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0'
Depattmtitlt the Treasury
Library
AUG 2 1 2006
Treas.
HJ
10
.Al3
P4
v.429
Department of the Treasury
PRESS RELEASES
The following Press Release numbers were not used:
3095,4015,4017,4018 and 4024 through 4043
yage
1
of Z
PRess FWOM
February 1, 2006
JS-3094
Assistant Secretary for Financial Institutions Emil W. Henry Jr. February 2006
Quarterly Refunding Statement
We are offering $48.0 billion of Treasury securities to refund approximately $17.3
billion of privately held securities maturing on February 15 and to raise
approximately $30.7 billion. The securities are:
•
•
•
A new 3-year note in the amount of $21.0 billion, maturing February 15,
2009;
A new 1O-year note in the amount of $13.0 billion, maturing February 15,
2016;
A new 30-year bond in the amount of $14.0 billion, maturing February 15,
2036.
These securities will be auctioned on a yield basis at 1 :00 PM EST on Tuesday,
February 7, Wednesday, February 8, and Thursday, February 9, respectively. All of
these auctions will settle on Wednesday, February 15.
The balance of our financing requirements will be met with weekly bills, monthly 2year and 5-year notes, the March 1O-year note reopening, the April 1O-year TIPS
reopening, and the sale of 5-year TIPS in April. Treasury also is likely to issue cash
management bills in early March and April. Additional cash management bills may
be required to manage volatility associated with debt ceiling restrictions.
Debt Limit
Securities issued during the Quarterly Refunding will not be affected due to debt
limit constraints. All securities auctioned during the Refunding will settle as normal
on February 15, 2006.
While Treasury is working with Congress to promptly pass legislation to raise the
debt ceiling, Treasury market participants should be prepared for possible delays in
the auction schedule if Congress does not enact legislation to raise the debt limit.
Thirty-Year Coupon Cycle
Based on our initial consultations with market participants, Treasury will consider
issuing 30-year bonds on the May-November coupon cycle to facilitate trading in
the STRIPS market. We will continue to examine how our calendar can best
accommodate both coupon cycles. We expect to announce any change in the
issuance calendar for the 30-year bond on August 2, 2006. No calendar change
would occur before calendar year 2007.
Cash Balance Management
With the shift of the 5-year note to month end, Treasury's usual pattern of issuing
cash management bills at the beginning of the first and third months of a quarter
may change. While we expect to issue cash management bills at the beginning of
March and April, issuance in the future may not follow the same patterns. Treasury
will continue to provide market participants with as much advance notice as
possible when issuing cash management bills.
Debt Limit Consequences for the Sales of State and Local Government
Securities
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If the debt ceiling is not raised within the next two weeks, the Treasury Department
will begin to take extraordinary measures to stay beneath the ceiling, including
suspension of sales of State and Local Government series (SLGS) securities. The
suspension of SLGS sales during debt ceiling impasses facilitates Treasury's
management of debt levels.
If SLGS sales are suspended, the suspension would apply to demand deposit and
time deposit securities. New subscriptions for SLGS would not be accepted until the
suspension is lifted. Treasury will make an advance public announcement of the
effective time and date of any suspension. During the suspension period, Treasury
will not accept submissions of new subscriptions.
The Internal Revenue Service has issued guidance to affected entities in Rev. Proc.
95-47,1995-47 I.R.B. 12 which is available in the "Tax Exempt Bond Tax Kit" which
can be found by following the link labeled "TEB Tax Kit" at www.irs.flov/bonds.
Other Policy Matters Under Consideration
Treasury Securities Lending Facility
For several months, Treasury has been studying the idea of creating a securities
lending facility. Treasury will continue to consult with market participants regarding
a proposed standing, nondiscretionary securities lending facility, and welcomes
more detailed market discussion on the structure of a lending facility.
Please send comments and suggestions on these subjects or others relating to
Treasury debt management to debLrmmagernent@do.treas.gov.
The next quarterly refunding announcement will take place on Wednesday, May 3,
2006.
###
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PRESS ROOM
10 view or pont the /-,UI- content on this page, C1ownloaC1 the tree 1\(101)(;"') Aero!)at"·; f'<:eaCler"')
February 1, 2006
JS-3096
Report To The Secretary Of The Treasury From The Treasury Borrowing
Advisory Committee Of The Bond Market Association
Dear Mr. Secretary:
Since the Committee's last meeting in November, economic releases continue to
show the impact of record energy prices in the wake of Hurricane Katrina. For the
year, 2005 GOP growth was near its long-term trend of 3,2%, even though it ended
the year with weak 1.1 % growth in 04. Much of this decline was due to a sharp
drop-off in automobile purchases, which followed a rise in such purchases in 03
due to massive discounting, Despite the weakest consumption growth since 02
2001, investment spending continued to expand, supported by investment in capital
equipment. Going forward, moderation in home sales from their peak has the
potential to subtract from residential investment growth and bring GOP growth
below trend, but businesses' strong cash position should enable capital spending to
move ahead moderately.
Employment rebounded from weak job gains post-Katrina during September and
October. In the last two months of 2006, the economy added 413,000 jobs, just
below the 425,000 jobs added in the months before Hurricane Katrina, In addition,
the unemployment rate has reached a cyclical low of 4.9%, leading some, including
the FOMC, to worry about the potential impact on inflation from tighter labor
markets. However, wage gains remain tame, with average hourly earnings ending
2005 just 3.1 % above the previous year. In addition, taking into account the impact
of record energy prices, real disposable income ended the year just 0.4% above the
previous year.
Although energy prices moderated following the hurricanes, they have begun to rise
in 2006 due to instability in foreign oil-producing countries. Headline CPI inflation
ended 2005 at 3.4% down from its peak of 4,7% in September. Price increases
outside of energy were modest. The Fed's favored measure of inflation, the core
PCE deflator, increased at a 2.2% annualized pace in 04, putting its year-over-year
(YfY) change in 04 to 1.9%, The pass-through of higher energy prices and tight
labor markets raise the risk that increases in core inflation may lie ahead. However,
with energy prices unlikely to increase as drastically as they did in 2005, headline
inflation will likely moderate in 2006, Foreign demand looks to have little impact on
inflation, as the trade-weighted dollar remains close to its year-ago level.
After rising before the first FOMC tightening in June 2004, long-term Treasury
yields have declined almost 50 bps since this tightening cycle began. As the
FOMC increased its short-term target by 350 bps, the yield curve has flattened
substantially, even compared to previous tightening cycles of 1994 and 1999. A flat
or inverted yield curve is a historically rare occurrence and is weighing on the
Financials sector. Two-year yields and 1O-year yields have now converged, as twoyear yields are nearly 300 bps higher than the lows observed in mid-March 2004,
while 1O-year yields have risen only 75 bps, The market is currently pricing in just
above an 80% probability that the FOMC will raise rates by 25 basis points at its
March 28 meeting,
Corporate profits continue to rise, As of January 31, with slightly more than half of
S&P 500 companies reporting, 79% had met or exceeded expectations for the
fourth quarter.
The fiscal year (FY) 2005 deficit fell to $319 billion, the lowest deficit since FY 2002,
However, the hurricanes have reversed the improving trend in the federal deficit, a
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result of both reconstruction spending and lower receipts due to job losses.
Assuming half of the $62 billion appropriated for reconstruction is spent in FY 2006
and adding that to the CBO's baseline budget projection, the FY 2006 deficit will
likely be $345 billion (2.7°,{, of GOP), in line with OMB projections and a slight
worsening in the government's budget position. The Treasury will easily be able to
finance this slightly higher budget deficit with its current financing schedule.
In the first section of the charge, Treasury asked the Committee for its views
regarding the development of guidelines on the composition of the debt portfolio.
Specifically, is the composition of bills relative to coupon securities in the
appropriate balance at current levels of issuance? What other factors should
Treasury use in its determination of debt portfolio composition?
Treasury presented the Committee with charts describing the flexibility, capacity
and cost characteristics of bill finanCing. Characteristics of coupon financing were
also shown including interest cost volatility, rollover risk, operational risk and
investor base considerations. Additionally, charts demonstrating bill issuance as a
percentage of total marketable outstandings, distribution of bills versus coupons,
interest rate differentials across the maturity curve and average maturity of
outstandings were presented. Committee members discussed numerous portfolio
considerations and the viability or attractiveness of managing debt issuance around
specific guidelines, including average maturity or bills as a percentage of total
outstandings. While some felt that more specific guidelines might be worthwhile,
others cautioned against this and proposed having a list of considerations to
manage against without giving up Treasury's current issuance flexibility. These
considerations included interest cost and volatility over time, issue size and auction
frequency capacity, liquidity, responsiveness to the investor base and rollover risk.
One member suggested to Treasury that it conduct further statistical analysis of its
portfolio to determine an optimal barbell strategy to balance long-duration issuance
and bills. In general most members favored a focus on average maturity of the debt
while maintaining a relatively high percentage of bills as guiding principles for the
objective of achieving the lowest cost of borrowing over time.
In the second part of the charge, Treasury asked for the Committee's views on
resumed issuance of the 30-year bond. In particular they asked for the Committee's
views on future auction sizes, potential impacts on the STRIPS market and the
desirability of quarterly issuance. Treasury did not indicate when they would offer
guidance as to what amounts of issuance they plan in bonds but indicated
maintaining similar amounts of issuance through 2007. Committee members
differed as to preference of auction size, though many thought that there was strong
enough demand to accommodate auction sizes near $15 billion. Others thought
that a more gradual approach to reintroduction would result in lower borrowing
costs. These members suggested that the underwriting process may need some
time to form and that Dutch auctions of long duration instruments may be initially
an obstacle for market partiCipants. Similarly, another member suggested that
Treasury consider auction taps periodically as is common practice in the U.K. The
Committee strongly preferred consideration of cycles which included auctions held
in both May and November citing stronger stripping demand historically for bonds
auctioned at that time of year. One member suggested auctions in February and
August this year followed by May and November auctions in 2007. Members also
encouraged Treasury to be sensitive to potential shortages of coupon STRIPS as
they consider auction cycles as well.
In the third section of the charge, Treasury asked for the Committee's views with
regard to relevance of yield curve shape at current levels, on the financial markets
and the various types of participants within the broad industry group. A member
responded to Treasury's pre-assigned charge which is appended to this letter. The
member's response to the charge was organized in two basic parts: a discussion
of the shape of the curve's impact on the general economy and its predictive ability
of real output, and an analYSis of the yield curve's shape on a variety of types of
institutions. The member began his presentation by citing a reduced impact on the
real economy from very flat yield curves than had been observed in the 1980's. He
showed slides suggesting a coincidence of recessions with flat yield curves but
noted that correlations between the two had diminished over time. Other members
described a flat or inverted yield curve as a necessary but not sufficient predictor of
economic slowdown. The presenting member showed slides depicting an
increasing burden of financial obligations of homeowners due to the increase in
short rates and higher incidence of adjustable rate mortgages. In general, while not
minimizing the large increase in leverage of homeowners and associated debt
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service, the member felt that the yield curve at current shape and level may
facilitate a shift in preference from shorter-term borrowing to long. Other members
concurred with this view, describing consumers as efficient borrowers. The
presenting member then turned to a discussion of a variety of financial market
participants and the impact of the curve on their operating businesses. For the
insurance industry as a whole, he cited increased pressure on earnings as yield
spreads have contracted and long Treasury yields declined. The result has been
pressure on earnings and a greater reliance on lesser credits and structured credit
products, sacrificing liquidity for yield. Turning to the banking sector, the member
showed slides illustrating a decline in net interest margins associated with both
secular earnings trends and a flat yield curve. In general he felt that the larger
banking institutions had and would be able to withstand the earnings pressures as
their sources of revenues had been diversified by fee income. While larger banks
still enjoy reasonable loan growth, and the efficiencies of a consolidated industry,
the shape of the curve will pressure earnings. Lastly, the presenting member
discussed the impact of a flaller curve on the hedge fund industry noting that
increased risk tolerance was observed in many participants and that risk in illiquid
markets was growing as a result of fewer opportunities in the yield curve. Members
discussed the increased exposure in riskier asset classes as common, which
represents a tradeoff of liquidity for returns by a majority of investors.
In the last section of the charge, the Committee considered the composition of
marketable financing for the January-March quarter to refund $17.3 billion of
privately held notes and bonds maturing on February 15,2006, as well as the
composition of Treasury marketable financing for the remainder of the JanuaryMarch quarter and the April-June 2006 quarter. To refund $17.3 billion of privately
held notes and bonds maturing February 15,2006, the Committee recommended a
$20 billion 3-year note maturing February 15, 2009, a $13 billion 1O-year note due
February 15, 2016, and a $15 billion 30-year bond due February 15, 2036. For the
remainder of the quarter, the Committee recommended a $22 billion 2-year note
issued in February, a $15 billion 5-year note issued in February, an $8 billion
reopening of the 10-year note issued in March, a $22 billion 2-year note issued in
March, and a $15 billion 5-year note issued in March. The Committee also
recommended a $20 billion 13-day cash management bill issued on March 2, 2006
and maturing on March 15, 2006. For the April-June quarter, the Committee
recommended financing as found in the attached table. Relevant features include
three 2-year note issuances monthly, one 3-year note issuance in May, three 5-year
note issuances monthly, a 1O-year issuance in May with a June reopening, a 10year TIPS reopening in April and a 5-year TIPS issue in April.
Respectfully submitted,
Ian G. Banwell
Chairman
Thomas G. Maheras
Vice Chairman
Attachments (2)
REPORTS
• 01 Tabies
• 02 Tables
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3/2/2006
US TREASURY FINANCING SCHEDULE FOR 1st QUARTER 2006
BILLIONS OF DOLLARS
ISSUE
ANNOUNCEMENT
DATE
4-WEEKAND
3&6 MONTH BILLS
12/29
1/5
1112
1/19
1/26
2/2
2/9
2/16
2/23
3/2
3/9
3/16
3/23
CASH MANAGEMENT BILLS
2/28
13-DAY BILL
Matures 3/15
AUCTION SETTLEMENT
DATE
DATE
1/3
1/9
1/17
1/23
1/30
2/6
2/13
2/21
2/27
3/6
3/13
3/20
3/27
3/1
1/5
1/12
1/19
1/26
2/2
2/9
2/16
2/23
3/2
3/9
3/16
3/23
3/30
3/2
MATURING
AMOUNT
NEW
MONEY
15.00
16.00
17.00
17.00
17.00
47.00
47.00
45.00
46.00
43.00
-7.00
-5.00
0.00
3.00
6.00
17.00
17.00
17.00
17.00
17.00
17.00
16.00
16.00
43.00
42.00
46.00
45.00
51.00
54.00
58.00
57.00
12.00
16.00
16.00
17.00
11.00
8.00
1.00
-3.00
699.00
624.00
75.00
20.00
20.00
0.00
4-WK
OFFERED
AMOUNT
3-MO
6-MO
8.00
8.00
8.00
12.00
12.00
17.00
18.00
20.00
20.00
20.00
18.00
21.00
25.00
25.00
25.00
25.00
25.00
20.00
20.00
20.00
20.00
20.00
20.00
20.00
18.00
18.00
0.00
COUPONS
CHANGE
IN SIZE
13.00
9.00
5-Year Note
10-YearTIPS (R)
1/9
1/9
1/11
1/12
1/16
1/16
1300
9.00
20-Year TIPS (R)
2-Year Note
1/19
1/23
1/24
1/25
1/31
1/31
10.00
22.00
3-Year Note
10-Year Note
30-Year Bond
2/1
2/1
2/1
2/7
2/8
2/9
2/15
2/15
2/15
20.00
13.00
15.00
15.00
17.28
-2.28
2-Year Note
5-Year Note
2/16
2/16
2/22
2/23
2/28
2/28
22.00
15.00
2.00
26.00
22.00
-11.00
10-Year Note (R)
3/6
3/9
3/15
8.00
2-Year Note
5-Year Note
3/23
3/23
3/27
3/29
3/31
3/31
22.00
15.00
26.01
22.00
-11.01
184.00
94.88
89.11
2.00
25.61
2.00
10.00
-3.61
20.00
13.00
8.00
Estimates are italicized
NET CASH RAISED THIS QUARTER:
R =Reopening
164.11
US TREASURY FINANCING SCHEDULE FOR 2nd QUARTER 2006
BILLIONS OF DOLLARS
ANNOUNCEMENT
DATE
JE
EEKAND
MONTH BILLS
3/30
4/6
4/13
4/20
4/27
5/4
5/11
5/18
5/25
6/1
6/8
6/15
6/22
AUCTION SETTLEMENT
DATE
DATE
4/3
4/10
4/17
4/24
5/1
5/8
5/15
5/22
5/30
6/5
6/12
6/19
6/26
4/6
4/13
4/20
4/27
5/4
5/11
5/18
5/25
6/1
6/8
6/15
6/22
6/29
4-WK
OFFERED
AMOUNT
3-MO
6-MO
20.00
12.00
8.00
8.00
10.00
14.00
20.00
20.00
18.00
14.00
12.00
10.00
10.00
18.00
17.00
17.00
17.00
17.00
17.00
18.00
18.00
18.00
18.00
18.00
18.00
18.00
16.00
15.00
15.00
15.00
15.00
15.00
16.00
16.00
16.00
16.00
16.00
16.00
16.00
MATURING
AMOUNT
NEW
MONEY
57.00
59.00
61.00
57.00
57.00
49.00
44.00
44.00
46.00
50.00
56.00
54.00
51.00
-3.00
-15.00
-21.00
-17.00
-15.00
-3.00
10.00
1000
6.00
-2.00
-10.00
-10.00
-7.00
608.00
685.00
-77.00
iH MANAGEMENT BILLS
lAY BILL
3/29
Matures 4/17
3/30
4/3
25.00
25.00
000
lAY BILL
4/5
Matures 4/17
4/6
4/7
15.00
15.00
0.00
lAY BILL
5/30
Matures 6/15
5/31
6/1
15.00
15.00
0.00
6/5
Matures 6/15
6/6
6/7
12.00
12.00
0.00
\y
BILL
0.00
JPONS
CHANGE
IN SIZE
ear TIPS (R)
,ar TIPS
4/12
4/25
4/17
4/20
4/10
,ar Note
,ar Note
4/24
4/24
4/26
5/1
4/27
5/1
·ar Note
ear Note
5/3
5/3
5/9
5/11
ar Note
ar Note
5/22
5/22
ear Note (R)
ar Note
ar Note
4/28
9.00
10.00
9.00
1000
1.00
24.00
16.00
2.00
5/15
22.00
15.00
5/24
5/25
5/31
5/31
6/5
6/8
6/22
6/22
6/26
6/27
26.02
13.98
2.00
2.00
59.95
-22.95
24.00
16.00
100
24.25
15.75
6/15
9.00
1.00
6/30
6/30
25.00
16.00
100
1.00
5/15
186.00
9.00
24.57
16.43
134.78
51.21
1ates are italicized
NET CASH RAISED THIS QUARTER:
~eopening
-25.79
Page I of ~
~I
•
•
:i. .~-r;'
1'l',-~
PRESS ROOM
February 1, 2006
JS-3097
Minutes of The Meeting Of The Treasury Borrowing Advisory Committee Of
The Bond Market Association
January 31, 2006
January 31, 2006
The Committee convened in closed session at the Hay-Adams Hotel at 3:00 p.m.
All Committee members were present. Assistant Secretary Emil Henry, Deputy
Assistant Secretary James Clouse and Office of Debt Management Director Jeff
Huther welcomed the Committee and gave them the charge.
The Committee addressed the first question in the Committee charge (attached)
regarding the appropriate composition of Treasury's debt portfolio and how to
further develop guidelines on portfolio composition. Director Huther presented a
series of charts describing the Treasury's portfolio considerations and the
characteristics of bill and coupon financing. Since 1977, bills as a percent of total
Treasury debt outstanding have averaged approximately 26 percent; currently bills
are 23 percent of total debt outstanding. Director Huther showed charts describing
the composition of the Treasury's current portfolio, and a chart showing that
historically bills carry lower interest rates on average than coupons, but higher
interest cost volatility. Director Huther indicated that bill issuance provides the
Treasury with greater flexibility and is used first to address short-term changes in
the deficit.
One member of the Committee asked whether Treasury should be looking at the
new cash raised through bills versus coupons rather than the percent of total debt
outstanding. Director Huther indicated that Treasury looks at average maturity of
debt outstanding and the average maturity of issuance, and that both measures are
of interest.
One Committee member noted that Treasury issues bills in large part for flexibility,
but that with the flatness of the yield curve, it should not cost Treasury to move
further out the curve and that it would be prudent to do so in part to avoid rollover
risk. Another Committee member noted that the number of Treasury auctions per
year (which is currently higher than average, particularly in bills) and the number of
available days to auction securities could be a real constraint. Other members
noted that this was a constraint that Treasury could manage. One Committee
member noted that, out of the list of portfolio considerations, the primary
considerations are flexibility, interest cost and liquidity. The Committee agreed that
the list of portfolio considerations shown in the chart were reasonable.
One Committee member asked if Treasury should be looking at the division
between bills and coupons in the portfolio, or if Treasury should be focusing on the
average maturity of the debt. The Committee member noted that the Treasury has
large financing needs going forward (forecasted deficits), that there is
unprecedented demand for longer-dated securities, but that the average maturity of
the debt outstanding was near its lowest level in twenty years. The Committee
member noted that extending the average maturity of the debt may be advisable.
The Committee then discussed Treasury's rationale for not having a stated policy
on the appropriate level for the average maturity of debt outstanding or a publicly
stated ceiling or floor for this measure. Several Committee members suggested
that Treasury should not set an explicit target or band for the average maturity of
debt outstanding or for bills as a percent of debt outstanding. One Committee
member noted that Treasury should only set explicit targets if they relate directly to
the stated portfolio considerations such as lowest interest cost. Some Committee
members noted that setting bands for an appropriate average maturity of debt
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would be arbitrary. One Committee member noted that having the list of portfolio
considerations was a better option and that the importance of each consideration
may change over time. Other Committee members suggested that having a target
would generate speculation in the market about what actions Treasury might take if
Treasury were nearing its targets.
One Committee member suggested that Treasury needs to do more analysis on its
investor base as it has changed substantially over the past twenty years. The
member suggested more work needs to be done on the depth of demand,
particularly at the very short and long end of the curve.
The Committee then addressed the second question in the charge regarding the
Committee's views on resumed issuance of the 3D-year bond. The Committee was
asked about the initial auction size for the bond, coupon cycles for the STRIPS
market and the consequences of a commitment to both coupon cycles on bond
issuance in future years. Director Huther showed charts depicting the amount of
bonds currently held in stripped form. Several members of the Committee asked
why Treasury would wait to fill out the May/November STRIPS rather than
addressing the issue now. One Committee member noted the recent increase in
stripping activity and the gap in maturities between 2031 and 2036, and suggested
that having February/August and May/November STRIPS would make a more
complete curve. Other Committee members noted that Treasury should look at
both the principal and coupon STRIPS and that analyzing just principal STRIPS
does not convey the full story. Other Committee members suggested that Treasury
should address STRIPS as the bond program matures rather than making a
decision immediately. Director Huther noted that Treasury would like to have as
much flexibility as possible, while maintaining transparency with the market.
The Committee then moved to discussing the size of the February 3D-year bond
issue. Director Huther reminded the Committee that Treasury had stated they
would be issuing $20 to $30 billion in a 3D-year bond in 2006. The Committee had
differing views on whether Treasury should consider issuing a larger or smaller first
bond. Some Committee members suggested that a $15 billion initial offering was
on the large side and that Treasury should be more cautious with its first bond
offering in five years. Members suggested that Treasury should ease back into the
market because some market participants were concerned about the duration and
risk at auction. Other Committee members argued for a larger first offering, arguing
that there was large demand for the 3D-year bond, particularly from the pension
fund community, and that this demand should warrant a larger issue size. These
members noted that even if the first auction was a bit "bumpy," demand for the
issue would most likely cause the issue to trade well going forward in the secondary
market. They suggested that the marginal cost to Treasury was lower than the risk
of having too small an issue, and having it tighten up and trade poorly in the market.
Next the Committee addressed the third question in the Committee charge
regarding the relationship between the shape of the yield curve and the outlook for
financial markets. One Committee member presented a series of charts discussing
the shape of the Treasury yield curve and the impact on the housing market,
insurance companies, banks and leveraged accounts. The charts showed that the
general economic climate in 2006 should remain favorable and argued that the
shape of the yield curve has less predictive power today than in the past. The
presentation showed that consumers have been expanding their spending capacity
by extracting wealth from their homes, and that the shape of the yield curve and
level of rates has had an impact on this phenomenon. The presentation showed
that financial institutions, such as insurance companies, banks and leveraged
accounts were taking on more risk and that risk appetite was growing.
The Committee was asked if flat yield curve was indicative of a slowdown or a
recession. Several Committee members agreed that the flattening yield curve may
not be predicting a slowdown or recession, but that other factors, such as heavy
demand for longer-dated securities, were helping create the curve flattening.
Several Committee members agreed that the flat yield curve and low level of rates
had increased risk appetite, as market partiCipants sought out higher returns.
Finally, the Committee discussed its borrowing recommendations for the February
refunding and the remaining financing for this quarter as well as the April - June
quarter. Charts containing the Committee's recommendations are attached. The
Committee consensus was to recommend a $15 billion 3D-year issue, though the
Committee chairman noted the differing views.
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The meeting adjourned at 4:30 p.m.
The Committee reconvened at the Hay-Adams Hotel at 6:30 p.m All the Committee
members were present. The Chairman presented the Committee report to Assistant
Secretary Henry. A brief discussion followed the Chairman's presentation but did
not raise significant questions regarding the report's content.
The meeting adjourned at 6:45 p.m.
Jeff Huther
Director
Office of Debt Management
January 31, 2006
Certified by:
Ian Banwell, Chairman
Treasury Borrowing Advisory Committee
Of The Bond Market Association
January 31, 2006
Attach ments:
Link to the Treasury Borrowing Advisory Committee discussion charts
U.S. Treasury - Ofiice of Domestic Finance
Treasury Borrowing Advisory Committee Quarterly Meeting Committee
Charge - January 31,2006
Bills/Coupon Composition
We seek to develop guidelines for the appropriate composition of Treasury's debt
portfolio based on the share of the portfolio devoted to bills relative to coupon
securities. We would like the Committee's views on charts that we present and
Committee suggestions on how to further develop guidelines on portfolio
composition.
30-Year Bond
We would like the Committee's views on resumed issuance of the 30-year bond;
initial sizes, coupon cycles for the STRIPS market and the consequences of a
commitment to both coupon cycles on bond issuance in future years.
Shape of the Yield Curve
The recent flattening of the yield curve has led to questions about the relationship
between the shape of the yield curve and the outlook for financial markets. We
would like the Committee's views on the relevance of curve shape, at current levels,
on the financial markets and institutions.
Financing this Quarter
We would like the Committee's advice on the following:
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• The composition of Treasury notes to refund approximately $17.3 billion of
privately held notes and bonds maturing on February 15, 2006.
• The composition of Treasury marketable financing for the remainder of the
January- March quarter, including cash management bills.
• The composition of Treasury marketable financing
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PRESS ROOM
February 1, 2006
JS-3098
Treasury Secretary Snow to Visit Philadelphia to
Discuss the State of the U.S. Economy
U.S. Treasury Secretary John W. Snow will travel to Philadelphia, Pennsylvania
tomorrow to discuss the state of the U.S. economy. While in Philadelphia,
Secretary Snow will visit Centocor, a biotechnology company located in Radnor,
Pennsylvania, where he will make note of the contributions that innovation and
technology make to the economy and to standards of living for the American
people. Secretary Snow will also deliver remarks to the 2006 Greater Philadelphia
Investment Conference.
The following events are open to credentialed media with photo identification:
Wednesday, February 1, 2006
2:15 PM EST
Centocor
Tour of Centocor facility
145 King of Prussia Road
Radnor, Pennsylvania
*** Media please RSVP to Melissa Katz at 215-514-0957
*** Media must arrive no later than 1 :30 PM EST
2:45 PM EST
Centocor
Remarks to employees
145 King of Prussia Road
Radnor, Pennsylvania
*** Media please RSVP to Melissa Katz at 215-514-0957
*** Remarks to employees will be immediately followed by a 15 minute press
availability
6:45 PM EST
Remarks to the 2006 Greater Philadelphia Investment Conference
Radisson Plaza - Warwick Hotel
1701 Locust Street
Philadelphia, Pennsylvania
*** Media please RSVP to Robert Powelson at 610-725-9100 ext· 17
*** Media must RSVP no later than 12:00 noon Wednesday, February 1, 2006
*** Media must arrive no later than 5:30 PM EST
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February 1, 2006
JS-3099
MEDIA ADVISORY
Treasury Secretary Snow to Visit Charlotte,
North Carolina
to Discuss American Competitiveness and
the U.S. Economy
u.s. Treasury Secretary John W. Snow will travel to Charlotte, North Carolina
Thursday to discuss American competitiveness and the U.S. economy. While in
Charlotte, Secretary Snow will visit the North Carolina Research Campus where he
will participate in a discussion on the contributions that innovation and technology
make to the economy and to standards of living for the American people.
The following event is open to credentialed media with photo identification:
Friday, February 3, 2006
11:00 AM EST
North Carolina Research Campus
Site Visit and Roundtable
Cannon Village Visitors Center
Auditorium
200 West Avenue
Kannapolis, NC
**Media please RSVP to Phyllis Beaver at 704-273-1181 or
pbeaver@castle\":ooke.com
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February 1, 2006
JS-4000
The Honorable John W. Snow
Prepared Remarks
The Greater Philadelphia Investment Conference
Good evening; thank you so much for having me here tonight. As always, it's great
to be in Philadelphia. And I truly cannot imagine a better city in which to discuss the
topic that I have come here with. Because Philadelphia, the historic political
birthplace of our nation, is also the place where an economic marvel began. Born
just 230 years ago, today it is the unrivaled envy of the world: the American
economy.
Philadelphia is also celebrating the 300 th birthday of your favorite son, Benjamin
Franklin - one of the great innovators of all time. That tradition of creativity and
innovation is alive and well in this region today. I saw it in action this afternoon at a
company called Centocor, where research and development are leading to
products and medicines that improve the quality of life for people not only in this
country, but also people all over the world.
There's an important connection here - the President highlighted it last night between our ability to create, discover and innovate, and America's remarkable
ability to compete in a changing global economy. We've been doing it for all of our
history, and with the focus on good policies, we will continue to achieve higher and
higher standards of living far into the future.
It was an important message the President delivered last night. He told America,
correctly, that our economy is performing very well - far better than other major
economies. But, as the President said, we live in a new world and are faCing
competition from new economic players like China, India, and other "emerging
market" countries. In order for America to continue to be a dynamic engine of
growth, President Bush is outlining action in three key areas: health, energy, and
America's competitiveness.
AffordaQle and Accessible Health Care. The President's reform agenda will help to
make health care more affordable and accessible. Health Savings Accounts putting patients in charge of their health care - will contribute to this goal. We need
to make health insurance portable, make the system more efficient, and lower
costs.
Advanced Energy Initiative. The President has said that the best way to break
America's dependence on foreign sources of energy is through new technology. So
the President announced the Advanced Energy Initiative, which provides for a 22
percent increase in clean-energy research at the Department of Energy. This
initiative also bui: 's on the energy legislation finally passed by the Congress last
year that encourages and rewards energy conservation activity.
American Competitiveness Initiative. This ambitious strategy by the President will
significantly increase federal investment in critical research, ensure that the U.S.
continues to lead the world in opportunity and innovation, and provide American
children with a strong foundation in math and science.
With a focus on these and other good policies, we'll keep America competitive in
the world and keep our economy strong as it has been for some time now. A
current snapshot of this economy illustrates its strength: GOP growth was over 3.5
percent last year. Over four and a half million new jobs have been created since
May of 2003, two million of them in the last year alone. Unemployment is running
lower than the 1970s, 1980s and 1990s, U.S. equity markets are rising, and
household wealth is at an all-time high.
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The picture of our economy was not as good a few years ago, and I'm proud to be
part of an Administration that has a deep understanding of what makes the
American economy work. The President has advanced a rich and varied set of
policies - from tax cuts to trade, energy to health care - that put entrepreneurs and
consumers in the drivers' seat, where they belong. Based on principles and proven
theory, these policies have helped our economy - which is naturally buoyant in its
structure - to get solidly back on track.
Everywhere I go in this world, and every time I host finance ministers and
colleagues from other countries, I am asked the same question: how does the U.S.
do it? How do you keep your economy so robust?
And while there are plenty of current policies that I can point to, it's important to
remember the answer actually begins here in Philadelphia. The words written by
our founding fathers here in this city, without a doubt, created the environment in
which innovation, productivity and economic growth could and would occur for
hundreds of years to come. And no one understands that better than the President.
In fact, a lot of what his agenda aims to accomplish is a devotion to the excellent
structure that our economy is built on.
It is worth noting that the words of the constitution were not written in a vacuum. Not
in a quiet or pastoral setting. They were written here, in a city that was booming
with commerce and innovation. The City of Brotherly Love was, at that time, the
largest city on the east coast, teeming with shipping and trading, buying and selling,
production and innovation.
The basic structure of the United States was a profound theory - but maybe in part
thanks to the success of a young Philadelphia, the men who laid it out already knew
this theory would work.
As the President often says, government does not create wealth. Government
creates an environment in which economic growth and progress can occur.
This is how the country, and the economy, was set up. We have a stable economic
and political system that is checked and balanced. It's bicameral and federalist so
that no one group - legislative or political - can gain too much power. It means that
the power resides with the people when it comes to government, and with
consumers when it comes to business.
Both property and intellectual rights are protected because our founders valued the
individual, and we have stuck by that principle, as a nation, decade after decade.
Although people on my side of the aisle are forever trying to shrink the influence of
government - or maybe because we are forever trying - the fact is that the U.S.
remains a land of relatively low rates of both regulation and taxation, which is
absolutely critical for business growth, innovation and job creation.
Americans, beginning with the founders, have a value for the individual and more
than a tendency toward independence.
Truly free free-enterprise has, over the years, given rise to capital markets that are
very well-developed and deep.
Credible, low-inflation monetary policy provides steady foundation for all of this, of
course. The fact that the Federal Reserve Board is independent and well-run is an
economic factor whose importance cannot be over-emphasized. We were fortunate
to have Alan Greenspan at its helm for as long as we did, and I have the utmost
confidence that my friend and colleague Ben Bernanke is going to be a successor
worthy of the Greenspan legacy.
Another critical economic element is the United States' openness to free trade. As
the President often points out, 95 percent of the world's customers live outside of
the U.S. And in a country that thoroughly embraces free enterprise, customers and
products alike have no borders.
A literal openness to people led to high levels of immigration. We have been a
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beacon of light to those who wish to live in true freedom and independence, and the
assimilation of foreign-born entrepreneurs has given us an enormous advantage
when it comes to innovation. It helps to explain why we are by far the world's
innovation leader.
The opportunity to take a risk and succeed has not only drawn people to the United
States, it has enabled each generation of Americans to live better than the
generation before. Entrepreneurship may look different from the days of the
founders (who were virtually all entrepreneurs, by the way - farmers, businessmen,
merchants, shippers, even land and securities speculators!), but the golden
opportunity to take a risk and make a living off of your own ideas and sweat is just
the same.
This is one of the reasons that I find news stories that predict a lack of financial
opportunity for the up-and-coming generation to be just this side of absurd. Every
generation worries about the next, but every generation has soared past their
parents. We look back on 20 straight decades of more, better jobs each decade
than the last. The evolution of our flexible and dynamic economy has made that
possible, and I encourage all of you to take those stories for what they are:
entertainment. They remind me of stories that once predicted massive failures of
the banking system due to a lack of capable technology. Or, even further back, of a
concern that half the population would need to be employed as telephone operators
to connect all the calls that were being made.
We look back at those fears today and laugh! And we will again. You see, we've
overcome every hurdle, every time. And if we keep our economy flexible and open
we'll keep on doing just that.
The American economy owes much of its success to the embrace of
entrepreneurship, which breeds the critical innovation that I'm talking about. The
entrepreneurial spirit is exceptional in this country, and although we can always do
better the government has done pretty well at staying out of that powerful spirit's
way. This is a point of great pride for our President, whose economic agenda is
largely a small-business agenda.
We may be known, internationally, for the names of our biggest companies, but it is
small business that has kept our economic engine running strong and smooth. It
has also given us incredible stability because it avoids situations where too many
people's livelihood depends on just a few big employers. Most of our new jobs
(around three quarters) are actually created by small business, and that's a sign of
tremendous stability and forward-movement in an economy.
This is something other governments are picking up on and hoping to emulate. I've
had very productive dialogue on the topic of entrepreneurship, and how to foster it,
with government colleagues in Europe and Brazil, just to give two examples, in
recent months.
We must always keep in mind that the foundations of our economy are always
vulnerable to a chipping-away effect that comes from well-intentioned governing. As
an institution, government sometimes can't help but intrude, here and there, on a
free-market system. Taxes are necessary. Some regulation is necessary. But
finding how much of each can be tough. And when government goes too far and
starts acting like a drag on the economy, it's time to roll it back.
President Bush has rolled back taxes on individuals and entrepreneurs, capital and
investors. This has helped the economy recover from what was a really difficult
period just a few years ago.
The last time I was in government, at the Department of Transportation, we rolled
back regulation on the trucking industry which was another important step toward a
better economic environment.
The urge of government to tinker with the free market is almost irresistible, so we've
always got to keep an eye on it.
Every new rule, regulation or tax must be scrutinized for the impact it could have on
the economic structure that has served the country so very well for so long.
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Are there bumps on the free market road? Of course. And government does have a
role in protecting citizens when they are at risk of drowning in the tide of change.
But the tide is also, as John Kennedy said, what will ultimately cause their boats to
rise.
How does all of this impact today's public policy debate? Primarily I'm concerned
with keeping taxes low. The President's tax cuts have clearly benefited the
economy and he's not about to accept tax increases now. I'm helping him
communicate that plain fact to Congress. This also keeps American businesses
competitive so that they can continue to invest and create jobs.
Keeping budgets under control is a current area of focus for the Administration as
well. We'll unveil a budget next week that is true to the President's goals of reducing
the deficit and keeping the growth of government in check by holding overall
discretionary spending below the rate of inflation. It proposes cutting programs that
aren't delivering their promises to the taxpayers and proposes tens of billions of
dollars of savings on entitlement programs. It is a budget that works to ensure that
future generations of Americans will have the opportunity to live in a Nation that is
more prosperous and more secure.
Education and worker training policies - to point out one part of that budget - must
be constantly adapted to the changing times and the changing, growing economy.
