the portion of the Slovak tax, as computed prior to the deduction, which is appropriate to the income taxable in the United States (other than solely on the basis of citizenship). In effect, Slovakia would limit its foreign tax credit on a per-country basis with respect to the United States under the proposed treaty.

Special rules for U.S. citizens who reside in Slovakia

In the case of a U.S. citizen residing in Slovakia, the proposed treaty provides that items of income which could be taxed by the United States solely by reason of citizenship (under the saving clause) would be sourced in Slovakia to the extent necessary to avoid double taxation. In no event, however, would the tax paid to the United States be less than the tax that would be paid if the individual were not a U.S. citizen.

To illustrate this provision, assume that a U.S. citizen who resides in Slovakia receives $200 of portfolio dividend income from a U.S. company. Absent the proposed treaty's saving clause (which would allow the United States to tax the dividend income as if the treaty were not in effect), the maximum amount of tax that could be imposed by the United States would be $30 (based on the 15percent rate mandated under Article 10 (Dividends)). In computing the individual's Slovak income tax on the dividend income, the general double tax relief provisions of the proposed treaty would require Slovakia to allow a credit against its tax for the U.S. tax. Thus, the income recipient would pay Slovak tax appropriate to the dividend only if the pre-credit amount of the Slovak tax exceeds $30.

In computing the individual's U.S. tax liability on the dividend income, the proposed treaty would require the United States to treat the dividend as foreign source income so as to allow a credit for any Slovak tax paid, but only to the extent necessary to avoid double taxation of that income and, in no case, to reduce the U.S. tax liability with respect to that income below the $30 withheld at

source.

Article 25. Non-Discrimination

The proposed treaty contains a non-discrimination provision similar to provisions which are embodied in other recent U.S. income tax treaties. This non-discrimination provision would apply not just to the taxes that the treaty covers generally, but to all taxes that either country or any of its political subdivisions or local authorities impose.

In general, under the proposed treaty, a treaty country could not discriminate by imposing more burdensome taxes (or requirements connected with taxes) on nationals of the other country than on its own nationals in the same circumstances. This provision would apply whether or not those nationals are residents of the United States or Slovakia. For the purposes of U.S. tax, however, a U.S. national that is not a resident of the United States and a Slovak national that is not a resident of the United States are not in the same circumstances, because only the U.S. national is subject to U.S. tax on its worldwide income.

The proposed treaty would adopt the OECD model treaty definition of nationals. Nationals would be individuals possessing the

citizenship of the United States or Slovakia and all legal persons, partnerships, and associations deriving their status as such from the laws in force in the United States or Slovakia. Under the U.S. model treaty, by comparison, only U.S. citizens qualify as U.S. nationals for purposes of obtaining non-discrimination benefits.

Similarly, in general, a treaty country could not impose less favorable taxes on permanent establishments of enterprises of the other country than it imposes on its enterprises that carry on the same activities. However, a country would not be required to grant to residents of the other country the personal allowances, reliefs, or reductions for taxation purposes on account of civil status or family responsibilities that it grants to its own residents.

The proposed treaty makes clear that nothing in the article on non-discrimination is to be construed as preventing either country from imposing a branch profits tax.

Each country would be required (subject to the arm's-length pricing rules of Articles 9 (Associated Enterprises), 11(4) (Interest), and 12(5) (Royalties)) to allow an enterprise of a treaty country to deduct interest, royalties, and other disbursements paid by the enterprise to a resident of the other country under the same conditions that it allows deductions for such amounts paid to residents of the same country as the payor. Similarly, any debts of a resident of a treaty country to a resident of the other country, for purposes of determining the taxable capital of the first-mentioned resident, would be deductible under the same conditions as if the debts had been contracted to a resident of the first-mentioned country. The staff understands that this provision is not intended to limit in any way the ability of the United States to deny deductions for interest expense under the so-called "earnings-stripping" rules of section 163(j) of the Code.

The rules concerning non-discrimination also would apply to enterprises of one country which are owned in whole or in part by residents of the other country. An enterprise resident in one treaty country, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other country, could not be subject in the country of its residence to any taxation or any connected requirement which is other or more burdensome than the taxation and connected requirements that the country of its residence imposes or may impose on other similar enterprises.

The saving clause would not apply to the provisions of the nondiscrimination article of the proposed treaty.

Article 26. Mutual Agreement Procedure

The proposed treaty contains a mutual agreement provision that would authorize the competent authorities of both the United States and Slovakia to consult together to attempt to alleviate individual cases of double taxation not in accordance with the proposed treaty. The saving clause of the proposed treaty would not apply to this article, so that the application of this article could result in waiver (otherwise mandated by a substantive provision of the proposed treaty) of taxing jurisdiction by the country of citizenship or residence.

Generally, under the proposed treaty, a person who considers that the actions of one or both of the treaty countries will cause that person to pay a tax not in accordance with the proposed treaty could present the case to the competent authority of the country of which the person is a resident or national. In such an instance, the case would have to be presented within three years from the first notification of the action resulting in taxation not in accordance with the provision of the proposed treaty. It would not be necessary for a person first to have exhausted the remedies provided under the internal laws of the two countries before taking the case to the competent authority.

