[DOCID: f:er013.105]
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105th Congress                                              Exec. Rept.
                                 SENATE

 1st Session                                                     105-13
_______________________________________________________________________


 
                      TAX CONVENTION WITH IRELAND

                                _______
                                

                October 30, 1997.--Ordered to be printed

_______________________________________________________________________


          Mr. Helms, from the Committee on Foreign Relations,

                        submitted the following

                              R E P O R T

                   [To accompany Treaty Doc. 105-31]

    The Committee on Foreign Relations, to which was referred 
the Convention between the Government of the United States of 
America and the Government of Ireland for the Avoidance of 
Double Taxation and the Prevention of Fiscal Evasion with 
Respect to Taxes on Income and Capital Gains, signed at Dublin 
on July 28, 1997, together with a Protocol and exchange of 
notes done on the same date, having considered the same, 
reports favorably thereon, with one understanding, two 
declarations, and one proviso, and recommends that the Senate 
give its advice and consent to ratification thereof, as set 
forth in this report and the accompanying resolution of 
ratification.


                                CONTENTS
                                                                   Page
  I. Purpose..........................................................1
 II. Background.......................................................2
III. Summary..........................................................2
 IV. Entry Into Force and Termination.................................3
  V. Committee Action.................................................4
 VI. Committee Comments...............................................4
VII. Budget Impact...................................................17
VIII.Explanation of Proposed Treaty and Proposed Protocol............17

 IX. Text of the Resolution of Ratification..........................60

                               I. Purpose

    The principal purposes of the proposed income tax treaty 
between the United States and Ireland are to reduce or 
eliminate double taxation of income earned by residents of 
either country from sources within the other country and to 
prevent avoidance or evasion of the income taxes of the two 
countries. The proposed treaty is intended to continue to 
promote close economic cooperation between the two countries 
and to eliminate possible barriers to trade and investment 
caused by overlapping taxing jurisdictions of the two 
countries. It is intended to enable the two countries to 
cooperate in preventing avoidance and evasion of taxes.

                             II. Background

    The proposed treaty and proposed protocol both were signed 
on July 28, 1997. The United States and Ireland also exchanged 
diplomatic notes on July 28, 1997 reflecting certain common 
understandings and interpretations with respect to the proposed 
treaty. The proposed treaty would replace the existing income 
tax treaty between the two countries that was signed in 1949.
    The proposed treaty, together with the proposed protocol 
and the exchange of notes, was transmitted to the Senate for 
advice and consent to its ratification on September 24, 1997 
(see Treaty Doc. 105-31). The Senate Committee on Foreign 
Relations held a public hearing on the proposed treaty and 
proposed protocol and exchange of notes on October 7, 1997.

                              III. Summary

    The proposed treaty (as supplemented by the proposed 
protocol) is similar to other recent U.S. income tax treaties, 
the 1996 U.S. model income tax treaty (``U.S. model''), 
<SUP>1</SUP> and the model income tax treaty of the 
Organization for Economic Cooperation and Development (``OECD 
model''). However, the proposed treaty and proposed protocol 
contain certain substantive deviations from those documents.
---------------------------------------------------------------------------
    \1\ The Treasury Department released the U.S. model on September 
20, 1996. A 1981 U.S. model treaty was withdrawn by the Treasury 
Department on July 17, 1992.
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    As in other U.S. tax treaties, the proposed treaty's 
objective of reducing or eliminating double taxation 
principally is achieved by each country agreeing to limit, in 
certain specified situations, its right to tax income derived 
from its territory by residents of the other country. For 
example, the proposed treaty contains provisions under which 
neither country generally will tax business income derived from 
sources within that country by residents of the other country 
unless the business activities in the taxing country are 
substantial enough to constitute a permanent establishment or 
fixed base (Articles 7 and 14). Similarly, the proposed treaty 
contains ``commercial visitor'' exemptions under which 
residents of one country performing personal services in the 
other country will not be required to pay tax in the other 
country unless their contact with the other country exceeds 
specified minimums (Articles 14, 15, and 17). The proposed 
treaty provides that dividends and certain capital gains 
derived by a resident of either country from sources within the 
other country may be taxed by both countries (Articles 10 and 
13); however, the rate of tax that the source country may 
impose on a resident of the other country on dividends 
generally will be limited by the proposed treaty (Article 10). 
The proposed treaty also provides that interest and royalties 
derived by a resident of either country generally will be 
exempt from tax in the other country (Articles 11, 12 and 22).
    In situations where the country of source retains the right 
under the proposed treaty to tax income derived by residents of 
the other country, the proposed treaty generally provides for 
relief from the potential double taxation through the allowance 
by the country of residence of a tax credit for certain foreign 
taxes paid to the other country (Article 24).
    The proposed treaty contains the standard provision (the 
``saving clause'') contained in U.S. tax treaties pursuant to 
which each country retains the right to tax its citizens and 
residents as if the proposed treaty had not come into effect 
(Article 1). In addition, the proposed treaty contains the 
standard provision that it may not be applied to deny any 
taxpayer any benefits the taxpayer would be entitled to under 
the domestic law of a country or under any other agreement 
between the two countries (Article 1).
    The proposed treaty also contains a detailed limitation on 
benefits provision to prevent the inappropriate use of the 
proposed treaty by third-country residents (Article 23).

                  IV. Entry Into Force and Termination

                          A. Entry into Force

    The proposed treaty is subject to ratification in 
accordance with the applicable procedures of each country, and 
the instruments of ratification are to be exchanged as soon as 
possible. In general, the proposed treaty will enter into force 
when the instruments of ratification are exchanged. The present 
treaty generally ceases to have effect once the provisions of 
the proposed treaty take effect.
    With respect to taxes withheld at source, the proposed 
treaty will be effective for amounts paid or credited on or 
after the first of January following entry into force. With 
respect to other taxes, the proposed treaty will be effective, 
in the case of the United States, for taxable periods beginning 
on or after the first of January following entry into force 
and, in the case of Ireland, for financial years with respect 
to the corporation tax and years of assessment with respect to 
the income and capital gains taxes beginning on or after the 
first of January following entry into force.
    Where greater benefits would be available to a taxpayer 
under the present treaty than under the proposed treaty, the 
proposed treaty provides that the taxpayer may elect to be 
taxed under the present treaty (in its entirety) for the 
twelve-month period following the date on which the proposed 
treaty otherwise would have effect.
    The proposed treaty includes a special transition rule with 
respect to the limitation on benefits provision. Under this 
rule, an Irish company that is claiming the benefits of the 
proposed treaty on the basis that it is owned by residents of 
European Union (``EU'') or North American Free Trade Agreement 
(``NAFTA'') countries may do so without regard to the 
requirement that such owners be entitled to benefits equivalent 
to those under the proposed treaty. This rule generally applies 
for the two-year period from the date the proposed treaty 
otherwise takes effect; however, it applies for the three-year 
period from the date the proposed treaty takes effect if the 
election to continue the application of the present treaty is 
made.

                             B. Termination

    The proposed treaty will remain in force until terminated 
by either country. Either country may terminate the proposed 
treaty at any time after five years from the date of its entry 
into force by giving at least six months prior notice through 
diplomatic channels. A termination will be effective with 
respect to taxes withheld at source for amounts paid or 
credited on or after the first of January following the 
expiration of the six-month period. A termination will be 
effective with respect to other taxes, in the case of the 
United States, for taxable periods beginning on or after the 
first of January following the expiration of the six-month 
period and, in the case of Ireland, for financial years with 
respect to the corporation tax and years of assessment with 
respect to the income and capital gains taxes beginning on or 
after the first of January following the expiration of the six-
month period.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed treaty with Ireland and the related protocol and 
exchange of notes (Treaty Doc. 105-31), as well as on other 
proposed tax treaties and protocols, on October 7, 1997. The 
hearing was chaired by Senator Hagel. The Committee considered 
these proposed treaties and protocols on October 8, 1997, and 
ordered the proposed treaty with Ireland and the related 
protocol and exchange of notes favorably reported by a voice 
vote, with the recommendation that the Senate give its advice 
and consent to ratification of the proposed treaty, subject to 
an understanding, two declarations, and a proviso.

                         VI. Committee Comments

    On balance, the Committee on Foreign Relations believes 
that the proposed treaty with Ireland is in the interest of the 
United States and urges that the Senate act promptly to give 
advice and consent to ratification. However, the Committee has 
taken note of certain issues raised by the proposed treaty and 
believes that the following comments may be useful to Treasury 
Department officials in providing guidance on these matters 
should they arise in the course of future treaty negotiations.

                     A. Treatment of REIT Dividends

REITs in general

    Real Estate Investment Trusts (``REITs'') essentially are 
treated as conduits for U.S. tax purposes. The income of a REIT 
generally is not taxed at the entity level but is distributed 
and taxed only at the investor level. This single level of tax 
on REIT income is in contrast to other corporations, the income 
of which is subject to tax at the corporate level and is taxed 
again at the shareholder level upon distribution as a dividend. 
Hence, a REIT is like a mutual fund that invests in qualified 
real estate assets.
    An entity that qualifies as a REIT is taxable as a 
corporation. However, unlike other corporations, a REIT is 
allowed a deduction for dividends paid to its shareholders. 
Accordingly, income that is distributed by a REIT to its 
shareholders is not subject to corporate tax at the REIT level. 
A REIT is subject to corporate tax only on any income that it 
does not distribute currently to its shareholders. As discussed 
below, a REIT is required to distribute on a current basis the 
bulk of its income each year.
    In order to qualify as a REIT, an entity must satisfy, on a 
year-by-year basis, specific requirements with respect to its 
organizational structure, the nature of its assets, the source 
of its income, and the distribution of its income. These 
requirements are intended to ensure that the benefits of REIT 
status are accorded only to pooling of investment arrangements, 
the income of which is derived from passive investments in real 
estate and is distributed to the investors on a current basis.
    In order to satisfy the organizational structure 
requirements for REIT status, a REIT must have at least 100 
shareholders and not more than 50 percent (by value) of its 
shares may be owned by five or fewer individuals. In addition, 
shares of a REIT must be transferrable.
    In order to satisfy the asset requirements for REIT status, 
a REIT must have at least 75 percent of the value of its assets 
invested in real estate, cash and cash items, and government 
securities. In addition, diversification rules apply to the 
REIT's investment in assets other than the foregoing qualifying 
assets. Under these rules, not more than 5 percent of the value 
of its assets may be invested in securities of a single issuer 
and any such securities held may not represent more than 10 
percent of the voting securities of the issuer.
    In order to satisfy the source of income requirements, at 
least 95 percent of the gross income of the REIT generally must 
be from certain passive sources (e.g., dividends, interest, and 
rents). In addition, at least 75 percent of its gross income 
generally must be from certain real estate sources (e.g., real 
property rents, mortgage interest, and real property gains).
    Finally, in order to satisfy the distribution of income 
requirement, the REIT generally is required to distribute to 
its shareholders each year at least 95 percent of its taxable 
income for the year (excluding net capital gains). A REIT may 
retain 5 percent or less of its taxable income and all or part 
of its net capital gain.
    A REIT is subject to corporate-level tax only on any 
taxable income and net capital gains that the REIT retains. 
Under an available election, shareholders may be taxed 
currently on the undistributed capital gains of a REIT, with 
the shareholder entitled to a credit for the tax paid by the 
REIT with respect to the undistributed capital gains such that 
the gains are subject only to a single level of tax. 
Distributions from a REIT of ordinary income are taxable to the 
shareholders as a dividend, in the same manner as dividends 
from an ordinary corporation. Accordingly, such dividends are 
subject to tax at a maximum rate of 39.6 percent in the case of 
individuals and 35 percent in the case of corporations. In 
addition, capital gains of a REIT distributed as a capital gain 
dividend are taxable to the shareholders as capital gain. 
Capital gain dividends received by an individual will be 
eligible for preferential capital gain tax rates if the 
relevant holding period requirements are satisfied.

