US Response to Japan Note on Convention…Double Taxation Signed Nov 6, 2003

DEPARTMENT OF STATE
WASHI NGTON
November 6,2003
Excellency:
I have the honor to acknowledgereceipt of Your Excellency’snote of today’s date
which reads as follows:
“Excellency:
I have the honor to refer to the Convention between the Government of Japan and the
Government of the United States
of America for the Avoidance of Double Taxation and the
Prevention
of Fiscal Evasion with respect to Taxes on Income which was signed today
(hereinafter referred to as “the Convention”) and to the Protocol also signed today which
forms an integral part of the Convention, and to confirm, on behalf of the Governmentof
Japan, the following understanding reached between the Government of Japan and the
Government
of the United States of America:
His Excellency
Ryozo Kato,
Ambassador of Japan.
DIPLOMATIC NOTE

1. In order to avoid application of the local inhabitant taxes or the enterprise tax as
provided for in paragraph
3 of Article 8 of the Convention, if a political subdivision or local
authority of the United States seeks to levy a
tax similar to the local inhabitant taxes or the
enterprise
tax in Japan on the profits of any enterprise of Japan from the operation of ships or
aircraft in international traffic
in circumstances where the Convention would preclude the
imposition of a Federal income tax
on those profits, the Government of the United States will
use its best endeavors to persuade that political subdivision
or local authority to refrain from
I.
imposing such tax.
2.
It is understood that the principle as set out in paragraph 1 of Article 9 of the
Convention may apply for the purposes of determining the profits to be attributed to a
permanent establishment.
It is understood that the provisions of Article 7 of the Convention
shall not prevent the Contracting States from treating the permanent establishmentas having
the same amount of capital that it would need to support its activities if it were a distinct and
separate enterprise engaged in the same or similar activities. With respect to financial
institutions other than insurance companies, a Contracting State may determine the amount of
capital to be attributed to a permanent establishment
by allocatingthe institution’s total equity
between its various ofices
on the basis of the proportion of the financial institution’s risk-
weighted assets attributable to each of them.
3.
With reference to Article 9 of the Convention, it is understood that double taxation
can be avoided only if tax authorities share a common understanding of the principles to be
applied in resolving transfer pricing cases. Therefore, the Contracting States shall undertake
to conduct transfer pricing examinations of enterprisesand evaluate applications for advance
pricing arrangementsin accordance with the Transfer Pricing Guidelines for Multinational
Enterprises and Tax Administrations of the Organisation for Economic Cooperation and
Development (hereinafter referred to as “the
OECD Transfer Pricing Guidelines”), which

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reflect the international consensus with respect to these issues. The domestic transfer pricing
rules, including the transfer pricing methods, of each Contracting State may be applied in
resolving transfer pricing cases under the Convention only to the extent that they are
consistent with the OECD Transfer Pricing Guidelines.
4.
With reference to paragraphs 2 and 3 of Article 10 of the Convention, it is understood
that, in the case of Japan, the date on which entitlementto the dividends is determined is the
end of the accountingperiod for which the distribution of profits takes place.
5.
With reference to subparagraph (c) of paragraph 3 of Article 11 of the Convention:
(a)
it is understood that the term “bonds” includes bonds, commercial paper, and
medium-term notes, whether collateralized or not; and
(b)
it is understood that bonds that are subject to transfer restrictions applicable to
private placements shall not be considered to have been issued
in the financial

markets. The preceding sentence shall not apply to offerings qualifylng for exemption

fiom securities registration requirements pursuant to Rule 144Apromulgated under

the SecuritiesAct of
1933 of the United States or any similar provisions under the

domestic law of Japan.

6.
It is understood
that the term “authorities (including courts and administrative bodies)

involved in the administrationof the taxes” as referred to in paragraph
2 of Article 26 of the
Convention includes such authorities as provide legal advice to those governmental entities
that are directly involved in the assessment or collection, the enforcement or prosecution in
respect
of, or the determination of appeals in relation to, the taxes, but are not themselves a
part of such entities, and includes,
in the case of the United States, the Office of Chief
Counsel for the Internal Revenue Service.

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7.
It is understood that the term “supervisory bodies” as referred to in paragraph 2 of
Article
26 of the Convention includes authorities that supervise the general administrationof
the government of a Contracting State.
8.
It is understood that the powers of the competent authority of each Contracting State
to obtain information include powers to obtain information held by financial institutions,
nominees, or persons acting in an agency or fiduciary capacity (not including information
relating to communicationsbetween a legal representative in its role as such and its client to
the extent that the communications are protected under domestic law), and information
relating to the ownership of legal persons, and that the competent authority of each
Contracting State is able to exchange such idormation in accordance with Article
26 of the
Convention.
If the foregoingunderstanding is acceptable to the Government of the United States of
America,
I have the honor to suggest that the present note and Your Excellency’sreply to that
effect should be regarded as constituting an agreement between the
two Governments in this
matter, which shall enter into force at the same time as the Convention.
I avail myself of this opportunity to extend to Your Excellency the assurance of my
highest consideration.”
I have further the honor to confirm on behalf of the Government of the United States
of America that the foregoing understanding is acceptable and to agree that Your
Excellency’s note and
this note shall be regarded as constituting an agreement between the
two Governments which shall enter into force at the same time as the Convention.

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I avail myself of this opportunity to renew to Your Excellency the assurance of my
highest consideration.
For the Secretary of State:
ci”