As the President said in announcing the American Competitiveness Initiative last
night, a strong economy depends on a skilled and talented workforce. The
President sees great success and potential in the ability of community colleges to
provide relevant, focused training for jobs that exist today - jobs that may not have
existed even five years ago because of innovation. And workers should be able to
continue to learn new skills for the changing business environment. This is an
investment in our future that is more important than venture capital itself!
Health care costs have got to be brought down, and we've included some
mechanisms in the budget to address that pressing issue. As the President pointed
out in his State of the Union Address last night, it's time to allow Americans to save
more in their Health Savings Accounts. We hope this will encourage more people to
start HSAs, which put patients back in charge of their health-care purchasing
decisions while saving money on a tax-preferred basis.
So I'm not recommending a static environment. Keeping that environment open and
flexible will take great effort, and great restraint, from every level of government on
every day of our history.
In closing I want to say, unequivocally, that the future of the American economy is
very bright. As Ronald Reagan once said, "there are no great limits to growth
because there are no limits of human intelligence, imagination, and wonder." That's
what this country, and this terrific economy, is all about.
Thanks so much for having me here tonight.
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February 2, 2006
JS-4001
Testimony of
Patricia A. Brown, Deputy International Tax Counsel (Treaty Affairs),
United States Department of the Treasury
Before the Senate Committee on Foreign Relations
on Pending Income Tax Agreements
Mr. Chairman and distinguished Members of the Committee, I appreciate the
opportunity to appear today at this hearing to recommend, on behalf of the
Administration, favorable action on four tax agreements that are pending before this
Committee. We appreciate the Committee's interest in these agreements and in the
U.S. tax treaty network, as demonstrated by the scheduling of this hearing.
As you expressed so well, Mr. Chairman, tax treaties are "part of the basic
infrastructure of the global marketplace". The international network of over 2000
bilateral tax treaties has established a stable framework that allows international
trade and investment to flourish. The success of this framework is evidenced by the
fact that countless cross-border transactions, from investments in a few shares of a
foreign company by an individual to multi-billion dollar purchases of operating
companies in a foreign country, take place each year, with only a relatively few
disputes regarding the allocation of tax revenues between governments.
Individuals, too, benefit from the rules regarding allocation of investment income,
but also from the rules regarding income from employment, the tax treatment of
cross-border pension contributions and distributions, and, of course, the estate tax
rules.
Just like our physical infrastructure, our tax treaty network requires constant
attention. Countries introduce new preferential taxing regimes, or tighter anti-abuse
rules; they may introduce bank secrecy or abolish it; or they may enter into an
agreement with another country that is more advantageous than the agreement
they have with the United States. Any of these situations may create an opportunity
or a risk that needs to be addressed by a new or revised agreement. We must be
creative and flexible in how we approach issues to find solutions to particular
problems that are consistent with our overall goals. We are also becoming more
efficient, concluding short protocols in order to update an agreement without calling
into question every one of its provisions. Of course, this Committee's willingness to
consider these agreements quickly has been a tremendous help in this regard. It
can change the entire tone (and pace) of a treaty negotiation when the other side
discovers that an advantageous change can be approved and implemented within
the space of a year.
Three of the four agreements that are before you now are updates to relatively
recent agreements. The fourth, the full treaty with Bangladesh, is an updated
version of a 1980 treaty that never entered into force because of Senate concerns
about several provisions. The Administration believes that these agreements with
Bangladesh, France and Sweden will serve to further the goals of our tax treaty
network. We urge the Committee and the Senate to take prompt and favorable
action on all of these agreements.
Purposes and Benefits of Tax Treaties
Tax treaties provide benefits to both taxpayers and governments by setting out
clear ground rules that will govern tax matters relating to trade and investment
between the two countries. A tax treaty is intended to mesh the tax systems of the
two countries in such a way that there is little potential for dispute regarding the
amount of tax that should be paid to each country. The goal is to ensure that
taxpayers do not end up caught in the middle between two governments, each of
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which claims taxing jurisdiction over the same income. A treaty with clear rules
addressing the most likely areas of disagreement minimizes the time the two
governments (and taxpayers) spend in resolving individual disputes.
One of the primary functions of tax treaties is to provide certainty to taxpayers
regarding the threshold question with respect to international taxation: whether the
taxpayer's cross-border activities will subject it to taxation by two or more countries.
Treaties answer this question by establishing the minimum level of economic
activity that must be engaged in within a country by a resident of the other country
before the first country may tax any resulting business profits. In general terms, tax
treaties provide that if the branch operations in a foreign country have sufficient
substance and continuity, the country where those activities occur will have primary
(but not exclusive) jurisdiction to tax. In other cases, where the operations in the
foreign country are relatively minor, the home country retains the sole jurisdiction to
tax its residents.
Tax treaties protect taxpayers from potential double taxation through the allocation
of taxing rights between the two countries. This allocation takes several forms. First,
the treaty has a mechanism for resolving the issue of residence in the case of a
taxpayer that otherwise would be considered to be a resident of both countries.
Second, with respect to each category of income, the treaty assigns the "primary"
right to tax to one country, usually (but not always) the country in which the income
arises (the "source" country), and the "residual" right to tax to the other country,
usually (but not always) the country of residence of the taxpayer. Third, the treaty
provides rules for determining which country will be treated as the source country
for each category of income. Finally, the treaty provides rules limiting the amount of
tax that the source country can impose on each category of income and establishes
the obligation of the residence country to eliminate double taxation that otherwise
would arise from the exercise of concurrent taxing jurisdiction by the two countries.
As a complement to these SUbstantive rules regarding allocation of taxing rights, tax
treaties provide a mechanism for dealing with disputes or questions of application
that arise after the treaty enters into force. In such cases, designated tax authorities
of the two governments - known as the "competent authorities" in tax treaty
parlance - are to consult and reach an agreement under which the taxpayer's
income is allocated between the two taxing jurisdictions on a consistent basis,
thereby preventing the double taxation that might otherwise result. The U.S.
competent authority under our tax treaties is the Secretary of the Treasury. That
function has been delegated to the Director, International (LMSB) of the Internal
Revenue Service.
In addition to reducing potential double taxation, treaties also reduce potential
"excessive" taxation by reducing withholding taxes that are imposed at source.
Under U.S. domestic law, payments to non-U.S. persons of dividends and royalties
as well as certain payments of interest are subject to withholding tax equal to 30
percent of the gross amount paid. Most of our trading partners impose similar levels
of withholding tax on these types of income. This tax is imposed on a gross, rather
than net, amount. Because the withholding tax does not take into account expenses
incurred in generating the income, the taxpayer that bears the burden of withholding
tax frequently will be subject to an effective rate of tax that is significantly higher
than the tax rate that would be applicable to net income in either the source or
residence country. The taxpayer may be viewed, therefore, as suffering "excessive"
taxation. Tax treaties alleviate this burden by setting maximum levels for the
withholding tax that the treaty partners may impose on these types of income or by
providing for exclusive residence-country taxation of such income through the
elimination of source-country withholding tax.
Because of the excessive taxation that withholding taxes can represent, the United
States seeks to include in tax treaties provisions that substantially reduce or
eliminate source-country withholding taxes.
Tax treaties also include provisions intended to ensure that cross-border investors
do not suffer discrimination in the application of the tax laws of the other country.
This is similar to a basic investor protection provided in other types of agreements,
but the non-discrimination provisions of tax treaties are specifically tailored to tax
matters and therefore are the most effective means of addressing potential
discrimination in the tax context. The relevant tax treaty provisions provide
guidance about what "national treatment" means in the tax context byexplicitly
prohibiting types of discriminatory measures that once were common In some tax
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systems. At the same time, tax treaties clarify the manner in which possible
discrimination is to be tested in the tax context. Particular rules are needed here for
example, to reflect the fact that foreign persons that are subject to tax in the host
country only on certain income may not be in the same position as domestic
taxpayers that may be subject to tax in such country on all their income.
In addition to these core provisions, tax treaties include provisions dealing with
more specialized situations, such as rules coordinating the pension rules of the tax
systems of the two countries or addressing the treatment of Social Security benefits
and alimony and child support payments in the cross-border context. These
provisions are becoming increasingly important as the number of individuals who
move between countries or otherwise are engaged in cross-border activities
increases. While these matters may not involve substantial tax revenue from the
perspective of the two governments, rules providing clear and appropriate treatment
are very important to the individual taxpayers who are affected.
Tax treaties also include provisions related to tax administration. A key element of
U.S. tax treaties is the provision addressing the exchange of information between
the tax authorities. Under tax treaties, the competent authority of one country may
request from the other competent authority such information as may be relevant for
the proper administration of the country's tax laws; the requested information will be
provided subject to strict protections on the confidentiality of taxpayer information.
Because access to information from other countries is critically important to the full
and fair enforcement of the U.S. tax laws, information exchange is a priority for the
United States in its tax treaty program. If a country has bank secrecy rules that
would operate to prevent or seriously inhibit the appropriate exchange of
information under a tax treaty, we will not conclude a treaty with that country.
Indeed, the need for appropriate information exchange provisions is one of the
treaty matters that we consider non-negotiable.
Tax Treaty Negotiating Priorities and Process
In establishing our negotiating priorities, our primary objective is the conclusion of
tax treaties or protocols that will provide the greatest economic benefit to the United
States and to U.S. taxpayers. We communicate regularly with the U.S. business
community, seeking input regarding the areas in which treaty network expansion
and improvement efforts should be focused and information regarding practical
problems encountered by U.S. businesses with respect to the application of
particular treaties and the application of the tax regimes of particular countries.
The United States has a network of 57 bilateral income tax treaties covering 65
countries. This network includes all 29 of our fellow members of the OECD. It also
covers the vast majority of foreign trade and investment of U.S. businesses.
Because the coverage of our treaty network is already quite comprehensive, it
frequently will make more sense, as an economic matter, for the United States to
negotiate an update to an existing agreement, rather than to negotiate a full treaty
with a new treaty partner. Such a full agreement will require the potential treaty
partner to grapple with many of the complexities of U.S. domestic and international
tax rules and U.S. tax treaty policy, and how it interacts with its own domestic law
and policies. Thus, the primary constraint on the size of our tax treaty network may
be the complexity of the negotiations themselves. The various functions performed
by tax treaties and most particularly the need to mesh the particular tax systems of
the two treaty partners, make the negotiation process exacting and timeconsuming.
A country's tax policy reflects the sovereign choices made by that country.
Numerous features of the treaty partner's particular tax legislation and its interaction
with U.S. domestic tax rules must be considered in negotiating an appropriate
treaty. Examples include whether the country eliminates double taxation through an
exemption system or a credit system, the country's treatment of partnerships and
other transparent entities, and how the country taxes contributions to pension
funds, earnings of the funds, and distributions from the funds. A treaty negotiation
must take into account all of these and many other aspects of the particular treaty
partner's tax system in order to arrive at an agreement that accomplishes the
United States' tax treaty objectives.
A country's fundamental tax policy choices are reflected not only in its tax
legislation but also in its tax treaty positions. The choices in this regard can and do
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differ significantly from country to country, with substantial variation even across
countries that seem to have quite similar economic profiles. A treaty negotiation
also must reconcile differences between the particular treaty partner's preferred
treaty positions and those of the United States.
Obtaining the agreement of our treaty partners on provisions of importance to the
United States sometimes requires other concessions on our part. Similarly, the
other country sometimes must make concessions to obtain our agreement on
matters that are critical to it. In most cases, the process of give-and-take produces
a document that is the best tax treaty that is possible with that other country. In
other cases, we may reach a pOint where it is clear that it will not be possible to
reach an acceptable agreement. In those cases, we simply stop negotiating with the
understanding that negotiations might restart if circumstances change. Each treaty
that we present to the Senate represents not only the best deal that we believe we
can achieve with the particular country, but also constitutes an agreement that we
believe is in the best interests of the United States.
In some situations, the right result may be no tax treaty at all or may be a
substantially curtailed form of tax agreement. With some countries a tax treaty may
not be appropriate because of the possibility of abuse. With other countries there
simply may not be the type of cross-border tax issues that are best resolved by
treaty. For example, with a country that does not impose significant income taxes,
where there is little possibility of the double taxation of income in the cross-border
context that tax treaties are designed to address, an agreement that is focused on
the exchange of tax information may be most valuable. Alternatively, a bifurcated
approach may be appropriate in situations where a country has a special
preferential tax regime for certain parts of the economy that is different from the tax
rules generally applicable to the country's residents. In those cases, the residents
benefiting from the preferential regime do not face potential double taxation and so
should not be entitled to the reductions in U.S. withholding taxes accorded by a tax
treaty, while a full treaty relationship might be useful and appropriate in order to
avoid double taxation in the case of the residents who do not receive the benefit of
the preferential regime.
Prospective treaty partners must evidence a clear understanding of what their
obligations would be under the treaty, including those with respect to information
exchange, and must demonstrate that they would be able to fulfill those obligations.
Sometimes a tax treaty may not be appropriate because a potential treaty partner is
unable to do so. In other cases, a tax treaty may be inappropriate because the
potential treaty partner is not willing to agree to particular treaty provisions that are
needed in order to address real tax problems that have been identified by U.S.
businesses operating there.
The U.S. commitment to including comprehensive limitation of benefits provisions
designed to prevent "treaty shopping" in all of our tax treaties is one of the keys to
improving our overall treaty network. Our tax treaties are intended to provide
benefits to residents of the United States and residents of the particular treaty
partner on a reciprocal basis. The reductions in source-country taxes agreed to in a
particular treaty mean that U.S. persons pay less tax to that country on income from
their investments there and residents of that country pay less U.S. tax on income
from their investments in the United States. Those reductions and benefits are not
intended to flow to residents of a third country. If third-country residents are able to
exploit one of our tax treaties to secure reductions in U.S. tax, the benefits would
flow only in one direction as third-country residents would enjoy U.S. tax reductions
for their U.S. investments but U.S. residents would not enjoy reciprocal tax
reductions for their investments in that third country.
Moreover, such third-country residents may be securing benefits that are not
appropriate in the context of the interaction between their home country's tax
systems and policies and those of the United States. This use of tax treaties is not
consistent with the balance of the deal negotiated. Preventing this exploitation of
our tax treaties is critical to ensuring that the third country will sit down at the table
with us to negotiate on a reciprocal basis, so that we can secure for U.S. persons
the benefits of reductions in source-country tax on their investments in that country.
Update on the Treasury Department's Position on Inter-Company Dividends
In earlier testimony before this Committee, Treasury Department representatives
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have discussed the decision, first made in connection with the negotiation of the
treaty with the United Kingdom in 2001, to eliminate the source-country withholding
tax on certain inter-company dividends, The position of the Treasury Department
has been, and continues to be, that this decision is made independently with
respect to every treaty negotiation, The United States will agree to the provision
only if the agreement includes limitation on benefits and information exchange
provisions that meet the highest standards, and if the overall balance of the
agreement is appropriate,
Since we first expressed our willingness to eliminate the source-country withholding
tax on inter-company dividends, a number of treaty relationships that had been at
best stagnant and at worst problematic have changed for the better, Suddenly,
there was some leverage to achieve goals that had seemed out of reach for one
reason or another. Thus, although the new policy has been in place for only about
five years, it has enabled us to achieve the following goals in one or more treaties:
•
•
•
•
•
Strengthening our provisions to prevent treaty shopping, including the
introduction of rules that prevent the use of tax treaties after a corporate
inversion transaction;
Significantly improving information exchange provisions, allowing access to
information even when the treaty partner does not need the information for
its own tax purposes;
Reducing withholding taxes on interest and royalties to levels lower than
those to which those treaty partners had ever previously agreed;
Eliminating withholding taxes on dividends paid to pension funds, a tax that
otherwise would inevitably lead to double taxation; and
Protecting U.S. companies against the retaliatory re-imposition of
withholding taxes on inter-company dividends.
The reductions we have achieved in our own treaties also are influencing the
negotiation of agreements between other countries. U.S, companies benefit from
those agreements as well, as many of them have subsidiaries that may benefit if
similar reductions in rates are adopted under a new U.K.-Japan treaty, for example.
We believe that these significant achievements demonstrate that the current policy
is having very positive effects and will continue to do so in the foreseeable future.
Discussion of Proposed New Treaties and Protocols
I now would like to discuss the four agreements that have been transmitted for the
Senate's consideration. We have submitted Technical Explanations of each
agreement that contain detailed discussions of the provisions of each treaty and
protocol. These Technical Explanations serve as an official guide to each
agreement.
The proposed Protocol amends the income tax treaty between the United States
and Sweden that was signed in 1994. The most significant provisions in the
Protocol relate to the treatment of dividends and limitation on benefits, The
Protocol also rectifies a mistake that was made in the 1994 treaty that caused a
great deal of hardship for a number of former employees of the U,S. government. It
also makes a number of necessary updates to the treaty.
Like a number of recent agreements, the Protocol will eliminate the source-country
withholding tax on most inter-company dividends and on dividends paid to pension
funds, The provision dealing with inter-company dividends was very important to
Sweden, because it had unilaterally eliminated its withholding tax on inter-company
dividends. The legislative history to that domestic law change makes it clear that
the main beneficiaries of that change were expected to be U.S. companies. In fact,
it refers specifically to assurances given to the Swedish negotiators that the United
States would not agree to eliminate the withholding tax on inter-company dividends
in any bilateral agreement with any country. Now that U.S. policy has changed,
failure to provide a reciprocal benefit for Swedish companies would have
jeopardized the exemption from Swedish withholding tax that currently benefits U.S,
companies. We believe that securing that protection, as well as eliminating the
withholding tax on dividends paid to pension funds, is a sufficient quid pro quo,
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Nevertheless, we also took this opportunity to add anti-inversion provisions to the
limitation on benefits provisions of the treaty. The new provision represents a
somewhat simplified version of a similar provision introduced in the recent protocol
with the Netherlands. Although we have no reason to believe that Sweden would
be an attractive destination for an inverted U.S. corporation, including the provision
in a mainstream agreement such as this helps to establish a precedent that will be
extremely useful in other treaty negotiations.
The Protocol also resolves a long-standing problem regarding the taxation of local
employees of the Embassy in Stockholm and consulate in Gothenburg. The
Protocol provides a grandfather rule to eliminate the unintended consequences
resulting from a change made by the 1994 U.S.-Sweden income tax treaty
regarding the taxation of local employees (or former employees) of the Embassy in
Stockholm and consulate in Gothenburg. To rectify this problem, the Protocol
provides that Sweden may not tax a pension under the U.S. Civil Service
Retirement Pension Plan paid by the United States to employees of the U.S.
embassy in Stockholm or the U.S. consulate general in Gothenburg if the individual
was hired prior to 1978.
Other provisions in the Protocol reflect changes in U.S. domestic law or are
intended to bring it into closer conformity with current U.S. treaty practice. For
example, the current treaty preserves the U.S. right to tax former citizens whose
loss of citizenship had, as one of its principal purposes, the avoidance of tax. The
proposed Protocol updates this provision to reflect legislative changes since 1994.
In order to reflect 1996 changes to the Internal Revenue Code, the Protocol
provides that a former citizen or long-term resident of the United States may, for the
period of ten years following the loss of such status, be taxed in accordance with
the laws of the United States.
United States and Sweden will notify each other through the diplomatic channel,
accompanied by an instrument of ratification, when their respective requirements
for entry into force have been completed. The proposed Protocol will enter into
force on the thirtieth day after the later of the notifications. It will have effect, with
respect to taxes withheld at source, on or after the first day of the second month
next following the date upon which the Protocol enters into force. With respect to
other taxes, it will have effect for taxable years beginning on or after the first day of
January next following the date upon which the Protocol enters into force.
ErE;)nch Income Tax Protocol
The proposed income tax protocol amends the 1994 income tax treaty between the
United States and France, which entered into force in 1995.
The primary impetus for the negotiation of the income tax Protocol was to clarify the
treatment of investments made in France by U.S. investors through partnerships
located in the United States, France, or third countries. Because France taxes
French partnerships on their worldwide income, and does not treat them as fiscally
transparent, the Protocol confirms that France maintains taxing rights with respect
to French partnerships. However, the Protocol provides that French treaty benefits
will apply to U.S. residents who invest through U.S. partnerships or partnerships
located in certain third countries. These partnership provisions will eliminate
uncertainty and provide significant benefits to U.S. investors.
The income tax Protocol also reforms the treatment of certain French investment
vehicles, which would have been entitled to U.S. treaty benefits under the 1994
treaty. Under the revised provision, a "fonds commun de placement" will not itself
qualify for U.S. treaty benefits, but holders of interests in such an investment
vehicle may qualify for treaty benefits if they are residents of France or of a third
country that has an appropriate tax treaty with the United States.
The income tax Protocol modifies the provisions of the treaty dealing with pensions
and pension contributions in order to achieve parity given the two countries'
fundamentally different pension systems. The French pension system relies almost
entirely on the state social security system with much more limited use of private
pension arrangements such as employer plans and individual plans. The
provisions in the 1994 treaty that treated private pension payments and social
security payments differently are replaced in the proposed Protocol with provisions
that treat the two systems the same. Under the proposed Protocol, the country of
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source is assigned taxing rights with respect to both state social security payments
and private pension payments. The proposed Protocol also includes a provision
that allows U.S. persons to deduct voluntary contributions to the French social
security system to the same extent that contributions to a U.S. plan would be
deductible, which is comparable to the provision in the 1994 treaty that allows
French residents deductions for contributions to U.S. private pension plans.
The proposed Protocol makes other changes to the1994 treaty to reflect more
closely current U.S. treaty policy. The proposed Protocol updates the treatment of
dividends paid by U.S. REITs to reflect a change in approach adopted in 1997,
which is intended to prevent the use of structures designed to avoid U.S.
withholding taxes on outbound dividends while providing appropriate benefits to
portfolio investors in REITs. The proposed Protocol also extends the provision in
the 1994 treaty preserving U.S. taxing rights with respect to certain former citizens
to cover certain former long-term residents in order to reflect 1996 changes to the
Internal Revenue Code.
Each state will notify the other when it has completed the necessary steps to bring
the proposed Protocol into force. The Protocol will enter into force upon the receipt
of the later of those two notices. In general, it will have effect, with respect to taxes
withheld at source, for amounts paid or credited on or after the first day of the
second month following the date on which the Protocol enters into force and, with
respect to other taxes, for taxable periods beginning on or after the first day of
January following entry into force. However, because the rules benefiting U.S.
residents investing through partnerships are intended to ensure that the treaty
provides results that are consistent with the intent of the negotiators of the 1995
treaty, those changes will be applicable as of the effective dates of the 1994 treaty.
French Estate Tax Protocol
The proposed estate tax Protocol amends the estate and gift tax treaty between the
United States and France, which was signed in 1978 and entered into force in
1980.
In 1988, U.S. estate tax law was changed to tax currently transfers of property to
non-citizen surviving spouses. France, along with several other countries with
which the United States has estate tax treaties, objected to this change.
Although the U.S. rejected claims by estate tax treaty partners that the 1988
change violated treaty nondiscrimination clauses, we indicated our willingness to
amend our estate tax treaties with certain treaty partners to provide relief to
surviving non-citizen spouses in appropriate cases. Accordingly, the proposed
Protocol eases the impact of the 1988 provisions upon certain estates of limited
value. Pursuant to the Protocol, transfers of non-community property from a French
domiciliary to a spouse who is not a United States citizen that may be taxed by the
United States solely on the basis of situs under the treaty can be included in the tax
base only to the extent that the value of the property, after applicable deductions,
exceeds 50 percent of the value of all property that may be taxed by the United
States.
In addition to the allowance of the marital exclusion, the Protocol also provides for a
limited elective estate tax marital deduction which, if elected, waives the right to any
available marital deduction that would be allowed under United States domestic
law. The election is available only where the spouses satisfy certain domiciliary
and citizenship requirements and only to "qualifying property" (generally, property
that passes to the surviving spouse and that would have qualified for the marital
deduction if the surviving spouse had been a United States citizen). The amount of
the deduction is equal to the lesser of the value of the qualifying property or the
"applicable exclusion amount" (generally, the amount which the unified credit
shelters from estate tax) for the year of the decedent's death.
The United States, in a 1995 protocol to the U.S.-Canada income tax treaty and a
1998 protocol to the U.S.-Germany estate tax treaty, provided similar relief to
certain estates of limited value involving Canadians and Germans. The United
States' willingness to enter into the proposed Protocol was a significant factor in
France's ratification of the current U.S.-France income tax treaty, which was signed
in 1994.
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The proposed Protocol also provides a pro rata unified credit to the estate of a
French domiciliary for purposes of computing the U.S. estate tax. Under this
provision, a French domiciliary is allowed a credit against U.S. estate tax ranging
from the amount ordinarily allowed to the estate of a nonresident under the Code
($13,000) to the amount of credit allowed to the estate of a U.S. citizen under the
Code ($555,800 in 2004 and 2005), based on the extent to which the assets of the
estate are situated in the United States (with either amount reduced to the extent of
any credit previously allowed with respect to lifetime gifts). Congress anticipated
the negotiation of such pro rata unified credits in Internal Revenue Code section
2102(c)(3)(A), and a similar credit was included in the 1995 U.S.-Canada income
tax protocol and the 1998 German estate tax treaty protocol.
The proposed Protocol also modernizes the provisions dealing with the elimination
of double taxation. In determining the French tax, if the transferor was a French
domiciliary at the time of the transfer, France may tax any property which may also
be taxed by the United States, but must allow a deduction from that tax in an
amount equal to the United States tax paid upon such transfer.
If the transferor is a domiciliary or citizen of the United States and a transfer of
property is subject to situs taxation by France, the United States must allow a credit
equal to the amount of tax imposed by France with respect to such property. If the
transferor is a United States citizen (or former citizen or long-term resident who lost
such status with a principal purpose of tax avoidance) but a French domiciliary, the
United States must allow a credit for the amount of tax imposed by France (after
allowance for the deduction from French tax referred to in the first paragraph) with
respect to such property. All of the credits allowed under the Protocol are limited to
the tax imposed (and actually paid) on the property for which the credit is claimed.
The proposed estate tax Protocol also makes other changes to the Convention to
reflect more closely current U.S. treaty policy. For example, the proposed Protocol
extends the United States' ability to tax former citizens and long-term residents to
conform with 1996 legislative changes to the Internal Revenue Code. The
proposed Protocol also defines the term "real property" in a manner consistent with
the definition provided in Treas. f;Zeg. § 1.897-1 (b) and our income tax treaties. The
proposed Protocol adds a rule that allows source state taxation of stock in real
property holding companies.
Each state will notify the other when it has completed the necessary steps to bring
the proposed estate tax Protocol into force. The Protocol will enter into force upon
the receipt of the later of those two notices. Although the proposed Protocol
generally will be effective with respect to gifts made and deaths occurring after the
exchange of instruments of ratification, the relief provided with respect to surviving
non-citizen spouses and the pro rata unified credit will be effective with respect to
gifts made and deaths occurring after November 10, 1988 (the effective date of the
1988 legislative changes). Claims for refund asserting the benefits of the proposed
Protocol that otherwise would be barred by the statute of limitations must be made
within one year of entry of the Protocol, however, and all claims for retroactive relief
are subject to the rules regarding the United States' ability to tax former citizens and
long-term residents.
The negotiators believed that retrospective relief was not inappropriate, given the
fact that the 1988 legislative changes were the impetus for negotiation of the
proposed Protocol and negotiations commenced soon after the enactment of those
changes. The United States agreed to similar retrospective relief in the 1995 U.S.Canada income tax treaty protocol and the 1998 U.S.-Germany estate tax treaty
protocol.
Bangladesh
The United States does not currently have an income tax treaty with Bangladesh.
The proposed income tax treaty with Bangladesh was signed in Dhaka September
26,2004.
The proposed treaty generally follows the pattern of the U.S. model treaty, while
incorporating some provisions found in other U.S. treaties with developing
countries. The maximum rates of source-country withholding taxes on investment
income provided in the proposed treaty are generally equal to or lower than the
maximum rates provided in other U.S. treaties with developing countries (and some
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developed countries).
The proposed treaty generally provides a maximum source-country withholding tax
rate on dividends of 15 percent. Direct investment dividends are subject to taxation
at source at a 10-percent rate. The proposed treaty requires a 10-percent
ownership threshold for application of the 1O-percent tax rate.
The proposed treaty provides for a 10 percent rate of tax at source on most interest
payments. However, interest received by any financial institution (including an
insurance company) and interest earned on trade credits are subject to a 5 percent
rate of tax at source. In addition, interest derived by the Governments of the
Contracting States and instrumentalities of those Governments, as well as debt
guaranteed by government agencies (e.g., the U.S. Export-Import Bank) is exempt
from tax at source.
The proposed treaty provides that royalties are subject to a 10 percent tax at
source. Consistent with the U.S. and OECD Model treaties, income from the rental
of tangible personal property is not treated as a royalty, but as business profits, thus
eliminating any withholding tax at source.
The standard U.S. anti-abuse rules are provided for certain classes of investment
income. For example, dividends paid by non-taxable conduit entities, such as U.S.
RICs and REITs, are subject to special rules to prevent the use of these entities to
transform wharis otherwise high-taxed income into lower-taxed income.
The proposed treaty follows the standard rules for taxation by the source country of
the business profits of a resident of the other country. The source country's right to
tax such profits is generally limited to cases in which the profits are attributable to a
permanent establishment located in that country. The proposed treaty, however,
defines a "permanent establishment" in a way that grants rights to tax business
profits that are somewhat broader than those found in the U.S. and OECD Models.
However, these rules are quite similar to rules found in our tax treaties with other
developing countries.
In the case of shipping and aircraft, the proposed Convention, consistent with
current U.S. treaty policy, provides for exclusive residence-country taxation of
profits from the international operation of ships or aircraft. Like the U.S. Model, only
the country of residence may tax profits from the rental or maintenance of
containers used in international traffic.
The proposed treaty provides rules that are similar to the U.S. Model with respect to
the taxation of income from the performance of personal services, However, like
some other U.S. treaties with developing countries, the proposed treaty grants a
taxing right to the host country with respect to some classes of personal services
income that is broader in a few respects than in the OECD or U.S. Model.
The proposed treaty contains a comprehensive limitation on benefits article, which
provides detailed rules designed to deny "treaty shoppers" the benefits of the
treaty. These rules are comparable to the rules contained in the U.S. model and
recent U.S. treaties.
The proposed treaty also sets out the manner in which each country will relieve
double taxation. Both the United States and Bangladesh will provide such relief
through the foreign tax credit mechanism. The proposed Convention does not
include a "tax sparing credit", since such credits are contrary to U.S. treaty policy.
At Bangladesh's request, the exchange of notes provides that, if the United States
alters its policy regarding the granting of tax sparing credits or provides for such
credits in another treaty, negotiations will be reopened with a view to concluding a
protocol that would offer similar benefits to Bangladesh.
The proposed treaty provides for non-discriminatory treatment (i.e., national
treatment) by one country to residents and nationals of the other. Also included in
the proposed treaty are rules necessary for administering the treaty, including rules
for the resolution of disputes under the treaty.
The proposed treaty includes an exchange of information provision that generally
follows the U.S. model. Under these provisions, Bangladesh will provide U.S. tax
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officials such information as is relevant to carry out the provisions of the treaty and
the domestic tax laws of the United States.
The proposed Convention is subject to ratification. It will enter into force upon the
exchange of instruments of ratification. It will have effect, with respect to taxes
withheld at the source, for amounts paid or credited on or after the first day of the
second month following entry into force. In other cases the Convention will have
effect with respect to taxable periods beginning on or after the first day of January
following the date on which the Convention enters into force.
Treaty Program Priorities
We continue to maintain a very active calendar of tax treaty negotiations. We
currently are in ongoing negotiations with Canada, Chile, Germany, Hungary,
Iceland, Korea and Norway. In addition, we are beginning negotiations with
Bulgaria. We also have substantially completed work on agreements with Denmark
and Finland and look forward to their conclusion.
A key continuing priority is updating the few remaining U.S. tax treaties that provide
for low withholding tax rates but do not include the limitation on benefits provisions
needed to protect against the possibility of treaty shopping. We have also had
informal exploratory discussions with several countries in Asia; we hope that those
discussions will lead to productive negotiations later in 2006 or in 2007.
Work on the U.S. Model was well advanced last year but was delayed due to other
commitments. However, we expect to forward a draft text to the staffs of the
Senate Foreign Relations Committee and Joint Committee on Taxation within the
next month. We look forward to working with them on this project.
Conclusion
Let me conclude by again thanking the Committee for its continuing interest in the
tax treaty program, and the Members and staff for devoting time and attention to the
review of these new agreements. We greatly appreciate the assistance and
cooperation of the staffs of this Committee and of the Joint Committee on Taxation
in the tax treaty process.
We urge the Committee to take prompt and favorable action on the agreements
before you today.
REPORTS
• Technical Explanation: Protocol witt, Sweden
• Technical Explanation Income Tax Protocol with France
• Technical Explanation: Estate Tax Protocol with France
• Technical Explanation: Treaty with Bangladesh
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DEPARTMENT OF THE TREASURY
TECHNICAL EXPLANATION OF THE PROTOCOL
SIGNED AT WASHINGTON ON SEPTEMBER 30, 2005
AMENDING THE CONVENTION BETWEEN
THE UNITED STATES OF AMERICA
AND
THE GOVERNMENT OF SWEDEN
FOR THE AVOIDANCE OF DOUBLE TAXATION AND
THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME,
SIGNED AT WASHINGTON ON SEPTEMBER 1, 1994
This is a technical explanation of the Protocol signed at Washington on
September 30, 2005 (the "Protocol"), amending the Convention between the United
States of America and the Government of Sweden for the avoidance of double taxation
and the prevention of fiscal evasion with respect to taxes on income, signed at
Washington on September 1, 1994 (the "Convention").
Negotiations took into account the U.S. Department of the Treasury's current tax
treaty policy and Treasury's Model Income Tax Convention, published on September 20,
1996 (the "u.S. Model"). Negotiations also took into account the Model Tax Convention
on Income and on Capital, published by the Organization for Economic Cooperation and
Development (the "OECD Model"), and recent tax treaties concluded by both countries.
This Technical Explanation is an official guide to the Protocol. It explains
policies behind particular provisions, as well as understandings reached during the
negotiations with respect to the interpretation and application of the Protocol. This
technical explanation is not intended to provide a complete guide to the Convention as
amended by the Protocol. To the extent that the Convention has not been amended by the
Protocol, the Technical Explanation of the Convention remains the official explanation.
References in this technical explanation to "he" or "his" should be read to mean "he or
she" or "his or her."
Article I
Article I of the Protocol modifies Article 1 (Personal Scope) of the Convention
with respect to the last sentence of paragraph 4, which permits the United States to tax as
U.S. citizens former citizens whose loss of citizenship had as one of its principal purposes
the avoidance of tax. To reflect 1996 and 2004 amendments to U.S. tax law in this area,
the Protocol provides that, notwithstanding other provisions of the Convention, a former
citizen or long-term resident of the United States may, for the period often years
following the loss of such status, be taxed in accordance with the laws of the United
States.
Section 877 of the Internal Revenue Code of 1986 (the "Code") generally applies
to a former citizen or long-term resident of the United States who relinquishes citizenship
or terminates long-term residency if either of the following criteria exceed established
thresholds: (a) the average annual net income tax of such individual for the period of 5
taxable years ending before the date of the loss of status, or (b) the net worth of such
individual as of the date of the loss of status. The thresholds are adjusted annually for
inflation. The United States defines "long-term resident" as an individual (other than a
U.S. citizen) who is a lawful permanent resident of the United States in at least 8 of the
prior 15 taxable years. An individual is not treated as a lawful permanent resident for any
taxable year if such individual is treated as a resident of a foreign country under the
provisions of a tax treaty between the United States and the foreign country and the
individual does not waive the benefits of such treaty applicable to residents of the foreign
country.
Paragraph b) of Article I of the Protocol also addresses special issues presented by
fiscally transparent entities such as partnerships and certain trusts and estates. In general,
paragraph b) of Article I relates to entities that are not subject to tax at the entity level, as
distinct from entities that are subject to tax, but with respect to which tax may be relieved
under an integrated system. This paragraph applies to any resident of a Contracting State
who is entitled to income derived through an entity that is treated as fiscally transparent
under the laws of either Contracting State. Entities falling under this description in the
United States include partnerships, common investment trusts under section 584 and
grantor trusts. This paragraph also applies to U.S. limited liability companies ("LLCs")
that are treated as partnerships for U.S. tax purposes.
Under paragraph b) of Article I of the Protocol, an item of income, profit or gain
derived by such a fiscally transparent entity will be considered to be derived by a resident
of a Contracting State if a resident is treated under the taxation laws of that State as
deriving the item of income. For example, if a Swedish company pays interest to an
entity that is treated as fiscally transparent for U.S. tax purposes, the interest will be
considered derived by a resident of the U.S. only to the extent that the taxation laws of
the United States treats one or more U.S. residents (whose status as U.S. residents is
determined, for this purpose, under U.S. tax law) as deriving the interest for U.S. tax
purposes. In the case of a partnership, the persons who are, under U.S. tax laws, treated
as partners of the entity would normally be the persons whom the U.S. tax laws would
treat as deriving the interest income through the partnership. Also, it follows that persons
whom the United States treats as partners but who are not U.S. residents for U.S. tax
purposes may not claim a benefit for the interest paid to the entity under the Convention,
because they are not residents of the United States for purposes of claiming this treaty
benefit. (If, however, the country in which they are treated as resident for tax purposes,
as determined under the laws of that country, has an income tax convention with Sweden,
they may be entitled to claim a benefit under that convention.) In contrast, if, for
example, an entity is organized under U.S. laws and is classified as a corporation for U.S.
tax purposes, interest paid by a Swedish company to the U.S. entity will be considered
derived by a resident of the United States since the U.S. corporation is treated under U.S.
taxation laws as a resident of the United States and as deriving the income.
2
The same result obtains even if the entity were viewed differently under the tax
laws of the country of source (e.g, as not fiscally transparent in Sweden in the first
example above where the entity is treated as a partnership for u.S. tax purposes).
Similarly, the characterization of the entity in a third country is also irrelevant, even if the
entity is organized in that third country. The results follow regardless of whether the
entity is disregarded as a separate entity under the laws of one jurisdiction but not the
other, such as a single owner entity that is viewed as a branch for u.S. tax purposes and
as a corporation for Swedish tax purposes. These results also obtain regardless of where
the entity is organized (i.e., in the United States, in Sweden, or, as noted above, in a third
country).