Foreign investors in REITs

    Nonresident alien individuals and foreign corporations 
(collectively, foreign persons) are subject to U.S. tax on 
income that is effectively connected with the foreign person's 
conduct of a trade or business in the United States, in the 
same manner and at the same graduated tax rates as U.S. 
persons. In addition, foreign persons generally are subject to 
U.S. tax at a flat 30-percent rate on certain gross income that 
is derived from U.S. sources and that is not effectively 
connected with a U.S. trade or business. The 30-percent tax 
applies on a gross basis to U.S.-source interest, dividends, 
rents, royalties, and other similar types of income. This tax 
generally is collected by means of withholding by the person 
making the payment of such amounts to a foreign person.
    Capital gains of a nonresident alien individual that are 
not connected with a U.S. business generally are subject to the 
30-percent withholding tax only if the individual is present in 
the United States for 183 days or more during the year. The 
United States generally does not tax foreign corporations on 
capital gains that are not connected with a U.S. trade or 
business. However, foreign persons generally are subject to 
U.S. tax on any gain from a disposition of an interest in U.S. 
real property at the same rates that apply to similar income 
received by U.S. persons. Therefore, a foreign person that has 
capital gains with respect to U.S. real estate is subject to 
U.S. tax on such gains in the same manner as a U.S. person. For 
this purpose, a distribution by a REIT to a foreign shareholder 
that is attributable to gain from a disposition of U.S. real 
property by the REIT is treated as gain recognized by such 
shareholder from the disposition of U.S. real property.
    U.S. income tax treaties contain provisions limiting the 
amount of income tax that may be imposed by one country on 
residents of the other country. Many treaties, like the 
proposed treaty, generally allow the source country to impose 
not more than a 15-percent withholding tax on dividends paid to 
a resident of the other treaty country. In the case of real 
estate income, most treaties, like the proposed treaty, specify 
that income derived from, and gain from dispositions of, real 
property in one country may be taxed by the country in which 
the real property is situated without limitation. <SUP>2</SUP> 
Accordingly, U.S. real property rental income derived by a 
resident of a treaty partner generally is subject to the U.S. 
withholding tax at the full 30-percent rate (unless the net-
basis taxation election is made), and U.S. real property gains 
of a treaty partner resident are subject to U.S. tax in the 
manner and at the rates applicable to U.S. persons.
---------------------------------------------------------------------------
    \2\ The proposed treaty, like many treaties, allows the foreign 
person to elect to be taxed in the source country on income derived 
from real property on a net basis under the source country's domestic 
laws.
---------------------------------------------------------------------------
    Although REITs are not subject to corporate-level taxation 
like other corporations, distributions of a REIT's income to 
its shareholders generally are treated as dividends in the same 
manner as distributions from other corporations. Accordingly, 
in cases where no treaty is applicable, a foreign shareholder 
of a REIT is subject to the U.S. 30-percent withholding tax on 
ordinary income distributions from the REIT. In addition, such 
shareholders are subject to U.S. tax on U.S. real estate 
capital gain distributions from a REIT in the same manner as a 
U.S. person.
    In cases where a treaty is applicable, this U.S. tax on 
capital gain distributions from a REIT still applies. However, 
absent special rules applicable to REIT dividends, treaty 
provisions specifying reduced rates of tax on dividends apply 
to ordinary income dividends from REITs as well as to dividends 
from taxable corporations. As discussed above, the proposed 
treaty, like many U.S. treaties, reduces the U.S. 30-percent 
withholding tax to 15 percent in the case of dividends 
generally. Prior to 1989, U.S. tax treaties contained no 
special rules excluding dividends from REITs from these reduced 
rates. Therefore, under pre-1989 treaties such as the present 
treaty with Ireland, REIT dividends are eligible for the same 
reductions in the U.S. withholding tax that apply to other 
corporate dividends.
    Beginning in 1989, U.S. treaty negotiators began including 
in treaties provisions excluding REIT dividends from the 
reduced rates of withholding tax generally applicable to 
dividends. Under treaties with these provisions such as the 
proposed treaty, REIT dividends generally are subject to the 
full U.S. 30-percent withholding tax. <SUP>3</SUP> 
---------------------------------------------------------------------------
    \3\ Many treaties, like the proposed treaty, provide a maximum tax 
rate of 15 percent in the case of REIT dividends beneficially owned by 
an individual who holds a less than 10 percent interest in the REIT.
---------------------------------------------------------------------------

Analysis of treaty treatment of REIT dividends

    The specific treaty provisions governing REIT dividends 
were introduced beginning in 1989 because of concerns that the 
reductions in withholding tax generally applicable to dividends 
were inappropriate in the case of dividends from REITs. The 
reductions in the rates of source country tax on dividends 
reflect the view that the full 30-percent withholding tax rate 
may represent an excessive rate of source-country taxation 
where the source country already has imposed a corporate-level 
tax on the income prior to its distribution to the shareholders 
in the form of a dividend. In the case of dividends from a 
REIT, however, the income generally is not subject to 
corporate-level taxation.
    REITs are required to distribute their income to their 
shareholders on a current basis. The assets of a REIT consist 
primarily of passive real estate investments and the REIT's 
income may consist principally of rentals from such real estate 
holdings. U.S.-source rental income generally is subject to the 
U.S. 30-percent withholding tax. Moreover, the United States's 
treaty policy is to preserve its right to tax real property 
income derived from the United States. Accordingly, the U.S. 
30-percent tax on rental income from U.S. real property is not 
reduced in U.S. tax treaties.
    If a foreign investor in a REIT were instead to invest in 
U.S. real estate directly, the foreign investor would be 
subject to the full 30-percent withholding tax on rental income 
earned on such property (unless the net-basis taxation election 
is made). However, when the investor makes such investment 
through a REIT instead of directly, the income earned by the 
investor is treated as dividend income. If the reduced rates of 
withholding tax for dividends apply to REIT dividends, the 
foreign investor in the REIT is accorded a reduction in U.S. 
withholding tax that is not available for direct investments in 
real estate.
    On the other hand, some argue that it is important to 
encourage foreign investment in U.S. real estate through REITs. 
In this regard, a higher withholding tax on REIT dividends 
(i.e., 30 percent instead of 15 percent) may not be fully 
creditable in the foreign investor's home country and the cost 
of the higher withholding tax therefore may discourage foreign 
investment in REITs. For this reason, some oppose the inclusion 
in U.S. treaties of the special provisions governing REIT 
dividends, arguing that dividends from REITs should be given 
the same treatment as dividends from other corporate entities. 
Accordingly, under this view, the 15-percent withholding tax 
rate generally applicable under treaties to dividends should 
apply to REIT dividends as well.
    This argument is premised on the view that investment in a 
REIT is not equivalent to direct investment in real property. 
From this perspective, an investment in a REIT should be viewed 
as comparable to other investments in corporate stock. In this 
regard, like other corporate shareholders, REIT investors are 
investing in the management of the REIT and not just its 
underlying assets. Moreover, because the interests in a REIT 
are widely held and the REIT itself typically holds a large and 
diversified asset portfolio, an investment in a REIT represents 
a very small investment in each of a large number of 
properties. Thus, the REIT investment provides diversification 
and risk reduction that are not easily replicated through 
direct investment in real estate.
    At the October 7, 1997 hearing on the proposed treaty (as 
well as other proposed treaties and protocols), the Treasury 
Department announced that it has modified its policy with 
respect to the exclusion of REIT dividends from the reduced 
withholding tax rates applicable to other dividends under 
treaties. The Treasury Department worked extensively with the 
staff of the Committee on Foreign Relations, the staff of the 
Joint Committee on Taxation, and representatives of the REIT 
industry in order to address the concern that the current 
treaty policy with respect to REIT dividends may discourage 
some foreign investment in REITs while maintaining a treaty 
policy that properly preserves the U.S. taxing jurisdiction 
over foreign direct investment in U.S. real property. The new 
policy is a result of significant cooperation among all parties 
to balance these competing considerations.
    Under this policy, REIT dividends paid to a resident of a 
treaty country will be eligible for the reduced rate of 
withholding tax applicable to portfolio dividends (typically, 
15 percent) in two cases. First, the reduced withholding tax 
rate will apply to REIT dividends if the treaty country 
resident beneficially holds an interest of 5 percent or less in 
each class of the REIT's stock and such dividends are paid with 
respect to a class of the REIT's stock that is publicly traded. 
Second, the reduced withholding tax rate will apply to REIT 
dividends if the treaty country resident beneficially holds an 
interest of 10 percent or less in the REIT and the REIT is 
diversified, regardless of whether the REIT's stock is publicly 
traded. In addition, the current treaty policy with respect to 
the application of the reduced withholding tax rate to REIT 
dividends paid to individuals holding less than a specified 
interest in the REIT will remain unchanged.
    For purposes of these rules, a REIT will be considered 
diversified if the value of no single interest in real property 
held by the REIT exceeds 10 percent of the value of the REIT's 
total interests in real property. An interest in real property 
will not include a mortgage, unless the mortgage has 
substantial equity components. An interest in real property 
also will not include foreclosure property. Accordingly, a REIT 
that holds exclusively mortgages will be considered to be 
diversified. The diversification rule will be applied by 
looking through a partnership interest held by a REIT to the 
underlying interests in real property held by the partnership. 
Finally, the reduced withholding tax rate will apply to a REIT 
dividend if the REIT's trustees or directors make a good faith 
determination that the diversification requirement is satisfied 
as of the date the dividend is declared.
    The Treasury Department will incorporate this new policy 
with respect to the treatment of REIT dividends in the U.S. 
model treaty and in future treaty negotiations. In addition, 
the Treasury Department has committed to use its best efforts 
to negotiate a protocol with Ireland to amend the proposed 
treaty to incorporate this policy.
    The Committee believes that the new policy with respect to 
the applicability of reduced withholding tax rates to REIT 
dividends appropriately reflects economic changes since the 
establishment of the current policy. The Committee further 
believes that the new policy fairly balances competing 
considerations by extending the reduced rate of withholding tax 
on dividends generally to dividends paid by REITs that are 
relatively widely-held and diversified. The Committee 
encourages the Treasury Department to act expeditiously in 
meeting its commitment to negotiate a protocol with Ireland 
that incorporates this new policy.

                       B. Exchange of Information

    One of the principal purposes of the proposed income tax 
treaty between the United States and Ireland is to prevent 
avoidance or evasion of income taxes of the two countries. The 
exchange of information article of the proposed treaty is one 
of the primary vehicles used to achieve that purpose.
    The exchange of information article contained in the 
proposed treaty conforms in most respects to the corresponding 
articles of the U.S. and OECD models. As is true under the U.S. 
model, under the proposed treaty the countries are to exchange 
such information as is relevant for carrying out the provisions 
of the proposed treaty or the domestic tax laws of the 
countries. As is also true under these model treaties, under 
the proposed treaty a country is not required to carry out 
administrative measures at variance with the laws and 
administrative practices of either country, to supply 
information which is not obtainable under the laws or in the 
normal course of the administration of either country, or to 
supply information which discloses any trade, business, 
industrial, commercial, or professional secret or trade 
process, or information the disclosure of which is contrary to 
public policy.
    There is one significant respect in which the exchange of 
information article will not be fully implemented by Ireland. 
The proposed treaty conforms to the corresponding article of 
the U.S. model by including the standard provision that upon 
request a country shall obtain information to which the request 
relates in the same manner and to the same extent as if the tax 
of the requesting country were imposed by the requested 
country. However, paragraph 10 of the proposed protocol states 
that, for purposes of this provision regarding obtaining 
information, as of the date of signature of the proposed 
treaty, <SUP>4</SUP> the laws and practices of Ireland do not 
permit its tax authorities to carry out inquiries on behalf of 
another country where no Irish liability for a tax covered by 
the proposed treaty is at issue. The proposed protocol also 
states that if Irish laws and practices later change to permit 
such inquiries, Ireland will then implement this provision of 
the proposed treaty. The diplomatic notes state that, in 
addition to these provisions, pursuant to a provision of Irish 
law, the United States may obtain information of financial 
institutions in Ireland or depositions of witnesses located in 
Ireland, for the purpose of investigating or prosecuting 
criminal fiscal offenses (including criminal revenue offenses) 
under the laws of the United States. The consequence of both 
the diplomatic notes and the proposed protocol is that the 
United States may obtain limited information with respect to 
criminal offenses, and may obtain no information with respect 
to civil offenses; Ireland may obtain information generally 
with respect to both criminal and civil offenses.
---------------------------------------------------------------------------
    \4\ July 28, 1997.
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    As part of its consideration of the proposed treaty, the 
Committee asked if the Treasury Department considers the 
exchange of information provisions of the proposed treaty to be 
adequate to carry out the tax-avoidance purposes for which 
income tax treaties are entered into by the United States. The 
relevant portion of the Treasury Department's October 8, 1997 
letter <SUP>5</SUP> responding to this inquiry is reproduced 
below:
---------------------------------------------------------------------------
    \5\ Letter from Joseph H. Guttentag, International Tax Counsel, 
Treasury Department, to Senator Paul Sarbanes, Committee on Foreign 
Relations, October 8, 1997 (``October 8, 1997 Treasury Department 
letter'').

