ual cases and, more generally, to facilitate consultation between tax officials of the two governments.

At times, residents of countries that do not have income tax treaties with the United States attempt to use a treaty between the United States and another country to avoid U.S. tax. To prevent third-country residents from obtaining treaty benefits intended for treaty country residents only, the treaties generally contain an "anti-treaty shopping" provision that is designed to limit treaty benefits to bona fide residents of the two countries.

Treaties generally provide that neither country may subject nationals of the other country (or permanent establishments of enterprises of the other country) to taxation more burdensome than that it imposes on its own nationals (or on its own enterprises). Similarly, in general, neither country may discriminate against enterprises owned by residents of the other country.

IV. EXPLANATION OF PROPOSED TAX TREATY

A detailed, article-by-article explanation of the proposed income tax treaty between the United States and Slovakia appears below.

Article 1. General Scope

The general scope article describes the persons who may claim the benefits of the proposed treaty and contains other rules, including the "saving clause" that generally allows each country to tax its citizens and residents notwithstanding the proposed treaty.

The proposed treaty generally would apply to residents of the United States and to residents of Slovakia, with specific exceptions designated in other articles. This follows other U.S. income tax treaties, the U.S. model treaty, and the OECD model treaty. Residence is defined in Article 4.

The proposed treaty also contains the rule found in other U.S. tax treaties that its provisions would not restrict in any manner any exclusion, exemption, deduction, credit, or other allowance otherwise accorded by the domestic laws of either treaty country or any other agreement between the two countries. Thus, the proposed treaty would apply only where it benefits taxpayers. In cases where a treaty provision would have a detrimental effect on a taxpayer, the taxpayer may elect to utilize the rules of domestic law or of another agreement between the two countries.

As set forth in the Technical Explanation, the fact that the proposed treaty would only apply to a taxpayer's benefit does not mean that a taxpayer could inconsistently select among treaty and internal law provisions in order to minimize its overall tax burden. The Technical Explanation sets forth the following example. Assume a resident of Slovakia has three separate businesses in the United States. One business is profitable, and constitutes a U.S. permanent establishment. The other two are trades or businesses that would earn effectively connected income as determined under the Internal Revenue Code, but do not constitute permanent establishments as determined under the proposed treaty; one trade or business is profitable and the other incurs a net loss. Under the Code, all three operations would be subject to U.S. income tax, in which case the losses from the unprofitable line of business could offset the taxable income from the other lines of business. On the other hand, only the income of the operation which gives rise to a permanent establishment would be taxable by the United States. under the proposed treaty. The Technical Explanation makes clear that the taxpayer could not invoke the proposed treaty to exclude the profits of the profitable trade or business and invoke U.S. internal law to claim the loss of the unprofitable trade or business against the taxable income of the permanent establishment.11

11 See Rev. Rul. 84-17, 1984-1 C.B. 10.

Like all U.S. income tax treaties, the proposed treaty contains a "saving clause." Under this clause, with specific exceptions described below, the proposed treaty would not restrict the taxation by either country of its residents or its citizens, including former citizens. By reason of this saving clause, unless otherwise specifically provided in the proposed treaty, the United States would continue to tax its citizens who are residents of Slovakia as if the treaty were not in force. The term "resident" for purposes of the treaty (and thus, for purposes of the saving clause) includes corporations and other entities as well as individuals (Article 4 (Resident)). Because Article 4 would generally provide for the determination of a single residence country for persons covered by the proposed treaty, the saving clause would have two effects. First, it would preserve the right of a country to tax its residents in situations where exclusive taxing jurisdiction would be granted (except for this clause) to the other country. Second, it would preserve the right of a country to tax its citizens in situations where the citizen would be treated as a resident of the other country pursuant to the proposed treaty, and exclusive taxing jurisdiction would be granted (except for this clause) to the country of residence. In cases where a country would apply the saving clause to tax its residents or citizens, the proposed treaty would provide a mechanism for eliminating resulting double taxation (Article 24).

Under Code Section 877, a former U.S. citizen whose loss of citizenship had as one of its principal purposes the avoidance of U.S. income, estate or gift taxes is, with respect to certain income, subject to U.S. tax for a period of 10 years following the loss of citizenship. The treaty language described above corresponds to provisions found in the U.S. model and most recent treaties which would grant a country the right to tax former citizens. Even absent a specific provision, the Internal Revenue Service has taken the position that the United States retains the right to tax former citizens resident in the other treaty country.12

The proposed treaty would provide exceptions to the saving clause for certain benefits conferred by the articles dealing with associated enterprises (Article 9), pensions, alimony, and child support (Article 19); relief from double taxation (Article 24); non-discrimination (Article 25); and mutual agreement procedures (Article 26). These exceptions are consistent with those in the U.S. model.

In addition, the saving clause would not apply to the benefits conferred by one of the countries under the articles dealing with government service (Article 20), students, trainees, teachers, and researchers (Article 21), and diplomatic agents and consular officers (Article 28), with respect to individuals who are neither citizens of, nor lawful permanent residents in, the conferring country. This exclusion is standard, and is included in the U.S. model. With respect to the United States, an individual is considered a lawful permanent resident if he or she has been admitted to the United States as a permanent resident under U.S. immigration laws (i.e., holds a "green card").

