Technical Explanation PDF

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ARTICLE
82. TERMINATION
The
Convention
will
continue
in
effect
indefinitely,
but
may
be
terminated
by
either
State
at any
time
after the
year
1973.
A State
seeking
to
terminate
the
Convention
must
give notice
at
least 6 months
before
the
end of
the calendar
year through
diplomatic
channels.
If the
Convention
is terminated,
such termination
will be effective:
In the case
of Finland to taxes which are
levied for taxable years beginning
on
or after January
1 of the
year in which
notice
Is given;
In
the case of the
United States:
(1) as respects
withholding
taxes,
on January
1
of the year
following
the year in which
notice is
given;
(2)
as respects other
income taxes,
for any taxable
year beginning
on
or after
January 1 of the year following
the year in which notice
Is given.
However, upon prior notice to
be given through diplomatic channels,
the pro­
visions of
Article 25 (Social Security Payments)
may be terminated by either
State
at any time after this
Convention enters into
force.
OuYrosER
6, 1970.
TEOENIoAL
ExPLANATION
OF PBoPoarD
U.S.-TRINIDAD
AND TOBAGO INCOME
TAX
CoNvENTION,
SIGNED JANUARY
9, 1970
(Department
of the
Treasury)
ARTICLE
1. TAXES
COVEBED
This Article
designates
the
taxes of the
respective
States which
are the
sub­
ject of the
proposed Convention.
With respect
to the United
States,
the taxes
in-
eluded
are the
United States
Federal
Income
taxes imposed
by the
Internal
Revenue
Code.
This includes,
for
example, the
surtax and
would
also
include
such taxes as the temporary surcharge
which was in force from
1968 to 1970.
However,
the Convention
is not intended
to apply
to taxes
which are
in the na­
ture
of a penalty
such
as the taxes
imposed
under section
531 (accumulated
earnings
tax) and
section 541
(personal
holding company
tax)
of the Internal
Revenue Code.
These
two taxes
were expressly
excluded
to avoid
uncertainty
as
to their
status.
With
respect
to
Trinidad
and Tobago,
the taxes
Included
are the
corporation
tax and
the Income
tax.
Pursuant
to paragraph
(2) of this
Article the proposed
Convention
would also
apply to taxes
substantially
similar
to those
enumerated which
are imposed,
in addition to or in
place of the existing income taxes,
after the date of signature
of this Convention (January 9,1970).
For purposes
of
Article
6 (Nondiscrimination)
the Convention
applies
to taxes
of every
kind which are, or may be, imposed
by the respective States,
at the na­
tional, State, or local level.
ARTICLE
2. GENERAL
DEFIN1TIONS
This Article sets
out definitions of certain of the
basic terms used In the pro­
posed Convention and sets forth
rules for determining fiscal domicile
or residence
for
purposes
of
the
proposed
Convention.
A
number
of important
terms,
however,
are defined
elsewhere
in the Convention.
Any term used In
this Convention which is not defined
therein shall, unless the
context otherwise
requires,
have
the meaning
which it has
under the
laws of
the
State which
is imposing the
tax. The proposed
Convention also
provides a pro­
cedure
under
which a
common definition
may
be arrived
at by the
competent
authorities of the
United States and Trinidad and
Tobago, in Order to prevent
double taxation
or further any other
purpose of this
Convention, If
the definition
of such term
under the respective
internal
laws of the States
differs or
if
the term
is not readily
definable
under the
laws of one
or both of
the States.
The
common meaning is to be
arrived at by means of the mutual
agreement procedure
which
is described
in Article 23 (Mutual
Agreement
Procedures) of the
proposed
Convention.
While treaties
in the
past did not
specify the
power of
the competent
authorities to resolve
such differences
in definitions,
this power
is nevertheless
inherent
in the
authority
set forth
In
the mutual
agreement
articles
of
these
treaties to resolve "difficulties or doubts."
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This
Article defines geographical Trinidad
and Tobago and geographical
United
States to include their respective continental shelves. The addition of a definition
of the continental shelf is intended to clarify what the Contracting States con­
sider
to be included within their respective
jurisdictions to tax. The United
States
continental shelf is defined as the seabed and subsoil of the adjacent submarine
areas beyond the territorial sea over which the United States exercises exclusive
rights in accordance with international law for the purpose of exploration and
exploitation of the natural resources of such area, but only to the extent that
the person, property, or activity to which this Convention is being applied is con­
nected with such exploration or exploitation. For example, the income earned by
a ship and Its employees
engaged in taking seismograph
soundings on the United
States continental shelf will be treated for tax purposes the same as the Income
from a comparable
activity on the land of one
of the States of the United States.
A comparable definition
is used In the case of Trinidad
and Tobago. The definition
of the continental
shelf in the case of the United
States only includes the con­
tinental
shelf surrounding the 50 States.
Thus, for example, the continental
shelf
surrounding Puerto Rico
is not included. If the Treaty were
extended beyond the
50 States and the District of Columbia (see Article 29-Extension of Convention)
the continental shelf of the extended areas could also be covered. While the ter­
ritorial sea is part of the United States and Trinidad and Tobago for all purposes,
the defined
continental shelf is only part of
the United States or Trinidad and
Tobago, as the case may be, in
limited situations. It is included only
to the extent
that a person or property or activity to which the Convention is being applied is
connected with exploration
or exploitation of the continental
shelf. The phrase
"connected
with" does not require physical attachment
to the continental shelf
to
be within the scope of the definition.
This
Article
also sets forth rules for
determining residence for purposes
of
the proposed Convention.
Residence
is important because,
in general, only a
resident of the Contracting States may qualify for the benefits of the Convention.
A resident of one of the Contracting States is a corporation of that State
(as defined in this
Article) or any person (other
than a corporation) who is a
resident of that State for purposes of its tax. Specifically in the case of the
United States the term "a resident of the United States" means a United States
corporation and any person (except a corporation or any other entity treated
as a corporation for United States tax purposes) resident in the United States
for purposes of its tax. The parenthetical language in the definition of a resident
of the United
States is intended to make
clear that a foreign corporation,
or
other entity treated as a foreign corporation for United States tax purposes,
which is a resident of the United States for certain purposes of its income tax
law is not, under the Convention,
a
resident of the United
States. A similar
rule was needed
in the case of Trinidad
and Tobago.
In the
case
of the United
States,
the
definition
provides
that
a partnership,
estate, or trust is treated as a resident only to the extent that the income derived
by such person is suoject to United States tax as the income of a resident. This
language, although different from the Income Tax Convention between the
United States and France, signed July 28, 1967, is intended to achieve the same
result. Under United States
law, a partnership is never,
and an estate or trust
is often not, taxed as such. Under the proposed Convention, in the case of the
United States,
income received
by a partnership, estate, or trust
will not qualify
for the benefits
of
the Convention unless such
income is subject to tax in
the
United States Thus, in effect, the status of income which is subject to tax
only in the hands
of the partners or beneficiaries
will be determined by the
residence of
such partners or beneficiaries.
With respect to income taxed in
the
hands of the estate or trust,
the residence of the estate or
trust is determinative.
This
provision is
reciprocal
because of the presence
of a similar problem under
Trinidad and Tobago law.
Unlike our
other conventions, the proposed
Convention with Trinidad and
Tobago does not provide a mechanism for determining a single residence for
individuals
who are treated
by each State
as being respectively
resident therein.
In addition, corporations could
be treated by both States as
being resident
therein under
the definitions
set forth in the
treaty. Dual residency
in the case
of
corporations
is a
relatively
easy
situation
for
them
to avoid.
This Article
also provides
that the terms
"paid," "distributed,"
and "received"
when applied to income shall
Include amounts which are "credited."
This pro­
vision, which
has not appeared
in previous
income tax conventions
to which
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the
United States is a party, is intended
to make clear that a dividend
paid by
n Trinidad and Tobago corporation Includes an amount credited by such
corporation.
ARTICLE
3. GENERAL RULES
OF TAXATION
The general rules of taxation applicable under the proposed Convention are
as follows;
A resident of one
State may be taxed by the other
State only on income from
source-within
that other State (including
industrial or commercial profits
attributable to a permanent establishment located in that other State), subject
to the
limitations set forth in this Convention.
The jurisdictional rules
of th
proposed Convention parallel those set forth in section 472(a) of
the United
States Internal Revenue Code, relating to nonresident alien Individuals, and
section 882(b), relating
to foreign corporations engaged
In trade or business
in the United States, as amended by the Foreign Investors Tax Act of 1966.
The proposed Convention contains the general rule (also found In our new
French Convention)
that the Convention does
not effect in any manner any exclu­
sion, exemption, deduction,
credit, or other allowance now
or hereafter accorded
by the
laws of a State in the determination
of a tax imposed by that
State. or
by any other agreement between
the States. Even though the OECD
Model Con­
vention does
not contain a comparable provision,
this rule reflects the well-es­
tablished principle that the Convention will not have the effect of increasing
the tax burden
on residents of the sirnatory countries.
