Post by Sapphire Capital on Jul 16, 2008 19:47:51 GMT 4
Treasury deputy assistant secretary for international tax affairs Michael Mundaca has urged prompt action to ratify the tax treaties pending between the US and three foreign countries
Mundaca testified at a routine Senate committee on foreign relations hearing on pending income tax treaties on July 10. In a careful analysis of the agreements with Canada, Iceland and Bulgaria, Mundaca highlighted important aspects of each treaty. Emily McMahon, deputy chief of staff at the Joint Committee on Taxation, gave evidence on the treaties at the same session
A key change in the agreement with Canada eliminates withholding taxes on cross-border interest. Also included are an unusually broad collection of provisions relating to the taxation of permanent establishments (PE); one rule will permit the source-country taxation rights of income from certain provisions of services not otherwise considered to be provided through a PE.
Article 3 of the Protocol amends article V (permanent establishment) of the convention and provides that if (and only if) an enterprise meets either of two tests as provided in subparagraphs 9(a) and 9(b), the enterprise will be deemed to provide those services through a PE in the other state.
The first test holds that services must be performed in the other state by an individual who is present in that other state for a period or periods aggregating 183 days or more in any 12-month period. And during that period or periods, more than 50% of the gross active business revenues of the enterprise (including revenue from active business activities unrelated to the provision of services) must consist of income derived from the services performed in that state by that individual.
The second test provides that an enterprise will have a PE if the services are provided in the other state for an aggregate of 183 days or more in any 12-month period with respect to the same or connected projects for customers who either are residents of the other state or maintain a PE in the other state with respect to which the services are provided.
The proposed protocol with Iceland would modernise the outdated 1975 agreement between the two countries. The inclusion of a limitation of benefits provision is the key inclusion in the new rules. Third-party investors have been accused of abusing the lack of such a prohibitory clause in the treaty.
The convention with Bulgaria will make history as the first of its type concluded between the two countries. The proposed treaty follows the US model income tax treaty format and will include a maximum 10% tax rate for withholding taxes on cross-border portfolio dividend payments by the source state.
All three treaties require the US and the other country party to the agreement, to notify one another in writing when each has ratified the respective treaty.
"We urge the committee to take prompt and favourable action on the agreements before you today," said Mundaca.
The US has a continuing tax treaty programme and is working on agreements with Malta, France and New Zealand, with negotiations with Asian and South American countries due to follow in the near future.
Mundaca testified at a routine Senate committee on foreign relations hearing on pending income tax treaties on July 10. In a careful analysis of the agreements with Canada, Iceland and Bulgaria, Mundaca highlighted important aspects of each treaty. Emily McMahon, deputy chief of staff at the Joint Committee on Taxation, gave evidence on the treaties at the same session
A key change in the agreement with Canada eliminates withholding taxes on cross-border interest. Also included are an unusually broad collection of provisions relating to the taxation of permanent establishments (PE); one rule will permit the source-country taxation rights of income from certain provisions of services not otherwise considered to be provided through a PE.
Article 3 of the Protocol amends article V (permanent establishment) of the convention and provides that if (and only if) an enterprise meets either of two tests as provided in subparagraphs 9(a) and 9(b), the enterprise will be deemed to provide those services through a PE in the other state.
The first test holds that services must be performed in the other state by an individual who is present in that other state for a period or periods aggregating 183 days or more in any 12-month period. And during that period or periods, more than 50% of the gross active business revenues of the enterprise (including revenue from active business activities unrelated to the provision of services) must consist of income derived from the services performed in that state by that individual.
The second test provides that an enterprise will have a PE if the services are provided in the other state for an aggregate of 183 days or more in any 12-month period with respect to the same or connected projects for customers who either are residents of the other state or maintain a PE in the other state with respect to which the services are provided.
The proposed protocol with Iceland would modernise the outdated 1975 agreement between the two countries. The inclusion of a limitation of benefits provision is the key inclusion in the new rules. Third-party investors have been accused of abusing the lack of such a prohibitory clause in the treaty.
The convention with Bulgaria will make history as the first of its type concluded between the two countries. The proposed treaty follows the US model income tax treaty format and will include a maximum 10% tax rate for withholding taxes on cross-border portfolio dividend payments by the source state.
All three treaties require the US and the other country party to the agreement, to notify one another in writing when each has ratified the respective treaty.
"We urge the committee to take prompt and favourable action on the agreements before you today," said Mundaca.
The US has a continuing tax treaty programme and is working on agreements with Malta, France and New Zealand, with negotiations with Asian and South American countries due to follow in the near future.