Daily Tax Update - December 16, 2008

US TAX TREATIES WITH CANADA, BULGARIA AND ICELAND ENTER INTO FORCE:  Yesterday, the Treasury Department announced that a tax treaty protocol and two new tax treaties have entered into force. These new tax treaties (and accompanying protocols) with Bulgaria and Iceland and a protocol amending the existing tax treaty with Canada are generally effective for tax years beginning on or after January 1, 2009. Certain provisions of the treaties and protocols, however, have different effective dates.

  • Provisions of the protocol with Canada, which amends the existing treaty (signed in 1980 and previously amended), include:
    • Phased-in elimination of source-country withholding taxes on interest (withholding tax is eliminated for unrelated party interest paid or credited on or after January 1, 2008; withholding tax rate on related party interest is reduced to a maximum 7 percent rate for interest paid or credited during 2008, 4 percent for interest paid or credited during 2009, and is eliminated thereafter);
    • Special rules for the treatment of income derived through or paid by fiscally transparent entities (generally effective beginning January 1, 2009, but paragraph 7, which denies treaty benefits in some cases, is not effective until January 1, 2010);
    • An expansion of the definition of “permanent establishment” to include the provision of services in certain circumstances (generally effective on January 1, 2010, but services rendered and days of presence before January 1, 2010, are not considered); and
    • Mandatory binding arbitration of certain cases that cannot be resolved by the competent authorities within a specific period (applicable to cases already under consideration by the competent authorities when the Protocol enters into force, but will take effect no earlier than two years after the date that the Protocol enters into force).
  • Provisions of the new treaty and protocol with Iceland, which replace the existing treaty (signed in 1975), include:
    • Reductions of source-country withholding taxes on certain dividends; and
    • Modern limitation on benefits provisions.
  • Provisions of the new treaty and protocols with Bulgaria include:
    • Reductions of source-country withholding taxes on dividends, interest, and royalties;
    • Elimination of source-country withholding taxes on interest paid to financial institutions and on interest and dividends paid to pension funds; and
    • Modern limitation of benefits provisions.
  • For additional information, contact Philip R. West - pwest@steptoe.com

PRESIDENT-ELECT EXPECTED TO NAME SEN. SALAZAR TO CABINET: President-elect Barack Obama is expected to name Senate Finance Committee member Ken Salazar (D-CO) as his nominee for Secretary of the Interior.

  • Meanwhile, Rep. Raul Grijalva (D-AZ) declined an appointment to the House Ways and Means Committee. Grijalva said, “I am grateful for the honor by Speaker Pelosi and the Democratic Caucus, but I respectfully decline this appointment. Though the Ways and Means Committee is instrumental in crafting laws on taxation, tariffs, Social Security and other public benefits, the need to continue my work on the Committee on Natural Resources and, more specifically, my [National Parks, Forest and Public Lands] Subcommittee Chairmanship, is more important at this time.”

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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