Article V of the Protocol amends Article 6 (General Rules of Taxation) of the Convention

in several respects. Paragraph 1 of Article V of the Protocol conforms the rule of paragraph (3) of Article 6 to current U.S. treaty policy regarding the treatment of former U.S. citizens. It provides that, for purposes of the saving clause in paragraph (3), a citizen of a Contracting State includes a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of tax. Such a former citizen is to be treated as a citizen for this purpose only for £ period of 10 years following the loss of citizenship. In the United States, such a former citizen is taxable in accordance with the provisions of section 877 of the Code for 10 years following the loss of citizenship. The paragraph also provides for consultation by the competent authorities on the purposes of an individual's loss of citizenship.

Paragraph 2 of Article V of the Protocol amends subparagraph (a) of paragraph (4) of Article 6 of the Convention, which contains exceptions to the saving clause. The source State's exemptions of alimony and annuities, and the residence State exemption for child-support payments, in paragraph (2) and (3), respectively, of Article 20 (Private Pensions and Annuities), are added to the general exceptions to the saving clause.

Paragraph 3 of Article V of the Protocol amends paragraph (6) of Article 6 (General Rules of Taxation) of the Convention. Paragraph (6) contains a so-called "remittance basis" rule, under which source-country relief under the Convention applies only to that portion of an item of income that is remitted to the residence country, if the rule in the residence country is to subject to tax only the remitted income. Under the Convention the income must be remitted during the year in which the income accrues. The protocol modifies this rule to allow source relief if the income is remitted during the year of accrual or during the first three months of the following year. This amendment permits relief from source-country tax even in cases where there is a short time leg between the time of accrual of the income and the time it is remitted that may extend into the next taxation year.

Paragraph 4 of Article V of the Protocol adds two new paragraphs to Article 6 (General Rules of Taxation) of the Convention. The new paragraphs are designated as paragraphs (7) and (8), and the existing paragraph (7) becomes paragraph (9).

The new paragraph (7) elaborates on paragraph (8) of Article 4 (Source of Income), paragraphs (1) and (2) of Article 8 (Business Profits), paragraph (5) of Article 12 (Dividends), paragraph (5) of Article 13 (Interest), paragraph (3) of Article 14 (Royalties), and subparagraph (c) of paragraph (1) of Article 15 (Capital Gains). This paragraph incorporates the principle of Code section 864(c)(6) into the Convention. Like the Code section on which it is based, the new paragraph (7) provides that any income or gain attributable to a permanent establishment (or, in the context of Articles 12, 13 and 14, a fixed base as well) during its existence is taxable in the Contracting State where the permanent establishment (or fixed base) is situated even if the payments are deferred until after the permanent establishment (or fixed base) no longer exists.

The new paragraph (8) is intended to deal with changes in law or in treaty policy of either of the Contracting States, that have the effect of changing the application of the Convention in a significant manner or that alter the relationship between the Contracting States. Paragraphs 6 and 7 of the Exchange of Notes elaborate the procedure established in paragraph (8) of the Article. Paragraph (8) provides, first, that, in response to a change in the law or policy of either State, the appropriate authority of either State may request consultations with its counterpart in the other State to determine whether a change in the Convention is appropriate. The "appropriate authorities" may be the Contracting States themselves, communicating through diplomatic channels, or they may be the competent authorities under the Convention, communicating directly. The request for consultations may come either from the authority of the Contracting State making the change in law or policy, or it may come from the authority of the other State. If the authorities determine, on the basis of the consultations, that a change in domestic legislation has significantly altered the balance of benefits provided by the Convention, they will endeavor, promptly, to amend the Convention to restore an appropriate balance. The authorities also may consult regarding a change in treaty policy or domestic law by one of the Contracting States. The purpose of these consultations would be to determine whether the change in policy should result in amendment of the Convention.

Paragraph 7 of the Exchange of Notes provides several examples of the kinds of unilateral changes that may prompt a decision to seek to negotiate amendments to the Convention. Such a decision may result from the granting by one of the Contracting States of favorable benefits to a third country, such as an agreement to Liberalize the foreign tax credit granted by treaty. Another example provided in the Exchange of Notes is the granting to a thirdcountry partner of corporate/shareholder integration benefits. Paragraph 7 of the Exchange of Notes also suggests that, as long as the U.S.-Israel Free Trade Agreement remains in force, if one Contracting State treats expenses, for example research and development expenses, incurred within that State more favorably than the same expenses incurred within the other State, such a change would lead to consultations regarding possible amendments to the Convention.

Paragraph 6 of the Exchange of Notes states the agreement of the Contracting States that if the United States grants tax sparing credits under agreement with any other country, the Convention will be amended promptly to incorporate such a provision.