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It also is intended to enable the two countries to cooperate in pre. venting avoidance and evasion of taxes,II BACKGROUND. The proposed treaty and proposed protocol both were signed on. August 19 1999 The proposed treaty and proposed protocol would. replace the existing income tax treaty between the United States. and Denmark that was signed in 1948 1, The proposed treaty together with the proposed protocol were. transmitted to the Senate for advice and consent to its ratification. on September 21 1999 see Treaty Doc 106 12 The Committee. on Foreign Relations held a public hearing on the proposed treaty. on October 27 1999,III SUMMARY, The proposed treaty is similar to other recent U S income tax. treaties the 1996 U S model income tax treaty U S model and. the model income tax treaty of the Organization for Economic Co. operation and Development OECD model However the pro. posed treaty contains certain substantive deviations from those. treaties and models, As in other U S tax treaties these objectives principally are. achieved through each country s agreement to limit in certain. specified situations its right to tax income derived from its terri. tory by residents of the other country For example the proposed. treaty contains provisions under which each country generally. agrees not to tax business income derived from sources within that. country by residents of the other country unless the business ac. tivities in the taxing country are substantial enough to constitute. a permanent establishment or fixed base Articles 7 and 14 Simi. larly the proposed treaty contains commercial visitor exemptions. under which residents of one country performing personal services. in the other country will not be required to pay tax in the other. country unless their contact with the other country exceeds speci. fied minimums Articles 14 15 and 17 The proposed treaty pro. vides that dividends interest royalties and certain capital gains. derived by a resident of either country from sources within the. other country generally may be taxed by both countries Articles. 10 11 12 and 13 however the rate of tax that the source country. may impose on a resident of the other country on dividends inter. est and royalties generally will be limited by the proposed treaty. Articles 10 11 and 12, In situations where the country of source retains the right under.
the proposed treaty to tax income derived by residents of the other. country the proposed treaty generally provides for relief from the. potential double taxation through the allowance by the country of. 1 A prior proposed U S income tax treaty with Denmark was signed in 1980 with a related. proposed protocol that was signed in 1983 The Committee reported favorably on this proposed. treaty and protocol in 1984 However the Senate did not consider the treaty further in 1984. The Committee also reported favorably on the treaty and protocol in 1985 During Senate con. sideration of the treaty in 1985 objections were raised regarding the creditability under the. treaty of the Danish hydrocarbon tax The Senate has not given its advice and consent to ratifi. cation of this treaty, residence of a tax credit for certain foreign taxes paid to the other. country Article 23, The proposed treaty contains the standard provision the saving. clause included in U S tax treaties pursuant to which each coun. try retains the right to tax its residents and citizens as if the treaty. had not come into effect Article 1 In addition the proposed treaty. contains the standard provision providing that the treaty may not. be applied to deny any taxpayer any benefits the taxpayer would. be entitled to under the domestic law of a country or under any. other agreement between the two countries Article 1. The proposed treaty also contains a detailed limitation on bene. fits provision to prevent the inappropriate use of the treaty by. third country residents Article 22,IV ENTRY INTO FORCE AND TERMINATION. A ENTRY INTO FORCE, The proposed treaty will enter into force on the date on which. the second of the two notifications of the completion of ratification. requirements has been received Each country must notify the. other when its requirements for ratification have been satisfied. The present treaty generally ceases to have effect once the provi. sions of the proposed treaty take effect, With respect to taxes withheld at source the proposed treaty will.
be effective for amounts paid or credited on or after the first day. of the second month next following the date on which the proposed. treaty enters into force With respect to other taxes the proposed. treaty will be effective for taxable years beginning on or after the. first day of January next following the date on which the proposed. treaty enters into force, Where greater benefits would be available to a taxpayer under. the present treaty than under the proposed treaty the proposed. treaty provides that the taxpayer may elect to be taxed under the. present treaty in its entirety for one year following the date on. which the proposed treaty otherwise would have effect. B TERMINATION, The proposed treaty will continue in force until terminated by ei. ther country Either country may terminate the proposed treaty at. any time by giving written notice of termination through diplo. matic channels With respect to taxes withheld at source a termi. nation is effective for amounts paid or credited six months after the. date on which notice of termination was given In the case of other. taxes a termination is effective for taxable periods beginning on or. after six months from the date on which notice of termination was. V COMMITTEE ACTION, The Committee on Foreign Relations held a public hearing on the. proposed treaty and proposed protocol with Denmark Treaty Doc. 106 12 as well as on other proposed treaties and protocols on Oc. tober 27 1999 The hearing was chaired by Senator Hagel The. Committee considered these proposed treaties and protocols on No. vember 3 1999 and ordered the proposed treaty with Denmark fa. vorably reported by a voice vote with the recommendation that the. Senate give its advice and consent to ratification of the proposed. treaty subject to a declaration and a proviso,VI COMMITTEE COMMENTS. On balance the Committee on Foreign Relations believes that. the proposed treaty with Denmark is in the interest of the United. States and urges that the Senate act promptly to give advice and. consent to ratification The Committee has taken note of certain. issues raised by the proposed treaty and believes that the fol. lowing comments may be useful to the Treasury Department offi. cials in providing guidance on these matters should they arise in. the course of future treaty negotiations,A CREDITABILITY OF DANISH HYDROCARBON TAX.
