MESSAGE FROM THE PRESIDENT OF THE UNITED STATES TRANSMITTING CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS, SIGNED AT DUBLIN ON JULY 28, 1997, TOGETHER WITH A PROTOCOL AND EXCHANGE OF NOTES DONE ON THE SAME DATE
LETTER OF SUBMITTAL
DEPARTMENT OF STATE,
Washington, August 19, 1997.
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 Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed at Dublin on July 28, 1997, (“the Convention”) together with a Protocol and an exchange of notes done on the same date, which, in each case provides binding interpretations and understandings concerning the application of the Convention.
This Convention will replace the existing Convention Between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation and the prevention of Fiscal Evasion with Respect to Taxes on Income signed at Dublin on September 13, 1949. The new Convention maintains many provisions of the existing convention, but it also provides certain additional benefits and updates the text to reflect current tax treaty policies.
This Convention is similar to the tax treaties between the United States and other 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.
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 most respects, the rates under the new Convention are the same as those in many recent U.S. tax treaties with OECD countries.
The maximum rates of tax that may be imposed on dividend and royalty income are generally the same as in the current U.S.-Ireland treaty. 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 has been reduced from 95 percent ownership of the equity of a firm to 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 derived and beneficially owned by a resident of a Contracting State are generally taxable only in that State.
As in the current convention, under Article 11 of the proposed Convention, interest arising in one Contracting State and owned by a resident of the other Contracting State is exempt from taxation by the source country. The restrictions on the taxation of royalty and interest income do not apply, however, 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 in that State. In that situation, the income is to be considered either business profit or income from 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 as well as 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 new 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 present convention grants taxing rights that are in some respects broader and in others narrower than those found in modern treaties.
As do all recent U.S. treaties, this Convention preserves the right of the United States to impose its branch profits tax in addition to the basic corporate tax on a branch’s business (Article 7). This tax, which was introduced in 1986, is not addressed under the present treaty. Paragraph 4 of the Protocol also accommodates a provision of the 1986 Tax Reform Act that attributes to a permanent establishment income that is earned during the life of the permanent establishment but is deferred and not received until after the permanent establishment no longer exists.
Consistent with U.S. treaty policy, Article 8 of the new 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.
Article 21 of the proposed Convention provides special thresholds to determine when income derived in connection with the offshore exploration for, and exploitation of, natural resources may be taxed in the source country. The general rule of Article 21 is that all exploitation activities give rise to a permanent establishment while exploration activities create a permanent establishment only if they continue for a period of 120 days in a twelve-month period. Article 21 also provides that salaries and other remuneration of a resident of one Contracting State derived from an employment in connection with offshore activities carried on through a permanent establishment in the other may be taxed by the other State. Other U.S. treaties with countries bordering on the North Sea (e.g., Norway, the United Kingdom, and the Netherlands) have similar articles dealing with offshore activities.
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 other recent U.S. treaties with OECD countries. Unlike many U.S. treaties, however, the new Convention, at Article 18, provides for the deductibility of cross-border contributions by temporary residents of one State to pension plans registered in the other State under limited circumstances.
Article 23 of the new Convention contains significant anti-treaty-shopping rules making its benefits unavailable to persons engaged in treaty-shopping. The current convention contains no such anti-treaty- shopping rules. The Limitation on Benefits of the proposed Convention also eliminates another potential abuse by denying U.S. benefits with respect to income attributable to third-country permanent establishments of Irish corporations that are exempt from tax in Ireland by operation of Irish law (the so-called “triangular cases”). Under the new Convention, full U.S. treaty benefits generally will be granted in these triangular cases only when the U.S. source income is subject to a significant level of tax in Ireland or in the country in which the permanent establishment is located.
The proposed Convention also contains rules necessary for its administration, including rules for the resolution of disputes under the Convention (Article 26) and for exchange of information (Article 27).
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 Article 29, it will enter into force upon the exchange of instruments of ratification and 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. When the present convention affords a more favorable result for a taxpayer than the proposed Convention, the provisions of the present convention will continue to apply for one additional year. Article 29 (5) also provides that certain companies that are owned by residents of member states of the European Union or of parties to the North American Free Trade Agreement not be subject to the terms of Article 23 (5) (b) for an additional two years.
The proposed Convention will remain in force indefinitely unless terminated by one of the Contracting States, pursuant to Article 30. That Article provides that, at any time after five years from the date the Convention enters into force, either State may terminate the Convention by giving prior notice through diplomatic channels of six months.
A Protocol and an exchange of notes accompany the Convention and provide binding interpretations and understandings concerning the application of the Convention. The Protocol, which states that it is an integral part of the Convention, elaborates on the meaning of certain terms used in the Convention. The exchange of notes provides further clarification and will constitute an agreement that will enter into force upon entry into force of the Convention.
A technical memorandum explaining in detail the provisions of the Convention will be prepared by the Department of the Treasury and will be submitted separately to the Senate Committee on Foreign Relations.
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,
September 24, 1997.
To the Senate of the United States:
I transmit herewith for Senate advice and consent to ratification the Convention Between the Government of the United States of America and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed at Dublin on July 28, 1997, (the “Convention”) together with a Protocol and an exchange of notes done on the same date. 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 other 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, with its Protocol and exchange of notes, and that the Senate give its advice and consent to ratification.
WILLIAM J. CLINTON.