation of the income tax Protocol was to clarify the treatment of investments made in France by US investors through partnerships located in the United States, France, or third countries," she explained, continuing:

"The income tax Protocol also reforms the treatment of certain French investment vehicles, which would have been entitled to US treaty benefits under the 1994 treaty."

"Under the revised provision, a "fonds commun de placement" will not itself qualify for US treaty benefits, but holders of interests in such an investment vehicle may qualify for treaty benefits if they are residents of France or of a third country that has an appropriate tax treaty with the United States."

She additionally revealed that the proposed estate tax Protocol also under discussion with the French authorities amends the estate and gift tax treaty between the United States and France, which was signed in 1978 and entered into force in 1980.

Finally, with regard to the forthcoming income tax agreement with Bangladesh, Ms Brown explained that:

"The United States does not currently have an income tax treaty with Bangladesh. The proposed income tax treaty with Bangladesh was signed in Dhaka September 26, 2004."

"The proposed treaty generally follows the pattern of the US model treaty, while incorporating some provisions found in other US treaties with developing countries. The maximum rates of source-country withholding taxes on investment income provided in the proposed treaty are generally equal to or lower than the maximum rates provided in other US treaties with developing countries (and some developed countries)."

"The proposed treaty generally provides a maximum source-country withholding tax rate on dividends of 15 percent. Direct investment dividends are subject to taxation at source at a 10 percent rate. The proposed treaty requires a 10 percent ownership threshold for application of the 10 percent tax rate."

However, she concluded by explaining that:

"The proposed Convention is subject to ratification. It will enter into force upon the exchange of instruments of ratification. It will have effect, with respect to taxes withheld at the source, for amounts paid or credited on or after the first day of the second month following entry into force."

"In other cases the Convention will have effect with respect to taxable periods beginning on or after the first day of January following the date on which the Convention enters into force."

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