T.Doc.105-10 EXTRADITION TREATY WITH LUXEMBOURG ...

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105th Congress                                              Treaty Doc.
                                SENATE  

 1st Session                                                      105-9
_______________________________________________________________________


 
                   TAX CONVENTION WITH SOUTH AFRICA

                               __________

                                MESSAGE

                                  from

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

  CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF 
SOUTH AFRICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF 
   FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS, 
                 SIGNED AT CAPE TOWN FEBRUARY 17, 1997


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 June 26, 1997.--Convention was read the first time and, together with 
the accompanying papers, referred to the Committee on Foreign Relations 
          and ordered to be printed for the use of the Senate


                         LETTER OF TRANSMITTAL

                              ----------                              

                                    The White House, June 26, 1997.
To the Senate of the United States:
    I transmit herewith for Senate advice and consent to 
ratification the Convention Between the United States of 
America and the Republic of South Africa for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income and Capital Gains, signed at Cape 
Town, February 17, 1997. Also transmitted is the report of the 
Department of State concerning the Convention.
    This Convention, which generally follows the U.S. model tax 
treaty, provides maximum rates of tax to be applied to various 
types of income and protection from double taxation of income. 
The Convention also provides for the exchange of information to 
prevent fiscal evasion and sets forth standard rules to limit 
the benefits of the Convention so that they are available only 
to residents that are not engaged in treaty shopping.
    I recommend that the Senate give early and favorable 
consideration to this Convention and give its advice and 
consent to ratification.

                                                William J. Clinton.


