Article I of the Protocol amends Article 1 (Taxes Covered) of the Convention. Paragraph

1 of Article I of the Protocol amends subparagraph (a) of paragraph (1) of Article 1 of the Convention in two respects. In referring to the U.S. Internal Revenue Code ("Code"), it replaces the words "Internal Revenue Code" with the words "Internal Revenue Code of 1986". This change reflects the fact that the Tax Reform Act of 1986 ("TRA") was enacted after the date of signature of the Convention. The Convention covers both existing taxes, and taxes substantially similar to those existing taxes that are enacted after the date of signature of the Convention. The TRA introduced certain taxes into the Code that, arguably, arm not substantially similar to those in the pre-1986 Code (e.g., branch profits tax and gross basis tax on shipping profits). In order to make certain that these taxes are covered by the Convention as amended by the Protocol, subparagraph (a) of paragraph (1) is changed to clarify that the base against which any new taxes are judged is the Internal Revenue Code of 1986.

The second change in subparagraph (a) is the addition of the words "but excluding social security taxes" to the description of the U.S. taxes covered. This change, introduced at Israel's request, conforms the Convention to U.S. policy, which is not to cover social security taxes in t3x treaties, but to reserve coverage of those taxes to social security Totalization agreements.

There is no such agreement in force between the United States and Israel. Because of the exclusion of social security taxes, for example, if an Israeli resident earns personal service income during a temporary visit to the United States, and his remuneration is exempt from U.S. income tax under one of the personal services provisions of the Convention, whether he will be subject to social security taxes will be determined, independent of the Convention, under the rules of U.S. law. The exclusion of social security taxes from the coverage of the Convention does not affect the taxation of social security benefits, which are dealt with in Article 21 (Social Security Payments) of the Convention.

Paragraph 2 of Article I of the Protocol modifies the description of the Israeli taxes covered for purposes of the Convention. The changes conform the coverage under the Convention to current Israeli law. After the Protocol's amendments, the income taxes covered in the case of Israel are the taxes imposed by the Israeli Income Tax Ordinance, by the Land Appreciation Tax Law, by the Income Tax Law (Adjustments for Inflation), and other taxes on income administered by the Government of Israel. This latter category is defined to include, but is not limited to, the profit tax on barking institutions and insurance companies, and the income tax component of a compulsory loan. Paragraph 1 of the Exchange of Notes clarifies that “other taxes on income administered by the Government of Israel” includes only taxes that are imposed solely under Israeli law.

Paragraph 3 of Article I of the Protocol replaces paragraph (3) of Article 1 of the Convention. This paragraph defines the tax coverage of the Convention for purposes of Article 27 (Nondiscrimination). Under the Protocol, in conformity with standard U.S. treaty policy, the nondiscrimination protection of the Convention will apply to all taxes imposed at all levels of Government -- by the Contracting States, or by a state or political subdivision of a state. Paragraph 2 of the Exchange of Notes confirms that the coverage includes taxes imposed by local authorities.