Technical Explanation (1986)
TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND (ON BEHALF OF THE GOVERNMENT OF BERMUDA) RELATING TO THE TAXATION OF INSURANCE ENTERPRISES AND MUTUAL ASSISTANCE IN TAX MATTERS
This is a technical explanation of the Convention between the United States and the United Kingdom (on behalf of Bermuda) signed on July 11, 1986 (the “Convention”). This explanation is an official guide to the Convention. It reflects policies behind particular Convention provisions, as well as understandings reached with respect to the interpretation and application of the Convention. This explanation also refers to the provisions of the diplomatic notes (the “Note”) exchanged by the United States and the United Kingdom at the time of signing the Convention.
Article 1. General Definitions
Paragraph 1 defines the principal terms used in the Convention. Unless the context otherwise requires, a term defined in this paragraph has a uniform meaning throughout the Convention. A number of important terms are, however, defined in other Articles. For example, the terms “resident” and “permanent establishment” are defined in Articles 2 (Residence) and 3 (Permanent Establishment), respectively.
The term “United States” is defined to mean the United States of America. Neither Puerto Rico, the Virgin Islands, Guam, nor any other U.S. possession or territory is within the definition of the United States.
The term “Bermuda” means the islands in the Atlantic Ocean known as Bermuda.
The term “person” is defined to include an individual, an estate, a trust, a company, a partnership, and any other body of persons. The term “company” means any body corporate or any entity which is treated as a body corporate for tax purposes.
The term “enterprise of insurance” means an enterprise of which the predominant business activity during the taxable year is the issuing of insurance or annuity contracts or acting as the reinsurer of risks underwritten by insurance companies, together with the investing or reinvesting of assets held in respect of insurance reserves, capital, and surplus incident to the carrying on of the insurance business.
The terms “enterprise of a Covered Jurisdiction” and “enterprise of the other Covered Jurisdiction” mean an enterprise carried on by a resident, as defined in Article 2, of the United States or Bermuda, as the contest requires.
The term “competent authority” is defined to mean; in the case of the United States, the Secretary of the Treasury or his delegate. In the case of Bermuda, the term means the Minister of Finance or his delegate.
The term “insurance obligation” is defined to mean any obligation which, in accordance with normal industry practice, an insurer undertakes under the terms of a contract of insurance, to make payments or incur expenses in connection with the insurance protection offered under the contract, including any such obligation to pay claims to or for the benefit of the insured resulting from damages connected with the covered risk, to pay interest on such claims, and to pay the costs of defending an insured against such damages, but in no event including any obligation to pay premiums or other costs of reinsuring the covered risk. The obligation to pay premiums or other costs of reinsuring a risk covered under an insurance contract is, thus. excluded from the definition of insurance obligation, regardless of whether such obligation arises under or outside of the insurance contract covering the risk.
The term “Covered Jurisdiction” is defined to mean the United States or Bermuda, as the context requires.
Paragraph 2 provides that in the case of a term not defined in the Convention, the domestic law of the Covered Jurisdiction applying the Convention shall control, unless the context in which the term is used requires otherwise or the competent authorities reach agreement on a meaning pursuant to the third sentence of paragraph 2. Where the United States is the Covered Jurisdiction applying the Convention, the domestic tax law shall be the domestic law referred to in the preceding sentence. The term “context” refers to the purpose and background of the provisions in which the term appears. An agreement by the competent authorities with respect to the meaning of a term used in the Convention would supersede conflicting meanings in the domestic lava of the Covered Jurisdictions.
Article 2. Residence
This Article sets forth rules for determining the residence of individuals, companies, and other persons for purposes of the Convention. Article 2 is Important because, except as otherwise provided, only a resident of a Covered Jurisdiction may claim benefits under the Convention. A determination of residence under this Article applies for all other provisions of the Convention. In general, the determination of residence in the case of the United States begins with a person’s liability to tax as a resident under the taxation laws of the United States. In the case of Bermuda, the determination depends upon other factors, as discussed below. The Convention definition is, of course, exclusively for purposes of the Convention.
