ARTICLE 2

Taxes Covered

This Article specifies the U.S. and Italian taxes to which the Convention applies. With two exceptions, the taxes specified in Article 2 are the covered taxes for all purposes of the Convention. A broader coverage applies, however, for purposes of Articles 24 (NonDiscrimination) and 26 (Exchange of Information). Article 24 applies with respect to all taxes, including those imposed by state and local governments. Article 26 applies with respect to all taxes imposed at the national level.

Paragraph 1

Paragraph 1 is based on the OECD Model and explains that the Convention applies to income taxes imposed on behalf of either Contracting State; this covers taxes on total income or any part of income and includes tax on gains derived from property. The Convention does not

apply to payroll taxes. Nor does it apply to property taxes, except with respect to Article 24 (Non-Discrimination).

Paragraph 2

Subparagraph 2(a) provides that the existing United States covered taxes are the Federal income taxes imposed by the Code, together with the excise taxes imposed with respect to insurance premiums paid to foreign insurers (Code sections 4371 through 4374) and with respect to private foundations (Code sections 4940 through 4948). With respect to the excise tax on insurance premiums, paragraph 3 of Article 1 of the Protocol provides that the Convention applies only to the extent that the Italian insurer does not reinsure those risks with a resident of a country with which the United States does not have an income tax convention providing an exemption from this tax. Although they may be regarded as income taxes, social security taxes (Code sections 1401, 3101, 3111 and 3301) are specifically excluded from coverage. Except with respect to Article 24 (Non-Discrimination), state and local taxes in the United States are not covered by the Convention.

In this Convention, unlike the prior Convention, the Accumulated Earnings Tax and the Personal Holding Companies Tax are covered taxes because they are income taxes and they are not otherwise excluded from coverage. Under the Code, these taxes will not apply to most foreign corporations because of a statutory exclusion or the corporation's failure to meet a statutory requirement.

Subparagraph 2(b) specifies that the existing Italian covered taxes are the individual income tax; the corporation income tax; and that portion of the regional tax on productive activities (commonly known as IRAP) that is considered to be an income tax pursuant to paragraph 2(c) of Article 23 (Relief from Double Taxation) of the Convention.

Under paragraph 3, the Convention will apply to any taxes that are identical, or substantially similar, to those enumerated in paragraph 2, and which are imposed in addition to, or in place of, the existing taxes after the date of signature of the Convention. The paragraph also provides that the competent authorities of the Contracting States will notify each other of significant changes in their taxation laws or of other laws that affect their obligations under the Convention. The use of the term "significant" means that changes must be reported that are of significance to the operation of the Convention. Other laws that may affect a Contracting State's obligations under the Convention may include, for example, laws affecting bank secrecy.

The competent authorities are also obligated to notify each other of official published materials concerning the application of the Convention. This requirement encompasses materials such as technical explanations, regulations, rulings and judicial decisions relating to the Convention.