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Articles I and II of the Protocol revise paragraph (4) (a) of Article 1 (Personal Scope) and add a new paragraph (4) to Article 4 (Fiscal Residence) of the Convention to provide that United States citizen females married to United Kingdom domiciliaries prior to January 1, 1974, shall be treated as if that marriage took place on January 1, 1974, for the purpose of establishing domicile in the United Kingdom.

Article III of the Protocol adds a new sentence to paragraph (1) of Article 22 (Other Income) to make clear that the United Kingdom may continue to impose its tax on discretionary and accumulation trusts. Article IV amends paragraph (3) (e) of Article 25 (Mutual Agreement Procedure) to provide that the competent authorities may agree to eliminate double taxation on such trusts.

S. Ex. J, 95th Cong., 1st Sess., V.

Acting Secretary of State Christopher indicates in his report that all of the modifications contained in the 1977 Protocol are explained in greater detail in a technical report sent to the Senate by the Dept. of the Treasury.

For further information concerning the 1975 U.S.-U.K. Tax Treaty and amending Notes and the 1976 Protocol, see the 1975 Digest, Ch. 10, § 4, p. 635, and the 1976 Digest, Ch. 10, § 4, p. 532.

Taxation of International Flows of Income

On January 17, 1977, the Department of the Treasury submitted a report entitled "Blueprints for Basic Tax Reform," which Secretary of the Treasury William E. Simon describes in its Foreword as a start toward the objective of an entirely new U.S. tax system with a much broader tax base but with much lower and simpler rates. The Report, which was prepared primarily by Deputy Assistant Secretary David F. Bradford with the assistance of Assistant Secretary for Tax Policy Charles M. Walker and Deputy Assistant Secretary William M. Goldstein, contains the following comments within the chapter entitled "A Model Comprehensive Income Tax":

INTERNATIONAL CONSIDERATIONS
The Residence Principle

There are two basic prototype approaches to the taxation of international flows of income. The first is the residence principle, under which all income, wherever earned, would be defined and taxed according to the laws of the taxpayer's own country of residence. The second prototype is the source principle, which would require the taxpayer to pay tax according to the laws of the country or countries in which his income is earned, regardless of his residence. Adoption of one prototype or the other, as compared with the mixed system that now prevails, would have the desirable effect of insuring that no part of an individual's income would be taxed by more than one country, and would reduce the number of bilateral treaties necessary to assure against double taxation.

A number of considerations point to the residence principle as the more desirable principle to establish. First, the concept of income as consumption plus change in net worth implies that attribution of income by source is inappropriate. Income, by this definition, is an attribute of individuals, not of places. Second, if owners of factor services are much less mobile internationally than the factor services they supply, variations among countries in taxes imposed by residence will have smaller allocation effects than tax variations among places of factor employment. Third, the income redistribution objective manifested by the use of progressive income taxes implies that a country should impose taxes on the entire income of residents. The usual concept of income distribution cannot be defined on the basis of income source.

For these reasons, the model plan recommends that the United States seek, as a longrun objective, a worldwide system of residence principle taxation. . . .

Establishing the Residence Principle

To encourage the establishment worldwide of the residence principle, the model tax would reduce in stages, and according to the outcome of international treaty negotiations, the rates of U.S. withholding taxes on income paid to foreign residents and the foreign tax credit allowed to U.S. residents on foreign source income. This process would depend upon corresponding reductions by foreign countries in the taxation of income of U.S. residents.

Interim Rules

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Foreign Shareholders. As a practical matter, it would not be feasible to exempt foreign shareholders from U.S. taxation until such time as the residence principle received broad political acceptance both in the United States and abroad. Initially, therefore, foreign shareholders might be subject to a withholding tax of perhaps 30 percent on their share of corporate income (whether or not distributed), with the rate of taxation subject to reduction by treaty. . . Foreign Tax Credits. Eventually, a deduction-not a credit— should be allowed for foreign income taxes, because they are not significantly different from State and local income taxes, for which a deduction is also allowed. This approach would encourage foreign governments to provide U.S. firms operating abroad with benefits approximately equal to the amount of taxes. Otherwise, U.S. firms would gradually withdraw their investments. However, it will take time for foreign governments to accept the residence principle, just as the United States is not immediately willing to forego withholding taxes on U.S. source income paid to foreign residents....

Foreign Corporations. In keeping with the model income tax definition of income, the earnings of a foreign corporation controlled by U.S. interests would flow through to the domestic parent company and then to the shareholders of the domestic parent. The U.S. parent corporation would be deemed to receive the before-foreign-tax

257-179 O 79-51

income of the subsidiary even if no dividends were paid. This would eliminate deferral here just as the integration plan eliminates shareholder deferral of tax as income on the form of corporate retained earnings. A foreign tax credit would be allowed for the foreign country's corporate income tax and withholding tax to the extent of the 30-percent limit. Excess foreign taxes would be deductible.

The earnings of foreign corporations that are not controlled by U.S. interests would be taxable in the hands of U.S. shareholders only when distributed as dividends, and, therefore, a deduction rather than a credit would be allowed for any underlying foreign corporate income tax. A foreign tax credit would be allowed to U.S. shareholders only to the extent of foreign withholding taxes, and limited by the U.S. withholding rate on dividends paid to foreign residents. (The remainder of foreign withholding taxes would be allowed as a deduction.)

Other Foreign Income. Other types of foreign income paid to U.S. residents would be similarly eligible for a foreign tax credit, again limited by the U.S. tax imposed on comparable types of income paid to foreigners. Thus, a U.S. resident earning salary income abroad would be allowed to claim a foreign tax credit up to the limit of U.S. witholding taxes that are imposed on the salary incomes of foreign residents in the U.S.

