SECTION 2. EXPLANATION OF

TREATY LISTS IN APPENDIX A AND B

U.S. income tax treaties are bilateral agreements that eliminate double taxation

on cross-border investments and activities of residents of the two contracting states. These agreements also generally prevent discriminatory taxation. In general, nondiscrimination articles include a provision that prevents taxation that is more burdensome on foreign nationals than U.S. nationals, where nationality is the sole basis for the more burdensome treatment (“the nationality provision”). The tax imposed under section 5000C applies only to specified Federal procurement payments made to foreign persons, regardless of their residence, and not U.S. persons. Therefore, in general, the tax imposed under section 5000C constitutes taxation more burdensome on foreign nationals than U.S. nationals. Thus, depending on the particular terms of the nondiscrimination provision in an income tax treaty, the tax may not be imposed on nationals who benefit from this protection.

Scope of persons covered by the nationality provision

The definition of national in U.S. income tax treaties generally includes citizens or nationals of a contracting state as well as legal persons, such as corporations, whose status as such is derived from the laws of that country. See Article 3(1)(j) of the 2006 U.S. Model Tax Treaty. There is no requirement that the legal person be a taxable entity or that the national be treated as a resident of that country under its treaty with the United States. In addition, there is no requirement that the national satisfy the limitation on benefits article, if any, in the treaty between the national’s country of residence and the United States. Some treaties apply only to nationals who are natural persons

(that is, individuals) and not entities. Other treaties apply only to natural persons who are also residents of the United States. The tax imposed by section 5000C would not apply to payments to nationals resident in the United States.

Scope of taxes covered

Not all treaty nondiscrimination articles cover taxes of every kind and description, such as the tax imposed by section 5000C. Some apply only to federal income taxes, in which case, the article would not cover the tax imposed under section 5000C.

Appendix A provides a list of qualified income tax treaties that exempt all nationals of that country from the tax imposed under section 5000C. Appendix B provides a list of qualified income tax treaties that exempt only individual nationals of that treaty country.