The term “resident of Bermuda” is defined as an individual who has the status of a legal resident of Bermuda, or a company, partnership, trust, or association created under the laws of Bermuda.
The term “resident of the United States” is defined as a person (except a company) resident in the United States for purposes of its tax. This includes a resident alien individual, who is subject to tax by the United States on his worldwide income, or an alien present in the United States who makes an election under Internal Revenue Code (“Code”) section 6013(g) or (h), as well as a resident U.S. citizen. The term also includes a company which is created or organised under the laws of the United States or a political subdivision thereof.
This Article also provides that a partnership, estate, or trust is a resident of the United States only to the extent that the income derived by such person is subject to tax by the United States as the income of a resident, either in its hands or in the hands of its partners or beneficiaries. For example, under current United States law, a partnership is never, and an estate or trust is often not, taxed as such. Thus, under the Convention, a partnership, estate, or trust not taxed as such will be treated as a resident of the United States only to the extent that income derived by such partnership, estate, or trust is subject to tax in the hands of its partners or beneficiaries as the income of a U.S. resident.
Article 3. Permanent Establishment
This Article defines the term “permanent establishment” which is relevant particularly to the taxation of business profits of an enterprise of insurance under Article 4 (Taxation of Insurance Enterprises). Paragraph 1 defines the term “permanent establishment” as a regular place of business through which the business of an enterprise of insurance is wholly or partly carried on. No difference in meaning is intended between the use of the term “regular place of business” in the Convention and the more commonly used term “fixed place of business”.
Paragraph 2 provides an illustrative list of regular places of business which constitute a permanent establishment. The list includes: a place of management; a branch; an office; and premises used as a sales outlet. The term “place of management” is used in the OECD Model Income Tax Convention. Since a place of management would in most cases require an office, which is specifically listed in paragraph 2, the insertion of “place of management” will generally not cause a regular place of business to be a permanent establishment if it would not otherwise be a permanent establishment. The reference to premises used as a “sales outlet” does not mean that premises used by an enterprise of insurance for the mere delivery of insurance contracts or related documents is a permanent establishment; additional significant activity by the enterprise at the premises, such as the negotiation of contracts, is necessary for the premises to constitute a “sales outlet” and a permanent establishment of the enterprise.
Paragraph 3 provides that the furnishing of services, including consultancy, management, technical and supervisory services, within a Covered Jurisdiction by an enterprise of insurance through employees or other persons constitutes a permanent establishment, but only if: the activities continue within that Jurisdiction for a period or periods aggregating more than 90 days in any 12 month period (and for 30 days or more in the taxable year); or the services are performed within that Jurisdiction for an associated enterprise. For this purpose, any two enterprises are considered “associated” if either participates directly or indirectly in the management, control, or capital of the other, or it the same persons participate directly or indirectly in the management, control, or capital of both.
Paragraph 4 overrides paragraphs 1 and 2 to provide that a regular place of business may be used for one or more of the following activities and not be a permanent establishment:
(a) the maintenance of a regular place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise of insurance; or
(b) the maintenance of a regular place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise.
The reference in subparagraph (b) to advertising, scientific research, and the supply of information is not intended to suggest that such activities are always auxiliary or that other activities cannot be auxiliary.
Paragraphs 5 and 6 describe the permanent establishment implications of employees and agents. Under paragraph 5, a person (other than an agent of independent status to whom paragraph 6 applies) acting in a Covered Jurisdiction on behalf of an enterprise of insurance of the other Covered Jurisdiction shall be deemed to be a permanent establishment of that enterprise in the first-mentioned Jurisdiction if he has and habitually exercises in the first-mentioned Jurisdiction an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those listed in paragraph 4.
Paragraph 6 provides that if an enterprise of insurance of one Covered Jurisdiction merely carries on business in the other Covered Jurisdiction through a broker, a general commission agent, or any other agent of independent status acting in the ordinary course of his business, the enterprise will not thereby be considered to have a permanent establishment in that other Jurisdiction. Paragraph 6 also provides, however, that such broker or agent will not be considered independent, and paragraph 6 shall not apply, if all his activities are devoted wholly, or almost wholly, on behalf of that enterprise and the transactions between the two are not conducted under arm’s-length conditions.