    Adequate exchange of information with our treaty partners 
is one of the key objectives of our tax treaty policy. While 
the proposed convention deviates to some extent from the U.S. 
Model, we believe that it provides substantial benefits to the 
United States. The proposed convention obligates Ireland to 
obtain and exchange information in a broad class of cases. 
Ireland will obtain and exchange information without 
restriction for U.S. investigations and prosecutions of 
criminal tax cases. Legislation granting authority to exchange 
information in such cases was formulated during negotiation of 
the proposed Convention and its enactment by the Irish 
legislature was viewed by the United States as a precondition 
to completing the negotiations. In civil cases Ireland will 
provide any information its tax authorities possess and will 
obtain information if Ireland also has a tax interest in the 
case (that is, where Irish tax liability is also at issue). 
While the laws and practices of Ireland currently do not permit 
it to obtain information in civil cases where it does not have 
a tax interest, the Protocol includes Ireland's agreement that, 
if the laws and practices of Ireland change in this respect, 
Ireland will carry out enquiries on behalf of the United States 
in such cases.
    The information exchange provision in fact does impose 
reciprocal obligations on Ireland and the United States. Under 
rules of international comity, recognized by the OECD, the 
United States would not feel compelled to obtain information on 
behalf of Ireland in cases in which Ireland would not 
reciprocate. This issue was fully addressed during 
negotiations, and Ireland recognizes that it cannot expect to 
obtain information on a non-reciprocal basis.

    Although broader exchange of information provisions are 
desirable, the Committee understands the difficulty in 
achieving broader provisions given the current constraints of 
Irish laws and practices. However, the Committee does not 
believe that the Irish treaty should be construed in any way as 
a precedent for other negotiations. The Committee is 
particularly concerned about the presence in the proposed 
treaty of information exchange provisions that appear to be 
non-reciprocal. In this regard, the Committee has been assured 
by the Treasury Department that the provisions of the treaty do 
not compel the United States to obtain and provide information 
on a non-reciprocal basis. Because of the significance of 
information exchange provisions to this and all U.S. tax 
treaties, the Committee has included in its recommended 
resolution of ratification an understanding regarding the fact 
that the U.S. competent authority follows this practice of 
comity with respect to exchanges of information under all tax 
treaties. Moreover, the Committee does not believe that 
significant limitations on the effect of information exchange 
provisions, relative to the preferred U.S. tax treaty position, 
should be accepted in negotiations with other countries that 
seek to have or to maintain the benefits of a tax treaty 
relationship with the United States.

                        C. Insurance Excise Tax

    The proposed treaty, unlike the present treaty, covers the 
U.S. excise tax on insurance premiums paid to foreign insurers. 
With the waiver of the excise tax on insurance premiums, for 
example, an Irish insurer without a permanent establishment in 
the United States can collect premiums on policies covering a 
U.S. risk or a U.S. person free of the excise tax on insurance 
premiums. However, the tax is imposed to the extent that the 
risk is reinsured by the Irish insurer with a person not 
entitled to the benefits of an income tax treaty providing 
exemption from the tax. This latter rule is known as the 
``anti-conduit'' clause. Moreover, the tax is imposed if the 
premiums paid to the Irish insurer are not subject to the 
generally applicable tax imposed on insurance corporations in 
Ireland.
    Such waivers of the excise tax have raised serious 
congressional concerns. For example, concern has been expressed 
over the possibility that such waivers may place U.S. insurers 
at a competitive disadvantage with respect to foreign 
competitors in U.S. markets if a substantial tax is not 
otherwise imposed (e.g., by the treaty partner country) on the 
insurance income of the foreign insurer (or, if the risk is 
reinsured, the reinsurer). Moreover, in such case, a waiver of 
the tax does not serve the primary purpose of treaties to 
prevent double taxation, but instead has the undesirable effect 
of eliminating all tax on such income.
    The U.S.-Barbados and U.S.-Bermuda tax treaties each 
contained such a waiver as originally signed. In its report on 
the Bermuda treaty, the Committee expressed the view that those 
waivers should not have been included. The Committee stated 
that waivers should not be given by Treasury in its future 
treaty negotiations without prior consultations with the 
appropriate committees of Congress. <SUP>6</SUP> Congress 
subsequently enacted legislation to ensure the sunset of the 
waivers in the two treaties. The insurance excise tax also is 
waived in the treaty with the United Kingdom (without the so-
called ``anti-conduit rule''). The inclusion of such a waiver 
in that treaty has been followed by a number of legislative 
efforts to redress the perceived competitive imbalance created 
by the waiver.
---------------------------------------------------------------------------
    \6\ Limited consultations took place in connection with the 
proposed treaty.
---------------------------------------------------------------------------
    The proposed treaty waives imposition of the excise tax on 
insurance and reinsurance premiums paid to residents of 
Ireland. The Committee understands that, unlike Bermuda and 
Barbados, Ireland imposes substantial tax on the income, 
including insurance income, of its residents. In this regard, 
the proposed treaty includes a special rule that denies the 
waiver if the premiums are not subject to the generally 
applicable tax on Irish insurance companies. Moreover, unlike 
in the case of the U.K. treaty, the waiver in the proposed 
treaty contains the anti-conduit clause.
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department whether the Irish 
income tax imposed on Irish insurance companies with respect to 
insurance premiums results in a tax burden that is substantial 
in relation to the U.S. tax on U.S. insurance companies. The 
relevant portion of the October 8, 1997 Treasury Department 
letter responding to this inquiry is reproduced below:

    Treasury recognizes the valid policy concerns about the 
competitiveness of U.S. insurance companies that justify the 
imposition of the excise tax on foreign insurers insuring U.S. 
risks. Consistent with this policy objective, the Treasury 
Department will only agree to cover this excise tax in an 
income tax convention, and thereby grant an exemption from the 
tax, if Treasury is satisfied that an insurer operating from 
the treaty partner and insuring U.S. risks would face a level 
of taxation that is substantial relative to the level of 
taxation faced by U.S. insurers. We agreed to the exemption 
provided in the proposed convention only after a thorough 
review of Irish law and information on Irish insurance company 
operations. This review concluded that insurance companies 
facing Ireland's general insurance tax provisions were subject 
to a substantial level of tax in Ireland. However, it also 
concluded that insurers benefitting from Ireland's 
International Financial Services Center do not face a 
significant level of tax relative to U.S. insurance companies. 
The treaty therefore denies the exemption if an insurer does 
not face Ireland's general tax provisions. Consultations were 
held with Senate and House Committee staff members before a 
final decision was made.

    In light of the inclusion in the proposed treaty of the 
anti-conduit clause and the provision requiring that the 
insurance company be subject to the country's generally 
applicable tax, and based on the assessment provided by the 
Treasury Department regarding the relative tax burdens of Irish 
insurers and U.S. insurers, the Committee believes that the 
waiver of the excise tax for Irish insurers is consistent with 
the criteria the Committee has articulated for such waivers. 
However, the Committee instructs the Treasury Department 
promptly to notify the Committee of any changes in laws or 
business practices that would have an impact on the tax burden 
of Irish insurers relative to that of U.S. insurers.

                           D. Treaty Shopping

    The proposed treaty, like many U.S. income tax treaties, 
generally limits treaty benefits for treaty country residents 
so that only those residents with a sufficient nexus to a 
treaty country will receive treaty benefits. Although the 
proposed treaty generally is intended to benefit residents of 
Ireland and the United States only, residents of third 
countries sometimes attempt to use a treaty to obtain treaty 
benefits. This is known as treaty shopping. Investors from 
countries that do not have tax treaties with the United States, 
or from countries that have not agreed in their tax treaties 
with the United States to limit source-country taxation to the 
same extent that it is limited in another treaty may, for 
example, attempt to reduce the tax on interest on a loan to a 
U.S. person by lending money to the U.S. person indirectly 
through a country whose treaty with the United States provides 
for a lower rate of withholding tax on interest. The third-
country investor may attempt to do this by establishing in that 
treaty country a subsidiary, trust, or other entity which then 
makes the loan to the U.S. person and claims the treaty 
reduction for the interest it receives.
    The anti-treaty-shopping provision of the proposed treaty 
is similar to anti-treaty-shopping provisions in the Internal 
Revenue Code (the ``Code'') (as interpreted by Treasury 
regulations) and in the U.S. model. The provision also is 
similar to the anti-treaty-shopping provision in several recent 
treaties. In particular, the proposed treaty provision 
resembles the anti-treaty-shopping provisions contained in the 
1993 U.S. treaty with the Netherlands and the 1995 U.S. treaty 
with France. The degree of detail included in this provision is 
notable in itself. The proliferation of detail may reflect, in 
part, a diminution in the scope afforded the Internal Revenue 
Service (the ``IRS'') and the courts to resolve interpretive 
issues adversely to a person attempting to claim the benefits 
of a treaty; this diminution represents a bilateral commitment, 
not alterable by developing internal U.S. tax policies, rules, 
and procedures, unless enacted as legislation that would 
override the treaty. (In contrast, the IRS generally is not 
limited under the proposed treaty in its discretion to allow 
treaty benefits under the anti-treaty-shopping rules.) The 
detail in the proposed treaty does represent added guidance and 
certainty for taxpayers that may be absent under treaties that 
may have somewhat simpler and more flexible provisions.
    The anti-treaty-shopping provisions in the proposed treaty 
differ from those in the Code and other treaties in a number of 
respects. The proposed treaty contains a particularly broad 
range of categories under which persons may qualify for some or 
all benefits of the treaty.
    For example, the proposed treaty includes a special rule 
under which income derived from the operation of ships and 
aircraft in international traffic will be eligible for the 
exemption from source-country tax provided under the treaty. 
Under this rule, an Irish resident that derives shipping income 
from the United States is entitled to exemption from U.S. tax 
on such income if at least 50 percent of the interests in the 
resident is owned, directly or indirectly, by qualified 
persons, U.S. citizens or residents, or individuals who are 
residents of a third country or a company or companies the 
principal shares of which are substantially and regularly 
traded on an established securities market in the third 
country. This rule applies as long as the third country grants 
an exemption to shipping income under similar terms to citizens 
and corporations of the source country. This rule also is 
included in the treaty with the Netherlands.
    The proposed treaty is similar to other U.S. treaties and 
the branch tax rules in affording treaty benefits to certain 
publicly traded companies. In comparison with the U.S. branch 
tax rules, the proposed treaty is more lenient. The proposed 
treaty allows benefits to be afforded to a company that is at 
least 50-percent owned, directly or indirectly, by one or more 
qualifying publicly traded corporations, while the branch tax 
rules allow benefits to be afforded only to a wholly-owned 
subsidiary of a publicly traded company. The proposed treaty 
also allows benefits to non-corporate entities, such as trusts, 
that satisfy a similar standard for public ownership.
    The proposed treaty also provides mechanical rules under 
which so-called ``derivative benefits'' are afforded. 
<SUP>7</SUP> Under these rules, an entity is afforded certain 
benefits based in part on its ultimate ownership of at least 95 
percent by seven or fewer residents of EU or NAFTA countries 
who would be entitled to treaty benefits under an existing 
treaty with the third country. The U.S. model does not contain 
a derivative benefits provision.
---------------------------------------------------------------------------
    \7\ The U.S. income tax treaties with the Netherlands, Jamaica and 
Mexico also provide similar benefits.
---------------------------------------------------------------------------
    Taken as a whole, some may argue that the derivative 
benefits provision of the proposed treaty is more generous to 
taxpayers claiming U.S. treaty benefits than the derivative 
benefits provision of any U.S. tax treaties currently in 
effect. For example, while most other treaties to which the 
United States is a party generally allow derivative benefits 
only with respect to certain income (e.g., interest, dividends 
or royalties), the proposed treaty allows a taxpayer to claim 
derivative benefits with respect to the entire treaty. 
<SUP>8</SUP> In addition, unlike most existing treaties, the 
proposed treaty, does not require any same-country ownership of 
an Irish company claiming treaty benefits. <SUP>9</SUP> In 
other words, an Irish entity that is 100-percent owned by 
certain third-country residents and that does not otherwise 
have a nexus with Ireland (e.g., by engaging in an active trade 
or business there), may be entitled to claim benefits under the 
proposed treaty. Moreover, in order for residents of third 
countries to be taken into account under this rule, the 
proposed treaty generally requires only that the third country 
have an income tax treaty with the United States, and does not 
require that such treaty provide benefits as favorable as those 
under the proposed treaty. The latter requirement is imposed 
under the proposed treaty only in order to qualify for benefits 
with respect to dividends, interest, and royalties. In 
addition, that requirement with respect to eligibility for 
derivative benefits with respect to dividends, interest, and 
royalties does not apply for the first two or three years that 
the treaty is in force.
---------------------------------------------------------------------------
    \8\ The U.S.-Jamaica tax treaty is the only other existing treaty 
that allows a taxpayer to claim derivative benefits with respect to the 
entire treaty.
    \9\ Article 26(4) of the U.S.-Netherlands treaty, for example, 
requires more than 30-percent Dutch ownership of the entity claiming 
derivative benefits, and more than 70-percent EU ownership of such 
entity. On the other hand, the 1995 U.S.-Canada protocol permits a 
company to claim certain treaty benefits under the derivative benefits 
provision without any same country ownership; however, the benefits 
that may be so obtained are limited to reduced withholding rates for 
dividends, interest and royalties.
---------------------------------------------------------------------------
    The proposed treaty includes a special rule designed to 
prevent the proposed treaty from reducing or eliminating U.S. 
tax on income of an Irish resident in a case where no other 
substantial tax is imposed on that income (the so-called 
``triangular case''). This is necessary because an Irish 
resident may in some cases be wholly or partially exempt from 
Irish tax on foreign (i.e., non-Irish) income. The special rule 
applies generally if the combined Irish and third-country 
taxation of U.S.-source income derived by an Irish enterprise 
and attributable to a permanent establishment in the third 
country is less than 50 percent of the tax that would be 
imposed if the Irish enterprise earned the income in Ireland.
    Under the special rule, the United States is permitted to 
tax dividends, interest, and royalties paid to the third-
country permanent establishment at the rate of 15 percent. In 
addition, under the special rule, the United States is 
permitted to tax other types of income without regard to the 
proposed treaty. The special rule generally does not apply if 
the U.S. income is derived in connection with, or is incidental 
to, an active trade or business in the third country. The 
special rule is similar to a provision of the 1993 protocol to 
the U.S.-Netherlands tax treaty and a provision of the U.S.-
France treaty. This special rule for triangular cases is not 
included in the U.S. model.
    The U.S.-France treaty provides a further exception from 
the application of the special rule for the triangular case if 
the third-country income is subject to taxation by either the 
United States or France under the controlled foreign 
corporation rules of either country. <SUP>10</SUP> Although the 
proposed treaty does not provide an explicit controlled foreign 
corporation exception, the Committee expects that the U.S. 
competent authority would grant relief under the proposed 
treaty in a case where the U.S.-source income subject to the 
special rule ultimately is included in a U.S. shareholder's 
income under the subpart F rules. The Committee believes that 
either an explicit controlled foreign corporation exception 
should have been included in the text of the proposed treaty, 
as in the French treaty and the proposed treaties with Austria 
and South Africa, or the availability of such relief should 
have been described in the Technical Explanation of the 
proposed treaty, as in the case of the proposed treaty with 
Luxembourg.
---------------------------------------------------------------------------
    \10\ In the case of the United States, these provisions are 
contained in sections 951-964 of the Code and are referred to as the 
``subpart F'' rules.
---------------------------------------------------------------------------
    The practical difference between the proposed treaty tests 
and the corresponding tests in other treaties will depend upon 
how they are interpreted and applied. Given the relatively 
bright line rules provided in the proposed treaty, the range of 
interpretation under it may be fairly narrow.
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department about the sufficiency 
of the anti-treaty-shopping provision in the proposed treaty. 
The relevant portion of the October 8, 1997 Treasury Department 
letter responding to this inquiry is reproduced below:

    We made every effort in negotiating the proposed Convention 
to ensure that the limitation on benefits provision adequately 
distinguished between persons that legitimately should qualify 
for treaty benefits and persons that may have a treaty shopping 
motive. We believe that we have been successful.
    The provisions in this treaty do differ in some respects 
from those in the U.S. Model and in other U.S. treaties, but 
this is to be expected. Negotiation of these provisions 
requires that the specific circumstances of the treaty partner 
be taken into account. As a consequence, no two treaties have 
identical limitation on benefits provision. In Ireland's case, 
the provisions needed to accommodate the fact that Ireland is a 
country with close economic ties to the rest of Europe and 
historically substantial foreign participation in its business 
sector. The provisions do this without compromising their 
fundamental objective.

    The Committee believes that the United States should 
maintain its policy of limiting treaty-shopping opportunities 
whenever possible. The Committee further believes that, in 
exercising any latitude Treasury has with respect to the 
operation of a treaty, the treaty rules should be applied to 
deter treaty-shopping abuses. On the other hand, the Committee 
recognizes that implementation of the tests for treaty shopping 
set forth in the proposed treaty raise factual, administrative, 
and other issues that cannot currently be foreseen. The 
Committee emphasizes that the provisions in the proposed treaty 
must be implemented so as to serve as an adequate tool for 
preventing possible treaty-shopping abuses in the future.

              E. Arbitration of Competent Authority Issues

    The proposed treaty would allow for a binding arbitration 
procedure, if agreed by both competent authorities and the 
taxpayer or taxpayers involved, for the resolution of those 
disputes in the interpretation or application of the proposed 
treaty that are within the jurisdiction of the competent 
authorities to resolve. The competent authorities could release 
to the arbitration board such information as is necessary to 
carry out the arbitration procedure. The members of the 
arbitration board are subject to the limitations on disclosure 
contained in the exchange of information article of the 
proposed treaty. This provision would take effect only after an 
exchange of diplomatic notes between the United States and 
Ireland.
    Generally, the jurisdiction of the competent authorities 
under the proposed treaty is as broad as it is under any U.S. 
income tax treaties. For example, the competent authorities are 
empowered (in this as in other treaties) to agree on the 
attribution of income, deductions, credits, or allowances of an 
enterprise to a permanent establishment. They may agree on the 
allocation of income, deductions, credits, or allowances 
between associated enterprises and others under the provisions 
of Article 9 (Associated Enterprises), which is the treaty 
analogue of Code section 482. They also may agree on the 
characterization of particular items of income, on the common 
meaning of a term, and on the application of procedural aspects 
of internal law. Finally, the competent authorities may agree 
on the elimination of double taxation in cases not provided for 
in the treaty. According to the Technical Explanation with 
respect to this procedure, agreements reached by the competent 
authorities need not conform to the internal law provisions of 
either treaty country.
    As part of its consideration of the proposed treaty, the 
Committee asked the Treasury Department about the 
appropriateness of the arbitration provision contained in the 
proposed treaty. The relevant portion of the October 8, 1997 
Treasury Department letter responding to this inquiry is 
reproduced below:

    Treasury recognizes that there has been little practical 
experience with arbitration of tax treaty disputes and this 
creates some uncertainty about how well arbitration would work. 
For this reason, Treasury does not advocate the inclusion of 
arbitration provisions in new treaties. However, if the treaty 
partner is strongly interested in an arbitration provision, we 
are willing to include such a provision in a new treaty with 
the proviso that it cannot be implemented until the treaty 
partners have exchanged diplomatic notes to that effect. This 
provides the opportunity to wait until more experience has been 
gained with arbitration and with the treaty partner before 
deciding whether the implementation of such a provision is 
desirable.

    The Committee continues to believe that the tax system 
potentially may have much to gain from use of a procedure, such 
as arbitration, in which independent experts can resolve 
disputes that otherwise may impede efficient administration of 
the tax laws. However, the Committee also believes that the 
appropriateness of such a clause in a future treaty depends 
strongly on the other party to the treaty, and the experience 
that the competent authorities have under the provision in the 
German treaty. The Committee understands that to date there 
have been no arbitrations of competent authority cases under 
the German treaty, and few tax arbitrations outside the context 
of that treaty. The Committee believes that it is appropriate 
to have conditioned the effectiveness of the arbitration 
provision in the proposed treaty on subsequent action which 
should occur only after review of future developments in this 
evolving area of international tax administration.

                           VII. Budget Impact

    The Committee has been informed by the staff of the Joint 
Committee on Taxation that the proposed treaty is estimated to 
cause a negligible change in fiscal year Federal budget 
receipts during the 1998-2007 period.

       VIII. Explanation of Proposed Treaty and Proposed Protocol

    A detailed, article-by-article explanation of the proposed 
treaty between the United States and Ireland, as supplemented 
by the proposed protocol, is presented below. In the 
explanation below, the understandings and interpretations 
reflected in the diplomatic notes are covered together with the 
relevant articles of the proposed treaty.

Article 1. General Scope

    The general scope article describes the persons who may 
claim the benefits of the proposed treaty. The proposed treaty 
generally applies to residents of the United States and 
residents of Ireland. However, other articles of the proposed 
treaty provide for specific expansions of this scope to persons 
that are residents of neither the United States nor Ireland for 
purposes of such articles (e.g., Article 25 (Non-
Discrimination) and Article 27 (Exchange of Information and 
Administrative Assistance)). The determination of whether a 
person is a resident of the United States or Ireland is made 
under the provisions of Article 4 (Residence).
    The proposed treaty provides that it does not restrict in 
any manner any benefit accorded by internal law or by any other 
agreement between the United States and Ireland. Thus, the 
proposed treaty will not apply to increase the tax burden of a 
resident of either the United States or Ireland. According to 
the Technical Explanation, the fact that the proposed treaty 
only applies to a taxpayer's benefit does not mean that a 
taxpayer may select inconsistently among treaty and internal 
law provisions in order to minimize its overall tax burden. In 
this regard, the Treasury Department's Technical Explanation 
(hereinafter referred to as the ``Technical Explanation'') sets 
forth the following example. Assume a resident of Ireland has 
three separate businesses in the United States. One business is 
profitable and constitutes a U.S. permanent establishment. The 
other two businesses generate effectively connected income as 
determined under the Code, but do not constitute permanent 
establishments as determined under the proposed treaty; one 
business is profitable and the other business generates a net 
loss. Under the Code, all three businesses would be subject to 
U.S. income tax, in which case the losses from the unprofitable 
business could offset the taxable income from the other 
businesses. On the other hand, only the income of the business 
which gives rise to a permanent establishment is taxable by the 
United States under the proposed treaty. The Technical 
Explanation makes clear that the taxpayer may not invoke the 
proposed treaty to exclude the profits of the profitable 
business that does not constitute a permanent establishment and 
invoke U.S. internal law to claim the loss of the unprofitable 
business that does not constitute a permanent establishment to 
offset the taxable income of the permanent establishment. 
<SUP>11</SUP> 
---------------------------------------------------------------------------
    \11\ See Rev. Rul. 84-17, 1984-1 C.B. 308.
---------------------------------------------------------------------------
    The proposed treaty provides that the dispute resolution 
procedures under its mutual agreement article take precedence 
over the corresponding provisions of any other agreement to 
which the United States and Ireland are parties in determining 
whether a measure is within the scope of the proposed treaty. 
Unless the competent authorities agree that a taxation measure 
is outside the scope of the proposed treaty, only the proposed 
treaty's nondiscrimination rules, and not the nondiscrimination 
rules of any other agreement in effect between the United 
States and Ireland, generally apply to that law or other 
measure. The only exception to this general rule is such 
national treatment or most favored nation obligations as may 
apply to trade in goods under the General Agreement on Tariffs 
and Trade. For purposes of this provision, the term ``measure'' 
means a law, regulation, rule, procedure, decision, 
administrative action, or any other similar provision or 
action.
    Like all U.S. income tax treaties, the proposed treaty is 
subject to a ``saving clause.'' Under this clause, with 
specific exceptions described below, the proposed treaty is not 
to affect a country's taxation of its residents or its 
citizens. By reason of this saving clause, unless otherwise 
specifically provided in the proposed treaty, the United States 
will continue to tax its citizens who are residents of Ireland 
as if the treaty were not in force. Similarly, the United 
States will continue to tax persons that are treated as U.S. 
residents under U.S. tax law as if the treaty were not in 
force, unless such persons are treated as residents of Ireland 
under the treaty tie-breaker rules governing dual residents 
provided in Article 4 (Residence). The term ``residents'' 
includes corporations and other entities as well as 
individuals.
    The proposed treaty contains a provision under which the 
saving clause (and therefore the jurisdiction to tax) applies 
to former citizens whose loss of citizenship had as one of its 
principal purposes the avoidance of tax. This rule applies only 
for a period of 10 years following such loss of citizenship. 
Under the U.S. model, the saving clause applies to both former 
citizens and former long-term residents. The Code provides 
special rules for the imposition of U.S. income tax on former 
U.S. citizens for a period of ten years following their loss of 
U.S. citizenship. The Health Insurance Portability and 
Accountability Act of 1996 extended the special income tax 
rules for former U.S. citizens to apply also to certain former 
long-term residents of the United States. The proposed treaty 
provision reflects the reach of the U.S. tax jurisdiction 
pursuant to these special rules prior to its extension to 
former U.S. long-term residents. Accordingly, the saving clause 
in the proposed treaty does not permit the United States to 
impose tax on former U.S. long-term residents who otherwise 
would be subject to the special income tax rules contained in 
the Code.
    Exceptions to the saving clause are provided for the 
following benefits conferred by a country pursuant to the 
proposed treaty: the provision for correlative adjustments to 
the profits of an enterprise following an adjustment by Ireland 
of the profits of a related enterprise (Article 9, paragraph 
2); the rule regarding source of directors' fees (Article 16, 
paragraph 2); the treatment of social security benefits and 
child support payments (Article 18, paragraphs 1(b) and 4); the 
provisions for relief from double taxation (Article 24); the 
non-discrimination rules (Article 25); and the mutual agreement 
procedures (Article 26). These exceptions to the saving clause 
allow the provision of the enumerated benefits to citizens and 
residents of a country, without regard to its internal law.
    In addition, exceptions from the saving clause are provided 
for certain benefits conferred by a treaty country pursuant to 
the proposed treaty, but only in the case of an individual who 
neither is a citizen of, nor has immigrant status in, such 
country. Under this rule, the specified benefits under the 
proposed treaty are available to an individual who spends 
enough time in the United States to be taxed as a U.S. resident 
under Code section 7701(b), provided that the individual has 
not acquired U.S. immigrant status (i.e., is not a green-card 
holder). The following benefits are subject to this rule: the 
treatment of pension fund contributions (Article 18, paragraph 
5); the exemption from tax on compensation from government 
service (Article 19) the exemption from U.S. tax on certain 
income received by temporary visitors who are students or 
trainees (Article 20); and the special rules applicable to 
diplomatic agents and consular officers (Article 28).

