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practical matter, thus leaving some double taxation in place. For
these reasons, dividend withholding taxes are commonly viewed as
barriers to cross-border investment. The principal argument in
favor of eliminating withholding taxes on certain direct dividends
in the proposed treaty is that it would remove one such barrier.
Direct dividends arguably present a particularly appropriate case
in which to remove the barrier of a withholding tax, in view of the
close economic relationship between the payor and the payee.
Whether in the United States or in Japan, the dividend-paying cor-
poration generally faces full net-basis income taxation in the source
country, and the dividend-receiving corporation generally is taxed
in the residence country on the receipt of the dividend (subject to
allowable foreign tax credits). If the dividend-paying corporation is
more than 50-percent owned by the dividend-receiving corporation,
it is arguably appropriate to regard the dividend-receiving corpora-
tion as a direct investor (and taxpayer) in the source country in
this respect, rather than regarding the dividend-receiving corpora-
tion as having a more remote investor-type interest that would
warrant the imposition of a second-level source-country tax.
Although the United States only recently first agreed to bilateral
zero rates of withholding tax on direct dividends, many other coun-
tries have a longer history of including such provisions in one or
more of their bilateral tax treaties. These countries include OECD
members Austria, Denmark, France, Finland, Germany, Iceland,
Ireland, Japan, Luxembourg, Mexico, the Netherlands, Norway,
Sweden, Switzerland, and the United Kingdom, as well as non-
OECD-members Belarus, Brazil, Cyprus, Egypt, Estonia, Israel,
Latvia, Lithuania, Mauritius, Namibia, Pakistan, Singapore, South
Africa, Ukraine, and the United Arab Emirates. In addition, a zero
rate on direct dividends has been achieved within the European
Union under its ‘‘Parent-Subsidiary Directive.’’ Finally, many coun-
tries have eliminated withholding taxes on dividends as a matter
of internal law (e.g., the United Kingdom and Mexico). Thus, al-
though the zero-rate provision in the proposed treaty is a relatively
recent development in U.S. treaty history, there is substantial
precedent for it in the experience of other countries. It may be ar-
gued that this experience constitutes an international trend toward
eliminating withholding taxes on direct dividends, and that the
United States would benefit by joining many of its treaty partners
in this trend and further reducing the tax barriers to cross-border
direct investment.
General direction of U.S. tax treaty policy
Looking beyond the U.S.-Japan treaty relationship, the Com-
mittee may wish to determine whether the inclusion of the zero-
rate provision in the proposed treaty (as well as in the U.K., Aus-
tralia, and Mexico treaties) signals a general shift in U.S. tax trea-
ty policy. Specifically, the Committee may want to know whether
the Treasury Department: (1) intends to pursue similar provisions
in other proposed treaties in the future; (2) proposes any particular
criteria for determining the circumstances under which a zero-rate
provision may be appropriate or inappropriate; (3) expects to seek
terms and conditions similar to those of the proposed treaty in con-
nection with any zero-rate provisions that it may negotiate in the
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