Ex. Rept. 116-3 - Protocol Amending the Tax Convention with Japan, 2019-07-10

Date10 July 2019
Type of DocumentSenate Executive Report
IssuerCommittee on Foreign Relations
89–119
116
TH
C
ONGRESS
E
XEC
. R
EPT
.
" !
SENATE
1st Session 116–3
PROTOCOL AMENDING THE
TAX CONVENTION WITH JAPAN
J
ULY
10, 2019.—Ordered to be printed
Mr. R
ISCH
, from the Committee on Foreign Relations,
submitted the following
REPORT
[To accompany Treaty Doc. 114–1]
The Committee on Foreign Relations, to which was referred the
Protocol Amending the Convention between the United States of
America and the Government of Japan for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income and a related agreement entered into by an ex-
change of notes (together with the ‘‘proposed Protocol’’), both signed
on January 24, 2013, at Washington, together with correcting notes
exchanged March 9 and March 29, 2013 (Treaty Doc. 114–1), hav-
ing considered the same, reports favorably thereon with a declara-
tion and conditions, as indicated in the resolution of advice and
consent, and recommends that the Senate give its advice and con-
sent to ratification thereof, as set forth in this report and the ac-
companying resolution of advice and consent.
CONTENTS
Page
I. Purpose ........................................................................................................... 1
II. Background .................................................................................................... 2
III. Major Provisions ............................................................................................ 2
IV. Entry Into Force ............................................................................................ 3
V. Implementing Legislation ............................................................................. 3
VI. Committee Action .......................................................................................... 3
VII. Committee Comments ................................................................................... 3
VIII. Text of Resolution of Advice and Consent to Ratification .......................... 5
IX. Annex 1.—Technical Explanation ................................................................ 8
I. P
URPOSE
The purpose of the Protocol, along with the underlying treaty, is
to promote and facilitate trade and investment between the United
States and Japan. Many of the provisions in the proposed Protocol
are intended to bring the existing Convention in closer conformity
with the 2006 U.S. Model, accounting for particular aspects of Jap-
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anese law and its interaction with U.S. laws. The proposed Protocol
provides an exemption from source-country withholding tax on all
cross-border payments of interest largely in conformity with
theU.S. Model Treaty and expands the category of cross-border
dividends that are eligible for an exemption from source-country
withholding, including modifying the ownership requirement for ex-
emption. The proposed Protocol would amend provisions of the ex-
isting Convention governing the taxation of capital gains to allow
for taxation of gains from the sale of real property and real prop-
erty interests by the State where such property is located in con-
formity with the Foreign Investment in Real Property Tax Act. The
proposed Protocol also incorporates into the existing Convention
provisions that allow the revenue authorities of a Convention party
to request assistance on revenue collection from the other party.
The Protocol contains provisions to ensure the exchange of infor-
mation between tax authorities in both countries, consistent with
both the U.S. Model, international standards, and U.S. law.
II. B
ACKGROUND
The United States has a tax treaty with Japan that is currently
in force, which was concluded in 2003 (Convention between the
Government of The United States Of America and the Government
of Japan for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with respect to Taxes on Income, signed at Wash-
ington D.C. on 6 November, 2003). The proposed Protocol was nego-
tiated to bring U.S.-Japan tax treaty relations into closer con-
formity with each country’s current tax treaty policies. For exam-
ple, the proposed Protocol also includes updated exchange of infor-
mation articles and a mandatory binding arbitration provision to
resolve disputes between the revenue authorities of the United
States and Japan.
III. M
AJOR
P
ROVISIONS
A detailed article-by-article analysis of the Protocol may be found
in the Technical Explanation Published by the Department of the
Treasury on April 13, 2015, which is included at Annex 1 to this
report. In addition, the staff of the Joint Committee on Taxation
prepared an analysis of the Protocol, JCX-136-15 (October 29,
2015), which was of great assistance to the committee in reviewing
the Protocol. A summary of the key provisions of the Protocol is set
forth below.
ASSISTANCE IN COLLECTION OF TAXES
The proposed Protocol incorporates into the existing Convention
provisions that enable a party’s revenue authority to make a lim-
ited number of requests for assistance of the other party’s revenue
authority in the collection of taxes, related costs, interest, and pen-
alties. Requests for assistance are also limited by certain conditions
depending on whether the revenue claim is against a company or
an individual.
EXCHANGE OF INFORMATION
Consistent with the U.S. Model and international standards, the
proposed Protocol provides authority for the two countries to ex-
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change tax information that is foreseeably relevant to carrying out
the provisions of the existing Convention as amended by the pro-
posed Protocol. The proposed Protocol allows the United States to
obtain information (including from financial institutions) from
Japan regardless of whether Japan needs the information for its
own tax purposes.
MANDATORY ARBITRATION
The Protocol incorporates mandatory, binding arbitration for cer-
tain cases where the competent authorities of the United States
and Japan have been unable to resolve after a reasonable period
of time. A mandatory and binding arbitration procedure was not in-
cluded in the 2006 U.S. Model treaty, but has recently been in-
cluded in the U.S. income tax treaties with Belgium, Canada, Ger-
many, France, Switzerland, and Spain.
IV. ENTRY INTO FORCE
The proposed Protocol shall enter into force upon exchange of in-
struments of ratification. The proposed Protocol will have effect,
with respect to taxes withheld at source, for amounts paid or cred-
ited on or after the first day of the third month next following the
date of entry into force of the proposed Protocol, and with respect
to other taxes, for taxable years beginning on or after the first day
of January next following the date of entry into force of the pro-
posed Protocol. Special rules apply for the entry into force of the
mandatory binding arbitration provisions.
V. IMPLEMENTING LEGISLATION
As is the case generally with income tax treaties, the Protocol is
self-executing and does not require implementing legislation for the
United States.
VI. COMMITTEE ACTION
The committee held a public hearing on the Protocol in the 114th
Congress. The transcript for the committee hearing held in the
114th Congress on October 29, 2015 can be found in Annex 2,
pages 23–69, in Exec. Rept. 114–1. The committee heard testimony
from Robert B. Stack, Deputy Assistant Secretary for International
Tax Affairs at the Department of the Treasury, Washington, D.C.,
and from Thomas A. Barthold, Chief of Staff, Joint Committee on
Taxation, Washington, D.C. The committee considered the Protocol
and reported it favorably in the 114th Congress on November 10,
2015.
In the 116th Congress, the committee hosted a staff briefing from
Department of the Treasury and Department of State officials with
Senate Foreign Relations, Finance and Joint Tax Committee staff
on June 11, 2019. On June 25, 2019, the committee considered the
Protocol and ordered it favorably reported, with a quorum present
and without objection.
VII. COMMITTEE COMMENTS
The Committee on Foreign Relations believes that the Protocol
will stimulate increased trade and investment, reduce tax evasion,
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