Dept. of the Treasury, Blueprints for Basic Tax Reform, Jan. 17, 1977.

Canada

Foreign Tax Law Affecting the United States

On September 8, 1977, the Senate agreed to Senate Resolution 152 requesting the President to bring to the attention of the Canadian Government with a view to adjusting outstanding differences the adverse effect of certain provisions of the Canadian tax code on the U.S. broadcasting industry. The resolution, initially introduced by Senator Daniel P. Moynihan, is a response to a Canadian Parliamentary measure that denied as of September 1976 certain tax deductions which allowed companies in Canada to deduct the cost of advertisements in American magazines or broadcasts aimed at the Canadian market from the United States. Portions of the report by the Senate Committee on Foreign Relations concerning this resolution, as introduced in the Congressional Record by Senate Majority Leader Robert C. Byrd, appear below:

BACKGROUND

Over 20 Canadian cities receive programs from U.S. television stations, either through a closed cable relay system or off-the-air. The American stations involved range from Seattle, Wash., to Presque Isle, Maine. To a lesser degree, signals from a number of Canadian stations are received on the northern border cities of the United States.

Border stations in both countries are governed by agreements between the two Governments and cross-border service is a result of wavelength assignments made pursuant to those agreements. Also, the regulatory agencies of both countries allow cross-border television signals to be picked up by domestic cable television systems. The Federal Communications Commission (FCC) has developed a reciprocity rule which allows foreign programs to be carried by a domestic American station where it or another station could benefit in the reverse situation, that is, its programs could be carried reciprocally by the Canadians. The Canadian Radio-Television Commission (CRTC) issues licenses specifically indicating to each cable TV system the signals it may carry. In some cases it has allowed American signals to be picked up and transmitted by microwave relay to cable systems many miles beyond the area in which they could otherwise be received. As a result about 40 percent to 50 percent of all Canadians with TV sets are cable subscribers, making the Canadian cable TV industry one of the most extensive in the world. In neither country do cable operators have to pay stations for use of their programs. Broadcasters are expected to obtain their compensation by selling advertising to businesses interested in reaching the cable system's subscribers.

On July 26, 1971, the CRTC proposed in its "Policy Statement on Cable Television" an amendment to Canada's Income Tax Act to prevent Canadians from deducting as a business expense their advertising on foreign stations even though their purpose was to reach Canadian audiences. On January 23, 1975, the Canadian Government announced it would seek to abolish tax concessions that allow companies to deduct the cost of advertisements in American magazines or broadcasts aimed at the Canadian market. The Canadian Parliament approved a measure denying tax deductions in July 1976, effective the following September, except for certain contracts signed before the effective date. The State Department began discussions with Canadian officials on the substance and timing of the legislation, but was told that since the measure dealt with internal domestic tax matters it was not subject to international negotiation. The Department has advised the committee that it intends "... to keep this matter and its adverse impact on U.S. broadcast interests before the Canadian Government as opportunities to do so arise."

123 Cong. Rec. S 14348-14349 (daily ed., Sept. 8, 1977).

The resolution appears below:

Whereas the people of the United States place the utmost value on their enduring friendship and special relationship with the people of Canada;

Whereas the people of Canada and the people of the United States have established singular standards of openness and candor in discussing mutual interest and concerns; and

Whereas recent amendments to the Canadian tax code appear to inhibit commercial relations between Canadian businesses and American broadcasters: Now, therefore, be it

Resolved, That the Senate call on the President to raise with the Government of Canada the question of the impact of the recent provisions of the Canadian tax code on the United States broadcasting industry with a view to adjusting outstanding differences.

SEC. 2. The Secretary of the Senate is directed to transmit a copy of this resolution to the President.

123 Cong. Rec. S 14349 (daily ed., Sept. 8, 1977).

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Foreign Assets Control

National Emergency Authorities

On December 28, 1977, President Carter signed into law H.R. 7738, an Act with respect to the powers of the President in time of war or national emergency (Public Law 95-223; 91 Stat. 1625-1629). Portions of his statement on signing the Act follow:

H.R. 7738 is the result of a cooperative effort by the Congress and this administration. Its broad purpose is to differentiate between those economic powers available to the President in time of war and those available in time of declared national emergency. The bill is largely procedural. It places additional constraints on use of the President's emergency economic powers in future national emergencies and ensures that the Congress and the public will be kept informed of activities carried out under these powers. Enactment of the bill will not affect embargoes now being exercised against certain countries, nor does it affect the blockage of assets of nationals of those and other countries.

In approving the bill, I must note my serious concern over the provision contained in section 207 (b), which would allow Congress to terminate a national emergency declared by the President by concurrent resolution.

Provisions such as these raise profound constitutional questions, since article I, section 7, of the Constitution requires that congressional action having the force of law be presented to the President for his signature or veto. In addition, such provisions have the potential of involving Congress in the execution of the laws-a responsibility reserved exclusively to the President under the Constitution. This feature of the bill may be unconstitutional. I will therefore treat the provision as requiring only that I "notify and wait" with respect to national emergencies covered by section 207(b) of this act.

13 Weekly Comp. Pres. Doc. 1941 (Jan. 2, 1978).

Title I of the Act removes from the Trading With the Enemy Act certain economic powers of the President in national emergencies other than war but provides conditions under which current uses of those powers may continue notwithstanding those amendments. Title II establishes new Presidential authority to exercise controls over interna

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