Report text available as:

  • TXT
  • PDF   (PDF provides a complete and accurate display of this text.) Tip ?
104th Congress                                              Exec. Rept.
                                 SENATE

 2d Session                                                      104-34
_______________________________________________________________________


 
                 INCOME TAX CONVENTION WITH KAZAKHSTAN

                                _______
                                

               September 25, 1996.--Ordered to be printed

_______________________________________________________________________


   Mr. Helms, from the Committee on Foreign Relations, submitted the 
                               following

                              R E P O R T

 [To accompany Treaty Doc. 103-33, Treaty Doc. 104-15, and Exchange of 
              Notes dated June 16 and 23, 1995 (EC-1431)]

    The Committee on Foreign Relations, to which was referred 
the Convention Between the Government of the United States of 
America and the Government of the Republic of Kazakhstan for 
the Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income and Capital, with 
Protocol, signed at Almaty on October 24, 1993, and two related 
exchanges of notes dated August 1 and September 7, 1994, and 
August 15 and September 7, 1994; an exchange of notes dated at 
Washington July 10, 1995 relating to such convention and 
protocol; and an exchange of notes dated June 16 and 23, 1995, 
having considered the same, reports favorably thereon, without 
amendment, and recommends that the Senate give its advice and 
consent to ratification thereof, subject to a proviso.

                               I. Purpose

    The principal purposes of the proposed income tax treaty 
between the United States and Kazakhstan are to reduce or 
eliminate double taxation of income earned by residents of 
either country from sources within the other country, and to 
prevent avoidance or evasion of the income taxes of the two 
countries. The proposed treaty is intended to promote close 
economic cooperation and facilitate trade and investment 
between the two countries. It also is intended to enable the 
two countries to cooperate in preventing avoidance and evasion 
of taxes.

                             II. Background

    The proposed treaty and the proposed protocol were both 
signed on October 24, 1993. Two related exchanges of notes were 
dated August 1 and September 7, 1994 and August 15 and 
September 7, 1994. In addition, there was an exchange of notes 
dated July 10, 1995, and an exchange of notes dated June 16 and 
23, 1995. Currently, the United States and Kazakhstan adhere to 
the provisions of a tax treaty signed June 20, 1973 between the 
Soviet Union and the United States (the ``USSR treaty''). The 
proposed treaty replaces the USSR treaty with respect to 
Kazakhstan.
    The proposed treaty, together with the related protocol and 
the two related exchanges of notes, was transmitted to the 
Senate for advice and consent to its ratification on September 
19, 1994 (see Treaty Doc. 103-33). The exchange of notes dated 
July 10, 1995 was transmitted to the Senate for advice and 
consent to its ratification on August 3, 1995 (see Treaty Doc. 
104-15). The exchange of notes dated June 16 and 23, 1995 was 
transmitted to the Senate on September 18, 1995 (see EC-1431). 
The Committee on Foreign Relations held a public hearing on the 
proposed treaty on June 13, 1995.

                              III. Summary

In general

    As in other U.S. tax treaties, the principal objectives of 
the proposed income tax treaty generally are achieved by each 
country agreeing to limit, in certain specified situations, its 
right to tax income derived from its territory by residents of 
the other. For example, the treaty contains the standard treaty 
provisions that neither country will tax business income 
derived from sources within that country by residents of the 
other country unless the business activities in the taxing 
country are substantial enough to constitute a permanent 
establishment or fixed base (Articles 6 and 14). Similarly, the 
treaty contains the standard ``commercial visitor'' exemptions 
under which residents of one country performing personal 
services in the other will not be required to pay tax in the 
other unless their contact with the other exceeds specified 
minimums (Articles 14-16). The proposed treaty provides that 
dividends, interest, and royalties derived by a resident of 
either country from sources within the other country generally 
may be taxed by both countries (Articles 10-12). Generally, 
however, dividends, interest, and royalties received by a 
resident of one country from sources within the other country 
are to be taxed by the source country on a restricted basis 
(Articles 10-12).
    In situations where the country of source retains the right 
under the proposed treaty to tax income derived by residents of 
the other country, the treaty generally provides for the relief 
of the potential double taxation by the country of residence 
allowing a foreign tax credit (Article 23).
    The treaty contains the standard provision (the ``saving 
clause'') contained in U.S. tax treaties that each country 
retains the right to tax its citizens and residents as if the 
treaty had not come into effect (Article 1). In addition, the 
treaty contains the standard provision that the treaty will not 
be applied to deny any taxpayer any benefits he would be 
entitled to under the domestic law of the country or under any 
other agreement between the two countries (Article 1); that is, 
the treaty will only be applied to the benefit of taxpayers.

