ticle and the students and trainees provisions, and the elimination of double taxation in cases not provided for in the treaty.

The proposed treaty authorizes the competent authorities to communicate with each other directly for purposes of reaching an agreement in the sense of this mutual agreement article. This provision makes clear that it is not necessary to go through diplomatic channels in order to discuss problems arising in the application of the treaty. It also removes any doubt as to restrictions that might otherwise arise by reason of the confidentiality rules of the United States or the Netherlands.

The proposed treaty contains language under which, if a disagreement cannot be resolved by the competent authorities, they may agree to submit the disagreement for arbitration, provided that the taxpayer or taxpayers also agree in writing to be bound by the decision of the arbitration board. However, this portion of the treaty does not take effect until the United States and the Netherlands have so agreed in the future. This agreement is to be evidenced not by another treaty or protocol subject to Senate advice and consent, but rather by notes to be exchanged through diplomatic channels. According to the Understanding, it is understood that such diplomatic notes will be exchanged when the competent authorities of the two countries are satisfied with the experience under the voluntary arbitration provision of the U.S.-Germany income tax treaty, which went into force in 1991, or under the mandatory arbitration provision in the EC member country multilateral treaty on associated enterprises, which was signed in 1990 but has yet to come into force.60 The Understanding provides for consultations between the competent authorities, after a three-year period following the proposed treaty's entry into force, to determine whether the conditions for this exchange have been fulfilled.

According to the Understanding, it is also understood that if and when the arbitration provision of the treaty takes effect, certain procedures set forth in the Understanding will apply. These procedures are substantially similar to the procedures set forth in notes exchanged by the United States and Germany in 1989 at the time that the present U.S.-Germany income tax treaty was signed, and in the proposed protocol to the proposed U.S. income tax treaty with Mexico. Subject to the general principles established in the Understanding, the procedures may be modified or supplemented by the competent authorities or, in the case of the arbitration board's own procedures, by the arbitration board itself (consistent with generally accepted principles of equity).

The competent authorities may agree to invoke arbitration if they fail to reach an agreement within two years of the date on which the case was submitted to one of them, but only after the other competent authority procedures spelled out in the treaty have been fully exhausted. The Understanding provides that the competent authorities will not generally accede to arbitration with respect to matters concerning either the tax policy or the domestic tax law of either treaty country.

The Understanding describes how an arbitration board will be chosen in each case. Each board will have at least three members.

6090/436/EEC.

Each competent authority will appoint the same number of members, and these members will agree on the appointment of the other member or members of the board. The other member or members may be from the United States, the Netherlands, or another OECD member country. Further criteria for selecting the other member, or other members, of the arbitration board may be issued by the competent authorities. All board members and their staffs must agree in writing to be bound by applicable confidentiality and disclosure rules of both countries. If those provisions conflict, the most restrictive provisions will apply.

The competent authorities may agree on and instruct the arbitration board regarding specific rules of precedure, such as appointment of a chairman, precedures for reaching a decision, establishment of time limits, etc. Otherwise, the arbitration board shall establish its own rules of procedure consistent with generally accepted principles of equity. Taxpayers and/or their representatives shall be afforded the opportunity to present their views to the arbitration board.

The decision of a case by an arbitration board must be made on the basis of the treaty, giving due consideration to the domestic laws of the treaty countries and the principles of international law. The board will provide the competent authorities with an explanation of its decision. The decision, although binding with respect to the case at issue, will not have precedential effect. However, it is expected that the decisions ordinarily will be taken into account in subsequent cases involving the same taxpayer or taxpayers, the same issue or issues, and substantially similar facts. The Understanding states that arbitration board decisions may also be taken into account in other cases where appropriate.

The Understanding also provides for each treaty country to bear the costs of compensating its appointees, and half of the compensation of the appointees chosen by the arbitration board members. However, the arbitration board is given authority to allocate these costs differently, and each competent authority of a treaty country is given the authority to require the taxpayer or taxpayers to agree to bear that country's share of the costs as a prerequisite for arbi

tration.