This rule represents
the position of the United States under all conventions to which it is a party
except that, to the extent
a convention specifically provides.
it may be necessary
to waive certain rights as a condition to claiming more advantageous treaty
benefits.
The proposed Convention also contains the traditional savings clause under
which the United States reserves the right to tax its citizens and residents as if
the
Convention had not come into effect. However, the savings clause does not
apply In several cases in which its application would contravene policies re­
flected in the
Convention. Thus,
the savings clause
does not affect
the proviions
with respect to
the foreign tax credit, nondiscrimination,
or
tax deferral for
technical assistance. Although
the provisions dealing with the mutual
agreement
procedure are not specifically excepted from the savings clause, agreements
made by the competent authorities may nevertheless inure to the benefit of a
citizen or resident of the United States or a resdient of Trinidad and Tobago.
Moreover, the savings clause
will not deny the benefits of the
Convention to
governmental
employees or teachers or
students unless such individuals
are citi­
zens of the United States or have Immigrant status In the United States. The
OECD Model Convention
does not contain a savings
clause because it Is oriented
toward
the residence principle of taxation.
This Article also provides that any income from sources within a State to
which the Convention Is not expressly applicable will be taxable by that State
in accordance with Its own law. For example, because income from prizes or
awards is not covered by the Convention, such income will be taxed In accord­
ance with the internal law of the State from which such income is derived. The
OECD Model Convention differs on this point and provides that income which is
not expressly mentioned will be taxable only in the State of residence. In any
event It should be noted that the proposed Convention specifically covers most
types
of income.
Another general rule of taxation
Is that subject to the provisions
of
paragraph
(4) a State may tax a resident of that State whether or not that person is also
a resident
of the other
State.
ARTICLE 4. BELIEF
FROM DOUBLE
TAXATION
Under the
existing Convention, the United
States provides relief from double
taxation by allowing a credit for Trinidad and Tobago tax subject to the provi­
sions
of the law of
the United States.
The proposed Convention employs the same method of avoiding double taxa­
tion in providing that subject to the provisions of United States law in effect for
the taxable year (which do not affect the general principle of the Article) credit
will be allowed to a United States citizen or resident for Trinidad and Tobago
tax paid but
not in excess of the portion of
United States tax which net income
from Trinidad and Tobago
sources bears to total net income.
Except for the spe-
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cial
source
rules
provided
by
the Convention,
this
provision
does
not
add
to the
rights
that a United
States
citizen or resident
has
to the foreign
tax credit,
in­
cluding
his
right
under
current
law
to elect
the overall
limitation,
but
is for the
purpose
of
giving
treaty recognition
to such
rights.
Modifications
in United
States
law
after
the effective
date of
the
Convention
whieh
concern
the foreign
tax
credit will
be applicable
with
respect
to Trinidad
and Tobago
source
income if
such modifications
do not
contravene
the
general
principles
of the
Convention.
With respect
to the
treatment
of dividends
which
are
received
by a United
States
corporation
from
a corporation
resident
in Trinidad
and Tobago
in
which
such
United States
corporation
owns
at least 10
percent of
the voting
power,
the proposed
Convention differs
in one respect
from the provisions
which
would be
applicable to such
dividend
under
the Internal
Revenue Code.
The
proposed
Convention
provides that in
the case of such
a dividend such
United
States corporation must
include in gross income the amount
of Trinidad and
Tobago tax which the Trinidad
and Tobago corporation
paid
on the profits out
of which such dividend
is paid and which the recipient
corporation is "deemed"
to have paid. Thus, the dividend
must be grossed up. Under the Internal
Revenue
Code, however,
a dividend does
not have to be
grossed up in order
for the recip­
ient
United States corporation to claim
a deemed paid credit, if the
dividend
is paid by a less
developed country corporation and
most Trinidad and Tobago
corporations
will be considered less developed
country corporations. Inasmuch
as the computation of
the deemed paid tax credit without
gross-up under the
Internal
Revenue Code will often produce
a more favorable result
than the
gross-up computation
under the proposed Convention,
it may be to the advan­
tage
of United
States corporations in some
cases to use the Code rules in com­
puting the deemed paid
credit Of course, in these cases
United States corpora­
tions may continue
to use the Code rules rather
than those found in the pro­
posed Convention.
In a case where the taxpayer
follows the Code rules on gross­
ulp,
it may nevertheless
use the source
rules set forth
in Article 5 of the
proposed
Convention.
The proposed Convention provides that Trinidad and Tobago will allow its
residents a credit for the amount of income taxes paid to the United States.
In the case
of a Trinidad and Tobago corporation
which receives a dividend
from
a United States corporation
in which such recipient corporation
controls.
directly or indirectly,
at least 10 percent of the
voting power, such corpora­
tion will be allowed a credit against its Trinidad and Tobago tax for the amount
of the United
States tax paid on the corporate
profits out
of which such dividend
is paid. This credit is, of course,
in addition to the credit allowed
for the taxes
paid to the
United States
by the Trinidad
and Tobago corporation.
Under
the
internal law of Trinidad
and
Tobago the indirect credit
would be allowed only
if the recipient
corporation owned
at least 25 percent
of the voting
stock in the
payor United States
corporation. The foreign tax
credit Trinidad and Tobago
will allow
is
subject to a per-country
limitation.
ARTICLE
5.
SOUB0E
OF INCOME
This Article sets
forth in a single provision all
of the various rules which
are
to be applied
to determine the
source
of the
different kinds
of income
covered by
the treaty: dividends, interest, royalties,
income from real property,
including gains derived
from the sale of such property,
and compensation for
personal
services. These rules affect
the application of Article 3 (General
Rules
of Taxation) and
Article 4 (Relief from Double
Taxation).
The source of any
kind of income not covered by the
treaty shall be determined
under the internal law of the two States. In the case of different source rules
applicable to an item of
income the competent authorities
of the two States
under the mutual agreement procedure may establish a common source for the
item of income.
Dividends
paid by a corporation of one
State are treated as from sources
within that State
and dividends
paid by any other
corporation
are treated as
from
sources
outside
that State. However,
dividends
paid by a Trinidad
and
Tobago corporation shall be treated as income from sources within the United
States if, for the 3-year period
ending with the close of Its taxable
year preced­
ing the declaration of such dividend (or for such portion of that period as the
corporation
has been
in existence),
such corporation
(a) had a
permanent
establishment
in the United States, and (b)
derived 50 percent or more of
its
gross Income
from the
induistrial
or commercial
profits
effectively connected
vith
52-019-71-
7
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the industrial
or commercial
activity
engaged
in through
such permanent
estab­
lishment.
The provision
was included
to offset a provision
in Trinidad
and
Tobago
law which
imposed a
withholding
tax on remitted
profits
of a United
States
permanent establishment in Trinidad
and Tobago. However, the
amount
of the dividend
to be treated
as from United
States sources
under this
pro­
vision
is not to
exceed an
amount which
bears the
same ratio
to the entire
divi­
dend as the
gross income of
the
corporation for
such period which
is effectively
connected
with the
commercial or
industrial activity
engaged in through
such
permanent
establishment within the
United States bears to its gross
income
from all sources.
A further limitation
is that in no
case shall the amount
of
such
dividend which
is treated as income from
sources within the United States
exceed the net amount of money or money's worth transferred from such per­
manent
establishment during
such period.
This rule as
applied to dividends
paid by a Trinidad
and Tobago
corporation conforms
to United States
statutory
law except
that, under
section 861 (a)
(2) (B) of the
Internal
Revenue
Code,
there is no limitation
regarding
the net amount of money
or money's worth
transferred. This limitation which is similar to a provision in the laws of
Trinidad and
Tobago
is intended
to insure that the
United States
will not treat
dividends
paid by a Trinidad
and Tobago
corporation
as income from
United
States sources to the extent
the profits of a permanent establishment
which such
corporation
maintains in the United
States are retained and reinvested.
Interest paid by that State, including any local government within such State,
or by a resident
of such State is treated
as
from sources within that State.
Interest paid by any other
person will be treated as from
sources
outside that
State. However,
interest
paid by a resident
of any State
with a permanent
establishment
in any other
State, directly
or
indirectly,
out of the
funds of
such permanent establishment
will be treated as income
from sources within
the
State
where such permanent establishment
is located. The rules
set forth
above in the first two sentences
correspond
generally to the Internal
Revenue
Code provision
dealing with interest (other
than interest on deposit with per­
sons carrying on the banking
business). The exception to
this general rule, set
forth above in the
third sentence, is not contained
In the Internal Revenue Code
but is substantially similar to
the same rule in the United States-Belgian
Income
Tax Convention signed July 9,1970.