For example, income from U.S. sources received by an entity organized under the
laws of the United States, which is treated for Swedish tax purposes as a corporation and
is owned by a Swedish shareholder who is a Swedish resident for Swedish tax purposes,
is not considered derived by the shareholder of that corporation even if, under the tax
laws of the United States, the entity is treated as fiscally transparent. Rather, for purposes
of the treaty, the income is treated as derived by the U.S. entity.
Article II
Article II of the Protocol modifies Article 2 (Taxes Covered) of the Convention
by replacing subparagraph b) of paragraph 1, which identifies the Swedish taxes to which
the Convention applies. Subparagraph b) of paragraph 1 applies to the following Swedish
taxes: (1) the national income tax, (2) the withholding tax on dividends, (3) the income
tax on non-residents, (4) the income tax on non-resident artistes and athletes, (5) the
national capital tax (for purposes of paragraph 3 of Article 2), (6) the excise tax on
insurance premiums paid to foreign insurers, and (7) the municipal income tax.
Article III
Article III of the Protocol replaces paragraph I of Article 4 (Residence) of the
Convention. The term "resident of a Contracting State" is defined in subparagraph a) of
paragraph I. In general, this definition incorporates the definitions of residence in U.S.
and Swedish law by referring to a resident as a person who, under the laws of a
Contracting State, is subject to tax there by reason of his domicile, residence, citizenship,
place of management, place of incorporation or any other similar criterion and also
includes that State and any political subdivision or local authority thereof. Thus,
residents of the United States include aliens who are considered u.S. residents under
Code section 770 I (b). Subparagraphs b) and c) address special cases that may arise in the
context of Article 4.
Certain entities that are nominally subject to tax but that in practice are rarely
required to pay tax also would generally be treated as residents and therefore accorded
treaty benefits. For example, a U.S. Regulated Investment Company (RIC), U.S. Real
Estate Investment Trust (REIT) and u.S. Real Estate Mortgage Investment Conduit are
all residents of the United States for purposes of the treaty. Although the income earned
3
by these entities normally is not subject to U.S. tax in the hands of the entity, they are
taxable to the extent that they do not currently distribute their profits, and therefore may
be regarded as "liable to tax." They also must satisfy a number of requirements under the
Code in order to be entitled to special tax treatment.
A person who is liable to tax in a Contracting State only in respect of income
from sources within that State or capital situated therein or of profits attributable to a
permanent establishment in that State will not be treated as a resident of that Contracting
State for purposes of the Convention. Thus, a consular official of Sweden who is posted
in the United States, who may be subject to U.S. tax on U.S. source investment income,
but is not taxable in the United States on non-U.S. source income, would not be
considered a resident of the United States for purposes of the Convention. (See Code
section 7701(b)(5)(B)). Similarly, an enterprise of Sweden with a permanent
establishment in the United States is not, by virtue of that permanent establishment, a
resident of the United States. The enterprise generally is subject to U.S. tax only with
respect to its income that is attributable to the U.S. permanent establishment, not with
respect to its worldwide income, as it would be if it were a U.S. resident.
Subparagraph b) of paragraph I contains an exception to the general rule of
paragraph I a) that residence under internal law also determines residence under the
Convention. The exception applies with respect to a u.S. citizen or alien lawfully
admitted for permanent residence (i.e., a "green card" holder). Under paragraph 1 a), a
person is considered a resident of the United States for purposes of the Convention ifhe
is liable to tax in the United States by reason of citizenship. In addition, aliens admitted to
the United States for permanent residence ("green card" holders) qualify as U.S. residents
under the first sentence of paragraph I because they are taxed by the United States as
residents, regardless of where they physically reside.
Under the exception of paragraph 1 b), a U.S. citizen or green card holder will be
treated as a resident of the United States for purposes of the Convention, and, thereby
entitled to treaty benefits, only if he has a substantial presence (see section 7701 (b )(3)),
permanent home or habitual abode in the United States. This rule requires that the U.S.
citizen or green card holder have a reasonably strong economic nexus with the United
States. Ifsuch a person is a resident of both the United States and Sweden, whether or
not he is to be treated as a resident of the United States for purposes of the Convention is
determined by the tie-breaker rules of paragraph 2.
Thus, for example, an individual resident of Mexico who is a U.S. citizen by
birth, or who is a Mexican citizen and holds a U.S. green card, but who, in either case,
has never lived in the United States, would not be entitled to benefits under the
Convention. However, a U.S. citizen who is transferred to Mexico for two years would
be entitled to benefits under the Convention ifhe maintains a permanent home or habitual
abode in the United States and is not a resident of Mexico for purposes of the SwedenMexico tax treaty.
The fact that a U.S. citizen who does not have close ties to the United States may
not be treated as a U.S. resident under the Convention does not alter the application of the
4
saving clause of paragraph 4 of Article I (Personal Scope) to that citizen. For example, a
U.S. citizen who pursuant to the "citizen/green card holder" rule is not considered to be a
resident of the United States still is taxable on his worldwide income under the generally
applicable rules of the Code.
Subparagraph (c) of paragraph I of Article 4 of the Convention provides that
certain tax-exempt entities such as pension funds and charitable organizations will be
regarded as residents of a Contracting State regardless of whether they are generally
liable to income tax in the State where they are established. Subparagraph (c) applies to
legal persons organized under the laws of a Contracting State and established and
maintained in that State: to provide pensions or other similar benefits pursuant to a plan;
or exclusively for religious, charitable, scientific, artistic, cultural, or educational
purposes and that is a resident ofa Contracting State. Thus, an exempt section 501 (c)
organization (such as a U.S. charity) that is generally exempt from tax under U.S. law is a
resident of the United States for all purposes of the Convention.
Article IV
Article IV of the Protocol replaces Article 10 (Dividends) of the Convention.
Article 10 provides rules for the taxation of dividends paid by a company that is a
resident of one Contracting State to a beneficial owner that is a resident of the other
Contracting State. The Article provides for full residence country taxation of such
dividends and a limited source-State right to tax.
Paragraph 1
The right of a shareholder's country of residence to tax dividends arising in the
source country is preserved by paragraph 1, which permits a Contracting State to tax its
residents on dividends paid to them by a company that is a resident of the other
Contracting State.
Paragraph 2
The State of source also may tax dividends beneficially owned by a resident of the
other State, subject to the limitations of paragraphs 2 and 3. Paragraph 2 generally limits
the tax in the State of source on the dividend paid by a company resident in that State to
15 percent of the gross amount of the dividend. If, however, the beneficial owner of the
dividend is a company that is a resident of the other State and that directly owns shares
representing at least 10 percent of the voting power of the company paying the dividend,
then the withholding tax in the State of source is limited to 5 percent of the gross amount
of the dividend. Shares are considered voting shares if they provide the power to elect,
appoint or replace any person vested with the powers ordinarily exercised by the board of
directors ofa U.S. corporation.
The benefits of paragraph 2 may be granted at the time of payment by means of
reduced withholding at source. It also is consistent with the paragraph for tax to be
5
withheld at the time of payment at full statutory rates, and the treaty benefit to be granted
by means of a subsequent refund so long as refund procedures are applied in a reasonable
manner.
The term "beneficial owner" is not defined in the Convention, and is, therefore,
defined as under the internal law of the country imposing tax (i.e., the source country).
The beneficial owner of the dividend for purposes of Article lOis the person to which the
dividend income is attributable for tax purposes under the laws of the source State. Thus,
if a dividend paid by a corporation that is a resident of one of the States (as determined
under Article 4 (Residence)) is received by a nominee or agent that is a resident of the
other State on behalf of a person that is not a resident of that other State, the dividend is
not entitled to the benefits of this Article. However, a dividend received by a nominee on
behalf of a resident of that other State would be entitled to benefits. These interpretations
are confirmed by paragraph 12 of the Commentary to Article 10 of the OECD Model. See
also paragraph 24 of the Commentary to Article I of the OECD Model.
Companies holding shares through fiscally transparent entities such as
partnerships are considered for purposes of this paragraph to hold their proportionate
interest in the shares held by the intermediate entity. As a result, companies holding
shares through such entities may be able to claim the benefits of subparagraph (a) under
certain circumstances. The lower rate applies when the company's proportionate share of
the shares held by the intermediate entity meets the 10 percent threshold. Whether this
ownership threshold is satisfied may be difficult to determine and often will require an
analysis of the partnership or trust agreement.
The determination of whether the ownership threshold for subparagraph 2(a) is
met for purposes of the 5 percent maximum rate of withholding tax is made on the date
on which entitlement to the dividend is determined. Thus, in the case of a dividend from
a U.S. company, the determination of whether the ownership threshold is met generally
would be made on the dividend record date.
Paragraph 3
Paragraph 3 provides exclusive residence-country taxation (i.e., an elimination of
withholding tax) with respect to certain dividends distributed by a company that is a
resident of one Contracting State to a resident of the other Contracting State. As
described further below, this elimination of withholding tax is available with respect to
certain inter-company dividends and with respect to tax-exempt pension funds.
Subparagraph (a) of paragraph 3 provides for the elimination of withholding tax
on dividends beneficially owned by a company that has owned 80 percent or more of the
voting power of the company paying the dividend for the 12-month period ending on the
date entitlement to the dividend is determined. The determination of whether the
beneficial owner of the dividends owns at least 80 percent of the voting power of the
paying company is made by taking into account stock owned both directly and stock
owned indirectly through one or more residents of either Contracting State.
6
Eligibility for the elimination of withholding tax provided by subparagraph (a) is
subject to additional restrictions based on, but supplementing, the rules of Article 17
(Limitation on Benefits). Accordingly, a company that meets the holding requirements
described above will qualify for the benefits of paragraph 3 only if it also: (1) meets the
"publicly traded" test of subparagraph 2( c) of Article 17 (Limitation of Benefits), (2)
meets the "ownership base erosion" and "active trade or business" test described in
subparagraph 2(e) and subparagraph 4 of Article 17 (Limitation of Benefits), (3) meets
the "derivative benefits" test of paragraph 3 of Article 17 (Limitation of Benefits), or (4)
is granted the benefits of subparagraph 3(a) of Article 10 by the competent authority of
the source State pursuant to paragraph 6 of Article 17 (Limitation on Benefits).
These restrictions are necessary because of the increased pressure on the
Limitation on Benefits tests resulting from the fact that the United States has relatively
few treaties that provide for such elimination of withholding tax on inter-company
dividends. The additional restrictions are intended to prevent companies from reorganizing in order to become eligible for the elimination of withholding tax in
circumstances where the Limitation on Benefits provision does not provide sufficient
protection against treaty-shopping.
For example, assume that ThirdCo is a company resident in a third country that
does not have a tax treaty with the United States providing for the elimination of
withholding tax on inter-company dividends. ThirdCo owns directly 100 percent ofthe
issued and outstanding voting stock of US Co, a U.S. company, and ofSCo, a Swedish
company. SCo is a substantial company that manufactures widgets; USCo distributes
those widgets in the United States. IfThirdCo contributes to SCo all the stock of US Co,
dividends paid by USCo to SCo would qualify for treaty benefits under the active trade or
business test of paragraph 4 of Article 17. However, allowing ThirdCo to qualify for the
elimination of withholding tax, which is not available to it under the third state's treaty
with the United States (if any), would encourage treaty-shopping.
In order to prevent this type of treaty-shopping, paragraph 3 requires SCo to meet
the ownership-base erosion requirements of subparagraph 2( e) of Article 17 in addition to
the active trade or business test of paragraph 4 of Article 17. Thus, SCo would not
qualify for the exemption from withholding tax unless (i) on at least half the days of the
taxable year, at least 50 percent of each class of its shares was owned by persons that are
residents of Sweden and eligible for treaty benefits under certain specified tests and (ii)
less than 50 percent ofSCo's gross income is paid in deductible payments to persons that
are not residents of either Contracting State. Because SCo is wholly owned by a third
country resident, SCo could not qualify for the elimination of withholding tax on
dividends from USCo under the ownership-base erosion test and the active trade or
business test. Consequently, SCo would need to qualify under another test or obtain
discretionary relief from the competent authority under Article 17(6). For purpose of
Article 3(a)(ii), it is not sufficient for a company to qualify for treaty benefits generally
under the active trade or business test or the ownership-base erosion test unless it
qualifies for treaty benefits under both.
7
Alternatively, companies that are publicly traded or subsidiaries of publiclytraded companies will generally qualify for the elimination of withholding tax. Thus, a
company that is a resident of Sweden and that meets the requirements of Article 17(2)(i)
or (ii) will be entitled to the elimination of withholding tax, subject to the 12-month
holding period requirement of Article IO(3)(a).
In addition, under Article 1O(3)(a)(iii), a company that is a resident of a
Contracting State may also qualify for the elimination of withholding tax on dividends if
it satisfies the derivative benefits test of paragraph 3 of Article 17. Thus, a Swedish
company that owns all of the stock of a u.S. corporation may qualify for the elimination
of withholding tax ifit is wholly-owned, for example, by a U.K., Dutch, or a Mexican
publicly-traded company and the other requirements of the derivative benefits test are
met. At this time, ownership by companies that are residents of other European Union,
European Economic Area or North American Free Trade Agreement countries or that are
resident in Switzerland would not qualify the Swedish company for benefits under this
provision, as the United States does not have treaties that eliminate the withholding tax
on inter-company dividends with any other of those countries. If the United States were
to negotiate such treaties with more of those countries, residents of those countries could
then qualify as equivalent beneficiaries for purposes of this provision.
The derivative benefits test may also provide benefits to U.s. companies receiving
dividends from Swedish subsidiaries, because of the effect of the Parent-Subsidiary
Directive in the European Union. Under that directive, inter-company dividends paid
within the European Union are free of withholding tax. Under subparagraph (h) of
paragraph 7 of Article 17, that directive will also be taken into account in determining
whether the owner of a U.S. company receiving dividends from a Swedish company is an
"equivalent beneficiary." Thus, a company that is a resident of a member state of the
European Union will, by definition, meet the requirements regarding equivalent benefits
with respect to any dividends received by its U.S. subsidiary from a Swedish company.
For example, assume USCo is a wholly-owned subsidiary ofICo, an Italian publiclytraded company. USCo owns all of the shares ofSCo, a Swedish company. IfSCo were
to pay dividends directly to ICo, those dividends would be exempt from withholding tax
in Sweden by reason of the Parent-Subsidiary Directive, even though the tax treaty
between Italy and Sweden otherwise would allow Sweden to impose a withholding tax at
the rate of 5 percent. If ICo meets the other conditions of subparagraph 7(g) of Article
17, it will be treated as an equivalent beneficiary by reason of subparagraph 7(h) of that
article.
A company also may qualify for the elimination of withholding tax pursuant to
Article IO(3)(a)(iii) ifit is owned by seven or fewer U.S. or Swedish residents who
qualify as an "equivalent beneficiary" and meet the other requirements of the derivative
benefits provision. This rule may apply, for example, to certain Swedish corporate joint
venture vehicles that are closely-held by a few Swedish resident individuals.
8
Article 10(3) contains a specific rule of application intended to ensure that certain
joint ventures, not just wholly-owned subsidiaries, can qualify for benefits. For example,
assume that the United States were to enter into a treaty with Country X, a member of the
European Union, that includes a provision identical to Article 10(3). USCo is 100
percent owned by SCo, a Swedish company, which in turn is owned 49 percent by PCo, a
Swedish publicly-traded company, and 51 percent by XCo, a publicly-traded company
that is resident in Country X. In the absence of a special rule for interpreting the
derivative benefits provision, each of the shareholders would be treated as owning only
their proportionate share of the shares held by SCo. If that rule were applied in this
situation, neither shareholder would be an equivalent beneficiary, because neither would
meet the 80 percent ownership test with respect to USCo. However, since both PCo and
XCo are residents of countries that have treaties with the United States that provide for
elimination of withholding tax on inter-company dividends, it is appropriate to provide
benefits to SCo in this case.
Consequently, Article 10(3) provides that, when determining whether a person is
an equivalent beneficiary, each of the shareholders is treated as owning shares with the
same percentage of voting power as the shares held by SCo for purposes of determining
whether it would be entitled to an equivalent rate of withholding tax. This rule is
necessary because of the high ownership threshold for qualification for the elimination of
withholding tax on inter-company dividends.
If a company does not qualify for the elimination of withholding tax under any of
the foregoing objective tests, it may request a determination from the relevant competent
authority pursuant to paragraph 6 of Article 17. Benefits will be granted with respect to
an item of income if the competent authority of the Contracting State in which the
income arises determines that the establishment, acquisition or maintenance of such
resident and the conduct of its operations did not have as one of its principal purposes the
obtaining of benefits under the Convention.
In making its determination under Article 17(6) with respect to income arising in
the United States, the U.S. competent authority will consider the obligations imposed
upon Sweden by its membership in the European Union. In particular, the United States
will have regard for any legal requirements for the facilitation of the free movement of
capital among member states of the European Union. The competent authority will also
consider the differing internal tax systems, tax incentive regimes and tax treaty practices
of the relevant member states.
For example, in the case above where SCo was denied the zero rate of
withholding tax because it was wholly owned by ThirdCo, the competent authority would
consider whether ThirdCo was a resident ofa member state of the European Union or
European Economic Area. If it were, that would be a factor in favor of a determination
that SCo is entitled to the benefits of the zero rate of withholding tax on dividends.
However, that positive factor could be outweighed by negative factors. One negative
factor could be a determination by the U.S. competent authority that ThirdCo benefited
from a tax incentive regime that eliminated any domestic taxation. The competent
9
authority would also consider facts that might indicate that ThirdCo acquired SCo not
"under ordinary business conditions" but instead to interpose SCo between ThirdCo and
USCo, creating a Sweden-U.S. "bridge." These might include the fact that existing U.S.
operations were restructured in an attempt to benefit from the elimination of withholding
tax on dividends; or the fact that ThirdCo was owned by residents of a country that is not
a member state of the European Communities. Finally, another significant negative
factor would be if the U.S. competent authority faced difficulties in learning the identity
of Third Co's owners, such as an uncooperative taxpayer or legal barriers such as
"economic espionage" or other limitations on the effective exchange of information in the
country of which ThirdCo is a resident.
Subparagraph (b) of paragraph 3 of Article 10 of the Convention provides for
exclusive taxation by the Contracting State of residence (i.e., the elimination of sourcecountry withholding tax) for dividends beneficially owned by a pension fund (as defined
in paragraph 11 of this Article) provided that such dividends are not derived from the
carrying on of a business, directly or indirectly, by the pension fund or through an
associated enterprise and such fund does not sell or make a contract to sell the holdings
from which such dividend is derived within two months of the date the pension fund
acquired the holding.
Paragraph 4
Paragraph 4 provides rules for the treatment of dividends paid by RIC or a REIT
that are consistent with U.S. treaty policy.
The first sentence of subparagraph 4(a) provides that dividends paid by a RIC or
REIT are not eligible for the 5 percent rate of withholding tax of subparagraph 2(a) or the
elimination of source-country withholding tax of subparagraph 3(a).
The second sentence of subparagraph 4(a) provides that the 15 percent maximum
rate of withholding tax of subparagraph 2(b) applies to dividends paid by RICs and that
the elimination of source-country withholding tax of subparagraph 3(b) applies to
dividends paid by RICs and beneficially owned by a pension fund.
The third sentence of subparagraph 4(a) provides that the 15 percent rate of
withholding tax also applies to dividends paid by a REIT and that the elimination of
source-country withholding tax of subparagraph 3(b) applies to dividends paid by REITs
and beneficially owned by a pension fund, provided that one of the three following
conditions is met. First, the beneficial owner of the dividend is an individual or a pension
fund, in either case holding an interest of not more than 10 percent in the REIT. Second,
the dividend is paid with respect to a class of stock that is publicly traded and the
beneficial owner of the dividend is a person holding an interest of not more than 5
percent of any class of the REIT's shares. Third, the beneficial owner of the dividend
holds an interest in the REIT of not more than 10 percent and the REIT is "diversified."
A REIT is diversified if the gross value of no single interest in real property held by the
REIT exceeds 10 percent of the gross val ue of the REIT's total interest in real property.
10
Foreclosure property is not considered an interest in real property, and a REIT holding a
partnership interest is treated as owning its proportionate share of any interest in real
property held by the partnership.
The restrictions set out above are intended to prevent the use of these entities to
gain inappropriate U.S. tax benefits. For example, a company resident in Sweden that
wishes to hold a diversified portfolio of U.S. corporate shares could hold the portfolio
directly and would bear a U.S. withholding tax of 15 percent on all of the dividends that
it receives. Alternatively, it could hold the same diversified portfolio by purchasing 10
percent or more of the interests in a RIC. If the RIC is a pure conduit, there may be no
U.S. tax cost to interposing the RIC in the chain of ownership. Absent the special rule in
paragraph 4, such use of the RIC could transform portfolio dividends, taxable in the
United States under the Convention at a 15 percent maximum rate of withholding tax,
into direct investment dividends taxable at a 5 percent maximum rate of withholding tax
or eligible for the elimination of source-country withholding tax.
Similarly, a resident of Sweden directly holding U.S. real property would pay
U.S. tax upon the sale of the property either at a 30 percent rate of withholding tax on the
gross income or at graduated rates on the net income. As in the preceding example, by
placing the real property in a REIT, the investor could, absent a special rule, transform
income from the sale of real estate into dividend income from the REIT, taxable at the
rates provided in Article 10, significantly reducing the U.S. tax that otherwise would be
imposed. Paragraph 4 prevents this result and thereby avoids a disparity between the
taxation of direct real estate investments and real estate investments made through REIT
conduits. In the cases in which paragraph 4 allows a dividend from a REIT to be eligible
for the 15 percent rate of withholding tax, the holding in the REIT is not considered the
equivalent of a direct holding in the underlying real property.
Paragraph 5
Paragraph 5 provides a broad and flexible definition of the term "dividends." The
definition is intended to cover all arrangements that yield a return on an equity
investment in a corporation as determ ined under the tax law of the state of source,
including types of arrangements that might be developed in the future.
The term dividends includes income from shares, or other corporate rights that are
not treated as debt under the law of the source State, that participate in the profits of the
company. The term also includes income that is subjected to the same tax treatment as
income from shares by the law of the State of residence of the dividend paying company.
Thus, a constructive dividend that results from a non-arm's length transaction between a
corporation and a related party is a dividend under paragraph 5.
In the case of the United States, the term dividends includes amounts treated as a
dividend under U.S. law upon the sale or redemption of shares or upon a transfer of
shares in a reorganization. See, e.g., Rev. Rul. 92-85, 1992-2 C.B. 69 (sale of foreign
subsidiary's stock to U.S. sister company is a deemed dividend to extent of subsidiary's
11
and sister's earnings and profits). Further, a distribution from a U.S. publicly traded
limited partnership, which is taxed as a corporation under U.S. law, is a dividend for
purposes of Article 10. However, a distribution by a limited liability company is not
characterized by the United States as a dividend and, therefore, is not a dividend for
purposes of Article 10, provided the limited liability company is not taxable as a
corporation under U.S. law.
Finally, a payment denominated as interest that is made by a thinly capitalized
corporation may be treated as a dividend to the extent that the debt is recharacterized as
equity under the laws of the source State. In the case, of the United States, these rules
include section 163m of the Code.
The term dividends also includes income from arrangements, including debt
obligations, carrying the right to participate in profits. In the case of the United States,
this includes contingent interest that is not portfolio interest.
Paragraph 6
Paragraph 6 provides that the general source country limitations under paragraph
2 and 3 on dividends do not apply if the beneficial owner of the dividends is a permanent
establishment situated in the source country, or performs in that other State independent
personal services from a fixed base situated therein, and the dividends are attributable to
such permanent establish or fixed base. In such case, the rules of Article 7 (Business
Profits) or Article 14 (Independent Personal Service) shall apply, as the case may be.
Accordingly, such dividends will be taxed on a net basis using the rates and rules of
taxation generally applicable to residents of the Contracting State in which the permanent
establishment or fixed base is located, as modified by the Convention. An example of
dividends paid with respect to the business property of a permanent establishment would
be dividends derived by a dealer in stock or securities from stock or securities that the
dealer held for sale to customers.
Paragraph 7
The right of a Contracting State to tax dividends paid by a company that is a
resident of the other Contracting State is restricted by paragraph 7 to cases in which the
dividends are paid to a resident of that Contracting State or are attributable to a
permanent establishment or fixed base in that Contracting State. Thus, a Contracting
State may not impose a "secondary" withholding tax on dividends paid by a nonresident
company out of earnings and profits from that Contracting State. In the case of the
United States, the secondary withholding tax was eliminated for payments made after
December 31, 2004 in the American Jobs Creation Act of 2004.
Paragraph 8
Paragraph 8 provides an exemption from U.S. excise taxes on private foundations
in the case of a rei igious, scientific, literary, educational, or charitable organization which
12
is resident in Sweden, but only if such organization has received substantially all of its
support from persons other than citizens or residents of the United States. This provision
is designed to ensure that the Nobel Foundation, a Swedish charitable organization, will
not be subject to U.S. excise taxes.
Paragraphs 9 and 10
Paragraph 9 permits a Contracting State to impose a branch profits tax on a
company resident in the other Contracting State. The tax is in addition to other taxes
permitted by the Convention. The term "company" is defined in subparagraph 1(b) of
Article 3 (General Definitions).
A Contracting State may impose a branch profits tax on a company if the
company has income attributable to a permanent establishment in that Contracting State,
derives income from real property in that Contracting State that is taxed on a net basis
under Article 6 (Income from Real Property), or realizes gains taxable in that State under
paragraph 1 of Article- 13 (Gains). In the case of the United States, the imposition of such
tax is limited, however, to the portion of the aforementioned items of income that
represents the amount of such income that is the "dividend equivalent amount." This is
consistent with the relevant rules under the U.S. branch profits tax, and the term dividend
equivalent amount is defined under U.S. law. Section 884 defines the dividend
equivalent amount as an amount for a particular year that is equivalent to the income
described above that is included in the corporation's effectively connected earnings and
profits for that year, after payment of the corporate tax under Articles 6 (Income from
Real Property), 7 (Business Profits) or 13 (Gains), reduced for any increase in the
branch's U.S. net equity during the year or increased for any reduction in its U.S. net
equity during the year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg.
section 1.884-1.
Sweden currently does not impose a branch profits tax. If Sweden were to impose
such a tax, the base is limited to the portion of the income described in subparagraph 9(a)
that is comparable to the amount that would be distributed as a dividend by a locally
incorporated subsidiary.
Paragraph 10 limits the rate of the branch profits tax allowed under paragraph 9 to
5 percent. Paragraph 10 also provides that the branch profits tax will not be imposed,
however, if certain requirements are met. In general, these requirements provide rules for
a branch that parallel the rules for when a dividend paid by a subsidiary will be subject to
exclusive residence-country taxation (i.e., the elimination of source-country withholding
tax). Accordingly, the branch profits tax may not be imposed in the case of a company
that: (l) meets the "publicly traded" test of subparagraph 2( c) of Article 17 (Limitation of
Benefits), (2) meets the "ownership base erosion" and "active trade or business" test
described subparagraph 2(e) and subparagraph 4 of Article 17, (3) meets the "derivative
benefits" test of paragraph 3 of Article 17, or (4) is granted the benefits of subparagraph
3(a) of Article 10 by the competent authority pursuant to paragraph 6 of Article 17.
13
Thus, for example, if a Swedish company would be subject to the branch profits
tax with respect to profits attributable to a U.S. branch and not reinvested in that branch,
paragraph 10 may apply to eliminate the branch profits tax if the company either met the
"publicly traded" test, met both the "ownership-base erosion" and "active trade or
business" tests, or the derivative benefits test. If, by contrast, a Swedish company did not
meet those tests, then the branch profits tax would apply at a rate of 5 percent, unless the
Swedish company is granted benefits with respect to the elimination of the branch profits
tax by the competent authority pursuant to paragraph 6 of Article 17.
Paragraph 11
Paragraph 11 defines a pension fund to mean a person (as defined in Article 3
(General Definitions» that is organized under the laws of a Contracting State who is
established and maintained in that State primarily to administer or provide pensions or
other similar remuneration, including social security payments, and is exempt from tax in
that Contracting State with respect to such activities.
Relation to Other Articles
Notwithstanding the foregoing limitations on source country taxation of
dividends, the saving clause of paragraph 4 of Article I (Personal Scope) permits the
United States to tax dividends received by its residents and citizens as ifthe Convention
had not come into effect.
The benefits of this Article are also subject to the provisions of Article 17
(Limitation on Benefits). Thus, if a resident of Sweden is the beneficial owner of
dividends paid by a U.S. company, the shareholder must qualify for treaty benefits under
at least one of the tests of Article 17 in order to receive the benefits of this Article.
Paragraph 2 of Article III of the Protocol makes a conforming change to the crossreference in paragraph 5 of Article 24 (Non-Discrimination) of the Convention.
Article V
Article V of the Protocol replaces Article 17 (Limitation on Benefits) of the
Convention.
Structure of the Article
Article 17 follows the form used in other recent U.S. income tax treaties.
Paragraph I states the general rule that a resident of a Contracting State is entitled to
benefits otherwise accorded to residents only to the extent that the resident satisfies the
requirements of the Article. Paragraph 2 lists a series of attributes of a resident of a
Contracting State, anyone of which suffices to make such entitled to all the benefits of
the Convention. Paragraph 3 provides a so-called "derivative benefits" test under which
certain categories of income may qualify for benefits. Paragraph 4 sets forth the active
14
trade or business test, under which a person not entitled to benefits under paragraph 2
may nonetheless be granted benefits with regard to certain types of income. Paragraph 5
provides special rules for so-called "triangular cases" notwithstanding the other
provisions of Article 17. Paragraph 6 provides that benefits may also be granted if the
competent authority of the State from which the benefits are claimed determines that it is
appropriate to grant benefits in that case. Paragraph 7 defines the terms used specifically
in this Article.
Even if a person satisfies the requirements of Article 17, benefits shall be granted
only if the resident of a Contracting State satisfies any other specified conditions for
claiming benefits. This means, for example, that a publicly-traded company that satisfies
the conditions of subparagraph 2(c) will be eligible for the elimination of withholding tax
on dividends at source only ifit also owns 80 percent or more of the voting power of the
paying company and satisfies the 12-month holding period requirement of subparagraph
3(a) of Article 10, and satisfies any other conditions specified in Article 10 or any other
articles of the Convention.
Paragraph 1
Paragraph 1 provides that a resident of a Contracting State will be entitled to all
the benefits of the Convention otherwise accorded to residents of a Contracting State only
to the extent provided in this Article.
The benefits otherwise accorded to residents under the Convention include all
limitations on source-based taxation, the treaty-based relief from double taxation, and the
protection afforded to residents of a Contracting State under Article 24 (NonDiscrimination). Some provisions do not require that a person be a resident in order to
enjoy the benefits ofthose provisions. Article 25 (Mutual Agreement Procedure) is not
limited to residents of the Contracting States, and Article 20 (Government Service)
applies to government employees regardless of residence. Article 17 accordingly does not
limit the availability of treaty benefits under this provisions.
Article 17 and the anti-abuse provisions of domestic law complement each other,
as Article 17 effectively determines whether an entity has a sufficient nexus to a
Contracting State to be treated as a resident for treaty purposes, while domestic antiabuse provisions (e.g., business purpose, substance-over-form, step transaction or conduit
principles) determine whether a particular transaction should be recast in accordance with
its substance. Thus, internal law principles of the source Contracting State may be
applied to identifY the beneficial owner of an item of income, and Article 17 then will be
applied to the beneficial owner to determine if that person is entitled to the benefits of the
Convention with respect to such income.
Paragraph 2
Paragraph 2 has five subparagraphs, each of which describes a category of
residents that are entitled to all benefits of the Convention. It is intended that the
15
provisions of paragraph 2 will be self-executing. Claiming benefits under paragraph 2
does not require an advance competent authority ruling or approval. The tax authorities
may, of course, on review, determine that the taxpayer has improperly interpreted the
paragraph and is not entitled to the benefits claimed.
Individuals -- Subparagraph 2(a)
Subparagraph (a) provides that individual residents of a Contracting State will be
entitled to all the benefits of the Convention. Ifsuch an individual receives income as a
nominee on behalf of a third country resident, benefits may be denied under the
applicable articles of the Convention by the requirement that the beneficial owner of the
income be a resident of a Contracting State.
Governments -- Subparagraph 2(b)
Subparagraph (b) provides that the Contracting States and any political
subdivision or local authority thereof will be entitled to all the benefits of the Convention.
Publicly-Traded Corporations -- Subparagraph 2(c)
Subparagraph (c) applies to two categories of companies: publicly traded
companies and subsidiaries of publicly traded companies. A company resident in a
Contracting State is entitled to all the benefits of the Convention under clause (i) of
subparagraph (c) if the principal class of its shares, and any disproportionate class of
shares, is regularly traded on one or more recognized stock exchanges and the company
satisfies at least one of the following additional requirements. First, the company's
principal class of shares is primarily traded on a recognized stock exchange located in a
Contracting State of which the company is a resident; or, in the case of a company
resident in Sweden, on a recognized stock exchange located within the European Union,
any other European Economic Area country or Switzerland; or, in the case of a company
resident in the United States, on a recognized stock exchange located in another state that
is a party to the North American Free Trade Agreement. Second, the company's primary
place of management and control is in its State of residence.
The term "recognized stock exchange" is defined in subparagraph (d) of
paragraph 7. It includes the NASDAQ System and any stock exchange registered with
the Securities and Exchange Commission as a national securities exchange for purposes
of the Securities Exchange Act of 1934. It also includes the Stockholm Stock Exchange,
the Nordic Growth Market, and any other exchange subject to regulation by the Swedish
Financial Supervisory Authority. The term also includes the Irish Stock Exchange and
the stock exchanges of Amsterdam, Brussels, Copenhagen, Frankfurt, Hamburg,
Helsinki, London, Madrid, Milan, Oslo, Paris, Reykjavik, Riga, Tallinn, Toronto, Vienna,
Vilnius and Zurich, and any other stock exchange agreed upon by the competent
authorities of the Contracting States.
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The term "principal class of shares" is defined in subparagraph (a) of paragraph 7
to mean the ordinary or common shares of the company representing the majority of the
aggregate voting power and value of the company. If the company does not have a class
of ordinary or common shares representing the majority of the aggregate voting power
and value of the company, then the "principal class of shares" is that class or any
combination of classes of shares that represents, in the aggregate, a majority of the voting
power and value of the company. In addition, subparagraph (c) of paragraph 7 defines the
term "shares" to include depository receipts for shares.
The term "disproportionate class of shares" is defined in subparagraph (b) of
paragraph 7. A company has a disproportionate class of shares if it has outstanding a
class of shares which is subject to terms or other arrangements that entitle the holder to a
larger portion of the company's income, profit, or gain in the other Contracting State than
that to which the holder would be entitled in the absence of such terms or arrangements.
Thus, for example, a company resident in Sweden meets the test of subparagraph (b) of
paragraph 7 if it has outstanding a class of "tracking stock" that pays dividends based
upon a formula that approximates the company's return on its assets employed in the
United States.
A company whose principal class of shares is regularly traded on a recognized
stock exchange will nevertheless not qualify for benefits under subparagraph (c) of
paragraph 2 if it has a disproportionate class of shares that is not regularly traded on a
recognized stock exchange. The following example illustrates this result.
Example. SCo is a corporation resident in Sweden. SCo has two classes of
shares: Common and Preferred. The Common shares are listed and regularly traded on
the Stockholm Stock Exchange. The Preferred shares have no voting rights and are
entitled to receive dividends equal in amount to interest payments that SCo receives from
unrelated borrowers in the United States. The Preferred shares are owned entirely by a
single investor that is a resident of a country with which the United States does not have a
tax treaty. The Common shares account for more than 50 percent of the value of SCo and
for 100 percent of the voting power. Because the owner of the Preferred shares is entitled
to receive payments corresponding to the U.S. source interest income earned by SCo, the
Preferred shares are a disproportionate class of shares. Because the Preferred shares are
not regularly traded on a recognized stock exchange, SCo will not qualify for benefits
under subparagraph (c) of paragraph 2.
A class of shares will be "regularly traded" in a taxable year, under subparagraph
(e) of paragraph 7, if the aggregate number of shares of that class traded on one or more
recognized exchanges during the twelve months ending on the day before the beginning
of that taxable year is at least six percent of the average number of shares outstanding in
that class during that twelve-month period. For this purpose, if a class of shares was not
listed on a recognized stock exchange during this twelve-month period, the class of
shares will be treated as regularly traded only if the class meets the aggregate trading
requirements for the taxable period in which the income arises. Trading on one or more
recognized stock exchanges may be aggregated for purposes of meeting the "regularly
17
traded" standard of subparagraph (e). For example, a U.S. company could satisfy the
definition of "regularly traded" through trading, in whole or in part, on a recognized stock
exchange located in Sweden or certain third countries. Authorized but unissued shares are
not considered for purposes of subparagraph (e).
A company whose principal class of shares is regularly traded on a recognized
exchange but cannot meet the primarily traded test may claim treaty benefits if its
primary place of management and control is in its country of residence. This test should
be distinguished from the "place of effective management" test which is used in the
OECD Model and by many other countries to establish residence. In some cases, the
place of effective management test has been interpreted to mean the place where the
board of directors meets. By contrast, the primary place of management and control test
looks to where day-to-day responsibility for the management of the company (and its
subsidiaries) is exercised. The company's primary place of management and control will
be located in the State in which the company is a resident only if the executive officers
and senior management employees exercise day-to-day responsibility for more of the
strategic, financial and operational policy decision making for the company (including
direct and indirect subsidiaries) in that State than in the other State or any third state, and
the staffs that support the management in making those decisions are also based in that
State.
A company resident in a Contracting State is entitled to all the benefits ofthe
Convention under clause (ii) of subparagraph (c) of paragraph 2 if five or fewer publicly
traded companies described in clause (i) are the direct or indirect owners of at least 50
percent of the aggregate vote and value of the company's shares (and at least 50 percent
of any disproportionate class of shares). If the publicly-traded companies are indirect
owners, however, each of the intermediate companies must be a resident of one of the
Contracting States. Thus, for example, a Swedish company, all the shares of which are
owned by another Swedish company, would qualify for benefits under the Convention if
the principal class of shares (and any disproportionate classes of shares) of the Swedish
parent company are regularly and primarily traded on the London stock exchange.
However, a Swedish subsidiary would not qualify for benefits under clause (ii) if the
publicly traded parent company were a resident of Ireland, for example, and not a
resident of the United States or Sweden. Furthermore, if a Swedish parent company
indirectly owned a Swedish company through a chain of subsidiaries, each such
subsidiary in the chain, as an intermediate owner, must be a resident of the United States
or Sweden for the Swedish subsidiary to meet the test in clause (ii).
