Technical Explanation to the 1984 Protocol (1985)


A protocol accompanies and forms part of the Agreement.

The provisions of paragraphs 1 through 6 of the Protocol are discussed above in connection with Articles 1, 2, 3, 4 and 11 of the Agreement.

Paragraph 7 of the Protocol contains a protection against “treaty shopping.” It provides that the competent authorities may through consultation deny the benefits of Articles 9, 10, and 11, concerning dividends, interest and royalties, to a company of a third country if that company becomes a resident of one of the Contracting States for the principal purpose of enjoying benefits under the Agreement. This consultation obligation is intended to benefit both governments. The denial of benefits requires consultation, but is not dependent on the prior agreement of the competent authorities.

This provision is stated in more general and limited terms than the corresponding provision in other recent U.S. tax treaties, not because of a lesser interest in the principle of limiting treaty benefits to residents of the other Contracting State, but because it is not anticipated that this Agreement will be used for treaty shopping purposes. In particular, Chinese currency and investment controls and their limited network of treaties make it unlikely that third country residents would use China as a conduit for investing in the United States.

Paragraph 8 confirms that the taxation of international transportation income is governed by the agreement of March 5, 1982 with respect to mutual exemption from taxation of transportation income of shipping and air transport enterprises.