Boyalties
paid
for the use of, or the
right to use, property described
In
para­
graph (4) of Article
14 (Royalties)
in
a State
are treated as
income from
sources within that State.
Income
from real
property and royalty
income from
the
operation
of mines,
quarries, or other
natural resources are to be treated
as income from sources
within the State in which such property is located.
Income from the rental
of tangible personal property
is to be treated as in­
come from sources within the State in which such property is located when
rented. Notwithstanding some minor differences in terms compared with Uke
provisions
in recent treaties, this language
is intended to reflect the rule of .the
Internal Revenue Code
and recent treaties that the source
of such rental income
is the State in which the property is located during the period of the lease..
Compensation received
by an individual for his performance
of personal serv­
ices and income received by a person from the furnishing of personal services of
another are to be treated as income from sources within the State In which such
services are performed. If services are performed partly within and patly out­
side any State, Income from
the performance or furnishing
of such services
shall be treated as income from sources partly within and partly outside that
State. Compensation for personal services, and private pensions and annuities
paid in respect .of such services, performed aboard ships or aircraft operated
in international traffic
by a resident of a State and, in
the case of the United
States, registered
in the United States, provided the
services are performed by
a member of the regular complement
of the ship or aircraft, are
to be treated as
income from sources within that State.
Income
from the purchase and sale
of personal movable property
is
to be
treated as income from sources within the State In which such property Is sold.
This rule
conforms to the rule set forth in
section 861 (a) (6) of the Internal
Revenue Code.
Notwithstanding the rules contained in paragraphs (1) through (7), indus­
trial and commercial
profits attributable to a permanent
establishment
which
the recipient, being a resident of one State has in the other State, including
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income dealt with in the articles pertaining to dividends, interest, royalties, and
income from real property if from rights
or property which are effectively con­
nected with such permanent establishment, shall be treated solely as income from
sources within that other State. The factors taken into account in determining
whether such effective connection exists will include whether the income is
derived
from property used, or held for use, in the conduct of the commercial or
industrial activities carried on through such permanent establishment or
whether
the commercial or
industrial activities
carried on
through such perma­
nent establishment were a material factor in the realization of the income. As
previously
noted under Article 3 (General
Rules of Taxation), this source
rule
conforms to United States policy governing the taxation of business profits and
investment income
as expressed in the Foreign Investors Tax Act of 1966. Such
policy is also reflected in the recent French Convention as well as the protocols
to the German,
Netherlands, and United
Kingdom Conventions.
Several of the source rules set out in this Article differ to some degree from
those existing in the Internal Revenue Code. Since Article 3 (General Rules of
Taxation) provides that the Convention will not increase a person's United
States tax, a taxpayer
is entitled to use the more beneficial
of the Code or
Convention rules in calculating his income for United States tax purposes, or
In the case of a
citizen or resident of the United
States, his foreign tax credit.
The rule on interest in this Article permits Trinidad and Tobago, under the
proper circumstances, to impose a tax on any interest paid by a permanent
establishment
in Trinidad and Tobago of a United States corporation. While
the rule appears to be fully reciprocal,
the United States will
not, because of
section 861(a)
(1) (B) of
the Code, impose
on nonresident
aliens and foreign
corporations a tax on interest paid by a resident of the United States unless
such resident derives 20 percent or more of its
gross income from United States
sources for the 3-year period ending with the close of the taxable year of such
resident preceding the payment of such interest.
It should also be noted that the source rules do not serve to extend the benefits
of this
proposed Convention to persons
other than residents of the two
States.
Generally, the rules are only applicable for taxing residents of either State and,
therefore, are not applicable in determining source of income of residents of
other States. although the income of such other residents is of a type referred
to
in this Article.
ARTICLE 6. NONDISCRIMINATION
The proposed Convention
bans discrimination by one
State against the na­
tionals of the other State or of a permanent establishment of nationals or cor­
porations of the other State. Thus, for
example, a national of Trinidad and
Tobago who is a resident
of the United States and who otherwise
meets the re­
nuirements
specified in section 911 of
the Internal Revenue Code would
under
this Article
of the proposed
Convention
be
eligible for the benefits
of section
911
although
such national
is not
a citizen of
the United States.
This Article provides, however,
that a State may accord
special treatment to
its own
residents
on the basis
of civil status
or family
responsibility.
This
Article
also provides
that Trinidad
and Tobago
is
not prohibited
from imposing a
branch
profits tax in
accordance with
paragraph (5)
of Article 12 (Dividends)
and the
United States from imposing
a comparable tax burden on
the income of a per­
manent
establishment
maintained
by residents
of
Trinidad
and Tobago
in
the
United States.
The ban
on discrimination
extends to
all taxes without
regard to subject
mat­
ter
nd whether
imposed
at
the national,
State,
or local
level.
This
Article is substantially
similar
to
the nondiscrimination
Article
of the
AEOD Model Convention
except
that the Model
includes a provislon
concerning
Stateless
persons
which has
been omitted
from the
proposed
Convention.
ARTICLE
7. TAX
DEFERRAL
FOR TECHNICAL
ASSISTANCE
This
Article provides
for a
reciprocal
tax deferral
which
will
be applicable
when
patents.
processes,
know-how
and
similar
items,
and
ancillary
technical
services
rendered
in
connection
with
the
furnishing
of
such
property
or
infor­
mation,
are provided
by a
resident
of one
State
to a
corporation
of the
other
State in
return
for stock
of
the
corporation
of such
other
State.
Under
paragraph
(.3) of Article
28
(Effective
Dates
and Ratification)
this
Article
shall
only
be
effective
with
respect
to
stock
received
on or
after
the
date
the proposed
Con­
vention
was
signed
(January
9,1970).
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Under
this
provision,
a
resident
of one
of the
States
may
elect
not to
include
in income,
both.for
United
States and
Trinidad
and Tobago
tax purposes,
any
amount
otherwise includable
by
reason of
the receipt
of stock in
return for
the
enumerated
items
of property,
information,
or ancillary
services.
In order
to
qualify for
the deferral,
such resident
must
receive stock
of a corporation
of
the
other
State as
consideration
for
providing
to such
corporation,
for
use in
connec
tion with
a trade or
business
actively
conducted
in that
other State
by such
cor­
poration,
any of the
following properties,
information, or
services:
(1) Any
patent,
invention,
model,
design,
secret
formula
or process,
or
similar
property
right;
(2) Information
concerning
industrial,
commerical
or
scientific
knowledge,
experience,
or skill;
or
(3)
Technical,
managerial,
engineering,
architectural.
scientific,
skilled, in­
dustrial,
commercial,
or
like
services
which
are ancillary
and subsidiary
to
the
transfer
of
the property
rights
referred
to In
(1)
or any
information
referred
to in
(2).
Where
such
an election
is
made,
expenses
allocable
to amounts
excluded
from
income
may not
be deducted
currently.
Where the
stock
received
is later
dis­
posed
of, the amount
originally
excluded
will then
be included
in income
in the
manner
in which
it would
have
been
included
upon
receipt
of
such stock.
Where
the
stock is
sold for.less
than the
amount
originally
excluded,
the
amount
Actually
received
on the
sale
Is included
In
Income
as it
initially
would
have
been
In the
absence
of
this deferral
provision.
When
the
stock
Is disposed
of, deductions
previously
disallowed
because
allocable
to excluded
amounts
will be
allowed
and any
gain
upon
such
disposition
will
be
determined
as if
the gain
had
been
included
in
income,
and
the
deductions
allowed,
upon
original
receipt
of
the stock.
This
provision
is
made
subject
to
regulations
to
be issued
by
both
parties
to
the treaty.
In the
case of
the United
States
the Secretary
of the
Treasury
or
his delegnte
may
prescribe
such
regulations
as are
necessary
to
effectuate
the provisions
of
this
Article
and
to further
define
and determine
the terms,
conditions.
and
amounts
ref'r-d
to in this ArtOIe.
Ti the enf-of
Trtridd end
T'oh'i*o the
Minister of
Finance or
his authorized
representative
may
prescribe
such regula­
tions
as
are
necessary
to
effectuate
the provisions
of
this Article
and
to further
define the terms,
conditions.
and amounts referred
to in this
Article. In par­
ticular. the
Minister
of Finance
or his authorized
representative
is specifically
authorized to
prescribe by regulation
standards
for determining
whether services
referred
to in
paragraph
(1) of this
Article are
ancillary
and subsidiary
to the
property rights
or information
referred
to In that
paragraph.
In such
regulations. the
Minister of Finance
could provide
that this provision
will
only apply to an equity interest
in a Trinidad and Tobago corporation
issued to the United States shareholder in conformance with the Trinidad and
Tobago law dealing
with
the allowable extent of
foreign equIty interests In
Trinidad
and Tobago corporations.
