CONTENTS Page Article 31. Assistance and Support in Collection Page INTRODUCTION This pamphlet,1 prepared by the staff of the Joint Committee on Taxation, provides an explanation of the proposed income tax treaty; and the proposed protocol to that treaty, between the United States and the Kingdom of the Netherlands ("the Netherlands”). The proposed treaty was signed on December 18, 1992, and amplified by diplomatic notes signed the same day. The proposed treaty would replace the existing income tax treaty between the two countries that was signed in 1948 and modified and supplemented by a supplementary treaty signed in 1965. The proposed protocol was signed on October 13, 1993, and was amplified by diplomatic notes signed that day. The Senate Committee on Foreign Relations has scheduled a public hearing on the proposed treaty and the proposed protocol on October 27, 1993. The proposed treaty is similar to other recent U.S. income tax treaties, the 1981 proposed U.S. model income tax treaty (the “U.S. model"), and the model income tax treaty of the Organization for Economic Cooperation and Development (the "OECD model"). However, the proposed treaty contains certain deviations from those documents. Part I of the pamphlet summarizes the principal provisions of the proposed treaty. Part II presents a discussion of issues that the proposed treaty presents. Part III provides an overview of U.S. tax laws relating to international trade and investment and U.S. tax treaties in general. This is followed in Part IV by a detailed, article-by-article explanation of the proposed treaty.2 Part V is a detailed explanation of the proposed protocol. 2a This pamphlet may be cited as follows: Joint Committee on Taxation, Explanation of Proposed Income Tax Treaty (and Proposed Protocol) Between the United States and the Kingdom of the Netherlands (JCS-15-93), October 26, 1993. 2 For a copy of the proposed treaty, see Senate Treaty Doc. 103-6, May 12, 1993. 2. For a copy of the proposed protocol, see Senate Treaty Doc. 103-19, October 25, 1993. In general I. SUMMARY The principal purposes of the proposed income tax treaty between the United States and the Netherlands 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 income taxes of the two countries. The proposed treaty is intended to continue to promote close economic cooperation between the two countries and to eliminate possible barriers to trade caused by overlapping taxing jurisdictions of the two countries. It is also intended to enable the countries to cooperate in preventing avoidance and evasion of taxes. As in other U.S. tax treaties, the objectives of the treaty are achieved principally by each country agreeing to limit, in certain specified situations, its right to tax income derived from its territory by residents of the other. For example, the treaty contains the standard treaty provisions that neither country will tax business income derived from sources within that country by residents of the other unless the business activities in the taxing country are substantial enough to constitute a permanent establishment or fixed base (Articles 7 and 15). Similarly, the treaty contains the standard "commercial visitor" exemptions under which residents of one country performing personal services in the other will not be required to pay tax in the other unless their contact with the other exceeds specified minimums (Articles 15-18). The proposed treaty provides that dividends and certain capital gains derived by a resident of either country from sources within the other country generally may be taxed by both countries (Articles 10 and 14). Generally, however, dividends, interest, and royalties received by a resident of one country from sources within the other country are to be taxed by the source country on a restricted basis or not at all (Articles 10, 12, and 13). In situations where the country of source retains the right under the proposed treaty to tax income derived by residents of the other country, the treaty generally provides for the relief from the potential double taxation by allowing a foreign tax credit in the country of residence, or, in the case where the Netherlands is the country of residence, allowing in some cases a proportional exemption of U.S. source income from Dutch tax (Article 25). The proposed treaty contains the standard provision (the "saving clause") contained in U.S. tax treaties that each country retains the right to tax its citizens and residents as if the treaty had not come into effect (Article 24(1)). In addition, the proposed treaty contains the standard provision that the treaty will not be applied to deny any taxpayer any benefits he would be entitled to under the domestic law of the country or under any other agreement between the two countries (Article 1(2)); that is, the treaty only will be applied to the benefit of taxpayers. The proposed treaty differs in certain respects from other U.S. income tax treaties and from the U.S. model treaty. It also differs in significant respects from the present treaty with the Netherlands. (The present treaty predates the 1981 U.S. model treaty.) Some of these differences are as follows: (1) Perhaps most significantly, the proposed treaty contains a limitation on benefits, or "anti-treaty shopping," article. The present treaty has no such article. The proposed treaty provision retains in some respects the outline of the limitation on benefits provisions contained in recent U.S. treaties and in the branch tax provisions of the Internal Revenue Code and Treasury Regulations. However, to an unprecedented degree the proposed treaty provision is more detailed, and in some respects may be more generous to foreign persons, than recently negotiated provisions in other treaties. (2) Because the foregoing provision of the proposed treaty is believed to be inadequate to prevent all significant forms of tax treaty abuse, the treaty provides that either additional Dutch laws must be enacted to prevent income tax avoidance or evasion in certain cases, or the two countries must agree on a provision aimed at such income tax avoidance or evasion, which agreement must be laid down in a separate protocol to the proposed treaty. The proposed treaty may leave open the possibility that a Dutch resident company with a branch in a third-country tax haven will be entitled to treaty protection against the imposition of U.S. tax, even though the company is also availing itself of the internal law provisions of both the third country and the Netherlands in order to eliminate all substantial non-U.S. tax on its income. The Dutch law or protocol to be adopted must, under the terms of the proposed treaty, deal with the situation where a Dutch enterprise derives foreign source interest or royalties attributable to a permanent establishment in a third country, and the permanent establishment is both exempt from Dutch tax and subject to special or low taxation because of a "tax haven" regime. On October 13, 1993 a protocol for this purpose was signed. The protocol would relax the treaty limits on source country taxation with respect to interest and royalty income that bears less than full taxation in the recipient's residence country. The proposed protocol nevertheless requires source country tax reductions not required under a corresponding anti-abuse provision in a version of the Limitation on Benefits article that was proposed in 1981 at the time that the last U.S. model treaty was proposed. (3) The U.S. excise tax on insurance premiums paid to a foreign insurer generally is covered; that is, it is treated as a tax that may be eliminated by the treaty. This is a departure from the present treaty and other older U.S. tax treaties, although this tax is covered in some more recent treaties, such as the present treaties with Finland, France, Germany, Hungary, India, Italy, Spain, and the United Kingdom. The excise tax on premiums paid to foreign insurers is covered under the U.S. model treaty. (4) Like the U.S. model treaty, but unlike the present treaty, the proposed treaty covers the U.S. excise taxes with respect to private |