Under the proposed treaty Danish national taxes imposed under. the Danish Hydrocarbon Tax Act adopted in 1982 and any sub. stantially similar tax that may be enacted later are specifically. treated as creditable income taxes for U S foreign tax credit pur. poses The affected taxpayers are those that earn oil and gas ex. traction income and related income from oil or gas wells in Den. mark Generally the covered activities are conducted in the Danish. sector of the North Sea, One reason for the creditability for Danish hydrocarbon taxes. under the proposed treaty is the concern that the taxes paid by. U S companies subject to the Danish Hydrocarbon Tax Act would. not be creditable under the present treaty between the two coun. tries or under U S law It is unclear the extent to which the taxes. imposed under the Hydrocarbon Tax Act would be creditable under. U S law No specific determination has been made administra. tively or judicially concerning the creditability of the Danish hydro. carbon tax under the Code or the Treasury regulations there. A second reason for the creditability for Danish hydrocarbon. taxes under the proposed treaty is that similar treaty credits are. allowed for arguably comparable oil and gas taxes imposed by the. United Kingdom Norway and the Netherlands under U S income. tax treaties currently in force with those countries Because the. United Kingdom Norway and the Netherlands are Denmark s. North Sea competitors the Committee believes that fairness re. quires that U S taxpayers also be allowed a treaty credit for Dan. ish taxes on oil and gas extraction and related income Consistent. with this determination it should be noted that this Committee. has twice reported favorably on a prior proposed U S income tax. 2 Although there have been no specific determinations with respect to the Danish hydrocarbon. tax the United States Tax Court has recently addressed the issue of the credibility under the. Code and the Treasury regulations under Code section 901 of special charges similar to the. Danish hydrocarbon tax imposed under the United Kingdom s petroleum revenue tax in Exxon. Corp v Commissioner 113 T C No 24 Nov 2 1999 applying final Treasury regulations. under section 901 and Norway s Petroleum Tax Act in Phillips Petroleum Co v Commissioner. 104 T C 256 1995 applying temporary Treasury regulations under section 901 Both the U K. and Norwegian petroleum taxes were held to be creditable taxes for U S foreign tax credit pur. poses Such determinations however are inherently factual therefore the determination of the. creditability of taxes imposed under the Danish Hydrocarbon Tax Act under U S law remains. an open issue, treaty and protocol with Denmark containing a similar provision. for the creditability of taxes imposed under the Hydrocarbon Tax. The Committee recognizes the need of U S companies to have a. high degree of certainty with respect to a significant tax issue such. as the foreign tax credit The Committee questions however the. wisdom of addressing these concerns through the treaty mecha. nism The credit for Danish hydrocarbon taxes allowed under the. proposed treaty could be larger than the credit otherwise allowed. under the Code and Treasury regulations and thus may reduce. U S taxes collected from U S oil companies that choose to operate. in the Danish sector of the North Sea While the proposed treaty s. per country limitation on the amount of the Danish hydrocarbon. tax that is creditable may reduce any such U S revenue loss the. per country limitation would not eliminate any such revenue loss. Moreover taxpayers are likely to rely upon the proposed treaty. only to the extent that it provides them with a more favorable for. eign tax credit result than would otherwise result from the applica. tion of the Code, The Congressional tax writing committees and this Committee. have made it clear in the past that treaties are not the appropriate. vehicle for granting credits for taxes that might not otherwise be. creditable under the Code or Treasury regulations The Committee. believes that it would be more appropriate for the United States to. address unilaterally problems of the sort raised by special oil and. gas taxes imposed by foreign countries The Committee believes. that treaties should not be used in the future to handle foreign tax. credit issues which are more appropriately addressed either legisla. tively or administratively Nevertheless the Committee believes. that given the circumstances surrounding the Danish hydrocarbon. tax it is justifiable to provide a credit for such tax in this case. B TREATY SHOPPING, The proposed treaty like a number of U S income tax treaties. generally limits treaty benefits for treaty country residents so that. only those residents with a sufficient nexus to a treaty country will. receive treaty benefits Although the proposed treaty generally is. intended to benefit residents of Denmark and the United States. only residents of third countries sometimes attempt to use a treaty. to obtain treaty benefits This is known as treaty shopping Inves. tors from countries that do not have tax treaties with the United. States or from countries that have not agreed in their tax treaties. with the United States to limit source country taxation to the same. extent that it is limited in another treaty may for example at. tempt to reduce the tax on interest on a loan to a U S person by. lending money to the U S person indirectly through a country. whose treaty with the United States provides for a lower rate of. withholding tax on interest The third country investor may at. tempt to do this by establishing in that treaty country a subsidiary. 3 The Committee reported favorably on the prior proposed treaty and protocol in 1984 and. 1985 During Senate consideration of the treaty in 1985 objections were raised regarding the. creditability under the treaty of the Danish hydrocarbon tax The Senate has not given its ad. vice and consent to ratification of that treaty, trust or other entity which then makes the loan to the U S person.
and claims the treaty reduction for the interest it receives. The anti treaty shopping provision of the proposed treaty is simi. lar to anti treaty shopping provisions in the Code as interpreted. by Treasury regulations and in the U S model The provision also. is similar to the anti treaty shopping provision in several recent. treaties The degree of detail included in these provisions is notable. in itself The proliferation of detail may reflect i. Senate give its advice and consent to ratification of the proposed treaty The Committee recognizes the need of U S companies to have a

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