Authorization
is granted
to each State
to require,
by regulations,
that
a portion
of the stock
received
in return
for the enumerated
property,
information,
or
services
be deposited
with
a designated
bank
or
other
denository
for
the purpose
of assuring
collection of
any taxes payable
upon
its disposition.
Under
this provision,
a United
States
corporation
can make
a transfer
of
property
to a
Trinidad
and
Tobago
corporation
in exchange
for
the stock
of
that
Trinidad
and
Tobago
corporation,
without
regard
to the
provisions
of section
351 of the
Code, and
elect not to
Include in
income for
United States
tax pur­
poses
any
gain
otherwise
recognized
(whether
under
sections
1231
or 124)
of
the Code) as
a result of such
transfer. In addition,
that United
States corpora­
tion
can furnish
"know-how"
to the
Trinidad
and Tobago
corporation
and obtain
the deferral
for United
States
tax purposes
without
initially having
to consider
whether
such
"know-how"
constitutes
property
for purposes
of the
appliention
of section
351 of
the Code.
It can also
provide the
enumerated
services,
to the
extent
that they
are rendered
in connection
with
and subsidiary
to the
furnish­
ing of property
rights or information
which
are covered under
the Article,
without
having the
value of
the portion
of such
stock which
is attributable
to
the services
included
in income.
This elective
deferral
privilege,
which
avoids
cash
problems
involved in
having to
pay a current
tax on
the receipt
of stack
where
the recipient
wishes
to hold,
rather than
sell, such
stock,
would,
of course,
also
apply for purposes
of the imposition
of any Trinidad
and Tobago
tax other­
wise due by reason
of the transaction.
Thus, where
the connected
services are
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rendered in Trinidad
and Tobago and stock in the Trinidad and Tobago corpora­
tion to which such services are provided is taken in consideration thereof, the
United States.resident
taking such stock is
not subject to (1) Trinidad and
Tobago tax,
until later disposition of
the stock, and (2) any United
States
tax otherwise due by reason
of the receipt of such stock.
ARTICLE 8. BUSINESS PROFITS
This
Article sets forth the typical treaty
rule that industrial or commercial
profits
of a resident of one State are taxable in the other State only if the
resident has a permanent establishment in that other State. Where there is a
permanent
establishment only the industrial
or commercial profits attributable
to the permanent establishment
can be taxed by
that other State.
This Article represents an acceptance by Trinidad and Tobago of the principle
that investment
income should be taxed separately
from industrial and com­
mercial profits where
appropriate. Absent the provision,
Trinidad and Tobago
would tax all income directly or indirectly accrued In or derived from Trinidad
and Tobago, whether or not effectively connected with a permanent establish­
ment, at the regular rates.
Under most of the United States Conventions negotiated prior to the new
French
Treaty,
industrial or commercial
profits are not taxed in the
absence
of a permanent establishment.
However, once there is a permanent
establishment
these conventions, and the old French Convention, provide that the provisions
reducing the tax
rates on interest and dividends
and exempting royalties are
not
applicable. This rule is known as
the
"force of httraction" principle
and
is
replaced in the proposed
Convention,
as in our new treaty
with France, with the
enrectively connected concept. Under the new approach, only that interest, divi­
dends and royalties which are effectively connected with the permanent estab­
lishment
are taxable as
part of the industrial or commercial
profits and only
such income does not benefit from the reduced rate or exemption.
In determining the
proper attribution of industrial
or commercial profits under
the
proposed Treaty, the permanent establishment
is generally to be treated
as an
independent entity and considered as realizing the profits which would be realized
if the permanent
establishment dealt with the resident
of which it is a permanent
establishment on an arm's length basis. Expenses, wherever incurred, which are
reasonably connected with
profits attributable to the permanent
establishment,
including executive and general administrative expenses, will be allowed as de­
ductions by the State
in which the permanent establishment
is located in com­
puting the tax due to such State. However, it is not necessary to allow a profit
to the head office for ancillary services furnished to the permanent establishment
as long as the permanent establishment
is allowed to deduct the
allocable costs
incurred
by
the head
office.
The mere
purchase of goods or merchandise
in a State by the permanent estab­
lishment, or by the resident of which it is a permanent establishment, for the
account of such resident will not cause attribution of profits to such permanent
establishment.
The term "industrial or
commercial profits" means income
derived from the
active conduct
of a trade or business. For example,
it includes profits from manu­
facturing,
mercantile, agricultural, fishing, and transportation activities. How­
ever,
the term
also includes Investment income
but only if the right or property
giving rise to the income is effectively connected to a permanent establishment.
Income received
by an individual as compensation
for personal services (either
as an employee or in an independent capacity) or insuraence premiums, are not
included within
the definition of industrial or
commercial profits. Further, rentals
from
motion picture films or films or
tapes
for radio or television broadcasting
are not included within the definition of the term industrial or commercial profits
under
the
proposed
Convention.
This
Article is substantially similar
to the business profits article of the
OECD
Model Convention
except that the Model Convention
does not contain a definition
of
industrial
or commercial
profits.
ARTICLE
9.
PERMANENT
ESTABLISHMENT
This Article defines the term 'permanent establishment." The existence of a
permanent establishment
is, under the terms of the proposed
Convention, a pre­
requisite
for one State to tax the industrial
or commercial profits of a
resident
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of the
other State.
The
concept
is
also significant
in determining
the
applicability
of other
provisions of
the Convention,
such as Article 12
(Dividends), Article
13
(Interest), and Article 14 (Royalties). The definition of "permanent establish­
ment" is a
modernized version of the definition
found in some of our older treaties.
The new definition
is similar to the definition found
in
our French Convention.
The
term "permanent establishment"
means "a fixed place
of
business through
which a resident
of one of the Contracting
States engages in industrial or com­
mercial activity." Illustrations of the concept of a fixed place of business include
a seat
of management, an
office, a store or other
sales outlet, a workshop,
a fac­
tory, a warehouse,
a place of extraction
of
natural resources,
or a building, con­
struction,
or installation
project which
is used for such
purpose for 6 months
or
more. As a general
rule, any fixed facility through
which an individual, corpora­
tion or
other person
conducts
industrial
or commercial
activity
will be
treated
as its permanent
establishment
unless it
falls in one
of the specific
exceptions
described below.
The proposed Convention
uses the
term "a seat of
management"
which
was
the
term used
in our Convention
with
France.
The technical
explana­
tion of our
French
Convention
explains the
definition
of
the term
"a seat of
man­
agement"
and its difference
in meaning
!rom
the term
"a place of
management"
as follows:
It
should
be noted
that this
convention
uses
the
term "seat
of management"
where
the OECD
model convention
and prior agreements
to which the
United
-States
is a
party used
the term
"place
of management";
both
terms
are trans­
lations
of the French term "un siege
de direction" and it is believed
the
translation found in this
convention is the more accurate.
Prior agreements
in which
the term "place of
management" appears
will be interpreted
there­
fore as if the
words "seat of management"
had been used.
That
explanation is applicable to the
proposed Trinidad and Tobago Convention.
This Article specifically provides that a permanent establishment does not
include a fixed place of business of a resident of one of the Contracting States
which is lodated
in the other Contracting State if
it is used only for one or more
of the following:
(a) the processing
by another person, whether
related or
unrelated. under
arrangements
or conditions which
are or would be made between
independ­
ent
persons, of goods or merchandise
belonging to the resident;
(b) the purchase, under
arrangements
or conditions
which
are or would
be made between independent
persons, of goods or merchandise
for the ac­
count
of the resident;
(c) the storage and/or delivery of goods belonging to the resident, (other
than goods or merchandise held for sale by such resident in a store or other
sales outlet);
(d) the collection
of information for
the resident;
(e) advertising, the conduct of scientific research, the display of goods or
merchandise, or the supply of
Information, if such activities
have a prepara­
tory and
auxiliary character in the trade
or business of the resident;
or
(f) construction, assembly, or Installation projects If the site or facilities
are used for such purposes for less than 6 months.
These exceptions
are cumulative and a site or facility used solely for more than
one of
these purposes
will not be considered
a permanent
establishment
under
the proposed
Convention.
The
construction
project
rule is a physical
test
under
which the resident must be actively engaged in the project during the specifled
period.
Notwithstanding
the
other provisions
of this Article,
a person will
be con­
sidered to
have a
permanent
establishment
If he engages
in business through
an agent, other
than an independent
agent, who
has and regularly
exercises au­
thority to conclude
contracts
In the name of
such person unless
the agent only
exercises
such authority
to purchase
goods or merchandise.
The proposed
Conven­
tion further provides
that a resident
of one State
will be considered
to have a
permanent
establishment
in the
other State
if such resident
engages
in business
in sucb other
State through a
person, who maintains
in that other
State, a stock
of
goods or merchandise
belonging to
such resident from
which such person
regu­
larly fills
orders or makes
deliveries. A resident
of one State
will also be
con­
sidered to
have a permanent
establishment
in the other
State if
such resident
maintains
equipment or machinery for rental
or other purposes within that other
.State for a period of 6 months or more.
