Article 23. RELIEF FROM DOUBLE TAXATION

In this Article, each Contracting State undertakes to relieve double taxation by granting a credit against its income tax for the income tax paid to the other country. It also provides a credit to a parent company (one owning at least 10 percent of the voting stock of a company that is a resident of the other State) for tax "indirectly" paid to that other State. Each Contracting State uses the foreign tax credit to avoid double taxation of income arising in the other State. The credit is subject to the limitations of domestic law, such as Code sections 59(a), 902, and 904.

Point 8 of the Protocol further elaborates on the provisions in this Article. Subparagraph (a) of point 8 provides that Kazakhstan will credit the U.S. tax imposed on U.S. citizens resident in Kazakhstan by reason of citizenship, subject only to the limitation to the amount of the Kazakh tax on non-Kazakhstan source income. This includes the portion of the U.S. tax imposed solely on the basis of citizenship in accordance with the saving clause of paragraph 3 of Article 1 (General Scope). Thus, the United States fully retains primary taxing jurisdiction with respect to U.S. source income and third-country source income of a U.S. citizen who is resident in Kazakhstan. Accordingly, it is not necessary to re-source any of the U.S. source income of such an individual to avoid double taxation. (Cf. Paragraph 3 of Article 23 (Relief from Double Taxation) of the U.S.-German income tax convention.)

Kazakhstan confirms in point 8 b) of the Protocol that, in computing the taxes on profits and income specified in Article 2 (Taxes Covered), it allows certain deductions to a Kazakh entity wholly owned by U.S. residents, to joint ventures involving U.S.

investors, and to permanent establishments of U.S. residents. The deductions specified in point 8 b) are the amount of wages actually paid and interest, whether or not paid to a bank and without regard to the term of the debt. The amount of interest allowed as a deduction, however, shall not exceed the limitation on interest deductions under Kazakhstan law, as long as the limitation permits deduction of at least an arm's length rate of interest, with a reasonable risk premium.2 (Kazakhstan's new tax law, which was enacted by presidential decree on April 24, 1995, makes no distinction between foreign and domestic ownership for purposes of interest and wage deductions and generally permits full deduction of these expenses.)

Based upon the confirmation of deductions in point 8 b) of the Protocol, Article 23 provides that the Kazakhstan taxes referred to in Article 2 shall be treated as income taxes, and therefore are eligible for the foreign tax credit. Thus, when those Kazakhstan taxes are paid by ventures wholly or partly owned by U.S. investors, they will be eligible for foreign tax credits in the United States.

The deductions for wages and interest are critical to the agreement by the United States to provide a foreign tax credit for the Kazakh taxes covered under Article 2. The United States permits a credit only for foreign taxes imposed on net income, and the deduction of wages and interest is necessary to ensure that the base of the Kazakh tax is net income. Kazakhstan has an obligation under Article 2 (Taxes Covered) to notify the United States, through the competent authority mechanism, of significant changes in its law, including changes that deny or have the effect of denying, these significant deductions. The United States will not be obligated under the Convention to grant a foreign tax credit should Kazakhstan change its law in the future to deny these deductions. Moreover, the United States may, without regard to any treaty obligation, make an independent assessment of any other substantial change in Kazakh law to ensure that the Kazakh tax remains creditable under principles of U.S. domestic law.

Subaragraph c) of Point 8 of the Protocol provides that income tax paid by a Kazakh person that is treated as a partnership under U.S. principles will be treated by the United States as having been paid by the U.S. partners, pursuant to the

2 Point 8 b) does not alter the general rule under Article 6 (Business Profits) that deductions will not be allowed for interest paid by a permanent establishment to the home office. Consequently, in accordance with Article 6 (Business Profits), a permanent establishment will be allowed to claim deductions for interest expenses only to the extent they are reasonably allowable to the permanent establishment.

rules of the Code. The Code rules regarding foreign taxes paid or accrued by a partnership are found in sections 702 and 901 and in Treas. Reg. § 1.901-l(a). Private letter rulings issued by the IRS confirm that the foreign taxes paid by a partnership, at least in the circumstances addressed by those rulings, "flow through" to its partners (P.L.R. 7934096 and P.L.R. 7211160390A).

Subparagraph d) of point 8 of the Protocol clarifies that the Convention does not provide for a "tax sparing" credit, that is, a credit for taxes waived under a tax holiday or other provision. It is firm U.S. treaty policy not to grant a treaty credit for taxes that are not in fact paid to the treaty partner; the foreign tax credit in the United States is available only for taxes actually paid or accrued to a foreign taxing authority. Subparagraph d) does, however, provide that, in the event the United States revises this policy or agrees in a treaty with another country to give a tax sparing credit, this Convention will be promptly amended to incorporate a tax sparing credit. If this Convention is so amended, approval by the United States Senate would be required before a tax sparing credit would be effective with respect to Kazkkhstan.

24. NON-DISCRIMINATION

This Article ensures that citizens and residents of a Contracting State will not be subject to discriminatory taxation in the other Contracting State. This Article does not require identical treatment of taxpayers. Distinctions in tax treatment may be based upon differences in taxpayers' circumstances and in such cases are not discriminatory within the meaning of this Article. Certain examples of such treatment are discussed below.

Generally, non-discrimination under this Article means providing the better of national treatment or most-favored-nation treatment with respect to statutory rules and administrative practice; it does not require most-favored-nation treatment when citizens or residents of a third State are provided benefits under special agreements, such as bilateral income tax treaties with the third State. Thus, if Kazakh law imposes a more favorable tax regime on the income of joint ventures with a specified percentage of foreign capital vis-a-vis companies wholly owned by residents, the benefits of the favorable regime will also apply to joint ventures in which the foreign participation is by U.S. citizens or residents.