Paragraph 7 provides that the fact that a company which is a resident of one Covered Jurisdiction either controls or is controlled by a company which is a resident of the other Covered Jurisdiction, or which is a resident of any Jurisdiction and carries on business in that other Covered Jurisdiction, does not automatically render either company a permanent establishment of the other.
Article 4. Taxation of Insurance Enterprises
This Article provides rules for the taxation by a Covered Jurisdiction of income derived by a resident of the other Jurisdiction from carrying on the business of insurance in the first-mentioned Jurisdiction.
Paragraph 1 provides that the business profits of an enterprise of insurance of a Covered Jurisdiction derived from carrying on the business of insurance (including insubstantial amounts of income incidental to such business) shall not be taxable in the other Covered Jurisdiction unless the enterprise carries on or has carried on business in the other Jurisdiction through a permanent establishment situated therein. The term “permanent establishment” is defined in Article 3 (Permanent Establishment). If the enterprise of insurance does have a permanent establishment in the other Covered Jurisdiction, that Jurisdiction may tax that portion of the enterprise’s business profits which is attributable to the permanent establishment. Paragraph 1 also contains the traditional “savings clause” under which the United States reserves the right to tax its residents, as determined under Article 2 (Residence), and its citizens as if the Convention had not come into effect.
Paragraph 2 provides that the profits to be attributed to the permanent establishment itself are those which it might be expected to make it it were a distinct and independent enterprise engaged in the same or similar activities under the same or similar conditions. The term profits “attributable to” a permanent establishment means that the limited “force-of-attraction” rule of Code section 864(c)(3) does not apply for U.S. tax purposes under the Convention. Profits may, however, be from sources within or without a Covered Jurisdiction and be “attributable to” a permanent establishment. Thus, items of income described in section 864(c)(4)(C) of the Code which are attributable to a permanent establishment in the United States of an enterprise of insurance are subject to tax by the United States.
Paragraph 2 also provides that in computing the business profits of a permanent establishment, there shall be allowed as deductions (for purposes of tax other than the excise tax imposed on premiums paid to foreign insurers) those expenses incurred for the purposes of the permanent establishment, whether incurred in the Jurisdiction where the permanent establishment is situated or elsewhere. Deductible expenses include a reasonable allocation to the permanent establishment of administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise. For purposes of the excise tax imposed on premiums paid to foreign insurers, the business profits of an enterprise of insurance means the gross premiums paid to the enterprise.
Paragraph 2 also provides that the same method for determining the profits attributable to a permanent establishment shall be used each year unless there is good and sufficient reason to change. In the United States, such a change may be a change of accounting method requiring the approval of the Internal Revenue Service.
Paragraph 2 further provides that where business profits include dividends, interest, royalties, gains, or compensation for services beneficially owned by a resident of a Covered Jurisdiction, Article 4 shall not affect the taxation of such items by the other Covered Jurisdiction unless the items are attributable to a permanent establishment of such beneficial owner in such other Jurisdiction.
Paragraph 3 ensures that the source basis tax benefits granted by a Covered Jurisdiction pursuant to the Convention are ultimately enjoyed by the intended beneficiariesthe residents of the other Covered Jurisdictionand not by residents of third Jurisdictions not having a substantial business and tax nexus with the other Jurisdiction.
The first sentence of paragraph 3 provides the general rule, subject to the exception in paragraph 4 as described below, that a resident of a Covered Jurisdiction which derives income from the other Covered Jurisdiction is not entitled to relief from taxation in such other Jurisdiction under Article 4 if either of two conditions is present:
(1) Treaty benefits will not be granted if 50 percent or less of the beneficial interest in the resident is owned, directly or indirectly, by any combination of one or more individual residents of the United States or Bermuda or U.S. citizens. In other words, the treaty benefits will not be granted unless more than 50 percent of the beneficial interest in the resident is owned, directly or indirectly, by any combination of individual residents of the Covered Jurisdictions or U.S. citizens. For purposes of this test, the United States will not treat any individual as owning an interest “indirectly” through an intermediary entity if the evidence of and rights to the ownership of any interest in such intermediary entity are in bearer form.