With respect to
an independent
agent, the proposed
Convention
also provides
that
a resident of one
State will not be
deemed to have
a permanent establish-
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99

ment in the other State
if such resident engages in industrial
or
commercial
activity in
such other State through an Independent
agent, such as a broker
or
general commission agent, if such
agent is acting in the ordinary
course of his
business.
The determination
of whether a
resident of one
State has a permanent
estab­
lishment
in the other State
is to be made without
regard to
any control relation­
ship
of
such resident
with respect to
a resident of the
other State or with
respect
to a person
which engages
in industrial or
commercial activity
in that other
State (whether through a
permanent
establishment or
otherwise).
The Article provides
that a resident
of one of
the States has
a permanent
establishment
in the
other State if it sells
in that other State
goods or merchan­
dise that are
either (1) subjected
to substantial
processing in
that other State
(whether
or not
purchased
in
the other State)
or (2) purchased
in that
other
State and such
goods or merchandise
are not
subjected to
substantial processing
outside
the other State.
Under this
rule, which is similar
to the rule
contained
In the proposed
Belgian
Convention
the taxpayer
will
have a permanent
estab­
lishment
whether or
not he maintains
a sales office In
the other State.
Thus,
where an independent
agent acting
for a United
States corporation
arranges for
the sale of
goods in
Trinidad and
Tobago,
the United
States
corporation
will
nevertheless
be deemed
to have a
permanent
establishment
in Trinidad
and
Tobago
where those
goods were
purchased
in
Trinidad
and Tobago
for
that
corporation
by the agent
(or by
any other
person)
and then
resold by
the
corporation
without
having
been
subjected
to
processing
outside
Trinidad
and
Tobago prior
to such
resale. With
respect
to
a United States
corporation
selling
goods purchased
outside
Trinidad
and Tobago
(or
produced outside
Trinidad
and Tobago), their
resale (or sale)
in Trinidad
and Tobago will
of itself give
rise to a
permanent establishment
only if these
goods are subjected
to substantial
processing
In Trinidad
and Tobago.
If a resident
of one State maintains
a permanent
establishment
in the other
State
at any time during
the
taxable year,
the permanent
establishment
will
be
considered to have existed
for the entire taxable
year.
ARTICLE 10. SHIPS AND AIRCAFT
This Article
provides that,
notwithstanding
the
rules
of Article
8 (Business
Profits), a
resident of Trinidad
and Tobago
will be exempt
from tax in the
United
States on income
derived
from
the
operation
in international
traffic
of
ships or aircraft, including capital
gain derived from the sale
of a ship or
aircraft
used in such traffic,
and that a
resident of the United
States will
be
exempt
from tax In Trinidad
and Tobago on Income derived
from
the operation
in international traffic of ships
or aircraft, including capital gain
derived from
the sale of a ship or aircraft used
in
such traffic, registered in the
United States.
It should
be noted that the registration
requirement Is only applicable
in the
case of a resident of the United States.
This
Article also
will apply
to income
derived
from the
leasing,
to
a person
engaged
in the operation
of
ships or aircraft,
of a
ship or aircraft
under
a full
or bareboat charter, where
the lessor Is engaged In the
operation
of ships or
aircraft if such lease is
ancillary to the lessor's other operations.
For example,
if an airline of
one of the Contracting
States which
has excess
equipment in
the winter months leases several aircraft which are excess during that period
to an airline
in the other Contracting State,
the
lessor is not subject to tax
by
that
other Contracting
State.
ARTICLE 11. RELATED PERSONS
This Article complements section 482 of the Internal Revenue Code of 1954
and confirms the power of each government to allocate items of income, deduc­
tion,
credit, or allowances
in
cases
in which a resident
of one State is
related to
any
other person if such related persons impose conditions between themselves
which
are different from conditions which would be imposed between inde­
pendent persons. This provision is similar to the provision contained In the
OECD
Model
Convention.
Provision
is made in Article 28 (Mutual Agreement
Procedures) for consul­
tation and agreement between the two States where an allocation by either State
results or would
result in double taxation.
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ARTICLE
12. DIVIDENDS
The
proposed
Convention
provides
for
unilateral
reduction
on
the
part of
Trinidad
and
Tobago
with
respect
to
dividends
which
are
derived
from
sources
within
Trinidad
and Tobago
by a
resident
of
the United
States.
Thus,
the
United
States
withholding
tax which
is
imposed
at a
30-percent
rate
on non-effectively
connected
dividends
paid by
United
States
corporations
to nonresidents
of the
United
States
is not affected
by
the proposed
Convention.
In the
absence
of a
convention,
Trinidad
and
Tobago imposes
a 30-percent
withholding
tax on divi­
dends
and
branch
profits
remitted
to nonresidents
of Trinidad
and
Tobago.
To
determine
the source
of
a dividend
for the purposes
of
this
Article,
the rules con­
tained
in paragraph
(1)
of Article
5 (Source
of Income)
are used.
Under
the proposed
Convention Trinidad
and Tobago
may impose
a with­
holding tax of 25
percent on the
gross amount actually
distributed
with respect
to portfolio
investment
dividends. The proposed
Convention
further provides
that
Trinidad and
Tobago may impose a maximum
rate of 10 percent with respect
to
Intercorporate
dividends
if the recipient owns
10 percent or
more of the stock
of
the paying corporation
and generally
if not more
than 25 percent
of the gross
income
of the paying
corporation
consists
of dividends
and interest.
The
rate
of withholding
which Is imposed by Trinidad
and Tobago on profits of
a branch
of a United States
corporation located in Trinidad
and Tobago is also limited to
10 percent.
The proposed Convention
abandons the "force of attraction"
concept by pro­
viding that the reduced
rate of tax on dividends is
denied only if the shares with
respect to which
the dividends are
paid are
effectively
connected
with a perma­
nent
establishment which
the recipient
United States
resident
has in Trinidad
and Tobago. In such a case the dividends may be taxed as business profits in
accordance
with Article 8 (Business
Profits) of the proposed Convention.
The proposed Convention
also provides specific definitions
of the term "divi­
dends" in the case of the United
States and Trinidad and Tobago.
These terms
allow each State to treat
those payments which, under
their internal law are
treated as dividends, to be so treated for purposes of the proposed Convention.
This rule is directly related to the position adopted in the.proposed Convention
with respect
to remittances of a branch of
a United States corporation, located
in Trinidad and
Tobago, to such
corporation.
The proposed
Convention
also provides that
dividends paid by a corporation
of one of the States
to a person other than a resident
of the other State (in the
case
of dividends paid by a Trinidad
and Tobago corporation, other
than to a
citizen of the United States)
shall be exempt from tax by
that other State unless
such dividends
are treated as income from sources
within that other State under
Article 5 (Source of Income). Thus, for example, If dividends are paid by a
Trinidad and Tobago corporation to av individual who is a resident of a third
country and who is not
a
citizen of the United States, and
such
dividends are
not effectively connected with
a permanent establishment located
in the United
States, the
United States
will not be able
to subject this dividend
to tax unless
the Trinidad and Tobago
corporation had a permanent
establishment in the
United States
for a 3-year period and derived
at least 50 percent of its gross
income from industrial
and commercial
profits which
are effectively
connected
with
such permanent
establishment.
In such a case,
the only amount
subject to
tax would
be the pro rata portion of the
permanent
establishment's Income
which is effectively
connected
with
the United States
trade or business.
In no
case
will the amount
of the dividend
which was treated
as income from
sources
within
the United
States exceed
the net amount
of
money
or money's worth
transferred
from such permanent
establishment
during
the
3-year period.
The
proposed
Convention
also provides
that where
a corporation
of
one State
has a
permanent
establishment
in the other
State
and derives
profits
or
income
which are
effectively
connected
with that
permanent
establishment,
any remit­
tance
of such
profits
or income
by
that permanent
establishment
may
be taxed
as
a distribution
in
accordance
with
the law
of the other
State
at a
rate which
will not exceed
10 percent. This
10-percent rate
corresponds to the
reduced rate
which
is applied
to
Intercorporate
dividends
under
paragraph
(1) (b)
of this
Article.
This
provision
has
been included
to
take into
account
the taxation
of
such remittances
under
the
tax
laws of
Trinidad
and
Tobago.
This
provision
only
applies
to remittances
that
are attributable
to gains,
profits,
or income
which
is
effectively
connected
with
the
permanent
establishment
in
Trinidad
and
Tobago. Thus,
if there Is a permanent
establishment
in Trinidad
and Tobago
BELGIUM 401

101

and no income Is
earned which is treated as effectively
connected with that
permanent
establishment, no portion of any
remittance from that permanent
establishment to
the United States home office would
be subject to this 10­
percent
tax.