Tax-Exempt Organizations and Pensions -- Subparagraph 2(d)
A tax-exempt organization other than a tax-exempt pension fund is entitled to all
the benefits of the Convention, without regard to the residence of its beneficiaries or
members. Entities qualifying under this subparagraph are those that generally are exempt
from tax in their Contracting State of residence and that are established and maintained
exclusively to fulfill religious, charitable, educational, scientific, artistic, cultural, or
public purposes.
18
A tax-exempt pension fund is entitled to all the benefits of the Convention if, as of
the close of the end of the prior taxable year, more than 50 percent of the beneficiaries,
members or participants of the tax-exempt pension are individuals resident in either
Contracting State or if the organization sponsoring the tax-exempt pension is entitled to
all the benefits of the Convention under Article 17. For purposes of this provision, the
term "beneficiaries" should be understood to refer to the persons receiving benefits from
the pension fund.
Ownership/Base Erosion
-~
Subparagraph 2(e)
Subparagraph 2(e) provides an additional method to qualify for treaty benefits
that applies to any form of legal entity that is a resident of a Contracting State. The test
provided in subparagraph (e), the so-called ownership and base erosion test, is a two-part
test. Both prongs of the test must be satisfied for the resident to be entitled to treaty
benefits under subparagraph 2( e).
The ownership prong of the test, under clause (i), requires that 50 percent or more
of each class of shares or other beneficial interests in the person is owned, directly or
indirectly, on at least half the days of the person's taxable year by persons who are
residents of the Contracting State of which that person is a resident and that are
themselves entitled to treaty benefits under certain parts of paragraph 2 -- subparagraphs
(a), (b), (d), or clause (i) of subparagraph (c).
Trusts may be entitled to benefits under this provision if they are treated as
residents under Article 4 (Residence) and they otherwise satisfy the requirements of this
subparagraph. For purposes of this subparagraph, the beneficial interests in a trust will be
considered to be owned by its beneficiaries in proportion to each beneficiary's actuarial
interest in the trust. The interest of a remainder beneficiary will be equal to 100 percent
less the aggregate percentages held by income beneficiaries. A beneficiary's interest in a
trust will not be considered to be owned by a person entitled to benefits under the other
provisions of paragraph 2 if it is not possible to determine the beneficiary's actuarial
interest. Consequently, if it is not possible to determine the actuarial interest of the
beneficiaries in a trust, the ownership test under clause i) cannot be satisfied, unless all
possible beneficiaries are persons entitled to benefits under the other subparagraphs of
paragraph 2.
The base erosion prong of clause (ii) of subparagraph (e) is satisfied with respect
to a person if less than 50 percent of the person's gross income for the taxable year is
paid or accrued to persons who are not residents of either Contracting State, in the form
of payments deductible for tax purposes in the payer's State of residence. These amounts
do not include arm's-length payments in the ordinary course of business for services or
tangible property and payments in respect of financial obligations to a bank that is not
related to the payor. To the extent they are deductible from the taxable base, trust
distributions are deductible payments. However, depreciation and amortization
deductions, which do not represent payments or accruals to other persons, are disregarded
19
for this purpose. In the case of Sweden, such amounts do not include the amount of socalled group contributions, if any, paid to a Swedish resident or permanent establishment.
Sweden taxes companies on an entity rather than consolidated group basis and therefore,
tax consolidation is not allowed. Qualifying companies may exchange group
contributions, which are deductible by the payor and taxable to the payee. Through these
contributions, tax consolidation can be effectively achieved.
Paragraph 3
Paragraph 3 sets forth a derivative benefits test that is potentially applicable to all
treaty benefits, although the test is applied to individual items of income. In general, a
derivative benefits test entitles the resident of a Contracting State to treaty benefits if the
owner of the resident would have been entitled to the same benefit had the income in
question flowed directly to that owner. To qualify under this paragraph, the company
must meet an ownership test and a base erosion test.
Subparagraph (a) sets forth the ownership test. Under this test, seven or fewer
equivalent beneficiaries must own shares representing at least 95 percent of the aggregate
voting power and value of the company and at least 50 percent of any disproportionate
class of shares. Ownership may be direct or indirect. The term "equivalent beneficiary"
is defined in subparagraph (g) of paragraph 7. This definition may be met in two
alternative ways, the first of which has two requirements.
Under the first alternative, a person may be an equivalent beneficiary because it is
entitled to equivalent benefits under a treaty between the country of source and the
country in which the person is a resident. This alternative has two requirements.
The first requirement is that the person must be a resident of a member state of the
European Union, a European Economic Area state, a party to the North American Free
Trade Agreement, or Switzerland (collectively, "qualifying States").
The second requirement of the definition of "equivalent beneficiary" is that the
person must be entitled to equivalent benefits under an applicable treaty. To satisfy the
second requirement, the person must be entitled to all the benefits of a comprehensive
treaty between the Contracting State from which benefits of the Convention are claimed
and a qualifying State under provisions that are analogous to the rules in paragraph 2 of
this Article regarding individuals, qualified governmental entities, publicly-traded
companies or entities, and tax-exempt organizations and pensions. If the treaty in
question does not have a comprehensive limitation on benefits article, this requirement
only is met if the person would be entitled to treaty benefits under the tests in paragraph 2
of this Article applicable to individuals, qualified governmental entities, publicly-traded
companies or entities, and tax-exempt organizations and pensions.
In order to satisfy the second requirement necessary to qualify as an "equivalent
beneficiary" under paragraph 7(g)(i)(8) with respect to insurance premiums, dividends,
interest, royalties or branch tax, the person must be entitled to a rate of excise,
20
withholding or branch tax that is at least as low as the excise, withholding or branch tax
rate that would apply under the Convention to such income. Thus, the rates to be
compared are: (l) the rate of tax that the source State would have imposed if a qualified
resident of the other Contracting State was the beneficial owner of the income; and (2)
the rate of tax that the source State would have imposed if the third State resident
received the income directly from the source State. For example, USCo is a wholly
owned subsidiary of SCo, a company resident in Sweden. SCo is wholly owned by ICo,
a corporation resident in Italy. Assuming SCo satisfies the requirements of paragraph 3
of Article 10 (Dividends), SCo would be eligible for the elimination of dividend
withholding tax. The dividend withholding tax rate in the treaty between the United
States and Italy is 5 percent. Thus, if ICo received the dividend directly from USCo, ICo
would have been subject to a 5 percent rate of withholding tax on the dividend. Because
ICo would not be entitled to a rate of withholding tax that is at least as low as the rate that
would apply under the Convention to such income (i.e., zero), ICo is not an equivalent
beneficiary within the meaning of paragraph 7(g)(i) of Article 17 with respect to the
elimination of withholding tax on dividends.
Subparagraph 7(h) provides a special rule to take account of the fact that
withholding taxes on many inter-company dividends, interest and royalties are exempt
within the European Union by reason of various EU directives, rather than by tax treaty.
Ifa U.S. company receives such payments from a Swedish company, and that U.S.
company is owned by a company resident in a member state of the European Union that
would have qualified for an exemption from withholding tax if it had received the income
directly, the parent company will be treated as an equivalent beneficiary. This rule is
necessary because many European Union member countries have not re-negotiated their
tax treaties to reflect the rates applicable under the directives.
The requirement that a person be entitled to "all the benefits" of a comprehensive
tax treaty eliminates those persons that qualify for benefits with respect to only certain
types of income. Accordingly, the fact that a French parent of a Swedish company is
engaged in the active conduct of a trade or business in France and therefore would be
entitled to the benefits of the U.S.-France treaty ifit received dividends directly from a
U.S. subsidiary of the Swedish company is not sufficient for purposes of this paragraph.
Further, the French company cannot be an equivalent beneficiary if it qualifies for
benefits only with respect to certain income as a result of a "derivative benefits"
provision in the U.S.-France treaty. However, it would be possible to look through the
French company to its parent company to determine whether the parent company is an
equivalent beneficiary.
The second alternative for satisfying the "equivalent beneficiary" test is available
only to residents of one of the two Contracting States. U.S. or Swedish residents who are
eligible for treaty benefits by reason of subparagraphs (a), (b), (c)(i), or (d) of paragraph 2
are equivalent beneficiaries for purposes of the relevant tests in Article 17. Thus, a
Swedish individual will be an equivalent beneficiary without regard to whether the
individual would have been entitled to receive the same benefits if it received the income
directly. A resident of a third country cannot qualify for treaty benefits under these
21
provisions by reason of those paragraphs or any other rule of the treaty, and therefore do
not qualify as equivalent beneficiaries under this alternative. Thus, a resident of a third
country can be an equivalent beneficiary only if it would have been entitled to equivalent
benefits had it received the income directly.
The second alternative was included in order to clarify that ownership by certain
residents ofa Contracting State would not disqualify a U.S. or Swedish company under
this paragraph. Thus, for example, if90 percent of a Swedish company is owned by five
companies that are resident in member states of the European Union who satisfy the
requirements of clause (i), and 10 percent of the Swedish company is owned by a U.S. or
Swedish individual, then the Swedish company still can satisfy the requirements of
subparagraph (a) of paragraph 3.
Subparagraph (b) of paragraph 3 sets forth the base erosion test. A company
meets this base erosion test if less than 50 percent of its gross income for the taxable
period is paid or accrued, directly or indirectly, to a person or persons who are not
equivalent beneficiaries in the form of payments deductible for tax purposes in
company's State of residence. These amounts do not include arm's-length payments in
the ordinary course of business for services or tangible property and payments in respect
of financial obligations to a bank that is not related to the payor. This test is the same as
the base erosion test in clause (ii) of subparagraph (e) of paragraph 2, except that
deductible payments made to equivalent beneficiaries, rather than amounts paid to
residents of a Contracting State, are not counted against a company for purposes of
determining whether the company exceeded the 50 percent limit.
As in the case of base erosion test in subparagraph (e) of paragraph 2, deductible
payments in subparagraph (b) of paragraph 3 also do not include arm's length payments
in the ordinary course of business for services or tangible property or with respect to
financial obligations to banks that are residents of either Contracting State.
Paragraph 4
Paragraph 4 sets forth a test under which a resident of a Contracting State that
does not qualify for treaty benefits under paragraph 2 may receive treaty benefits with
respect to certain items of income that are connected to an active trade or business
conducted in its State of residence.
Subparagraph (a) sets forth the general rule that a resident of a Contracting State
engaged in the active conduct of a trade or business in that State may obtain the benefits
of the Convention with respect to an item of income, profit, or gain derived in the other
Contracting State. The item of income, profit, or gain, however, must be derived in
connection with or incidental to that trade or business.
The term "trade or business" is not defined in the Convention. Pursuant to
paragraph 2 of Article 3 (General Definitions), when determining whether a resident of
Sweden is entitled to the benefits of the Convention under paragraph 4 of this Article
22
with respect to an item of income derived from sources within the United States, the
United States will ascribe to this term the meaning that it has under the law of the United
States. Accordingly, the U.S. competent authority will refer to the regulations issued
under section 367(a) for the definition of the term "trade or business." In general,
therefore, a trade or business will be considered to be a specific unified group of activities
that constitute or could constitute an independent economic enterprise carried on for
profit. Furthermore, a corporation generally will be considered to carryon a trade or
business only if the officers and employees of the corporation conduct substantial
managerial and operational activities.
The business of making or managing investments for the resident's own account
will be considered to be a trade or business only when part of banking, insurance or
securities activities conducted by a bank, an insurance company, or a registered securities
dealer. Such activities conducted by a person other than a bank, insurance company or
registered securities dealer will not be considered to be the conduct of an active trade or
business, nor would they be considered to be the conduct of an active trade or business if
conducted by a bank, insurance company or registered securities dealer but not as part of
the company's banking, insurance or dealer business.
An item of income is derived in connection with a trade or business if the incomeproducing activity in the State of source is a line of business that "forms a part of" or is
"complementary" to the trade or business conducted in the State of residence by the
income recipient.
A business activity generally will be considered to form part of a business activity
conducted in the State of source if the two activities involve the design, manufacture or
sale of the same products or type of products, or the provision of similar services. The
line of business in the State of residence may be upstream, downstream, or parallel to the
activity conducted in the State of source. Thus, the line of business may provide inputs
for a manufacturing process that occurs in the State of source, may sell the output of that
manufacturing process, or simply may sell the same sorts of products that are being sold
by the trade or business carried on in the State of source.
Example I. USCo is a corporation resident in the United States. USCo is engaged
in an active manufacturing business in the United States. USCo owns 100 percent of the
shares of SCo, a company resident in Sweden. SCo distributes USCo products in Sweden.
Because the business activities conducted by the two corporations involve the same
products, SCo's distribution business is considered to form a part of USCo's
manufacturing business.
Example 2. The facts are the same as in Example 1, except that USCo does not
manufacture. Rather, USCo operates a large research and development facility in the
United States that licenses intellectual property to affiliates worldwide, including SCo.
SCo and other USCo affiliates then manufacture and market the USCo-designed products
in their respective markets. Because the activities conducted by SCo and USCo involve
23
the same product lines, these activities are considered to form a part of the same trade or
business.
For two activities to be considered to be "complementary," the activities need not
relate to the same types of products or services, but they should be part of the same
overall industry and be related in the sense that the success or failure of one activity will
tend to result in success or failure for the other. Where more than one trade or business is
conducted in the State of source and only one of the trades or businesses forms a part of
or is complementary to a trade or business conducted in the State of residence, it is
necessary to identify the trade or business to which an item of income is attributable.
Royalties generally will be considered to be derived in connection with the trade or
business to which the underlying intangible property is attributable. Dividends will be
deemed to be derived first out of earnings and profits of the treaty-benefited trade or
business, and then out of other earnings and profits. Interest income may be allocated
under any reasonable method consistently applied. A method that conforms to U.S.
principles for expense allocation will be considered a reasonable method.
Example 3. Americair is a corporation resident in the United States that operates
an international airline. SSub is a wholly-owned subsidiary of Americair resident in
Sweden. SSub operates a chain of hotels in Sweden that are located near airports served
by Americair flights. Americair frequently sells tour packages that include air travel to
Sweden and lodging at SSub hotels. Although both companies are engaged in the active
conduct of a trade or business, the businesses of operating a chain of hotels and operating
an airline are distinct trades or businesses. Therefore SSub's business does not form a
part of Americair's business. However, SSub's business is considered to be
complementary to Americair's business because they are part of the same overall industry
(travel), and the links between their operations tend to make them interdependent.
Example 4. The facts are the same as in Example 3, except that SSub owns an
office building in Sweden instead of a hotel chain. No part of Americair's business is
conducted through the office building. SSub's business is not considered to form a part of
or to be complementary to Americair's business. They are engaged in distinct trades or
businesses in separate industries, and there is no economic dependence between the two
operations.
Example 5. USFlower is a company resident in the United States. USFlower
produces and sells flowers in the United States and other countries. USFlower owns all
the shares of SHolding, a corporation resident in Sweden. SHolding is a holding company
that is not engaged in a trade or business. SHolding owns all the shares of three
corporations that are resident in Sweden: SFlower, SLawn, and SFish. SFlower
distributes USFlower flowers under the USFlower trademark in Sweden. SLawn markets
a line of lawn care products in Sweden under the USFlower trademark. In addition to
being sold under the same trademark, SLawn and SFlower products are sold in the same
stores and sales of each company's products tend to generate increased sales of the
other's products. SFish imports fish from the United States and distributes it to fish
wholesalers in Sweden. For purposes of paragraph 4, the business of SFlower forms a
24
part of the business of USFlower, the business of SLawn is complementary to the
business of USFlower, and the business of SFish is neither part of nor complementary to
that of USFlower.
An item of income derived from the State of source is "incidental to" the trade or
business carried on in the State of residence if production of the item facilitates the
conduct of the trade or business in the State of residence. An example of incidental
income is the temporary investment of working capital of a person in the State of
residence in securities issued by persons in the State of source.
Subparagraph (b) of paragraph 4 states a further condition to the general rule in
subparagraph (a) in cases where the trade or business generating the item of income in
question is carried on either by the person deriving the income or by any associated
enterprises. Subparagraph (b) states that the trade or business carried on in the State of
residence, under these circumstances, must be substantial in relation to the activity in the
State of source. The substantiality requirement is intended to prevent a narrow case of
treaty-shopping abuses in which a company attempts to qualify for benefits by engaging
in de minimis connected business activities in the treaty country in which it is resident
(i.e., activities that have little economic cost or effect with respect to the company
business as a whole).
The determination of substantiality is made based upon all the facts and
circumstances and takes into account the comparative sizes of the trades or businesses in
each Contracting State (measured by reference to asset values, income and payroll
expenses), the nature of the activities performed in each Contracting State, and the
relative contributions made to that trade or business in each Contracting State. In any
case, in making each determination or comparison, due regard will be given to the
relative sizes of the U.S. and Swedish economies.
The determination in subparagraph (b) also is made separately for each item of
income derived from the State of source. It therefore is possible that a person would be
entitled to the benefits of the Convention with respect to one item of income but not with
respect to another. If a resident of a Contracting State is entitled to treaty benefits with
respect to a particular item of income under paragraph 4, the resident is entitled to all
benefits of the Convention insofar as they affect the taxation of that item of income in the
State of source.
The application of the substantiality requirement only to income from related
parties focuses only on potential abuse cases, and does not hamper certain other kinds of
non-abusive activities, even though the income recipient resident in a Contracting State
may be very small in relation to the entity generating income in the other Contracting
State. For example, if a small U.S. research firm develops a process that it license to a
very large, unrelated, Swedish pharmaceutical manufacturer, the size of the U.S. research
firm would not have to be tested against the size of the Swedish manufacturer. Similarly,
a small U.S. bank that makes a loan to a very large unrelated Swedish business would not
have to pass a substantiality test to receive treaty benefits under Paragraph 4.
25
Subparagraph (c) of paragraph 4 provides special rules for determining whether a
resident of a Contracting State is engaged in the active conduct of a trade or business
within the meaning of subparagraph (a). Subparagraph (c) attributes the activities of a
partnership to each of its partners. Subparagraph (c) also attributes to a person activities
conducted by persons "connected" to such person. A person ("X") is connected to
another person ("'Y") if X possesses 50 percent or more of the beneficial interest in Y (or
ifY possesses 50 percent or more of the beneficial interest in X). For this purpose, X is
connected to a company if X owns shares representing fifty percent or more of the
aggregate voting power and value of the company or fifty percent or more of the
beneficial equity interest in the company. X also is connected to Y if a third person
possesses fifty percent or more of the beneficial interest in both X and Y. For this
purpose, if X or Y is a company, the threshold relationship with respect to such company
or companies is fifty percent or more of the aggregate voting power and value or fifty
percent or more of the beneficial equity interest. Finally, X is connected to Y if, based
upon all the facts and circumstances, X controls Y, Y controls X, or X and Yare
controlled by the same person or persons.
Paragraph 5
Paragraph 5 deals with the treatment of insurance premiums, royalties and interest
in the context of a so-called "triangular case."
The term "triangular case" refers to the use of the following structure by a resident
of Sweden to earn, in this case, interest income from the United States. The resident of
Sweden, who is assumed to qualify for benefits under one or more of the provisions of
Article 17 (Limitation on Benefits), sets up a permanent establishment in a third
jurisdiction that imposes only a low rate of tax on the income of the permanent
establishment. The Swedish resident lends funds into the United States through the
permanent establishment. The permanent establishment, despite its third-jurisdiction
location, is an integral part of a Swedish resident. Therefore the income that it earns on
those loans, absent the provisions of paragraph 5, is entitled to exemption from U.S.
withholding tax under the Convention. Under a current Swedish income tax treaty with
the host jurisdiction of the permanent establishment, the income of the permanent
establishment is exempt from Swedish tax. Thus, the interest income is exempt from U.S.
tax, is subject to little tax in the host jurisdiction of the permanent establishment, and is
exempt from Swedish tax.
Because the United States does not exempt the profits of a third-jurisdiction
permanent establishment of a U.S. resident from U.S. tax, either by statute or by treaty,
the paragraph only applies with respect to U.S. source insurance premiums, interest, or
royalties that are attributable to a third-jurisdiction permanent establishment of a Swedish
resident.
Paragraph 5 replaces the otherwise applicable rules in the Convention for
insurance premiums, interest and royalties with a 15 percent U.S. withholding tax for
26
interest and royalties and the rules of U.S. domestic law for insurance premiums under
the following circumstances. First, the actual tax paid on the U.S. source premiums,
interest or royalties in the th ird state is subject is less than 60 percent of the tax that
would have been payable in Sweden if the income were earned in Sweden by the
enterprise and were not attributable to the permanent establishment in the third state.
In general, the principles employed under Code section 954(b)( 4) will be
employed to determine whether the profits are subject to an effective rate of taxation that
is above the specified threshold.
Notwithstanding the level of tax on interest and royalty income of the permanent
establishment, paragraph 5 will not apply under certain circumstances. In the case of
interest (as defined in Article 11 (Interest)), paragraph 5 will not apply if the interest is
derived in connection with, or is incidental to, the active conduct of a trade or business
carried on by the permanent establishment in the third state. The business of making,
managing or simply holding investments is not considered to be an active trade or
business, unless these are banking or securities activities carried on by a bank or
registered securities dealer. In the case of royalties, paragraph 5 will not apply if the
royalties are received as compensation for the use of, or the right to use, intangible
property produced or developed by a permanent establishment itself.
Paragraph 6
Paragraph 6 provides that a resident of one of the States that is not entitled to the
benefits of the Convention as a result of paragraphs 1 through 5 still may be granted
benefits under the Convention at the discretion of the competent authority of the State
from which benefits are claimed. In making determinations under paragraph 6, that
competent authority will take into account as its guideline whether the establishment,
acquisition, or maintenance of the person seeking benefits under the Convention, or the
conduct of such person's operations, has or had as one of its principal purposes the
obtaining of benefits under the Convention. Thus, persons that establish operations in one
of the States with a principal purpose of obtaining the benefits of the Convention
ordinarily will not be granted relief under paragraph 6.
The competent authority may determine to grant all benefits of the Convention, or
it may determine to grant only certain benefits. For instance, it may determine to grant
benefits only with respect to a particular item of income in a manner similar to paragraph
4. Further, the competent authority may set time limits on the duration of any relief
granted.
For purposes of implementing paragraph 6, a taxpayer will be permitted to present
his case to the relevant competent authority for an advance determination based on the
facts. In these circumstances, it is also expected that if the competent authority
determines that benefits are to be allowed, they will be allowed retroactively to the time
of entry into force of the relevant treaty provision or the establishment of the structure in
question, whichever is later.
27
A competent authority is required by paragraph 6 to consult the other competent
authority before denying benefits under this paragraph. According to the notes, the
competent authority will consider the obligations of Sweden by virtue of its membership
in the European Union in making a determination under paragraph 6. In particular, the
competent authority will consider any legal requirements for the facilitation of the free
movement of capital and persons, together with the differing internal tax systems, tax
incentive regimes and existing tax treaty policies among member states of the European
Union. As a result, where certain changes in circumstances otherwise might cause a
person to cease to be a eligible for treaty benefits under paragraphs 2 of Article 17, for
example, such changes need not result in the denial of benefits.
The changes in circumstances contemplated include, all under ordinary business
conditions, a change in the State of residence of a major shareholder of a company; the
sale of part of the stock ofa Swedish company to a resident in another member state of
the European Union; or an expansion of a company's activities in other member states of
the European Union. So long as the relevant competent authority is satisfied that those
changed circumstances are not attributable to tax avoidance motives, they will count as a
factor favoring the granting of benefits under paragraph 6, if consistent with existing
treaty policies, such as the need for effective exchange of information.
Paragraph 7
Paragraph 7 defines several key terms for purposes of Article 17. Each of the
defined terms is discussed in the context in which it is used.
Article VI
The Protocol adds an additional paragraph to Article 20 (Government Services) of
the Convention. This paragraph provides a grandfather rule to eliminate the unintended
consequences resulting from the 1994 U.S.-Sweden income tax treaty regarding the
taxation oflocal employees (or former employees) of the Embassy in Stockholm and
consulate in Gothenburg.
The 1939 U.S.-Sweden income tax treaty generally provided that wages, salaries
and similar compensation and pensions paid by one Contracting State to individuals in
another Contracting State were exempt from tax in the latter State. The U.S. government
reduced the salaries paid to Swedish residents and citizens working at the U.S. Embassy
in Stockholm or consulate in Gothenburg to take account of the fact that they were
exempt from Swedish income tax. Accordingly, their pensions, which were based on
"high-three," were also reduced.
The 1994 U.S .-Sweden income tax treaty generally provides that remuneration
(other than a pension) paid by a Contracting State to an individual in respect of services
rendered to that State is taxable only that State unless the person was already a resident of
the other State before he began working for the first-mentioned State. The 1994 treaty
28
also generally provides that a pension paid by a Contracting State to an individual in
respect of services to that State are taxable only in the other Contracting State if the
individual is a resident and citizen of that State.
Under the 1994 U.S.-Sweden tax treaty, Sweden does tax the pensions of Swedish
residents or citizens who worked in the U.s. Embassy in Stockholm and consulate in
Gothenburg. The 1994 U.S.-Sweden tax treaty failed to provide a grandfather for former
employees whose pension benefits are based on a "high three" that took into account the
exemption from Swedish income tax provided for in the 1939 U.S.-Sweden tax, thereby
significantly reducing the expected benefits to these former employees.
To rectify this problem, the Protocol adds an additional paragraph to Article 20
(Government Service) of the Convention to provide that Sweden may not tax a pension
under the U.S. Civil Service Retirement Pension Plan paid by the United States to
employees of the U.S. embassy in Stockholm or the U.S. consulate general in
Gothenburg if the individual was hired prior to 1978.
Article VII
The Protocol makes conforming changes to Article 23 (Relief from Double
Taxation) to reflect the amendments made to the saving clause of paragraph 4 Article 1
(Personal Scope) and to reflect amendments to section 877 of the Code in 1996.
Article VIII
Article VIII of the Protocol contains the rules for bringing the Protocol into force and
giving effect to its provisions.
Paragraph I provides for the ratification of the Convention by both Contracting
States according to their applicable procedures. Each State must notify the other as soon
as its requirements for ratification have been complied with. The Convention will enter
into force on the thirtieth day after the later of such notifications accompanied by an
instrument of ratification.
In the United States, the process leading to ratification and entry into force is as
follows: Once a protocol or treaty has been signed by authorized representatives of the
two Contracting States, the Department of State sends the protocol or 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 of the Senate Committee on Foreign
Relations to hold hearings on the protocol or treaty and 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 protocol or 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.
29
The date on which a treaty enters into force is not necessarily the date on which
its provisions take effect. Paragraph 2 contains rules that determine when the provisions
of the treaty will have effect.
Under subparagraphs (a)(i) and (b)(ii), the provisions of the Protocol relating to
taxes withheld at source will have effect with respect to amounts paid or credited on or
after the first day of the second month next following the date on which the Protocol
enters into force. For example, if instruments of ratification are exchanged on April 25 of
a given year, the withholding rates specified in paragraphs 2 and 3 of Article 10
(Dividends) would be applicable to any dividends paid or credited on or after June 1 of
that year. Similarly, the revised Limitation on Benefits provisions of Article 5 of the
Protocol would apply with respect to any payments of interest, royalties or other amounts
on which withholding would apply under the Code if those amounts are paid or credited
on or after June 1.
This rule allows the benefits of the withholding reductions to be put into effect as
soon as possible, without waiting until the following year. The delay of one to two
months is required to allow sufficient time for withholding agents to be informed about
the change in withholding rates. If for some reason a withholding agent withholds at a
higher rate than that provided by the Convention (perhaps because it was not able to reprogram its computers before the payment is made), a beneficial owner of the income
that is a resident of Sweden may make a claim for refund pursuant to section 1464 of the
Code.
Under subparagraph (b)(i) the provision of Article VI of the Protocol relating to
the taxation of pensions of certain employees of the U.S. embassy in Stockholm or the
U.S. consulate general in Gothenburg by Sweden is effective for income derived on or
after January 1, 1996.
For all other taxes, subparagraphs (a)(ii) and (b)(iii) specify that the Protocol will
have effect for any taxable period beginning on or after January 1 of the year next
following entry into force.
30
DEPARTMENT OF THE TREASURY
TECHNICAL EXPLANATION OF THE PROTOCOL BETWEEN
THE UNITED STATES OF AMERICA
AND
THE FRENCH REPUBLIC
SIGNED AT WASHINGTON ON DECEMBER 8, 2004
AMENDING THE CONVENTION BETWEEN
THE UNITED STATES OF AMERICA AND
THE FRENCH REPUBLIC
FOR THE AVOIDANCE OF DOUBLE TAXATION
AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME AND CAPITAL
SIGNED AT PARIS ON AUGUST 31,1994
This is a technical explanation of the Protocol signed at Washington on December
8,2004 (the "Protocol"), amending the Convention Between the United States of
America and the French Republic for the A voidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed at
Paris on August 31, 1994 (the "Convention").
Negotiations took into account the U.S. Department of the Treasury's current tax
treaty policy and Treasury's Model Income Tax Convention, published on September 20,
1996 (the "U .S. Model"). Negotiations also took into account the Model Tax Convention
on Income and on Capital, published by the Organization for Economic Cooperation and
Development, and recent tax treaties concluded by both countries.
This Technical Explanation is an official guide to the Protocol. It explains
policies behind particular provisions, as well as understandings reached during the
negotiations with respect to the interpretation and application of the Protocol. This
technical explanation is not intended to provide a complete guide to the Convention as
amended by the Protocol. To the extent that the Convention has not been amended by the
Protocol, the Technical Explanation of the Convention remains the official explanation.
References in this technical explanation to "he" or "his" should be read to mean "he or
she" or "his or her."
Article I
Article I of the Protocol revises Article 4 (Resident) of the Convention by adding
two subparagraphs to paragraph 2(b), and by replacing subparagraphs (b)(iii) and (iv).
These changes clarify the meaning of "resident" in certain cases, and address the
treatment of cross-border investments made through partnerships and other similar forms
of entity. The changes were necessary because of differences in the way France and the
United States view such entities.
In general, subparagraphs 2(b)(iv) through (b)(vi) provide specific rules in the
case of income derived through fiscally transparent entities such as partnerships and
1
certain estates and trusts. In general, fiscally transparent entities are entities the income
of which is taxed at the beneficiary, member, or participant level. Entities falling under
this description in the Untted States include partnerships, common investment trusts
under Internal Revenue Code section 584, and grantor trusts. This paragraph also applies
to U.S. limited liability companies ("LLCs") that are treated as partnerships for U.S. tax
purposes. Entities that are subject to tax, but with respect to which tax may be relieved
under an integrated system, are not considered fiscally transparent entities.
The Protocol revises paragraph 2(b) by moving a "fonds commun de placement"
from subparagraph (b)(iii) to (b)(iv). Thus, a "fonds commun de placement" is no longer
an automatic resident under the Convention; instead, it is treated as a partnership for
purposes of claiming U.S. tax benefits under the Convention. Thus, it will be considered
a "resident of a Contracting State," but only to the extent that the income it derives is
treated in that Contracting State as the income of a resident. This is consistent with the
rule allowing for specific identification of an entity by the treaty partners as a resident
entitled to claim treaty benefits. See Treas. Reg. § 1.894-1 (d)( 1).
The Protocol clarifies that under subparagraph (b)(iv), an item of income, profit or
gain derived by a fiscally transparent entity will be considered to be derived by a resident
of a Contracting State if a resident is treated under the taxation laws of that State as
deriving the item of income. In the case of income or gains arising in France, treaty
benefits are available only if the conditions set forth in subparagraphs (b)(iv)(aa) through
(dd) are also met: there is no contrary position in a double taxation convention between
either Contracting State and the third state; the fiscally transparent entity is not treated as
a corporation for tax purposes, or otherwise liable to tax on French source income in its
own hands or in the hands of its partners, beneficiaries, or grantors under the tax laws of
the third State; a partner's, beneficiary's or grantor's share of income or gain is generally
taxed in the same manner as it would have been were that income or gain derived
directly, except to the extent resulting from differences in accounting methods,
accounting periods, or other similar differences; and information concerning the fiscally
transparent entity, or its partners, beneficiaries, or grantors, may be exchanged under the
terms of a double tax convention between the Contracting State in which the income
arises and the third State.
For example, if a French company pays interest to an entity that is treated as
fiscally transparent for U.S. tax purposes, the interest will be considered derived by a
resident of the United States only to the extent that the taxation laws of the United States
treats one or more U.S. residents (whose status as U.S. residents is determined, for this
purpose, under U.S. tax law) as deriving the interest for U.S. tax purposes. In the case of
a partnership, the persons who are, under U.S. tax laws, treated as partners of the entity
would normally be the persons whom the U.S. tax laws would treat as deriving the
interest income through the partnership. Also, it follows that persons whom the United
States treats as partners but who are not U.S. residents for U.S. tax purposes may not
claim a benefit for the interest paid to the entity under the Convention, because they are
not residents of the United States for purposes of claiming this treaty benefit. (If,
however, the country in which they are treated as resident for tax purposes, as determined
2
under the laws of that country, has an income tax convention with France, they may be
entitled to claim a benefit under that convention.) In contrast, if, for example, an entity is
organized under U.S. laws and is classified as a corporation for U.S. tax purposes,
interest paid by French company to the U.S. entity will be considered derived by a
resident of the United States since the U.S. corporation is treated under U.S. taxation laws
as a resident of the United States and as deriving the income.
The same result obtains even if the entity is viewed differently under the tax laws
of France (~, as not fiscally transparent in the first example above where the entity is
treated as a partnership for U.S. tax purposes). Similarly, the characterization of the
entity in a third country is also irrelevant, even if the entity is organized in that third
country. The results follow regardless of whether the entity is disregarded as a separate
entity under the laws of one jurisdiction but not the other, such as a single owner entity
that is viewed as a branch for U.S. tax purposes and as a corporation for French tax
purposes. These results also obtain regardless of whether the entity is organized in the
United States or, subject to the limitations above, in a third country).
For example, income from U.S. sources received by an entity organized under the
laws of the United States, which is treated for French tax purposes as a corporation and is
owned by a French shareholder who is a French resident for French tax purposes, is not
considered derived by the shareholder of that corporation even if, under the tax laws of
the United States, the entity is treated as fiscally transparent.
These principles also apply to trusts to the extent that they are fiscally transparent
in either Contracting State. For example, if X, a resident of France, creates a revocable
trust in the United States and names persons resident in a third country as the
beneficiaries of the trust, X would be treated under U.S. law as the beneficial owner of
income derived from the United States. In that case, the trust's income would be
regarded as being derived by a resident of France only to the extent that the laws of
France treat X as deriving the income for French tax purposes.
New subparagraph (iv) is not an exception to the saving clause of paragraph 2 of
Article 29 (Miscellaneous Provisions). Accordingly, subparagraph (iv) does not prevent
a Contracting State from taxing an entity that is treated as a resident of that State under its
tax law. For example, if a U.S. LLC with French members elects to be taxed as a
corporation for U.S. tax purposes, the United States will tax that LLC on its worldwide
income on a net basis, and will impose withholding tax, at the rate provided in Article 10,
on dividends paid by the LLC, without regard to whether France views the LLC as
fiscally transparent.
New subparagraph (b) (v) applies to a fiscally transparent entity organized in the
United States that derives income from the United States and France. In the United
States, the fiscally transparent entity is treated as a resident in proportion to the income it
derives from both Contracting States. Such entity will also be treated as a resident of
France to the extent that it derives French source income allocable to French resident
partners, beneficiaries or grantors. The purpose of the latter provision is to ensure that
3
France will not be denied the ability to tax the income ofa French partner in a U.S.
partnership, even though France otherwise might treat the U.S. entity as an entity that is
not fiscally transparent.
New subparagraph (b)(vi) clarifies that, for purposes of subparagraphs (b)(iv) and
(v), the income derived by a fiscally transparent entity is considered to be treated under
the tax laws of one of the Contracting States as the income of a resident to the extent it
benefits a partner, beneficiary, or grantor that is a pension trust, other organization, or
not-for-profit organization referred to in subparagraph (b)(ii), even ifsuch income is
exempt from tax under the laws of that State.
Article II
Article II of the Protocol modifies Article 10 (Dividends) of the Convention by
deleting and replacing the last sentence in the final paragraph of paragraph 2. Article 10
provides rules for the taxation of dividends paid by a company that is a resident of one
Contracting State to a beneficial owner that is a resident of the other Contracting State.
Paragraph 2 limits the right of the source State to tax dividends beneficially
owned by a resident of the other Contracting State. In the case of dividends paid by a
U.S. real estate investment trust C'REIT"), the U.S. tax is limited to 15 percent of the
gross amount of dividends in certain circumstances; otherwise, the statutory rate of thirty
percent applies. The Protocol broadens the scope of paragraph 2 by enlarging the class of
shareholders that qualify for the reduced rate of withholding tax. These changes are
consistent with provisions in recent U.S. treaties.
Under new paragraph 2, the 15 percent maximum rate of withholding tax is
applicable to dividends paid by a U.S. REIT ifone of three conditions is satisfied: the
beneficial owner of the dividend is an individual holding an interest in the REIT of not
more than 10 percent; the dividend is paid on a class of stock that is publicly traded and
the beneficial owner of the dividend is a person holding an interest of not more than 5
percent of any class of the REIT's stock; or the beneficial owner of the dividend is a
person holding an interest in the REIT of not more than 10 percent and the value of no
single interest in real property owned by the REIT exceeds 10 percent of the value of the
REIT's total interest (k, the REIT is diversified). Ifnone of these conditions are met,
dividends paid by the REIT will be subject to the U.S. domestic withholding rate of30
percent.
Article III
Article III of the Protocol replaces Article 18 (Pensions) of the Convention.
Article 18 provides rules for the taxation of pensions and social security benefits.
4
Paragraph 1
Paragraph 1 provides for exclusive source country taxation of social security
benefits, pension distributions and other similar remuneration paid by a pension or other
retirement arrangement established in one Contracting State to a resident of the other
Contracting State. The rule applies to both periodic and lump sum payments.
Paragraph 2
Subparagraph (a)(i) of paragraph 2 allows an individual who exercises
employment or self-employment in a Contracting State to deduct or exclude from income
in that Contracting State contributions made by or on behalf of the individual during the
period of employment or self-employment to an exempt pension trust established in the
other Contracting State. Thus, for example, if a participant in a U.S. qualified plan goes
to work in France, the participant may deduct or exclude from income in France
contributions to the U.S. qualified plan made while the participant works in France.
