ARTICLE 5 — U.S. Income Tax Treaty

Relief from Double Taxation

Under the 1954 Convention, the United States provided relief from double taxation by allowing a credit for Japanese tax in accordance with the provisions of the law of the United States and, accordingly, incorporated by reference the foreign tax credit provision of the 1939 Code (section 131)

The new Convention employs the same method of avoiding double taxation in providing that in accordance with the provisions of the law of the United States (as in force from time to time) credit will be allowed for the appropriate amount of Japanese tax payable by a citizen or resident of the United States. Except for the special source rules provided by the Convention, this provision does not add to the rights which a United States citizen or residence has to the foreign tax credit as now in effect, but is for the purpose of giving treaty recognition to such rights. Modifications in United States law after the effective date of the Convention which concern the foreign tax credit will be applicable with respect to Japanese source income if such modifications do not contravene the general principle of the Convention. In addition to the credit mentioned above in this paragraph, a United States corporation owning at least 10 percent of the voting power of a Japanese corporation from which it receives dividends in a taxable year will be allowed a credit for the appropriate amount of Japanese tax paid by the Japanese corporation paying such dividends with respect to the profits out of which such dividends are paid. The rules set forth in Article 6 (source of income) are available to determine the source of income for the purpose of applying the United States credit in relation to taxes paid to Japan.

In the case of Japan, the Convention employs a credit method for avoiding double taxation similar to that provided in the case of the United States.

Paragraph (2) of this article provides that any tax on income or profits imposed by a political subdivision or local authority of a State shall be included along with the tax of that State which will be credited by the other State.