Summary of treaty provisions

    The proposed treaty is similar to other U.S. income tax 
treaties, the 1981 U.S. model treaty (the ``U.S. 
model''),1 and the model income tax treaty of the 
Organization for Economic Development (the ``OECD model''). 
However, the proposed treaty contains certain deviations from 
those models. It also differs in significant respects from the 
USSR treaty. (That treaty predates the 1981 U.S. model treaty 
and was not representative of U.S. treaty policy.) A summary of 
the provisions of the proposed treaty and the proposed 
protocol, including some of these differences, follows:
---------------------------------------------------------------------------
    \1\ The Treasury Department has withdrawn the U.S. model from use 
as a model treaty. Accordingly, its provisions may no longer represent 
the preferred position for U.S. treaty negotiations. Comparison of the 
provisions of the proposed treaty against the provisions of the U.S. 
model should be considered in the context of the provisions of 
comparable recent U.S. treaties with other countries. The Treasury 
Department's new model, released on September 20, 1996, was released 
too late for consideration by the Committee in connection with the 
proposed treaty.
---------------------------------------------------------------------------
    (1) Like all treaties, the proposed treaty is limited by a 
``saving clause'' (Article 1(3)), under which the treaty is not 
to affect (subject to specific exceptions) the taxation by 
either treaty country of its residents or its nationals. 
Exceptions to the saving clause are similar to those in the 
U.S. model and other U.S. treaties; the USSR treaty, in 
contrast, flatly states that it shall not restrict the right of 
a treaty country to tax its own citizens.
    (2) The U.S. excise tax on insurance premiums paid to a 
foreign insurer is not a covered tax; that is, the proposed 
treaty does not preclude the imposition of the tax on insurance 
premiums paid to Kazakhstani insurers (Article 2). This is a 
departure from the USSR treaty and the U.S. model tax treaty, 
but one that is shared by many U.S. treaties, including recent 
ones. In addition, the proposed treaty, like the model treaty 
but unlike the USSR treaty, does not contain a general 
prohibition on source country taxation of reinsurance premiums 
derived by a resident of the other country. Nor does the 
proposed treaty contain the provision of the USSR treaty under 
which, if the income of a resident of one country is tax-exempt 
in the other country, the transaction giving rise to that 
income is exempt from any tax that is or may otherwise be 
imposed on the transaction.
    (3) Like the U.S. model but unlike the USSR treaty, the 
proposed treaty generally does not cover U.S. taxes other than 
income taxes, although it does cover taxes on property. Nor 
does the proposed treaty cover the accumulated earnings tax, 
the personal holding company tax, and social security taxes.
    (4) The proposed treaty makes it clear that each country 
includes its territorial sea, and also the economic zone and 
continental shelf in which certain sovereign rights and 
jurisdiction may be exercised in accordance with international 
law (Article 3).
    (5) By contrast with the USSR treaty, but like the U.S. 
model, U.S. citizens are entitled to treaty benefits regardless 
of actual residence in a third country. In addition, the 
proposed treaty introduces rules for determining when a person 
is a resident of either the United States or Kazakhstan, and 
hence entitled to benefits under the treaty (Article 4). The 
proposed treaty, like the model, provides tie-breaker rules for 
determining the residence for treaty purposes of ``dual 
residents,'' or persons having residence status under the 
internal laws of each of the treaty countries.
    (6) Article 5 of the proposed treaty introduces the 
permanent establishment threshold for one country's imposition 
of tax on the business profits of a resident of the other 
country, in conformity with the U.S. and OECD model treaties. 
This replaces the concept of a ``representation'' used in the 
USSR treaty.
    (7) Under the U.S. model treaty, a building site or 
construction or installation project, or an installation or 
drilling rig or ship used for the exploration or exploitation 
of natural resources, constitutes a permanent establishment 
only if it lasts more than 12 months. The corresponding rule in 
the proposed treaty is the same. Under the USSR treaty, the 
source country is prohibited from taxing the income of a 
resident of the other country from furnishing engineering, 
architectural, designing, and other technical services in 
connection with an installation contract with a resident of the 
source country and which are carried out in a period not longer 
than 36 months at one location. The proposed treaty treats as a 
permanent establishment the furnishing of services, including 
consultancy services, within a country for a period of more 
than 12 months.
    (8) The USSR treaty in general imposes no restriction on 
the taxation of income from real property by the country in 
which the property is located. The proposed treaty contains a 
provision similar to the corresponding model treaty provision 
permitting taxation of such income by the country in which the 
real property is located, including the U.S. model treaty 
provision under which investors in real property in the country 
not of their residence must be permitted to elect to be taxed 
on those investments on a net basis (Article 9).
    (9) The business profits article of the U.S. model treaty 
omits the force of attraction rules contained in the Code, 
providing instead that the business profits to be attributed to 
the permanent establishment shall include only the profits 
derived from the assets or activities of the permanent 
establishment. The proposed treaty, on the other hand, contains 
a limited force of attraction rule (Article 6) under which a 
country (the first country) could tax sales in that country by 
a resident of the other country of goods or merchandise of the 
same or similar kind as the goods or merchandise that are sold 
by that person through its permanent establishment in the first 
country and other business activities in that country of the 
same kind as those effected through its permanent 
establishment. This rule is narrower in scope than the Code's 
force of attraction rules.
    (10) The proposed treaty clarifies that a country may tax 
profits or income if the other-country resident carries on ``or 
has carried on'' business, or has ``or had'' a fixed base, in 
that country. Addition of the words ``or has carried on'' and 
``or had'' clarifies that, for purposes of the treaty rules 
stated above, any income attributable to a permanent 
establishment (or fixed base) during its existence is taxable 
in the country where the permanent establishment (or fixed 
base) is situated even if the payments are deferred until after 
the permanent establishment (or fixed base) has ceased to 
exist.
    (11) The proposed treaty provides that expenses incurred 
for the purposes of the permanent establishment are to be 
allowed as deductions from the taxable income of a permanent 
establishment. However, the proposed treaty provides that no 
deductions may be taken in respect of amounts paid by the 
permanent establishment to the head office in the form of 
royalties, fees, or other payments, to the extent that they 
exceed reimbursements of costs incurred by the head office and 
allocable to the permanent establishment.
    (12) The proposed treaty, similar to the model treaty and 
similar in some respects to the USSR treaty, provides that 
income of a resident of one treaty country from the operation 
of ships or aircraft in international traffic is taxable only 
in that country (Article 8). Similar to the model treaty, the 
proposed treaty includes bareboat leasing income in the 
category of income to which this rule applies. Similar to the 
model treaty and unlike the present treaty, the proposed treaty 
provides that income of a treaty-country resident from the use 
or rental of containers and related equipment used in 
international traffic shall be taxable only in that country.
    (13) Article 7 of the proposed treaty corresponds to the 
associated enterprises article in the U.S. model treaty. In 
particular, the proposed treaty contains a ``correlative 
adjustment'' clause, providing that either treaty country must 
correlatively adjust any tax liability it previously imposed on 
a person for income reallocated to a related person by the 
other treaty country. The USSR treaty contains no associated 
enterprises article.
    (14) The USSR treaty generally imposes no restriction on 
the source-country taxation of dividends. The proposed treaty, 
similar to the U.S. model treaty, provides in Article 10 that 
direct investment dividends (i.e., dividends paid to companies 
resident in the other country that own directly at least 10 
percent of the voting shares of the payor) generally will be 
taxable by the source country at a rate no greater than 5 
percent. Other dividends generally are taxable by the source 
country at a rate no greater than 15 percent.
    (15) Like recent U.S. treaties, the proposed protocol 
provides that dividends paid by a U.S. regulated investment 
company (a ``RIC'') are subject to source country taxation at 
the 15-percent limit (paragraph 2(a)). In addition, like some 
recent U.S. treaties, the proposed treaty and proposed protocol 
impose no general restriction on the source country taxation of 
dividends paid by a U.S. real estate investment trust (a 
``REIT'').
    (16) The USSR treaty generally imposes no restriction on 
the U.S. branch profits tax. The proposed treaty, similar to 
U.S. treaties negotiated since 1986, expressly permits the 
United States and Kazakhstan to impose a branch profits tax, 
but at a rate not exceeding 5 percent (Article 10(5)).
    (17) The USSR treaty limits the source-country taxation of 
interest only in the case of interest in connection with the 
financing of trade between the United States and the Soviet 
Union. Unlike the model treaties, the proposed treaty provides 
that interest may be taxed by both treaty countries, rather 
than by the residence country only. Taxation of interest by the 
source country generally is limited by the proposed treaty to a 
rate of 10 percent (Article 11). Certain governmental interest 
is exempt from source-country taxation under the proposed 
treaty. In addition, the proposed treaty provides that income 
from any arrangement, including a debt obligation, carrying the 
right to participate in profits and treated as a dividend by 
the source country according to its internal laws, may be taxed 
by the source country as a dividend. Thus, for example, the 
country of source could withhold tax on deductible interest 
paid under an ``equity kicker'' loan, at rates applicable to 
dividends. There is no similar provision in the U.S. or OECD 
models.
    The proposed protocol (paragraph 3(a)) provides that any 
lower rate of withholding tax on interest agreed to in a treaty 
between Kazakhstan and another OECD country will be applicable 
between the United States and Kazakhstan. The Memorandum of 
Understanding (point 4) clarifies that this modification in the 
applicable withholding-tax rate will be subject to the usual 
ratification processes.
    (18) The proposed treaty permits the United States to 
impose its branch-level interest tax on a permanent 
establishment's ``excess interest amount,'' as defined in U.S. 
law (Article 11(7)). Kazakhstan is permitted under the proposed 
treaty to impose a similar tax.
    (19) The proposed protocol (paragraph 3(c)) provides that 
the interest article in the proposed treaty does not interfere 
with the jurisdiction of the United States to tax under its 
internal law an excess inclusion with respect to a residual 
interest in a real estate mortgage investment conduit (a 
``REMIC''). Currently, internal U.S. law applies regardless of 
treaties that were in force when the REMIC provisions were 
enacted.
    (20) Unlike the model treaties and the USSR treaty, the 
proposed treaty provides that royalties may be taxed by both 
treaty countries, rather than by the residence country only. 
Taxation of royalties by the source country is limited by the 
proposed treaty to a rate of 10 percent (Article 12). Royalties 
generally are defined as payments for the use of certain 
rights, property, or information. Unlike the model treaty, the 
proposed treaty does not treat as royalties gains from the 
alienation of rights or property which are contingent on the 
productivity, use, or further alienation of such right or 
property. The taxation of such gains is governed by the 
proposed treaty's ``Gains'' article, which, in a manner similar 
to the royalties article of the model treaties, generally 
reserves taxing jurisdiction to the residence country (Article 
13).
    (21) Also included in the proposed treaty's definition of 
royalties are payments for the use of, or the right to use, 
industrial, commercial, or scientific equipment. However, the 
proposed treaty provides an election for such equipment rentals 
to be taxed on a net basis, as if attributable to a permanent 
establishment (Article 12(2)).
    (22) The proposed protocol expressly provides in paragraph 
4 that where the treaty limits the right to collect taxes, 
which taxes are nevertheless withheld at source at the rates 
provided for under internal law, refunds will be made in a 
timely manner on application by the taxpayer.
    (23) Both the U.S. model treaty and the proposed treaty 
provide for source-country taxation of capital gains from the 
disposition of property used in the business of a permanent 
establishment in the source country (Article 13(4)). Unlike 
most recent U.S. tax treaties, however, the proposed treaty 
does not specifically provide for source-country taxation of 
such gains where the payments are received after the permanent 
establishment has ceased to exist. The Treasury Department's 
Technical Explanation (hereinafter referred to as the 
``Technical Explanation'') states that, unlike the United 
States, Kazakhstan does not impose tax in that circumstance.
    (24) Both the U.S. model treaty and the proposed treaty 
provide for source-country taxation of capital gains from the 
disposition of real property regardless of whether the taxpayer 
is engaged in a trade or business in the source country. The 
proposed treaty expands the U.S. model treaty definition of 
real property for these purposes to encompass U.S. real 
property interests. This safeguards U.S. tax under the Foreign 
Investment in Real Property Tax Act of 1980, which applies to 
dispositions of U.S. real property interests by nonresident 
aliens and foreign corporations.
    (25) Article 13(3) of the proposed treaty permits a treaty 
country (the first country) to impose its statutory tax on 
gains from the disposition, by a resident of the other country, 
of stock, participation, or other rights in the capital of a 
company or other legal person which is a resident of the first 
country if the recipient of the gain, during the 12-month 
period preceding the disposition, had a direct or indirect 
participation of at least 25 percent in the capital of that 
company or other legal person. Such gains are treated as 
arising in the first country to the extent necessary to avoid 
double taxation. The Committee understands that Kazakhstan has 
enacted such a tax. The proposed protocol provides for 
competent authority consultations regarding the application of 
appropriate rules respecting tax-free reorganizations.
    (26) The proposed treaty exempts all other gains from 
source-country taxation. This includes gains from the 
alienation of ships, aircraft, or containers operated in 
international traffic.
    (27) Article 14 of the proposed treaty provides that income 
derived by a resident of one of the treaty countries from the 
performance of professional or other personal services in an 
independent capacity generally is not taxable in the other 
treaty country unless the services are or were performed in 
that other country and the person either (a) has or had a fixed 
base there regularly available for the performance of his or 
her activities, or (b) is or was present there for more than 
183 days in any 12-month period. In such a case, the other 
country is permitted to tax the income from services performed 
in that country as are attributable to the fixed base.
    (28) The dependent personal services article of the 
proposed treaty (Article 15) is similar to that article of the 
U.S. model. Under the proposed treaty, salaries, wages, and 
other similar remuneration derived by a resident of one treaty 
country in respect of employment exercised in the other country 
is taxable only in the residence country (i.e., is not taxable 
in the other country) if the recipient is present in the other 
country for a period or periods not exceeding in the aggregate 
183 days in the taxable year concerned and certain other 
conditions are satisfied.
    (29) Article 16 of the proposed treaty allows directors' 
fees and similar payments derived by a resident of one treaty 
country for services performed in his or her capacity as a 
member of the board of directors (or another similar organ) of 
a company which is a resident of the other country to be taxed 
in that other country. The U.S. model treaty, on the other 
hand, generally treats directors' fees under other applicable 
articles, such as those on personal service income. Under the 
U.S. model, the country where the recipient resides generally 
has primary taxing jurisdiction over personal service income 
and the source country tax on directors' fees is limited. By 
contrast, under the OECD model treaty (and the proposed 
treaty), the country where the company is resident has full 
taxing jurisdiction over directors' fees and other similar 
payments the company makes to residents of the other treaty 
country, regardless of where the services are performed.
    (30) The proposed treaty omits the U.S. model treaty 
reservation to the source country of jurisdiction to tax an 
entertainer or athlete, residing in the other country, who 
earns more than $20,000 in the source country during a taxable 
year, without regard to the existence of a fixed base or other 
contacts with the source country. Thus, under the proposed 
treaty, the rules applicable to personal service income apply 
to entertainers and athletes.
    (31) The proposed treaty modifies the USSR treaty's rule, 
similar to the U.S. model rule, that compensation paid by a 
treaty country government to one of its citizens for services 
rendered to that government in the discharge of governmental 
functions may only be taxed by that government's country. Under 
Article 17 of the proposed treaty, as under the OECD model 
treaty and other U.S. treaties, such compensation generally may 
only be taxed by the recipient's country of residence, if the 
recipient is a citizen of that country, or (in the case of 
remuneration other than a pension) did not become a resident of 
that country solely for the purpose of rendering the services.
    (32) The proposed treaty, like the U.S. model treaty and 
unlike the USSR treaty, expressly provides for the taxation of 
pensions in general only by the residence country, and for the 
taxation of social security benefits and other public pensions 
not arising from government service only in the source country 
(Article 18). Also like the U.S. model, the proposed treaty 
provides for taxation of annuities and alimony only by the 
residence country, and taxation of child support payments only 
by the source country.
    (33) The USSR treaty, unlike the models, precludes each 
country from taxing a resident of the other country who is 
temporarily present in the first country as a journalist, media 
correspondent, teacher, or researcher; or who is temporarily 
present to participate in an exchange program for 
intergovernmental cooperation in science and technology, or to 
study or gain technical, professional, or commercial 
experience. These exemptions generally extend only to income or 
allowances connected with the purpose of the visit, and only 
for such period as is required to effectuate the purpose of the 
visit, and in no case more than two years in the case of 
teachers and researchers, five years in the case of students, 
and one year in other cases.
    The proposed treaty contains a narrower set of limitations 
on host-country taxation of temporary visitors (Article 19) 
than does the USSR treaty. The limitations do not apply to 
visits for teaching or for journalism. They also do not provide 
an exemption for employment income. The proposed treaty 
prohibits the host country from taxing certain payments from 
abroad for the purpose of the individual's maintenance, 
education, study, research, or training. Temporary presence in 
the host country must be for the purpose of studying at an 
educational institution; training as required to practice a 
profession; or studying or doing research as a recipient of a 
grant from a governmental, religious, charitable, scientific, 
literary, or educational organization. In the last case, the 
proposed treaty prohibits the host country from taxing the 
grant. The exemptions apply no longer than the period of time 
ordinarily necessary to complete the study, training or 
research. Moreover, no exemption for training or research will 
extend for a period exceeding five years. The exemption from 
host country tax does not apply to income from research if the 
research is undertaken for private benefit.
    (34) The proposed treaty contains an ``other income'' 
article which differs fundamentally from the ``other income'' 
article of the U.S. model treaty and more recent U.S. treaties. 
Under the U.S. model, income not dealt with in another treaty 
article generally may be taxed only by the residence country. 
By contrast, Article 20 of the proposed treaty, like, for 
example, the recent U.S.-Mexico treaty, specifies that items of 
income of a resident of a treaty country which are not dealt 
with elsewhere in the treaty and which arise in the other 
treaty country are taxable in the other country.
    (35) The proposed treaty contains a limitation on benefits, 
or ``anti-treaty shopping,'' article similar to the limitation 
on benefits articles contained in recent U.S. treaties and 
protocols and in the branch tax provisions of the Code (Article 
21). The limitation on benefits article in the proposed treaty 
is virtually identical to the corresponding provisions of the 
recent U.S. income tax treaty with the Russian Federation.
    (36) Unlike most U.S. treaties and the model treaties, the 
USSR treaty has no provision providing relief from double 
taxation. In the general case this absence may have little or 
no impact on a U.S. person, as the United States provides 
relief from double taxation by internal law, through the 
foreign tax credit. The proposed treaty provides that each 
country shall allow its residents (and the United States its 
citizens) a credit for income taxes imposed by the other 
country (Article 23). However, such credits need only be in 
accordance with the provisions and subject to the limitations 
of internal law (as it may be amended from time to time without 
changing the general principle that credits must be allowed).
    Paragraph 8(a) of the proposed protocol provides an 
additional credit rule for a U.S. citizen who is a resident of 
Kazakhstan. To such a person Kazakhstan must allow credits even 
for U.S. taxes imposed solely by reason of the person's 
citizenship, but to no greater extent than the Kazakhstani tax 
on income from sources outside Kazakhstan.
    (37) U.S. law allows taxpayers credit for foreign taxes 
only if the foreign taxes are directed at the taxpayer's net 
gain. Thus the sufficiency of deductions allowed under foreign 
law is relevant to the creditability of foreign tax against 
U.S. tax liability. At times, Soviet and Kazakhstani law have 
in effect placed significant restrictions on labor and interest 
cost deductions. The Committee understands that the Kazakhstan 
Tax Code permits the deduction of wage and interest expense. In 
order to assist U.S. taxpayers' ability to take U.S. credits 
for Kazakhstani taxes, Kazakhstan confirms under the proposed 
protocol (paragraph 8) that its law permits certain Kazakhstani 
entities deductions for actual wages paid and for interest 
(whether paid to a bank or another person and without regard to 
the term of the loan). The deductions are limited by 
Kazakhstani law, but only to the extent that such limitation is 
not less than an arm's-length rate (taking into account a 
reasonable risk premium). This confirmation applies to U.S.-
owned entities, to joint ventures with U.S. ownership, and to 
Kazakhstani permanent establishments of U.S. entities. On the 
basis of these required deductions, the proposed protocol 
treats Kazakhstan's taxes as income taxes that are eligible for 
the U.S. foreign tax credit. The Technical Explanation states 
that the United States is not obligated to treat the 
Kazakhstani taxes as eligible for U.S. foreign tax credits in 
the event that these required deductions are denied under 
Kazakhstani law.
    (38) The proposed treaty does not provide for ``tax 
sparing'' or other fictitious credits for taxes forgiven by one 
treaty country to residents of the other country under an 
incentive program. Like some other U.S. treaties, however, 
paragraph 8(d) of the proposed protocol indicates that the 
United States and Kazakhstan will amend the proposed treaty 
(subject to the usual ratification procedures) to provide such 
credits in the event that the United States either amends its 
internal laws to allow such credits or agrees to provide them 
in a tax treaty with any other country.
    (39) Article 24 of the proposed treaty greatly expands the 
nondiscrimination rule in the USSR treaty, in some respects 
conforming it to the U.S. model, and in other respects 
providing additional benefits. The USSR treaty requires 
``national treatment'' to the extent of prohibiting 
discrimination under the laws of one country against citizens 
of the other country resident in the first country. It requires 
``most-favored-nation treatment'' to the extent of prohibiting 
less favorable treatment, under the laws of one country, of 
citizens of the other country resident in the first country, or 
of local representations of residents of the other country, 
than the treatment afforded to third-country citizens and 
representations of third-country residents. The proposed treaty 
also requires both ``national treatment'' to the extent 
required in the U.S. model and a form of ``most-favored-nation 
treatment'' (not taking into account special agreements, such 
as bilateral income tax treaties, with third countries) to be 
applied to citizens and residents of the treaty countries. The 
proposed treaty affords these benefits to citizens of the other 
country in the same circumstances as citizens of the first 
country, regardless of residence; to the local permanent 
establishments of residents of the other country, and to 
enterprises owned by residents of the other country. In 
addition, the proposed treaty prohibits discrimination against 
the deductibility of amounts paid to residents of the other 
country. The Technical Explanation states that, like the U.S. 
model treaty, it was intended that the nondiscrimination rules 
of the proposed treaty apply not only to all national-level 
taxes, but also to all taxes imposed by each country's 
political subdivisions and local authorities.
    (40) Like the U.S. model treaty, and unlike the USSR 
treaty, the proposed treaty makes express provision for the 
competent authorities to mutually agree on topics that arise 
under the proposed treaty, but are not mentioned in the present 
treaty's mutual agreement article, such as the characterization 
of particular items of income, the common meaning of a term, 
the application of procedural aspects of internal law, and the 
elimination of double taxation in cases not provided for in the 
treaty (Article 25).
    (41) Paragraph 9 of the proposed protocol provides for 
competent authority consultations in the event of a change in 
law (or the application thereof) that may eliminate or 
significantly limit a benefit provided by the proposed treaty. 
If the issue cannot be resolved by the competent authorities, 
the proposed treaty is subject to termination under its 
termination provisions, but without regard to the prohibition 
on termination during the first five years after entry into 
force.
    (42) The proposed treaty, like the U.S. treaties with 
Germany, Mexico, and the Netherlands, provides for a binding 
arbitration procedure to be used to settle disagreements 
between the two countries regarding the interpretation or 
application of the treaty (Article 25(5)). The arbitration 
procedure can only be invoked by the agreement of both 
countries. The effective date of this provision is delayed 
until the two countries have agreed that it will take effect, 
to be evidenced by a future exchange of diplomatic notes.
    (43) Unlike some other recent U.S. treaties, the proposed 
treaty does not provide that its dispute resolution procedures 
under the mutual agreement article takes precedence over the 
corresponding provisions of any other agreement between the 
United States and Kazakhstan in determining whether a law or 
other rule is within the scope of the proposed treaty. 
Therefore, under the treaty as proposed, if Kazakhstan accedes 
to the General Agreement on Trade in Services (the ``GATS''), 
tax issues between the United States and Kazakhstan may be 
subject to the dispute resolution procedures of the World Trade 
Organization. This issue is addressed in the exchange of notes 
dated July 10, 1995 which constitutes an agreement that will 
enter into force on the date the treaty enters into force. The 
exchange of notes provides that, in the event the GATS applies 
between the United States and Kazakhstan, the dispute 
resolution procedures under the mutual agreement article of the 
proposed treaty will take precedence.
    (44) While the USSR treaty requires exchanges of 
information only to the extent of providing information about 
changes in internal law, the proposed treaty includes the 
standard exchange of information article, similar to that in 
the U.S. model, which contemplates that each competent 
authority will assist the other in obtaining and transmitting 
information that relates to the assessment, collection, 
enforcement, and prosecution of tax claims against particular 
taxpayers (Article 26). The proposed treaty, like some other 
U.S. treaties, omits the U.S. model provision pledging 
assistance in collecting such amounts as may be necessary to 
ensure that treaty relief does not enure to the benefit of 
persons not entitled thereto.
    (45) The proposed treaty would enter into force on the date 
of the exchange of instruments of ratification, and would be 
effective for matters other than withholding tax on January 1 
of the year the treaty enters into force. With respect to 
withholding taxes, the proposed treaty will be effective on the 
first day of the second month following entry into force 
(Article 28). Paragraph 10 of the proposed protocol states 
that, during the first taxable year in which the proposed 
treaty is in effect, a taxpayer may elect to be taxed under the 
USSR treaty in its entirety.

