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4 November 2008

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Protocol to treaty between United States and Canada ratified

On 23 September 2008, the United States ratified the fifth amending protocol, signed on 21 September 2007, to the income and capital tax treaty between the, United States-Canada signed on 26 September 1980

US Senate Foreign Relations Committee publishes report on US-Canada income tax protocol

On 11 September 2008, the US Senate Committee on Foreign Relations published a report regarding the US-Canada income tax protocol signed on 21 September 2007 to the US-Canda income tax treaty, signed on 26 September 1980, as amended by the protocols done on 14 June 1983, 28 March 1984, 17 March 1995, and 29 July 1997. The report urges the full US Senate to act promptly to give advice and consent to ratification of the protocol, with a condition related to the arbitration provision.

The Senate committee's report discusses the purpose, background, major provisions of the protocol, details of its entry into force, implementing legislation, the committee action, the committee's recommendation and comments, a Resolution of Advice and Consent to Ratification, and a copy of the Treasury Department's Technical Explanation of the protocol.

Of particular interest, the report notes that the Canada protocol includes a special permanent establishment rule for services that expands the standard definition of a permanent establishment in a way that affects enterprises that provide services. This new rule is similar to the permanent establishment rule also being introduced in the US-Bulgaria treaty and protocol. The report notes that the US Treasury Department testified to the Senate committee that these provisions are not a shift in US tax treaty policy and will not be included in the US Model Convention (2006). The Senate committee urged that they also not be included in future US treaties.

Additionally, the report discusses the new binding arbitration mechanism and the concerns that it has with this provision. For a report on the conditions for periodic reporting imposed by the Senate committee with regard to the arbitration provision in the Canada protocol (and also in the arbitration provisions in the 2006 US-Germany protocol and new US-Belgium treaty).

The Senate committee report highlights the new provision in the protocol for fiscally transparent and hybrid entities that would prevent the use of such entities to claim the benefits when the investors are not subject to tax on the income in their state of residence. The Senate committee noted that this provision was intended to prevent tax-abuse but was potentially overbroad, and noted further that the US Treasury Department did not contemplate including it in future US treaties.

The report discusses a new rule for dual-resident corporations which provides that if a dual residence company is created under the laws in force in one treaty country but not under the laws in force in the other treaty country, the company is deemed to be a resident only of the first treaty country. The Senate committee noted that this provision was likely to help in preventing tax abuse but discussed several possible drawbacks.
A copy of the report is available from the Congressional Report website.

Fifth protocol to treaty between Canada and US – US Senate Foreign Relations Committee refers to full Senate for ratification with condition (arbitration)

On 11 September 2008, the US Senate Committee on Foreign Relations reported the fifth protocol to the US-Canda income and capital tax treaty, signed at Chelsea on 21 September 2007, to the full US Senate and recommended that advice and consent be given to ratification.

Accompanying the Senate Committee's report is an Executive Report recommending ratification of the protocol on the condition that the US Department of Treasury submit periodic reports to Congress on the mandatory binding arbitration provisions included in the Canadian protocol, in the US-Belgium treaty and in the protocol to the US-Germany treaty that were ratified at the end of 2007.

The Executive Report requires that, before the first arbitration conducted under the new arbitration procedures in the Canadian protocol, the US Secretary of Treasury shall transmit the text of the rules of procedure to be used by the arbitration board, including conflict of interest rules to be applied to members of the arbitration board to the US Senate Committees on Finance and Foreign Relations of the Senate and to the US Joint Committee on Taxation.

The texts of the rules to be used under the similar arbitration procedures in the US-Belgium treaty and the protocol to the US-Germany treaty, are also required to be submitted.

The Executive Report further requires that 60 days after a determination has been reached by an arbitration board in the tenth arbitration proceeding involving the aforementioned countries, the Secretary of Treasury shall prepare and submit a detailed report to the Joint Committee on Taxation and the Committee on Finance of the Senate regarding the operation and application of the arbitration mechanism. This detailed report must be submitted on an annual basis for a period of five years thereafter.

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