(2) Treaty benefits will also not be granted if the income of the resident is used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet liabilities to, persons who are neither residents of the United States or Bermuda nor U.S. citizens. The term “disproportionate distributions” means distributions made with respect to beneficial ownership interests which are disproportionate to such interests. The term “liabilities” refers to payments which reduce gross premiums or are deductible against gross income, and it includes liabilities for interest, royalties, and other expenses, including premiums paid in connection with reinsuring risks. It does not, however, include liabilities, whether for interest or other expenses, which meet the definition of “insurance obligations” contained in Article 1 (General Definitions). The term “substantial” is not defined. If, however, the sum of (i) the ratio which reinsurance premium payments bears to gross premiums less return premiums and (ii) the ratio which payments of other liabilities bears to (a) gross premiums less return premiums and less reinsurance premium payments plus (b) gross income from all other activities, is no more than 50 percent, such payments will not generally be considered “substantial”; provided, however, that in appropriate circumstances a lower aggregate percentage will be considered “substantial”.
Paragraph 3 also provides for competent authority consultation with respect to the denial of benefits in any particular case if the competent authority of the Jurisdiction of residence of the person which has been denied benefits so requests. This provision does not require prior agreement of the competent authorities before benefits may be denied.
Paragraph 4 contains an exception to the general denial of benefits rules of paragraph 3. A company which is a resident of a Covered Jurisdiction and which would not be entitled to benefits by virtue of paragraph 3 would, under paragraph 4, be entitled to the benefits of Article 4 if there is substantial and regular trading in its principal class of shares on a recognised stock exchange. A recognised stock exchange is defined to mean: (1) the NASDAQ System, owned by the National Association of Securities Dealers, Inc.; (2) any stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934; and (3) and other stock exchange which the competent authorities may agree is a recognised exchange.
Paragraph 5 provides that no provision of the Convention shall limit the application of any internal law provisions in either Covered Jurisdiction designed to place transactions between related enterprises on an arm’s-length basis. Thus, the Convention doe not limit the right of the United States to apply section 482 of the Code.
Paragraph 6 identifies the existing taxes to which Article 4 applies. In the United States, these taxes are the Federal income taxes imposed by the Code, but excluding the accumulated earnings tax (Code section 531) and the personal holding company tax (Code section 541). Paragraph 6 also covers the U.S. excise taxes on insurance premiums paid to foreign insurers; provided. however, that such excise taxes are covered only to the extent that risks covered by the premiums are not reinsured with a person not entitled to relief from such taxes under this or any other U.S. Convention. Paragraph 6 further provides that Article 4 shall also apply to any taxes Imposed by the United States subsequent to July 11, 1986 which are identical or substantially similar to the taxes existing on that date and covered by the Article. Paragraph 6 does not apply to any existing taxes in Bermuda. If, however, Bermuda should impose any taxes which are identical or substantially similar to the existing U.S. taxes to which the Article applies, those Bermudian taxes would be covered by the Article to the same extent as the existing U.S. taxes. The competent authorities agree to notify each other of any significant changes in their respective tax laws and of any official published material relating to the application of the Convention, including this technical explanation.
Paragraph 7 provides that a Covered Jurisdiction may not impose more burdensome taxes on a permanent establishment in that Jurisdiction of an enterprise of insurance of the other Covered Jurisdiction than the first-mentioned Jurisdiction Imposes on its own enterprises of insurance carrying on the same activities. The paragraph clarifies that the basic rule of the preceding sentence is not to be construed as obliging a Covered Jurisdiction to grant to residents of the other Covered Jurisdiction any personal allowances, reliefs, and tax reductions on account of civil status or family responsibilities which it grants to its own residents.