                  IV. Entry Into Force and Termination

                          a. entry into force

    The proposed treaty is subject to ratification in 
accordance with the applicable procedures of each country, and 
instruments of ratification are to be exchanged as soon as 
possible. In general, the proposed treaty will enter into force 
when the instruments of ratification are exchanged. The 
exchanges of notes will enter into force when the treaty enters 
into force.
    With respect to taxes withheld at source on dividends, 
interest or royalties, the proposed treaty will be effective 
for amounts paid or credited on or after the first day of the 
second month following entry into force. With respect to other 
taxes, the proposed treaty will be effective for taxable 
periods beginning on or after the first of January of the year 
the treaty enters into force.
    Where greater benefits would have been available to a 
taxpayer under the USSR treaty than under the proposed treaty, 
the proposed protocol provides that a taxpayer may elect to be 
taxed under the USSR treaty (in its entirety) for the first 
taxable year with respect to which the proposed treaty would 
otherwise have effect.

                             b. termination

    The proposed treaty will continue in force until terminated 
by either country. Either country may terminate the treaty at 
any time after five years from the date of its entry into force 
by giving at least six months prior written notice through 
diplomatic channels. A termination will be effective with 
respect to taxes withheld at source for amounts paid or 
credited on or after the first of January following the 
expiration of the six month period. A termination will be 
effective with respect to other taxes for taxable periods 
beginning on or after the first of January following the 
expiration of the six-month period.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed treaty with Kazakhstan, the related protocol, and 
the two related exchanges of notes (Treaty Doc. 103-33), as 
well as on other proposed tax treaties and protocols, on June 
13, 1995. The hearing was chaired by Senator Thompson. The 
Committee considered the proposed treaty with Kazakhstan on 
September 25, 1996, and ordered the proposed treaty, the 
protocol, and the two related exchanges of notes; the exchange 
of notes dated July 10, 1995; and the exchange of notes dated 
June 16 and 23, 1995 favorably reported by a voice vote, with 
the recommendation that the Senate give its advice and consent 
to ratification of the proposed treaty, the protocol, and the 
exchanges of notes, subject to a proviso.

                         VI. Committee Comments

    On balance, the Committee on Foreign Relations believes 
that the proposed treaty with Kazakhstan is in the interest of 
the United States and urges that the Senate act promptly to 
give advice and consent to ratification. The Committee has 
taken note of certain issues raised by the proposed treaty, and 
believes that the following comments may be useful to U.S. 
Treasury officials in providing guidance on these matters 
should they arise in the course of future treaty negotiations.

           a. relationship to uruguay round trade agreements

    The multilateral trade agreements encompassed in the 
Uruguay Round Final Act, which entered into force as of January 
1, 1995, include the GATS. This agreement generally obligates 
members and their political subdivisions to afford persons 
resident in member countries (and related persons) ``national 
treatment'' and ``most-favored-nation treatment'' in certain 
cases relating to services. The GATS applies to ``measures'' 
affecting trade in services. A ``measure'' includes any law, 
regulation, rule, procedure, decisions, administrative action, 
or any other form. Therefore, the obligations of the GATS 
extend to any type of measure, including taxation measures.
    However, the application of the GATS to tax measures is 
limited by certain exceptions under Article XIV and Article 
XXII(3). Article XIV requires that a tax measure not be applied 
in a manner that would constitute a means of arbitrary or 
unjustifiable discrimination between countries where like 
conditions prevail, or a disguised restriction on trade in 
services. Article XIV(d) allows exceptions to the national 
treatment otherwise required by the GATS, provided that the 
difference in treatment is aimed at ensuring the equitable or 
effective imposition or collection of direct taxes in respect 
of services or service suppliers of other members. ``Direct 
taxes'' under the GATS comprise all taxes on income or capital, 
including taxes on gains from the alienation of property, taxes 
on estates, inheritances and gifts, and taxes on the total 
amounts of wages or salaries paid by enterprises as well as 
taxes on capital appreciation.
    Article XXII(3) provides that a member may not invoke the 
GATS national treatment provisions with respect to a measure of 
another member that falls within the scope of an international 
agreement between them relating to the avoidance of double 
taxation. In case of disagreement between members as to whether 
a measure falls within the scope of such an agreement between 
them, either member may bring this matter before the Council 
for Trade in Services. The Council is to refer the matter to 
arbitration; the decision of the arbitrator is final and 
binding on the members. However, with respect to agreements on 
the avoidance of double taxation that are in force on January 
1, 1995, such a matter may be brought before the Council for 
Trade in Services only with the consent of both parties to the 
tax agreement.
    Article XIV(e) allows exceptions to the most-favored-nation 
treatment otherwise required by the GATS, provided that the 
difference in treatment is the result of an agreement on the 
avoidance of double taxation or provisions on the avoidance of 
double taxation in any other international agreement or 
arrangement by which the member is bound.
    The United States is a party to the GATS, but Kazakhstan is 
not yet a party thereto. If Kazakhstan accedes to the GATS, 
under the treaty as proposed, tax issues between the United 
States and Kazakhstan could be subject to the dispute 
resolution procedures of the World Trade Organization. At the 
time of the June 13, 1995, hearing, the Committee understood 
that the Treasury Department expected to address this issue in 
an exchange of notes. Thus, as part of its consideration of the 
proposed treaty, the Committee inquired of the Treasury 
Department what assurance did the Committee have that the 
exchange of notes addressing this issue would occur. The 
relevant portion of the Treasury Department's July 5, 1995, 
letter \2\ responding to this inquiry is reproduced below:
---------------------------------------------------------------------------
    \2\ Letter from then Assistant Secretary of the Treasury (Tax 
Policy) Leslie B. Samuels to Senator Fred Thompson, Committee on 
Foreign Relations, July 5, 1995 (``July 5, 1995 Treasury Department 
letter'').

