CONTENTS 2 11 INTRODUCTION This pamphlet,1 prepared by the staff of the Joint Committee on Taxation, provides an explanation of the proposed income tax treaty, as modified by the proposed protocol, between the United States and the Russian Federation ("Russia"). The proposed treaty and proposed protocol were both signed on June 17, 1992. Currently, the United States and Russia adhere to the provisions of a tax treaty signed June 20, 1973 between the Soviet Union and the United States (the "USSR treaty"). The proposed treaty would replace the USSR treaty with respect to Russia.2 The Senate Committee on Foreign Relations has scheduled a public hearing on the proposed treaty (and 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 and protocol. 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 and protocol.3 1 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 Russian Federation (JCS-17-93) October 26, 1993. 2 Adherence to the USSR treaty as between the United States and other former republics of the Soviet Union would not be altered by entry into force of the proposed treaty between the United States and Russia. 3 For a copy of the proposed tax treaty and protocol, see Senate Treaty Doc. 102-39, September 8, 1992. In general I. SUMMARY The principal purposes of the proposed income tax treaty between the United States and Russia 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 the income taxes of the two countries. The proposed treaty is intended 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 intended to enable the two countries to cooperate in preventing avoidance and evasion of taxes. As in other U.S. tax treaties, these objectives are principally achieved 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 13). 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 13, 14, and 16). The proposed treaty provides that dividends derived by a resident of either country from sources within the other country generally may be taxed by both countries (Article 10). 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 (Articles 10, 11, and 12). 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 of the potential double taxation by the country of residence allowing a foreign tax credit (Article 22). The 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 1). In addition, the 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); that is, the treaty will only be applied to the benefit of taxpayers. Differences among proposed treaty, USSR treaty, and model treaties 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 treaty with the Soviet Union. (That treaty predates the 1981 U.S. model treaty.) Some of these differences are as follows: (1) Like all treaties, the proposed treaty is limited by a "saving clause," under which the treaty is not to affect (subject to specific exceptions) the taxation by either treaty country of its residents or its nationals. Exceptions to the saving clause are similar to those in the U.S. model and other U.S. treaties; the USSR treaty, in contrast, flatly states that it shall not restrict the right of a treaty country to tax its own citizens. (2) The U.S. excise tax on insurance premiums paid to a foreign insurer is not a covered tax; that is, the proposed treaty would not preclude the imposition of the tax on insurance premiums paid to Russian insurers. This is a departure from the USSR treaty and the U.S. model tax treaty, but one that is shared by many U.S. treaties, including recent ones. In addition, the proposed treaty, like the model treaty but unlike the USSR treaty, does not contain a general prohibition on source country taxation of reinsurance premiums derived by a resident of the other country. Nor does the proposed treaty contain the provision of the USSR treaty under which, if the income of a resident of one country is tax-exempt in the other country, the transaction giving rise to that income is exempt from any tax that is or may otherwise be imposed on the transaction. (It is understood that this provision applies to the insurance premium excise tax, and does not apply to customs duties.) (3) Like the U.S. model but unlike the USSR treaty, the proposed treaty generally does not cover U.S. taxes other than income taxes, although it does cover capital taxes and excise taxes with respect to private foundations. Nor does the proposed treaty cover the accumulated earnings tax, the personal holding company tax, and social security taxes. (4) The proposed treaty makes it clear that each country includes its territorial sea, and also the economic zone and continental shelf in which certain sovereign rights and jurisdiction may be exercised in accordance with international law. (5) By contrast with the USSR treaty, but like the U.S. model, U.S. citizens are entitled to treaty benefits regardless of actual residence in a third country. In addition, the proposed treaty introduces rules for determining when a person is a resident of either the United States or Russia, and hence entitled to benefits under the treaty. The proposed treaty, like the model, provides tie-breaker rules for determining the residence for treaty purposes of “dual residents," or persons having residence status under the internal laws of each of the treaty countries. (6) Under the proposed treaty, any corporate dual resident will be treated as a resident of one or the other country only if the competent authorities can agree; if not, the proposed treaty (unlike the U.S. model) expressly provides that the company shall be treated as a resident of neither country for purposes of enjoying treaty benefits, and hence is entitled to no treaty benefits. |