Article 2. Taxes Covered

    The proposed treaty specifies the particular covered taxes 
of each country for all purposes of the proposed treaty. Unlike 
the U.S. model and most other U.S. income tax treaties, the 
non-discrimination rules of Article 25 apply just to these 
covered taxes, and not to taxes of all kinds imposed by either 
country or its political subdivisions or local authorities.
    In the case of the United States, the proposed treaty, like 
the present treaty, applies to the Federal income taxes imposed 
by the Code. However a specific exclusion is provided for the 
accumulated earnings tax, the personal holding company tax and 
social security taxes. The proposed treaty also applies to the 
U.S. excise taxes imposed on insurance premiums paid to foreign 
insurers and the U.S. excise tax imposed with respect to 
private foundations. The present treaty does not apply to any 
excise taxes.
    The proposed treaty applies to the excise taxes on 
insurance premiums paid to foreign insurers only to the extent 
that the risks covered by such premiums are not reinsured with 
a person that is not entitled to an exemption from such taxes 
either under the proposed treaty or under any other treaty. The 
proposed protocol further provides that it is understood that 
the proposed treaty will not apply to the excise taxes on 
insurance premiums where such premiums are not subject to the 
generally applicable tax imposed on insurance corporations in 
the country in which the insurer is resident. Because the 
insurance excise taxes are covered taxes under the proposed 
treaty, Irish insurance companies generally are not subject to 
the U.S. excise taxes on insurance premiums for insuring U.S. 
risks. The excise taxes continue to apply, however, when an 
Irish insurer reinsures a policy it has written on a U.S. risk 
with a foreign reinsurer that is not entitled to a similar 
exemption under this or a different tax treaty. Moreover, such 
taxes continue to apply if the Irish insurance company is 
entitled to benefits under a special tax regime. Because the 
present treaty does not cover excise taxes, the U.S. insurance 
excise taxes may be imposed on Irish insurance company under 
the present treaty.
    In the case of Ireland, the proposed treaty applies to the 
income tax, the corporation tax, and the capital gains tax.
    The proposed treaty also contains a provision generally 
found in U.S. income tax treaties that applies the treaty to 
any identical or substantially similar taxes that either 
country may subsequently impose. The proposed treaty obligates 
the competent authority of each country to notify the competent 
authority of the other country of any significant changes in 
its internal tax laws and of any official published material 
concerning the application of the proposed treaty (including 
explanations, regulations, rulings, or judicial decisions). 
Unlike the U.S. model, the proposed treaty does not 
specifically obligate the competent authorities to notify each 
other of significant changes in other laws affecting their 
obligations under the proposed treaty.

Article 3. General Definitions

    This article provides definitions of terms used in the 
proposed treaty that apply for all purposes of the proposed 
treaty, unless the context requires otherwise. These 
definitions generally are consistent with the definitions 
contained in the U.S. model. In addition, certain terms are 
defined in the articles in which such terms are used.
    The term ``person'' includes an individual, an estate, a 
trust, a partnership, a company, and any other body of persons. 
A ``company'' is any body corporate or any entity which is 
treated as a body corporate for tax purposes.
    An ``enterprise of a Contracting State'' is defined as an 
enterprise carried on by a resident of that country. Similarly, 
an ``enterprise of the other Contracting State'' is defined as 
an enterprise carried on by a resident of the other country. 
The proposed treaty does not define the term ``enterprise.'' 
The Technical Explanation states that it is understood to mean 
any activity or set of activities that constitutes a trade or 
business.
    The term ``international traffic'' means any transport by a 
ship or aircraft, other than transport solely between two 
points within a country. The Technical Explanation states that 
transport that constitutes international traffic includes any 
portion of the transport that is between two points within a 
country, even if the internal portion of the transport involves 
a transfer to a land vehicle or is handled by an independent 
contractor (provided that the original bills of lading include 
such portion of the transport).
    The Irish competent authority is the Revenue Commissioners 
or their authorized representative. The U.S. competent 
authority is the Secretary of the Treasury or his delegate. In 
fact, the U.S. competent authority function has been delegated 
to the Commissioner of Internal Revenue, who has redelegated 
the authority to the Assistant Commissioner (International) of 
the IRS. On interpretative issues, the latter acts with the 
concurrence of the Associate Chief Counsel (International) of 
the IRS.
    The term ``United States'' means the United States of 
America and includes the States and the District of Columbia, 
but does not include Puerto Rico, the Virgin Islands, Guam or 
any other U.S. possession or territory. The term also includes 
any area outside the U.S. territorial waters which in accord 
with international law has been, or may hereafter be, 
designated under U.S. law as an area over which U.S. rights 
with respect to the seabed and subsoil and their natural 
resources may be exercised.
    The term ``Ireland'' similarly includes areas outside the 
territorial waters of Ireland.
    The terms ``the Contracting State,'' ``one of the 
Contracting States'' and ``the other Contracting State'' mean 
Ireland or the United States, as the context requires. The term 
``Contracting States'' means Ireland and the United States.
    The term ``national'' with respect to a country means any 
citizen of that country and any legal person, association or 
other entity deriving its status as such from the laws in force 
in that country.
    The term ``qualified governmental entity'' means (1) the 
government or a department of government of one of the 
countries or a political subdivision or local authority of a 
country; (2) a person wholly owned, directly or indirectly, by 
a country or a political subdivision or local authority, 
provided it is organized under the laws of the country, its 
earnings are credited to its own account, and its assets vest 
in the country, political subdivision or local authority upon 
its dissolution; and (3) a pension trust or fund of a person 
described herein that is constituted and operated exclusively 
to administer or provide government service pension benefits. 
Under the proposed treaty, a qualified governmental entity may 
not engage in commercial activity, and its income may not inure 
to the benefit of a private person.
    The proposed treaty also provides that, unless the context 
otherwise requires or the competent authorities of the two 
countries agree to a common meaning, all terms not defined in 
the treaty are to have the meanings which they have under the 
laws of the country whose tax is being applied. The Technical 
Explanation states that a meaning of a term provided under the 
tax laws of a country will take precedence over a meaning of 
such term under other laws of the country.

Article 4. Residence

    The assignment of a country of residence in a treaty is 
important because the benefits of the treaty generally are 
available only to a resident of one of the treaty countries as 
that term is defined in the treaty. Furthermore, double 
taxation often is avoided by the assignment of a single treaty 
country as the country of residence when, under the internal 
laws of the treaty countries, a person is a resident of both. 
The present treaty does not include a definition of the term 
``resident.''
    Under U.S. law, residence of an individual is important 
because a resident alien is taxed on worldwide income, while a 
nonresident alien is taxed only on certain U.S.-source income 
and on income that is effectively connected with a U.S. trade 
or business. An individual who spends substantial time in the 
United States in any year or over a three-year period generally 
is treated as a U.S. resident (Code sec. 7701(b)). A permanent 
resident for immigration purposes (i.e., a green-card holder) 
also is treated as a U.S. resident. Under the Code, a company 
is domestic, and therefore taxable on its worldwide income, if 
it is organized in the United States or under the laws of the 
United States, a State, or the District of Columbia.
    The proposed treaty generally defines the term ``resident 
of a Contracting State'' to mean any person who, under the laws 
of that country, is liable to tax therein by reason of his or 
her domicile, residence, place of management, place of 
incorporation, or any other criterion of a similar nature. The 
proposed treaty further provides that a U.S. citizen or alien 
admitted for permanent residence (i.e., a green-card holder) is 
a resident of the United States, but only if the individual has 
a substantial presence, permanent home, or habitual abode in 
the United States. Unlike under the U.S. model, citizenship 
alone does not establish residence. As a result, U.S. citizens 
residing overseas are not necessarily entitled to the benefits 
of the proposed treaty as U.S. residents.
    The proposed treaty also provides that a qualified 
governmental entity of a country is a resident of that country.
    Special rules apply to treat as residents of a treaty 
country certain organizations that generally are exempt from 
tax in that country. Under these rules, pension trusts and any 
other organizations established in a treaty country and 
maintained exclusively to administer or provide retirement or 
employee benefits are treated as residents of such country if 
they are established or sponsored by a person resident in such 
country. Similarly, charitable and other exempt organizations 
are residents, provided that the use of their assets, both 
currently and upon their dissolution or liquidation, is limited 
to the accomplishment of the purposes that serve as the basis 
for its tax exemption.
    The proposed treaty also provides special rules to treat 
certain investment entities as residents of the country in 
which they are organized or created, even though they may not 
be subject to significant tax at the entity level. Under this 
rule, Regulated Investment Companies (``RICs'') and REITs are 
treated as U.S. residents and Collective Investment 
Undertakings are treated as Irish residents. In addition, this 
rule may apply to any similar investment entities agreed upon 
by the competent authorities of both countries.
    The proposed protocol contains a special rule for fiscally 
transparent entities. Under this rule, if a resident of one 
country is entitled to income, profit or gain in respect of an 
interest in a person that derives income, profit or gain from 
the other country, any such item so derived will be considered 
to be an item of that resident to the extent it is so treated 
under the taxation laws of the first country. Thus, an item of 
income will be considered to be derived by a resident of a 
country if he or she is treated under the tax laws of such 
country as deriving such income.
    The term ``resident of a Contracting State'' does not 
include any person who is liable to tax in that country in 
respect only of income from sources in that country or of 
profits attributable to a permanent establishment in that 
country.
    The proposed treaty provides a set of ``tie-breaker'' rules 
to determine residence in the case of an individual who, under 
the basic residence rules, would be considered to be a resident 
of both countries. Such a dual resident individual is deemed to 
be a resident of the country in which he or she has a permanent 
home available. If the individual has a permanent home in both 
countries, the individual's residence is deemed to be the 
country with which his or her personal and economic relations 
are closer (i.e., the ``center of vital interests''). If the 
country in which the individual has his or her center of vital 
interests cannot be determined, or if the individual does not 
have a permanent home available in either country, such 
individual is deemed to be a resident of the country in which 
he or she has an habitual abode. If the individual has an 
habitual abode in both countries or in neither country, the 
individual is deemed to be a resident of the country of which 
he or she is a national. If the individual is a national of 
both countries or neither country, the competent authorities of 
the countries are to settle the question of residence by mutual 
agreement.
    In the case of a person other than an individual that would 
be considered to be a resident of both countries under the 
basic treaty definition, the proposed treaty provides that the 
competent authorities shall endeavor by mutual agreement to 
deem the person to be a resident of one country only for 
purposes of the proposed treaty.

