In August, 2003, the US and Swiss competent authorities concluded an agreement regarding the Limitation on Benefits Article of the income tax treaty and accompanying Revised Memorandum of Understanding between the United States and the Swiss Confederation. The agreement provides guidance regarding application of the “derivative benefits” provisions of the treaty, under which a Swiss company may be entitled to treaty benefits based, in part, on the residence of its ultimate beneficial owners. The agreement provides that certain categories of US residents will be taken into account for purposes of the derivative benefits ownership tests, including individuals who are residents of the United States and companies incorporated in the United States whose principal class of shares is primarily and regularly traded on a recognized stock exchange. In February, 2004, the Treasury Department addressed issues surrounding the administration and regulation of the foreign tax credit rules whilst also forbidding transactions designed to generate credits for foreign taxes paid on gains that are not subject to tax in the United States. Notice 2004-19 follows reconsideration by the authorities of Notice 98-5. Notice 98-5 described an approach for disallowing foreign tax credits based on a comparison of economic profit to the claimed tax benefits and stated that this approach would be implemented through regulations. The Treasury decided not to issue regulations as described in Notice 98-5. This decision was influenced by recent court cases involving foreign tax credit transactions that clearly produced results inconsistent with the purpose of the foreign tax credit rules. The courts held that the approach taken in Notice 98-5 did not support the IRS's proposed disallowance of foreign tax credits in those cases. Treasury and the IRS disagree strongly with the result in those cases, but have concluded that the approach described in Notice 98-5 is unlikely to be an effective tool for addressing transactions that abuse the foreign tax credit rules. Accordingly, Notice 2004-19 withdraws Notice 98-5, and describes the approaches Treasury and the IRS are using to address transactions and arrangements structured to give rise to inappropriate foreign tax credit results. Notice 2004-20 halts a specific transaction designed to generate credits for foreign taxes paid on gains that are not subject to tax in the United States. The claimed result of the transaction is a foreign tax credit but no corresponding income and U.S. tax for the U.S. taxpayer. The transaction involves a purported acquisition of stock of a foreign target corporation by a domestic corporation, an accompanying election under section 338, and a prearranged plan to sell the target corporation's assets in a transaction that gives rise to foreign tax without corresponding income for U.S. tax purposes. Commenting on the notices, Treasury Assistant Secretary for Tax Policy Pam Olson observed: “The foreign tax credit serves the important purpose of eliminating potential double taxation. It was never intended to eliminate tax altogether.” “Transactions structured so the taxpayer incurs foreign taxes without any corresponding U.S. tax liability because the underlying income is not recognized for U.S. tax purposes do not give rise to the double taxation that is the economic basis for the foreign tax credit. These types of transactions should not generate foreign tax credits.” She added: “The Treasury Department and the IRS will continue to use all of the tools available to stem abusive foreign tax credit transactions. In addition, we urge Congress to pass the legislation proposed in the President's Budget to ensure the government has additional tools to prevent abuse in this area.” In March, 2004, the United States and the Netherlands signed a protocol amending their existing bilateral income tax treaty. US Treasury Secretary, John Snow observed that: "The new agreement that we are signing today is just the latest chapter in a long history of close relations between the United States and the Netherlands. It is hard to imagine a country that is more outwardly-focused than the Netherlands. As a result, the Netherlands has been an international leader in bringing down barriers to cross-border trade and investment. The first tax-related agreement between our two countries was a shipping agreement that entered into force in 1926. Since that time we have entered into a series of tax treaties and protocols, each of which has helped further improve the environment for international trade and investment." Going on to draw attention to the fact that the original tax treaty between the US and the Netherlands was one of the first bilateral agreements to include provisions preventing non-residents of either country from exploiting the tax benefits of the agreement, the Treasury Secretary outlined the ways in which the newly signed protocol improves upon the existing agreement. These include:

    * Modernising the provisions preventing inappropriate exploitation of the treaty to take into account economic developments and changes in treaty practices over the past decade. The new rules are simpler, clearer and more effective;Providing for exclusive residence-country taxation of certain intercompany dividends. This elimination of withholding taxes removes a remaining barrier to investment between our two countries in both directions;Providing clear rules regarding the treatment of investments made through partnerships, allowing flexibility in business form; and
    * Further coordinating the two countries' tax rules relating to pensions, allowing individuals to take up employment opportunities in either country without concerns about unintended tax effects on their retirement benefits.

    After some problems in the Senate, the new protocol came into effect at the end of 2004.

    In July, 2004, the Treasury Department issued fresh guidance relating to the determination of the applicable tax treaty in cases where a foreign corporation is resident in two foreign countries. According to the revenue ruling, a foreign corporation will be treated as a resident for US tax treaty purposes only of the country to which residence has been assigned under the tax treaty between the two foreign countries.