Finally, the proposed treaty contains a provision that requires the competent authorities to consult on establishing a basis for the full implementation of the proposed treaty whenever the internal law of the one of the treaty countries is or may be applied in a manner that may impede the full implementation of the proposed treaty. If one of the competent authorities becomes aware of such actual or potential application, it is to inform the other in a timely manner, and consultations should begin within 6 months. The staff understands that this provision is intended to cover situations, among others, where internal law changes in conflict with the proposed treaty. In diplomatic notes accompanying the treaty, the State Department and its Dutch counterpart, on behalf of their respective governments, confirmed that they recognized the principle that the treaty, once in force, is binding upon both parties and must be performed by them in good faith and in accordance with generally accepted rules of international law. The negotiators further confirmed their recognition that they should avoid enactment

or interpretation of legislation or other domestic measures that would prevent the performance of their obligations under the treaty. The negotiators, recognizing the possibility of significant changes in the national taxation laws which may affect implementation of the treaty, were able to agree in principle that in such a case an appropriate amendment of the treaty might be necessary. The consultation language in the treaty provides a mechanism for initiating such amendments.

Article 30. Exchange of Information and Administrative Assistance

In general

This article, together with two following articles, form the basis for cooperation between the two countries in their attempts to deal with avoidance or evasion of their respective taxes and to obtain information so that they can properly administer the treaty. The proposed treaty provides for the exchange of information which is necessary to carry out the provisions of the proposed treaty or of the domestic laws of the two countries concerning taxes to which the treaty applies insofar as the taxation under those domestic laws is not contrary to the treaty. The proposed treaty specifies that the purposes for which information is to be exchanged include assessment, collection, administration, enforcement, prosecution before an administrative authority or initiation of prosecution before a judicial body, or determination of appeals with respect to the taxes covered by the treaty. The exchange of information is not restricted by Article 1 (General Scope). Therefore, third-country residents will be covered. However, like the present treaty but unlike the U.S. model the exchange of information article is restricted by Article 2 (Taxes Covered). Unlike the U.S. model, the proposed treaty does not obligate the parties to exchange information about national-level taxes (such as excise taxes) that are not listed under article 2.

Any information exchanged is to be treated as secret in the same manner as information obtained under the domestic laws of the country receiving the information. The exchanged information may be disclosed only to persons or authorities (including courts and administrative bodies) involved in functions listed above in relation to taxes to which the treaty applies. Such persons or authorities can use the information for such purposes only.

As indicated in the Understanding, persons involved in the administration of taxes include the tax-writing committees of Congress and the U.S. General Accounting Office, for use in the performance of their role in overseeing the administration of U.S. tax laws. The Understanding further indicates that the role of Congress and the GAO in overseeing the administration of U.S. tax law is understood to be limited to ensuring that the administration of the tax law by the executive branch is honest, efficient, and consistent with legislative intent.

Exchanged information generally may be disclosed in public court proceedings or in judicial decisions. However, a treaty country may use information obtained under the treaty as evidence before a criminal court only if prior authorization has been given by

the competent authority of the country supplying the information. The competent authorities may mutually agree to waive the condition of prior authorization.

Upon an appropriate request for information, the requested country is to obtain the information to which the request relates in the same manner and to the same extent as if its tax were at issue. A requested country is to use its subpoena or summons powers or any other powers that it has under its own laws to collect information requested by the other country. It is intended that the requested country may use those powers even if the requesting country could not under its own laws. Thus, it is not intended that the provision be strictly reciprocal. For example, once the Internal Revenue Service has referred a case to the Justice Department for possible criminal prosecution, the U.S. investigators can no longer use an administrative summons to obtain information. If, however, the Netherlands could still use administrative processes to obtain requested information, it would be expected to do so even though the United States could not. The United States could not, however, tell Netherlands which of its procedures to use.

