US Senate Approves Updated Tax Treaty With Japan

by Mike Godfrey, Tax-News.com, Washington

11 March 2004

Treasury Secretary John Snow has welcomed the Senate’s approval of a new US-Japanese tax treaty, which he said yesterday will significantly reduce bilateral tax barriers to cross-border trade and investment between the two economic giants.

“This enhanced tax treaty relationship will foster still closer economic ties between the world’s two largest economies, enhancing the global competitiveness of our businesses and creating new opportunities for international trade and investment, which will mean more growth and jobs,” observed the Treasury Secretary.

The new tax treaty will replace the existing income tax treaty between the United States and Japan, which dates back to 1971. The new agreement is a complete modernization of the treaty relationship to reflect the changes in economic relations between the two countries that have taken place over the last thirty years.

The most dramatic advances in the new treaty are reflected in the reciprocal reductions in source-country withholding taxes on income from cross-border investments, and provide for the complete elimination of withholding taxes on all royalty income. Given the importance of the cross-border use of intangibles between the United States and Japan, the US government noted that this is a key provision.

The new treaty also provides for the complete elimination of withholding taxes on certain interest income, including interest income earned by financial institutions, and on dividend income paid to parent companies with a controlling interest in the paying company.

The new US-Japan tax treaty will enter into force when the required exchange of instruments of ratification between the two countries is completed. The approval of the treaty by the Senate follows a hearing on the treaty held by the Senate Committee on Foreign Relations on February 25th and favorable action on the treaty by the Committee on March 4th. The treaty is currently under consideration in the Japanese Diet.

Commerce Department figures show that bilateral trade between the US and Japan stood at $173 billon in 2002.

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