Article 5. Permanent Establishment

    The proposed treaty contains a definition of the term 
``permanent establishment'' that generally follows the pattern 
of other recent U.S. income tax treaties, the U.S. model, and 
the OECD model.
    The permanent establishment concept is one of the basic 
devices used in income tax treaties to limit the taxing 
jurisdiction of the host country and thus to mitigate double 
taxation. Generally, an enterprise that is a resident of one 
country is not taxable by the other country on its business 
profits unless those profits are attributable to a permanent 
establishment of the resident in the other country. In 
addition, the permanent establishment concept is used to 
determine whether the reduced rates of, or exemptions from, tax 
provided for dividends, interest, and royalties apply or 
whether those amounts are taxed as business profits.
    In general, under the proposed treaty, a permanent 
establishment is a fixed place of business through which an 
enterprise carries on business in whole or in part. A permanent 
establishment includes especially a place of management, a 
branch, an office, a factory, a workshop, a mine, an oil or gas 
well, a quarry, or any other place of extraction of natural 
resources. It also includes any building site or construction 
or installation project, if the site or project lasts for more 
than 12 months. The Technical Explanation states that the 12-
month test applies separately to each site or project, but that 
projects that are commercially and geographically 
interdependent are to be treated as a single project. The 
Technical Explanation further states that if the 12-month 
threshold is exceeded, the site or project is treated as a 
permanent establishment from the first day of activity.
    Notwithstanding this general definition of a permanent 
establishment, the proposed treaty provides that the following 
specified activities do not constitute a permanent 
establishment: the use of facilities solely for storing, 
displaying, or delivering goods or merchandise belonging to the 
enterprise; the maintenance of a stock of goods or merchandise 
belonging to the enterprise solely for storage, display, or 
delivery or solely for processing by another enterprise; the 
maintenance of a fixed place of business solely for the 
purchase of goods or merchandise or the collection of 
information for the enterprise; the maintenance of a fixed 
place of business solely for the purpose of carrying on, for 
the enterprise, any other activity of a preparatory or 
auxiliary character. The proposed treaty provides that the 
maintenance of a fixed place of business solely for any 
combination of these activities does not constitute a permanent 
establishment, provided that the overall activity resulting 
from such combination is of a preparatory or auxiliary 
character. In contrast, the U.S. model provides that such a 
combination of activities does not give rise to a permanent 
establishment without regard to whether the combination is of a 
preparatory or auxiliary character.
    If a person, other than an independent agent, is acting on 
behalf of an enterprise and has and habitually exercises in a 
country an authority to conclude contracts in the name of the 
enterprise, the enterprise generally will be deemed to have a 
permanent establishment in that country in respect of any 
activities that person undertakes for the enterprise. This rule 
does not apply where the activities of such person is limited 
to those activities described above, such as storage, display, 
or delivery of merchandise, which do not constitute a permanent 
establishment.
    The proposed treaty further provides that no permanent 
establishment is deemed to arise based on an agent's activities 
if the agent is a broker, general commission agent, or any 
other agent of independent status acting in the ordinary course 
of its business as an independent agent. The Technical 
Explanation states that an independent agent is one that is 
both legally and economically independent of the enterprise. 
Whether an agent and an enterprise are independent depends on 
the facts and circumstances of the particular case.
    The fact that a company that is resident in one country 
controls or is controlled by a company that is a resident of 
the other country, or that carries on business in that other 
country, does not of itself cause either company to be a 
permanent establishment of the other.

Article 6. Income from Immovable Property (Real Property)

    This article covers income, but not gains, from real 
property. The rules covering gains from the sale of real 
property are contained in Article 13 (Capital Gains).
    Under the proposed treaty, income derived by a resident of 
one country from immovable property (real property) situated in 
the other country may be taxed in the country where the real 
property is situated. Income from real property includes income 
from agriculture or forestry. The country in which the real 
property is situated is not, however, granted an exclusive 
right to tax the income derived from the real property; such 
income also may be taxed in the recipient's country of 
residence.
    The term ``immovable property (real property)'' has the 
meaning that it has under the law of the country in which the 
property in question is situated. In the case of the United 
States, the term ``real property'' is defined in Treas. Reg. 
sec. 1.897-1(b).
    The country in which real property is situated may tax 
income derived from the direct use, letting, or use in any 
other form of such property. The rules of this article allowing 
source-country taxation also apply to income from real property 
of an enterprise and to income from real property used for the 
performance of independent personal services. Accordingly, 
income from real property may be taxed by the country in which 
it is situated even though such income is not attributable to a 
permanent establishment or fixed base in such country.
    The proposed protocol provides residents of a country that 
are taxable in the other country on income from real property 
situated in the other country with an election to be taxed by 
the other country on such income on a net basis in accordance 
with the law of that other country. Such election is binding 
for the taxable year of the election and all subsequent years 
unless the competent authority of that other country agrees to 
terminate the election. U.S. internal law provides such a net-
basis election in the case of income of a foreign person from 
U.S. real property (Code secs. 871(d) and 882(d)).

Article 7. Business Profits

            U.S. internal law
    U.S. law distinguishes between the U.S. business income and 
other U.S. income of a nonresident alien or foreign 
corporation. A nonresident alien or foreign corporation is 
subject to a flat 30-percent rate (or lower treaty rate) of tax 
on certain U.S.-source income if that income is not effectively 
connected with the conduct of a trade or business within the 
United States. The regular individual or corporate rates apply 
to income (from any source) which is effectively connected with 
the conduct of a trade or business within the United States.
    The treatment of income as effectively connected with a 
U.S. business depends upon whether the source of the income is 
U.S. or foreign. In general, U.S.-source periodic income (such 
as interest, dividends, and rents) and U.S.-source capital 
gains are effectively connected with the conduct of a trade or 
business within the United States if the asset generating the 
income is used in, or held for use in, the conduct of the trade 
or business or if the activities of the trade or business were 
a material factor in the realization of the income. All other 
U.S.-source income of a person engaged in a trade or business 
in the United States is treated as effectively connected with 
the conduct of a trade or business in the United States.
    Foreign-source income generally is treated as effectively 
connected income only if the foreign person has an office or 
other fixed place of business in the United States and the 
income is attributable to that place of business. Only three 
types of foreign-source income are considered to be effectively 
connected income: rents and royalties for the use of certain 
intangible property derived from the active conduct of a U.S. 
business; certain dividends and interest either derived in the 
active conduct of a banking, financing or similar business in 
the United States or received by a corporation the principal 
business of which is trading in stocks or securities for its 
own account; and certain sales income attributable to a U.S. 
sales office. Special rules apply in the case of insurance 
companies.
    Any income or gain of a foreign person for any taxable year 
that is attributable to a transaction in another taxable year 
is treated as effectively connected with the conduct of a U.S. 
trade or business if it would have been so treated had it been 
taken into account in that other taxable year (Code sec. 
864(c)(6)).
            Proposed treaty limitations on internal law
    Under the proposed treaty, profits of an enterprise of one 
country are taxable in the other country only to the extent 
that they are attributable to a permanent establishment in the 
other country through which the enterprise carries on business.
    The taxation of business profits under the proposed treaty 
differs from U.S. rules for taxing business profits primarily 
by requiring more than merely being engaged in a trade or 
business before a country can tax business profits and by 
substituting an ``attributable to'' standard for the Code's 
``effectively connected'' standard. Under the Code, all that is 
necessary for effectively connected business profits to be 
taxed is that a trade or business be carried on in the United 
States.
    Under the proposed treaty, the profits of a permanent 
establishment are determined on an arm's-length basis. The 
proposed treaty provides that the profits attributed to a 
permanent establishment are determined based on the profits it 
would make if it were a distinct and separate enterprise 
engaged in the same or similar activities under the same or 
similar conditions and dealing wholly independently with the 
enterprise of which it is a permanent establishment. Amounts 
may be attributed to the permanent establishment whether they 
are from sources within or without the country in which the 
permanent establishment is located.
    In computing profits of a permanent establishment, the 
proposed treaty provides that deductions are allowed for 
expenses incurred for the purposes of the permanent 
establishment. These deductions include a reasonable allocation 
of executive and general administrative expenses, research and 
development expenses, interest, and other expenses incurred for 
the purposes of the enterprise as a whole (or the part of the 
enterprise that includes the permanent establishment). This 
rule applies without regard to where such expenses are 
incurred. According to the Technical Explanation, this rule 
permits the United States to use its current expense allocation 
rules in determining deductible amounts. Thus, for example, an 
Irish company which has a permanent establishment in the United 
States but which has its head office in Ireland will, in 
computing the U.S. tax liability of the permanent 
establishment, be entitled to deduct a portion of the executive 
and general administrative expenses incurred in Ireland by the 
head office for purposes of operating the U.S. permanent 
establishment, allocated and apportioned in accordance with 
Treas. Reg. section 1.861-8.
    Like the OECD model, the proposed treaty provides that a 
country may determine the profits attributed to a permanent 
establishment on the basis of an apportionment of the total 
profits of the enterprise. If it is customary in a country to 
use a total profits apportionment method, such method may be 
used pursuant to the proposed treaty, provided that the method 
of apportionment gives results that are consistent with the 
arm's-length principle of this article. This rule is not 
specified in the U.S. model; however, the provisions of the 
U.S. model permit the use of a total profits apportionment 
method as a means of determining arm's-length profits. The 
Technical Explanation states that methods other than separate 
accounting may be used to estimate the arm's-length profits of 
a permanent establishment, provided that the method 
approximates the results that would be achieved under a 
separate accounting approach.
    Profits are not attributed to a permanent establishment 
merely by reason of the purchase of goods or merchandise by a 
permanent establishment for the enterprise. Thus, where a 
permanent establishment purchases goods for its head office, 
the business profits attributed to the permanent establishment 
with respect to its other activities are not increased by the 
profit element with respect to its purchasing activities.
    The proposed treaty provides that the amount of profits 
attributable to a permanent establishment shall include only 
the profits derived from the assets or activities of the 
permanent establishment and must be determined by the same 
method each year unless there is good and sufficient reason to 
change the method. In this regard, the diplomatic notes provide 
that the assets of a permanent establishment will be understood 
to include any property or rights used by or held by or for the 
permanent establishment.
    Unlike the U.S. model, the proposed treaty does not contain 
a general definition of ``profits.'' The Technical Explanation 
states that such term is understood to mean income derived from 
any trade or business. Under the proposed treaty, the term 
``profits'' as used in this article includes income from the 
performance of personal services by an enterprise and income 
from the rental of tangible movable property. Accordingly, such 
income may be taxed in the source country only if the income is 
attributable to a permanent establishment. The Technical 
Explanation states that the term ``profits'' is understood to 
include income attributable to notional principal contracts and 
other financial instruments to the extent such income is 
related to a trade or business carried on through the permanent 
establishment.
    Where business profits include items of income which are 
dealt with separately in other articles of the proposed treaty, 
those other articles, and not the business profits article, 
govern the treatment of such items of income. Thus, for 
example, profits attributable to a U.S. ticket office of an 
Irish airline generally are exempt from U.S. Federal income tax 
under the provisions of Article 8 (Shipping and Air Transport). 
This rule does not apply, however, where the other article 
specifically provides that this article takes precedence (e.g., 
Article 10 specifically provides that dividends attributable to 
a permanent establishment are taxable as business profits).
    The proposed protocol provides that income or gain 
attributable to a permanent establishment during its existence 
is taxable in the country where the permanent establishment is 
situated even if the payments are deferred until the permanent 
establishment has ceased to exist. This incorporates the U.S. 
internal law rule of Code section 864(c)(6).

Article 8. Shipping and Air Transport

    Article 8 of the proposed treaty covers income from the 
operation of ships and aircraft in international traffic. The 
rules governing income from the sale of ships and aircraft 
operated in international traffic are contained in Article 13 
(Capital Gains).
    Under the proposed treaty, profits which are derived by an 
enterprise of one country from the operation in international 
traffic of ships or aircraft are taxable only in that country, 
regardless of the existence of a permanent establishment in the 
other country. ``International traffic'' means any transport by 
a ship or aircraft except when such transport is operated 
solely between places in a treaty country (Article 3(1)(d) 
(General Definitions)). Unlike the exemption provided in the 
present treaty, the exemption in the proposed treaty applies 
whether or not the ships or aircraft are registered in the 
first country.
    The proposed treaty provides that profits from the rental 
of ships or aircraft on a full basis for use in international 
traffic constitute profits from the operation of ships and 
aircraft in international traffic. Such profits therefore are 
exempt from tax in the other country. In addition the proposed 
treaty provides that profits from the operation of ships or 
aircraft in international traffic include profits derived from 
the rental of ships or aircraft on a bareboat basis if such 
ships or aircraft are operated in international traffic by the 
lessee or if such rental profits are incidental to profits from 
the operation of ships or aircraft in international traffic. 
The proposed treaty further provides that profits derived by an 
enterprise from the inland transport of property or passengers 
within either country is treated as profits from the operation 
of ships or aircraft in international traffic if such transport 
is undertaken in the course of international traffic by the 
enterprise.
    Under the proposed treaty, income derived by an enterprise 
of one country from the use, maintenance, or rental of 
containers (including trailers, barges, and related equipment 
for the transport of containers) used in international traffic 
is taxable only in that country.
    As under the U.S. model, the shipping and air transport 
provisions of the proposed treaty also apply to profits from 
participation in a pool, joint business, or international 
operating agency. This rule covers profits derived pursuant to 
an arrangement for international cooperation between carriers 
in shipping and air transport.