Paragraph 2, however, applies only to the extent of the relief allowed by the host State
(~, France in the example) for contributions to an exempt pension trust established in
that State.
Subparagraph (a)(ii) provides that, in the case of employment, accrued benefits
and contributions by or on behalf of the individual's employer, during the period of
employment in the host State, will not be treated as taxable income to the employee in
that State. Subparagraph (a)(ii) also allows the employer a deduction in computing
business profits in the host State for contributions to the plan. For example, if a
participant in a U.S. qualified plan goes to work in France, the participant's employer
may deduct from its business profits in France contributions to the U.S. qualified plan for
the benefit of the employee while the employee renders services in France.
As in the case of subparagraph (a)(i), subparagraph (a)(ii) applies only to the
extent of the relief allowed by the host State for contributions to pension funds
established in that State. Therefore, where the United States is the host State, the
exclusion of employee contributions from the employee's income under this paragraph is
limited to elective contributions not in excess of the amount specified in section 402(g).
Deduction of employer contributions is subject to the limitations of sections 415 and 404.
The section 404 limitation on deductions is calculated as if the individual were the only
employee covered by the plan.
France has both mandatory and non-mandatory pension plans. The relevant
comparison, for purposes of determining the amount and timing of deductions for French
tax purposes of amounts contributed to a U.S. retirement arrangement, is to the French
mandatory plans, provided that the French competent authority agrees that the U.S.
arrangement in question generally corresponds to the French mandatory plan (even
though the U.S. arrangement may not be mandatory).
5
Subparagraph (b) of paragraph 2 limits the availability of benefits under
subparagraph (a). Under subparagraph (b), subparagraph (a) does not apply to
contributions to an exempt pension trust unless the participant already was contributing to
the trust, or his employer already was contributing to the trust with respect to that
individual, before the individual began exercising employment in the State where the
services are performed (the "host State"). This condition would be met if either the
employee or the employer was contributing to an exempt pension trust that was replaced
by the exempt pension trust to which he is contributing. The rule regarding successor
trusts would apply if, for example, the employer has been taken over by a company that
replaces the existing pension plan with its own plan, rolling membership in the old plan
and assets in the old trust over into the new plan and trust.
In addition, under subparagraph (b), the competent authority of the host State
must determine that the recognized plan to which a contribution is made in the other
Contracting State generally corresponds to the plan in the host State. Subparagraph (c)
enumerates plans that are considered to "generally correspond" such that they are
automatically eligible for treaty benefits under paragraph 2(a). The competent authorities
may agree that distributions from other plans that generally meet similar criteria to those
applicable to other plans established under their respective laws also qualify for the
benefits of paragraph 2(a).
In the United States, the plans that are automatically eligible for benefits under
paragraph 2 include a French pension or other retirement arrangement organized under
the French social security legislation.
In France, the plans that are automatically eligible for benefits under paragraph 2
include qualified plans under section 401 (a) of the Internal Revenue Code, individual
retirement plans (including individual retirement plans that are part of a simplified
employee pension plan that satisfies section 408(k), individual retirement accounts,
individual retirement annuities, and section 408(p) accounts), section 403(a) qualified
annuity plans, and section 403(b) plans. Social security or other similar legislation of the
United States is also automatically eligible for benefits under paragraph 2. Although not
specifically mentioned in the Protocol, Roth lRAs under section 408A are of course a
type of individual retirement plan and therefore also automatically eligible for benefits
under paragraph 2.
Relationship to other Articles
Paragraph 1 of Article 18 is an exception to the saving clause of paragraph 2 of
Article 29 (Miscellaneous Provisions) by virtue of paragraph 3(a) of Article 29 as revised
by this Protocol. Thus, a U.S. citizen who resides in the United States and receives
distributions from a pension plan established in France will be subject to tax solely in
France on that distribution.
Paragraph 2 of Article 18 is an exception to the saving clause of paragraph 2 of
Article 29 by virtue of paragraph 3(b) of Article 29 as revised by this Protocol, but only
6
in the case of individuals who are neither citizens of, nor have immigrant status in, the
United States. The term "immigrant status" refers to a person admitted to the United
States as a permanent resident under U.S. immigration laws (1.&:., holding a "green card").
Accordingly, a U.S. resident (who is not a citizen or a green card holder) who is a
beneficiary of a French pension plan will not be subject to tax in the United States on the
earnings and accretions of, or the contributions made to, a French exempt pension trust
with respect to that U.S. resident.
Article IV
Article IV of the Protocol makes changes to Article J 9 (Public Remuneration) of
the treaty. These changes are necessary because of the revisions made by the Protocol to
Article J8 (Pensions).
The Protocol deletes paragraph 2, which deals with the taxation of pensions paid
in respect of government services described in paragraph I. The provisions of new
Article 18 now govern the treatment of such pensions.
Paragraph 3 of Article 19 provides cross-references to treaty Articles that apply to
remuneration for services performed in connection with a business carried on by a
governmental body. The Protocol updates paragraph 3 by deleting the reference to
Article 18, and renumbers it paragraph 2.
Article V
The Protocol deletes subparagraph (b)(iv) of paragraph 2 [Paragraph I in French
language] of Article 24 (Relief From Double Taxation) of the treaty, which allows a U.S.
citizen and resident of France a credit equal to the amount of French tax attributable to
income dealt with in subparagraph (a) of paragraph J of Article 18 (Pensions) that was
also subject to tax in the United States. Subparagraph (b)(iv) is rendered obsolete by the
provisions of Article 18 as amended by the Protocol.
The Protocol renumbers subparagraphs (b) (v) and (vi) of paragraph 2 [Paragraph
I in French language] of Article 24 subparagraphs (b)(iv) and (v) respectively to account
for the deletion of subparagraph (b )(iv).
The Protocol replaces subparagraph (c) of paragraph I [Paragraph 2 in French
language] of Article 24 to omit the reference to paragraph 2 of Article 19 (Public
Remuneration). This change conforms to revisions made to Article 18 and Article 19
(Public Remuneration) by the Protocol.
Article VI
Article VI of the Protocol makes changes to paragraphs 2 and 3 of Article 29
(Miscellaneous Provisions).
7
The Protocol revises paragraph 2 of Article 29, which permits the United States to
continue to tax as U.S. citizens former citizens whose loss of citizenship had as one of its
principal purposes the avoidance of tax, but only for a period of 10 years following such
loss. To reflect 1996 amendments to U.S. tax law in this area, the Protocol extends this
treatment to former long-term residents whose loss of such status had as one of its
principal purposes the avoidance of tax.
Section 877 of the Internal Revenue Code provides for special tax treatment of
former U.S. citizens and long-term residents who gave up their citizenship or long-term
resident status to avoid U.S. tax. Prior to its amendment by the American Jobs Creation
Act of2004 (AJCA), section 877 applied to individuals that relinquished U.S. citizenship
or terminated long-term residency with a principal purpose (i.e., subjective intent) of tax
avoidance. An individual was generally presumed to have a tax avoidance purpose if
their net worth or average annual net income tax liability exceeded specified thresholds.
The AJCA replaced the subjective determination of tax avoidance as a principal
purpose for relinquishment of citizenship or termination of residency with objective rules.
Former citizens or long-term residents are now subject to U.S. tax for the 10-year period
following loss of such status, unless they fall below certain net income and net worth
thresholds or satisfy certain limited exceptions for dual citizens and minors who have had
no substantial contact with the U.S.
Thus, section 877 now treats individuals who expatriate and meet the objective
tests as having expatriated for tax avoidance purposes. Accordingly, the objective tests in
section 877 represent the administrative means by which the United States determines
whether a taxpayer has a tax avoidance purpose for purposes of the reservation of taxing
rights contained in the last sentence of paragraph 2 of Article 29.
The Protocol also replaces paragraph 3 of Article 29. Paragraph 3 provides
exceptions to the saving clause set forth in paragraph 2 of Article 29. The Protocol
updates paragraph 3 to account for changes made in Article 18 (Pensions).
Article VII
Article VII contains the rules for bringing the Protocol into force and giving effect
to its provisions.
Paragraph 1 provides for the ratification of the Convention by both Contracting
States according to their constitutional and statutory requirements. Each State must
notify the other as soon as its requirements for ratification have been complied with. The
Convention will enter into force on the date of the later of such notifications.
In the United States, the process leading to ratification and entry into force is as
follows: Once a protocol or treaty has been signed by authorized representatives of the
two Contracting States, the Department of State sends the protocol or treaty to the
President who formally transmits it to the Senate for its advice and consent to ratification,
8
which requires approval by two-thirds of the Senators present and voting. Prior to this
vote, however, it generally has been the practice of the Senate Committee on Foreign
Relations to hold hearings on the protocol or treaty and 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 protocol or 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.
The date on which a treaty enters into force is not necessarily the date on which
its provisions take effect. Paragraphs 2 and 3 contain rules that determine when the
provisions of the treaty will have effect.
Under subparagraph (a) of paragraph 2, the provisions of the Protocol relating to
taxes withheld at source will have effect with respect to amounts paid or credited on or
after the first day of the second month following the date on which the Protocol enters
into force. For example, if instruments of ratification are exchanged on April 25 of a
given year, the withholding rates specified in paragraph 2 of Article 10 (Dividends) as
provided in Article II would be applicable to any dividends paid or credited on or after
June I of that year.
This rule allows the benefits of the withholding reductions to be put into effect as
soon as possible, without waiting until the following year. The delay of one to two
months is required to allow sufficient time for withholding agents to be informed about
the change in withholding rates. Iffor some reason a withholding agent withholds at a
higher rate than that provided by the Convention (perhaps because it was not able to reprogram its computers before the payment is made), a beneficial owner of the income
that is a resident of France may make a claim for refund pursuant to section 1464 of the
Code.
For all other taxes, subparagraph (b) of paragraph 2 specifies that the Protocol
generally will have effect for any taxable period beginning on or after January I of the
year following entry into force.
Paragraph 3 provides special effective dates with respect to the provisions of
Article I, paragraph 2 of the protocol relating to the treatment of fiscally transparent
entities. In general, these rules will have effect in respect of taxes withheld at source, for
any amount paid or credited on or after February I, 1996. For all other taxes,
subparagraph (b) specifies that the Protocol will have effect for any taxable period
beginning on or after January I, 1996. These dates are when such provisions in the
current treaty became effective. These special effective dates do not apply to the portion
of Article I that treats a "fonds commun de placement" as a partnership for purposes of
U.S. tax benefits under the treaty. That rule, therefore, will be effective in accordance
with the general rules of paragraph 2 of Article VII.
DEPARTMENT OF THE TREASURY
TECHNICAL EXPLANATION OF THE PROTOCOL BETWEEN
THE UNITED STATES OF AMERICA
AND
THE FRENCH REPUBLIC
SIGNED AT WASHINGTON ON DECEMBER 8, 2004
AMENDING THE CONVENTION BETWEEN
THE UNITED STATES OF AMERICA AND
THE FRENCH REPUBLIC
FOR THE A VOIDANCE OF DOUBLE TAXATION
AND THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO
TAXES ON ESTATES, INHERITANCES, AND GIFTS,
SIGNED AT WASHINGTON ON NOVEMBER 24, 1978
Introduction
This is a technical explanation of the Protocol signed at Washington on December 8,
2004 (the "Protocol"), which amends the Convention Between the United States of America and
the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Estates, Inheritances, and Gifts, signed at Washington on November
24, 1978 (the "Convention ").
This Technical Explanation is an official guide to the Protocol. It explains policies
behind particular provisions, as well as understandings reached during the negotiations with
respect to the interpretation and application of the Protocol. This technical explanation is not
intended to provide a complete guide to the Convention as amended by the Protocol. To the
extent that the Convention has not been amended by the Protocol, the Technical Explanation of
the Convention remains the official explanation. References in this technical explanation to "he"
or "his" should be read to mean "he or she" or "his or her."
Article I
Article I of the Protocol amends Article I (Estates and Gifts Covered) of the Convention
by adding a "saving" clause as new paragraph 4. Pursuant to the saving clause, the United States
reserves its rights, subject to certain exceptions, to tax certain estates or donors as provided in its
internal laws, notwithstanding any provisions of the Convention to the contrary.
First, the United States reserves the right to tax under its domestic law the estate or gift of
a U.S. citizen. The United States also retains the right to tax the estate of a decedent or the gift
of a donor who, at the time of his death or at the making of the gift, was domiciled (within the
meaning of Article 4 (Fiscal Domicile) of the Convention) in the United States. Finally, the
United States retains the right to tax the estate of a decedent or the gift of a donor who, at the
time of his death or at the making of the gift, was a former citizen or long-term resident of the
United States whose loss of such status had as one of its principal purposes the avoidance of tax,
but only for a period of 10 years following such loss.
The provision regarding former citizens and long-term residents is consistent with the
United States' reservation of its taxing rights provided for in sections 877, 2107, and 2501(a)(3)
and (5) of the Internal Revenue Code. The Protocol provides that the determination of whether
there was a principal purpose of tax avoidance with respect to former citizens or long-term
residents of the United States is made under the laws of the United States, which would include,
for example. the irrebuttable presumptions based on average annual net income tax liability and
net worth under section 877.
Section 877 of the Internal Revenue Code provides for special tax treatment of former
U.S. citizens and long-term residents who gave up their citizenship or long-term resident status
to avoid U.S. tax. Prior to its amendment by the American Jobs Creation Act 0[2004 (AJCA),
section 877 applied to individuals that relinquished U.S. citizenship or terminated long-term
residency with a principal purpose (i.e., subjective intent) of tax avoidance. An individual was
generally presumed to have a tax avoidance purpose if their net worth or average annual net
income tax liability exceeded specified thresholds.
The AJCA replaced the subjective determination of tax avoidance as a principal purpose
for relinquishment of citizenship or termination of residency with objective rules. Former
citizens or long-term residents are now subject to U.S. tax for the 10-year period following loss
of such status, unless they fall below certain net income and net worth thresholds or satisfy
certain limited exceptions for dual citizens and minors who have had no substantial contact with
the U.S.
Thus, section 877 now treats individuals who expatriate and meet the objective tests as
having expatriated for tax avoidance purposes. Accordingly, the objective tests in section 877
represent the administrative means by which the United States determines whether a taxpayer
has a tax avoidance purpose for purposes of the reservation of taxing rights contained in
paragraph 4(a)(iii) of the Convention.
Some provisions of the Convention and Protocol are intended to provide benefits to
citizens and residents even if such benefits do not exist under internal law. Article I of the
Protocol sets forth certain exceptions to the saving clause that preserve certain obligations of the
United States under the Convention. For example, the saving clause will not override the
obligation of the United States, in accordance with Article 12 (Exemptions and Credits), to credit
taxes paid to France on either a domiciliary or a situs basis.
Article I of the Protocol also provides that the saving clause shall not affect the benefits
conferred by the United States under Article 10 (Charitable Exemptions and Deductions),
relating to deductions for contributions to charitable organizations, paragraph 2 of Article 1 I,
2
relating to the marital exclusion for interspousal transfers of certain types of noncommunity
property, Article 13 (Time Limitations on Claims for Credit or Refund), Article 14 (Mutual
Agreement Procedure), or Article 17 (Diplomatic and Consular Officials).
Finally, Article I of the Protocol also provides that the saving clause shall not affect the
benefits conferred by the United States under paragraph 3 of Article 11, relating to a limited
estate tax marital deduction when property passes to a spouse who is not a United States citizen.
This exception to the saving clause does not apply, however, to former U.S. citizens or longterm residents whose loss of citizenship or residence status had as a principal purpose the
avoidance of tax, for a period of 10 years following such loss.
Article II
Article II of the Protocol replaces paragraph 2 of Article 3 (General Definitions) of the
Convention and provides that any term not otherwise defined in the Convention shall, unless the
context otherwise requires or the competent authorities agree to a common meaning, have the
meaning which it has under the law of the Contracting State for the purposes of the taxes to
which the Convention applies. The amendment also makes clear that any meaning under the tax
laws of such Contracting State will prevail over a meaning given under other laws of that state.
Article III
Article III of the Protocol replaces Article 5 of the existing Convention. Paragraph 1
provides that real property may be taxed in a Contracting State if such property is situated in that
State. This is a primary, but not exclusive, taxing right. Nothing in the Convention, for
example, precludes the United States from taxing the transfer of French situs real property by an
individual domiciled, for purposes of the Convention, in the United States, provided the United
States allows a credit for the French tax. Paragraph 4 provides that the rules of paragraph 1
apply to real property of an enterprise and to real property used for the performance of
independent personal services. That is, real property may be taxed by the State where it is
located, even if different from where the enterprise is located or where the independent personal
services are performed.
According to paragraph 2, the term "real property" is defined in accordance with the laws
of the Contracting State in which such property is situated, but it does not include claims secured
by real property (such as mortgages). In the case of the United States, the term "real property"
has the meaning given to it by Treas. Reg. section 1.897-1 (b). Consistent with section 1.8971(b), paragraph 2 provides that the term "real property" shall include: property accessory to real
property; livestock and equipment used in agriculture and forestry; rights to which the provisions
of general law respecting landed property apply; usufruct of real property; and rights to variable
or fixed payments as consideration for the working of, or the right to work, mineral deposits,
sources and other natural resources. Paragraph 2 also provides that ships and aircraft are not
regarded as real property.
3
Pursuant to paragraph 3, the term "real property" also includes shares, participations and
other rights in a company or legal person at least 50 percent of the assets of which consist,
directly or indirectly, of real property situated in one of the Contracting States or of rights
pertaining to such property. Such shares, participations and other rights are considered to be
situated in the Contracting States where the real property is located. Thus, this provision
encompasses real property interests other than the real property itself, so that taxation in the
Contracting State in which the property is situated cannot be avoided by holding real property
indirectly.
Article IV
Under Article 6 (Business Property of a Permanent Establishment and Assets Pertaining
to a Fixed Based Used for the Performance of Professional Services) of the Convention, except
as provided in Article 5 (Real Property), and with the exception of ships and aircraft operated in
international traffic and movable property pertaining to the operation of such ships and aircraft,
assets forming part of the business property of a permanent establishment of an enterprise may
be taxed by a Contracting State if the permanent establishment is situated in that State.
Paragraph 2 of Article 6 of the Convention defines the term "permanent establishment"
as a fixed place of business through which the business of an enterprise is wholly or partly
carried on. Article IV of the Protocol amends the last sentence of paragraph 2 by changing the
phrase "partnership or other association that is not a corporation" to "partnership or other similar
pass-through entity." The revision takes account of 1996 changes in entity classification
regulations by the United States and makes clear that an individual member of any type of passthrough entity which is engaged in industrial or commercial activity through a fixed place of
business will also be deemed to have been so engaged to the extent of his interest therein.
Article V
Under paragraph 1 of Article 10 (Charitable Exemptions and Deductions) of the
Convention, a transfer to a legal entity created or organized in a Contracting State is exempt
from tax, or fully deductible from the gross value liable to tax, in the other Contracting State,
with respect to taxes referred to in Article 2 (Taxes Covered), if the transfer would be eligible for
such exemption or deduction if the legal entity had been created or organized in the other
Contracting State. Under paragraph 2, the provisions of paragraph 1 apply only if the legal
entity to which property is transferred (a) has tax exempt status in the State in which it is created
or organized by reason of which transfers to it are exempt or fully deductible from the taxes
described in Article 2; (b) is organized and operated exclusively for certain enumerated
purposes; and (c) receives a substantial part of its support from contributions from the public or
from government funds.
Article V of the Protocol amends paragraph 2(b) of Article 10 to add "cultural" to the list
of enumerated exclusive purposes for which the legal entity must be organized and operated.
Thus, a transfer to a legal entity created or organized in France is exempt from tax, or fully
4
deductible from the gross value liable to tax, in the United States, with respect to the taxes
referred to in Article 2 if the French entity is organized and operated exclusively for the same
purposes as a U.S. charity generally exempt from tax under section 501(c).
Article VI
Marital Exclusion
Paragraph 1 of Article VI of the Protocol amends paragraph 2 of Article 11 (Community
Property and Marital Deduction) of the Convention, which provides rules for determining the
marital deduction allowed for transfers by a French domiciliary. The amendment obligates the
United States to give a marital deduction for interspousal transfers of noncommunity property
from domiciliaries of France to a spouse who is not a U.S. citizen. It provides that
noncommunity property that may be taxed by the United States solely on the basis of situs (i.e.,
under Article 5 (Real Property), Article 6 (Business Property of a Permanent Establishment and
Assets Pertaining to a Fixed Based Used for the Performance of Professional Services), or
Article 7 (Tangible Movable Property)) may be included in the taxable base of the United States
only to the extent its value (taking into account any applicable deductions) exceeds 50 percent of
the value of all the property which may be taxed by the United States. Thus, noncommunity
property taxable in the United States under these Articles transferred from a French domiciliary
to a spouse who is not a U.S. citizen may be taxed by the United States only to the extent it
exceeds 50 percent of the net value of all property which may be taxed by the United States.
The marital deduction provided for by this amendment does not apply to a United States
citizen domiciled in France or a former citizen or long-term resident of the United States whose
loss of such status had as one of its principal purposes the avoidance of tax (as defined under
United States law), but only for a period of 10 years following such loss. As a result, the United
States is not obligated to provide the benefits of new paragraph 2 of Article 11 of the Convention
to the estate of or a gift made by such a person. For example, a United States citizen who is
domiciled in France under French law could, for purposes of the Convention, be determined to
have his fiscal domicile in France under the tie-breaking rules of paragraph 2 of Article 4 (Fiscal
Domicile). As a result of Article VI of the Protocol, the United States is not required to provide
the marital exclusion of new paragraph 2 of Article 11 of the Convention with respect to
interspousal transfers from that U.S. citizen to a spouse who is not a U.S. citizen. (If the spouse
is a U.S. citizen, the transfer might be eligible for the unlimited marital exclusion provided under
U.S. law).
Marital Deduction
Article VI of the Protocol also renumbers existing paragraph 3 of Article 11 as paragraph
4, and adds a new paragraph 3. New paragraph 3 allows a marital deduction in connection with
transfers satisfying each of five conditions. First, the property transferred must be "qualifying
property." Second, the decedent must have been, at the time of death, domiciled in either France
or the United States, or a citizen of the United States. Third, the surviving spouse must have
5
been, at the time of the decedent's death, domiciled in either France or the United States. Fourth,
ifboth the decedent and the surviving spouse were domiciled in the United States at the time of
the decedent's death, at least one of them must have been a citizen of France. Finally, in order to
limit the benefits of new paragraph 3 to relatively small estates, the executor of the decedent's
estate is required to elect the benefits of new paragraph 3 and to waive irrevocably the benefits
of any estate tax marital deduction that would be allowed under U.S. domestic law, on a U.S.
Federal estate tax return filed by the deadline for making a qualified domestic trust election
under Internal Revenue Code section 2056A( d). In the case of the estate of a decedent for which
the U.S. Federal estate tax return is filed on or before the date on which this Protocol enters into
force, this election and waiver must be made on any return filed to claim a refund pursuant to the
special effective date applicable to such estates (discussed below with respect to Article IX of
the Protocol).
In order for property to be "qualifying property," it must pass to the surviving spouse
(within the meaning of U.S. domestic law) and be property that would have qualified for the
estate tax marital deduction under U.S. domestic law if the surviving spouse had been a U.S.
citizen and all applicable elections specified by U.S. domestic law had been properly made.
Because one of the requirements for property to qualify for the marital deduction under U.S.
domestic law is that the property be included in determining the value of the gross estate,
property will not qualify for the marital deduction of new paragraph 3 to the extent the property
is excluded from the decedent's gross estate by reason of paragraph 2 of Article 11 of the
Convention. The second example under Article VII of the Protocol (below) illustrates the
interaction of the two provisions.
The amount of the marital deduction allowed under new paragraph 3 of Article 11 of the
Convention equals the lesser of (i) the value of the qualifying property, or (ii) the "applicable
exclusion amount" (within the meaning of the law of the United States, determined without
regard to any gift previously made by the decedent). The "applicable exclusion amount" is
determined under section 2010 of the Internal Revenue Code with respect to the year in which
the decedent dies. For decedents dying in 2004 or 2005, the applicable exclusion amount for
estate tax purposes is $1,500,000. The applicable exclusion amount under section 2010 is
scheduled to increase to $2,000,000 for estates of decedents dying during 2006, 2007, or 2008,
and to $3,500,000 for estates of decedents dying in 2009.) Estates of decedents dying during
2010 are not subject to the estate tax. However, under a "sunset" provision effective January 1,
2011, this one-year "repeal" of the estate tax terminates and the applicable exclusion amount
reverts to $1,000,000 for estates of decedents dying after the year 20 I O.
In certain cases, the provisions of new paragraph 3 may affect the U.S. estate taxation of
a trust that would meet the requirements for a qualified terminable interest property ("QTIP")
election (for example, a trust with a life income interest for the surviving spouse and a remainder
interest for other family members) or a qualified domestic trust ("QDOT") election. If, in lieu of
making the QTIP election or the QDOT election, the decedent's executor makes the election
described in new subparagraph 3(b), the provisions of Internal Revenue Code sections 2044
(regarding inclusion in the estate of the second spouse of certain property for which the marital
6
deduction was previously allowed), 2056A (regarding qualified domestic trusts), and 2519
(regarding dispositions of certain life estates) will not apply. To obtain this treatment, however,
the executor is required, under new paragraph 3, to irrevocably waive the benefit of any marital
deduction allowable under the Internal Revenue Code with respect to the trust.
Article VII
Article VII of the Protocol replaces Article 12 (Exemptions and Credits) of the existing
Convention. Under paragraph 1, each Contracting State is required, except as otherwise
provided in the Convention, to impose its tax, and to allow exemptions, deductions, credits, and
other allowances, in accordance with its own internal laws.
Paragraph 2 provides specific rules for relieving double taxation. Paragraph 2(a) applies
when France imposes tax on the basis of the domicile (as determined under Article 4 (Fiscal
Domicile» of the decedent or donor. Under paragraph 2(a), France will tax the entire property
comprising the estate or the gift, but must allow a deduction from that tax (~, a credit) for any
U.S. tax imposed in accordance with the Convention (~, in accordance with Article 5 (Real
Property), Article 6 Business Property of a Permanent Establishment and Assets Pertaining to a
Fixed Based Used for the Performance of Professional Services), Article 7 (Tangible Movable
Property), or the saving clause of paragraph 4 of Article 1 (Estates and Gifts Covered» upon the
transfer of any property in relation to the same event. Such deduction, however, shall not exceed
that part of the French tax (computed before any deduction is made) attributable to the property
in respect of which the deduction is to be allowed.
Under French law, the rates of the inheritance and gift tax are determined on the basis of
the proximity of relationship between the deceased or the donor and the beneficiary or the donee.
In general, graduated rates are imposed where there is a close proximity of relationship and flat
rates are imposed where there is not a close proximity. Where the amount of the French tax is
computed by applying graduated rates, France must allow a deduction for any U.S. tax imposed
in accordance with the Convention, up to the amount computed by multiplying the taxable net
value of the property in respect of which the deduction is to be allowed by the ratio of the French
tax actually payable on the total property taxable in accordance with French law to the net value
of that total property. In other words, the upper limit on the deduction France must allow is
computed by multiplying the amount of the property also subject to U.S. tax by the average rate
of French tax actually payable on all the property comprising the estate or the gift. Where the
amount of the French tax is computed by a applying a flat rate, however, the upper limit on the
deduction France must allow is computed by multiplying the amount of the property also subject
to U.S. tax by the rate actually applicable to the property in respect of which the deduction is to
be allowed.
Under paragraph 2(a)(iii), the taxes for which France must allow a deduction, as
described above, include the United States Federal estate and gift tax, except where such taxes
are imposed solely pursuant to the saving clause of paragraph 4 of Article 1 (Estate and Gifts
Covered). In addition, where the United States imposes its tax on the basis of situs, France is
7
obligated to allow a deduction for such tax (subject to the limitations discussed earlier) only if
the decedent (at the time of his death) or the donor (at the time of the gift) was a United States
citizen and the tax is actually paid.
Under paragraph 2(b)(i), where both States impose a tax with respect to property which is
taxable by France in accordance with Articles 5, 6, or 7, the United States must allow a credit
equal to the amount of the tax imposed by France with respect to such property. Under
paragraph 2(b)(ii), if a decedent or donor was a citizen of the United States at the time of his
death or the making of a gift, and such person is considered under Article 4 as having been
domiciled in France, the United States must allow a credit equal to the amount of the tax
imposed by France, net of any deduction from tax allowed under paragraph 2(a). In addition, if
the United States includes property in a decedent's estate solely because he was a former citizen
or long-term resident of the United States whose loss of such status (within 10 years of the date
of death) had as one of its principal purposes the avoidance of tax, the United States must allow
a credit equal to the amount of the tax imposed by France in respect of all such property. Under
paragraph 2(b )(iii), notwithstanding the provisions of paragraph 2(b )(i) and (ii), the total amount
of all credits allowed by the United States pursuant to Article 12 or pursuant to its own laws or
other conventions with respect to all property in respect of which a foreign tax credit is
allowable under paragraph 2(b)(i) and (ii) is not to exceed that part of the United States tax
which is attributable to such property. The part of the tax deemed to be so attributable is to be
determined in accordance with the principles of section 2014(b)(2) of the Code and section
20.2014-3 of the Estate Tax Regulations.
Pro Rata Unified Credit
Paragraph 3 grants a "pro rata" unified credit to the estate of a decedent (other than a
United States citizen) domiciled in France for purposes of computing the U.S. estate tax.
Provisions similar to this and the marital deduction against U.S. estate tax in respect of certain
transfers to a surviving spouse (discussed above as new paragraph 3 of Article 11 (Community
Property and Marital Deduction) of the Convention, added by Article VI of the Protocol) were
included in the Third Protocol to the U.S.-Canada Income Tax Treaty and the Protocol to the
U.S.-Germany Estate, Inheritance, and Gift Tax Treaty.
Under the Internal Revenue Code, the estate of a nonresident not a citizen of the United
States is subject to U.S. estate tax only on its U.S. situs assets and is entitled to a unified credit of
$13,000, while the estate ofa U.S. citizen or U.S. resident is subject to U.S. estate tax on its
entire worldwide assets and is entitled to a unified credit in an amount determined under Internal
Revenue Code section 2010. For decedents dying in 2004 or 2005, the unified credit under
section 2010 for estate tax purposes is $555,800. The unified credit under section 2010 for estate
tax purposes is scheduled to increase to $780,800 for estates of decedents dying during 2006,
2007, or 2008, and to $ 1,455,800 for estates of decedents dying in 2009. As noted earlier,
estates of decedents dying during 2010 are not subject to the estate tax. Pursuant to a "sunset"
provision, this one-year repeal of the estate tax terminates and the unified credit reverts to
$345,800 for estates of decedents dying after the year 2010. A lower unified credit is provided
8
for the estate of a nonresident not a citizen because it is assumed that such estates generally will
hold fewer U.S. situs assets, as a percentage of the estate's total assets, and thus will have a lower
U.S. estate tax liability.
Subject to certain limitations, the pro rata unified credit provisions of paragraph 3
increase the credit allowed to the estate of a non-U .S. citizen domiciled in France to an amount
between $13,000 and the unified credit available to a U.S. citizen, to take into account the extent
to which the assets of the estate are situated in the United States. Paragraph 3 also provides that
the amount of the unified credit allowed to the estate of a non-U .S. citizen decedent domiciled in
France will in no event be less than the $\3,000 allowed under the Internal Revenue Code to the
estate of a nonresident not a citizen of the United States (subject to the adjustment for prior gift
tax unified credits, discussed below). Paragraph 3 does not apply to the estates of U.S. citizen
decedents, whether resident in France or elsewhere, because such estates receive the unified
credit under section 2010 of the Internal Revenue Code.
Subject to the adjustment for any gift tax unified credit previously allowed against gift
tax liability, the pro rata credit allowed under paragraph 3 is determined by multiplying the
unified credit available to a U.S. citizen under section 2010 of the Internal Revenue Code for the
year in which the decedent dies (~ $555,800 in 2004 or 2005) by a fraction, the numerator of
which is the value of the part of the gross estate situated in the United States and the
denominator of which is the value of the entire gross estate wherever situated. Thus, if a nonU.S. citizen domiciled in France died in 2005 and halfofhis entire gross estate (by value) were
situated in the United States, the estate would be entitled to a pro rata unified credit of $277,900
(provided that the U.S. estate tax due is not less than that amount). The entire gross estate
wherever situated (i.e., the worldwide estate, determined under U.S. domestic law) is to be taken
into account in computing the denominator. For purposes of computing the numerator, an
estate's assets will be treated as situated in the United States if they are so treated under U.S.
domestic law. However, an estate's assets will not be treated as situated in the United States for
purposes of this computation if the United States is precluded from taxing them by reason of
obligations elsewhere in the treaty.
Paragraph 3 restricts the availability of the pro rata unified credit in two respects. First,
the amount of the unified credit otherwise allowable under paragraph 3 is reduced by the amount
of any unified credit previously allowed against U.S. gift tax imposed on any gift by the
decedent. This rule reflects the fact that, under U.S. domestic law, a U.S. citizen or U.S. resident
individual is allowed a unified credit against the U.S. gift tax on lifetime transfers. However, as
a result of the estate tax computation, the individual is entitled only to a total unified credit
against estate tax of $555,800 (for decedents dying in 2004 or 2005), and the amount of the
unified credit available for use against U.S. estate tax on the individual's estate is effectively
reduced by the amount of any unified credit that has been allowed in respect of gifts by the
individual. (Note that the unified credit against gift tax liability is capped at $345,800 for all
years after 2001.) Pursuant to this rule, the amount of the pro rata unified credit otherwise
allowed to the estate of a deceased individual under paragraph 3 is reduced by the amount of any
unified credit previously allowed with respect to lifetime gifts by that individual. Under U.S.
9
law, the only circumstance under which any unified credit would have been previously allowed
is where the decedent made gifts subject to the U.S. gift tax while a U.S. citizen or U.S. resident
(as defined under the Internal Revenue Code for U.S. gift tax purposes).
Paragraph 3 also conditions allowance of the pro rata unified credit upon the provision of
all information necessary to verify and compute the credit. Thus, for example, the estate's
representatives will be required to demonstrate satisfactorily both the value of the worldwide
estate and the value of the U.S. portion of the estate. Substantiation requirements also apply, of
course, with respect to other provisions of the Protocol and the Convention. However, the
negotiators believed it advisable to emphasize the substantiation requirements in connection with
this provision, because the computation of the pro rata unified credit involves certain information
not otherwise relevant for U.S. estate tax purposes.
In addition, the amount of the pro rata unified credit is limited to the amount of U.S.
estate tax imposed on the estate. See section 21 02(b)( 4) of the Internal Revenue Code.
The following examples illustrate the operation of the pro rata unified credit and the
marital deduction of new paragraph 3 of Article II of the Convention and their interaction with
the marital exclusion of new paragraph 2 of Article II. Unless otherwise stated, assume for
purposes of illustration that: H, the decedent, and W, his surviving spouse, are French citizens
resident in France at the time of the decedent's death; H dies in 2005, when the unified credit for
estate tax purposes under section 20 I 0 of the Internal Revenue Code is $555,800 and the
applicable exclusion amount under section 20 lOis $1,500,000; all conditions set forth in
paragraph 3 of Article I I and paragraph 3 of Article 12 of the Convention, as added by the
Protocol, are satisfied (including the condition that the executor waive the estate tax marital
deduction allowable under U.S. domestic law); no deductions are available under the Internal
Revenue Code in computing the U.S. estate tax liability; there are no adjusted taxable gifts
within the meaning of Internal Revenue Code section 200 I (b) or 210 I (c); and the applicable
U.S. domestic estate and gift tax laws are those that were in effect on the date the Protocol was
signed.
Example I. (i) H has U.S. real property worth $4,000,000, all of which he bequeaths to
W. The remainder of H's estate consists of $6,000,000 of French situs property.
(ii) Pursuant to new paragraph 2 of Article II, the U.S. gross estate equals $2,000,000 (the
amount by which the $4,000,000 of U.S. real property bequeathed to W exceeds $2,000,000
(50% of the total value of U.S. property taxable by the United States under the Convention)).
H's worldwide gross estate equals $8,000,000 ($2,000,000 plus $6,000,000 of French situs
property).
(iii) The $2,000,000 U.S. gross estate is reduced by the $1,500,000 marital deduction of new
paragraph 3 of Article II, resulting in a $500,000 U.S. taxable estate. The tentative tax on the
taxable estate equals $155,800. H's estate would also be entitled to the pro rata unified credit
allowed by new paragraph 3 of Article 12 of$138,950 ($555,800 (the full unified credit)
10
multiplied by a fraction equal to the $2,000,000 U.S. gross estate over the $8,000,000 worldwide
gross estate). Thus, the total U.S. estate tax liability is $16,850 ($155,800 - $138,950).
Example 2. (i) The facts are the same as in Example 1, except that H bequeaths
$1,200,000 of his U.S. real property to Wand $2,800,000 of his U.S. real property to C, H's
child.
(ii) The $2,800,000 of U.S. real property bequeathed to C is included in H's U.S. gross estate.
Pursuant to new paragraph 2 of Article 11, none of the U.S. real property bequeathed to W is
included in the gross estate, because such property would be included only to the extent its value
(i.e., $1,200,000) exceeded 50% of the $4,000,000 total U.S. situs property taxable under
Articles 5, 6 or 7 of the Convention. H's worldwide gross estate equals $8,800,000 ($2,800,000
plus $6,000,000 of French situs property).
(iii) Because none of the U.S. situs property bequeathed to W is included in the U.S. gross
estate, the property is not "qualifying property", and therefore no marital deduction is allowed
with respect to that property under new paragraph 3 of Article 11. The tentative tax on the
$2,800,000 gross estate equals $1,156,800. H's estate would also be entitled to the pro rata
unified credit allowed by new paragraph 3 of Article 12, which equals $176,845 ($555,800 (the
full unified credit), multiplied by a fraction equal to the $2,800,000 U.S. gross estate over the
$8,800,000 worldwide gross estate). Thus, the total U.S. estate tax liability is $979,955
($1,156,800 - $176,845).
Paragraph 4 provides that in determining the French gift or inheritance tax with respect to
transfers by a donee or decedent who, at the time of making the gift or at death, was a citizen of
the U.S. or was domiciled in the U.S., the same deductions and credits must be allowed as if the
individual were domiciled in France. In addition, in determining the French gift or inheritance
tax with respect to transfers by a donee or decedent who, at the time of making the gift or at
death, was domiciled in France to an individual who is a U.S. citizen or is domiciled in the U.S.,
the same deductions and credits must be allowed as if the individual were domiciled in France.
