Memorandum by Mr. Frederick Livesey, Adviser, Office of Financial and Development Policy1
Recent Developments in U.S. Tax Treaties and International Phases of U.S. Tax Legislation
senate consent to 12 tax treaties
The Senate on September 17, 1951 gave its advice and consent to the ratification, subject in most cases to one or more specific reservations, of 12 bilateral treaties with 7 countries, and 2 bilateral supplementary protocols with two of them, for the avoidance of double taxation.
The instruments and countries are:
- In regard to income taxes:
- Convention with South Africa, signed December 13, 1946, and supplementary protocol, signed July 14, 1950; 2) Convention with New Zealand, signed March 16, 1948; 3) with Norway, signed June 13, 1949; 4) with Ireland, signed September 13, 1949; 5) with Greece, signed February 20, 1950; 6) with Canada, signed June 12, 1950; and 7) with Switzerland, signed May 24, 1951.
- In regard to estate taxes:
- Convention with South Africa, signed April 10, 1947, and supplementary protocol signed July 14, 1950; 2) Convention with Norway, signed June 13, 1949; 3) with Ireland, signed September 13, 1949; 4) with Greece, signed February 20, 1950; and 5) with Canada, signed June 12, 1950. (The conventions with Canada are supplementary to the existing income tax convention signed March 4, 1942 and estate tax convention signed June 8, 1944.)
further action on the treaties
The other parties to the conventions and protocols had already ratified them and empowered their Washington Embassies to exchange ratifications when the United States’ ratification was ready. Senate reservations made it impossible to accept the prepared instruments of ratification except those of the estate tax conventions with Ireland and Canada. The Department of State promptly requested the other governments to exchange ratifications of the other conventions in a form which will include acceptance of the respective Senate reservations. Switzerland exchanged ratifications of the income tax convention of May 24, 1951 in this form September 27 and Canada exchanged ratifications of the income and estate tax conventions of June 12, 1950 on November 21, 1951, bringing into force the conventions amended as stipulated in the Senate reservations. Other governments have not [Page 1241] yet formally communicated their attitudes. No indication has been received that all the conventions will not eventually be ratified. In most cases failure to exchange ratifications before January 1, 1952 would delay the effectiveness of the conventions until that date.
A Senate Foreign Relations Committee report of August 6, 1951 urging advice and consent to the ratification of all the conventions and protocols (Executive Report No. 1, 82nd Congress, First Session) submitted and discussed the reservations. They are in part new developments and in part reaffirmations of policies previously applied by the Senate in acting on certain earlier treaties.
(i) Mutual Assistance in Tax Collection.
The Committee report found the collection provisions in several conventions too broad, remarking that “as a general rule, it is not believed wise to have one government collect the taxes which are due to another government.”
In income tax conventions the Senate accepted the collection provisions of the South African, Greek and Norwegian conventions subject to the understanding that each of the parties to a treaty may collect the other’s tax solely in order to insure that the exemptions or reduced rates of tax provided under the convention shall not be enjoyed by persons not entitled to such benefits. The Senate report stipulated that collection provisions in the pending estate tax conventions (such provisions were included in the conventions with South Africa, Norway and Greece) be eliminated entirely, with the exception that the provision of the South African convention as amended by the supplementary protocol be accepted subject to the understanding that its application will be limited to those cases in which the estate of a decedent claims a credit under Article V of the convention.
(ii) Taxation of Public Entertainers.
The income tax conventions with South Africa, New Zealand, Canada and Switzerland contain provisions varying in detail for reciprocal exemption, entire or limited, of compensation for personal services performed by residents of one contracting state who are temporarily within the taxing state for a period or periods not to exceed 183 days in the taxable year but with a specific exception that the exemption shall not apply to profits or remuneration of public entertainers such as stage, motion picture or radio artists, musicians and athletes. The Senate reservation declines to accept this exception. This reaffirms a position first taken in a Senate reservation accepted in the ratification of the US-UK convention of 1946. South Africa, New Zealand, Canada and Switzerland declined to accept this position in negotiating their respective conventions with the United States on [Page 1242] which the Senate has just acted. Switzerland and Canada have now accepted the reservation.
(iii) Capital Gains and Accumulated Profits Provisions in Convention With Ireland.
A reservation to the Irish income tax convention declines to accept articles relating to capital gains and to accumulated profits similar to articles accepted in the US–UK income tax convention of 1946 but subsequently rejected by Senate reservation from income tax conventions with Denmark and the Netherlands which the Senate approved in June 1948. They were thereafter inserted in the convention with Ireland only because Ireland insisted that much of the value of the tax treaty to Ireland would be offset unless its terms were kept almost identic with those in the US–UK convention.
