FROM THE OFFICE OF PUBLIC AFFAIRS

Secretary Robert E. Rubin today signed income tax conventions with Estonia, Latvia and Lithuania. These first tax treaties between the United States and the three Baltic Republics represent an important step in Treasury's goal of expanding the U.S. tax treaty network with emerging economies.

Estonian President Lennart Meri, Latvian Minister of Foreign Affairs Valdis Birkavs and Lithuanian Minister of Foreign Affairs Algirdas Saudargas were the signatories for their respective countries. Latvian President Guntis Ulmanis and Lithuanian President Algirdas Brazauskas were also in attendance.

The proposed conventions generally follow the pattern of the U.S. model income tax convention. As with all bilateral tax agreements, however, there are some variations. These differences reflect particular aspects of the laws and treaty policies of the signatory countries, the interactions of U.S. law with the laws of the Baltic Republics, and U.S. economic relations with the three nations.

The three treaties establish maximum rates of withholding at source on dividends that are the same as those in the U.S. model. Dividends are subject to a maximum rate of tax at source of 15 percent, except that the rate is limited to five percent for dividends paid by a 10-percent or more subsidiary in one country to its parent in the other. Unlike the U.S. model, but like a number of U.S. treaties, interest and royalties are subject to limited tax at source. The proposed conventions provide for a maximum 10-percent rate of tax at source on most interest payments. Interest earned on trade credits and on government debt, including debt guaranteed by government agencies, however, is exempt from tax at source. Royalties for the use of industrial, commercial or scientific equipment are subject to a five-percent tax at source. All other royalties are taxed at a maximum rate of 10 percent.

The taxation of capital gains under the proposed conventions follows the pattern of the U.S. model. They provide that gains from real property (including a U.S. real property interest) are taxable in the situs state. Gains from the alienation of personal property that is part of a permanent establishment or fixed base may be taxed in the state where the permanent establishment or fixed base is located. All other gains are taxable exclusively in the state of residence of the alienator.

Consistent with the U.S. model, the three agreements provide generally for the taxation by one state of the business profits of a resident of the other only when such profits are attributable to a permanent establishment located in that other state. The proposed conventions, however, include an anti-abuse rule that would allow the source state to tax sales or activities carried out by a resident of the other state as if they were performed by a permanent establishment, if it is ascertained that such activities were structured with the intention to avoid taxation in the state where the permanent establishment is situated.

The treatment of profits from international carriage by aircraft and ships generally follows the U.S. model. However, income from the international rental of ships and aircraft that is not incidental to operation of ships and aircrafts is taxed at a five-percent rate as a royalty paid for the rental of equipment and income from the use or rental of containers that is non-incidental to the operation of ships or aircraft in international traffic is taxed only in the residence country unless the income is attributable to a permanent establishment in the other State.

The proposed conventions with Latvia and Lithuania, but not Estonia, contain special provisions relating to exploration or exploitation of the seabed and sub-soil. These rules are similar to those found in our treaties with North Sea countries.

The taxation of income from the performance of personal services is generally similar to that under the U.S. model, but, like some U.S. treaties with developing countries, the proposed conventions grant a taxing right to the host country with respect to certain categories of personal services income that is somewhat broader than in the U.S. model.

The proposed conventions contain rules, similar to those in all recent U.S. treaties, designed to restrict the benefits of the convention to persons that are not engaged in "treaty shop- ping." Also included are rules to prevent discriminatory taxation, as well as rules necessary for administering the conventions, including rules for the resolution of disputes under the conventions, and for the exchange of information.

Unique to these three conventions is an agreement that there will be a five-year period within which the appropriate authorities of the two states will meet to discuss the application of the convention to income derived from new technologies, such as payments received for transmission by satellite, cable, optic fibre or similar technology. The meeting may result in a protocol that specifically addresses the convention's application to income from new technologies. It is understood that, until and unless an agreement is reached to the contrary, no source country tax will be imposed on such income, unless the income is attributable to a permanent establishment in the source country.

The proposed conventions are subject to ratification. Each convention will enter into force after each state has notified the other that it has completed its ratification requirements. Each convention will have effect, with respect to taxes withheld at the source, for amounts paid or credited on or after the first day of January of the calendar year next following the year in which the convention enters into force. In other cases the convention will have effect with respect to taxable years beginning on or after the first day of January of the calendar year next following the year in which the convention enters into force. Each convention will remain in force indefinitely unless terminated by one of the contracting states. Either state will be able to terminate the convention at the end of any calendar year by giving written notice at least six months before the end of that calendar year.

Copies of the new conventions are available on the Internet at www.treas.gov/press or from the Office of Public Affairs, Treasury Department, Room 2321, Washington, D.C. 20220.