FROM THE OFFICE OF PUBLIC AFFAIRS

Every year the blossoming of Washington’s cherry trees, a gift to the United States from Japan, herald the arrival of spring.  This year the cherry blossoms also herald the entry into force of the new income tax treaty between the United States and Japan.  The new tax treaty entered into force upon the exchange of instruments of ratification between Howard H. Baker, Jr., Ambassador of the United States to Japan, and Ichiro Aisawa, Senior Vice-Minister for Foreign Affairs of Japan, at a ceremony on March 30th in Tokyo.

“The accelerated timeline on which the governments of both countries have acted to bring the new tax treaty into force reflects the strong mutual commitment to cross-border trade and investment between the United States and Japan.  The new U.S.-Japan treaty will significantly reduce existing tax barriers to investment and trade in both directions,” said Treasury Secretary Snow.  “This enhanced tax treaty relationship will foster still closer economic ties between the world’s two largest economies, enhancing the global competitiveness of our businesses and creating new opportunities for international trade and investment, which will mean more growth and jobs.  Because of the swift action taken by both governments, key benefits of the new tax treaty will be available to our businesses right away this summer.”

The new tax treaty replaces the existing income tax treaty between the United States and Japan, which dates back to 1971.  The new agreement is a complete modernization of the treaty relationship to reflect the changes in economic relations between the two countries that have taken place over the last thirty years.

The provisions of the new tax treaty related to source-country withholding taxes are applicable beginning on July 1, 2004.  The provisions related to other taxes generally are applicable for taxable years beginning on or after January 1, 2005.

The most dramatic advances in the new tax treaty are reflected in the reciprocal reductions in source-country withholding taxes on income from cross-border investments.  The new tax treaty provides for the complete elimination of withholding taxes on all royalty income.  Given the importance of the cross-border use of intangibles between the United States and Japan, this is a key provision.  The new tax treaty also provides for the complete elimination of withholding taxes on certain interest income, including interest income earned by financial institutions, and on dividend income paid to parent companies with a controlling interest in the paying company.  Because the new tax treaty entered into force before April 1st, the reductions in withholding taxes will be applicable as of July 1st.

The new tax treaty also ensures treaty benefits in appropriate circumstances for investments made through partnerships, allowing flexibility in business form.  In addition, the new tax treaty includes important provisions regarding the application of international standards for transfer pricing between affiliated companies operating in both countries.

The new tax treaty was signed by Secretary Snow and Ambassador Ryozo Kato, Ambassador of Japan to the United States, in Washington on November 6, 2003.  The United States and Japan announced on August 10, 2001, that they had agreed to open formal negotiations with respect to a new tax treaty.