It should be noted that this provision in no way affects the United States taxa­
tion of such. remittances. Thus, since the United States would not treat such
remittances
as a dividend, the 10-percent tax
which Is imposed would not
be
treated as a tax imposed on the operations of the corporation in Trinidad and
Tobago through
a permanent establishment.
It should
also be noted that the proposed
Convention does not contain
an
Article
dealing with capital gains. Both
Trinidad and Tobago and the
United
States
have
domestic rules
which
provide a
large measure
of exemption
for
foreigners deriving
capital gains.
In the case of
the United States,
a nonresident
alien is exempt from
tax on capital gains unless
he Is present in the
United States
for a period or
periods
aggregating
183 days or more
during the taxable
year. In
the case
of Trinidad
and Tobago,
capital
gains
are taxed
at normal
rates. How­
ever,
if the holding
period
of the asset
is longer
than 12 months,
-the
gain is not
regarded
as income
and
is exempt
from
taxation.
Since the
proposed
Convention
does
not provide
a special
rule for
capital gains,
paragraph
(2) of
Article 3
(General
Rules
of
Taxation)
applies.
ARTIOLE
18. INTEREST
The
proposed
Convention
provides
for a unilateral
reduction
by Trinidad
and
Tobago
of the rate
of withholding
tax which
is imposed
on interest
which
Is re­
ceived from
sources
within Trinidad
and Tobago
by
a resident
of the United
States
which
is either
a bank or
other financial
institution
not having
a perm­
anent establishment
in Trinidad
and Tobago.
In the case
of such
residents of
the
United States
the rate of tax
imposed by Trinidad
and Tobago
shall not exceed
15
percent
of the gross amount paid. For
purposes of determining the source
of an
interest payment, the rule provided
in paragraph (2) of Article
5 (Source of
Income) shall be
used. It should be noted that if the
recipient of an interest pay­
ment
from
sources within Trinidad
and Tobago is a resident of the
United
States, other than a bank
or financial institution which does
not have a perma­
nent establishment in Trinidad and Tobago, the reduced rate of tax which is
provided in the proposed Convention will not apply. The proposed Convention also
provides that interest received by one of the States or any wholly owned instru­
mentality
of that State is exempt from
tax by the other State. Thus, for
example,
interest which Is received from sources within Trinidad and Tobago by the Ex­
port-Import
Bank of the United States would
not be subject to Trinidad and
Tobago tax under this Article.
As in the case of
dividends,
the United States
has not reduced Its rate of
withholding
on interest
under the proposed
Convention.
Thus, the United
States
may
impose its withholding
tax at
the statutory rate
of 80 percent on
noneffec­
tively connected interest
which is derived by residents
or corporations of Trinidad
and Tobago from sources within
the
United States, except that interest
derived by
the Government
of Trinidad and Tobago or
any of
its wholly owned agencies
is
exempt from such tax.
Under Trinidad and Tobago income tax law any interest payment paid by a
subsidiary
to its nonresident parent or brother
company is deemed to be a non­
deductible
distribution of profits. Paragraph
(5) has been added
so as to
limit
the application
of this rule to
situations where
the taxpayer
cannot
demonstrate
the
absence of tax
avoidance
as the motive
for making
the
interest
payment. Under
the proposed Convention where
excess interest payments are
made
because the
payor and
the
recipient
are related,
the provisions
of
this Arti­
cle apply only
to so much of the
Interest as would
have been paid
to an unrelated
person. The excess
payment may
be taxed by each
State according
to its own law
including
the provisions
of the proposed
Convention
where applicable.
This
Article
contains a
provision which
is comparable
to
that found
In Article
12
(Dividends)
which
states
that interest
paid by
a corporation
of
one of
the
States
to a
person other
than
a resident
of the
other State
(and,
in
the
case of in­
terest
paid by
a Trinidad
and Tobago
corporation,
other
than a citizen
of the
United
States) shall
be exempt
from
tax by
the other
State,
unless
such interest
is treated
as
Income
from
sources
within
that
other
State
under
paragraph
(2)
(b)
or
(8) of
Article
5
(Source
of Income).
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ARTICLE
14.
ROYALTIES
The proposed
Convention provides
on a reciprocal
basis
an exemption for
artistic and literary royalties
but permits a tax to be levied
at a maximum rate
of 15 percent
on other
royalties.
The term
"royalties" is defined to Include
payments of any kind made as con­
sideration for the use
of, or the right to use, copyrights,
artistic or scientific
works, patents, designs, plans, secret processes or formulae, trademarks or other
like property or rights (not including motion picture films or films or tapes for
radio or television broadcasting) or information concerning industrial, com­
mercial, or scientific knowledge, experience, or skill.
For purposes of the proposed Convention, the term "royalties" does not include
any royalties, rentals, or other amounts paid In respect of the operation of mines
or quarries
or other natural resources. The
rules applicable to such income
are
contained in Article
15 (Income from Real Property)
of the proposed Convention.
The provisions of this Article do not apply If the recipient of a royalty has a
permanent establishment In a State of source and the rights or property giving
rise to such royalty Is effectively connected with such permanent establishment.
In such a case, the royalty may be taxed as industrial or commercial profits
under Article 8 (Business Profits). Thus, the "force of attraction" principle is
also abandoned with respect to royalties. To determine the source of a particular
royalty, the rules provided in paragraph (3) of Article 5 (Source of Income)
shall be used.
Under the proposed Convention, If excess royalties are paid because the payor
and recipient are related, the provisions of the royalties Article apply only to
so much of the royalty as would have been paid to an unrelated person. The
excess payment may
be taxed by each State, according
to Its own law including
the provisions
of the proposed Convention
where applicable.
ARTICLE 15. INCOME FROM REAL PROPERTY
This Article provides
a resident who is subject
to taxation on income from
real
property with
an election to be
taxed on a net
basis. The election
applies
to
income from
real property,
including gains
derived from the
sale or exchange
of such property,
-and natural resource royalties.
Each State retains the right
to tax income from
real property under paragraph (1)
of Article 3 (General Rules
of Taxation).
ARTICLE 16. INVESTMENT OR HOLDING COMPANIES
This Article denies
the benefits
of the dividends,
interest, and royalties
Articles
to a corporation of
one of the States deriving such income
from sources within the
other State
if (1) such corporation
is entitled
to special tax
benefits which result
in
the tax imposed
on such
income
being substantially
less
than the tax
generally
Imposed on
corporate profits in such State,
and (2) 25 percent or more of
the
capital of the corporation Is owned
directly or indirectly by one
or more persons
who
are not individual residents of such
State or, in the case of a Trinidad
and
Tobago corporation, are citizens of the United States.
The purpose of this Article is
to deal with a potential abuse which
could occur
if one
of the States provided preferential
rates of tax for investment or
holding
companies.
In such
a case, residents
of third countries
could organize
a corpora­
tion
in
the State extending
the preferential
rates
for
the purpose of
making
investments in the other State. The combination of the low tax rates in the first
State
and the reduced
rates or exemptions
in the other
State would
enable the
third-country
residents
to realize
unintended
benefits.
ARTICLE 17. INCOME FROM PERSONAL SERVICES
This Article
provides
that an individual resident
of
one State Is exempt from
tax by
the other State
with respect to
income from personal
services performed
in such other State
if such person is physically present
there
for not more than
183 days,
in the aggregate,
during
the taxable
year
and
either (1)
such individual
is
an employee of a
resident of a State
other than the
State of source
(or an em­
ployee
of a permanent
establishment
of a resident of
the State of source
located
outside such
State)
and the amount
of such
income is
not deducted
in computing
the profits of
a permanent establishment
of
the State of source;
or (2) such
income
does not exceed
$3,000 or Its equivalent
In Trinidad
and Tobago
dollars.
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403

103

Thus, if such individual's employment income does not exceed $3,000 or its
equivalent in
Trinidad and Tobago dollars, such individual need only satisfy the
physical presence limitation in order to qualify for the exemption.
Compensation for services performed as a member of the regular complement
aboard ships or aircraft operated in international traffic by a resident of one
State (and
in the case of the United
States, registered in the
United States)
are exempt from tax in the other State. This exception
does not limit a State's
right
to tax its own citizens
or residents.
"Income
from personal services"
includes
income from the
performance
of
per­
sonal services
in an independent capacity
and "employment Income."
Employment
income includes
income from services performed
by officers and directors of cor­
porations. However, income from personal services performed by partners is
treated
as income from the performance of services in an independent capacity.
The exemption applicable
to personal service income is limited in
the case of
(1) public entertainers,
such as musicians, actors, or professional athletes, and
(2) any person providing the services of a person described in (1) even though
such income
may otherwise be considered exempt
under some other provision
of
this Convention. These persons are taxable
if their income from such activities
exceeds $100 (or
its equivalent in Trinidad and Tobago
dollars) for each day
the
individual is
present for purposes
of performing
within
the State.