Where specifically requested by the competent authority of one country, the competent authority of the other country shall endeavor to provide the information in the form requested. Specifically, the competent authority of the second country will endeavor to provide depositions of witnesses and authenticated copies of unedited original documents (including books, papers, statements, accounts, and writings) to the same extent that they can be obtained under the laws and practices of the second country in the enforcement of its own tax laws.

Information may also be released to the arbitration board established under the mutual agreement provisions described above, where necessary for carrying out the arbitration procedure. Conditions and requirements for such release are similar to those applicable to information exchanged between the competent authorities. Moreover, the members of the arbitration board are subject to the same secrecy obligations that apply to competent authorities receiving information exchanged under this article.

General conditions on the exchange or release of information are laid down in Article 32 (discussed below).

Summonses to designated agents

Under the Code, any domestic corporation that is 25-percent owned by one foreign person, and any foreign corporation that conducts a trade or business in the United States (a "reporting corporation"), must furnish the IRS with such information as the Secretary may prescribe regarding transactions carried out directly or indirectly with certain foreign persons treated as related to the reporting corporation ("reportable transactions").

In addition, the Code provides that in order to avoid certain consequences with respect to certain reportable transactions, each foreign person that is a related party of a reporting corporation must agree to authorize the latter to act as its agent in connection with any request or summons by the IRS to examine records or produce testimony related to any reportable transaction. Failure of a related party to designate a reporting corporation as its agent for ac

cepting service of process in connection with reportable transactions, or, under certain circumstances, noncompliance with IRS summonses in connection with reportable transactions or other matters, can result in the application of the so-called "noncompliance rule." This rule permits the Secretary of the Treasury to determine the tax consequences to the reporting corporation of certain transactions or other items in his or her sole discretion, based on any information in the knowledge or possession of the Secretary or on any information that the Secretary may obtain through testimony or otherwise.

The legislative history accompanying the enactment of these rules indicates an expectation that where records of a related party are obtainable on a timely and efficient basis under information-exchange procedures provided under a tax treaty, the IRS generally would make use of those procedures before issuing a summons to the designated agent on behalf of the related party.61 Treasury regulations contain this language.62 For this purpose, the regulation provides that information is available on a timely and efficient basis if it can be obtained within 180 days of the request. However, the legislative history also indicates a cognizance of undue audit delays that have been caused by the Service's inability to quickly obtain relevant information through treaty procedures, and a recognition that exigent circumstances (for example, the imminent expiration of the limitations period) may arise that would make the use of a treaty procedure undesirable. Thus, an intention is expressed in the legislative history that the Service not be required to attempt to use a treaty procedure before issuing a summons with respect to information that might be obtained under that treaty. The regulation provides that the absence or pendency of a treaty request may not be asserted as grounds for refusing to company with a summons or as a defense against the assertion of the noncompliance penalty adjustment.

The Understanding would modify the intended operation of these rules in a case where a U.S. resident or permanent establishment that is a "reporting corporation" under the above rules has neither possession of nor access to records that may be relevant to the U.S. income tax treatment of a transaction between it and a foreign related party (or, in the case of a permanent establishment, the U.S. tax treatment of any other item), and the records are under the control of a Netherlands resident and are maintained outside the United States. In such a case, the Understanding provides that the United States is obligated to request those records from the Netherlands through an exchange of information under this article of the proposed treaty before issuing a summons for those records to the reporting corporation, provided that under all the circumstances presented, the records will be obtainable through the request on a timely and efficient basis. For purposes of this discussion, the Understanding provides that records will be considered to be available on a timely and efficient basis if they can be obtained within 180 days of the request or such other period agreed upon

81 Committee on Finance, Explanation of Provisions Approved by the Committee on October 3, 1989, Senate Finance Committee Print, 101st Cong., 1st Sess., pp. 115-116 (1989).

62 Treas. Reg. sec. 1.6038A-6(b).