Article 30 (Entry into Force)

This Article contains the rules for bringing the Convention into force and giving effect to its provisions.

Paragraph 1

Paragraph 1 provides that the Convention is subject to ratification and that the instruments of ratification shall be exchanged as soon as possible.

In the United States, the process leading to ratification and exchange of the instruments of ratification is as follows. Once a treaty has been signed by authorized representatives of the two Contracting States, the Department of State sends the treaty to the President who formally transmits it to the Senate for its advice and consent to ratification, which requires approval by two-thirds of the Senators present and voting. Prior to this vote, however, it generally has been the practice for the Senate Committee on Foreign Relations to hold hearings on the treaty and to make a recommendation regarding its approval to the full Senate. Both Government and private sector witnesses may testify at these hearings. After receiving the Senate's advice and consent to ratification, the treaty is returned to the President for his signature on the ratification document. The President's signature on the document completes the process in the United States. Upon completion of the process, the United States may exchange the instruments of ratification.

Paragraph 1 also provides that the Convention shall enter into force on the date of the exchange of instruments of ratification. The date on which a treaty enters into force is not

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necessarily the date on which its provisions take effect. Rules that determine when the provisions of the treaty will have effect are provided in paragraph 2.

Paragraph 2

Paragraph 2 provides rules that determine when the Convention is applicable in Japan and in the United States to withholding taxes and to other taxes.

The rules with respect to Japanese taxes are contained in paragraph 2(a). Under paragraph 2(a)(i), the Convention shall be applicable in Japan with respect to taxes withheld at source (principally the Articles covering dividends, interest and royalties) for amounts taxable on or after July 1 of the calendar year in which the Convention enters into force if the Convention enters into force before April 1 of a calendar year and for amounts taxable on or after January 1 of the year following the year in which the Convention enters into force if the Convention enters into force after March 31 of a calendar year. For example, if the instruments of ratification are exchanged and the treaty enters into force on June 30 of a given year, the withholding rates specified in paragraph 2 and 3 of Article 10 (Dividends) would be applicable in Japan to any dividends taxable on or after January 1 of the following year. This two-part rule allows the benefits of the withholding reductions to be put into effect as soon as possible. The delay to July 1 or January 1, as the case may be, is required to allow sufficient time for withholding agents to be informed about and prepare for the change in withholding rates.

Under paragraph 2(a)(ii), the Convention shall be applicable in Japan with respect to income taxes not withheld at source and the enterprise tax for income for any taxable year beginning on or after January 1 of the year following the year the Convention enters into force.

The rules with respect to U.S. taxes are contained in paragraph 2(b). Under paragraph 2(b)(i), the Convention shall be applicable in the United States with respect to taxes withheld at source for amounts paid or credited on or after July 1 of the calendar year in which the Convention enters into force if the Convention enters into force before April 1 of a calendar year and for amounts paid or credited on or after January 1 of the year following the year in which the Convention enters into force if the Convention enters into force after March 31 of a calendar year. For example, if the instruments of ratification are exchanged and the treaty enters into force on June 30 of a given year, the withholding rates specified in paragraph 2 and 3 of Article 10 (Dividends) would be applicable in the United States to any dividends paid or credited on or after January 1 of the following year. As noted above with respect to Japanese withholding taxes, this two-part rule allows the benefits of the withholding reductions to be put into effect as soon as possible. If for some reason a withholding agent withholds U.S. tax at a higher rate than that provided by the Convention (perhaps because it was not able to re-program its computers before the payment is made), a beneficial owner of the income that is a resident of Japan may make a claim for refund pursuant to section 1464 of the Code.

Under paragraph 2(b)(ii), the Convention shall be applicable in the United States with respect to taxes other than those withheld at source (including the excise tax on insurance premiums and the branch profits tax) for taxable periods beginning on or after January 1 of the year following the date on which the Convention enters into force.

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Paragraph 3

Paragraph 3 provides an exception to the entry into force of this Convention and the termination of the prior Convention. The treatment under Articles 19 (Teachers and Researchers) and 20 (Students and Trainees) of the prior Convention may be more generous than the treatment under the corresponding articles of the Convention. Certain individuals covered by those Articles may have made their plans to visit the host State upon the assumption that Article 19 or 20 of the prior Convention would apply to them. Paragraph 3 ensures that the rules do not change with respect to such individuals. It provides that an individual who is entitled to the benefits of Article 19 or 20 of the prior Convention at the time of entry into force of this Convention shall continue to be entitled to such benefits as if the prior Convention had remained in force. This additional grandfather rule is necessary because there are circumstances in which the twelve-month grace period of paragraph 4 would not cover the entire period at issue.

Paragraph 4

Paragraph 4 provides that the prior Convention generally ceases to have effect with respect to any tax as of the date this Convention takes effect with respect to that tax under paragraphs 1 and 2. As in many recent U.S. treaties, however, paragraph 4 also provides an exception to this general rule. Under paragraph 4, if any person entitled to benefits under the prior Convention would have been entitled to greater benefits than under this Convention, the prior Convention shall, at the election of such person, continue to have effect in its entirety for a twelve-month period from the date on which this Convention otherwise would have had effect under paragraph 2.

Thus, a taxpayer may elect to extend the benefits of the prior Convention for one year from the date on which the provisions of the new Convention would first take effect. During the period in which the election is in effect, the provisions of the prior Convention will continue to apply only insofar as they applied before the entry into force of the Convention. If the grace period is elected, all of the provisions of the prior Convention must be applied for that additional year. The taxpayer may not apply certain, more favorable provisions of the prior Convention and, at the same time, apply other, more favorable provisions of this Convention. The taxpayer must choose one treaty or the other.

For example, suppose the instruments of ratification are exchanged on June 30, 2004 and the Convention thus enters into force on that date. The new Convention would take effect with respect to taxes withheld at source for amounts paid or credited on or after January 1, 2005. If the election under paragraph 4 is made, the provisions of the prior Convention regarding withholding would continue to have effect for amounts paid or credited at any time prior to January 1, 2006. The provisions of the Convention regarding withholding (including the rules of Article 22 (Limitation on Benefits)) would have effect for amounts paid or credited on or after January 1, 2006. If the election is made with respect to other U.S. taxes, the Convention would be applicable for taxable periods beginning on or after January 1, 2006. In the absence of such an election, the Convention would be applicable for taxable periods beginning on or after January 1, 2005.

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The prior Convention shall terminate on the last date on which it has effect with respect to any tax in accordance with the provisions of this paragraph 4.