Article 24 - NON-DISCRIMINATION

    Article 24 assures nondiscriminatory taxation of similarly
situated persons. Paragraph 1 provides nondiscrimination rules
for nationals of a Contracting State, and paragraphs 2 thorough 6
provide nondiscrimination rules for residents of a Contracting
State. Generally, for purposes,of this Article, non-discrimina­
tion means providing national treatment. This Article does not
require identical treatment of taxpayers. There may be
distinctions in treatment based upon differences in taxpayers'
circumstances.

   Each of the relevant paragraphs of the Article provides a

standard to determine whether two persons are comparably situated and when, therefore, their tax treatment should be compared to

determine if discrimination exists. Although the actual words
differ from paragraph to paragraph (e.g., paragraph 1 refers to
two nationals "in the same circumstances," paragraph 2 refers to
two enterprises "carrying on the same activities," and paragraph
4 refers to two enterprises that are "similar"), the common
underlying premise is that if the difference in treatment is
directly related to a tax-relevant difference in the situations
of the domestic and foreign persons being compared, that

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difference is not to be treated as discriminatory (e.ag., one

person is taxable in a Contracting State on worldwide income and
the other is not, or tax may be collectible from one person at a

later stage, but not from the other). Other factors that can lead to nondiscriminatory differences in treatment will be noted

in the discussions of each paragraph.

   The operative paragraphs of the Article also use different
language to identify the kinds of differences in taxation

treatment that will be considered discriminatory. For example,

paragraphs 1 and 4 speak of "any taxation or any requirement
connected therewith which is other or more burdensome," while
paragraph 2 specifies that a tax "shall not be less favorably
levied." Regardless of these differences in language, only
differences in tax treatment that materially disadvantage the

foreign person relative to the domestic person are properly the

subject of the Article.

Paragraph 1

   Paragraph 1 provides that a national of one Contracting
State (as defined in subparagraph 1 f) of Article 3 (General

Definitions) may not be subject to taxation or connected require­

ments in the other Contracting State that-are other or more
burdensome than the taxes and connected requirements imposed upon
nationals of that other State in the same circumstances. For

this purpose, the phrase "same circumstances" refers particularly to residence, or taxation on worldwide income. Nationals of a Contracting State are afforded protection under this paragraph

even if they are not residents 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 by
Turkey as a Turkish citizen who is resident in that third country
and in the same circumstances

   Paragraph 1 does not, however, obligate the United States to
apply the same taxing regime to a Turkish citizen who is not
resident in the United States and a U.S. citizen who is not

resident in the United States. Paragraph 1 applies only when the citizens of the two States are in the same circumstances. United States citizens who are not residents of the United States but

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who are, nevertheless, subject to United States tax on their
worldwide income are not in the same circumstances with respect

to United States taxation as citizens of Turkey who are not
United States residents. Therefore, Article 24 would not entitle
a Turkish citizen not resident in the United States to the net
basis taxation of U.S. source dividends or other investment

income that applies to a U.S. citizen not resident in the United
States.

Paragraph 2

.Paragraph 2 provides that a permanent establishment in one

of the Contracting States of an enterprise of the other Contract­
ing State may not be less favorably taxed in the first-mentioned
State than an enterprise of that first-mentioned State that is
carrying on the same.activities in the first-mentioned State.

   Section 1446 of the Code imposes on any partnership with
income that is effectively connected with a U.S. trade or busi­
ness the obligation to withhold tax on amounts allocable to a
foreign partner. In the context of the Convention, this obliga­
tion applies with respect to a Turkish 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 under­
stood, however, that this distinction is not a form of discrimi­

nation within the meaning of either paragraph 1 or 2. No

distinction is made between U.S. and Turkish partnerships, since
the law requires that both domestic and foreign partnerships

withhold tax in respect of the partnership shares of non-U.S. partners. The requirement to withhold on the Turkish but not the U.S. partners' shares is not discriminatory taxation, but, like

other withholding on nonresident aliens, is merely a reasonable
method for the collection of tax from persons who are not
continually present in the United States, and as to whom it
otherwise may be difficult for the United States to enforce its

tax jurisdiction. (CL. the "backup withholding" rules of section

3406, which apply only to U.S. citizens and residents and serve a
similar purpose.) If tax has been overwithheld, the partner can,

as in other cases of overwithholding, file for a refund.

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   The fact that a U.S. permanent establishment of a Turkish
enterprise is subject to U.S. tax only on income that is
attributable to the permanent establishement, while a U.S.
corporation engaged in the same activities is taxable on its
worldwide income is not, in iteslf, a sufficient difference to

deny national treatment to the permanent establishment. There

are cases, however, where the two enterprises would not be
similarly situated and differences in treatment may
be warranted. For instance, it would not be a violation of the
nondiscrimination protection of paragraph 2 to require the
Turkish enterprise to provide information in a manner that may be
different from the information requirements imposed on a resident
enterprise because information may not be as readily available
from a foreign as from a domestic enterprise.