Paragraph 1 provides that a citizen of one Contracting State may not be subject to taxation or connected requirements in the other Contracting State which are different from or more burden­ some than the taxes and connected requirements imposed upon a citizen of that other State or of a third State in the same circumstances. A citizen of a Contracting State is afforded protection under this paragraph even if the citizen is not a

resident of either Contracting State. Thus, a U.S. citizen who is resident in a third country is entitled, under this paragraph, to the same tax treatment in Kazakhstan as a citizen of any other country who is a resident of that third country and in the same circumstances.

It is understood, however, that for U.S. tax purposes, a U.S. citizen who is resident outside the United States, whether in Kazakhstan or a third country, is not in the same circumstances as a citizen of Kazakhstan who is a resident outside the United States, whether in Kazakhstan or a third country, because the U.S. citizen is subject to U.S. tax on his worldwide income and the Kazkahstan citizen is subject to U.S. tax only on his U.S. income. It is understood that neither Contracting State is reguired to grant to residents of the other Contracting State the same personal exemptions and deductions that it provides to its own residents to take account of marital status or family responsibilities.

Paragraph 2 of the Article provides that a permanent establishment in a Contracting State of a resident of the other Contracting State may not be less favorably taxed in the firstmentioned State than an enterprise of that first-mentioned State or of a third State that is carrying on the same activities. The latter, most-favored-nation, treatment does not extend to benefits granted to permanent establishments of residents of a third State in accordance with a special agreement with that third State, such as an income tax Convention.

Section 1446 of the Code imposes on any partnership, whether domestic or foreign, the obligation to withhold tax from a foreign partner's distributive share of income effectively connected with a U.S. trade or business. If tax has been overwithheld, the partner can, as in other cases of over-withholding, file for a refund. In the context of the Convention, this obligation applies with respect to a Kazakh resident partner's share of the partnership income attributable to a U.S. permanent establishment. There is no similar obligation with respect to the distributive shares of U.S. resident partners.

It is understood that this withholding provision is not a form of discrimination within the meaning of paragraph 2 of the Article, but merely a reasonable adaptation of the mode of taxation to the particular circumstances of nonresident partners. Like other withholding provisions applicable to nonresident aliens, this is a reasonable method for the collection of tax from persons who are not continually present in the United States, and as to whom it may otherwise be difficult for the United States to enforce its tax jurisdiction. Cf. the "backup withholding" rules of section 3406 which apply only to U.S. citizens and residents and serve a similar purpose. (The

relationship between paragraph 2 and the imposition of the branch tax is dealt with below in the discussion of paragraph 5.)

Paragraph 3 prohibits discrimination in the allowance of

deductions. When a resident of a Contracting State pays interest or royalties or makes other disbursements to a resident of the other Contracting State, the first-mentioned Contracting State must allow a deduction for those payments in computing the taxable profits of the enterprise under the same conditions as if the payment had been made to a resident of the first-mentioned State. An exception to this rule is provided for cases where the provisions of paragraph 1 of Article 7 (Associated Enterprises), paragraph 6 of Article 11 (Interest) or paragraph 6 of Article 12 (Royalties) apply, because all of these provisions permit the denial of deductions in certain circumstances in respect to excess (not at arm's length) payments involving related persons. Paragraph 3 is not intended to limit in any way the application of domestic thin capitalization rules, such as section 163(j), which may deny or defer deductions for interest, as long as such rules continue to be consistent with the arm's length standard. The term "other disbursements" is understood to include a reasonable allocation of executive and general administrative expenses, research and development expenses and other expenses incurred for the benefit of a group of related persons which includes the person incurring the expense.

Paragraph 3 also provides that any debts of a resident of a Contracting State to a resident of the other Contracting State are deductible in the first-mentioned Contracting State in computing taxable capital under the same conditions as if the debt had been contracted to a resident of the first-mentioned State. This Article also applies to taxes imposed by local authorities in either Kazakhstan or the United States. (See discussion of paragraph 6.) Thus, for example, if a tax is imposed on the value of real property net of debt, the same deduction must be allowed with respect to debt of creditors who are residents of either Contracting State.

Paragraph 4 requires that a Contracting State not impose other or more burdensome taxation or connected requirements on a company which is a resident of that State that is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, than the taxation or connected requirements it imposes on similar resident companies owned by residents of the first-mentioned State or of a third State. It is understood that the U.S. rules which impose tax on a liquidating distribution of a U.S. subsidiary of a Kazakh company and the rule restricting the use of small business corporations to U.S. citizens and resident alien shareholders do not violate the provisions of this Article.

Paragraph 5 of the Article specifies that no provision of the Article will prevent either Contracting State from imposing the branch profits tax described in paragraph 5 of Article 10 (Dividends) or the branch level interest tax described in paragraph 7 of Article 11 (Interest).

Paragraph 6 provides that, notwithstanding the specification of taxes covered by the Convention in Article 2 (Taxes Covered), the non-discrimination protection in this Article applies to taxes of every kind and description. Although not explicitly so stated, this rule is intended to extend to taxes at all levels of government. The reference to taxes of political subdivisions was omitted largely for drafting reasons with respect to the Russian language text. Customs duties are not considered to be taxes for this purpose.

The saving clause of paragraph 3 of Article 1 (General Scope) does not apply to this Article, by virtue of the exceptions in paragraph 4(a) of Article 1. Thus, for example, a U.S. citizen who is resident in Kazakhstan may claim benefits in the United States under this Article.