Article 9. Associated Enterprises

    The proposed treaty, like most other U.S. tax treaties, 
contains an arm's-length pricing provision. The provision in 
the proposed treaty is more detailed than the corresponding 
provision in the present treaty. The proposed treaty recognizes 
the right of each country to determine the profits taxable by 
that country in the case of transactions between related 
enterprises, if the profits of an enterprise do not reflect the 
conditions which would have been made between independent 
enterprises.
    The redetermination rules of the proposed treaty apply 
where an enterprise of one country participates directly or 
indirectly in the management, control, or capital of an 
enterprise of the other country or the same persons participate 
directly or indirectly in the management, control, or capital 
of such enterprises. In such cases, if conditions between the 
two enterprises in their commercial or financial relations 
differ from those which would be made between independent 
enterprises, then any profits which would have accrued to one 
of the enterprises but for these conditions may be included in 
the profits of such enterprise and taxed accordingly. This 
provision allows a country to adjust the income or loss of one 
or both of the enterprises if they have entered into non-arm's-
length transactions.
    The Technical Explanation states that it is understood that 
this provision does not limit the rights of the respective 
countries to apply their internal intercompany pricing rules 
(e.g., Code sec. 482, in the case of the United States), 
provided that such rules are in accord with the arm's-length 
principle. The Technical Explanation also states that it is 
understood that the U.S. ``commensurate with income'' standard 
for determining appropriate transfer prices for intangibles was 
designed to operate consistently with the arm's-length 
standard. Finally, the Technical Explanation states that this 
rule permits adjustments to address thin capitalization issues.
    Under the proposed treaty, where a country includes in the 
profits of an enterprise of that country, and taxes, profits on 
which an enterprise of the other country has been charged to 
tax in that other country, and the other country agrees that 
the profits so included are profits that would have accrued to 
the enterprise of the first country if conditions between the 
two enterprises had been those that would have been made 
between independent enterprises, then the other country shall 
make an appropriate adjustment to the taxes charged on such 
profits. In making this adjustment, due regard is to be had to 
the other provisions of the proposed treaty. Moreover, the 
competent authorities will consult each other if necessary. To 
avoid double taxation, the proposed treaty's saving clause 
retaining each country's full taxing jurisdiction over its 
citizens and residents does not apply to prevent such 
correlative adjustments.

Article 10. Dividends

            Internal dividend taxation rules

United States

    The United States generally imposes a 30-percent tax on the 
gross amount of U.S.-source dividends paid to nonresident alien 
individuals and foreign corporations. The 30-percent tax does 
not apply if the foreign recipient is engaged in a trade or 
business in the United States and the dividends are effectively 
connected with that trade or business. In such a case, the 
foreign recipient is subject to U.S. tax on such dividends on a 
net basis at graduated rates in the same manner as a U.S. 
person would be taxed.
    Under U.S. law, the term ``dividend'' generally means any 
distribution of property made by a corporation to its 
shareholders, either from accumulated earnings and profits or 
current earnings and profits. However, liquidating 
distributions generally are treated as payments in exchange for 
stock and, thus, are not subject to the 30-percent withholding 
tax described above.
    Dividends paid by a U.S. corporation generally are U.S.-
source income. Also treated as U.S.-source income for this 
purpose are portions of certain dividends paid by a foreign 
corporation that conducts a U.S. trade or business. The U.S. 
30-percent withholding tax imposed on the U.S.-source portion 
of the dividends paid by a foreign corporation is referred to 
as the ``second-level'' withholding tax. This second-level 
withholding tax is imposed only if a treaty prevents 
application of the statutory branch profits tax.
    In general, corporations are not entitled under U.S. law to 
a deduction for dividends paid. Thus, the withholding tax on 
dividends theoretically represents imposition of a second level 
of tax on corporate taxable income. Treaty reductions of this 
tax reflect the view that where the United States already 
imposes corporate level tax on the earnings of a U.S. 
corporation, a 30-percent withholding rate may represent an 
excessive level of source-country taxation. Moreover, the 
further reduced rate of tax often applied by treaty to 
dividends paid to direct investors reflects the view that the 
source-country tax on payments of profits to a substantial 
foreign corporate shareholder may properly be reduced further 
to avoid double corporate-level taxation and to facilitate 
international investment.
    A REIT is a corporation, trust, or association that is 
subject to the regular corporate income tax, but that receives 
a deduction for dividends paid to its shareholders if certain 
conditions are met. In particular, in order to qualify as a 
REIT, the REIT must distribute the bulk of its income on a 
current basis. Thus, a REIT is treated, in essence, as a 
conduit for federal income tax purposes: generally no tax is 
imposed at the entity level and the shareholders are taxed on a 
current basis on the REIT's earnings. Because a REIT in form is 
taxable as a U.S. corporation, a distribution of its earnings 
is treated as a dividend rather than as income of the same type 
as the underlying earnings. Such distributions are subject to 
the U.S. 30-percent withholding tax when paid to foreign 
owners.
    A REIT is organized to allow persons to diversify ownership 
in primarily passive real estate investments. As such, the 
principal income of a REIT often is rentals from real estate 
holdings. Like dividends, U.S.-source rental income of foreign 
persons generally is subject to the 30-percent withholding tax 
(unless the recipient makes an election to have such rental 
income taxed in the United States on a net basis at the regular 
graduated rates). Unlike the withholding tax on dividends, 
however, the withholding tax on rental income generally is not 
reduced in U.S. income tax treaties.
    U.S. internal law also generally treats a RIC as both a 
corporation and a conduit for income tax purposes: generally no 
tax is imposed at the entity level and the shareholders are 
taxed on a current basis on the RIC's earnings. The purpose of 
a RIC is to allow investors to hold a diversified portfolio of 
securities. Thus, the holder of stock in a RIC may be 
characterized as a portfolio investor in the stock held by the 
RIC, regardless of the proportion of the RIC's stock owned by 
the dividend recipient.
    A foreign corporation engaged in the conduct of a trade or 
business in the United States is subject to a flat 30-percent 
branch profits tax on its ``dividend equivalent amount,'' which 
is a measure of the accumulated U.S. effectively connected 
earnings of the corporation that are removed in any year from 
its U.S. trade or business. The dividend equivalent amount is 
limited by (among other things) the foreign corporation's 
aggregate earnings and profits accumulated in taxable years 
beginning after December 31, 1986. The Code provides that no 
U.S. treaty shall exempt any foreign corporation from the 
branch profits tax (or reduce the amount thereof) unless the 
foreign corporation is a ``qualified resident'' of the treaty 
country. The definition of a ``qualified resident'' under U.S. 
internal law is somewhat similar to the definition of a 
corporation eligible for benefits under the proposed treaty 
(discussed below in connection with Article 23 (Limitation on 
Benefits)).

Ireland

    Ireland generally does not impose a withholding tax on 
dividends paid by an Irish company to foreign shareholders. 
Ireland generally provides resident shareholders with an 
imputed tax credit on dividends for the taxes paid by the 
company. This credit may be provided to foreign shareholders by 
treaty.
            Proposed treaty limitations on internal law
    The present treaty provides that dividends derived from 
sources within the United States by a resident of Ireland may 
be taxed by the United States. The rate of U.S. tax generally 
is limited to 15 percent. However, the rate of tax is limited 
to 5 percent if the dividend recipient is a corporation 
controlling (directly or indirectly) at least 95 percent of the 
voting power of the payor and not more than 25 percent of the 
gross income of the payor is derived from interest and 
dividends (other than interest and dividends received from the 
payor's subsidiaries). This 5-percent rate does not apply if 
the relationship between the dividend-paying corporation and 
the dividend-receiving corporation was arranged or maintained 
primarily with the intention of qualifying for such rate. The 
present treaty provides that dividends from sources within 
Ireland shall be exempt from Irish surtax if derived by an 
individual who is a U.S. resident, is subject to U.S. tax with 
respect to such dividends, and is not engaged in a trade or 
business in Ireland.
    Under the proposed treaty, dividends paid to a resident of 
one country may be taxed in the residence country without 
limitation. In addition, such dividends also may be taxed in 
the country in which the dividend paying company is resident in 
accordance with that country's laws. However, source-country 
taxation is subject to limitations if the beneficial owner of 
the dividends is a resident of the other country. Under these 
limitations, source-country tax is limited to 5 percent of the 
gross amount of the dividends if the beneficial owner is a 
company that owns at least 10 percent of the voting stock of 
the payor company. Under the proposed treaty, source-country 
tax generally is limited to 15 percent of the gross amount of 
the dividends in all other cases. The proposed treaty provides 
that the competent authorities will by mutual agreement settle 
the mode of application of these limitations. The proposed 
treaty provides that these limitations do not affect the 
taxation of the company on the profits out of which the 
dividends are paid.
    The proposed treaty provides special rules that apply as 
long as an individual resident in Ireland is entitled under 
Irish law to a tax credit in respect of dividends paid by an 
Irish-resident company. Such is the case at the present time. 
Under these special rules, dividends paid by a company resident 
in Ireland to a U.S. resident may be taxed in the United 
States. Where a U.S. resident is entitled to a tax credit in 
Ireland in respect of the dividend, such dividend may also be 
taxed in Ireland at a rate not exceeding 15 percent on the 
aggregate of the amount or value of the dividend and the amount 
of the tax credit. Where the U.S. resident is not entitled to a 
tax credit in Ireland in respect of the dividend, such dividend 
will be exempt from any Irish tax chargeable on dividends. A 
resident of the United States who receives dividends from an 
Irish-resident company and who is the beneficial owner of the 
dividends is entitled to the tax credit in respect of such 
dividend to which an Irish individual resident would be 
entitled and to the payment of any excess of such tax credit 
over his or her liability for Irish tax. This tax credit is 
treated for U.S. foreign tax credit purposes as a dividend. 
These tax credit rules do not apply if the beneficial owner of 
the dividend is (or is associated with) a company which either 
alone or together with associated companies controls directly 
or indirectly at least 10 percent of the voting power of the 
dividend-paying company. For this purpose, two companies are 
deemed to be associated if one is controlled directly or 
indirectly by the other or both are controlled directly or 
indirectly by a third company.
    The proposed treaty provides that the 15-percent limitation 
(and not the 5-percent limitation) applies to dividends paid by 
a RIC. The proposed treaty provides that the 15-percent 
limitation applies to dividends paid by a REIT to an individual 
owning a less than 10-percent interest in the REIT. There is no 
limitation in the proposed treaty on the tax that may be 
imposed by the United States on a REIT dividend, if the 
beneficial owner of the dividend is either an individual 
holding a 10-percent or greater interest in the REIT or is not 
an individual. Thus, such a dividend is taxable at the 30-
percent United States statutory rate. The present treaty does 
not include these limitations on the application of the reduced 
rates of source-country taxation to dividends from RICs and 
REITs.
    Like the U.S. model, the proposed treaty defines 
``dividends'' as income from shares or other rights, not being 
debt-claims. Dividends include any income or distribution 
treated as income from shares under the tax laws of the country 
of which the company is resident. The proposed protocol 
provides that the term ``dividends'' does not include interest 
which, because it was paid to a nonresident company, is treated 
under the domestic law of a country as dividends, to the extent 
that the interest does not exceed the amount that would be 
expected to be paid on an arm's-length basis.
    The proposed treaty's reduced rates of tax on dividends do 
not apply if the beneficial owner of the dividend carries on 
business through a permanent establishment (or a fixed base, in 
the case of an individual who performs independent personal 
services) in the source country and the dividends are 
attributable to the permanent establishment (or fixed base). 
Such dividends are taxed as business profits (Article 7) or as 
income from the performance of independent personal services 
(Article 14). In addition, the proposed protocol provides that 
dividends attributable to a permanent establishment or fixed 
base, but received after the permanent establishment or fixed 
base is no longer in existence are taxable in the country where 
the permanent establishment or fixed base existed.
    The proposed treaty allows a treaty country to impose a 
branch profits tax on a company resident in the other country 
if such company either has a permanent establishment in the 
first country or is subject to tax on a net basis in the first 
country on income from real property or gains from the 
disposition of real property interests. In cases where an Irish 
corporation conducts a trade or business in the United States, 
but not through a permanent establishment, the proposed treaty 
generally eliminates the branch profits tax that the Code 
imposes on such corporation.
    In general, the proposed treaty provides that the branch 
profits tax may be imposed by the United States only on the 
business profits of the Irish corporation that are attributable 
to its U.S. permanent establishment and the income that is 
subject to tax on a net basis as income or gains from real 
property. The tax is further limited to such amounts that are 
included in the ``dividend equivalent amount,'' as that term is 
defined under the Code and as it may be amended from time to 
time without changing the general principle thereof. In the 
case of Ireland, such tax may be imposed only on the business 
profits of the U.S. corporation that are attributable to its 
Irish permanent establishment and the income that is subject to 
tax on a net basis as income or gains from real property. The 
tax is further limited to such amounts that would be 
distributed as a dividend if the business profits, income or 
gains were earned by a subsidiary incorporated in Ireland.
    The proposed treaty limits the rate of the branch profits 
tax to the direct investment dividend tax rate of 5 percent.