                          LETTER OF SUBMITTAL

                              ----------                              

                                       Department of State,
                                         Washington, June 13, 1997.
The President,
The White House.
    The President: I have the honor to submit to you, with a 
view to its transmission to the Senate for advice and consent 
to ratification, the Convention Between the United States of 
America and the Republic of South Africa for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income and Capital Gains, signed at Cape 
Town on February 17, 1997 (``the Convention'').
    Currently, there is no income tax convention between the 
United States and South Africa. The income tax convention 
between the United States and South Africa of December 13, 1946 
was terminated July 1, 1987, pursuant to the terms of that 
convention and Section 313 of the Comprehensive Anti-Apartheid 
Act of 1986. The proposed Convention generally follows the 
pattern of the U.S. model treaty. It establishes maximum rates 
of tax that may be applied to various types of income, 
protection from double taxation of income, exchange of 
information to prevent fiscal evasion, and standard rules to 
limit the benefits of the Convention so they are available only 
to persons that are not engaged in treaty shopping. Like other 
U.S. tax conventions, this Convention provides rules specifying 
when income that arises in one of the countries (the ``source 
country'') and is beneficially owned by residents of the other 
country (the ``country of residence'') may be taxed by the 
source country.
    The Convention establishes maximum rates of tax that may be 
imposed by the source country on specified categories of 
income, including dividends, interest, and royalties, to 
residents of the other country that are the same as those in 
the U.S. model treaty and in many recent conventions with OECD 
countries. Pursuant to Article 10, dividends from direct 
investments are subject to tax by the source country at a rate 
of five percent. The threshold ownership criterion for direct 
investment is ten percent, consistent with other modern U.S. 
treaties, in order to facilitate direct investment. Other 
dividends are generally taxable by the source country at 15 
percent.
    In general, under Article 11, interest derived and 
beneficially owned by a resident of a Contracting State is 
exempt from tax by the source country and may be taxed only in 
the State in which the owner of the income resides. Under 
Article 12, royalties derived and beneficially owned by a 
resident of a Contracting State may also be taxed only in the 
State in which the owner of the income resides.
    These rates of taxation on royalty and interest income do 
not apply, however, if the beneficial owner of the income is 
not a resident of, but carries on business in the source 
country and the income is attributable to a permanent 
establishment in the source country. In that situation, the 
income is to be considered either business profit or income 
from independent personal services and is subject to the 
provisions of Articles 7 and 14, which deal with these classes 
of income.
    Like other U.S. tax treaties, this Convention provides the 
standard anti-abuse rules for certain classes of investment 
income in Articles 10 and 11.
    The taxation of capital gains, described in Article 13 of 
the Convention, follows the pattern of the U.S. model tax 
treaty. It provides that gains from the sale of real property 
(including a U.S. real property interest) are taxable in the 
State in which the property is situated. Gains from the sale of 
personal property that is part of a permanent establishment or 
fixed base may be taxed in the State in which the permanent 
establishment or fixed base is located. The proposed Convention 
permits taxation of profits from international carriage by 
ships or airplanes only by the country of residence. Gains, 
including gains from the sale of ships, aircraft, or containers 
operated or used in international traffic are taxable only in 
the Contracting State in which the alienator is located.
    Article 7 of the proposed Convention generally follows the 
standard rules for taxation by one country of the business 
profits of a resident of the other. The non-residence country's 
right to tax such profits is generally limited to cases in 
which the profits are attributable to a permanent establishment 
located in that country. The proposed Convention, however, 
grants rights to tax business profits that generally are 
somewhat broader than those found in the U.S. and OECD model 
treaties. Under the proposed Convention, pursuant to the 
definition of a ``permanent establishment'' in Article 5(2)(k), 
an enterprise will have a permanent establishment in a 
Contracting State if its employees or other personnel provide 
services within that State for 183 days or more within a 12-
month period in connection with the same or a connected 
project.
    As do all recent U.S. tax treaties, this Convention 
preserves the right of the United States to impose its branch 
profits tax in addition to the basic corporate tax on a 
branch's business (Article 10). The proposed Convention, at 
Article 7, also accommodates a provision of the 1986 Tax Reform 
Act that attributes to a permanent establishment or fixed base 
income that is earned during the life of the permanent 
establishment or fixed base but is deferred and not received 
until after the permanent establishment or fixed base no longer 
exists.
    Consistent with U.S. treaty policy, Article 8 of the new 
Convention permits only the country of residence to tax profits 
from international carriage by airplanes and ships. This 
reciprocal exemption also extends to income from the rental of 
ships or aircraft if the rental income is incidental to income 
from the operation of the craft in international traffic.
    The taxation of income from the performance of personal 
services under Articles 14 and 15 of the proposed Convention is 
subject to rules that essentially follow those of the U.S. 
model treaty. The 183-day personal service requirement in the 
definition of permanent establishment (Article 5) is adopted in 
the definition of fixed base in Article 14.
    Under Article 18 of the proposed Convention, at the request 
of South Africa, the tax treatment of pensions differs from 
that in the U.S. model treaty. Pensions will be subject to 
limited source-country tax. The residence country may also tax, 
subject to a foreign tax credit, if the source country has 
taxed the pension.
    Article 22 of the proposed Convention contains significant 
anti-treaty-shopping rules making the Convention's benefits 
unavailable to persons engaged in treaty shopping.
    The proposed Convention also contains the standard rules 
necessary for administering the Convention, including rules for 
the resolution of disputes under the Convention (Article 25). 
The information-exchange provisions of the proposed Convention 
(Article 26) make clear that South Africa is obligated to 
provide U.S. tax officials such information as is necessary to 
carry out the provisions of the Convention. The information is 
understood to include bank information. Consistent with U.S. 
policy, South African information will be available to U.S. 
authorities regardless of whether South Africa has a ``tax 
interest'' in the information.
    The Convention would permit the General Accounting Office 
and the tax-writing committees of Congress to obtain access to 
certain tax information exchanged under the Convention for use 
in their oversight of the administration of U.S. tax laws and 
treaties (Article 26).
    In accordance with Article 28, the United States and South 
Africa must notify each other that their constitutional 
requirements for entry into force of the Convention have been 
satisfied. The Convention will enter into force 30 days after 
the later of the notifications. It will have effect, with 
respect to taxes withheld at the source, for amounts paid or 
credited on or after the first day of January following entry 
into force. In other cases the Convention will have effect with 
respect to taxable periods beginning on or after the first day 
of January following the date on which the Convention enters 
into force.
    Article 29 provides that the proposed Convention will 
remain in force indefinitely unless terminated by one of the 
Contracting States. Either State will be able to terminate the 
Convention after five years from the date on which the 
Convention enters into force by giving prior notice of at least 
six months through diplomatic channels.
    A technical memorandum explaining in detail the provisions 
of the Convention will be prepared by the Department of the 
Treasury and will be submitted separately to the Senate 
Committee on Foreign Relations.
    The Department of the Treasury and the Department of State 
cooperated in the negotiation of the Convention. It has the 
full approval of both Departments.
    Respectfully submitted,
                                                Madeleine Albright.


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