ARTICLE 7. TAX DEFERRAL — U.S. Income Tax Treaty

This Article provides for a reciprocal tax deferral which will be applicable when patents. processes, know-how and similar items, and ancillary technical

services rendered in connection with the furnishing of such property or infor mation, are provided by a resident of one State to a corporation of the other State in return for stock of the corporation of such other State. Under paragraph

(.3) of Article 28 (Effective Dates and Ratification) this Article shall only be effective with respect to stock received on or after the date the proposed Con vention was signed (January 9,1970).

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Under this provision, a resident of one of the States may elect not to include in income, both.for United States and Trinidad and Tobago tax purposes, any amount otherwise includable by reason of the receipt of stock in return for the enumerated items of property, information, or ancillary services. In order to qualify for the deferral, such resident must receive stock of a corporation of the other State as consideration for providing to such corporation, for use in connec tion with a trade or business actively conducted in that other State by such cor poration, any of the following properties, information, or services:

(1) Any patent, invention, model, design, secret formula or process, or similar property right;

(2) Information concerning industrial, commerical or scientific knowledge, experience, or skill; or

(3) Technical, managerial, engineering, architectural. scientific, skilled, in dustrial, commercial, or like services which are ancillary and subsidiary to the transfer of the property rights referred to In (1) or any information referred to in (2).

Where such an election is made, expenses allocable to amounts excluded from income may not be deducted currently. Where the stock received is later dis posed of, the amount originally excluded will then be included in income in the manner in which it would have been included upon receipt of such stock. Where the stock is sold for.less than the amount originally excluded, the amount Actually received on the sale Is included In Income as it initially would have been In the absence of this deferral provision. When the stock Is disposed of, deductions previously disallowed because allocable to excluded amounts will be allowed and any gain upon such disposition will be determined as if the gain had been included in income, and the deductions allowed, upon original receipt of the stock.

This provision is made subject to regulations to be issued by both parties to the treaty.

In the case of the United States the Secretary of the Treasury or his delegnte may prescribe such regulations as are necessary to effectuate the provisions of this Article and to further define and determine the terms, conditions. and amounts ref'r-d to in this ArtOIe. Ti the enf- of Trtridd end T'oh'i*o the Minister of Finance or his authorized representative may prescribe such regula tions as are necessary to effectuate the provisions of this Article and to further define the terms, conditions. and amounts referred to in this Article. In par ticular. the Minister of Finance or his authorized representative is specifically authorized to prescribe by regulation standards for determining whether services referred to in paragraph (1) of this Article are ancillary and subsidiary to the property rights or information referred to In that paragraph.

In such regulations. the Minister of Finance could provide that this provision will only apply to an equity interest in a Trinidad and Tobago corporation issued to the United States shareholder in conformance with the Trinidad and Tobago law dealing with the allowable extent of foreign equIty interests In Trinidad and Tobago corporations.

Authorization is granted to each State to require, by regulations, that a portion of the stock received in return for the enumerated property, information, or services be deposited with a designated bank or other denository for the purpose of assuring collection of any taxes payable upon its disposition.

Under this provision, a United States corporation can make a transfer of property to a Trinidad and Tobago corporation in exchange for the stock of that Trinidad and Tobago corporation, without regard to the provisions of section 351 of the Code, and elect not to Include in income for United States tax pur poses any gain otherwise recognized (whether under sections 1231 or 124) of

the Code) as a result of such transfer. In addition, that United States corpora tion can furnish "know-how" to the Trinidad and Tobago corporation and obtain the deferral for United States tax purposes without initially having to consider whether such "know-how" constitutes property for purposes of the appliention of section 351 of the Code. It can also provide the enumerated services, to the extent that they are rendered in connection with and subsidiary to the furnish ing of property rights or information which are covered under the Article, without having the value of the portion of such stock which is attributable to the services included in income. This elective deferral privilege, which avoids cash problems involved in having to pay a current tax on the receipt of stack where the recipient wishes to hold, rather than sell, such stock, would, of course, also apply for purposes of the imposition of any Trinidad and Tobago tax other wise due by reason of the transaction. Thus, where the connected services are

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rendered in Trinidad and Tobago and stock in the Trinidad and Tobago corpora tion to which such services are provided is taken in consideration thereof, the United States.resident taking such stock is not subject to (1) Trinidad and Tobago tax, until later disposition of the stock, and (2) any United States tax otherwise due by reason of the receipt of such stock.