Article 11. Interest

            U.S. internal law
    Subject to numerous exceptions (such as those for portfolio 
interest, bank deposit interest, and short-term original issue 
discount), the United States imposes a 30-percent tax on U.S.-
source interest paid to foreign persons under the same rules 
that apply to dividends. U.S.-source interest, for purposes of 
the 30-percent tax, generally is interest on the debt 
obligations of a U.S. person, other than a U.S. person that 
meets specified foreign business requirements. Also subject to 
the 30-percent tax is interest paid to a foreign person by the 
U.S. trade or business of a foreign corporation. A foreign 
corporation is subject to a branch-level excess interest tax 
with respect to certain ``excess interest'' of a U.S. trade or 
business of such corporation; under this rule an amount equal 
to the excess of the interest deduction allowed with respect to 
the U.S. business over the interest paid by such business is 
treated as if paid by a U.S. corporation to a foreign parent 
and, therefore, is subject to a withholding tax.
    Portfolio interest generally is defined as any U.S.-source 
interest that is not effectively connected with the conduct of 
a trade or business and that (1) is paid on an obligation that 
satisfies certain registration requirements or specified 
exceptions thereto, and (2) is not received by a 10-percent 
owner of the issuer of the obligation, taking into account 
shares owned by attribution. However, the portfolio interest 
exemption is inapplicable to certain contingent interest 
income.
    If an investor holds an interest in a fixed pool of real 
estate mortgages that is a real estate mortgage interest 
conduit (``REMIC''), the REMIC generally is treated for U.S. 
tax purposes as a pass-through entity and the investor is 
subject to U.S. tax on a portion of the REMIC's income (which 
in turn generally is interest income). If the investor holds a 
so-called ``residual interest'' in the REMIC, the Code provides 
that a portion of the net income of the REMIC that is taxed in 
the hands of the investor--referred to as the investor's 
``excess inclusion''--may not be offset by any net operating 
losses of the investor, must be treated as unrelated business 
income if the investor is an organization subject to the 
unrelated business income tax and is not eligible for any 
reduction in the 30-percent rate of withholding tax (by treaty 
or otherwise) that would apply if the investor were otherwise 
eligible for such a rate reduction.
            Irish internal law
    Ireland generally imposes a withholding tax on interest 
paid to foreign persons at a rate of 26 percent. This tax does 
not apply to short-term trade interest. It also does not apply 
to interest payments to or by an Irish bank and certain 
interest payments within a corporate group.
            Proposed treaty limitations on internal law
    The proposed treaty generally exempts interest derived and 
beneficially owned by a resident of one country from tax in the 
other country. The present treaty also provided an exemption 
from source-country tax for interest, but included an exception 
for interest paid by a corporation resident in one country to a 
corporation resident in the other country that controlled 
(directly or indirectly) more than 50 percent of the voting 
power of the payor.
    The treaty defines the term ``interest'' generally as 
income from debt claims of every kind, whether or not secured 
by mortgage and whether or not carrying a right to participate 
in the debtor's profits. In particular, it includes income from 
government securities and from bonds or debentures, including 
premiums and prizes attaching to such securities, bonds, or 
debentures. The term ``interest'' includes all other income 
that is treated as income from money lent under the tax law of 
the country in which the income arises. Interest does not 
include income covered in Article 10 (Dividends). Penalty 
charges for late payment also are not treated as interest.
    This exemption from source-country tax does not apply if 
the beneficial owner of the interest carries on business 
through a permanent establishment (or a fixed base, in the case 
of an individual who performs independent personal services) in 
the source country and the interest paid is attributable to the 
permanent establishment (or fixed base). In that event, the 
interest is taxed as business profits (Article 7) or income 
from the performance of independent personal services (Article 
14). In addition, the proposed protocol provides that interest 
attributable to a permanent establishment or fixed base, but 
received after the permanent establishment or fixed base is no 
longer in existence, is taxable in the country where the 
permanent establishment or fixed base existed.
    The proposed treaty, unlike the U.S. model but like the 
OECD model, contains a rule for determining the source of 
interest. Under the proposed treaty, interest is deemed to 
arise in a country if the payor is a resident of that country 
or if the payor has in that country a permanent establishment 
or fixed base in connection with which the underlying 
indebtedness was incurred and by which the interest is borne.
    The proposed treaty addresses the issue of non-arm's-length 
interest charges between related parties (or parties having an 
otherwise special relationship) by stating that this article 
applies only to the amount of arm's-length interest. Any amount 
of interest paid in excess of the arm's-length interest is 
taxable according to the laws of each country, taking into 
account the other provisions of the proposed treaty. For 
example, excess interest paid to a parent corporation may be 
treated as a dividend under local law and, thus, entitled to 
the benefits of Article 10 (Dividends).
    The proposed treaty provides that the excess of the amount 
deductible by a U.S. permanent establishment of an Irish 
company over the interest actually paid by such permanent 
establishment, as determined under U.S. law, is treated as 
interest beneficially owned by an Irish resident. Accordingly, 
the exemption for interest beneficially owned by a resident of 
a treaty country generally will prevent the United States from 
imposing its excess interest tax.
    Like the U.S. model, the proposed protocol includes two 
limitations on the application of the exemption in the case of 
the United States. First, the exemption does not apply to 
interest arising in the United States if the amount of such 
interest is determined by reference to the profits of the 
issuer or an associated enterprise. However, if the beneficial 
owner is an Irish resident, such interest may be taxed by the 
United States at a maximum rate of 15 percent. Second, the 
exemption does not apply to an excess exclusion with respect to 
a residual interest in a REMIC. Amounts covered by this 
exception may be taxed by the United States under the proposed 
treaty at the full statutory rate of 30 percent.

Article 12. Royalties

            Internal law
    Under the same system that applies to dividends and 
interest, the United States imposes a 30-percent tax on U.S.-
source royalties paid to foreign persons and on gains from the 
disposition of certain intangible property to the extent that 
such gains are from payments contingent on the productivity, 
use, or disposition of the intangible property. Royalties are 
from U.S. sources if they are for the use of property located 
in the United States. U.S.-source royalties include royalties 
for the use of, or the right to use, intangible property in the 
United States. Ireland generally imposes a 26-percent 
withholding tax on patent royalties paid to foreign persons; no 
withholding tax is imposed on other types of royalties.
            Proposed treaty limitations on internal law
    The proposed treaty provides that royalties derived and 
beneficially owned by a resident of a treaty country may be 
taxed only by the residence country. Thus, the proposed treaty 
generally continues the rule of the present treaty that exempts 
U.S.-source royalties paid to Irish residents from the 30-
percent U.S. tax. This exemption is similar to that provided in 
the U.S. model.
    Royalties are defined as payments of any kind received as 
consideration for the use of or the right to use any copyright 
of literary, artistic, or scientific work (including 
cinematographic films and audio and video tapes and disks); for 
the use of or right to use any patent, trademark, design or 
model, plan, secret formula or process, or other like right or 
property; or for information concerning industrial, commercial 
or scientific experience. The term ``royalties'' also includes 
gains derived from the alienation of any property described 
above which are contingent on the productivity, use, or 
disposition of the property.
    Unlike the U.S. model, the proposed treaty does not include 
an explicit reference to computer software in the definition of 
royalties. The Technical Explanation states that it is mutually 
understood that consideration for the use of software is 
treated as royalties or business profits, depending on the 
facts and circumstances of the transaction. In this regard, the 
Technical Explanation further states that it is understood that 
payments for transfers of ``shrink-wrap'' computer software 
constitute business profits rather than royalties.
    The exemption under the proposed treaty does not apply 
where the beneficial owner carries on business through a 
permanent establishment (or a fixed base, in the case of an 
individual who performs independent personal services) in the 
source country and the royalties are attributable to the 
permanent establishment (or fixed base). In that event, such 
royalties are taxed as business profits (Article 7) or income 
from the performance of personal services (Article 14). In 
addition, the proposed protocol provides that royalties 
attributable to a permanent establishment or fixed base, but 
received after the permanent establishment or fixed base is no 
longer in existence, are taxable in the country where the 
permanent establishment or fixed base existed.
    The proposed treaty addresses the issue of non-arm's-length 
royalties between related parties (or parties having an 
otherwise special relationship) by stating that this article 
applies only to the amount of arm's-length royalties. Any 
amount of royalties paid in excess of the arm's-length royalty 
is taxable according to the laws of each country, taking into 
account the other provisions of the proposed treaty. For 
example, excess royalties paid to a parent corporation by its 
subsidiary may be treated as a dividend under local law and, 
thus, entitled to the benefits of Article 10 (Dividends) of the 
proposed treaty.
    The proposed treaty includes a provision not included in 
the U.S. or OECD models. Under the proposed treaty, a country 
may tax royalties paid by a resident of the other country only 
if one of four conditions is satisfied. First, the royalties 
are paid to a resident of the first country. Second, the 
royalties are attributable to a permanent establishment or 
fixed base in the first country. Third, the contract for the 
royalties was concluded in connection with a permanent 
establishment or fixed base in the first country, the royalties 
are borne by such permanent establishment or fixed base, and 
the royalties are not paid to a resident of the other country. 
Fourth, the royalties are paid in respect of intangible 
property used in the first country and are not paid to a 
resident of the other country, provided that the payor has 
received a royalty paid by a resident of the first country (or 
borne by a permanent establishment or fixed base in the first 
country) for the use of such property in the first country and 
provided that the use of the property is not a component part 
of nor directly related to the active conduct of a trade or 
business in which the payor is engaged.

Article 13. Capital Gains

            U.S. internal law
    Generally, gain realized by a nonresident alien individual 
or a foreign corporation from the sale of a capital asset is 
not subject to U.S. tax unless the gain is effectively 
connected with the conduct of a U.S. trade or business. 
However, a nonresident alien individual or foreign corporation 
is subject to U.S. tax on gain from the sale of a U.S. real 
property interest as if the gain were effectively connected 
with a trade or business conducted in the United States. ``U.S. 
real property interests'' include interests other than solely 
as a creditor (e.g., stock) in certain corporations if at least 
50 percent of the assets of the corporation consist of real 
property.
            Irish internal law
    Foreign corporations generally are subject to tax in 
Ireland on capital gains from assets used in a trade or 
business through a permanent establishment. In addition, 
foreign corporations and foreign individuals generally are 
subject to tax in Ireland on capital gains from real property 
located in Ireland and certain stock and securities that derive 
their value from such real property.
            Proposed treaty limitations on internal law
    Under the proposed treaty, gains derived by a treaty 
country resident attributable to the alienation of immovable 
property (real property) situated in the other country may be 
taxed in the other country. Immovable property (real property) 
situated in the other country for purposes of this article 
includes real property referred to in Article 6 (Income from 
Immovable Property (Real Property)), a United States real 
property interest, and shares (other than shares quoted on a 
stock exchange) deriving the greater part of their value 
directly or indirectly from immovable property in Ireland. The 
Technical Explanation states that distributions by a REIT that 
are attributable to gains derived from a disposition of real 
property are taxable under this article (and are not taxable 
under the dividends article (Article 10)).
    The proposed treaty contains a standard provision which 
permits a country to tax the gain from the alienation of 
movable property that is attributable to a permanent 
establishment or fixed base located in that country. This rule 
also applies to gains from the alienation of such a permanent 
establishment or such fixed base. The proposed treaty generally 
does not permit the United States to tax gains from the 
disposition of any movable property after such property ceases 
to be used in a U.S. trade or business. However, the proposed 
protocol provides that gains attributable to a permanent 
establishment or a fixed base, but received after the permanent 
establishment or fixed base is no longer in existence, are 
taxable in the country where the permanent establishment or 
fixed base existed.
    The proposed treaty provides that gains derived by an 
enterprise of one of the treaty countries from the alienation 
of ships, aircraft or containers operated in international 
traffic are taxable only in that country. This rule also 
applies to personal property pertaining to the operation of 
such ships, aircraft or containers. This rule applies even if 
such gain is attributable to a permanent establishment in the 
other country. The proposed treaty provides that gains from the 
alienation of any property other than that discussed above are 
taxable under the proposed treaty only in the country where the 
alienator is a resident.

Article 14. Independent Personal Services

            Internal law
    The United States taxes the income of a nonresident alien 
at the regular graduated rates if the income is effectively 
connected with the conduct of a trade or business in the United 
States by the individual. The performance of personal services 
within the United States may constitute the conduct of a trade 
or business within the United States.
    Under the Code, the income of a nonresident alien from the 
performance of personal services in the United States is 
excluded from U.S.-source income, and therefore is not taxed by 
the United States in the absence of a U.S. trade or business, 
if: (1) the individual is not in the United States for over 90 
days during t