Notwithstanding the prohibition against discriminatory taxation with respect to permanent establishments, paragraph 7 also provides that it shall not be construed to prevent the United States from imposing an additional tax, such as the branch profits tax, on the income of a permanent establishment maintained by a resident of Bermuda in the United States.
Paragraph 7 also prohibits discrimination in the matter of deductions. Interest, royalties, and other disbursements paid by a resident of a Covered Jurisdiction to an enterprise of insurance of the other Covered Jurisdiction must be deductible disbursements for determining taxable profits of such resident in the first-mentioned Covered Jurisdiction as if they had been paid to an enterprise of insurance of such first-mentioned Jurisdiction. An exception to this rule applies where the provisions of paragraph 5 of Article 4, relating to associated enterprises, apply. The term “other disbursements” includes a reasonable allocation of executive and general administrative expenses, research and development expenses, and other expenses incurred for the benefit of a group of related enterprises.
The non-discrimination rules of paragraph 7 apply to taxes which are identified in paragraph 6 as the taxes to which Article 4 applies.
Article 5. Mutual Assistance in Tax Matters
This Article provides that the competent authorities shall provide assistance as appropriate in carrying out the domestic laws concerning taxation. The scope of Article S is limited to assistance relating to the domestic tax laws of the Covered Jurisdictions. The text of Article 5 is quite brief, but a number of provisions in the note contain further details as to the obligation to provide assistance. The provisions of the Note have the same force in law as the Convention provisions themselves. Unless otherwise indicated, references in this explanation are to the provisions of the Convention.
The first sentence of Article 5 provides that the competent authorities of the Covered Jurisdictions shall provide assistance as appropriate in carrying out the laws of the respective Covered Jurisdictions relating to the prevention of tax fraud and the evasion of taxes. The term “tax fraud” is intended to include civil tax fraud, and the term “evasion of taxes” is intended to refer to all tax crimes.
The second sentence provides that the competent authorities shall, through consultations, develop appropriate conditions, methods, and techniques for providing, and shall thereafter provide, assistance as appropriate in carrying out the fiscal laws of the respective Covered Jurisdictions other than those relating to tax fraud and the evasion of taxes. This sentence is intended to apply to all civil tax matters other than tax fraud.
The assistance to be provided under this Article shall particularly include the provision of information relating to tax matters. The information to be provided shall not be limited to information relating to persons resident in either of the two Covered Jurisdictions (Note, paragraph 4).
The Covered Jurisdictions have agreed that, if specifically requested by a competent authority of one Covered Jurisdiction, the competent authority of the other Covered Jurisdiction shall provide information in specified forms to be admissible in judicial proceedings of the requesting Jurisdiction (Note, paragraph 6). The specified forms include depositions of witnesses and authenticated copies of original documents (including books, papers, statements, records, accounts, and writings), but only to the extent that such depositions and documents can be obtained under the laws and administrative practices of the requested Jurisdiction. It is intended that, in appropriate cases, the United States be permitted to conduct depositions in Bermuda. Bermuda has enacted legislation which authorizes its competent authority to provide information pursuant to the Convention in the form of depositions of witnesses and authenticated copies of documents to the extent authority exists under Bermuda’s laws and administrative practices to make depositions and authenticate copies (U.S.A. Bermuda Tax Convention Act 1986, enacted August 29, 1986 (the “Bermuda Act”)).
It is intended that the competent authorities of the Covered Jurisdictions use any powers available to them under their domestic law, including compulsory measures, to obtain information which is requested under the Convention. The recently enacted Bermuda Act confirms that the competent authority of Bermuda shall use such powers to implement Bermuda’s information obligations under the Convention.
Where documents, records, or other materials are in the custody of a resident of Bermuda and are located in Bermuda, the United States shall, where practicable, request assistance of the competent authority of Bermuda pursuant to the provisions of the Convention before resulting to unilateral compulsory measures to obtain such information (Note, paragraph 7).