          1. What assurances does this Committee have that an 
        exchange of notes will occur, and effectively permit 
        the treaty to preempt the dispute settlement procedures 
        under the GATS, should Kazakhstan accede to the GATS?
          We have been advised that the Ministries of Finance 
        and Trade and Industry have approved the notes. We hope 
        to complete promptly the formalities associated with 
        the exchange.

    The subsequent exchange of notes dated July 10, 1995, 
addresses the relationship between the proposed treaty and the 
GATS, in the event that the GATS applies between the United 
States and Kazakhstan, and the relationship between the 
proposed treaty and other agreements that apply between the two 
countries. The exchange of notes dated July 10, 1995, provides 
that, in the event the GATS applies between the United States 
and Kazakhstan, a dispute concerning whether a measure is 
within the scope of the proposed treaty is to be considered 
only by the competent authorities under the dispute settlement 
procedures of the proposed treaty. Moreover, the exchange of 
notes dated July 10, 1995, provides that the nondiscrimination 
provisions of the proposed treaty are the only 
nondiscrimination provisions that may be applied to a taxation 
measure unless the competent authorities determine that the 
taxation measure is not within the scope of the proposed treaty 
(with the exception of nondiscrimination obligations under the 
General Agreement on Tariffs and Trade (``GATT'') with respect 
to trade in goods, provided that GATT applies between the 
United States and Kazakhstan).
    The Committee believes that it is important that the 
competent authorities are granted the sole authority to resolve 
any potential dispute concerning whether a measure is within 
the scope of the proposed treaty and that the nondiscrimination 
provisions of the proposed treaty are the only appropriate 
nondiscrimination provisions that may be applied to a tax 
measure unless the competent authorities determine that the 
proposed treaty does not apply to it (except nondiscrimination 
obligations under GATT with respect to trade in goods, if it 
applies between the United States and Kazakhstan). The 
Committee also believes that the provision of the exchange of 
notes dated July 10, 1995, is adequate to preclude the 
preemption of the mutual agreement provisions of the proposed 
treaty by the dispute settlement procedures under the GATS (in 
the event that it applies between the United States and 
Kazakhstan).

              b. foreign tax credit for kazakhstani taxes

Tax policy

    To be creditable under the limitations of U.S. law, a 
foreign tax must be directed at the taxpayer's net gain. Like 
any foreign taxes, the Kazakhstani tax on income (profits) of 
enterprises and the income tax on individuals have been imposed 
on a base that is not necessarily identical to the U.S. income 
tax base. For example, the Committee understands that at the 
time the proposed treaty was signed, Kazakhstani tax laws may 
not have allowed full deductions for labor costs and interest 
expense. However, the Committee understands that the Kazakhstan 
Tax Code permits the deduction of wage and interest expense. In 
order to assist U.S. taxpayers seeking eligibility of 
Kazakhstani taxes for use as credits against U.S. tax, as 
discussed above in Part III, the proposed protocol requires 
Kazakhstan to provide interest and labor cost deductions in the 
case of certain U.S. persons and U.S.-participating entities. 
In addition, on the basis of those required deductions, the 
proposed treaty provides that the Kazakhstani taxes will be 
creditable for U.S. purposes.\3\
---------------------------------------------------------------------------
    \3\ The Committee understands that the proposed protocol will not 
treat as creditable the Kazakhstani taxes imposed on a taxpayer that is 
not eligible for the full deductions, as provided in the proposed 
protocol.
---------------------------------------------------------------------------
    It generally has not been consistent with U.S. tax policy 
for deductions from the U.S. tax base of a U.S. person to be 
granted by treaty. Nor has it been consistent with U.S. tax 
policy to guarantee by treaty the U.S. creditability of an 
otherwise non-creditable foreign tax. It is believed that both 
functions are generally more appropriately served in the normal 
course of internal U.S. tax legislation. The proposed treaty 
attempts to be consistent with these principles, while 
accommodating the differences between Kazakhstan's and the 
United States' internal constitutional processes. As a result, 
the treaty commits Kazakhstan to providing special features of 
its internal tax base with respect to foreign-owned 
investments, in order to conform Kazakhstan's taxes to the 
requirements of the U.S. foreign tax credit. However, the 
proposed treaty takes the unusual additional step of 
guaranteeing that the Kazakhstani tax, with the assurances 
described in the proposed protocol, is eligible for the U.S. 
foreign tax credit.

Stability of Kazakhstani tax law

    The tax laws of Kazakhstan were adopted, by presidential 
decree, in April 1995.\4\ The Committee understands that the 
Kazakhstan Tax Code has been in place since 1995. A set of 
technical amendments to the Tax Code were enacted in December 
1995.
---------------------------------------------------------------------------
    \4\ The Decree of the President of the Republic of Kazakhstan, 
Having the Force of a Law, ``On Taxes and Other Obligatory Payments to 
the Budget'' (Almaty, April 24, 1995).
---------------------------------------------------------------------------
    The 1992 U.S. income tax treaty with the Russian Federation 
included a similar provision to the proposed protocol's special 
deduction rules for the labor and interest expenses of certain 
foreign-owned entities. However, despite allowing deductions 
for all wages paid under the treaty, the Russian Federation 
subsequently enacted an excess-wage tax that applies to wages 
that exceed six times the minimum monthly wage. The package of 
amendments to the Russian tax laws that took effect recently 
continue the excess-wage tax at least through 1995.\5\ Under 
the terms of the United States-Russia tax treaty, the United 
States is not permitted to terminate the treaty until 1999.\6\
---------------------------------------------------------------------------
    \5\ Bureau of National Affairs, Daily Tax Report, May 1, 1995, p. 
G-2.
    \6\ The United States has rarely terminated a tax treaty in 
response to changes in the tax laws of a treaty partner. Despite the 
changes, it is usually desirable to continue the tax treaty 
relationship for the sake of other treaty benefits until the treaty can 
be renegotiated.
---------------------------------------------------------------------------
    The Committee understands that one of the December 1995 
amendments to the Kazakhstan Tax Code resulted in the enactment 
of an excess-wage tax. However, the Committee has been informed 
that the Kazakhstani government has assured the Treasury 
Department that the excess-wage tax will not be imposed on any 
U.S.-owned businesses. In addition, unlike the United States-
Russia tax treaty, the proposed treaty includes a provision 
that requires competent authority consultations in the event of 
a change in law (or the application thereof) that may eliminate 
or significantly limit a benefit provided by the proposed 
treaty. If the issue cannot be resolved by the competent 
authorities, the proposed treaty is subject to termination 
under its termination provisions, but without regard to the 
prohibition on termination during the first five years after 
entry into force. Had such a provision been included in the 
U.S.-Russia tax treaty, the Committee understands that the 
United States would have been permitted to terminate the 
treaty.
    Most tax treaty partners of the United States have long-
established tax systems. The states of the former Soviet Union 
generally have not yet had the opportunity fully to develop 
their economies and tax systems. It is less common for the 
United States to use a tax treaty as a device to stabilize the 
economy or tax system of a country undergoing development or 
transition. The Russian excess-wage tax is an example of how a 
tax treaty alone may not be completely effective toward this 
goal. Nonetheless, in such circumstances as those found in the 
Russian Federation, the tax treaty may afford U.S. investors 
and the U.S. Government a useful forum in which to air certain 
grievances that may arise in the area of fiscal policy.
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department the reason for entering 
into a treaty with a country whose government is not stable and 
the precedent for bilateral tax treaties where the content of a 
country's tax laws are not known in detail. The relevant 
portion of the July 5, 1995 Treasury Department letter 
responding to this inquiry is reproduced below:

          2. Why should the United States enter into a treaty 
        with a country whose government is not stable?
          Kazakhstan entered a period of political uncertainty 
        in March [1995], when a court ruling resulted in the 
        dissolution of Parliament. In April [1995], President 
        Nazarbayev held and won a national referendum on 
        extending his term in office until December 1, 2000. 
        Neither Treasury nor the State Department endorse this 
        development, which has been made known to Kazakhstan. 
        Both agencies, however, are convinced that proceeding 
        with the tax treaty is a prudent course and that the 
        treaty relationship will provide opportunities for the 
        United States to influence future developments within 
        Kazakhstan.
          In particular, the treaty will cement our already 
        excellent relationship with our tax counterparts in the 
        Ministry of Finance. The treaty process has helped move 
        Kazakhstan's tax system in line with international 
        norms. The treaty also is important to U.S. investors 
        in Kazakhstan. In response to Kazakhstan's ``open 
        door'' policy to outside investment, Kazakhstan has 
        attracted two of the largest commitments of U.S. 
        investment in all of the former Soviet Union, including 
        the single largest, Chevron's project in the Tengiz oil 
        field. Kazakhstan received more long-term investment 
        commitments in 1994 than did Russia, and some 70 U.S. 
        firms have representative offices in Kazakhstan. By 
        supporting development of Kazakhstan's rich oil and 
        mineral reserves, the treaty will open the way for 
        entrepreneurial activities by other U.S. investors, 
        enhance the opportunity for reducing dependence on 
        Persian Gulf oil, and encourage continued development 
        of a stable economic system that is more compatible 
        with free markets and democratic reforms.
          3. What precedent is there for bilateral tax treaties 
        where the content of [a country's] tax laws are not 
        known in detail?
          The content of Kazakhstan's tax laws is actually 
        known in considerable detail. The United States side 
        extensively reviewed the relevant provisions of the 
        Kazakhstan tax code in effect at the time of the 
        negotiation. This review raised questions about whether 
        wage and interest expenses were fully deductible, 
        resulting in the Protocol provisions confirming that 
        these deductions would be available to U.S. investors 
        in Kazakhstan.
          The U.S. side also has followed closely the 
        development of Kazakhstan's new law. This law was 
        drafted with the assistance of U.S. advisors familiar 
        to Treasury. It represents a significant step forward. 
        It regularizes and stabilizes the various contractual 
        arrangements for the taxation of royalties and profits, 
        and it eliminates more than 30 separate taxes, 
        mandatory ``contributions,'' and other Communist-era 
        levies. The rules in the new law are more comprehensive 
        than under the old law, reducing the need to rely on 
        easily-changed ``instructions'' (akin to regulations). 
        There also is a greater consistency among different 
        parts of the law. This increased transparency not only 
        aids Treasury's review of Kazakhstani law, it will 
        greatly enhance investors' certainty as to the tax 
        results of their activities.
          The English translation of the law indicates that it 
        is consistent with the treaty. The fact that there is 
        an English translation so soon is another indication of 
        Kazakhstan's interest in foreign investment. It usually 
        is as difficult to obtain English translations of 
        foreign tax laws as it is to obtain foreign language 
        translations of the Internal Revenue Code.
          4. What is the current legal status of the USSR tax 
        treaty in Kazakhstan?
          The United States considers the USSR tax treaty to 
        apply to Kazakhstan. Similarly, Kazakhstan publicly 
        undertook to honor the USSR's treaty obligations. 
        Kazakhstan has been applying the USSR treaty, and has 
        made known its intention to continue applying it until 
        the new treaty takes effect. Like the United States, 
        Kazakhstan is understandably eager to have a more 
        appropriate new treaty in place, and anticipates that 
        the new treaty will replace the USSR treaty as of 
        January 1, 1996.

