THE PRESIDENT OF THE
TRANSMITTING CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE REPUBLIC OF ESTONIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME, SIGNED AT WASHINGTON ON JANUARY 15, 1998
LETTER OF SUBMITTAL
DEPARTMENT OF STATE, Washington,
May 15, 1998.
The White House.
THE PRESIDENT: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, the Convention Between the United States of America and the Republic of Estonia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Washington on January 15, 1998 (“the Convention”).
This Convention will be the first such Convention between the United States of America and the Republic of Estonia. This Convention is similar to the tax treaties between the United States and OECD nations. It provides for maximum rates of tax to be applied to various types of income, protection from double taxation of income, exchange of information, and contains rules making its benefits unavailable to persons that are engaged in treaty shopping. The proposed withholding rates, while in some respects higher than those in the U.S. model, are the same as those in many other Estonian tax treaties. Like other U.S. tax conventions, this Convention provides rules specifying when income that arises in one of the countries and is attributable to residents of the other country may be taxed by the country in which the income arises (the “source” country).
In many respects, the rates under the new Convention are the same as those in many recent U.S. tax treaties, including some with OECD countries. Pursuant to Article 10, dividends from direct investments are subject to tax by the source country at a rate of five percent. The threshold criterion for direct investment is ten percent, consistent with other modern U.S. treaties, in order to facilitate direct investment. Other dividends are generally taxable at 15 percent. Under Article 12, royalties for the use of industrial, commercial, or scientific equipment derived and beneficially owned by a resident of a Contracting State are subject to a five-percent tax by the source country; all other royalties are subject to tax at a maximum rate of ten percent.
Under Article 11 of the proposed Convention, interest arising in one Contracting State and owned by a resident of the other Contracting State is subject to taxation by the source country at a maximum rate of ten percent. However, interest earned on trade credits and on government debt, including debt guaranteed by government agencies, is exempt from taxation by the source country.
The reduced withholding rates described above do not apply if the beneficial owner of the income is a resident of one Contracting State who carries on business in the other Contracting State in which the income arises and the income is attributable to a permanent establishment or fixed base. If the income is attributable to a permanent establishment, it will be taxed as business profits, and, if the income is attributable to a fixed base, it will be taxed as independent personal services.
The maximum rates of withholding tax described in the preceding paragraphs are subject to the standard anti-abuse rules for certain classes of investment income found in other U.S. tax treaties and agreements.
The taxation of capital gains, described in Article 13 of the Convention, generally follows the rule of recent U.S. tax treaties, the U.S. model and the OECD model. Gains on real property are taxable in the country in which the property is located, and gains from the sale of personal property are taxed only in the State of residence of the seller, unless attributable to a permanent establishment or fixed base in the other State.
Article 7 of the proposed Convention generally follows the standard rules for taxation by one country of the business profits of a resident of the other. The non-residence country’s right to tax such profits is generally limited to cases in which the profits are attributable to a permanent establishment located in that country. The source country may, however, tax sales or activities as though they were performed by a permanent establishment if it is ascertained that such activities were structured with the intent to avoid taxation in the State in which the permanent establishment is situated. As do all recent U.S. treaties, this Convention preserves the right of the United States to impose its branch taxes in addition to the basic corporate tax on a branch’s business.
Consistent with U.S. treaty policy, Article 8 of the proposed Convention permits only the country of residence to tax profits from international carriage by ships or aircraft and income from the use, maintenance, or rental of containers used in international traffic. This reciprocal exemption also extends to income from the rental of ships and aircraft if the rental income is incidental to income from the operation of ships and aircraft in international traffic. However, income from the international rental of ships and aircraft that is non-incidental to operation of ships and aircraft is taxed at the rate of five percent as a royalty paid for the use of the equipment.
The taxation of income from the performance of personal services under Articles 14 through 17 of the new Convention is essentially the same as that under recent U.S. treaties with OECD countries.
Article 22 of the proposed Convention contains significant anti-treaty-shopping rules making its benefits unavailable to persons engaged in treaty-shopping.
The proposed Convention also contains rules necessary for its administration, including rules for the resolution of disputes under the Convention and for exchange of information (Article 26). The Convention would permit the General Accounting Office and the tax-writing committees of Congress to obtain access to certain tax information exchanged under the Convention for use in their oversight of the administration of U.S. tax laws.
This Convention is subject to ratification. In accordance with the provisions of Article 28, it will enter into force when the Governments notify each other through diplomatic channels that their constitutional requirements for entry into force have been met. They will have effect for payments made or credited on or after the first day of January following entry into force with respect to taxes withheld by the source country; with respect to other taxes, the Convention will take effect for taxable periods beginning on or after the first day of January following the date on which the Convention enters into force.
The proposed Convention (like those with Latvia and Lithuania) provides at Article 28 that the appropriate authorities of the two Contracting States will meet within five years to discuss the application of the proposed Convention to income derived from new technologies.
The proposed Convention will remain in force indefinitely unless terminated by one of the Contracting States, pursuant to Article 29. That Article provides that either State may terminate the Convention by giving prior notice through diplomatic channels at least six months before the end of any calendar year.
The Department of the Treasury and the Department of State cooperated in the negotiation of the Convention. It has the full approval of both Departments.
LETTER OF TRANSMITTAL
THE WHITE HOUSE,
June 26, 1998.
To the Senate of the United States:
I transmit herewith for Senate advice and consent to ratification the Convention Between the United States of America and the Republic of Estonia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Washington on January 15, 1998. Also transmitted is the report of the Department of State concerning the Convention.
This Convention, which is similar to tax treaties between the United States and OECD nations, provides maximum rates of tax to be applied to various types of income and protection from double taxation of income. The Convention also provides for resolution of disputes and sets forth rules making its benefits unavailable to residents that are engaged in treaty shopping.
I recommend that the Senate give early and favorable consideration to this Convention and that the Senate give its advice and consent to ratification.
WILLIAM J. CLINTON.