In cases where the United States requests information with respect to a matter which does not constitute a U.S. criminal or tax fraud investigation, it is intended that a senior official designated by the Secretary of the Treasury shall certify such request as being relevant to and necessary for the determination of the tax liability of a U.S. taxpayer, or the criminal tax liability of a person under the laws of the United States (Note, paragraph 4). It is currently intended that this official be a senior official in the Internal Revenue Service, the Assistant Commissioner (International).
In cases where the United States requests information with respect to a matter, whether civil or criminal, which relates to a person not resident in the United States or Bermuda, it is also intended that a senior official designated by the Secretary of the Treasury shall certify such request as being relevant to and necessary for the determination of the tax liability of a U.S. taxpayer, or the criminal tax liability of a person under the laws of the United States (Note, paragraph 4). In addition, the U.S. competent authority shall establish to the satisfaction of the competent authority of Bermuda that such assistance is necessary for the proper administration of the fiscal laws of the United States. Where such necessity has been duly established, the competent authorities shall consult as to the appropriate form of the assistance to be provided (Note, paragraph 4)
The United States has agreed, based upon the information exchange provisions of the Convention and the Note, that the Secretary of the Treasury or his delegate Will be prepared, upon the entry upon into force of the Convention, to certify Bermuda for purposes of section 927(e)(3) of the Code such that a company organized under the laws of Bermuda say qualify as a foreign Sales Corporation (FSC) (Note, paragraph 11). The United States has also agreed that, upon entry into force of the Convention, the Secretary of the Treasury or his delegate will be prepared to execute on behalf of the United States Government an executive agreement satisfying the requirements of section 274(h)(6)(C) of the Code, which would incorporate by reference the provisions of Articles S and 6 of the Convention and of the Note, and would allow persons incurring expenses for attending business conventions in Bermuda to claim deductions for such expenses as though Bermuda were included as part of the “North American area” (Note, paragraph 11).
The parties have agreed that the provisions of Article 5 shall not impose on Bermuda the obligation to provide information which, in the hands of the person from whom the information is sought, is subject to the common lay solicitor-client privilege in Bermuda (Note, paragraph 5).
As of the date of signature of the Convention, Bermuda did not have in force any taxation laws which would serve as the basis for a request for assistance under the Convention.
Article 6. Confidentiality
This Article provides that the assistance provided (including the information exchanged) pursuant to the provisions of Article S (Mutual Assistance in Tax Matters) shall be treated as confidential in the same manner as such matters or items would be under the domestic laws of the Covered Jurisdiction requesting the assistance. Thus, the limitations on disclosure of any tax return or return information under section 6103 of the Code shall apply to information received from Bermuda. The Convention provides, in addition, that the disclosure and use of such information shall be limited in the United States to those 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, taxes. In Bermuda, information can be disclosed only to the Minister of finance or his delegate. The persons to whom information is disclosed in either Jurisdiction may use such information only for purposes of the assessment, collection, or administration of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, taxes. Such information may be disclosed in public court proceedings or public decisions, but shall not be disclosed to any country other than one of the Covered Jurisdictions for any purpose.
The provisions of Article 6 authorise the U.S. competent authority to allow access to information to persons involved in the administration of taxes covered in the Convention. Such person include legislative bodies involved in the administration of taxes and their agents, such as, for example, the General Accounting Office (GAO), when the GAO is engaged in a study of the administration of U.S. tax laws pursuant to a directive of Congress. The secrecy requirements of Article 6 must, however, be met. Also, matters that are the subject of assistance under the Convention but that are made public in accordance with the Convention shall not be further subject to Article 6 (Note, paragraph 9).
Article 7. Entry Into Force and Termination
Paragraph 1 provides that the Convention be subject to ratification in accordance with the applicable procedures of each party, and that the instruments of ratification be exchanged as soon as possible. The parties intend that instruments of ratification not be exchanged until Bermuda has enacted such legislation as may be required to implement the provisions of the Convention. The Bermuda Act meets this requirement.
