FROM THE OFFICE OF PUBLIC AFFAIRS

The Treasury Department today announced that President Clinton observed the signing of an income tax convention by U.S. Ambassador to Thailand William Itoh and Thai Foreign Minister Amnuay Viravan in Bangkok. This is the first income tax convention between the United States and Thailand and is an important achievement in the Administration's broad strategy of expanding the U.S. tax treaty network with major trading partners in Southeast Asia. The Convention will enter into force after the countries have exchanged the instruments of ratification.

"Today's signing reminds us that governments do not create wealth, but governments can create the climate in which our workers, our entrepreneurs, our investors and business people can have a free and unfettered opportunity to thrive," said President Clinton.

The proposed Convention generally follows the pattern of the U.S. Model treaty, provisions of which have been included in many recent U.S. treaties with other developing countries. There are, however, variations that reflect particular aspects of Thai treaty policy, additional accommodations for U.S. and Thai law, and U.S.-Thai economic relations.

Rate Provisions

Although the withholding rates under the proposed Convention are generally higher than those in the U.S. Model and in many recent U.S. treaties with OECD countries, the proposed rates are generally lower than those in many recent Thai treaties.

Under the proposed Convention, direct investment dividends are subject to taxation at source at a 10-percent rate, and portfolio dividends are taxable at a 15-percent rate. The proposed Convention requires a 10-percent ownership threshold for application of the 10-percent tax rate.

The proposed Convention provides for a maximum 15-percent rate of tax at source on most interest payments. However, interest paid by any financial institution, including an insurance company, and interest earned on trade credits is limited to a 10-percent rate of tax at source. In addition, interest earned on government debt, including debt guaranteed by government agencies (e.g., the U.S. Export-Import Bank) is exempt from tax at source.

Copyright royalties (including software) are subject to a 5-percent tax at source. Royalties for the right to use equipment are subject to an 8-percent tax at source. Royalties for patents and trademarks are subject to a 15-percent tax at source.

Standard U.S. anti-abuse rules are provided for certain classes of investment income. Dividends paid by non-taxable conduit entities, such as U.S. Regulated Investment Companies and Real Estate Investment Trusts, are subject to special rules to prevent the use of these entities to transform what is otherwise high-taxed income into lower-taxed income. Excess inclusions with respect to residual interests in Real Estate Mortgage Investment Conduits are denied the benefits of the reduced rate of tax at source on interest.

Allowances similar to those under some U.S. treaties with developing countries are made for taxation of income from the performance of personal services. But the proposed Convention grants a taxing right to the host country that is broader than that in the OECD or U.S. Models.

Capital Gains

The taxation of capital gains under the proposed Convention does not follow the normal pattern. Like a few other treaties, it allows gains to be taxed by both countries under the provisions of their respective internal law.

As with recent U.S. treaties and the U.S. and OECD Models, the proposed Convention provides generally for the taxation by the first country of the business profits of a resident of the second only when such profits derive from a permanent establishment located within the first country. The proposed Convention, however, grants rights to tax business profits that are somewhat broader than those found in the U.S. and OECD Models.

The proposed Convention preserves the U.S. right to impose its branch tax on U.S. branches of Thai corporations. The proposed Convention will also accommodate a provision of the 1986 Tax Reform Act that attributes to a permanent establishment any income earned during the life of the permanent establishment, but deferred and not received until after the permanent establishment has ceased to exist.

Air Carriers and Shipping

The proposed Convention, consistent with current U.S. treaty policy, provides for exclusive residence-country taxation of profits from international carriage by aircraft. This reciprocal exemption also extends to income from the rental of aircraft if the rental activity is incidental to the operation of aircraft by the lessor in international traffic. However, income from the international operation of ships (including rentals that are incidental to such operations) is taxed at one-half of the tax rate otherwise applicable. Income from the use or rental of containers that is incidental to the operation of ships or aircraft in international traffic is treated the same as the income from the operation of the ships or aircraft (i.e., it is exempt if incidental to aircraft operations, and taxed at half of the rate otherwise applicable if incidental to the operations of ships). This deviation from the preferred U.S. position regarding the taxation of shipping profits, which is suggested as an option in the U.N. Model, was necessary to accommodate Thailand's long-standing policy on this issue.

The United States and Thailand have agreed to exchange notes under which, if Thailand grants any other country more favorable treatment on income from the operation of ships in international traffic, then negotiations will be reopened to extend such favorable treatment to the United States. Other income from the rental of ships or aircraft and from the use or rental of containers is treated as business profits under Article 7. As such, these classes of income are taxable only in the country of residence of the beneficial owner of the income unless the income is attributable to a permanent establishment in the other country, in which case it is taxable in that country on a net basis.

Administration and Oversight

Information exchange provisions make clear that Thailand is obligated to provide U.S. tax officials such information as is necessary to carry out the provisions of the Convention. U.S. negotiators are satisfied that, under this provision and under the existing Mutual Legal Assistance Treaty between the two countries, Thailand will be able to provide adequate tax information, including bank information, relevant to criminal cases that may be pursued by U.S. authorities. Additionally, under this provision and in accordance with present Thai law, Thailand will be able to provide adequate tax information, including bank information, to U.S. authorities in all civil cases in which a Thai tax interest exists.

The proposed Convention contains an unusual provision regarding exchange of information, designed to deal with this "tax interest" problem. The proposed Convention provides that Thailand generally is required to treat a U.S. tax interest as a Thai tax interest in all cases, including both civil and criminal tax proceedings. However, this general provision will not be in effect until the United States receives from Thailand a diplomatic note indicating that Thailand is both prepared and able to implement this provision, which will not be possible until Thai law is changed. If the United States has not received such a diplomatic note by June 30 of the fifth year following entry into force of the Convention, the entire Convention will terminate on January 1 of the sixth year following its entry into force.

The proposed Convention also contains significant rules, known as the "Limitation on Benefits" article, designed to restrict the benefits of the Convention to persons not engaged in "treaty shopping." The provisions are similar to those found in the U.S. Model and in all recent U.S. treaties.

The proposed Convention provides a U.S. foreign tax credit for the Thai income taxes covered by the Convention, and a Thai foreign tax credit for the U.S. income taxes covered by the Convention. However, U.S. rules regarding "dual capacity" taxpayers apply in determining the extent to which the Thai Petroleum Income Tax will be considered an income tax for U.S. foreign tax credit purposes. This is clarified in the exchange of notes. The notes also provide that if the United States alters its long-standing against the granting of "tax sparing credits," or provides for such credits in another treaty, negotiations will be reopened with a view to concluding a protocol that would offer similar benefits to Thailand.

Furthermore, the proposed Convention provides for non-discriminatory tax treatment (i.e., national treatment) by one country of residents and nationals of the other. Also included in the proposed Convention are additional rules necessary for its administration, including rules for the resolution of disputes.

And the proposed Convention allows 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.

Ratification

The proposed Convention is subject to ratification. It will enter into force upon the exchange of instruments of ratification. It will have effect, with respect to taxes withheld at the source, for amounts paid or credited on or after the first day of the sixth month 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.

The Convention will remain in force indefinitely unless terminated by either country. Either country will be able to terminate the Convention after 5 years from the date on which the Convention enters into force by giving at least six months prior notice through diplomatic channels.

Copies of the new Convention are available from the Office of Public Affairs, Treasury Department, Room 2315, Washington, D.C. 20220.