Under paragraph 5, the credits or deductions for tax imposed by a Contracting State
allowable under Article 12 are in lieu of, and not in addition to, any credits or deductions for
such taxes allowed by the internal laws of the other Contracting State and must be computed
according to and subject to the limitations of the law of such other Contracting State, as amended
from time to time without changing the general principle thereof.
Paragraph 6 provides that a Contracting State is not prohibited from imposing tax where
property, under the rules of the Convention, is taxable only in the other Contracting State but tax,
though chargeable, is not paid. A tax, however, shall be deemed paid where tax liability is
reduced or eliminated by means of a specific exemption, deduction, exclusion, credit, or
allowance.
11
Under paragraph 7, where, pursuant to the provisions of the Convention, property may
not be taxed in a Contracting State, that Contracting State may nevertheless take into account
such exempted property that is otherwise taxable under its internal law in calculating the amount
of tax on the property that may be taxed in that Contracting State pursuant to the Convention. In
other words, such exempted property may be included in the tax base for purposes of
determining the applicable marginal rate of tax.
Under paragraph 8, the provisions of the Convention may not result in an increase in the
amount of the tax imposed by either Contracting State under its domestic laws. A reduction in
the credit allowed against a Contracting State's tax for tax paid to the other Contracting State,
which reduction results from the application of the Convention, is not for these purposes to be
construed as an increase in tax. This prevents the argument, for example, that an estate would
have received a higher foreign tax credit without the treaty, because it would have paid more
French taxes, and thus should be allowed the higher foreign tax credit even though the treaty
reduced the estate's French tax.
Article VIII
Article VIII of the Protocol amends Article 15 (Filing of Returns and Exchange of
Information) of the Convention by modifying the last sentence of paragraph 2. Under paragraph
2, the competent authority of each Contracting State is required to exchange two specific
categories of information with the competent authority of the other Contracting State. As
amended by the Protocol, the last sentence of paragraph 2 provides that any information
furnished must be treated as secret by the recipient State. Such information may not be disclosed
to persons other than those "involved in the" assessment, collection, enforcement, or prosecution
in respect of the taxes which are the subject of the Convention. This is a change from the current
language, which refers to persons "concerned with" such activities.
Article IX
Article IX contains the rules for bringing the Protocol into force and giving effect to its
provisions.
Paragraph I provides for the ratification of the Convention by both Contracting States
according to their constitutional and statutory requirements. Each State must notify the other as
soon as its requirements for ratification have been complied with. Paragraph 2 provides that the
Convention will enter into force on the date of the later of such notifications.
In the United States, the process leading to ratification and entry into force is as follows:
Once a protocol or treaty has been signed by authorized representatives of the two Contracting
States, the Department of State sends the protocol or 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 of the Senate Committee on Foreign Relations to hold hearings on the protocol or
12
treaty and 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 protocol or 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.
The date on which a treaty enters into force is not necessarily the date on which its
provisions take effect. Paragraphs 2 and 3 contain rules that determine when the provisions of
the treaty will have effect.
Pursuant to paragraph 2, the Protocol will generally have effect with respect to gifts made
and deaths occurring after such date.
Paragraph 3 contains special retrospective effective date provisions for paragraph 3 of
Article 11 (Community Property and Marital Deduction) of the Convention and paragraph 3 of
Article 12 (Exemptions and Credits) of the Convention, in each case as amended by the Protocol.
These paragraphs will take effect with respect to deaths occurring and gifts made after
November 10, 1988. However, the benefits of those provisions will be available with respect to
gifts made or deaths occurring after November 10, 1988, and prior to the general effective date
of paragraph 2, only if a claim for refund due as a result of those paragraphs is filed before the
date that is one year after the first day of the second month following the date on which the
Protocol enters into force or within the otherwise applicable period for filing such a claim
expires under the domestic law of the Contracting State concerned. Additionally, the saving
clause of paragraph 4 of Article 1 (Estates and Gifts Covered) applies to any such claim for
refund. Where an estate, prior to entry into force of the Protocol, was allowed a marital
deduction for a transfer to a qualified domestic trust under Internal Revenue Code section
2056A( d), such estate may elect to treat the qualified domestic trust as if it had never been
established in order to claim the benefits of paragraph 3 of Article 11 or paragraph 3 of Article
12, as long as it does so within the time for filing a claim for refund referred to in the preceding
sentence. Where such an election is made, the property is treated as having been transferred to
the surviving spouse at the time of the decedent's death for all purposes of the Convention.
13
DEPARTMENT OF THE TREASURY
TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN
THE GOVERNMENT OF THE UNITED STATES OF AMERICA
AND
THE GOVERNMENT OF THE PEOPLE'S REPUBLIC OF BANGLADESH
FOR THE AVOIDANCE OF DOUBLE TAXATION AND
THE PREVENTION OF FISCAL EVASION
WITH RESPECT TO TAXES ON INCOME
SIGNED AT DHAKA, SEPTEMBER 26, 2004
This is a technical explanation of the Convention between the United States and
Bangladesh signed at Dhaka on September 26, 2004(the "Convention"). Negotiations
with respect to the Protocol took into account the U.S. Department of the Treasury's
current tax treaty policy and Treasury's Model Income Tax Convention published
September 20, 1996 (the "U.S. Model").
Negotiations also took into account the Model Income Tax Convention on Income
and on Capital, published by the Organization for Economic Cooperation and
Development (the "OECD Model"), the United Nations Model Double Taxation
Convention Between Developed and Developing Countries (the "UN Model"), and recent
tax treaties concluded by both countries.
The Technical Explanation is an official guide to the Convention. It reflects the
policies behind particular Convention provisions, as well as understandings reached with
respect to the application and interpretation of the Convention. References in the
Technical Explanation to "he" or "his" should be read to mean "he or she" and "his or
her."
ARTICLE 1 (PERSONAL SCOPE)
Paragraph 1
Paragraph 1 of Article 1 provides that the Convention applies to residents of the
United States or Bangladesh except where the terms of the Convention provide
otherwise. Under Article 4 (Fiscal Domicile) a person is generally treated as a resident of
a Contracting State if that person is, under the laws of that State, liable to tax therein by
reason of his domicile or other similar criteria. If, however, a person is considered a
resident of both Contracting States, a single state of residence is assigned under Article 4.
This definition governs for all purposes of the Convention.
Certain provisions are applicable to persons who may not be residents of either
Contracting State. For example, Article 20 (Government Service) may apply to an
employee of a Contracting State who is resident in neither State. Paragraph 1 of Article
24 (Nondiscrimination) applies to nationals ofthe Contracting States. Under Article 26
(Exchange of Information and Administrative Assistance), information may be
exchanged with respect to residents of third states.
Paragraph 2
Paragraph 2 contains the traditional saving clause found in all u.s. treaties. Under
subparagraph (a) of paragraph 2, Contracting States reserve their rights, except as
provided in paragraph 3, to tax their residents and citizens as provided in their internal
laws, notwithstanding any provisions of the Convention to the contrary. For example, if a
resident of Bangladesh performs independent personal services in the United States and
the individual is not present in the United States for 183 days in a 12-month period, and
the income from the services is not attributable to a fixed base in the United States,
Article 15 (Independent Personal Services) would normally prevent the United States
from taxing the income. If, however, the resident of Bangladesh is also a citizen of the
United States, the saving clause permits the United States to include the remuneration in
the worldwide income of the individual and subject it to tax under the Internal Revenue
Code of 1986 ("Code") rules (i.e., without regard to Code section 894(a)). For special
foreign tax credit rules applicable to the U.S. taxation of certain U.S. income of its
citizens resident in Bangladesh, see paragraph 3 of Article 23 (Relief from Double
Taxation).
For purposes of the saving clause, "residence" is determined under Article 4
(Fiscal Domicile). Thus, if an individual who is not a U.S. citizen is a resident of the
United States under the Code, and is also a resident of Bangladesh under its law, and that
individual has a permanent home available to him in Bangladesh and not in the United
States, he would be treated as a resident of Bangladesh under Article 4 and for purposes
of the saving clause. The United States would not be permitted to apply its statutory rules
to that person if they are inconsistent with the treaty. Thus, an individual who is a U.S.
resident under the Code but who is deemed to be a resident of Bangladesh under the tiebreaker rules of Article 4 (Fiscal Domicile) would be subject to U.S. tax only to the
extent permitted by the Convention. However, the person would be treated as a U.S.
resident for U.S. tax purposes other than determining the individual's U.S. tax liability.
For example, in determining under Code section 957 whether a foreign corporation is a
controlled foreign corporation, shares in that corporation held by the individual would be
considered to be held by a U.S. resident. As a result, other U.S. citizens or residents
might be deemed to be United States shareholders of a controlled foreign corporation
subject to current inclusion of Subpart F income recognized by the corporation. See,
Treas. Reg. section 301.7701 (b)-7(a)(3).
Under subparagraph (b) of paragraph 2 each Contracting State also reserves its
right to tax former citizens and long-term residents whose loss of citizenship or long-term
residence had as one of its principal purposes the avoidance of tax. The subparagraph
defines "long-term resident", consistent with U.S. law, as an individual (other than a U.S.
citizen) who is a lawful permanent resident of the United States in at least 8 of the prior
15 taxable years. An individual shall not be treated as a lawful permanent resident for any
taxable year if such individual is treated as a resident of a foreign country under the
2
provisions of a tax treaty between the United States and the foreign country and the
individual does not waive the benefits of such treaty applicable to residents of the foreign
country.
In the United States, such a former citizen or long-term resident is taxable in
accordance with the provisions of section 877 of the Code. Section 877 provides for
special tax treatment of former U.S. citizens and long-term residents who gave up their
citizenship or long-term resident status to avoid U.S. tax. Prior to its amendment by the
American Jobs Creation Act of2004 (AJCA), section 877 applied to individuals that
relinquished U.S. citizenship or terminated long-term residency with a principal purpose
(i.e., subjective intent) of tax avoidance. An individual was generally presumed to have a
tax avoidance purpose if their net worth or average annual net income tax liability
exceeded specified thresholds. AJCA replaced the subjective determination of tax
avoidance as a principal purpose for relinquishment of citizenship or termination of
residency with objective rules. Former citizens or long-term residents are now subject to
U.S. tax for the I O-year period following loss of such status, unless they fall below
certain net income and net worth thresholds or satisty certain limited exceptions for dual
citizens and minors who have had no substantial contact with the U.S.
Thus, section 877 now treats individuals who expatriate and meet the objective
tests as having expatriated for tax avoidance purposes. Accordingly, the objective tests in
section 877 represent the administrative means by which the United States determines
whether a taxpayer has a tax avoidance purpose for purposes of the reservation of taxing
rights contained in subparagraph (b) of paragraph 2.
Paragraph 3
Some treaty provisions are intended to provide benefits to citizens and residents
that do not exist under internal law. Paragraph 3 sets forth certain exceptions to the
saving clause that preserve these benefits for citizens and residents of the Contracting
States.
Subparagraph (a) lists certain provisions of the Convention that are applicable to
all citizens and residents of a Contracting State, despite the general saving clause rule of
paragraph 2:
(1) Paragraph 2 of Article 9(Associated Enterprises) grants the right to a
correlative adjustment with respect to income tax due on profits reallocated under Article
9.
(2) Paragraphs 2 and 5 of Article 19(Pensions, Et Cetera) deal with social security
benefits and child support payments, respectively. The inclusion of paragraph 2 in the
exceptions to the saving clause means that the grant of exclusive taxing right of social
security benefits to the paying country applies to deny, for example, to the United States
the right to tax its citizens and residents on social security benefits paid by Bangladesh.
The inclusion of paragraph 5, which exempts child-support-payments from taxation by
the State of residence of the recipient, means that if a resident of Bangladesh pays child
3
support to a citizen or resident of the United States, the United States may not tax the
recipient.
(3) Article 23 (Relief from Double Taxation) confirms the benefit of a credit to
citizens and residents of one Contracting State for income taxes paid to the other, even if
such a credit is not available under the domestic law of the first State.
(4) Article 24(Nondiscrimination) requires one Contracting State to grant national
treatment to residents and citizens of the other Contracting State in certain circumstances.
Excepting this Article from the saving clause requires, for example, that the United States
give such benefits to a resident or citizen of Bangladesh even if that person is also a
citizen of the United States.
(5) Article 25 (Mutual Agreement Procedure) may confer benefits on citizens and
residents of the Contracting States. For example, the statute of limitations may be waived
for refunds and the competent authorities are permitted to use a definition of a term that
differs from the internal law definition. As with the foreign tax credit, these benefits are
intended to be granted by a Contracting State to its citizens and residents.
Subparagraph (b) of paragraph 3 provides a different set of exceptions to the
saving clause. The benefits referred to are all intended to be granted to temporary
residents ofa Contracting State (for example, in the case of the United States, holders of
non-immigrant visas), but not to citizens or to persons who have acquired permanent
residence in that State. If beneficiaries of these provisions travel from one of the
Contracting States to the other, and remain in the other long enough to become residents
under its internal law, but do not acquire permanent residence status (i.e., in the U.S.
context, they do not become "green card" holders) and are not citizens of that State, the
host State will continue to grant these benefits even if they conflict with their statutory
rules. The benefits preserved by this paragraph are the host country exemptions for the
following items of income: government service salaries and pensions under Article 20
(Government Service); certain income of visiting teachers, students and trainees under
Article 21 (Teachers, Students and Trainees); and the income of diplomatic agents and
consular officers under Article 27 (Effect of Convention on Diplomatic Agents and
Consular Officers, Domestic Laws and Other Treaties).
The provisions dealing with the relationship between the Convention and other
laws and treaties of the Contracting States, normally dealt with in Article 1 of U.S.
treaties are found in Article 27 (Effect of Convention on Diplomatic Agents and Consular
Officers, Domestic Laws and Other Treaties) of the Convention.
ARTICLE 2 (TAXES COVERED)
This Article specifies the U.S. taxes and the taxes of Bangladesh to which the
convention applies. With one exception, the taxes specified in Article 2 are the covered
taxes for all purposes of the Convention. A broader coverage applies, however, for
purposes of Article 24 (Nondiscrimination). Article 24 applies with respect to all taxes,
including those imposed by state and local governments.
4
Paragraph 1
Paragraph I is based on the OECD Model and provides that the Convention
applies to income taxes imposed on behalf of either Contracting State; this covers taxes
on total income or any part of income and includes tax on gains derived from property.
The Convention does not apply to payroll taxes. Nor does it apply to property taxes,
except with respect to Article 24 (NonDiscrimination).
Paragraph 2
Subparagraph 2(a) provides that the United States covered taxes are the Federal
income taxes imposed by the Code. Social security taxes (Code sections 140 I, 3101,
3111 and 330 I) are not covered taxes. Although, unlike the U.S. Model, the Convention
does not specify the exclusion of social security taxes, the Commentary to Article 2 of the
OECD Model state that social security taxes are not income taxes for these purposes.
Except with respect to Article 24 (Nondiscrimination), state and local taxes in the United
States are not covered by the Convention.
Subparagraph I (b) speci fies the existing taxes of
Bangladesh that are covered by the Convention. This is the income tax, and it includes
any surcharges that are calculated by reference to the income taxes.
Paragraph 3
Under paragraph 3, the Convention will apply to any taxes that are identical, or
substantially similar, to those enumerated in paragraph 2, and which are imposed in
addition to, or in place of, the existing taxes after the date of signature of the Convention.
The paragraph also provides that the competent authorities of the Contracting States will
notity each other of changes in their taxation laws or of other laws that significantly
affect their obligations under the Convention. The use of the term "significantly" means
that changes must be reported that are of significance to the operation of the Convention.
Other laws that may affect a Contracting State's obligations under the Convention may
include, for example, laws affecting bank secrecy.
ARTICLE 3 (GENERAL DEFINITIONS)
Paragraph 1
Paragraph I defines a number of basic terms used in the Convention. Certain
others are defined in other articles of the Convention. For example, the term "resident of
a Contracting State" is defined in Article 4 (Fiscal Domicile). The term "permanent
establishment" is defined in Article 5 (Permanent Establishment). The terms "dividends,"
"interest," and "royalties" are defined in Articles 10, II and 12, respectively. The
introduction to paragraph I makes clear that the definitions in this paragraph apply for all
purposes of the Convention, unless the context requires otherwise. This latter condition
allows flexibility in the interpretation of the treaty in order to avoid unintended results.
Terms that are not defined in the Convention are dealt with in paragraph 2.
Subparagraph I (a) defines the term "person" to include an individual, a
partnership, a company, an estate, a trust, and any other body of persons. The definition is
significant for a variety of reasons. For example, under Article 4 (Fiscal Domicile), only
a "person" can be a "resident" and therefore eligible for most benefits under the treaty.
Also, all "persons" are eligible to claim relief under Article 25 (Mutual Agreement
Procedure ).
The term "company" is defined in subparagraph I (b) as a body corporate or an
entity treated as a body corporate for tax purposes in the state where it is organized or has
its place of effective management.
The terms "enterprise of a Contracting State" and "enterprise of the other
Contracting State" are defined in subparagraph I (c) as an enterprise carried on by a
resident of a Contracting State and an enterprise carried on by a resident ofthe other
Contracting State. The term "enterprise" is not defined in the Convention. The OECD
Model defines the term as applying to the carrying on of any business. This meaning of
the term applies for purposes of the Convention as well.
Although subparagraph I (c) does not include the U.S. Model's explicit reference
to fiscally transparent enterprises, it is understood that the terms "enterprise of a
Contracting State" and "enterprise of the other Contracting State" encompass an
enterprise conducted through an entity (such as a partnership) that is treated as fiscally
transparent in the Contracting State where the entity's owner is resident. In accordance
with Article 4 (Fiscal Domicile), entities that are fiscally transparent in the country in
which their owners are resident are not considered to be residents of a Contracting State
(although income derived by such entities may be taxed as the income of a resident, if
taxed in the hands of resident partners or other owners). This treatment ensures that an
enterprise conducted by such an entity will be treated as carried on by a resident of a
Contracting State to the extent its partners or other owners are residents. This approach is
consistent with the Code, which under section 875 attributes a trade or business
conducted by a partnership to its partners and a trade or business conducted by an estate
or trust to its beneficiaries.
An enterprise of a Contracting State need not be carried on in that State. It may be
carried on in the other Contracting State or a third state (e.g., a U.S. corporation doing all
of its business in Bangladesh would still be a U .S. enterprise).
Subparagraph 1(d) defines the term "international traffic." The term means any
transport by a ship or aircraft except when the vessel is operated solely between places
within a Contracting State. This definition is applicable principally in the context of
Article 8 (Shipping and Air Transport). The definition in the OECD Model refers to the
operator of the ship, or aircraft having its place of effective management in a Contracting
State (i.e., being a resident of that State). The U.S. Model does not include this limitation.
6
The broader definition combines with paragraphs 2 and 4 of Article 8 to exempt from tax
by the source State income from the rental of aircraft or containers that is earned both by
lessors that are operators of aircraft and by those lessors that are not (e.g., a bank or a
container leasing company).
The exclusion from international traffic of transport solely between places within
a Contracting State means, for example, that carriage of goods or passengers solely
between New York and Chicago would not be treated as international traffic, whether
carried by a U.S. or a Bangladesh carrier. If, however, goods or passengers are carried by
a carrier resident in Bangladesh from a non-U.S. port to, for example, New York, and
some of the goods or passengers continue on to Chicago, the entire transport would be
international traffic. This would be true if the international carrier transferred the goods at
the u.S. port of entry from an aircraft to a land vehicle, or even if the overland portion of
the trip in the United States was handled by an independent carrier under contract with
the original Bangladesh carrier, so long as both parts of the trip were reflected in original
bills oflading. For this reason, the Convention refers, in the definition of "international
traffic," to "such transport" being solely between places in a Contracting State, while the
OECD Model refers to the ship or aircraft being operated solely between such places.
The language in the Convention is intended to make clear that, as in the above example,
even if the goods are carried on a different aircraft for the internal portion of the
international voyage than is used for the overseas portion of the trip the definition applies
to that internal portion as well as the external portion.
Finally, a "cruise to nowhere," i.e., a cruise beginning and ending in a port in the
same Contracting State with no stops in a foreign port, would not constitute international
traffic.
Subparagraphs I (e )(i) and (ii) define the term "competent authority" for the
United States and Bangladesh, respectively. The U.S. competent authority is the
Secretary of the Treasury or his delegate. The Secretary of the Treasury has delegated the
competent authority function to the Commissioner of Internal Revenue, who in tum has
delegated the authority to the Director, International (LMSB) and, with respect to
interpretative issues, the Director, International (LMSB) with the concurrence of the
Associate Chief Counsel (International) of the Internal Revenue Service.
The term "United States" is defined in subparagraph 1(f) to mean the United
States of America, including the states, the District of Columbia and the territorial sea of
the United States. The term does not include Puerto Rico, the Virgin Islands, Guam or
any other U.S. possession or territory. This Convention explicitly includes certain areas
under the sea within the definition of the United States. For certain purposes, the
definition is extended to include the sea bed and subsoil of undersea areas adjacent to the
territorial sea of the United States. This extension applies to the extent that the United
States exercises sovereignty in accordance with international law for the purpose of
natural resource exploration and exploitation of such areas. This extension of the
definition applies, however, only if the person, property or activity to which the
Convention is being applied is connected with such natural resource exploration or
7
exploitation. Thus, it would not include any activity involving the sea floor of an area
over which the United States exercised sovereignty for natural resource purposes if that
activity was unrelated to the exploration and exploitation of natural resources.
The term "Bangladesh" is defined in subparagraph I (g) to mean the People's
Republic of Bangladesh. The term is defined to include the territorial sea, sea bed and
subsoil adjacent to the territorial sea over which Bangladesh exercises its sovereign rights
in accordance with international law.
The term "national" as it relates to Bangladesh and to the United States, is defined
in subparagraphs I (h)(i) and (ii), respectively. This term is relevant for purposes of
Articles 20 (Government Service) and 24 (Nondiscrimination). A national of one of the
Contracting States is (1) an individual who is a citizen or national of that State, and (2)
any legal person, partnership or association deriving its status, as such, from the law in
force in the State where it is established.
Paragraph 2
Paragraph 2 provides that in the application of the Convention, any term used but
not defined in the Convention will have the meaning that it has under the law of the
Contracting State whose tax is being applied, unless the context requires otherwise. lfthe
term is defined under both the tax and nontax laws of a Contracting State, the definition
in the tax law will take precedence over the definition in the non-tax laws.
Finally, there also may be cases where the tax laws of a State contain multiple
definitions of the same term. In such a case, the definition used for purposes of the
particular provision at issue, if any, should be used.
lfthe meaning of a term cannot be readily determined under the law of a
Contracting State, or if there is a contlict in meaning under the laws of the two States that
creates difficulties in the application of the Convention, the competent authorities, as
indicated in paragraph 3(e) of Article 25 (Mutual Agreement Procedure), may establish a
common meaning in order to prevent double taxation or to further any other purpose of
the Convention. This common meaning need not conform to the meaning of the term
under the laws of either Contracting State.
The reference in paragraph 2 to the internal law of a Contracting State means the
law in effect at the time the treaty is being applied, not the law as in effect at the time the
treaty was signed. This use of "ambulatory definitions" has been clarified in this
paragraph by the use of the phrase "at that time."
The use of "ambulatory" definitions, however, may lead to results that are at
variance with the intentions of the negotiators and of the Contracting States when the
treaty was negotiated and ratified. The reference in both paragraphs 1 and 2 to the
"context otherwise requiring" a definition different from the treaty definition, in
paragraph 1, or from the internal law definition of the Contracting State whose tax is
8
being imposed, under paragraph 2, refers to a circumstance where the result intended by
the Contracting States is different from the result that would obtain under either the
paragraph I definition or the statutory definition. Thus, flexibility in defining terms is
necessary and permitted.
ARTICLE 4 (FISCAL DOMICILE)
This Article sets forth rules for determining whether a person is a resident of a
Contracting State for purposes of the Convention. As a general matter only residents of
the Contracting States may claim the benefits of the Convention. The treaty definition of
residence is to be used only for purposes of the Convention. The fact that a person is
determined to be a resident of a Contracting State under Article 4 does not necessarily
entitle that person to the benefits of the Convention. In addition to being a resident, a
person also must qualify for benefits under Article 17 (Limitation on Benefits) in order to
receive benefits conferred on residents of a Contracting State.
The determination of residence for treaty purposes looks first to a person's
liability to tax as a resident under the respective taxation laws of the Contracting States.
As a general matter, a person who, under those laws, is a resident of one Contracting
State and not of the other need look no further. That person is a resident for purposes of
the Convention of the State in which he is resident under internal law. If, however, a
person is resident in both Contracting States under their respective taxation laws, the
Article provides tie-breaker rules pursuant to which a person is assigned, where possible,
a single State of residence for purposes of the Convention.
Paragraph 1
The term "resident of a Contracting State" is defined in paragraph I. In general,
this definition incorporates the definitions of residence in U.S. law and that of
Bangladesh by referring to a resident as a person who, under the laws of a Contracting
State, is subject to tax there by reason of his domicile, residence, citizenship, place of
management, place of incorporation or any other similar criterion. Thus, residents of the
United States include aliens who are considered U.S. residents under Code section
7701(b).
Paragraph 1 also addresses special cases that may arise in the context of Article 4.
The paragraph makes explicit the generally understood practice of including
within the term "resident of a Contracting State" the Government of that state as well as
any political subdivisions or local authorities of that State.
Certain entities that are nominally subject to tax but that in practice rarely pay tax
also would generally be treated as residents and therefore accorded treaty benefits. For
example, a U.S. Regulated Investment Company (RIC), U.S. Real Estate Investment
Trust (REIT) and U.S. Real Estate Mortgage Investment Conduit (REMIC) are all
residents of the United States for purposes of the treaty. Although the income earned by
9
these entities normally is not subject to U.S. tax in the hands of the entity, they are
taxable to the extent that they do not currently distribute their profits, and therefore may
be regarded as "liable to tax." They also must satisfy a number of requirements under the
Code in order to be entitled to special tax treatment.
Subparagraph (a) provides that a person who is liable to tax in a Contracting State
only in respect of income from sources within that State will not be treated as a resident
of that Contracting State for purposes of the Convention. Thus, a consular official of
Bangladesh who is posted in the United States, who may be subject to U.S. tax on U.S.
source investment income, but is not taxable in the United States on non-U .S. source
income, would not be considered a resident of the United States for purposes of the
Convention. (See Code section nOI(b)(5)(B)). Similarly, although not explicitly stated
in the Convention, an enterprise of Bangladesh with a permanent establishment in the
United States is not, by virtue of that permanent establishment, a resident of the United
States. The enterprise generally is subject to U.S. tax only with respect to its income that
is attributable to the U.S. permanent establishment, not with respect to its worldwide
income, as is a U.S. resident.
Subparagraph (b) addresses special problems presented by partnerships, trusts or
estates (i.e., fiscally transparent entities). This subparagraph applies to any resident of a
Contracting State who is entitled to income derived through an entity that is treated as an
entity that is a partnership, trust, or estate under the laws of either Contracting State.
Entities falling under this description in the United States would include partnerships,
common investment trusts under section 584 and grantor trusts. This paragraph also
applies to U.S. limited liability companies ("LLCs") that are treated as partnerships for
U.S. tax purposes.
Subparagraph (b) provides that an item of income derived by such a fiscally
transparent entity is considered to be derived by a resident of a Contracting State to the
extent that the resident is treated under the taxation laws of the State where he is resident
as deriving the item of income. For example, if a corporation resident in Bangladesh
distributes a dividend to an entity that is treated as fiscally transparent for U.S. tax
purposes, the dividend will be considered derived by a resident of the United States only
to the extent that the taxation laws of the United States treat one or more U.S. residents
(whose status as U.S. residents is determined, for this purpose, under U.S. tax laws) as
deriving the dividend income for U.S. tax purposes. In the case of a partnership, the
persons who are, under U.S. tax laws, treated as partners of the entity would normally be
the persons whom the U.S. tax laws would treat as deriving the dividend income through
the partnership. Thus, it also follows that persons whom the U.S. treats as partners but
who are not U.S. residents for U.S. tax purposes may not claim a benefit for the dividend
paid to the entity under the Convention. Although these partners are treated as deriving
the income for U.S. tax purposes, they are not residents of the United States for purposes
of the treaty. If, however, they are treated as residents ofa third country under the
provisions of an income tax convention which that country has with Bangladesh, they
may be entitled to claim a benefit under that convention. In contrast, if an entity is
organized under U.S. laws and is classified as a corporation for U.S. tax purposes,
10
Page 1 of 5
February 2, 2006
JS-4002
Remarks by
Under Secretary for International Affairs Tim Adams
At AEI Seminar
Working with the IMF to Strengthen Exchange Rate
Surveillance
Introduction
Let me thank Desmond Lachman and the American Enterprise Institute for inviting
me to speak to this seminar on the IMF's role in foreign exchange surveillance.
First, though, I want to discuss the overarching questions facing the Fund. The IMF
is the world's central institution for global monetary cooperation. A strong IMF
serves the interests of the United States and the world economy. Over the past
decades, the Fund has done remarkably well, tackling the debt crises of the 1980s,
helping transform the former Soviet Union and Central Europe, and addressing the
emerging market crises of the 1990s. The IMF is indispensable.
But in a rapidly evolving global economic and financial system, the Fund faces the
continuous challenge of re-tooling itself. Already, this decade, many new and
fundamental questions have emerged regarding the IMF's future and relevance.
Will the global community resolve imbalances in an orderly manner? With large
emerging market countries across the world putting in place sound macroeconomic
policy frameworks, adopting pro-growth policies, relying on private finance, and
accumulating large stocks of foreign exchange reserves, will the Fund be needed
as a major balance of payments lender? Crises will always happen, but can the
Fund do better on ex ante crisis prevention? When crises erupt, how can they be
best managed, especially when the dynamics of global capital flows are not fully
appreciated? IMF transparency has been substantially enhanced, but is there more
to be done?
The Fund's major shareholders and Management are tackling these issues and
many others through the Managing Director's Strategic Review. The Managing
Director will soon bring forward his ideas on how to strengthen the Fund's
surveillance activities including exchange rate surveillance and broader integration
of financial markets issues into surveillance. We welcome this exercise and we look
forward to working with him constructively to achieve concrete results.
Today, I would like to offer my own thoughts on the very high priority issue of the
IMF's role in foreign exchange surveillance. My objective is to table ideas for
reforming IMF foreign exchange surveillance procedures to make surveillance more
effective, to contribute to the debate which the Managing Director's Strategic
Review is stimulating, and to help galvanize action by the Fund's shareholderswho set the tone and direction for the IMF - to better allow Rodrigo de Rato and the
IMF's excellent staff to play their role as the world's preeminent monetary institution
The Role of Exchange Rates
The IMF - its management, staff, and shareholders - has long struggled to strike
the right balance in providing advice on the role of exchange rates. I recognize that
this is not an easy issue to resolve as there are so many complicating factors. For
example:
•
The interaction between the exchange rate and domestic policies can run
both ways. In a fixed exchange rate regime, the exchange rate is the central
target of monetary policy. In a flexible exchange rate regime, the exchange
rate is an outcome from other Dolicip.s.
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•
Exchange rate changes can be influenced as much by developments
abroad as at home.
• Countries' exchange rate regime preferences differ depending on whether
an economy is relatively closed or open to tradable goods and financial
flows, the extent of pass-through from exchange rate changes to domestic
inflation, the flexibility of labor and other factor markets, the concentration of
its trade, or the sophistication. credibility, and quality of a country's
institutions.
• Imbalances themselves can be adjusted through domestic policy measures,
exchange rate adjustment, or some combination thereof.
And, of course, we struggle with who should bear the burden of adjustment
and by how much.
The international monetary system has also generally been characterized by an
asymmetric bias, where pressures are more acute on deficit than surplus countries
to bear the burden of global adjustment.
John Maynard Keynes, in particular, devoted himself to the issue of asymmetric
bias when he worked on the initial plans for something that would eventually be
known as the International Monetary Fund. Keynes worried about the potentially
damaging effects of global current account imbalances and the fact that market
forces were not very strong in compelling surplus countries to adjust. He believed
that the IMF should have the ability to pressure surplus countries to play their part
in resolving imbalances and developed what was then known as the "scarce
currency clause." That clause faded into history as an unused relic of the Bretton
Woods system of fixed exchange rate regimes, but the need for a lever on surplus
countries remained. The asymmetric bias of the international monetary system was
evident in the late 1960s ahead of the demise of the Bretton Woods system. It is
also present today in discussion of the need for more flexible exchange rate
regimes - including in emerging Asia.
IMF and Exchange Rate S~rv~illance
Today's global imbalances are not so dissimilar from the past in the sense that they
require a shared, multilateral solution to achieve an orderly resolution. Let me be
clear, the United States has its part to play in this process by raising national
saving, and in particular continuing on the path of deficit reduction. The
Administration does not and will never shy away from this point.
But the solution also requires an IMF capable of demonstrating strong leadership
on multilateral exchange rate surveillance. The IMF membership should endorse
such an enhanced role for the IMF, restoring its central role on exchange rates.
There are four areas where our experience clearly points to the need for concrete
improvements: clarifying exchange rate surveillance principles; Article IV reviews;
the special consultation mechanism; and multilateral surveillance reforms.
Clarifying Principles of IMF Surveillance over Exchange Rate Policies
First is clarifying the IMF exchange rate surveillance principles. The fact is that the
IMF has a good foundation of principles for members' exchange rate policies.
These include the idea that "members should take into account in their intervention
policies the interests of other members, including those of the countries in whose
currencies they intervene." Moreover, the principles of Fund surveillance over
exchange rate policies contain warnings against "protracted large-scale intervention
in one direction" and "excessive" reserve accumulation.
These principles, which enjoy broad support among IMF membership, mandate
active IMF involvement in exchange rate issues. And these principles are not new they were spelled out in the late 1970s. Still, the principles of Fund surveillance
could be sharpened with more procedural guidance on such issues as how long is
"protracted" intervention? How much is "large-scale"? What constitutes and what
are the costs of "excessive" build-up of reserves?
When the principles of surveillance were first drawn up, they were intentionally left
vague so that experience could shape their interpretation. Nearly thirty years later, I
believe we have that experience.
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Article IVs
Second is improving the Article IV review, the core of IMF surveillance since the
end of the Bretton Woods regime of fixed exchange rates. These reviews were
originally designed to enable the IMF to exercise "firm surveillance" over the
exchange rate policies of its members.
As I mentioned, assessing a member's balance of payments and its exchange rate
regime and practices requires a comprehensive analysis of the general economic
policies and performance of a country.
But my central point is that the pendulum has swung too far in Article IVs. In its
bilateral surveillance, the Fund focuses very heavily on domestic economic
developments and policies, especially fiscal policy, and addresses structural,
demographic, and longer-term factors in considerable detail. These items are
admittedly important. But increaSingly what is missing is a thorough assessment of
exchange rate issues.
Article IV reports need substantial and pointed discussions of exchange rate issues
on a consistent basis. The IMF's Articles very reasonably allow a member to adopt
the exchange rate regime of its choice. But at the same time, certain regimes may
not be appropriate to a country's circumstances, and the Fund - with its wealth of
expertise and experience across the globe - is well positioned to discuss this issue
with authorities and advocate change. I propose four specific reforms to improve
the quality of the foreign exchange element of the Article IV process.
1.
2.
3
4.
Article IV reports should explicitly discuss the consistency of a country's
exchange rate policy with domestic policies as well as the international
system and the IMF's principles for members' exchange rate poliCies.
The IMF should never accept uncritically a country's choice of exchange
rate regime and simply posit what domestic poliCies or external
circumstances would be required for the regime to be sustainable. Instead
the Fund should ask tough questions, such as whether a fixed exchange
rate is consistent with a realistic outlook for a country's fiscal policy, or
increased integration into international capital markets.
Evaluation of exchange rate policies should consider whether alternative
arrangements or regimes might be more appropriate. For example,
flexible exchange rates are the clear choice for "larger" emerging markets.
While not a substitute for sound domestic policies, currency flexibility can
limit the one-way betting that results in rapid depletion of reserves; it better
allows the external sector to bear a portion of the needed adjustment, rather
than imposing an undue burden on domestic demand; and it provides
signals of policy inconsistency in advance of crisis.
The IMF should improve its tools and advocacy to persuade countries to
exit unsustainable exchange regimes early on, rather than waiting for
perfect circumstances that never come. Too many countries wait until
circumstances are dire before abandoning an inappropriate exchange
arrangement, ratcheting up the costs to the country and to the global
community. Earlier analysis and more forceful advice could help encourage
smoother transitions.
Article IV reviews should draw more heavily from the Fund's World
Economic Outlook and excellent multilateral analysis. Multilateral analysis
should be integrated into and consistent with Article IV reports. This should
result in better consideration of the international environment and improve
the evaluation of specific country policies. So far visible progress along
these lines has been made mostly in bilateral surveillance of the United
States. Other countries - systemically important countries in particular would benefit from this treatment.
In making these recommendations I am aware that some Article IV reports in the
past have moved quite far in these directions. But this has not been consistent in
scope or in tone, and there has been considerable ambiguity about the degree of
shareholder support for such a robust role. It is time for the Fund - the only
institution with a mandate to assure a smoothly functioning international monetary
system - to reach judgments about the consistency of exchange rate policies with
members' international obligations, and to do that consistently across the
membership, particularly in systemically important countries. The Fund is not only a
trusted advisor to each of its members but the protector of the system as a whole.
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De-stigmatizing the Special Consultation Mechanism
Third, we must finally de-stigmatize the special consultation mechanism. In 1979,
the IMF developed a "special consultation" mechanism under which the Managing
Director could consult with members whose exchange rate policies might not be in
accord with the Fund's principles. Used only twice, revised in 1993 to broaden its
application and promote greater use, but never used since - the special
consultations mechanism is not working. There is nothing wrong with the concept of
special consultations, but in practice the tool has been used so rarely that its use
today would be perceived as a huge stigma for the country and might have market
ramifications.
As a means of enhanced engagement in Article IV reviews, a process for more
regular consultations should be undertaken to provide a realistic means of
intensifying exchange rate surveillance. The regularity of this process could lessen
the perceived stigma associated with special consultations, and encourage better
compliance with IMF principles for exchange rate policies.
The procedures for these regular consultations should require the Managing
Director to undertake intensified consultations pro-actively whenever an Article IV
review raises serious questions about the compatibility of a member's exchange
rate policy with IMF exchange rate principles or domestic policies, or when the
exchange rate regime otherwise appears unsustainable. If such consultations have
not been undertaken, the Executive Board should be able to call for them after
reviewing the Article IV report and subsequently discuss the results of the
intensified consultations.