Paragraph 2 provides that the Convention will enter into force upon the exchange of instruments of ratification. Once the Convention enters into force it shall have effect:
1. in respect of excise taxes on insurance premiums paid to foreign insurers, for premiums paid or credited on or after January 1, 1986;
2. in respect of income taxes imposed on the business profits derived by an enterprise of insurance, for such profits derived in taxable years beginning on or after the first day of the calendar year in which the Convention enters into force;
3. in respect of mutual assistance covered by the first sentence of Article 5 (Mutual Assistance in Tax Matters) (i.e., the sentence relating to tax fraud and the evasion of taxes), for taxable years not barred by the statute of limitations of the Covered Jurisdiction requesting such assistance; provided, however, that neither Covered Jurisdiction shall be required by Article 5 to provide such assistance with respect to taxable years beginning prior to January 1, 1977; and
4. in respect of mutual assistance covered by the second sentence of Article 5 and not also described in the first sentence (i.e., the sentence relating to nonfraudulent civil tax matters), for taxable years not barred by the statute of limitations of the Covered Jurisdiction requesting such assistance; provided, however, that neither Covered Jurisdiction shall be required by Article 5 to provide such assistance with respect to:
a. taxable years beginning prior to January 1, 1977; or
b. taxable years beginning prior to the entry into force of the Convention if the provisions of such assistance would cause or result in the breach of an obligation to maintain confidentiality of information under the laws of such Jurisdiction in effect on the date of signature of the Convention.
Thus, for purposes of Article 5 (Mutual Assistance in Tax Matters), Bermuda is not required to provide any information relating to taxable years beginning before January 1, 1977. For any requests involving criminal or civil tax fraud matters, Bermuda is required to provide information pursuant to Article 5 with respect to any taxable years beginning on or after January 1, 1977 (subject to the solicitor-client privilege exception noted above).
With respect to information requests involving nonfraudulent civil tax matters, Bermuda is required to provide information relating to taxable years beginning on or after January 1, 1977 but before the entry into force of the Convention only if the provision of such information would not cause or result in the breach, by the person from whom the information is sought, of any obligation to maintain confidentiality of information pursuant to the laws of Bermuda in existence on July 11, 1986. This protection extends only to information protected by Bermudian statutory and common law. Thus, information properly subject to the Bermudian common law solicitor-client or banker-client privilege would be eligible for such protection. If a taxpayer claims that other categories of information are protected under the common law of Bermuda, it is agreed that the Government of Bermuda will have ouch a claim determined in the courts of Bermuda if the United States so requests.
For requests relating to nonfraudulent civil tax matters arising in taxable years beginning after the entry into force of the Convention, Bermuda would be required to provide any information not protected by the solicitor-client privilege unless:
1. the documents or information sought was created in or derived from periods prior to the entry into force of the Convention;
2. the provision of such assistance would require Bermuda to cause the person from whom such documents or information is sought to breach a legal obligation to maintain confidentiality of such documents or information, properly asserted by such person under the laws of Bermuda as in effect on July 11, 1986; and
3. such documents or information is not of a kind that has a continuing operational effect (Note, paragraph 5(iv)).
However, the Note provides that if such pre-existing documentation is relevant to a request involving a post-effective date taxable year and does have a continuing operational effect, it will be subject to information exchange under the Convention. For example, if assistance is requested with respect to a taxpayer’s bank transactions occurring after the entry into force of the Convention and the signature card for the account in question was executed prior to the entry into force of the Convention, Bermuda’s obligation to provide assistance with respect to such a signature card would not be affected by confidentiality restrictions. Similarly, if a taxpayers depreciation deduction for a year after entry into force of the Convention is under examination, Bermuda’s obligation to provide assistance with respect to information about the purchase price of the property in question, if such property was acquired before the entry into force of the Convention, would not be affected by any confidentiality restrictions of Bermudian law.
Paragraph 2 provides that the Convention shall remain in force indefinitely unless terminated by one of the parties. Either party may terminate the Convention by giving notice to the other party on or after June 30 of the year following the calendar year in which the Convention enters into force. In that event, the Convention shall terminate on the first day of the seventh full calendar month following that in which the notice is given.