    Subsequent to the June 13, 1995 hearing, the Committee was 
informed that Kazakhstan adopted a new law permitting the 
creation of anonymous bank accounts. The Treasury Department 
expressed concerns that the existence of such accounts would be 
inconsistent with Kazakhstan's obligation to exchange 
information under the proposed treaty. Consequently, the 
Treasury Department requested the Committee to suspend its 
consideration of the proposed treaty. The Committee has had 
several communications with the Treasury Department concerning 
the status of the Kazakhstani anonymous bank accounts. In a 
letter to Senator Helms dated September 13, 1996, the Treasury 
Department provided an update of the situation. The relevant 
portion of the letter is reproduced below:

          I am writing to update you with respect to the 
        pending income tax treaty between the United States and 
        Kazakhstan (the ``Convention''), which is under 
        consideration by the Senate Foreign Relations 
        Committee. Your Committee held a hearing on the 
        proposed treaty on June 13, 1995. At that time, 
        Kazakhstan had recently adopted a law permitting the 
        creation of anonymous bank accounts. We were concerned 
        that the existence of such accounts would be 
        inconsistent with Kazakhstan's obligation to exchange 
        information under the proposed Convention. At 
        Treasury's request, the Committee agreed to hold the 
        Convention until we received adequate assurances from 
        the Government of Kazakhstan regarding access to bank 
        account information.
          During the past year, the U.S. and Kazakhstani 
        governments have had numerous discussions and exchanges 
        of correspondence regarding bank secrecy and its 
        implications for tax enforcement and tax treaties. 
        While this process has taken longer than we might have 
        liked, we believe that our efforts have been 
        successful. It appears that Kazakhstan now may go even 
        farther than simply ensuring access to anonymous bank 
        account information. The government of Kazakhstan has 
        prepared and sent to Parliament legislation that will 
        completely repeal the earlier law allowing anonymous 
        bank accounts to be established. The government of 
        Kazakhstan has provided Treasury with drafts of the 
        legislation, and, upon review, Treasury believes it 
        resolves the outstanding issues with respect to bank 
        account information. The legislation has been 
        designated ``urgent,'' and we therefore expect it to be 
        adopted within 30 days. We are advised by the 
        Kazakhstani government that there is no opposition to 
        the legislation. They also have assured us that no 
        anonymous accounts exist within Kazakhstan at present 
        and that no such accounts will be permitted to be 
        opened prior to adoption of the new legislation.

    The Committee believes that the political and economic 
situation in countries with which the United States is entering 
into bilateral agreements is an important aspect in the 
Senate's decision to advise and consent to ratification. The 
Committee supports the progress that Kazakhstan is making in 
democratic reforms.
    Kazakhstan holds great potential for U.S. investors and 
ratification of the proposed treaty will provide a more 
predictable investment climate. Due to accelerating reforms it 
is likely that, in the short term, related economic duress and 
discontent will increase. Ratification of the proposed treaty 
now will lock in a framework for United States-Kazakhstan 
economic relations that may be politically untenable later. The 
United States has a strong interest in the success of 
Kazakhstan's economic and democratic reform process. 
Ultimately, a strong and independent Kazakhstan is important to 
the stability of Europe and to overall U.S. foreign policy 
interests.

                   C. Developing Country Concessions

    The proposed treaty contains a number of developing country 
concessions, some of which are found in other U.S. income tax 
treaties with developing countries. The most significant of 
these concessions are listed below.

Definition of permanent establishment

    The proposed treaty departs from the U.S. and OECD model 
treaties by providing for broader source-basis taxation. The 
proposed treaty's permanent establishment article, for example, 
permits the country in which business activities are carried on 
to tax the activities on a broader basis, in certain cases, 
than it would be able to under either of the model treaties. 
Under the proposed treaty, the furnishing of services, 
including consultancy services, will create a permanent 
establishment if it exists in a country for more than 12 
months. Thus, for example, under the proposed treaty, a U.S. 
enterprise's business profits that are attributable to 
providing consultancy service without a fixed base in 
Kazakhstan could be taxed by Kazakhstan.

Source basis taxation

    Additional concessions to source basis taxation in the 
proposed treaty include maximum rates of source country tax on 
interest (10 percent) \7\ and royalties (10 percent) that are 
higher than those provided in the U.S. model treaty, treatment 
of certain equipment rentals as royalties, taxing jurisdiction 
on the part of the source country as well as the residence 
country with respect to income not otherwise specifically dealt 
with by the proposed treaty, and broader source country 
taxation of personal services income (especially directors' 
fees) than that allowed by the U.S. model.
---------------------------------------------------------------------------
    \7\ The proposed protocol (paragraph 3(a)) provides that any lower 
rate of withholding tax on interest agreed to in a treaty between 
Kazakhstan and another OECD country would be applicable (subject to the 
usual ratification processes, as clarified by point 4 of the Memorandum 
of Understanding) between the United States and Kazakhstan.
---------------------------------------------------------------------------

Taxation of business profits

    Under the U.S. model and many other U.S. income tax 
treaties, a country may only tax the business profits of a 
resident of the other country to the extent those profits are 
attributable to a permanent establishment situated within the 
first country. The proposed treaty expands the definition of 
business profits to include profits that are derived from 
sources within the country where a permanent establishment 
exists from sales of goods or merchandise of the same kind as 
those sold through the permanent establishment or from other 
business activities of the same kind as those effected through 
the permanent establishment.
    Also unlike the U.S. model treaty, the proposed treaty 
limits certain deductions for expenses incurred on behalf of a 
permanent establishment by the enterprise's head office. Unlike 
some other U.S. tax treaties with developing countries (such as 
Mexico and India), the proposed treaty's prohibition on 
deductions for amounts paid by the permanent establishment to 
its home office does not apply differently to interest payments 
than to royalties or other fees.

Certain equipment leasing

    In addition to containing the traditional definition of 
royalties which is found in most U.S. tax treaties (including 
the U.S. model), the proposed treaty provides that royalties 
include payments for the use of, or the right to use, 
industrial, commercial, or scientific equipment. These payments 
are often considered rentals in other treaties, subject to 
business profits rules which generally permit the source 
country to tax such profits only if they are attributable to a 
permanent establishment located in that country, and in such 
case, the tax is computed on a net basis. By contrast, the 
proposed treaty permits gross-basis source country taxation of 
these payments, at a rate not to exceed 10 percent, with an 
election for taxation on a net basis. The proposed treaty 
permits source country taxation of these payments irrespective 
of the existence of any permanent establishment.

Committee conclusions

    One purpose of the proposed treaty is to reduce tax 
barriers to direct investment by U.S. firms in Kazakhstan. The 
practical effect of these developing country concessions could 
be greater Kazakhstani taxation of future activities of U.S. 
firms in Kazakhstan than would be the case under the rules of 
either the U.S. or OECD model treaties.
    There is a risk that the inclusion of these developing 
country concessions in the proposed treaty could result in 
additional pressure on the United States to include them in 
future treaties negotiated with developing countries, 
especially other nations of the former Soviet Union. However, 
these precedents already exist in the U.N. model treaty, and a 
number of existing U.S. income tax treaties with developing 
countries already include similar concessions. Such concessions 
arguably are necessary in order to obtain treaties with 
developing countries. Tax treaties with developing countries 
can be in the interest of the United States because they 
provide developing country tax relief for U.S. investors and a 
clearer framework within which the taxation of U.S. investors 
will take place.
    The Committee is concerned that developing country 
concessions not be viewed as the starting point for future 
negotiations with developing countries. It must be clearly 
recognized that several of the rules of the proposed treaty 
represent substantial concessions by the United States, and 
that such concessions must be met with substantial concessions 
by the treaty partner. Thus, future negotiations with 
developing countries should not assume, for example, that the 
definition of permanent establishment provided in this treaty 
necessarily will be available in every case; rather, such a 
definition will be only adopted in the context of an agreement 
that satisfactorily addresses the concerns of the United 
States.

                           D. Treaty Shopping

    The proposed treaty, like a number of U.S. income tax 
treaties, generally limits treaty benefits for treaty country 
residents so that only those residents with a sufficient nexus 
to a treaty country will receive treaty benefits. Although the 
proposed treaty is intended to benefit residents of Kazakhstan 
and the United States only, residents of third countries 
sometimes attempt to use a treaty to obtain treaty benefits. 
This is known as ``treaty shopping.'' Investors from countries 
that do not have tax treaties with the United States, or from 
countries that have not agreed in their tax treaties with the 
United States to limit source country taxation to the same 
extent that it is limited in another treaty may, for example, 
attempt to secure a lower rate of tax by lending money to a 
U.S. person indirectly through a country whose treaty with the 
United States provides for a lower rate. The third-country 
investor may do this by establishing in that treaty country a 
subsidiary, trust, or other investing entity which then makes 
the loan to the U.S. person and claims the treaty reduction for 
the interest it receives.
    The anti-treaty-shopping provision of the proposed treaty 
is similar to an anti-treaty shopping provision in the Code (as 
interpreted by Treasury regulations) and in several newer 
treaties. Some aspects of the provision, however, differ either 
from an anti-treaty-shopping provision in the U.S. model 
treaty, or from the anti-treaty-shopping provisions sought by 
the United States in some treaty negotiations since the model 
was published in 1981. The issue is whether the anti-treaty-
shopping provision of the treaty effectively forestalls 
potential treaty shopping abuses.
    One provision of the anti-treaty-shopping article of the 
proposed treaty is more lenient than the comparable rule in one 
version proposed with the U.S. model. That U.S. model proposal 
allows benefits to be denied if 75 percent or less of a 
resident company's stock is held by individual residents of the 
country of residence, while the proposed treaty (like several 
newer treaties and an anti-treaty-shopping provision in the 
Code) lowers the qualifying percentage to 50, and broadens the 
class of qualifying shareholders to include residents of either 
treaty country (and citizens of the United States). Thus, this 
safe harbor is considerably easier to enter under the proposed 
treaty. On the other hand, counting for this purpose 
shareholders who are residents of either treaty country would 
not appear to invite the type of abuse at which the provision 
is aimed, since the targeted abuse is ownership by third-
country residents attempting to obtain treaty benefits.
    Another provision of the anti-treaty-shopping article 
differs from the comparable rule in some earlier U.S. treaties 
and proposed model provisions, but the effect of the change is 
less clear. The general test applied by those treaties to allow 
benefits, short of meeting the bright-line ownership and base 
erosion test, is a broadly subjective one, looking to whether 
the acquisition, maintenance, or operation of an entity did not 
have ``as a principal purpose obtaining benefits'' under the 
treaty. By contrast, the proposed treaty contains a more 
precise test that allows denial of benefits only with respect 
to income not derived in connection with the active conduct of 
a trade or business. (However, this active trade or business 
test does not apply with respect to a business of making or 
managing investments, so benefits can be denied with respect to 
such a business regardless of how actively it is conducted.) In 
addition, the proposed treaty gives the competent authority of 
the source country the ability to override this standard. The 
Technical Explanation accompanying the treaty provides some 
elaboration as to how these rules will be applied.
    The practical difference between the proposed treaty tests 
and the earlier tests will depend upon how they are interpreted 
and applied. The principal purpose test may be applied 
leniently (so that any colorable business purpose suffices to 
preserve treaty benefits), or it may be applied strictly (so 
that any significant intent to obtain treaty benefits suffices 
to deny them). Similarly, the standards in the proposed treaty 
could be interpreted to require, for example, a more active or 
a less active trade or business (though the range of 
interpretation is far narrower). Thus, a narrow reading of the 
principal purpose test could theoretically be stricter than a 
broad reading of the proposed treaty tests (i.e., would operate 
to deny benefits in potentially abusive situations more often).
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department to provide additional 
explanation regarding the sufficiency of the anti-treaty 
shopping provisions in the proposed treaty and other treaties. 
The relevant portion of the July 5, 1995 Treasury Department 
letter responding to this inquiry is reproduced below:

          7. Is Treasury confident that the anti-treaty 
        shopping provisions in these treaties will ensure full 
        payment of taxes by multinational corporations and 
        eliminate abuse of the treaties to lower taxes?
          In conjunction with various domestic statutes and 
        regulations, the limitation on benefits provisions 
        should be very effective in preventing underpayment of 
        U.S. withholding taxes by non-residents, including 
        multinationals.