ARTICLE 18. TEACHING AND RESEARCH
This
Article of the proposed Convention
provides a reciprocal exemption
from
tax for personal service
income of visiting teachers or researchers.
This exemp­
tion
applies
to an individual who
is a resident of one State
at the time he is in­
vited by the Government of the other State or by an accredited educational insti­
tution of the
other State to teach or do research
in
the other State and temporarily
comes to such other State in order to engage in such teaching or research at such
an accredited educational institution. However, the exemption does not apply
to
income
(1) from research undertaken not
in the public interest but primarily
for private benefit of a specific person or persons or (2) In cases where an agree­
ment exists between
the Governments of States for
the provision of the services
of such individuals. If the individual's visit exceeds a period of 2 years from the
date of arrival, the exemption applies to the Income received by the individual
-beforethe expiration
of such 2-year
period.
ARTICLE 19. STUDENTS AND TRAINEES
This
Article provides that an individual
who is a resident of one State
at the
time he becomes
temporarily present in the other State
for the purpose of study­
ing at a university or other accredited institution, of securing training for quall­
flication
in A profession or of studying
or
doing research as a recipient of
a grant,
allowance, or award from a
governmental, religious, charitable,
scientific,
iterary, or educational institution is exempt from tax in the host State on:
(1) Gifts from abroad
for his maintenance
and study;
(2) The
grant, allowance,
or award;
(3) Income from personal services performed in the host State not in excess
of $2,000 (or Its equivalent in Trinidad and Tobago dollars) for any taxable year.
The $2,000 exemption Is increased to $5,000 if a resident is securing training re­
quired to qualify him to practice a profession or a professional specialty.
These exemptions
continue
for such period of time
as may be reasonably or
customarily required to effectuate the purpose of his visit but in no event may
an individual
have the benefit of this provision
for more than a total of 5 taxable
years from
the date
of arrival.
In
addition, a resident
of one State
employed by
or under contract
with a
resident of
that State who, at the time he
Is a resident of that State, becomes
temporarily present in
the other State for the purpose of studying
or acquiring
technical, professional, or business experience other than from a resident of
the first-mentioned State is exempt from tax In the host State on income not,
in excess of $5,000 (or its equivalent in Trinidad and Tobago dollars) from
personal
services rendered in the host
State. The individual is exempt
for a
period of one year which
period commences with the first
day of the first month
in which he begins working or receives compensation.
Also, an individual who is a
resident of one State at the time
he becomes
temporarily
present in
the other.
State for a
period not
exceeding one
year
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104

and who
is temporarily
present in the
host State as a
participant in a
govern­
ment program
of the host State
for the primary
purpose of
training, research
or study
is entitled
to
an exemption
by
the host State
with respect
to his
income
from personal services
relating
to such training,
research, or study
performed in
the host
State
in an amount
not
in excess
of $10,000
(or its
equivalent
in Trinidad
and
Tobago
dollars).
*
If an individual
qualifies for the benefits of more
than one-of the provisions
of the personal services Articles,
he may choose the provision
most
favorable
to him but he may not
claim the benefits of more than
one provision in any
taxable year.
ARTICLS
20.
GOVERNMENTAL
SALARIES
The proposed Convention provides that wages, salaries, and similar compen­
sation, pensions, annuities, or similar benefits, which are paid by or from the
public funds of one of the States to an individual who is a national of that State
for services rendered to that State in the discharge of governmental functions
shall be exempt from
tax by the other
State.
Unlike the French Convention the proposed Convention does not apply to
political
subdivisions of
a State. Thus, for
example, employees
of a State or
municipal government of the United States employed In Trinidad and Tobago
will not be exempt from Trinidad and Tobago tax under the proposed Con­
vention.
With respect to the application
of this provision to Trinidad
and Tobago, It
should be noted that Trinidad and Tobago
taxes on the basis of residence and
not citizenship.
Further, a person loses his resident
status in Trinidad and
Tobago for
tax purposes if
he remains outside
the country
for a continuous
period
of 6 months. Thus, a resident
of Trinidad and Tobago employed
abroad
can be subject to tax in Trinidad
and Tobago for no more
than 0 months.
The proposed Convention also adds a specification that the compensation must
be paid in connection with the discharge of functions of a governmental nature.
Compen-ation paid
in connection with industrial
or commercial activity is
treate& the same as compensation received from a private employer. The pro­
visions relating to dependent personal services, private pensions and annuities,
and
social security
payments
would apply
in such a
case.
ARTICLE
21. RIULES
APPLICABLE
TO
PERSONAL
INCOME
ARTICLES
This Article
extends
the benefits
of the
personal
services
Articles
(Articles
17 through 20) to reimbursed
travel expenses.
However, such
reimbursed ex­
penses will
not be taken
into account in
computing the
maximum amount
of
exemptions
specified in Articles
17 (Income
from Personal
Services)
and 19
(Students
and
Trainees).
If an individual
qualifies for
the benefits
of
more
than one
of the provisions
of Articles 17
through 20, he
may choose the
pro­
vision
most favorable
to him
but he may
not claim the
benefits
of more than
one
Article with
respect to the
same income
in any one taxable
year.
ARTICLE 22. PRIVATE PENSIONS AND ANNUITIES
The proposed
Convention provides
that private
pensions, private
life an­
nuities.
and
alimony
which
are paid
to an
individual
who
is a resident
of
one
of the States shall
be exempt from tax In the
State of source.
The term "life annuities" is defined to mean a stated sum paid periodically at
stated times during life, or during a specified number of years, under an obligation
to make payments In return
for adequate and full consideration
in money or
money's worth.
The term "pension" is defined as periodic payments made after retirement or
death in consideration for services rendered. or by way of compensation for
Injuries received
in connection with past
employment.
The term
"alimony" is defined as periodic payments
made
pursuant to a decree
of divorce or of separate
maintenance which are taxable
to the recipient under the
internal
laws of the State of which
he
is a resident. Thus, the term "alimony"
would not
include a
payment which
would
not be taxable
to the
recipient under
the laws of the State in which he Is a resident even though such payment is made
pursuant to a decree of divorce or of separate maintenance.
The effect of this provision is the same as that of the OECD Model Convention.
BELGIUM
405

105

ARTICLE
28.
MUTUAL
AGREEMENT
PROCEDURES
This Article provides that the competent authorities of the States may prescribe
regulations for implementing the present Convention within their respective
States and may communicate with each other directly for the purpose
of ca frying
out and giving
effect to
the
provisions
of this Convention.
This Article also provides that the competent authorities of the two States will
endeavor to settle by mutual agreement cases of taxation not in accordance with
the
Convention as well as any other difficulties
or doubts arising as to
the appli­
cation of the Conventioa Some particular areas on which the competent authori­
ties
may consult
and reach agreement are (1)
the amount of industrial and com­
mercial profits to be attributed to a permanent
establishment,
(2) the allocation
of income,
deductions, credits, or allowances
between
a resident and any
related
person, and (3) the determination
of the source of
particular items of income
In accordance
with the rules
set forth in Article
5 (Source
of Income).
In implementing
the provisions
of this
Article, the competent
authoritiLs
will
communicate
with each other directly and meet
together for an exchange of oral
opinions where advisable.
In cases
in which the competent authorities
reach agreement with
respect to
a particular matter,
taxes will be adjusted and refunds
or credits allowed in
accordance
with such agreement. This provision
permits the issuance of a
re­
fund or credit notwithstanding
procedural barriers otherwise
existing under a
State's
law, such as the Statute of Limitations.
This provision will
apply only where agreement or
partial agreement bas been
reached between
the competent
authorities and
will apply In the
case of any
such agreement
after
the Convention
goes
Into effect
even though
the agreement
may concern
taxable years prior
thereto.
Revenue
Procedure 70-18
sets forth the
procedures followed
by the United
States in implementing its obligations under this type of article.
ARTICLE 24. EXCHANGE OF INFORMATION
This Article
provides for a
system of administrative
cooperation
between the
competent
authorities
of the two States
and specifies
conditions under
which in­
formation may
be exchanged to
facilitate the administration
of the
Convention
and to prevent
fraud and the avoidance of taxes
to
which the Convention relates.
Information
exchanged is treated as
secret and may not be disclosed
to any
persons other
than those
(including a court
or administrative
body) concerned
with the assessment,
collection,
enforcenwnt, or
prosecution of taxes
subject to
the Convention,
but this does not prohibit
disclosure In the course of a court
proceeding. In no case does this Article impose an obligation on either State to
exchange information
which would disclose trade secrets
or
similar information.
Further, information shall not be exchanged unless that Information Is available
to a Contracting State
under
its taxation laws and administrative
procedures.