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

   Paragraph 3

   Paragraph 3 prohibits discrimination in the allowance of
deductions. When a resident of one of the Contracting States
pays interest, royalties or other disbursements to a resident of
the other Contracting State, the first-mentioned 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 excep­
tion to this rule is provided for cases where the provisions of

paragraph 1 of Article 9 (Associated Enterprises), paragraph 7 of Article 11 (Interest) or paragraph 6 of Article 12 (Royalties)

apply, because these provisions permit the denial of deductions
in certain circumstances in respect of transactions between

related persons. The term "other disbursements" is understood to

include a reasonable allocation of executive and general adminis­
trative expenses, research and development expenses and other
expenses incurred for the benefit of a group of related persons
that includes the person incurring the expense.

   The rules under section 163(j) of the Code relating to

earnings-stripping are not discriminatory within the meaning of

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paragraph 3. First, section 163(j) applies equally to interest

paid to domestic or foreign related parties, as interest paid to
all domestic tax-exempt entities related to the payor corporation
(applying a greater than 50% ownership test) is subject to the
provision. Second, as noted above, paragraph 3 does not apply to

payments falling under Article 9(1) or 11(5), relating to

transactions not conducted in accordance with the arm's length
standard. As noted in the Commentary to Article 9 in the OECD
Model, Article 9 is generally considered to be consistent with
the application of thin capitalization rules. This would include

the application of the rules under Code section 163(j), as long

as such rules continue to be consistent with the arm's length
standard.

Paragraph 4

   Paragraph 4 requires that a Contracting State not impose

other or more burdensome taxation or connected requirements on an

enterprise of that State which is wholly or partly owned or
controlled, directly or indirectly, by residents of the other
State, than the taxation or connected requirements which it
imposes on other similar enterprises of that first-mentioned
State.

   For the reasons discussed above in connection with the
explanation of paragraph 2 of the Article, it is also understood
that application of section 1446 of the Code, which prescribes
withholding tax on non-U.S. partners, is consistent with the

United States' obligations under paragraph 4.

    It is further understood that the ineligibility of a U.S.

corporation with nonresident alien shareholders to make an election to be an "S" corporation does not violate paragraph ^{4 of}

this Article. If a corporation elects to be an "S" corporation,

it generally is not subject to income tax, and the shareholders
take into account their pro-rata shares of the corporation's
items of income, loss, deduction or credit. (The purpose of the
provision is to allow an individual or small group of individuals
to conduct business in corporate form while paying taxes at
individual rates as if the business were conducted directly.) A
nonresident alien does not pay U.S. tax on a net basis, and,

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thus, does not generally take into account items of loss,

deduction or credit. Thus, "S" corporation status is not
available for corporations with nonresident alien shareholders
because such shareholders are not net basis taxpayers. The S
corporation regime is also unavailalble for corporations with
other types of shareholders, where the purpose of the regime

cannot be fulfilled or its mechanics implemented. For example,

corporations with corporate shareholders are excluded because the
goal of permitting individuals to conduct a business in corporate
form at individual tax rates would not be furthered by their
inclusion.

   Paragraph 5

   Paragraph 5 makes clear that nothing in the Article obliga­
tes a Contracting State to grant to a resident of the other

Contracting State any personal allowances, reliefs, or other

reductions for taxation purposes that it grants to its own
residents on account of their civil status or family responsibil­

ities. Thus, if an individual resident in Turkey owns a Turkish

enterprise that has a permanent establishment in the United
States, in assessing income tax on the profits attributable to
the permanent establishment, paragraph 2 of the Article would not
obligate the United States to allow to the Turkish resident the
personal allowances for himself and his family that would be
permitted if the permanent establishment were a sole proprietor­
ship owned and operated by a U.S. resident.

Paragraph 6

   Paragraph 6 of the Article specifies that no provision of
the Article will prevent either Contracting State from imposing
the branch taxes described in paragraph 4 of Article 10 (Divi­

dends) and subparagraph 4 b) of Article 11 (Interest). Thus, even

if the branch taxes were judged to violate the provisions of

paragraph 2 or 4 of the Article, neither Contracting State would

be constrained from imposing those taxes.

Paragraph 7

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   As noted above, notwithstanding the specification of taxes
covered by the Convention in Article 2 (Taxes Covered), the
nondiscrimination protection offered by this Article extends to
taxes of every kind and description imposed by one of the
Contracting States or a political subdivision or local authority
thereof. Customs duties are not considered to be taxes for this
purpose.

Relation to other articles

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