    The Committee believes that limitation on benefits 
provisions are important to protect against ``treaty shopping'' 
by limiting benefits of a treaty to bona fide residents of the 
treaty partner. It also is important, however, for these 
provisions to be crafted to avoid interfering with legitimate 
and desirable economic activity. For example, the Committee 
believes that U.S. open-end regulated investment companies 
(``RICs'') generally should be eligible for treaty benefits 
under limitation on benefits provisions in order to facilitate 
cross-border investments from this important source of capital. 
Because these funds are required to stand ready to redeem their 
shares on a daily basis, the Committee believes they generally 
should be entitled to treaty benefits to the same extent as 
closed-end RICs, which qualify for benefits under standard 
limitation on benefits provisions because they are publicly 
traded on stock exchanges. While the Committee understands that 
open-end RICs may be determined by the competent authority to 
qualify for treaty benefits under limitation on benefits 
provisions in existing treaties, the Committee believes that, 
in future negotiations, the negotiators should address directly 
the treatment of open-end RICs under limitation of benefits 
provisions. The manner in which the eligibility of open-end 
RICs for treaty benefits is addressed may vary from treaty to 
treaty, for example, to permit the negotiators to ensure that 
investment companies established in the treaty country are not 
used to promote treaty shopping.
    The Committee continues to believe that the United States 
should maintain its policy of limiting treaty shopping 
opportunities whenever possible. The Committee continues to 
believe further that, in exercising any latitude Treasury has 
to adjust the operation of the proposed treaty, the rules as 
applied should adequately deter treaty shopping abuses. The 
USSR treaty does not contain anti-treaty shopping rules. 
Further, the proposed anti-treaty shopping provision may be 
effective in preventing third-country investors from obtaining 
treaty benefits by establishing investing entities in 
Kazakhstan since third-country investors may be unwilling to 
share ownership of such investing entities on a 50-50 basis 
with U.S. or Kazakhstani residents or other qualified owners to 
meet the ownership test of the anti-treaty shopping provision. 
In addition, the base erosion test provides protection from 
certain potential abuses of a Kazakhstani conduit. Finally, 
Kazakhstan imposes significant taxes of its own; these taxes 
may deter third-country investors from seeking to use 
Kazakhstani entities to make U.S. investments. On the other 
hand, implementation of the tests for treaty shopping set forth 
in the treaty may raise factual, administrative, or other 
issues that cannot currently be foreseen. The Committee 
emphasizes that the proposed provision must be implemented so 
as to serve as an adequate tool for preventing possible treaty-
shopping abuses in the future.

                          E. Transfer Pricing

    The proposed treaty, like most other U.S. tax treaties, 
contains an arm's-length pricing provision. The proposed treaty 
recognizes the right of each country to reallocate profits 
among related enterprises residing in each country, if a 
reallocation is necessary to reflect the conditions which would 
have been made between independent enterprises. The Code, under 
section 482, provides the Secretary of the Treasury the power 
to make reallocations wherever necessary in order to prevent 
evasion of taxes or clearly to reflect the income of related 
enterprises. Under regulations, the Treasury Department 
implements this authority using an arm's-length standard, and 
has indicated its belief that the standard it applies is fully 
consistent with the proposed treaty.\8\ A significant function 
of this authority is to ensure that the United States asserts 
taxing jurisdiction over its fair share of the worldwide income 
of a multinational enterprise. The arm's-length standard has 
been adopted uniformly by the leading industrialized countries 
of the world, in order to secure the appropriate tax base in 
each country and avoid double taxation, ``thereby minimizing 
conflict between tax administrations and promoting 
international trade and investment.'' \9\
---------------------------------------------------------------------------
    \8\ The OECD report on transfer pricing generally approves the 
methods that are incorporated in the current Treasury regulations under 
section 482 as consistent with the arm's-length principles upon which 
Article 9 of the proposed treaty is based. See ``Transfer Pricing 
Guidelines for Multinational Enterprises and Tax Administrations,'' 
OECD, Paris 1995.
    \9\ Id. (preface).
---------------------------------------------------------------------------
    Some have argued in the recent past that the IRS has not 
performed adequately in this area. Some have argued that the 
IRS cannot be expected to do so using its current approach. 
They argue that the approach now set forth in the regulations 
is impracticable, and that the Treasury Department should adopt 
a different approach, under the authority of section 482, for 
measuring the U.S. share of multinational income.10 Some 
prefer a so-called ``formulary apportionment'' approach, which 
can take a variety of forms. The general thrust of formulary 
apportionment is first to measure total profit of a person or 
group of related persons without regard to geography, and only 
then to apportion the total, using a mathematical formula, 
among the tax jurisdictions that claim primary taxing rights 
over portions of the whole. Some prefer an approach that is 
based on the expectation that an investor generally will insist 
on a minimum return on investment or sales.11
---------------------------------------------------------------------------
    \10\ See generally The Breakdown of IRS Tax Enforcement Regarding 
Multinational Corporations: Revenue Losses, Excessive Litigation, and 
Unfair Burdens for U.S. Producers: Hearing before the Senate Committee 
on Governmental Affairs, 103d Cong., 1st Sess. (1993) (hereinafter, 
Hearing Before the Senate Committee on Governmental Affairs).
    \11\ See Tax Underpayments by U.S. Subsidiaries of Foreign 
Companies: Hearings Before the Subcommittee on Oversight of the House 
Committee on Ways and Means, 101st Cong., 2d Sess. 360-61 (1990) 
(statement of James E. Wheeler); H.R. 460, 461, and 500, 103d Cong., 
1st Sess. (1993); sec. 304 of H.R. 5270, 102d Cong., 2d Sess. (1992) 
(introduced bills); see also Department of the Treasury's Report on 
Issues Related to the Compliance with U.S. Tax Laws by Foreign Firms 
Operating in the United States: Hearing Before the Subcommittee on 
Oversight of the House Committee on Ways and Means, 102d Cong., 2d 
Sess. (1992).
---------------------------------------------------------------------------
    A debate exists whether an alternative to the Treasury 
Department's current approach would violate the arm's-length 
standard embodied in Article 9 of the proposed treaty, or the 
nondiscrimination rules embodied in Article 25.12 Some, 
who advocate a change in internal U.S. tax policy in favor of 
an alternative method, fear that U.S. obligations under 
treaties such as the proposed treaty would be cited as 
obstacles to change.
---------------------------------------------------------------------------
    \12\ Compare ``Tax Conventions with: The Russian Federation,'' 
Treaty Doc. 102-39; ``United Mexican States,'' Treaty Doc. 103-7; ``The 
Czech Republic,'' Treaty Doc. 103-17; ``The Slovak Republic,'' Treaty 
Doc. 103-18; and ``The Netherlands,'' Treaty Doc. 103-6. ``Protocols 
Amending Tax Conventions with: Israel,'' Treaty Doc. 103-16; ``The 
Netherlands,'' Treaty Doc. 103-19; and ``Barbados,'' Treaty Doc. 102-
41. Hearing Before the Committee on Foreign Relations, United States 
Senate, 103d Cong., 1st Sess. 38 (1993) (``A proposal to use a 
formulary method would be inconsistent with our existing treaties and 
our new treaties.'') (oral testimony of Leslie B. Samuels, Assistant 
Secretary for Tax Policy, U.S. Treasury Department); a statement 
conveyed by foreign governments to the U.S. State Department that 
``[worldwide unitary taxation is contrary to the internationally agreed 
arm's-length principle embodied in the bilateral tax treaties of the 
United States'' (letter dated 14 October 1993 from Robin Renwick, U.K. 
Ambassador to the United States, to Warren Christopher, U.S. Secretary 
of State); and ``American Law Institute Federal Income Tax Project: 
International Aspects of United States Income Taxation II: Proposals on 
United States Income Tax Treaties'' (1992), at 204 (n. 545) (``Use of a 
world-wide combination unitary apportionment method to determine the 
income of a corporation is inconsistent with the `Associated 
Enterprises' article of U.S. tax treaties and the OECD model treaty'') 
with Hearing Before the Senate Committee on Governmental Affairs at 26, 
28 (``I do not believe that the apportionment method is barred by any 
tax treaty that United States has now entered into.'') (statement of 
Louis M. Kauder). See also Foreign Income Tax Rationalization and 
Simplification Act of 1992: Hearings Before the House Committee on Ways 
and Means, 102d Cong., 2d Sess. 224, 246 (1992) (written statement of 
Fred T. Goldberg, Jr., Assistant Secretary for Tax Policy, U.S. 
Treasury Department).
---------------------------------------------------------------------------
    As part of its consideration of the proposed treaty, the 
Committee requested the Treasury Department to provide 
additional explanation regarding the Administration's current 
policy with respect to transfer pricing issues, the use of the 
arm's-length pricing method, and the application of treaties to 
ensure full payment of required taxes by foreign corporations. 
The relevant portions of the July 5, 1995, Treasury Department 
letter responding to these inquiries are reproduced below:

          1. Please describe the position of the U.S. Treasury 
        with regard to the transfer pricing issue.
          While estimates of the magnitude of the problem vary, 
        Treasury regards transfer pricing as one of the most 
        important international tax issues that it faces. 
        Treasury believes that both foreign and U.S.-owned 
        multinationals have engaged in significant income 
        shifting through improper transfer pricing.
          Treasury identified three problems that allowed these 
        abuses to occur: (1) lack of substantive guidance in 
        U.S. regulations for taxpayers and tax administrators 
        to apply in cases where the traditional approaches did 
        not work; (2) lack of an incentive for taxpayers to 
        attempt to set their transfer prices in accordance with 
        the substantive rules; and (3) lack of international 
        consensus on appropriate approaches. To resolve these 
        problems, Treasury has taken the following steps in the 
        last two years:
          In July 1994, Treasury issued new final regulations 
        under section 482 of the Internal Revenue Code. These 
        regulations contain methods that were not reflected in 
        prior final regulations: the Comparable Profits and 
        Profit Split Methods. These methods are intended to be 
        used when the more traditional methods are unworkable 
        or do not provide a reliable basis for determining an 
        appropriate transfer price.
          In August 1993, Congress enacted a Treasury proposal 
        to amend section 6662(e) of the Internal Revenue Code. 
        This provision penalizes taxpayers that both (1) are 
        subject to large transfer pricing adjustments and (2) 
        do not provide documentation indicating that they made 
        a reasonable effort to comply with the regulations 
        under section 482 in setting their transfer prices. 
        Treasury issued temporary regulations implementing the 
        statute in February 1994.
          In July 1994, the Organization for Economic 
        Cooperation and Development issued a draft report on 
        transfer pricing. The United States is an active 
        participant in this body. The OECD transfer pricing 
        guidelines serve as the basis for the resolution of 
        transfer pricing cases between treaty partners and it 
        therefore is critical that any approach adopted in any 
        country be sanctioned in this report in order to reduce 
        the risk of double taxation. The draft report permits 
        the use of the new U.S. methods in appropriate cases.
          2. Why shouldn't the United States interpret Article 
        9 of the tax treaties regarding transfer pricing as 
        permitting other methods of pricing such as the unitary 
        or formulary apportionment method?
          If Treasury adopted such an interpretation, it would 
        send a signal to our treaty partners that we were 
        moving away from the arm's-length standard to a 
        different, more arbitrary approach. Sending such a 
        signal would be very destructive and, if implemented, 
        would inevitably result in double (and under) taxation 
        due to the fundamental inconsistency between the 
        approach used in the United States and that used 
        elsewhere. Further, adopting such an interpretation 
        would invite non-OECD countries to introduce their own 
        approaches that currently cannot be foreseen, but that 
        could inappropriately increase their tax bases at the 
        expense of the United States and other countries.
          3. The consensus regarding transfer pricing methods 
        is currently the arm's-length standard. Will the U.S. 
        remain open to the possibility of better or alternative 
        methods without moving to such alternative methods 
        unilaterally?
          If it appeared that another approach was superior to 
        the current approach, the U.S. would push for the 
        adoption of this new approach on a multilateral basis 
        so that there would be the necessary international 
        consensus in favor of the new approach.
          4. Why does industry support the arm's-length pricing 
        method?
          Most multinationals are willing to pay their fair 
        share of tax. Their primary concern is that they not be 
        subjected to double taxation. Because the arm's-length 
        standard is the universally adopted international norm 
        and the major countries of the world have adopted a 
        consensus interpretation of that standard within the 
        OECD, the risks of double taxation are infinitely 
        smaller under the arm's-length standard than under any 
        other approach.
          5. A recent GAO report suggested that many foreign 
        corporations are not paying their fair share of taxes. 
        Is Treasury satisfied that these treaties ensure full 
        payment of required taxes?
          A tax treaty by itself will not prevent transfer 
        pricing abuses. Rather, the treaty leaves it to the 
        internal rules and practices of the treaty partners to 
        deal with such issues. In the United States, Treasury 
        has taken the measures described above to ensure that 
        foreign--and domestic--corporations pay their fair 
        share of taxes. A tax treaty can make these internal 
        measures more effective, particularly through the 
        exchange of information provisions that enable the U.S. 
        tax authorities to obtain transfer pricing information 
        on transactions between related parties in the United 
        States and the treaty partner. The treaties also 
        facilitate Advance Pricing Agreements that preclude the 
        possibility of double taxation and at the same time 
        ensure that each country receives an appropriate share 
        of the taxes paid by a multinational.

              F. Arbitration of Competent Authority Issues

    In a step that has been taken only recently in U.S. income 
tax treaties (i.e., beginning with the 1989 income tax treaty 
between the United States and Germany), the proposed treaty 
provides for a binding arbitration procedure, if both competent 
authorities and the taxpayers involved agree, for the 
resolution of those disputes in the interpretation or 
application of the treaty that it is within the jurisdiction of 
the competent authorities to resolve. This provision is 
effective only after diplomatic notes are exchanged between 
Kazakhstan and the United States. Consultation between the two 
countries regarding whether such an exchange of notes should 
occur will take place after a period of three years after the 
proposed treaty has entered into force.
    Generally, the jurisdiction of the competent authorities 
under the proposed treaty is as broad as it is under any U.S. 
income tax treaties. Specifically, the competent authorities 
would be required to resolve by mutual agreement any 
difficulties or doubts arising as to the interpretation or 
application of the treaty. They could also consult together 
regarding cases not provided for in the treaty.
    As an initial matter, it is necessary to recognize that 
there are appropriate limits to the competent authorities' own 
scope of review.13 The competent authorities would not 
properly agree to be bound by an arbitration decision that 
purported to decide issues that the competent authorities would 
not agree to decide themselves. Even within the bounds of the 
competent authorities' decision-making power, there likely will 
be issues that one or the other competent authority will not 
agree to put in the hands of arbitrators. Consistent with these 
principles, the Technical Explanation expects that the 
arbitration procedures will ensure that the competent 
authorities would not accede to arbitration with respect to 
matters concerning the tax policy or domestic tax law of either 
treaty country.
---------------------------------------------------------------------------
    \13\ In discussing a clause permitting the competent authorities to 
eliminate double taxation in cases not provided for in the treaty, 
Representative Dan Rostenkowski, then Chairman of the House Committee 
on Ways and Means, submitted the following testimony in 1981 hearings 
before the Senate Committee on Foreign Relations:

      Under a literal reading, this delegation could be 
      interpreted to include double taxation arising from any 
      source, even state unitary tax systems. Accordingly, the 
      scope of this delegation of authority must be clarified and 
      limited to include only noncontroversial technical matters, 
---------------------------------------------------------------------------
      not items of substance.

Tax Treaties: Hearings on Various Tax Treaties Before the Senate 
Committee on Foreign Relations, 97th Cong., 1st Sess. 58 (1981).
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department whether the fact that 
Kazakhstan has a new tax code meets the Committee's criteria 
for arbitration provisions. The relevant portion of the July 5, 
1995 Treasury Department letter responding to these inquiries 
are reproduced below:

          5. How does a treaty with a country that has a one-
        month old tax code meet [the Committee's criteria for 
        arbitration provisions]?
          The arbitration provision in the proposed treaty with 
        Kazakhstan was negotiated and drafted consistently with 
        our understanding of the Senate's views on arbitration 
        as expressed in the Report of the Senate Foreign 
        Relations Committee on the treaty between the United 
        States and Germany. The Committee recognized ``that the 
        tax system potentially may have much to gain from use 
        of a procedure, such as arbitration, in which 
        independent experts can resolve disputes which 
        otherwise may impede efficient administration of the 
        tax laws'' and endorsed the ``experiment'' of 
        arbitration. In each treaty signed since the Senate's 
        consideration of the German treaty, Treasury has 
        included an arbitration provision only if the treaty 
        partner agrees to delay its implementation. The delay 
        affords us the opportunity to evaluate our experience 
        under the German treaty.
          Thus, in the treaty with Kazakhstan we have agreed to 
        establish an arbitration mechanism only after an 
        exchange of diplomatic notes, which cannot occur until 
        after the Convention has been in force for three years 
        and then only after the Competent Authorities have 
        consulted and agreed that arbitration is an appropriate 
        means of resolving treaty disputes. Therefore the new 
        Kazakhstani tax law will be at least several years old 
        before this arbitration procedure could be initiated.
          We do not believe that Kazakhstan's new tax code has 
        any bearing on the advisability of an arbitration 
        procedure. However, if some aspect of Kazakhstani law 
        made it unadvisable to initiate the procedure, the 
        United States would refrain from exchanging the 
        diplomatic notes necessary to initiate it.

    As stated in recommending ratification of the U.S.-Germany 
treaty and the United States-Netherlands treaty, the Committee 
still believes that the tax system potentially may have much to 
gain from use of a procedure, such as arbitration, in which 
independent experts can resolve disputes that otherwise may 
impede efficient administration of the tax laws. However, the 
Committee believes that the appropriateness of such a clause in 
a treaty depends strongly on the other party to the treaty, and 
the experience that the competent authorities have under the 
corresponding provision in the German and Netherlands treaties. 
The Committee understands that to date there have been no 
arbitrations of competent authority cases under the German 
treaty or the Netherlands treaty, and few tax arbitrations 
outside the context of those treaties. The Committee believes 
that the negotiators acted appropriately in conditioning the 
effectiveness of this provision on the outcome of future 
developments in this evolving area of international tax 
administration.

                           VII. Budget Impact

    The Committee has been informed by the staff of the Joint 
Committee on Taxation that the proposed treaty is estimated to 
have a negligible effect on annual Federal budget receipts 
during the fiscal year 1997-2003 period.

                  VIII. Explanation of Proposed Treaty

    For a detailed article-by-article explanation of the 
proposed tax treaty, see the ``Treasury Department Technical 
Explanation of the Convention and Protocol Between the United 
States of America and the Republic of Kazakhstan for the 
Avoidance of Double Taxation and the Prevention of Fiscal 
Evasion with Respect to Taxes on Income and Capital Signed at 
Almaty on October 24, 1993.''

               IX. Text of the Resolution of Ratification

    Resolved, (two-thirds of the Senators present concurring 
therein), That the Senate advise and consent to the 
ratification of the Convention Between the Government of the 
United States of America and the Government of the Republic of 
Kazakhstan for the Avoidance of Double Taxation and the 
Prevention of Fiscal Evasion with Respect to Taxes on Income 
and Capital, Together with the Protocol, signed at Almaty on 
October 24, 1993, and Two Related Exchanges of Notes dated 
August 1 and September 7, 1994 and dated August 15 and 
September 7, 1994 (Treaty Doc. 103-33); an Exchange of Notes 
dated at Washington July 10, 1995, Relating to the Convention 
Between the Government of the United States of America and the 
Government of the Republic of Kazakhstan for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income and Capital, Together With a Related 
Protocol, signed at Almaty on October 24, 1993 (Treaty Doc. 
104-15); and an Exchange of Notes dated June 16 and 23, 1995 
(EC-1431). The Senate's advice and consent is subject to the 
following proviso, which shall not be included in the 
instrument of ratification to be signed by the President:

          The United States shall not exchange the instruments 
        of ratification with the Government of the Republic of 
        Kazakhstan until such time as the Government of the 
        Republic of Kazakhstan has notified the Government of 
        the United States that its laws no longer permit 
        anonymous bank accounts to be established.
              X. APPENDIX 1.--EXCHANGE OF NOTES (EC 1431)

                              ----------                              

                                  U.S. Department of State,
                                 Washington, DC, September 5, 1995.
Hon. Al Gore,
President of the Senate
Washington, DC.
    Dear Mr. President: In accordance with established State 
Department practice regarding corrections to treaties, I am 
enclosing authentic copies of an exchange of notes dated June 
16 and 23, 1995, correcting the text of the Convention Between 
the Government of the United States of America and the 
Government of the Republic of Kazakhstan for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income and Capital, together with a related 
Protocol, signed at Almaty on October 2,4 1993, and exchanges 
of notes transmitted with the Convention. The Convention was 
submitted to the Senate for advice and consent to ratification 
on September 19, 1994, and is printed in Senate Treaty Document 
103-33, 103d Congress, 2d Session.
    These notes are being sent to the Committee on Foreign 
Relations in order to correct the Convention. We would 
appreciate it if the Committee on Foreign Relations and the 
Senate would consider the text of this Convention as corrected.
            Sincerely,
                                          Wendy R. Sherman,
                          Assistant Secretary, Legislative Affairs.
    Enclosures: As stated.

                   Embassy of the United States of America,
                                             Almaty, June 16, 1995.
    The Embassy of the United States of America presents its 
compliments to the Ministry of Foreign Affairs of the Republic 
of Kazakhstan and has the honor to refer to the Convention 
Between the Government of the United States of America and the 
Government of the Republic of Kazakhstan for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income and Capital, together with a related 
Protocol, signed at Almaty on October 24, 1993, and Exchanges 
of Notes (the ``Convention''):
    The United States has discovered a discrepancy between the 
English and Russian texts of paragraph 2 b) of Article 28 
(Entry in Force) of the Convention. The Embassy proposes 
correcting this discrepancy through an exchange of diplomatic 
notes. The Ministry of Foreign Affairs is requested to correct 
the signed Russian-language copies of the Convention that are 
held in Kazakhstan so that the Russian-language text conforms 
to the English-language text. The Kazakh-language version, 
currently in process of conformation, will also reflect these 
changes.
    The full text of paragraph 2 b) of Article 28 reads as 
follows in the English:

          b) in respect of other taxes, for taxable periods 
        beginning on or after the first day of January of the 
        year in which the Convention enters into force.