12 Rev. Rul. 79-152, 1979-1 C.B. 237.

Article 2. Taxes Covered

In the case of the United States, the proposed treaty would apply to the Federal income taxes imposed by the Internal Revenue Code, excluding the accumulated earnings tax, the personal holding company tax, and social security taxes. Additionally, the proposed treaty would apply to the excise taxes imposed with respect to the investment income of private foundations.13 In a departure from the U.S. model treaty and several other U.S. treaties, the excise tax imposed on insurance premiums paid to foreign insurers would not be a covered tax under the proposed treaty.

In the case of Slovakia, the proposed treaty would apply to the income taxes imposed by the income tax law and the tax on immovable property (real property tax).

The proposed treaty also contains a provision generally found in U.S. income tax treaties to the effect that it would apply to identical or substantially similar taxes that either country may subsequently impose in addition to, or in place of, the existing taxes. The proposed treaty, like the U.S. model, would obligate the competent authority of each treaty country to notify the competent authority of the other country of any significant changes in the tax laws of its country and of any published material concerning application of the treaty, including explanations, regulations, rulings, or judicial decisions.

Article 3. General Definitions

The proposed treaty contains certain of the standard definitions found in most U.S. income tax treaties.

The term "Contracting State" would mean the United States or Slovakia, as the context requires.

The term "United States” would mean the United States of America, but would not include Puerto Rico, the Virgin Islands, Guam or any other U.S. possession or territory. When the term is used in a geographical sense, it would include the territorial sea and the seabed and subsoil of the adjacent area over which the United States may exercise rights in accordance with international law and in which the laws relating to U.S. tax are in force. The intent of this rule is to cover the U.S. continental shelf in conformity with the definition of continental shelf contained in section 638 of the Code.

The proposed treaty defines "Slovakia" as the Slovak Republic, but does not provide a definition of the term "Slovak Republic.'

"

The term "person" would be defined to include an individual, an estate, a trust, a partnership, a company, and any other body of persons. A "company" would be any body corporate or any entity which is treated as a body corporate for tax purposes.

An "enterprise of a Contracting State" and "enterprise of the other Contracting State" would be defined, respectively, as an enterprise carried on by a resident of one of the treaty countries and an enterprise carried on by a resident of the other treaty country. Although the treaty does not define the term "enterprise," it would

13 Code section 4948 imposes a 4-percent excise tax on the gross U.S. source investment income for the taxable year of every foreign organization which is a private foundation. (See, generally, Code secs. 4940-4948.)

have the same meaning that it has in other U.S. tax treaties; that is, the trade or business activities undertaken by an individual, partnership, company, or other entity.

The proposed treaty defines "international traffic" as any transport by a ship or aircraft operated by a resident of one of the treaty countries, except where the transport is solely between places in the other country (i.e., wholly within the other country). Accordingly, with respect to a Slovak enterprise, purely domestic transport in the United States would not be international traffic.

The U.S. competent authority would be the Secretary of Treasury or his delegate. The U.S. competent authority function has been delegated to the Commissioner of Internal Revenue, who has redelegated the authority to the Assistant Commissioner (International). On interpretive issues, the latter acts with the concurrence of the Associate Chief Counsel (International) of the IRS.

The Slovak competent authority would be the Minister of Finance or his authorized representative.

Article 25 (Non-discrimination) of the proposed treaty defines the term "nationals" to mean individuals possessing the nationality of the relevant treaty country, and legal persons, partnerships, and associations deriving their status from the law in force in the United States or Slovakia. Under this definition, for example, a corporation organized under the law of one of the United States is a U.S. national. One result of this broad definition is a broad application of the proposed treaty's non-discrimination rules.

The proposed treaty also contains the standard provision that, unless the context otherwise requires or the competent authorities of the two countries establish a common meaning, all terms not otherwise defined by the proposed treaty would have the meaning which they have under the applicable tax laws of the country applying the proposed treaty.

Article 4. Resident

The assignment of a country of residence is important because the benefits of the proposed treaty generally would be available only to a "resident" of one of the countries as that term is defined in the treaty. Furthermore, double taxation would often be avoided by the proposed treaty assigning one of the countries as the country of residence where under the laws of the countries the person is a resident of both.

Under U.S. law, residence of an individual is important because a resident alien is taxed on his or her worldwide income, while a nonresident alien is taxed only on U.S. source income and on income that is effectively connected with a U.S. trade or business. Under the standards for determining residence provided in the Deficit Reduction Act of 1984 (the "1984 Act"), an individual who spends substantial time in the United States in any year or over a three-year period generally is a U.S. resident. A permanent resident for immigration purposes (i.e., a "green card" holder) also is a U.S. resident. The standards for determining residence provided in the 1984 Act do not alone determine the residence of a U.S. citizen for the purpose of any U.S. tax treaty (such as a treaty that benefits residents, rather than citizens, of the United States). A company is domestic, and therefore taxable in the United States on