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Article 26. Mutual Agreement Procedure
This pamphlet,1 prepared by the staff of the Joint Committee on Taxation, provides an explanation of the proposed income tax treaty between the United States and the Slovak Republic. The proposed treaty was signed on October 8, 1993. The Senate Committee on Foreign Relations has scheduled a public hearing on the proposed treaty on October 27, 1993.
No income tax treaty between the United States and the Slovak Republic (Slovakia) is in force at present.
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
1 This pamphlet may be cited as follows: Joint Committee on Taxation, Explanation of Proposed Income Tax Treaty Between the United States and the Slovak Republic (JCS-19-93), October 26, 1993.
2 For a copy of the proposed treaty, see Senate Treaty Doc. 103-18, October 21, 1993.
The principal purposes of the proposed income tax treaty between the United States and Slovakia 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 countries to cooperate in preventing avoidance and evasion of taxes.
As in other U.S. tax treaties, these objectives would be 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 country. For example, the proposed treaty provides that a treaty country would not tax business income derived from sources within that country by residents of the other country unless the business activities in the first country are substantial enough to constitute a permanent establishment or fixed base (Articles 7 and 14). Similarly, the proposed treaty contains "commercial visitor" exemptions under which residents of one country performing personal services in the other country would not be required to pay tax in that other country unless their contact with that country exceeds specified minimums (Articles 14, 15, and 18). The proposed treaty provides that dividends, royalties, and certain gains derived by a resident of either country from sources within the other country generally would be taxable by both countries (Articles 10, 12 and 13). Generally, however, dividends and royalties received by a resident of one country from sources within the other country would be taxed by the source country on a restricted basis (Articles 10 and 12). The proposed treaty provides that as a general rule, the source country could not tax interest received by a resident of the other treaty country (Article 11).
In situations where the country of source would retain the right under the proposed treaty to tax income derived by residents of the other country, the treaty generally would provide for the relief of the potential double taxation generally by requiring the other country to grant a credit against its tax for the taxes paid to the source country.
The proposed treaty contains a "saving clause" similar to that contained in other U.S. tax treaties (Article 1(3)). Under this provision, the United States generally would retain the right to tax its citizens and residents as if the treaty had not come into effect. In addition, the proposed treaty contains the standard provision that it would not apply to deny a taxpayer any benefits that person is 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 would only apply to the benefit of taxpayers.
The proposed treaty also contains a non-discrimination provision (Article 25) and provides for administrative cooperation and exchange of information between the tax authorities of the two countries to avoid double taxation and to prevent fiscal evasion with respect to income taxes (Articles 26 and 27).
Differences between proposed treaty and other treaties
The proposed treaty differs in certain respects from other U.S. income tax treaties, and from the U.S. model and OECD model treaties. Some of these differences are as follows:
(1) The U.S. excise tax imposed on insurance premiums paid to foreign insurers would not be a covered tax under the proposed treaty; that is, the proposed treaty would not preclude the imposition of the tax on insurance premiums paid to Slovak insurers. This is a departure from the U.S. model treaty, but one that is shared by many U.S. treaties, including recent ones.
(2) The definition of the term "United States" as contained in the proposed treaty generally conforms to the definition provided in the U.S. model. In both treaties the term generally is limited to the United States of America, thus excluding from the definition U.S. possessions and territories. The proposed treaty, however, makes it clear that the United States would include its 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 laws relating to U.S. tax are in force. The U.S. model is silent with respect to this point.
(3) The proposed treaty defines "Slovakia" as the Slovak Republic, but does not contain a definition of the term "Slovak Republic." In most U.S. treaties, the geographic area of both treaty countries is defined specifically.
(4) A U.S. citizen who is not also a U.S. resident (i.e., he or she does not have a substantial presence, permanent home, or habitual abode in the United States) generally would not be covered by the proposed treaty.3 The U.S. model does cover such U.S. citizens. The United States rarely has been able to negotiate coverage for nonresident citizens, however.
(5) For purposes of qualifying for benefits under the proposed treaty, the term "resident of a Contracting State" would specifically include the governments of the two treaty countries, including their political subdivisions and local authorities, and any agencies or instrumentalities of those national or subnational governmental bodies. The term also would cover a pension trust or other organization that is constituted and operated exclusively to provide pension benefits or for religious, charitable, scientific, artistic, cultural, or other educational purposes and that is a resident of a treaty country under its domestic laws.
(6) The definition of permanent establishment in the proposed treaty in one facet is somewhat broader than that in the U.S. model, the OECD model, and in existing U.S. treaties. Under the
3 Similarly, the treaty would not cover an alien who has been admitted for permanent U.S. residence (i.e., a "green card" holder) unless that person has a U.S. substantial presence, permanent home, or habitual abode.