Upon notification, the competent authority would make a determination as to whether the objection appears justified. If the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, then that competent authority would endeavor to resolve the case by mutual agreement with the competent authority of the other treaty country, with a view to the avoidance of taxation which is not in accordance with the Convention. The provision would require the waiver of the statute of limitations of either country so as to permit the issuance of a refund or credit notwithstanding the statute of limitations. The provision, however, would not authorize the imposition of additional taxes after the statute of limitations has run.

The competent authorities of the two countries would be required to endeavor to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the treaty. They could also consult together for the elimination of double taxation in cases not provided for in the proposed treaty. According to the Technical Explanation, it is intended that the competent authorities could agree, for example, to the same attribution of income, deductions, credits, or allowances between a resident of a treaty country and its permanent establishment in the other country; to the allocation of income, deductions, credits, or allowances between persons; or to settle a variety of conflicting applications of the proposed treaty, including those regarding the characterization of items of income or of persons, the application of source rules to particular items of income, differences in meanings of a term, and differences in applying penalties, fines, and interest. Such agreements would not have to conform to the internal law provisions of either treaty country.

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

Article 27. Exchange of Information and Administrative Assistance

This article would form the basis for cooperation between the United States and Slovakia in their attempts to deal with avoidance or evasion of their respective taxes and to enable them to ob

tain information so that they could properly administer the proposed treaty. The proposed treaty would provide for the exchange of information which would be necessary to carry out its provisions or the provisions of the domestic laws of the two countries concerning taxes covered by it insofar as the taxation under those domestic laws would not be contrary to the proposed treaty. The exchange of information would not be restricted by Article 1 (General Scope). Therefore, the two countries could exchange information about third-country residents. The proposed treaty, like the U.S. model treaty, would provide for the exchange of information about all taxes imposed by either country (whether or not otherwise covered by the treaty).

Any information exchanged under these provisions would be treated as secret in the same manner as information obtained under the domestic laws of the country receiving the information. Exchanged information could be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by the proposed treaty. Such persons or authorities could use the information for such purposes only, but could disclose the information in public court proceedings or in judicial decisions. The staff understands that this provision would permit access to taxpayer information to legislative bodies involved in the oversight of the administration of taxes, as well as to their agents. Persons involved in the administration of taxes include legislative bodies, such as, for example, the tax-writing committees of Congress and the U.S. General Accounting Office.

Under the proposed treaty, a country would not be required to carry out administrative measures at variance with the laws and administrative practice of either country, to supply information which is not obtainable under the laws or in the normal course of the administration of either country, or to supply information which would disclose any trade, business, industrial, commercial, or professional secret or trade process, or information the disclosure of which would be contrary to public policy.

Upon an appropriate request for information, the requested country would be required 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. Where specifically requested by the competent authority of a treaty country, the competent authority of the other country would provide the information in the form requested. Specifically, the requested competent authority would provide depositions of witnesses and authenticated copies of unedited original documents (including books, papers, statements, records, accounts, and writings) to the extent that they can be obtained under its laws and practices in the enforcement of its own tax laws. Article 28. Diplomatic Agents and Consular Officers

The proposed treaty contains the rule found in other U.S. tax treaties that its provisions would not affect the fiscal privileges of diplomatic agents or consular officials under the general rules of international law or the provisions of special agreements. Accordingly, the proposed treaty would not defeat the exemption from tax

which a host treaty country may grant to the salary of diplomatic officials of the other country.

The saving clause (as modified by paragraph 4(b) of Article 1) would not apply to this article, so that, for example, U.S. diplomats who are considered Slovak residents would not be subject to Slovak tax.

Article 29. Entry Into Force

The proposed treaty would be subject to ratification in accordance with the applicable procedures of the United States and Slovakia and the instruments of ratification would be exchanged as soon as possible in Washington, D.C. In general, the proposed treaty would enter into force when the instruments of ratification are exchanged.

With respect to taxes withheld at source (i.e., taxes on dividends, interest, and royalties), the treaty would be effective for amounts paid or credited on or after the first day of the second month next following the date on which the treaty enters into force. With respect to other taxes, the treaty would be effective for taxable periods beginning on or after January 1 of the year in which the treaty enters into force. This latter rule differs from the corresponding provision of the U.S. model treaty; under that provision, the treaty would be effective with respect to such other taxes for taxable periods beginning on or after the first day of January next following the date on which the treaty enters into force.

Article 30. Termination

The proposed treaty would continue in force indefinitely, but either country could terminate it at any time after five years from its entry into force. Notice of termination would have to be made through diplomatic channels, and given at least six months before the treaty could be terminated.

If termination occurs, it would be effective in respect of taxes withheld at source for amounts paid or credited on or after the first day of January next following the expiration of the notification period. With respect to other taxes, termination would occur with respect to taxable periods beginning on or after the first day of January next following the expiration of the notification period.

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