status of tax treaty negotiations
The Senate vote of September 17 was a clearance, subject to the above reservations, of all tax treaties which were ready for consideration by the Senate Foreign Relations Committee on June 28, when the Committee voted its own recommendations. At the request of Belgium, no action was taken on the treaty signed with that country October 28, 1948 and sent to the Senate March 12, 1949. It is expected that substantial amendments to this treaty will be submitted in a supplementary protocol negotiated in May 1951 and now under review in the Treasury. An estate tax treaty with Switzerland signed July 9, 1951 was sent to the Senate August 2. Draft treaties negotiated with Israel and Finland are also now under review in the Treasury. An Italian negotiating delegation initialled drafts of income and estate tax conventions at Washington November 21. A Japanese delegation will open discussions at Washington about December 12.
international items in revenue act of 1951
In the field of domestic legislation, the Revenue Act of 1951, approved October 20, amends previous law by provisions which may be important aids to American private enterprise and investment abroad. These include three of the four liberalizations of existing law which were recommended to the Senate in 1950 as Point IV tax points.
foreign tax credit extended to minority stock holdings in a foreign corporation
Section 131 (f) of the Internal Revenue Code has permitted a domestic corporation holding a majority of the voting stock of a foreign corporation to receive foreign tax credit for income taxes paid by the foreign corporation to a foreign government with respect to the profits of the foreign corporation which are paid as dividends to the domestic corporation. The new act removes the requirement of majority ownership. [Page 1243] It provides that the foreign tax credit is to be allowed if the American corporation owns at least 10% of the voting stock of the foreign corporation. Moreover, under previous law, if a foreign subsidiary of an American corporation owned all of the voting stock of another foreign corporation, the dividends received by the American corporation with respect to the earnings of the second subsidiary were eligible for foreign tax credit. The new law extends the foreign tax credit to apply in the case of dividends received by American corporations in case of majority ownership, but not complete ownership, of the second foreign subsidiary by the first foreign subsidiary. The Senate Finance Committee report commented that these amendments are expected to result in a revenue loss of $30 million in a full year’s operation. This is the eliminated double taxation.
Effective dates. The amendments to Section 131 (f) are effective with respect to dividends received during taxable years beginning after December 31, 1950.
foreign estate tax credit established
The 1951 act for the first time creates in US law a foreign estate tax credit comparable, so far as it goes, to the income tax credit which has been law for thirty years. The US has collected estate tax with respect to the entire estate, wherever situated (except real property outside the US), of decedents who are either domiciled within the US or citizens of the US. The new law allows a credit in the case of US citizens and residents where double taxation arises from the US imposing estate tax on property situated within that country. In the case of a decedent who was a resident but not a citizen of the US, the credit is to be allowed only if the country of which the decedent was a national, in imposing death taxes, allows a similar credit in the case of a citizen of the US resident in such country.
According to the Finance Committee report the estate tax credits are allowable (under principles developed under the foreign income tax credit), not only for death taxes of foreign states in the international sense, but also for such taxes of possessions or political subdivisions of foreign states. Where credit for a particular foreign death tax is authorized by treaty, there is to be allowed either a credit computed under the treaty or that computed under the Internal Revenue Code, as amended, whichever is greater. For example, if a portion of the estate of a citizen of the US is situated in the Province of Quebec and is subjected to Dominion and Provincial succession duties, the credit for the Dominion duty computed under the estate tax treaty with Canada, or the credit for the Dominion and Provincial duties computed under the Code, whichever is greater, is to be allowed.[Page 1244]
Effective date. The estate tax credit (which is written into sections 813, 936, and 927 of the Internal Revenue Code) is effective with respect to estates of decedents dying after October 20, 1951.
The amendments will not eliminate all double taxation of estates, as the income tax credit has not eliminated all double taxation of incomes. Scope for estate tax treaties with some countries may still be found.
exemption of income earned abroad
The new law attempts to increase the effectiveness of the tax exemption incentive which our law has offered to US citizens to accept employment abroad. Section 116(a) of the Internal Revenue Code has exempted from income tax income earned abroad by US citizens who are bona fide residents in a foreign country or countries during the entire taxable year. In application this has denied exemption to persons during their first year abroad unless they became bona fide residents as of January 1. It was also difficult for a person who was abroad on a fixed term contract and maintaining a family in the US to establish that he was a bona fide resident in a foreign country. The new law provides two alternatives: 1) a person who establishes that he has been a bona fide resident of a foreign country or countries for “an uninterrupted period which includes an entire taxable year” shall be exempt from tax on amounts received if such amounts constitute earned income attributable to such period; and 2) a person “who during any period of 18 consecutive months is present in a foreign country or countries during at least 510 full days in such period” is exempt from tax on amounts received if such amounts are earned income attributable to such period. A supplemental provision (in Section 1621 of the Internal Revenue Code) allows employers to refrain from collecting “pay-as-you-go” withholding tax when it is reasonable to believe that this exemption will apply. The limitation “except amounts paid by the United States or any agency thereof” continues to apply throughout.
Effective date. The amendments to Section 116(a) are effective for taxable years beginning after December 31, 1950. The amendment to Section 1621 will be applicable to wages paid on or after January 1, 1952.
- Source text was an attachment to unclassified Foreign Service Serial No. 1149, December 12, 1951, entitled “Recent United States Tax Legislation and Treaties”.↩