    The Russian text of this paragraph should be corrected to 
read as follows:


    Following notification to the Embassy in Kazakhstan that 
this correction is acceptable to Kazakhstan the United States 
original will be corrected. The exchange of diplomatic notes 
would be considered a correction of the Convention and would 
become part of the official treaty record, but would not be 
considered by the United States to be an amendment of the 
Convention. The Convention will be printed in the United States 
Treaties and Other International Acts Series as corrected.
    The Embassy of the United States of America avails itself 
of this occasion to renew to the Ministry of Foreign Affairs of 
the Republic of Kazakhstan the assurances of its high 
consideration.
                                ------                                

                               Department of State,
                               Office of Language Services,
                                              Translating Division.
Ministry of Foreign Affairs of the Republic of Kazakhstan:
    The Ministry of Foreign Affairs of the Republic of 
Kazakhstan presents its compliments to the Embassy of the 
United States of America in the Republic of Kazakhstan and has 
the honor to report that it received the note of June 16, 1995, 
regarding the Convention between the Government of the Republic 
of Kazakhstan and the Government of the United States of 
America for the Avoidance of Double Taxation and Prevention of 
Fiscal Evasion with Respect to Taxes on Income and Capital, 
together with a related Protocol, signed at Almaty on October 
24, 1993, and Exchanges of Notes (the ``Convention'').
    The note stated:
    [The Russian translation of the English note cited above 
agrees in all substantive respects with the English original--
translator's note]
    The Ministry of Foreign Affairs has the honor to advise 
that the Republic of Kazakhstan agrees to this correction. This 
correction will be regarded as a part of the official 
Agreement.
    The Ministry avails itself of the occasion to renew to the 
Embassy the assurance of its high consideration.

Almaty, June 23, 1995.
Embassy of the United States of America.
                       XI. APPENDIX 2.--STATEMENT

                              ----------                              


 Written Statement of Joseph H. Guttentag, International Tax Counsel, 
Department of the Treasury, Before the Committee on Foreign Relations, 
                    U.S. Senate, September 24, 1996

Mr. Chairman and Members of the Committee:
    I am pleased to submit this statement on behalf of the 
Administration to recommend favorable action on the protocols 
to two tax treaties, with Indonesia and with the Netherlands 
with respect to the Netherlands Antilles, that are on the 
Committee's business meeting agenda. Also on the agenda is the 
tax treaty with Kazakhstan, on which the Administration 
recommended favorable action in testimony before the Committee 
on June 13, 1995. There are also three additional bilateral tax 
treaties that the President has transmitted to the Senate, with 
Austria, Luxembourg, and Turkey. All these agreements provide 
significant benefits to the United States, as well as to our 
treaty partners. Treasury appreciates the Committee's interest 
in these agreements, and requests the Committee and the Senate 
to take favorable action at this time on the three agreements 
that are on the Committee's agenda, and on the remaining three 
treaties as soon as possible.
    The tax treaty program is designed to remove obstacles to 
international trade and investment, such as double taxation, 
and to prevent fiscal evasion, such as through treaty shopping 
and information concealing. Accordingly, tax treaties provide 
substantial benefits to taxpayers as well as to the fiscs of 
both treaty partners.
    For example, high withholding taxes at source are an 
impediment to international economic activity. Under United 
States domestic law, all payments to non-United States persons 
of dividends and royalties as well as certain payments of 
interest are subject to withholding tax equal to 30 percent of 
the gross amount paid. Inasmuch as this tax is imposed on a 
gross rather than net amount, it imposes a high cost on 
investors receiving such payments. Indeed, in many cases the 
cost of such taxes can be prohibitive. Most of our trading 
partners impose similar levels of withholding tax on these 
types of income.
    Tax treaties alleviate this burden by reducing the levels 
of withholding tax that the treaty partners may impose on these 
types of income. In general, United States policy is to reduce 
the rate of withholding taxation on interest and royalties to 
zero. Dividends normally are subject to tax at one of two 
rates, 15 percent on portfolio investors and 5 percent on 
direct corporate investors, with certain exceptions.
    The Treasury Department has included in all its recent tax 
treaties comprehensive ``limitation on benefits'' provisions 
that limit the benefits of the treaty to bona fide residents of 
the treaty partner. These provisions are not uniform, as each 
country has its own characteristics that make it more or less 
inviting to treaty shopping in particular ways. Consequently, 
each provision must to some extent be tailored to fit the facts 
and circumstances of the treaty partners' internal laws and 
practices. Moreover, these provisions should be crafted to 
avoid interfering with legitimate and desirable economic 
activity. For example, in the future we plan to address 
directly in our negotiations the issue of how open-end United 
States regulated investment companies (RICs) should be treated 
under limitation on benefits provisions in order to facilitate 
cross-border investments from this important source of capital. 
Because these funds are required to stand ready to redeem their 
shares on a daily basis, we believe they generally should be 
entitled to treaty benefits to the same extent as closed-end 
RICs, which qualify for benefits under standard limitation on 
benefits provisions because they are publicly traded on stock 
exchanges. However, the extent to which this goal may be 
achieved is likely to vary from treaty to treaty, as the 
negotiators need to ensure that mutual funds established in the 
treaty partner cannot be used to promote treaty shopping.
    Our tax treaties and treaty positions are subject to 
continual review. We reexamine the appropriateness and 
effectiveness of our treaty provisions, and receive comments 
from both public and private sources. The release last week of 
the new U.S. model income tax treaty, copies of which were 
provided to the Committee, is an important step in this process 
but does not represent its conclusion. The new model represents 
our favored treaty positions at this time; we will reevaluate 
and update the model over time as we evaluate model treaty 
positions as employed in our recent tax treaties and receive 
comments and further suggestions on the model itself.
Discussion of pending agreements--Indonesia, Netherlands Antilles, and 
        Kazakhstan
    I would like to discuss the importance and purposes of each 
agreement that the Committee has set for consideration. We have 
submitted Technical Explanations of each agreement that contain 
detailed discussions of each treaty and protocol. These 
Technical Explanations serve as an official guide to each 
agreement. We have furnished our treaty partners with a copy of 
the relevant technical explanation and offered them the 
opportunity to submit their comments, suggestions and 
concurrence.
Indonesia
    The proposed protocol with Indonesia, which was signed at 
Jakarta on July 24, 1996, amends the income tax treaty with 
Indonesia that was signed in 1988 and entered into force on 
December 30, 1990. In many cases, the withholding tax rates 
permitted under the existing tax treaty with Indonesia 
significantly exceed those found in Indonesia's treaties with 
other OECD countries. This places United States business at a 
substantial competitive disadvantage in Indonesia relative to 
competitors from other industrialized countries. Because 
Indonesia is one of the world's most populous countries, with a 
rapidly expanding market that is located in a region of dynamic 
economic growth, it is especially important that United States 
firms be able to compete there without this disadvantage.
    The proposed protocol achieves this objective by reducing 
the withholding tax rates permitted to bring them into line 
with those in Indonesia's recent treaties with other OECD 
countries. The protocol reduces the maximum rates of tax on 
direct-investment dividends, interest, and royalty income, 
which are generally 15 percent under the current treaty, to 10 
percent.

Netherlands Antilles

    Many years ago, the United States and the Netherlands 
agreed to extend the then treaty between them to the 
Netherlands Antilles. The extension became a contentious issue, 
and in 1987 most of the provisons of the treaty as extended to 
the Netherlands Antilles were terminated, except for the 
taxation of interest at source and ancillary provisions. The 
proposed protocol to the Netherlands treaty relates only to the 
Netherlands Antilles and would complete the termination by 
eliminating the exemption from United States withholding tax 
for interest, except with respect to certain grandfathered debt 
instruments.
    The proposed protocol relating to the Netherlands Antilles 
would eliminate ongoing treaty shopping through the Netherlands 
Antilles by limiting the exemption from United States 
withholding tax to certain debt instruments issued on or before 
October 15, 1984. These debt instruments were issued in 
connection with Eurobond offerings by Netherlands Antilles 
subsidiaries of United States companies, generally before the 
Deficit Reduction Act of 1984 allowed United States companies 
to issue debt, free of United States withholding tax, directly 
into the international capital markets. It is appropriate to 
provide a continued exemption for these debt instruments 
because the Eurobonds were issued in reasonable reliance on the 
continued existence of the exemption and it is believed that 
eliminating the exemption entirely would have an adverse effect 
on international capital markets.

Kazakhstan

    In addition to the five new treaties and protocols, the 
Committee still has under consideration a treaty between the 
United States and Kazakhstan. This treaty was the subject of a 
hearing last year. At our request, the Committee delayed its 
vote on this treaty until we received adequate assurances from 
the Government of Kazakhstan regarding access to bank account 
information. At the time of last year's hearing, Kazakhstan had 
recently adopted laws permitting the opening of anonymous bank 
accounts, and we wanted to be certain that the existence of 
these accounts would not, as a legal or a practical matter, 
impeded our access to bank account information in order to 
enforce our tax laws.
    I am pleased to report that Kazakhstan is now clearly 
moving away from bank secrecy. The Government of Kazakhstan has 
submitted legislation to the Kazakhstan Parliament to repeal 
the earlier laws permitting the establishment of anonymous bank 
accounts. We understand that the lower house of the Kazakhstan 
Parliament has passed the legislation and that the Government 
of Kazakhstan expects the law to be enacted without opposition 
this week.
    We appreciate the Committee's support on this very 
important issue and hope that we can work cooperatively to move 
this treaty forward while at the same time protecting the 
integrity of the treaty's exchange of information provisions. 
One alternative that we would support is for the Committee to 
report the treaty recommending that the Senate give its advice 
and consent to ratification assuming Kazakhstan's adoption of 
the new law. The full Senate then could approve the 
recommendation with appropriate conditions concerning the 
elimination of anonymous bank accounts. We have provided the 
committee with the latest information we have regarding the 
status of this issue and will continue to keep the Committee 
advised. If the Senate chooses to give its advice and consent 
to the treaty at the present time, the Administration is 
willing and able to accept the responsibility of not permitting 
instruments of ratification to be exchanged until it is fully 
satisfied that the conditions described above have been fully 
satisfied. Absent this procedure, entry into force of the 
treaty could be further substantially delayed. Based on 
information we have received it would be in the interest of the 
United States to have the treaty enter into force as promptly 
as possible.
    We will continue to work with the Committee and its staff 
to bring this issue to a mutually satisfactory conclusion.

Conclusion

    Let me conclude by again thanking the Committee for its 
continuing interest in tax treaty program. We appreciate the 
assistance and cooperation of the staffs of this Committee and 
of the Joint Committee on Taxation in the tax treaty process. 
With your and their help, we have over the past several years 
brought into force 19 new treaties and protocols.
    We urge the committee to take prompt and favorable action 
on the three agreements before you at the business meeting. We 
further urge the Committee to take favorable action as soon as 
possible on the remaining three tax treaties that the President 
has submitted to the Senate. Such action will send an important 
message to our trading partners and our business community. It 
will demonstrate our desire to expand the United States treaty 
network with income tax treaties formulated to enhance the 
worldwide competitiveness of United States companies. It will 
strengthen and expand our economic relations with countries 
that have seen significant economic and political changes in 
recent years. Finally, it will make clear our intention to deal 
bilaterally in a forceful and realistic way with treaty abuse.