The mutual exchange of Information called for by these provisions is presently
In effect in most of the conventions
to which the United States
Is a party.
ARTICLE 25. ASSISTANCE IN COLLECTION
This Article provides for mutual assistance in the collection of taxes where re­
quired
to
avoid an abuse of the Convention.
The provision is intended
merely to
insure that the benefits of the Convention will only be available with respect to
persons entitled to such benefits; it does not in any way alter the rights under
other provisions of.the Convention.
The Article provides that
each State will endeavor to
collect for the other
State such
amounts as may be necessary to insure
that any exemption or reduced
rate of tax granted under the proposed Convention will not be availed of by per­
sons
not entitled to
those benefits. However,
this Article
will not require
a State,
in order
to collect taxes
which are imposed
by the other
State, to undertake
any
administrative
measures
that differ from
Its Internal regulations
or practices
nor will this Article require a State to undertake any administrative or judicial
measures which
are contrary
to that State's
sovereignty, security,
or public
policy.
ARTICLE
20. TAXPAYER CLAIMS
This
Article
provides for
the administrative
review
of
taxpayer
claims.
Thus,
when
a resident of
one State considers
that action
has resulted or will
possibly
BELGIUM
406

106

result
in taxation
contrary
to the provisions
of
the Convention,
such resident
may
present his case to
the competent authority of the State
of which he is a resident.
This remedy is in addition to any remedy provided by the law of either State.
The competent authority of the State to which the claim is made shall, if he
thinks the
claim has merit, endeavor to settle
this claim with the competent
authority of the
other State. In
cases in which
the competent authorities
reach
agreement
with respect
to a
particular
matter, taxes
will be imposed
and
refunds
or
credits allowed
(as provided
in Article
24 (Mutual
Agreement
Procedures))
in accordance
with
such agreement
ARTICLE 27. EXCHANGE
OF LEGAL INFORMATION
This Article specifically provides that the competent authority of each State
will advise the competent authority
of the other State of any addition to
or
amendment
of tax laws
which concern
the imposition of
taxes which are
the sub­
ject of this Convention.
It is further provided
that the competent
authority of
each State will
exchange the texts of
all published material interpreting
the
present Convention under the laws of the respective States, whether in the form
of regulations,
rulings, or
judicial
decisions.
ARTICLE 28. EFFECTIVE DATES AND RATIFICATION
This Article provides for the
ratification of the proposed Convention
and for
the exchange of instruments of
ratification. The proposed Convention
will have
effect
for taxable years beginning on or after the
first day of January of the year
in which the
instruments of ratification
are
exchanged.
However, (1)
the provi­
sions
of paragraph (2) of Article
7 (Tax-Deferral for Technical
Assistance)
shall be effective
with respect to stock received on or
after the date of the signing
of the Convention
and (2) Trinidad
and Tobago
agrees, following
the signing of
this Convention, to take all steps
that are necessary to give effect
to the provi­
sions of Article
12 (Dividends) so that the provisions
of that Article shall be
effective from January
1, 1970, and shall terminate on December
31, 1970, unless
this Convention has been ratified by both States. This provision was added in
order to authorize
Trinidad and Tobago to reduce
the rate of its withholding on
dividends
as
soon as the Convention
is signed and not postpone this
reduction
until the
Convention is
ratified.
This Article also provides rules
for terminating the Convention.
The Conven­
tion will continue in effect indefinitely, but may be terminated by either State at
any time after 5 years
from the first day of January of
the year in which the
instruments of ratification are
exchanged. A State seeking to terminate
the Con­
vention must give
notice at least 6 months before
the end of the calendar year
through diplomatic channels. If the Convention is terminated such termination
shall he effective for taxable years beginning on or after the first day of January
next following
the expiration of
the 6-month period.
ARTICLE 29. EXTENSION OF CONVENTION
This Article provides a method by which either State may extend the Conven­
tion, either in whole or in part or with such modification as may be found neces­
sary for special application in a particular case, to all or any areas for whose
international relations the State Is responsible and which area imposes taxes
substantially
similar in
character to those which are
the subject of this
Convention.
Extension
to an area may be accomplished
by a State through a written noti­
fication given to the other
State through diplomatic channels.
The other State
shall indicate its acceptance by a written communication through diplomatic
channels. When the notification and communication have been ratified in ac­
cordance with
the constitutional procedures
of
each State and instruments
of
ratification exchanged
the extension will take effect for
the date specified in,
and be subject to
such conditions as are specified
in, the notification. Without
such acceptance
and exchange of instruments
of ratification in respect of
an
area, none of the provisions
of this Convention shall apply
to such areas.
Either of the States may terminate an extension with respect to an area by
6 months
prior written notice of termination
given to the other State
at any
time after the date of entry
Into force of the extension. The
termination will
take effect
for taxable years beginning on or
after the first day of January next
BELGIUM
407

107

following
the
expiration
of
the 6-month
period.
The
termination
of
an extension
to a
particular
area
shall
not
affect
the application
of the
Convention
to the
United
States,
Trinidad
and
Tobago,
or
any other
area
to
which
the Convention
has
been extended.
OCTOBER
6,
1970.
TECHNIOAL
EXPLANATIoN
or PBOPOsED
UNrrED
STATEG-NETHEBLANDS
EsTATE
TAx
CONVENTION
(Department
of the
Treasury)
.
INTRODUCTION
The proposed
Estate
Tax
Convention
and
Protocol
with the
Netherlands
Is the
first
estate tax
convention
to
be sent to
the Senate
since
the Convention
between
the
United
States
and Canada,
which
was
ratified
on January
31,
196 That
Convention
replaced
an earlier
estate
tax convention
between
the two
countries.
Prior
to that
the most
recent
estate tax
convention
forwarded
to the Senate
was
with
Italy. It
was ratified
on July
29, 1955.
The
proposed
Convention
Is substantially
different
from
the twelve
existing
tax conventions'
principally
because
of
two significant
developments
since
the
negotiation
of
our last
estate tax
convention.
The
new convention
Is the
first to
reflect
changes and
the policies
underlying
those changes
in United
States
estate
taxation
of nonresident
aliens
contained
in
the Foreign
Investors
Tax Act
of
1966.
The proposed
convention
is also
based,
in part,
on the
provisions
of the
OECD
Model Estate
Tax
Convention
(entitled
Draft Double
Taxation
Conven­
tion on
Estates and
Inheritances),
published
in 1966
by the Organization
for
Economic
Co-operation
and Development,
to the
extent consistent
with
the laws
and policies
of the
United
States and
the Netherlands.
The United
States
played
a substantial
part In
the drafting
of
the model
convention.
As
the United
States
nears
the
completion
of
its income
tax convention
network
in Western
Europe
(based
on
the OECD
Model
Income
Tax Convention),
we are
seeking
a comple­
mentary estate
tax convention
system. The
proposed
convention
reflects a
co­
ordination
and rationalization
of the Netherlands
succession and
transfer
duties
(typical
of Western
European
legal systems)
with the
United States
estate
tax.
However,
most
of the provisions
in
the proposed
convention
are found
in the
existing
conventions
and
only a
few provisions
are
new,
such
as Article
4, which
provides
rules
designed
to
ameliorate
tax problems
of
persons
temporarily
present in
a foreign country,
and Article
10(1), which
provides for
a marital
exemption.
The provisions of the proposed
Convention
are discussed article
by article
below, after
brief summaries
of the
Federal
estate tax,
the Dutch succession
and
transfer
duties, and
the general
approaches
of existing
United
States estate
tax
conventions and the OECD Model Convention.
FEDERAL
ESTATE
TAX
The Federal estate tax is imposed with respect to the worldwide estates of
decedents
who were citizens or residents of
the United States at death and
on
the estates of nonresidents who were not citizens (referred to hereafter as non­
resident aliens) with respect
to
their property deemed situated
in the United
States. For Federal estate
tax purposes, a resident of
the United States Is a
domiciliary therein, i.e., a person residing in the United States who has the
intention
to remain in the
United
States Indefinitely
or a
person who has
lived
in the United States with such
an intention and who subsequently
left the
United
States without having
the intention to. remain indefinitely
In the country
of
his new residence.
In
other words,
while the
term "resident"
is
used
In the
estate tax laws,
it is generally
defined in terms
of the common
law rules with
respect to domicile.
For situs rules
of United States
domestic law,
see sections
2104 and 2105 of
the
Internal Revenue
Code of 1954 (the
"Code") and
the regulations thereunder;
for a discussion
of the more
important types
of property taxable
on the basis
of
1 The United
States
has estate
tax
conventions
in force
with Australia,
Canada,
Finland.
'rance, Greece,
Ireland,
Italy, Japan,
Norway,
Switzerland,
the Republic
of
South Africa,
!andthe United Kingdom.
BELGIUM
408