Current income tax treaty developments.

• Author: Dichter, Arthur J.

The past year was another exciting one in the foreign relations area; six new income tax treaties and one new protocol were signed. This article provides highlights of the income tax treaty activity occurring in late 1996 and 1997, and focuses on the salient aspects of the new treaty with Ireland and new protocol with Canada.

U.S. tax treaty negotiators were very busy in 1997, as six new treaties and one new protocol became effective, including a new treaty with Ireland and a new protocol with Canada. In the ratification process, the treaties faced opposition from the real estate investment trust (REIT) lobby(1) and were nearly delayed until next year. However, a compromise was reached and the ratification process was completed. This article reviews the past year's activity in this area.

Treaties and Protocols Taking Effect In 1997

Austria

New treaty replacing the 1956 agreement signed May 31, 1996; approved by the Senate Oct. 31, 1997; entered into force Feb. 1, 1998. Reduced withholding rates apply for payments after March 31, 1998; otherwise, the treaty is generally effective for fiscal periods beginning after Dec. 31, 1998. Taxpayers may elect to apply the existing Austrian treaty for the first year the new treaty is in effect.

Canada

Fourth protocol amending the 1980 treaty signed July 29, 1997; approved by the Senate Oct. 31, 1997; entered into force Dec. 16, 1997. Provisions have varied effective dates (see below).

Ireland

New treaty replacing the 1949 agreement signed July 28, 1997; approved by the Senate Oct. 31, 1997; entered into force Dec. 17, 1997. The treaty is generally effective for payments and tax periods beginning after Dec. 31, 1997. Taxpayers may elect to apply the existing Irish treaty for the first year the new treaty is in effect. Certain provisions in the limitation on benefits article may be deferred for the first three years the new treaty is in effect.

South Africa

New treaty signed Feb. 17, 1997. There has been no income tax treaty in force between the U.S. and South Africa since July 1, 1987, when the 1946 agreement was terminated in accordance with the Anti-Apartheid Act. The new treaty was approved by the Senate on Oct. 31, 1997, entered into force Dec. 28, 1997, and is generally effective for payments and tax periods beginning after Dec. 31, 1997.

Switzerland

New treaty replacing the 1951 treaty signed Oct. 2, 1996; approved by the Senate Oct. 31, 1997; entered into force Dec. 19, 1997. Reduced withholding rates are effective for payments after Jan. 31, 1998; otherwise, the treaty is generally effective for tax periods beginning after Dec. 31, 1997. Taxpayers may elect to apply the existing Swiss treaty for the first 12 months that the new treaty is in effect.

Thailand

New treaty signed Nov. 26, 1996, replacing an unratified 1965 agreement; approved by the Senate Oct. 31, 1997; entered into force Dec. 15, 1997. Reduced withholding rates are effective for payments after May 31, 1998; otherwise, the treaty is generally effective for tax periods beginning after Dec. 31, 1997.

Turkey

First-ever treaty signed March 28, 1996; approved by the Senate Oct. 31, 1997; entered into force Dec. 19, 1997. The treaty is generally effective for payments and tax periods beginning after Dec. 31, 1997.

Treaties Approved in 1997, But Not Yet in Force

Luxembourg

New treaty replacing the 1962 treaty signed April 13, 1996; approved by the Senate Oct. 31, 1997. This treaty has yet to enter into force. The Senate attached a declaration to its Resolution of Advice and Consent to Ratification that prohibits the treaty from entering into force until the treaty on Mutual Legal Assistance in Criminal Matters between Luxembourg and the U.S. enters into force.(2) That agreement will not be brought before the Senate for ratification until later this year. Once in force, the income tax treaty will generally be effective for payments and tax periods beginning after December 31 of the year of entry into force (e.g., after Dec. 31, 1998 if the treaty enters into force in 1998). Taxpayers may elect to apply the existing Luxembourg treaty for the first year the new treaty is in effect.

Ukraine

First-ever treaty and protocol signed March 4, 1994; approved by the Senate Aug. 11, 1995. Bank secrecy problems continue to delay entry into force.

Treaties Signed in 1998,

Estonia, Latvia, Lithuania

On Jan. 15, 1998, Treasury announced the signing of these three treaties, all of which had been initialed in May 1997. The U.S. does not currently have a treaty in force with any of these countries; none of these treaties is currently in force.

Other Agreements

Austria

Supplementary Agreement Amending the Agreement Between the U.S. and Austria on Social Security. This agreement was signed Oct. 5, 1995 and became effective on Jan. 1, 1997; the original agreement was signed July 13, 1990. The primary purpose of the supplementary agreement is to introduce a new method of computing Austrian benefits under the agreement. The new computation method replaces a provision in the original agreement that would have resulted in reduced Austrian social security benefits for certain individuals who have divided their careers between the U.S. and Austria. The supplementary agreement also makes a number of revisions to the original agreement necessary to take into account changes that have occurred in U.S. and Austrian law in recent years.

Canada

Second Supplementary Agreement Amending the Agreement Between the U.S. and Canada on Social Security. This agreement was signed May 28, 1996 and became effective on Oct. 1, 1997; the original agreement was signed March 11, 1981 and amended on May 10, 1983. The primary purpose of the supplementary agreement is to take into account changes in the U.S. and Canadian law that have occurred since the original agreement was signed and to conform it more closely to later social security agreements the U.S. and Canada have concluded with other countries. The supplementary agreement also adds a provision authorizing the U.S. and Canadian social security agencies to establish a program of mutual administrative assistance.

U.K.

Supplementary Agreement Amending the Agreement Between the U.S. and the U.K. on Social Security. This agreement was signed June 6,1996 and became effective on Sept. 1, 1997; the original agreement was signed Feb. 13, 1984. The primary purpose of the supplementary agreement is to remove certain restrictions in the original agreement on the payment of U.K. disability benefits to U.S. residents. Other amendments take into account changes in the U.S. and U.K. law...