Accordingly, the foreign corporation will not be entitled to claim the benefits of the tax treaty between the United States and the country to which residence is not assigned under the treaty between the two foreign countries. However, the foreign corporation will be entitled to claim the benefits of the tax treaty between the United States and the country to which residence is assigned, provided that it satisfies any limitation on benefits provision and other applicable requirements of the treaty. In September, 2004, a new income tax treaty between the United States and the People's Republic of Bangladesh was signed in Dhaka, the US government announced. The treaty was signed by Ambassador Harry Thomas, on behalf of the United States, and Khairruzzaman Chowdhury, Secretary of the Internal Resources Division of the Ministry of Finance and Chairman of the National Board of Revenue, on behalf of Bangladesh. According to the US Treasury, the treaty represents another advance in its ongoing efforts to expand the US tax treaty network by establishing new tax treaty relationships with emerging economies. The new treaty with Bangladesh generally follows the pattern of the US model tax treaty and recent US tax treaties, including recent agreements with other developing countries. The treaty will be sent to the Senate for its advice and consent to ratification. If the Senate acts favorably and the treaty enters into force, it will represent the first tax treaty in force between the two countries. An amended tax treaty between the United States and Barbados was unanimously approved by the US Senate late in 2004. The Second Protocol to the US/Barbados tax treaty, signed by US Treasury Secretary John Snow and Barbadian Minister of Industry and International Business Dale Marshall in July 2004, seeks to strengthen anti-treaty shopping provisions to ensure that the benefits of the treaty go only to bona fide residents of each country. The treaty is awaiting ratification by the House of Assembly in Barbados before it can become law. In February, 2005, the United States and New Zealand entered into a mutual agreement to clarify the entitlement of members of certain fiscally transparent entities to benefits under their bilateral double taxation avoidance convention. The move came after it emerged that entities may be treated as fiscally transparent by the competent authorities in one country, but not in the other.In a statement, the Internal Revenue Service explained that: “Consistent with the approach taken in Article 4 (Residence) of the Convention, and pursuant to the authority of Article 24 (Mutual Agreement Procedure) of the Convention, the Competent Authorities agree that, in applying the Convention, income paid to and through such an entity is considered to be derived by a resident of the Contracting State to the extent of the share the resident has in the income.”The IRS went on to add that: “If a resident of the United States is a partner or member of an entity created or organized in the United States…and the entity is treated for United States federal tax purposes as a partnership or is disregarded as an entity separate from its owner (e.g., a limited partnership; or a Limited Liability Company, including one owned by a single member), the resident of the United States would be afforded the benefits of the treaty on the income that the resident derives from New Zealand through the entity, even if under its domestic law New Zealand does not treat the entity as fiscally transparent.”“Consistent with the New Zealand/US treaty, the benefits extend to the income received by the fiscally transparent entity only to the extent of the resident's share of that income.”Also in February, changes to the Internal Revenue Service's advance pricing agreement program looked to be on the horizon. Hal Hicks, the IRS's international associate chief counsel, who presided over the public meeting, was said to be “definitely interested” in a number of changes that can be made to the program, which has been criticized by tax practitioners for its inflexibility.It is believed by APA program director Matthew Frank that IRS Chief Counsel Donald Korb anticipates changes to the program will be made within a “very short time frame”.In April, 2005, the governments of the United States and Bulgaria announced that they plan to begin negotiations on a bilateral income tax treaty, the first such agreement between the two countries. The initial round of talks was expected to take place in the autumn of 2005.In October, 2005. Assistant Secretary of State for Economic and Business Affairs, E. Anthony Wayne and Swedish Ambassador, Gunnar Lund signed a new Protocol to amend the existing bilateral income tax treaty, concluded in 1994, between the two countries. The Protocol significantly reduces tax-related barriers to trade and investment flows between the United States and Sweden. It also modernizes the treaty to take account of changes in the laws and policies of both countries since the current treaty was signed. The Protocol brings the tax treaty relationship with Sweden into closer conformity with US treaty policy, with the most important aspect of the agreement dealing with the taxation of cross-border dividend payments.

The Protocol is one of a few recent US tax agreements to provide an elimination of the withholding tax on dividends arising from certain direct investments. It also strengthens the treaty's provisions preventing so-called treaty shopping, which is the inappropriate use of a tax treaty by third-country residents.

Dividend Taxation Under 2003 Tax-Cutting Legislation

The Jobs and Growth Tax Relief Reconciliation Act of 2003 generally provides that a dividend paid to an individual shareholder from either a domestic corporation or a “qualified foreign corporation” is subject to tax at the reduced rates applicable to certain capital gains. A qualified foreign corporation includes certain foreign corporations that fall under the terms of those double tax treaties which include an exchange of information program. The foreign corporation must be a resident within the meaning of such term under the relevant treaty. A 'qualified foreign corporation' does not include any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a foreign personal holding company, a foreign investment company, or a passive foreign investment company. Four US income tax treaties do not meet the requirements of the Act. The tax treaties with Bermuda and The Netherlands Antilles are not comprehensive income tax treaties within the meaning of the Act; the USSR income tax treaty, which continues to apply to certain former Soviet Republics, does not include an information exchange program. The current income tax treaty with Barbados was determined not to be satisfactory because of concern that the treaty may operate to provide benefits which are intended to mitigate or eliminate double taxation in cases where there is no risk of double taxation.

With the exception of these four countries, all of the treaties listed in the table above qualify under the Act.

Tax Information Exchange Agreements

Many offshore jurisdictions don't want to or are not eligible to enter fully-fledged double tax treaties with their major trading partners. In these cases, the United States (along with other members of the OECD) has been following a policy of entering more limited agreements known as Tax Information Exchange Agreements (TIEA).Such agreements typically provide for exchange of information about the beneficial ownership of companies or trusts based upon a formal request being received by the competent authority in the signatory nations. Normally a request must be made on an individual case basis - 'fishing' trips are not allowed - and the subject of the request must be under investigation in the requesting jurisdiction. The requesting country must also have pursued 'all means available' within its own area of jurisdiction, and strict confidentiality provisions are contained within the TIEAs to ensure that information is not passed on to third parties. At least, so it is claimed.The United States has signed ten TIEAs with prominent offshore jurisdictions in the last few years, all of which had come into force by the end of 2004. The jurisdictions involved are:BermudaThe BahamasThe Cayman IslandsJerseyGuernseyThe Isle of ManArubaAntiguaBritish Virgin Islands

Netherlands Antilles