Multilateral Surveillance Reform
Finally, multilateral surveillance should be enhanced. Since the 1980s, the IMF's
multilateral surveillance has centered on the World Economic Outlook publication,
which provides the Fund staff's globally consistent forecast and a broad view of
trends that cut across countries and regions. Multilateral analysis can be extremely
helpful by providing an overview of the global economy, and can be helpful for
bilateral surveillance efforts, in particular, by identifying the ways local policies and
systemic forces influence one another.
Considerable academic work, informal reasoning, and modeling have been applied
to exchange rate determination. Many types of models exist, from a simple
deviation from long-term averages to more state-of-the-art techniques. All of these
models have critics. No approach or model has been able to predict exchange rate
behavior, and we must be humble regarding our knowledge on this front.
It would be wholly unrealistic to think that countries would or could agree on what
constitutes a precise "right" exchange rate level. Nor should the IMF be placed in
the position of determining what the "right" exchange rate level is.
Nonetheless, quantitative efforts at exchange rate determination have helped
enhance understanding of exchange rate issues, and I believe that multilateral
surveillance could benefit from greater use of models and data that assess
exchange rate trends. The presentation of many different estimates, using many
different methodologies, alongside the relevant data, can be helpful in developing a
qualitative assessment of a country's exchange rate policies and improving the
information content for - and the functioning of - markets.
Therefore the IMF should deepen its work in developing techniques for assessing
exchange rate behavior, extend this work more to emerging markets, and regularly
publish its results. It should also seek to identify problematic or inappropriate
exchange rate behavior. Some have said that publishing such data could trigger
market instability. I do not agree. Properly presented, I think the routine publication
of data would provide added information to reach fundamental judgments about
exchange rate regimes.
To present the analysis, the Fund should have a regular report dedicated to
exchange rate developments across many countries. This could take the form of a
stand-alone report or an annex to the World Economic Outlook. In addition to
presenting the foregoing data, the report would focus on analysis and assessments
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of exchange rate policies that contribute to the build-up of unsustainable bilateral or
multilateral imbalances or that threaten to impede the orderly adjustment of
imbalances. Furthermore, the Fund report should include its most current analysis
on the conditions for exchange rate regime sustainability - including appropriate
domestic and external circumstances for fixed regimes, floating regimes, and how
to transition from one to another.
This report would achieve several goals. It would strengthen the IMF's focus on
exchange rate surveillance and the resources it devotes to these issues. It could
prompt debate. which could contribute to the development and refinement of
analytical techniques. And the presentation of multiple models and judgmental
interpretation of them would provide policymakers as well as market participants
with a view of the richness and complexity of exchange rate dynamics - even for an
individual currency. But most importantly, the report would facilitate identification of
exchange rate policies that damage other members or pose a risk to the
international financial system.
Conclusion
Taken together. these reforms would strengthen the IMF and improve the Fund's
work as the preeminent monetary institution. As you know, the United States is
engaged in discussions with certain countries regarding their exchange rate
policies. and these discussions may color the interpretation of the surveillance
reform proposals I have outlined today. Indeed, the IMF may fear being perceived
as doing the bidding of the United States. But the ideas I proposed today go beyond
immediate U.S policy concerns. They are a reflection of the enduring concerns that
led to the establishment of the IMF itself. I believe a strong IMF role on exchange
rate issues is central to the stability and health of the international economy.
Thank you.
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February 2, 2006
JS-4003
The Honorable John W. Snow
Prepared Remarks to
The National Association of Wholesaler-Distributors' Executive Summit
Good afternoon; thanks so much for having me here today and thank you for the
honor of receiving your Distinguished Leadership Award. I am deeply flattered that
your group has chosen me for this tribute.
Providing economic leadership is a challenge. And, in fact, I think that companies
like yours do it best. Those of us in government generally need to think about
staying out of your way!
I am a great admirer of the leadership the President has shown on the economy.
He has a keen understanding and a deep respect for what makes the American
economy so special. and his policies are based on a respect for free enterprise,
entrepreneurship and, as he so often says, simply "letting people keep more of the
money they earn."
It was an important message the President delivered in his State of the Union
Address this week. He told America, correctly, that our economy is performing very
well - far better than other major economies. But, as the President said, we live in a
new world and are facing competition from new economic players like China, India,
and other "emerging market" countries. In order for America to continue to be a
dynamic engine of growth, President Bush is outlining action in three key areas:
health, energy, and America's competitiveness.
The President is seeking to make health care more affordable and accessible. An
expansion of opportunities within Health Savings Accounts - which patients in
charge of their health care - will contribute to this goal. We also need to make
health insurance portable, make the system more efficient, and lower costs.
Allowing Association Health Plans would address many these concerns in the
small-business community.
The President said this week that the best way to break America's dependence on
foreign sources of energy is through new technology. His Advanced Energy
Initiative would provide for a 22 percent increase in clean-energy research at the
Department of Energy and would build on the energy legislation finally passed by
the Congress last year that encourages and rewards energy conservation activity.
In his Tuesday night address, the President also talked about an ambitious strategy
we are calling the American Competitiveness Initiative. It would significantly
increase federal investment in critical research, ensure that the U.S. continues to
lead the world in opportunity and innovation, and provide American children with a
strong foundation in math and science.
With a focus on these and other good policies, we'll keep America competitive in
the world and keep our economy strong as it has been for some time now. Over the
past two to three years, economic indicators have been a steady drumbeat of good
news. It's really amazing to look back on the past five years. When President Bush
took office just five years ago he was inheriting an economy in decline. The bursting
of the stock market bubble pushed the economy into recession and then the terrible
shock of September 11 th made economic matters even worse.
Thanks to responsible economic leadership from the President and Federal
Reserve Board, our economy is now unmistakably in a trend of expansion. GOP
growth grew at over 3.5 percent last year. Four and a half million new jobs have
been created since May of 2003; two million of them in the last year alone.
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Unemployment is running lower than the 1970s, 1980s and 1990s, payrolls are
rising and household wealth is at an all-time high.
The contributions to the economy of the wholesale trade - your productivity and job
creation in particular - are greatly appreciated. Thanks to businesses and workers
like yours, the U.S. is both the economic envy of, and inspiration to, the world.
When we look at the underlying fundamentals of the economy, we can see that
businesses and workers have every reason to be optimistic about the future.
For example, we see that productivity growth remains strong. Output per hour in
the non-farm business sector has risen at an average annual rate of 3.2 percent
since 2001, faster than any five-year period in the 1970s, 1980s or 1990s.
Consumer net worth - that's assets minus debts - is at a record high, and not just
because of housing. Deposits - the money in checking accounts, savings accounts,
and money market funds - are at a record high and are larger as a share of
disposable income than at any time since 1993.
In the past two years, the economy has generated about 170,000 jobs per month,
and that includes the two-month slowdown in job growth in the aftermath of
Hurricanes Katrina and Rita. In the past 32 years new claims for unemployment
insurance have almost never been as low as they have been recently, the only
exception being the peak of the high-tech bubble from November 1999 to June
2000.
Core inflation remains low, and that's good news for everyone.
It is also noteworthy that new orders for non-defense capital goods were 20 percent
higher in 2005 than in 2004 This tells us that the capacity of American businesses
to produce in the future is rising. Meanwhile, the capacity utilization rate is 80.7
percent, which is below the level that in the past has been associated with rising
inflation. In other words, American businesses are increasing capacity and at the
same time have room to more intensively use the capacity they have, suggesting
low inflation in the future plus pent-up demand for labor.
Independent private-sector forecasts point to continuing good news. For 2006, they
predict a nice increase in real wages. Inflation-adjusted hourly wages are in fact
already beginning their rise, growing 1.6 percent between September and
December.
We are, right now, likely witnessing the tipping point on wages - when incomes rise
for workers and business combined, but workers once again increase their incomes
faster than businesses. As employers, you are familiar with the scenario: once
businesses have been doing well for a while, they ultimately compete those
increases in income away by competing harder for labor. The result is higher wages
and higher standards of living for workers.
Both on leading indicators and a deeper background analysis, the American
economy proves to be on solid footing. The question that business and government
should look at is this: why is our economy performing so well and what can we do to
continue these positive trends?
Put in the simplest of terms, you - the business community - create the jobs,
develop the new products and services and so on. And we - the government - are
responsible for creating an environment in which you can succeed.
The Federal Reserve has added to a favorable environment by implementing sound
monetary policy. And there can be no doubt that the President's economic policies
of lower taxes on income and capital have given both businesses and individuals
the room they needed to grow and prosper.
The approach of this administration has been to implement the type of policies that
have always, historically, enabled this nation to thrive. Ours is a country that is
unique in its freedoms and we owe our prosperity to those freedoms. The simple
fact that we operate as a free market is central to our success. The U.S. has tended
to encourage small-business ownership, innovation and entrepreneurship, and
that's essential for a thriving economy. Policies that let entrepreneurs and workers
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simply do what they do best have always enabled our economy to be more open,
flexible, adaptive and resilient than any other in the world.
The President's tax cuts tapped into this proven, and I think uniquely American,
economic theory on promoting growth, and effectively lightened the burden on
individuals and businesses, leaving you to spend and invest, grow and create jobs.
His American Competitiveness Initiative, with its increases in federal investment in
critical research, will complement this entrepreneurial, creative and innovative
environment.
The reduced burden on the cost of capital and investment was critical because it is
the lifeblood of a free market economy. And as you are well aware, there is a risk
right now that taxes on investment and job creation could be raised. That would be
a terrible mistake, given the economic success that lower rates precipitated.
With more Americans working than ever before, more Americans owning stock than
ever before and with federal tax revenues at an all-time high to boot. there is simply
no reason for the Congress to accept a tax increase from the Congress. And I'm
confident the President won't accept one, period.
But this fight to keep taxes low on business, families and individuals will take an
extra effort from you and our friends on the Hill. They've got to make all of the
President's tax cuts permanent; letting them expire would be a tax increase - there
is simply no other way to put it. And tax increases would be bad for the economy,
bad for every American who still needs a job or seeks a better job.
According to our own Treasury estimates, the lower tax rate on dividends and
capital gains will ultimately increase national output by $35 billion. This is
significant because it illustrates the real point of these policies: they increase
savings and investment, increase labor productivity through this higher capital
formation. and, ultimately, increase jobs, the size of our economy and raise livings
standards.
We still have a federal budget deficit - one that is too large and that the President is
firmly committed to reducing. But our deficits are not the result of lower receipts tax revenues are coming in strong. Deficits matter and one of our highest priorities
is to achieve the President's goal of reducing our deficit in half to below 2.3 percent
of GDP by 2009. Even in the face of increased costs to deal with last summer's
hurricanes. I am confident that we will achieve this goal through spending restraint
and continued economic growth.
Good news on spending restraint came before the holidays, with final approval in
Congress of the FY2006 appropriations bills. The President worked with
Congress to reduce non-security discretionary spending below last year's level,
terminate or reduce funding for 89 lower-priority or poor-performing programs, and
rein in mandatory spending for the first time in nearly a decade. And yesterday the
Congress wrapped up work on the budget reconciliation bill that reduced the rate of
growth of entitlement spending for the first time in eight years.
The President's proposed FY 2007 budget will be released next week that is true to
the President's goals of reducing the deficit and keeping the growth of government
in check by holding overall discretionary spending below the rate of inflation. It
proposes cutting 141 programs that aren't delivering their promises to the taxpayers
and proposes tens of billions of dollars of savings on entitlement programs. It is a
budget that works to ensure that future generations of Americans will have the
opportunity to live in a Nation that is more prosperous and more secure.
The prescription for the near future, for our economy, is straightforward: if we keep
on doing what we're doing, policy-wise, we should keep getting what we're getting in this case, excellent economic growth, millions of new jobs and a deficit that is in
decline.
Can we do even better? You bet. Policies that reduce the number of baseless
lawsuits would be a great way to further free-up business and entrepreneurs to
produce and create jobs.
Asbestos legislation may come to the Senate floor next week, and the
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Administration would like to see a bill get off the floor and into conference so the
Congress can work on a final bill that brings certainty to the marketplace, allows
actual victims to get payments and stops trial lawyers from stealing productivity and
Jobs from the American economy in the name of innocent victims' health.
Nearly $74 billion has been lost on the inefficient and ruinous asbestos litigation
system, and nearly $30 billion of those dollars went to wealthy trial lawyers at the
expense of asbestos victims. When you consider that these costs have already
bankrupted 77 companies, cost America 60,000 jobs and caused workers to lose
$200 million in wages it is unthinkable that we could go on without fixing the
system. The President will be calling on the Senate to get this issue into committee
quickly.
Another issue that I know impacts the cost of doing business for this group
especially is the cost of energy. The President understands that impact, and it's
why he fought so hard for last year's historic energy bill. There's work ahead on
energy issues, and a reduced dependency on foreign sources is at the top of the
President's energy agenda.
The President also appreciates the drag that excessive regulation can put on
business, and therefore on job creation and innovation. That's why he tasks his
cabinet with taking a close look at their agencies, at their regulations, and making
sure that the benefits and protections of regulation are achieved without putting an
undue hardship on you. We want you to be able to do what you do best, and that's
create jobs. So there's a balance to achieve on regulation, and this entire
administration is dedicated to achieving that balance.
Similar in some ways to excessive regulation is excessive complexity in our tax
code. The code is not where it should be. After nearly three years as Treasury
Secretary I have yet to find anyone who is happy with the tax code - unless you are
in the tax preparation business, that is. Just to navigate it, millions of Americans
have to enlist professional help. I know you've heard - and lived - the statistics billions of hours of paperwork for tax filers and businesses, $140 billion dollars in
lost time and money just trying to comply with our increasingly unwieldy tax code.
This is a drag on economic growth in America and an unnecessary burden we all
share.
The President's Tax Reform Panel did excellent work under the leadership of the
tvvo co-chairmen, former Senators John Breaux and Connie Mack, and we're
reviewing their proposals now. We only get the chance to reform the code every
tvventy years or so, so we've got to make sure it's done right. We're not going to
rush the reform process because America deserves a tax code that meets the
President's goals for fairness, simplicity, and economic growth.
The rising cost of health care is another critical issue that I know you all deal with
every day, and we still need common-sense medical liability reform to help address
those costs. Health care costs have got to be brought down, and we've included
some mechanisms in the budget to address that pressing issue. As the President
pointed out in his State of the Union Address this week, it's time to allow Americans
to save more in their Health Savings Accounts. We hope this will encourage more
people to start HSAs, which put patients back in charge of their health-care
purchasing decisions while saving money on a tax-preferred basis.
For the longer term, we have economic issues that loom and the sooner we
address them, the better. The President did the right thing by leading on Social
Security reform. We appreciate your support for it. It remains the right thing to do.
I also appreciate, and share, the concern of this group when it comes to the skills
and preparation of the American workforce. Education and worker training policies
must be constantly adapted to the changing times and the changing, growing
economy. As the President said in announcing the American Competitiveness
Initiative Tuesday night, a strong economy depends on a skilled and talented
workforce. The President sees great success and potential in the ability of
community colleges to provide relevant, focused training for jobs that exist today jobs that may not have existed even five years ago because of innovation. And
workers should be able to continue to learn new skills for the changing business
environment. This is an investment in our future that is more important than venture
capital itself!
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Our workers are already competing with workers all around the globe, and when the
playing field is level both our workforce and our businesses will always prove
themselves That's why a level playing field is central to the President's free and fair
trade agenda. This underscores the importance of the Doha trade round which has
the potential to boost American jobs by reducing and eliminating tariffs and other
barriers on farm and industrial goods, ending unfair subsidies and opening the
global market to American services. The U.S. will push for a bold, wide-ranging
agreement, and the President will continue to use the American influence to bring
American workers even greater opportunities. With 95 percent of America's
potential customers living abroad, opening up new markets is extremely important.
I would never advise anyone to bet against the American worker, American
business or the American economy overall. When businesses, families and
individuals are allowed to pursue their goals - with opportunities to invest and enjoy
the rewards of innovation, risk-taking and entrepreneurship - our economy is
incredibly resilient and powerful.
Again, I appreciate the chance to talk with you today about the prospects for our
economy. I look forward to taking your questions.
3/2/2006
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February 2, 2006
JS-4004
MEDIA ADVISORY
Treasury Secretary Snow to Visit Charlotte, North Carolina
to Discuss American Competitiveness and the U.S. Economy
U.S. Treasury Secretary John W. Snow will travel to Charlotte, North Carolina
Thursday to discuss American competitiveness and the U.S. economy. While in
Charlotte, Secretary Snow will visit the North Carolina Research Campus where he
will participate in a discussion on the contributions that innovation and technology
make to the economy and to standards of living for the American people.
The following event is open to credentialed media with photo identification:
Friday, February 3, 2006
8:00 AM EST
Breakfast with Charlotte Chamber of Commerce
Charlotte Chamber of Commerce
330 South Tryon Street
Charlotte, NC 28202
**Media please RSVP to Erica Johnson at (704) 378-1354
11:00 AM EST
North Carolina Research Campus
Site Visit and Roundtable
Cannon Village Visitors Center
Auditorium
200 West Avenue
Kannapolis, NC
**Media please RSVP to Phyllis Beaver at 704-273-1181 or
pbeaver@castlecooke.com
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February 3,
2006
JS-4005
The Honorable John W. Snow
Prepared Remarks to the Charlotte
Chamber of Commerce
Good morning, everyone; it's great to be with you here in Charlotte. Thanks to
businesses like yours all over the country, the American economy is doing very
well, and I want you to know that the President is dedicated to the policies that
create a good environment for job creation and innovation.
From lower tax rates for individuals and investors to the creation of low-cost, highsavings health care options, President Bush has been working to remove the
obstacles that can to hold back independent businesses like the ones this Chamber
represents.
He knows that your ability to invest in your business - and then deduct that
expense from your taxes - is critically important to your ability to grow and hire
more workers.
And he knows that affording a health-care plan on a small-business budget is a
struggle and a challenge that needs a light at the end of the tunnel. I hope that
Health Savings Accounts (HSAs) are offering that light already. I know that
employers both large and small are taking advantage of HSAs, and I think they are
a break-through health-care product.
But I want to be clear when I say that the President doesn't feel sorry for small and
medium-sized employers. No. He admires them. He knows where job creation and
innovation comes from, and he wants to encourage as much of those things as
possible.
I'm glad to see that the Charlotte economy is doing well, and I'm proud to report on
the robust health of the national economy. In his State of the Union Address this
week, the President told America about our healthy economy, which is performing
far better than other major economies. But, as the President said and you well
know, we live in a new world and are facing competition from new economic players
like China, India, and other "emerging market" countries. In order for America to
continue to be a dynamic engine of growth, President Bush is outlining action in
three key areas: health, energy, and America's competitiveness.
He believes that the best way to break America's dependence on foreign sources of
energy is through new technology. That's why he is proposing an Advanced Energy
Initiative that would provide for a 22 percent increase in clean-energy research at
the Department of Energy and would build on the energy legislation finally passed
by the Congress last year that encourages and rewards energy conservation
activity.
In his Tuesday night address, the President also talked about an ambitious strategy
we are calling the American Competitiveness Initiative. It would significantly
increase federal investment in critical research, ensure that the U.S. continues to
lead the world in opportunity and innovation, and provide American children with a
strong foundation in math and science.
With a focus on these and other good policies, we'll keep America competitive in
the world and keep our economy strong as it has been for some time now, with
excellent GOP growth, steady job creation and low unemployment.
I'm happy to be sharing the President's economic policy proposals with you today,
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but I'm also looking forward to hearing your thoughts, observations and questions
about the economy. America's economy is the envy of the world, but we'" only
maintain that status if we keep working on ii, every day.
I'd be delighted to take your questions now.
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February 3, 2006
JS-4006
Treasury Assistant Secretary
Warshawsky to
Hold Economic Briefing
U.S. Treasury Assistant Secretary for Economic Policy Mark Warshawsky will hold
a media briefing today to discuss the state of the U.S. Economy. The event is open
to credentialed media:
Who
U. S. Treasury Assistant Secretary Mark Warshawsky
What
Economic Media Briefing
When
Friday, February 3, 1:30 p.m. (EST)
Where
Media Room - Main Treasury
1500 Pennsylvania Ave, NW
Washington, DC
Note
Media without Treasury press credentials should contact Frances Anderson
at (202) 622-2960, or frances.anderson@do.treas.gov with the following
information: name, Social Security number and date of birth.
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February 3, 2006
JS-4007
The Honorable John W. Snow
Prepared Remarks: The North Carolina
Research Campus
Good morning, everyone; it's great to be with you here in North Carolina, especially
at thiS wonderful center of research and innovation. I'm really impressed with the
partnership that exists here among state government, higher education and private
enterprise.
We have a vibrant, dynamic economy in this country that is made up of all those
ingredients: business, education, and government. When all three excel in their
purpose is when our naturally resilient economy does its best.
We had terrific economic news this morning: the unemployment rate has now
dropped to 4.7 percent - the lowest it has been since July of 2001 - and 193,000
new jobs were created in January. On average, 200,000 jobs have been created
each month over the past three months and 4.7 million new jobs have been created
since May of 2003. These are uniformly good numbers. In addition to the numbers
for January, there were also revisions to the prior months, December and
November, which added some 80,000 additional jobs.
The fact that the unemployment rate has fallen to 4.7 From the 4.9 is a really a very
positive indicator about the strength of the labor markets. Also, the duration of
unemployment is dropping and dropping fairly smartly. What this all tells us is that
our labor markets are performing well and that we can expect riSing employment
and we can expect rising wage levels for Americans.
It's important to stay on this positive economic path, this path of job creation, and I
commend the Senate for action they took last night on tax cuts. They moved the
process forward, voting to extend some of the President's tax cuts, but I really want
to encourage Congress to go further by making the President's tax cuts permanent.
I hope the United States Congress will look closely at the good direction of our
economy and resist calls to increase taxes on the American people.
I know I don't need to tell this crowd about the dynamism of the American economy.
Changes in the job market here have been recent and swift. Ultimately, I believe,
each decade of economic success brings better jobs and a better quality of life to
American citizens, but it is possible for workers to get overwhelmed in the tide of
change. Centers like this work to ensure that people are benefiting from a rising tide
instead.
Where there was once fear of old jobs being lost, this center represents new jobs
found. Research on health, nutrition and biotechnology holds incredible promise for
the quality of life for the people of this country and of the world.
I hope you were as excited as I was to hear President Bush's dedication to
innovation in his State of the Union address this week. First, he told America about
our healthy economy, which is performing far better than other major economies.
But he also acknowledged that we live in a new world and are facing competition
from new economic players like China, India, and other "emerging market"
countries. In order for America to continue to be a dynamic engine of growth.
President Bush is outlining action in three key areas: health. energy, and America's
competitiveness.
The President's reform agenda will help to make health care more affordable and
accessible. Health Savings Accounts - putting patients in charge of their health
care - will contribute to this goal. We need to make health insurance portable,
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make the system more efficient, and lower costs.
President Bush believes that the best way to break America's dependence on
foreign sources of energy is through new technology. That's why he is proposing an
Advanced Energy Initiative that would provide for a 22 percent increase in cleanenergy research at the Department of Energy and would build on the energy
legislation finally passed by the Congress last year that encourages and rewards
energy conservation activity.
In his Tuesday night address, the President also talked about an ambitious strategy
we are calling the American Competitiveness Initiative. It would significantly
increase federal investment in critical research, ensure that the U.S. continues to
lead the world in opportunity and innovation, and provide American children with a
strong foundation in math and science.
With a focus on these and other good policies, and the work of terrific centers of
innovation like this one, we'll keep America competitive in the world and keep our
economy strong as it has been for some time now, with excellent GDP growth,
steady job creation and low unemployment.
I'm happy to be sharing the President's economic policy proposals with you today,
but I'm also looking forward to hearing your thoughts, observations and questions
about the economy. America's economy is the envy of the world, but we'll only
maintain that status if we keep working on it, every day.
I'd be delighted to take your questions now.
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1
or
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February 3, 2006
JS-4008
Statement of Treasury Secretary John W. Snow
On the January Employment Report
"Today we have terrific news that the unemployment rate has now dropped to 4.7
percent - the lowest it has been since July of 2001 - and that 193,000 new jobs
were created in January. On average, 200,000 jobs have been created each month
over the past three months. People who have been unemployed are finding it easier
and easier to find jobs. These numbers are a positive indicator that the American
economy continues to hold great promise for all Americans who are seeking
employment.
"The strength of the American economy has created 4.7 million jobs since May of
2003, and I am optimistic that we will remain on a good path and expect to see
rising employment and wages in the months ahead.
"I commend the Senate for moving the process forward towards extending the
President's tax cuts, but encourage Congress to go further by making the
President's tax cuts permanent. I encourage the United States Congress to look
closely at the good direction of our economy and resist calls to increase taxes on
the American people."
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February 3, 2006
JS-4009
Treasury to Hold Technical Briefing on Blue Book
U.S. Treasury will hold a media briefing of the General Explanations of the
Administration's Fiscal Year 2007 Revenue Proposals, also known as the "Blue
Book."
Who
Assistant Secretary for Public Affairs Tony Fratto
Deputy Assistant Secretary for Tax Analysis Robert Carroll
Deputy Assistant Secretary for Regulatory Affairs Eric Solomon
What
Technical Briefing on Blue Book
When
Monday, February 6,11 :30 a.m. - 12:30 p.m. (EST)
Where
Media Room - Main Treasury
1500 Pennsylvania Ave, NW
Washington, DC
Note
*Media without Treasury press credentials should contact Frances Anderson
at (202) 622-2960, or frances.anderson@do.treas.gov with the following
information: name, Social Security number and date of birth.
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February 6, 2006
js-4010
Proposed Treasury Budget for FY 2007
The President's proposed budget for Treasury in fiscal year 2007 reflects the
Department's dedication to promoting economic opportunity, strengthening national
security and exercIsing fiscal diSCipline.
"The President's proposed budget for FY 2007 is a budget that works to ensure that
future generations of Americans will have the opportunity to live in a nation that is
more prosperous and more secure," said Treasury Secretary John W. Snow.
"Treasury's budget request reflects this Department's ongoing commitment to fiscal
discipline and pursuit of the President's economic and security goals."
The Treasury appropriations request for FY 2007 is $11.605 billion, a 0.2 percent
increase over the FY 2006 enacted budget of $11.581 billion.
Promoting Economic Opportunity
The Treasury Department, through offices including Economic Policy, International
Affairs, Tax Policy and Domestic Finance, provides analysis, economic forecasting
and policy guidance on issues ranging from tax policy to international financial
crises.
The FY 2007 budget provides an additional $0.5 million to the Tax Policy Office to
enable the Department to build effective models for dynamic analysis of revenue
proposals.
Additional funds of $9.4 million are requested to fund Treasury's overseas presence
- providing the U.S. government with unique access to economic ministries in
foreign capitals, enhancing our ability to assess and mitigate financial risks, and
furthering Treasury's work on the ground to counter the financing of terrorism and
weapons of mass destruction.
Strengthening National Security
The Office of Terrorism and Financial Intelligence supports Treasury's national
security efforts by safeguarding the U.S. financial systems against illicit use. To
support these efforts, Treasury requests an increase of $12.5 million for the
Financial Crimes Enforcement Network to enhance its regulatory outreach and
strengthen analytical capabilities. An increase of $7.8 million is requested to enable
Treasury to continue to enhance its abilities to identify, disrupt, and dismantle the
financial infrastructure of terrorists, proliferators of weapons of mass destruction,
narco-traffickers, criminals and other threats.
Exercising Fiscal Discipline
One of Secretary Snow's highest priorities is keeping the U.S. on the path to
achieve the President's goal of cutting our deficit in half, to below 2.3 percent of
GOP, by 2009. The Treasury Department is committed to reducing the deficit by
exercising fiscal discipline and ensuring the most efficient and effective use of
taxpayer dollars while at the same time boosting revenues through continued
economic growth.
Enforcing the Nation's Tax Laws Fairly and Efficiently
The budget requests $10.591 billion for the Internal Revenue Service. An in-depth
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press briefing on the revenue proposals, including release of the "Blue Book" will be
held at 11 :30 a.m. (EST) today in room 4121 of the Treasury Building. (Media
without Treasury press credentials should contact Frances Anderson at (202) 6222960, or frances.anderson@do.treas.gov with: name, Social Security number and
date of birth.)
LINKS
•
Summary of Treasury's FY 2001 Budget Request
3/2/2006
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February 6, 2006
js-40 11
Treasury Releases FY 2007 Blue Book
Washington, DC - The U.S. Treasury Department today released its General
Explanations of the Administration's Fiscal Year 2007 Revenue Proposals,
otherwise known as the Blue Book. In addition to permanent extension of the
President's tax relief enacted in 2001 and 2003, the President's FY 2007 Budget
includes several new initiatives, including:
•
•
Increased expensing for small businesses;
A set of proposals to improve access to health care and expand Health
Savings Accounts (HSAs);
• Proposals to increase compliance, simplify the tax laws and reduce
taxpayer burden; and
• A proposal to create a new Dynamic Analysis Division within the Treasury
Department's Office of Tax Policy.
Increase Small Business Expensing
Small businesses are an important source of innovation and risk taking in today's
economy. Small businesses also create three-quarters of the nation's net new jobs.
The President's FY 2007 Budget would permanently allow small businesses to
deduct up to $200,000 of investment in equipment (section 179 property).
This provision would encourage investment and capital formation by lowering the
cost of capital purchases. This additional expensing would build on the lower
marginal tax rates and the provision allowing up to $100,000 of section 179
expensing enacted as part of the President's tax relief in 2001 and 2003 and
proposed to be permanently extended by the President's FY 2007 Budget.
More investment by small businesses means more jobs created by this important
sector of the economy. Expensing is also simpler than claiming regular depreciation
deductions, which is particularly helpful for small businesses. This expansion of
section 179 expensing would extend the benefits of expensing to more taxpayers
and would also simplify tax accounting for them. Making this expansion permanent
would allow these businesses to better plan their future investments.
Improve Access to Health Care and Expand Health Savings Accounts (HSAs)
The President's budget has important new proposals that will make health
insurance coverage more accessible and affordable to Americans. The Treasury
Department estimates that these proposals would increase the projected number of
Americans with HSA's by 50 percent. In 2010, the Treasury Department projects an
increase in the number of HSAs from 14 million to 21 million. The experience with
HSAs so far is that 37 percent of new HSA enrollees were previously uninsured. If
this trend continues, the President's proposals to expand HSAs could result in a
substantial reduction in the number of uninsured.
These proposals will lead to a more consumer driven, market-orientated health care
system that makes more efficient use of resources and reduces the rise in health
care costs.
The President's FY 2007 Budget includes proposals that would help make
insurance more available and more affordable by putting employer insurance,
individually-purchased insurance, and out-of-pocket health spending on an equal
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tax footing for those purchasing high deductible health plans.
• An above-the-line deduction and credit for payroll taxes paid (up to 15.3
percent) would be provided for high deductible insurance premiums to place
employer proVIded Insurance on an equal footing with individuallypurchased insurance.
• HSA contributions would be allowed up to a plan's out-of-pocket limit and a
credit for payroll taxes paid (up to 15.3 percent) on HSA contributions would
be allowed to place out-of-pocket spending on equal footing with health
insurance.
• A refundable health insurance tax credit for premiums paid on high
deductible health plans would be provided for lower income individuals to
help them purchase catastrophic coverage. This credit would cover up to 90
percent of the cost of a high deductible insurance premium up to $1,000 for
individuals and up to $3,000 for families.
• Other proposals included in the FY 2007 Budget would generally make
HSAs more flexible and accessible.
Health care costs continue to rise rapidly in the United States. Empowering health
care consumers to playa more direct role in their health care decisions, rather than
third party payors, would help to stem this trend. A health care system that is more
market-oriented and consumer driven will help control costs and result in health
care that is more affordable and accessible.
The Federal tax code's treatment of medical care has been a fundamental factor in
the development of the third party system of financing health care in the United
States. However, the tax code does not treat the self-employed, unemployed, and
workers for companies that do not offer health insurance (most of whom are small
businesses) the same as companies that do offer health insurance.
•
Current incentives in the tax code encourage people to insure against
predictable and routine expenses (not just unpredictable, large-scale
expenses) and, thus, are less sensitive to the cost of the health care they
consume.
• The tax subsidy is generally not available to the uninsured or to individual
insurance purchasers.
• Employees may be reluctant to leave their jobs for fear of losing their
insurance. Portability of health insurance is increasingly important in today's
dynamic labor markets where workers choose to change jobs with
increasing frequency.
Simplify the Tax Laws, Reduce Taxpayer Burden and Increase Voluntary
Compliance
Simplify the Tax Laws for Families:
The President's budget includes proposals to make the tax code simpler for families
with children.
Clarify the Uniform Definition of a Child. A taxpayer may be eligible to claim a
qualifying child for various tax benefits, including the dependent exemption, head of
household filing status, the child tax credit, the child and dependent care tax credit,
and the earned income tax credit (EITC). The 2004 tax relief act created a uniform
definition of qualifying child, allowing, in many circumstances, a taxpayer to claim
the same child for five different child-related tax benefits. However, the 2004 tax
relief act had some unintended consequences. To ensure that deserving taxpayers
receive child-related tax benefits, the President's FY 2007 Budget proposes to
clarify the uniform definition of a child.
Simplify EITC Eligibility Requirements. To qualify for the EITC, taxpayers must
satisfy requirements regarding filing status, the presence of children in their
households, and their work and immigration status in the United States. These rules
are confusing, require significant record keeping, and are costly to administer. The
President's FY 2007 Budget proposes to make certain simplifying changes to these
rules.
Reduce Computational Complexity of Refundable Child Tax Credit. Taxpayers with
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3/2/2006
Page 3 of4
ea.rned income in ex~ess of $11 ,300 may qualify for a refundable (or "additional")
child tax credit even If they do not have any income tax liability. About 70% of
additional child tax credit claimants also claim the EITC. However, the two credits
have a different definition of earned income and different U.S. residency
requirements. In addition, some taxpayers have to perform multiple computations to
determine the amount of their additional child tax credit. The President's FY 2007
Budget proposes certain changes to the additional child tax credit rules to address
these issues.
AMT Relief
The President's FY 2007 Budget proposes to temporary provisions in current law
for one year, through 2006, to address the rapid rise in the number of taxpayers
affected by the AMT in the near term. The Administration believes that a longer
term solution to the problems associated with the individual AMT should be
addressed within the context of fundamental tax reform.
The alternative minimum tax (AMT) imposes substantial burdens upon taxpayers
who were not the originally intended targets of the individual AMT. A temporary
provision, effective through 2005, increased the AMT exemption amounts to
$40,250 for a single taxpayer, and $58,000 for a married couple filing a joint return.
Beginning in 2006, the AMT exemption amounts decline to $33,750 for a single
taxpayer, and $45,000 for a married couple filing a joint return. Another temporary
proviSion effective through 2005, permits nonrefundable personal tax credits to
offset both regular tax and the AMT.
Without any change in the tax law, the number of taxpayers subject to the AMT
would increase by 20.4 million (from 5.5 million in 2005 to 25.9 million in 2006).
Improving Voluntary Compliance with the Tax Laws
While the vast majority of American taxpayers pay their taxes timely and accurately,
the nation still has a significant tax gap -- the difference between what taxpayers
should pay and what they actually pay on a timely basis. The net so-called "tax
gap" is roughly $300 billion annually (15 percent of all taxes collected) and means
that taxes are higher for compliant taxpayers. In an effort to reduce the tax gap with
minimum taxpayer burden, the President's FY 2007 Budget proposes to:
•
Clarify the circumstances in which employee leasing companies and their
clients can be held jointly liable for Federal employment taxes.
• Require debit and credit card issuers to report to the IRS gross
reimbursements paid to certain businesses.
• Require increased information reporting for certain non-wage payments
made by Federal, State and local governments to procure property and
services.
• Amend collections due process procedures applicable to Federal
employment taxes.
• Expand return preparer identification and penalty provisions.
In addition, the Treasury Department will study the standards used to distinguish
between employees and independent contractors for purposes of withholding and
paying Federal employment taxes.
Create New Dynamic Analysis Division within Treasury's Office of Tax Policy
In addition to the tax proposals outlined above, the President's FY 2007 Budget
would create a new Dynamic Analysis Division within the Treasury Department's
Office of Tax Policy. This Division would prepare dynamic analyses of major tax
policy changes. DynamiC analysis emphasizes the potential economic benefits of
tax changes for increasing and promoting economic growth. It is particularly
important for evaluating broad changes to the tax system. DynamiC analYSIS
recognizes a more comprehensive range of behavioral responses to tax changes,
including how tax changes affect the size of the economy. The Treasury
Department will likely be in a position to conduct a dynamiC analYSIS of the
.
President's tax proposals included in the FY 2007 Mid-SeSSion ReView (released In
mid-July).
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Improve Productivity to Constrain Costs at Internal Revenue Service
The President's FY 2007 Budget proposes an IRS operating budget of more than
$10.7 billion, supporting the Administration's goal to restrain spending and increase
tax receipts. As part of this budget proposal, the IRS will constrain costs by
improving productivity, offsetting costs with user fees and other adjustments to
operations. The budget proposal would enable the IRS to stay aligned with its
strategic plan of balancing service and enforcement and the goal of improving
compliance. Toward this end, the budget proposal holds steady resources for both
taxpayer service and enforcing tax laws.
-30-
REPORTS
•
FY 2007 Blue Book
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r of2
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $64,993 million as of the end of that week, compared to $65,622 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
January 27, 2006
TOTAL.!I
I
11. Foreign Currency Reserves
1
la. Securities
II
I
Of which, issuer headquartered in the US.
I
65,622
Euro
11,328
II
II
Yen
10,856
I
I
11,111
II
TOTAL
22,184
5,267
"
II
16,378
II
0
Ib.if. Banks headquartered in the US.
II
II
b.ii. Of which, banks located abroad
I
I
I
II
I
0
I
I
II
II
I!
b.iii. Banks headquartered outside the US.
b.iii. Of which, banks located in the U.S.
2. IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2
14. Gold Stock 3
15. Other Reserve Assets
I
I
II
February 3, 2006
I
II
II
II
64,993
I
I
Euro
11,230
II
II
Yen
10,691
0
b. Total deposits with:
bJ Other central banks and B/S
II
II
I
1/
I
I
II
II
II
11,016
"
II
5,188
TOTAL
II
0
II
16,204
"I
I
II
I
I
0
II
1/
1/
0
I
7,775
II
1/
22,921
0
0
0
0
II"
8,242
II
II
11,043
II
II
II
0
"
"
I
I
"
"II
7,621
I
I
II
8,203
11,043
I
I
I
I
I
I
I
I
I
I
I
0
"
II. Predetermined Short· Term Drains on Foreign Currency Assets
January 27, 2006
[
II
I
I
Euro
II
II
Yen
TOTAL
Euro
"
I
"II
"
"
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
1. Foreign currency loans and securities
"
[2.b. Long positions
II
"
II"
[3. Other
Yen
0
[2.8. Short positions
"
"II
II"
I
February 3, 2006
0
0
0
II
II
"
"II
II
TOTAL
I
0
I
0
II
II
0
I
0
I
TOTAL
I
I
I
I
I
I
"
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
I
~I
I
I
II
http://wv.·w.rreas.gov/prc5slreleflses/p03640.htm
February 3, 2006
January 27, 2006
Yen
Euro
"II
II
1\
\I
TOTAL
0
"
"
Euro
Yen
"I
"
"I
I"
II
II"
1\
1\
1\
1\
0
II
3/2/2006
Page2of2
l1.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
II
I
"II
I
"I
0
0
3. Undrawn, unconditional credit lines
I
\I
II
3.a With other central banks
I
II
II
3.b. With banks and other financial institutions
I
I Headquartered in the U.S.
3.c. With banks and other financial institutions
Headquartered outside the U. S.
4. Aggregate short and long positions of options
in foreign
14.a.1. Bought puts
II"
II
"1\
II"
I
I
"
"II
I
"II
1\
"
II
"
II
II
"II
11
"
II
"
"
"
4.b. Long positions
4.b.1. Bought calls
114.b.2. Written puts
I
"
"
"
I
I
II
II
"
I
II"
II
"
"II
I
I
II
II
I
I
II
4.a.2. Written calls
I
0
II
"II
"II
0
II"
"II
0
I"
II"
1/
1/
ICurrencies vis-a-vis the U.S. dollar
14.a Short positions
"I
II
I
0
I
I
11
\I
I
II
II
"
"II
"
"1\
I
I
I
II
I
"
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
21 The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/doliar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
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February 7, 2006
JS-4012
Secretary John W. Snow
Opening Statement
The President's FY 2007 Budget
Senate Finance Committee
February 7, 2006
Good morning. Thank you Chairman Grassley, Ranking Member Baucus, for
having me here this morning.
I'm pleased to be here today to talk with you about the President's Fiscal Year 2007
budget. This budget represents the President's dedication to fiscal discipline, an
efficient federal government and the continuation of a thriving U.S. economy.
Across the board, agencies were asked by the President to look closely at their
budgets and make tough decisions, because fiscal restraint is not only necessary
for deficit reduction, it is a necessary component of government that is responsible
to the people who employ it.
Those tough decisions were made at all levels of government management, and as
a result the President's budget holds the growth of discretionary spending below the
rate of inflation and cuts spending in non-security discretionary programs below
2006 levels.
The Administration has identified 141 programs that should be terminated or
significantly reduced in size because they aren't performing or could perform better
with consolidation; they aren't giving taxpayers their money's worth. The savings for
the American taxpayer would be 14 billion dollars.
Cutting the programs that aren't working and improving the efficiency of the ones
that are is all part of accountability to the taxpayer. To assist lawmakers in this
shared effort, the Administration launched ExpectMore.gov, a website that provides
candid information about programs that are successful and programs that fall short,
and in both situations, what they are doing to improve their performance next year. I
encourage the members of this Committee and those interested in our programs to
visit ExpectMore.gov, see how we are doing, and hold us accountable for
improving.
This budget, with its policies of economic growth and spending restraint, keeps us
on track to meet the President's steadfast goal of cutting the deficit in half by 2009.
It also seeks to avoid a tax increase by making the President's tax cuts permanent;
I want to take a moment to explain why that is entirely consistent with our deficitcutting goals.
In short, lower tax rates are good for the economy and a growing economy is good
for Treasury receipts. Indeed, our rate of economic growth led to record levels of
Treasury receipts in 2005. And, going forward, we project that receipts will rise
every year. In 2011 we will again reach, as a percentage of GOP, the levels we've
seen over the average of the last 40 years.
And there can be no question today that well-timed tax relief, combined with
responsible leadership from the Federal Reserve Board, created an environment in
which small businesses, entrepreneurs and workers could bring our economy back
from its weakened state of just a few years ago. The American economy is now
unmistakably in a trend of expansion, and those trend lines can clearly be traced to
the enactment of the tax relief.
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Since May of 2003, the economy has created 4.7 million jobs, two million of them in
the last year alone. We found out on Friday that unemployment has fallen from 4.9
percent to 4.7 percent, running lower than the average for the 1970s, 1980s and
1990s: GOP growth was three and a half percent last year. U.S. equity markets
have risen, and household wealth is at an all-time high.
The U.S. is, as the President often notes, the economic envy of the world.
When we look at the underlying fundamentals of the economy, its strength proves
deep and SOlid, and we can see that businesses and workers have every reason to
be optimistic about the future.
For example, we see that productivity growth remains strong. Output per hour in the
non-farm business sector has risen at an average annual rate of 3.2 percent since
the end of 2000, faster than any five-year period in the 1970s, 1980s or 1990s.
Household net worth - that's assets minus debts - is a record high, and not just
because of housing. Deposits - the money in checking accounts, savings accounts,
and money market funds - are at a record high and are larger as a share of
disposable income than at any time since 1993. Defaults on residential mortgage
loans at commercial banks are at historic lows.
In the past two years, the economy has generated about 170,000 jobs per month,
and that includes the two-month slowdown in job growth in the aftermath of
Hurricanes Katrina and Rita. In the past 32 years, new claims for unemployment
insurance have almost never been as low as they have been recently, the only
exception being the peak of the high-tech bubble from November 1999 to June
2000.
Core inflation remains low, and that's good news for everyone.
Independent private-sector forecasts point to continuing good news. and inflationadjusted hourly wages grew 1.6 percent between September and December and
this trend should continue.
We are, it appears, witnessing the tipping pOint on wages - when incomes rise for
workers and business combined, but workers once again increase their incomes
faster than businesses. Once businesses have been doing well for a while, they
ultimately compete those increases in income away by competing harder for
labor. The result is higher wages and higher standards of living for workers.
Both on leading indicators and a deeper background analysis, the American
economy proves to be on solid footing. The question that those of us in government
must look at now is this: why is our economy performing so well and what can we
do to continue these positive trends?
It is a sweeping and important question, so today we'll ask a more focused
question: what can our budget do, or not do, to keep the economy on track?
The answer to that is twofold: first, control spending. Second, don't increase taxes let taxpayers keep as much of their money as possible to invest and spend.
And of course I use the term "taxpayer" quite broadly. ! ask you to think of the
individual and family budgets that benefit from lower taxes, but also of the smallbusiness budgets. Lower marginal rates, for example, help small firms because
they tend to file their taxes as individuals, not as corporations. We are proposing to
allow smal! businesses to be able to deduct up to $200,000 of business-expanding
investment as a permanent feature of the tax code, for example. This tax benefit
encourages expansion and job creation in the sector that produces three-quarters
of the nation's net new jobs.
Lower rates and a degree of certainty in the system are absolutely critical to
keeping our economy, and our excellent rate of job creation, on track. And I cannot
say this strongly enough: we can't beat the budget defiCit Without a strong economy.
Tax increases carry an enormous risk of economic damage and I can tell you today
that the President will not accept that risk. He will not accept a tax Increase on the
3/2/2006
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Page 301"4
American people.
Fiscal discipline, combined with economic growth, is the correct path to deficit
reduction, penod, and we cannot let difficult decisions run us off of that path that we
know is right.
Our government does, of course, face economic demands that are exceptional,
from fighting the war on terror to helping the victims of devastating hurricanes put
their lives back together. These are costly events that lead to unwelcome, brief
deficits. They should be regarded as temporary as they are entirely surmountable
with continued economic strength and spending restraint in the areas where it is
possible and appropriate.
The second way for the budget to help keep the economy on track is to focus the
taxpayers' precious resources on things that we know will make a difference.
In order for America to continue to be a dynamic engine of growth, President Bush
is outlining action in three key areas: healthcare, energy, and America's
competitiveness.
Affordable and Accessible Health Care. The President's reform agenda will help to
make health care more affordable and accessible. Health Savings Accounts putting patients in charge of their health care - will contribute to this goa\. We need
to make health insurance portable, make the system more efficient, and lower
costs. We also need to level the playing field for individuals and the employees of
small business by allowing small businesses to form Association Health Plans.
The expansion of high deductible health plans and HSAs is something I'd
particularly like to emphasize. Combined with a high deductible health plan, HSAs
allow people to save for future health care expenses while providing immediate
protection against catastrophic health expenses. Furthermore, by giving people
more control over their health care spending, they offer a more affordable
alternative to traditional health insurance.
Today, millions of Americans - many of whom were previously uninsured -are
enjoying access to more affordable health insurance because of the increased
availability of HSA-qualified HD health plans. These plans are more available and
becoming more popular, because saving for health care needs in an HSA now has
the same tax advantages as a traditional health insurance plan.
It only makes sense to expand the scope of HSA qualified health insurance by
making their premiums deductible from income taxes and payroll taxes when
purchased by individuals. This is an important innovation that will significantly
reduce the cost of health insurance purchased by individuals, particularly important
for working people who don't have a federal income tax liability. As many of my
friends on the Democratic side of the aisle have pointed out to me - payroll taxes
are one of the most significant tax burdens for the poor. This innovation will enable
more individuals to purchase affordable health insurance. Expanding HSAs so
that policy holders and their employers can make annual contributions to cover all
out-of-pocket costs under their HSA policy will further encourage adoption of
qualified HDHP plans.
All told, the President's HSA proposals are projected to increase the number of
HSAs from the current projected for 14 million to 21 million.
Advanced Energy Initiative. The President has said that the best way to break
America's dependence on foreign sources of energy is through new technology. So
the President announced the Advanced Energy Initiative, which provides for a 22
percent increase in clean-energy research at the Department of Energy. This
initiative also builds on the energy legislation finally passed by the Congress last
year that encourages and rewards energy conservation activity.
American Competitiveness Initiative. This ambitious strategy by the President will
significantly increase federal investment in critical research, ensure that the U.S.
continues to lead the world in opportunity and innovation, and provide American
children with a strong foundation in math and science.
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Page 4 ot 4
This budget also gives us an opportunity to look at the other ways - in addition to
keeping tax rates low - that the federal government can make adjustments that add
to a growth-friendly environment for the businesses, entrepreneurs and workers
that produce that economic growth. Tax code reform remains a priority for this
President and the President's Advisory Panel on Federal Tax Reform provided us
this year with a strong foundation for a national discussion on ways to ensure that
our tax system better meets the needs of our dynamic, 21 st century economy. I
appreciate the fine work of Senators Mack and Breaux, for their outstanding
leadership of the Panel. This issue is also reflected in the budget through the
proposed creation of a new Dynamic Analysis Division within Treasury's Office of
Tax Policy. Understanding the full range of behavioral responses to tax changes,
including how tax changes affect the size of the economy and, subsequently, tax
revenues, is critical to designing meaningful, effective tax reform, and we believe
this small expenditure will have an enormous pay-off for the American taxpayer.
With a focus on these and other good policies, we'll keep America competitive in
the world and keep our economy strong as it has been for some time now.
In closing. I want to point out that a lot of good can come from a smart federal
budget, and a considerable amount of harm can come from a bad one. Let's use
the FY 2007 budget to make good policy - restrained as the circumstances dictate
on spending but aggressive on the expansion of opportunity.
I look forward to working with all of you on enacting this budget. Thank you for
having me here today; I'm pleased to take your questions now.
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3/2/2006
t.age
1
or
1
February 1, 2006
JS-4013
Treasurer to Visit Edinburg, Texas to Discuss the
U.S. Economy and Financial Education
U.S. Treasurer Anna Escobedo Cabral will travel to Edinburg, Texas on Friday to
discuss the U.S. economy and the importance of financial education.
The following events are open to credentialed media with photo identification:
Friday, February 3, 2006
1:30 PM CST
Freddy Gonzalez Elementary School
Remarks
2401 South Sugar Road
Edinburg, TX
**Media please rsvp to Sandra Quintanilla at (956) 381-2742 or
s?ndraq@panal11.edu
6:00 PM CST
Third National Minority Serving Institutions Research Partnerships Conference
Keynote Speech
Hidalgo County Historical Museum
121 East Mcintyre Street
Edinburg, TX
**Media please rsvp to Sandra Quintanilla at (956) 381-2742 or
silndraq@pal']am._edu
Treasurer Cabral's bio: httR://wvvY'!.trQasury.go\llorgCl[lizCltiQflibios!~ClbraJ:.9.ht011
History of the Treasurer's Office: bttgjlww\!'-' .treas.QQvloffico_s/lre9suror!offlcehistory.shiml
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Janual'y 30, 2006
JS-4014
Under Secretary Adams Meets with AfOB
and
Local Officials in Tunisia
Following the World Economic Forum in Davos, Switzerland, Treasury International
Affairs Under Secretary Tim Adams traveled to Tunis, Tunisia to meet today with
local finance and Afncan Development Bank (AfDB) officials.
Adams met with AfDB President Kaberuka, AfDB US. Executive Director Cynthia
Perry, and the AfDB Board of Directors to discuss the economic challenges and
opportunities Africa faces and the role of the US. and AfDB in promoting growth
and development. He also met with African ambassadors based in Tunisia, as well
as Tunisian Minister of Development and International Cooperation, Mohamed
Nouri Jouini.
"I'm very pleased to be in Tunis to demonstrate the United States' strong support
for the critically important work of the African Development Bank," said Adams.
"President Kaberuka is bringing some important new ideas and energy to the bank,
and we very much support efforts to enhance the Bank's work in the private sector,
and deliver real results to the African people that need them most and fight
corruption - which acts like a tax on the poor - inside or outside the Bank."
Adams discussed with local media the U.S.'s support for President Keberuka's
efforts to make the Bank more effective and efficient as well as the U.S.'s strong aid
and development commitments in the region. The U.S. is the largest provider of
development assistance to sub-Saharan Afnca. Since 2000, US assistance has
tripled - from $1.1 billion to $3.5 billion in 2004 - with assistance going to 32
countries at least doubling in this period.
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February 8, 2006
JS-4016
Treasury Designates UK-Based Individuals, Entities Financing
AI Qaida-Affiliated LlFG
The U.S. Department of the Treasury today designated five individuals and four
entities for their role in financing the Libyan Islamic Fighting Group (LlFG), an al
Qaida affiliate known for engaging in terrorist activity in Libya and cooperating with
al Qaida worldwide.
"The Libyan Islamic Fighting Group threatens global safety and stability through the
use of violence and its ideological alliance with al Qaida and other brutal terrorist
organizations," said Patrick O'Brien, the Treasury's Assistant Secretary for Terrorist
Financing and Financial Crime. "Through a sophisticated charitable front operation
and other companies, the individuals designated today have financially supported
LlFG's activities."
Today's designation, which is carried out by the Treasury's Office of Foreign Assets
Control (OFAC), was executed under Executive Order 13224, an authority that
targets the assets of terrorists and their financiers.
The individuals and entities supported the LlFG through various financial means,
primarily in the United Kingdom. The LlFG was formed in the early 1990s in
Afghanistan, and formally announced its existence in 1995. The group relocated to
Libya where it sought to overthrow Mu'ammar Qadhafi and replace his regime with
a hard-line Islamic state. The LlFG mounted several operations inside Libya
including a 1996 attempt to assassinate Qadhafi, but these failed to topple the
regime. Following a Libyan government security campaign against LlFG in the midto late 1990s, the group abandoned Libya and continued its activities in exile.
The group is part of the wider al Qaida-associated movement that continues to
threaten global peace and security. Accordingly, LlFG was designated pursuant to
Executive Order 13224 on September 23, 2001. On October 6,2001, the United
Nations Security Council also added LlFG to its consolidated list of entities
associated with al Qaida.
Identifying Information
Abd AI-Rahman AI-Faqih
AKAs: Mohammed Albashir
Muhammad AI-Bashir
Bashir Mohammed Ibrahim al-Faqi
AI-Basher Mohammed
Abu Mohammed
Mohammed Ismail
Abu Abd AI Rahman
Abd AI Rahman AI-Khatab
Mustafa
Mahmud
Abu Khalid
DOB: December 15, 1959
POB: Libya
ADDRESS: Birmingham, United Kingdom
Abd ai-Rahman al-Faqih is a senior leader of the LlFG and is involved in the
provision of false passports and money to LlFG members worldWide.
AI-Faqih has been tried and found guilty in absentia by t~e Rabat, Morocco Criminal
Court of Appeals for his involvement in the series of sUIcide bombings In
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Page 2 of 4
Casablanca, Morocco on May 16, 2003 that killed over 40 people and caused more
than 100 injuries. It was strongly suspected that the Moroccan Islamic Combat
Group (GICM) carried out that attack. GICM was designated pursuant to Executive
Order 13224 on November 22, 2002.
AI-Faqih has a history of GICM-related activity, notably representing the L1FG
during meetings held in Turkey in the late 19905 with GICM. During these
meetings, L1FG agreed to host weapons training and jihad indoctrination at L1FG
camps in Afghanistan for Moroccans.
Ghuma Abd'rabbah
AKAs: Ghunia Abdurabba
Ghoma Abdrabba
Abd'rabbah
Abu Jamil
DOB: September 2, 1957
POB: Benghazi, Libya
NATIONALITY: British
ADDRESS: Birmingham, United Kingdom
Ghuma Abd'rabbah is an associate of L1FG leader Abd' ai-Rahman al-Faqih.
Abd'rabbah is "Charity Correspondent" and one of three trustees for Sanabel Relief
Agency Limited (SRA), an international charity organization controlled by the L1FG
and used to transfer documents and funds for terrorist activities overseas. SRA
was also designated today.
Abdulbaqi Mohammed Khaled
AKAs:
Abul Baki Mohammed Khaled
Abd' al-Baki Mohammed
Abul Baki Khaled
Abu Khawla
DOB: August 18,1957
POB: Tripoli, Libya
NATIONALITY: British
ADDRESS: Birmingham, United Kingdom
Abdulbaqi Mohammed Khaled is a member of the L1FG and was a director of SRA.
Tahir Nasuf
AKAs: Tahir Mustafa Nasuf
Tahar Nasoof
Taher Nasuf
AI-Qa'qa
Abu Salima EI Libi
Abu Rida
DOB: November 4,1961
ALT. DOB: April 11, 1961
POB: Tripoli, Libya
ADDRESS: Manchester, United Kingdom
Tahir Nasuf is a middle-ranking member of the L1FG. He was previously associated
with senior UK-based Libyans tied to the al-Qaida-affiliated Armed Islamic Group
(GIA). The GIA was designated pursuant to Executive Order 13224 on September
23, 2001.
Nasuf is one of three trustees and a director of SRA.
Mohammed Benhammedi
AKAs: Mohamed Hannadi
Mohamed Ben Hammedi
Muhammad Muhammad Bin Hammidi
Ben Hammedi
Panhammedi
Abu Hajir
Abu Hajir AI Libi
Abu AI Qassam
DOB: September 22, 1966
http://treas.goy/press/releusoo/js4 003 .htm
Page 3 of 4
POB: Libya
NATIONALITY: Libyan
ADDRESS: Midlands, United Kingdom
Mohammed Benhammedi is a key financier for the LlFG and believed to provide
funds for the LlFG through Sara Properties Limited, Meadowbrook Investments
Limited and Ozlam Properties Limited. These three businesses were also
designated today. Benhammedi is also a member of what was identified as the
LlFG economic committee.
During Operation Enduring Freedom, in early 2002, Benhammedi was detained,
along with several others, by Iranian officials when he attempted to illegally enter
Iran from Afghanistan.
Sara Properties Limited
AKA: Sara Properties
ADDRESS 1: 104 Smithdown Road, Liverpool, Merseyside L7 4JQ (United
Kingdom)
ADDRESS 2: 2a Hartington Road, Liverpool L8 OSG (United Kingdom)
WEBSITE: http://www.saraproperties.co.uk
REGISTRATION #: 4636613
Sara Properties Limited is a real estate agency trading in residential property sale
and leasing. Mohammed Benhammedi, the co-director of Sara Properties Limited,
is a 75 percent shareholder of Sara Properties Limited and the owner of the Internet
domain for the Sara Properties Limited website. Through his ownership of several
businesses in the UK, including Sara Properties Limited, Benhammedi is known to
provide funds for the LlFG.
Meadowbrook Investments Limited
ADDRESS: 44 Upper Belgrave Road, Clifton, Bristol, BS8 2XN (United Kingdom)
COMPANY #: 05059698
Meadowbrook Investments Limited is registered as a Bristol-based real estate
company. Mohammed Benhammedi is a director of Meadowbrook Investments
Limited and has been in that position since April 27, 2004. Through his ownership
of several businesses in the UK, including Meadowbrook Investments Limited,
Benhammedi is known to provide funds for the LlFG.
Ozlam Properties Limited
ADDRESS: 88 Smithdown Road, Liverpool, L7 4JQ (United Kingdom)
REGISTRATION #: 05258730
Ozlam Properties Limited, a property company, is co-directed by Mohammed
Benhammedi. He was appointed director on October 13, 2005. Through his
ownership of several businesses in the UK, including Ozlam Properties Limited,
Benhammedi is known to provide funds for the LlFG.
Sanabel Relief Agency Limited
AKAs: Sanabel Relief Agency
Sanabel I'il-Igatha
SRA
SARA
AI-Rahama Relief Foundation Limited
ADDRESS 1: 63 South Rd, Sparkbrook, Birmingham B11 1EX (United Kingdom)
ADDRESS 2: 1011 Stockport Rd, Levenshulme, Manchester M9 2TB (United
Kingdom)
ADDRESS 3: P.O. Box 50, Manchester M19 2SP (United Kingdom)
ADDRESS 4: 98 Gresham Road, Middlesbrough (United Kingdom)
ADDRESS 5: 54 Anson Road, London, NW2 6AD (United Kingdom)
WESBITE: http://www.sanabel.orguk
EMAIL: info@sanabeLorg.uk
CHARITY #: 1083469
REGISTRATION #: 3713110
SRA was incorporated on February 12, 1999, and subsequently registered ,~ith the
UK charity commission on November 17, 2000 as a chanty with objectives to
http://treas.goY/press/releusoo/js4 003 .htm
3/2/2006
Page 4 ot 4
relieve poverty, sickness and distress and to advance education of persons who are
in need of such relief as a result of a natural disaster in particular, but not
exclusively, by the provision of funds."
While SRA characterizes itself to the public as a charitable organization, its first
priority is providing support to the LlFG's jihadist activities. LlFG's fundraising
charity is SRA, which is controlled by leaders of the LlFG. Directors of SRA use the
charity as a vehicle to transfer money and documents for terrorist activities
overseas.
Prior to September 11, 2001, SRA had an office in Taliban-ruled Afghanistan,
where the former head of SRA in Kabul was known to have ties to the LlFG. He
was later believed to be arrested in Pakistan with three other LlFG members and al
Qaida leader Abu Zubaydah. Further, the director of SRA in Afghanistan received
help from senior LlFG facilitator, Adnan ai-Ubi.
These individuals and entities were designated today pursuant to Executive Order
13224 chiefly pursuant to paragraphs (d)(i) and (d)(ii) based on a determination that
they assist in, sponsor or provide financial, material, or technological support for, or
financial or other services to or in support of, or are otherwise associated with,
persons listed as subject to E.O. 13224.
Blocking actions are critical to combating the financing of terrorism. When an
action is put into place, any assets existing in the formal financial system at the time
of the order are to be frozen. Blocking actions serve additional functions as well,
acting as a deterrent for non-designated parties who might otherwise be willing to
finance terrorist activity; exposing terrorist financing "money trails" that may
generate leads to previously unknown terrorist cells and financiers; disrupting
terrorist financing networks by encouraging deSignated terrorist supporters to
disassociate themselves from terrorist activity and renounce their affiliation with
terrorist groups; terminating terrorist cash flows by shutting down the pipelines used
to move terrorist-related assets; forcing terrorists to use alternative and more costly
and higher-risk means of financing their activities.
The United States is also taking action today pursuant to United Nations Security
Counsel Resolution 1617, which requires member states to financially isolate
individuals and entities added to the UN 1267 Committee's consolidated list of
terrorists tied to the Taliban, al Qaida and UBL.
http://treas.gov/pre-sS/reteases/jS4016.htm
3/2/2006
Page I at I
February 9, 2006
JS-4019
U.S. TREASURER TO VISIT BOSTON AREA TO DISCUSS FINANCIAL
EDUCATION AND THE IMPORTANCE OF SAVINGS
U.S Treasurer Anna Escobedo Cabral will travel to Dorchester, Mass. this Friday to
discuss financial education and the importance of savings. While in Dorchester,
Treasurer Cabral will visit the TechBoston Academy at the Dorchester Education
Complex where she will deliver keynote address to TechBoston Academy staff and
students. The following event is open to credentialed media:
WHO
U. S. Treasurer Anna Escobedo Cabral
Treasurer Cabral's bio: http//www.treasury.gov/organization/bios/calxal-e.hlml
History of the Treasurer's Office: http//www.tmas.gov/offices/treasurer/officehistory.shtml
WHAT
Keynote address at TechBoston Academy
WHEN
Friday, February 10, 10 a.m. (EST)
WHERE
9 Peacevale Road
Dorchester, MA
NOTE Media should RSVP to Erica Johnson at (704) 378-1354
http://treas.goY/press/releusoo/js 40 19 .htm
3/2/2006
Page [ of
t
February 9, 2006
JS-4020
TREASURY TO HOLD MEDIA BRIEFING ON PROPOSED
DIVISION OF DYNAMIC ANALYSIS
us. Treasury Deputy Assistant Secretary for Tax Analysis Robert Carroll will host a
media briefing to explain and answer questions regarding the further development
of its new Division of Dynamic Analysis, as proposed in the FY2007 Budget.
WHO
Deputy Assistant Secretary for Tax Analysis Robert Carroll
WHAT
The President's FY 2007 Budget proposed to create a new Dynamic Analysis
Division within the Treasury Department's Office of Tax Policy. The Deputy
Assistant Secretary will provide comments on the further development of the new
division and how it would prepare dynamic analyses of major tax policy changes.
WHEN
Friday, February 10, 11 :00 - 11 :30 a.m. (EST)
WHERE
Media Room - Main Treasury
1500 Pennsylvania Ave NW
Washington, DC 20220
NOTE
*Media without Treasury press credentials should contact Frances Anderson
at (202) 622-2960, or franccs.anderson@do.treas.gov with the following
information: name, Social Security number and date of birth.
3/2/2006
http://treas.gov/press/releu5eB/js4020
Page I ot 2
February 9, 2006
2006-2-9-15-38-29-7838
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $64,993 million as of the end of that week, compared to $65,622 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
January 27,2006
I
I'
65,622
TOTAL.!
11. Foreign Currency Reserves
1
II
Euro
I
11,328
I a. Securities
IOf whiCh, issuer headquartered in the US.
lb. Total deposits with:
,Ibi. Other central banks and BIS
libii. Banks headquartered in the US.
Ilb.ii. Of which, banks located abroad
"
II
"
11,111
II
5,267
II
II
II
,12. IMF Reserve Position 2
'13. SpeCial Drawing Rights (SDRs) 2
114. Gold Stock
3
115. Other Reserve Assets
22,184
I
II
II
II
II
I
II
64,993
I
II
Euro
II
II
11,230
II
11,016
II
Yen
10,691
TOTAL
I
21,921
I
II
0
I
II
16,204
I
0
I
0
I
0
I
0
I
I
II
1/
II
II
16,378
II
0
II
II
II
0
II
II
1/
1/
II
February 3, 2006
0
1/
"
TOTAL
"
'Ib.iii. Banks headquartered outside the US.
Ilb.iii. Of which, banks located in the U.S.
II
10,856
II
II
Yen
II
0
"II
1/
5,188
II
1/
I
\I
0
II
II
II
7,775
I
II
II
II
7,621
II
II
8,203
Ii
II
I
II
II
II
Ii
II
8,242
11,043
0
"
II
11,043
0
I
I
I
II. Predetermined Short-Term Drains on Foreign Currency Assets
1
I
January 27, 2006
1,r-I---F-e-br-u-ar-y-3-,2-0-0-6------,1
I
11=1=.F=o=re=jg=n=c=ur=re=n=cY=lo=a=n=s=an=d=s=e=cu=r=itie=s===1
Euro
II
II
Yen
/I
II
TOTAL
0
II
Euro
II
II
II
Yen
II
II
TOTAL
0
I
I
/[2.Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
/r£T Short positions
I
II
II
0
II
II
II
0
I
2.b. Long positions
I
II
II
0
II
II
II
0
I
[3~. Other
II
II
II
0
II
II
II
0
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
1. Contingent liabilities in foreign currency
l.a. Collateral guarantees on debt due within 1
year
r
January 27, 2006
II
I
Euro
I
I
II
http://treas.gov/preislreteasesl20002915j8297838.htm
II
Yen
II
1/
Ii
II
I
I
I
Euro
TOTAL
0
II
Yen
II
TOTAL
0
"II
II
II
II
I
II
I
I
February 3, 2006
1/
II
I
I
I
I
I
3/2/2006
Page '2 ot '2
111.b. Other contingent liabilities
I
~mign currency securities with embedded
"II
ons
ndrawn. unconditional credit lines
3.a. With other central banks
IHeadquartered in the US.
3.c. With banks and other financial institutions
IHeadquartered outside the US
4. Aggregate short and long positions of options
in foreign
ICurrencies vis-a-vis the U.S. dollar
14.a. Short positions
14.a.1. Bought puts
I
0
II
0
/I
I
/I
II
"
3.b. With banks and other financial institutions
"II
1/
"
1/
II
I
"
0
/I
0
1/
I
I
I
II
II
I
1\
"II
"/I
II
II
I
1/
II
I
"II
/I
\I
\I
II
\I
\I
I
II
I
II
II
/I
II
II
1\
\I
II
II
I
14b Long positions
\I
II"
II
II
14.b.1. Bought calls
\I
\I
14.b.2. Written puts
\I
II
14.a.2. Written calls
"
0
I
I
I
I
II
II
II
0
I
I
II
I
I
"
"\I
\I
I
I
I
I
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA). valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2J The items. "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
http: //treas.gov/preislreteasesl20002915j8297838.htm
3/212006
Page I ot I
February 10, 2006
JS-4021
Treasury Assistant Secretary to Hold Weekly Press Briefing
us. Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Monday, February 13 in Treasury's Media Room. The event is
open to all credentialed media.
Who
Assistant Secretary for Public Affairs Tony Fratto
What
Weekly Briefing to the Press
When
Monday, February 13, 11 :00 AM (EST)
Where
Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave., NW
Washington, DC
Note: Media without Treasury press credentials should contact Frances Anderson
at (202) 622-2960, or frances.anderson@do.treas.gov with the following
information: name, Social Security number, and date of birth.
http://treas.goY/press/releusoo/js4 023 .htm
3/2/2006
Page 1 ot 1
February 10, 2006
js-4022
Treasury Official to Visit Louisville to Discuss the U.S. Economy and
American Competitiveness
Deputy Assistant Secretary for Critical Infrastructure Protection D. Scott Parsons
will visit Louisville, Kentucky Monday to discuss the President's agenda to maintain
the economy's momentum and the American Competitiveness Initiative which is
aimed to encourage American innovation and strengthen our nation's ability to
compete in the global economy. This ambitious strategy will increase federal
investment in critical research, ensure that the United States continues to lead the
world in opportunity and innovation, and provide American children with a strong
foundation in math and science. The American Competitiveness Initiative commits
$5.9 billion in FY 2007, and more than $136 billion over 10 years, to increase
investments in research and development (R&D), strengthen education, and
encourage entrepreneurship and innovation. While in Louisville, Deputy Assistant
Secretary Parsons will give remarks to the Greater Louisville Inc. The following
event is open to credentialed media:
Who: Deputy Assistant Secretary for Critical Infrastructure Protection
D. Scott Parsons
Deputy Assistant Secretary Parsons' blo
What: Remarks to the Greater Louisville Inc.
When: Monday, February 13, 11 :30 a.m. (EST)
Where: Federal Reserve Bank of St. Louis
101 South Fifth Street
Suite 1920 (National city Tower)
Louisville, KY
Note: Media must RSVP to Leslie Dorris at (502) 625-0012 or
LDorris@GreaterLouisville.com
http://treas.gov/press/releusoo/js4 00 2,htm
3/2/2006
J.S. TreastIrj • D. Scott Parsons I5eputy Assistant Secretary - Office ofCnttcallntrastructure ProtectlO... Page 1 ot I
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D. Scott Parsons was appointed Deputy Assistant Secretary for Critical Infrastructure
Protection and Compliance Policy in June 2004. In this position, Mr. Parsons is responsible
for ensuring the resilience of the critical physical and cyber infrastructures of the financial
services sector, implementing Bank Secrecy Act regulations, and identifying means to protect
personal financial information, privacy, and identity theft. The office also provides daily staff
support to the Financial and Banking Information Infrastructure Committee (FBIIC), a
standing committee of the President's Working Group on Financial Markets. He previously
served as Senior Advisor to the Assistant Secretary for Management and Chief Financial
Officer.
Mr. Parsons has a record of accomplishment and leadership in the public and private sectors.
He returned to Washington, DC in 2002, after working for more than a decade in the finance
and technology industries. He served in management positions with Xerox Corporation,
Digital Equipment Corporation and Compaq Computer Corporation. During his tenure at
Compaq, Mr. Parsons was responsible for the launch of a joint venture among Compaq,
Cable & Wireless and Microsoft. He was also responsible for building a new go-to-market
model for the startup application service provider, and led a cross functional rapid action
team that re-engineered all aspects of business processes including financial management,
marketing communications, professional services processes and support, product viability,
and operational capabilities.
Mr. Parsons studied business at the University of Kentucky where he earned a bachelor
degree in finance.
His community involvement includes serving as a partner for Cornerstone, a school
dedicated to providing academic excellence for high-potential, underprivileged children in
Washington, D.C.
Last Updated: February 13,2006
httP;IIWWw.treas.gov/organizationibios/PH1:iOns-e.html
3/2/2006
rage
1
or
February 11, 2006
JS-4023
TREASURY SECRETARY JOHN W. SNOW
PREPARED STATEMENT FOLLOWING THE MEETING
OF THE G-B FINANCE MINISTERS
Good afternoon. We had an excellent meeting with G-8 Finance Ministers today,
hosted for the first time by Russia and Minister Kudrin. We also had the opportunity
to have a working lunch meeting with President Putin. I think we all benefited from
the discussion that included a review of G-8 agenda. The primary purpose of the
meeting today was to set the financial agenda for the G-8 Leaders Summit. Based
on the thorough preparation by Minister Kudrin and his staff, I think the leaders of
the G-8 countries will have a meaningful and productive meeting in July.
I appreciated the hospitality of our hosts this weekend and look forward to a
successful Russian Presidency.
Our first concern is strengthening economic growth. The U.S. economy continues
to be a major driver of the global economy, with solid growth expected to continue
in 2006. I was able to report to the ministers that the U.S. unemployment rate fell to
4.7 percent, which returns us to pre-September 11 levels. Inflation has been
restrained despite pressure from high energy prices. The budget deficit fell in the
past fiscal year, but the U.S. recognizes that there is still much more hard work to
be done to bring it down in the medium- to long-term. The deficit will likely widen
this fiscal year due to spending on hurricane recovery, but we are committed to
meeting President Bush's goal of cutting the deficit in half to about 2% of GOP by
the end of his term. I have every expectation that we will meet that goal.
The global economy remains strong and there are signs that the expansion will
continue. However, relative growth performance, especially among the larger
economies, continues to be uneven. More progress is needed to implement reform
policies that will raise growth potential and promote high sustainable growth of the
world economy. All countries, including the United States, but also the countries of
Europe, Japan, developing Asia and even the oil exporters, bear a responsibility to
help effect global adjustment in a way that maximizes and sustains global growth. I
continue to emphasize to my colleagues the importance of this shared
responsibility.
The positive outlook for the world economy makes this an opportune time to push
for progress on trade liberalization. The potential rise of protectionism represents
the most significant risk to the global economy. In our discussions, we saw clearly
the need to obtain an ambitious outcome from the Doha Development Round by the
end of 2006. I welcomed progress made at the Hong Kong Ministerial meeting but
recognize that further urgent efforts are necessary. We need to make significant
progress on market access in agriculture and industrial products. In addition, if this
round is to be truly development-focused, SUbstantial progress on services is
essential, since gains from services liberalization are estimated to be over four
times greater than the gains from goods trade alone. Financial services trade, in
particular, is important because it acts as a link to increased economic growth and
development.
I think this it's appropriate that Minister Kudrin is placing a heavy emphasis on
energy security in these discussions because of the risk high energy prices pose for
the global economy. There are many sides to energy security, but, as Finance
Ministers, we emphasized market-based solutions, transparency, and the
.
institutional framework necessary to encourage a friendly investment climate In
energy development and infrastructure. Energy is a high priority issue for President
Bush, and I had the opportunity to review his ambitious new Advanced Energy
Initiative to increase clean-energy research at the U.S. Department of Energy. In
developing countries the lack of energy access is a critical obstacle to development.
3/2/2006
http://treas.goy/press/releusoo/js4 C23 .htm
L.
Page 1. ot 1.
We were a/l pleased with the recent implementation of the G-8 debt agreement at
the IMF. As a result, 19 poor countries have received 100 percent irrevocable IMF
debt cancellation. Ministers had extensive discussions on the importance of
moving ahead with implementation at the World Bank and the African Development
Bank. We noted the unprecedented commitment provided to ensure that the
Bank's financial integrity remains unchanged - including specific commitments by
G-8 Heads of State to provide additional contributions to offset foregone debt
repayments on a dollar-for-dollar basis. The G-8 ministers encouraged World Bank
President Wolfowitz to seize upon the shareholder agreement reached during the
Annual Meetings and bring forward an acceptable final package for approval in the
very near future.
Ministers also discussed ways to address infectious diseases, which have a
significant economic impact on developed and developing economies. We
continued our discussion of the concept of Advance Market Commitments (AMCs)
for vaccines and agreed to continue to work toward developing a workable
proposal. We also discussed efforts currently underway to prevent the further
spread of Avian influenza. The spread of this virus has potentially severe human
and economic impacts, and we agreed that every nation must take all necessary
steps to help prevent a pandemic from occurring and to help mitigate its impact.
A key item on the agenda was fighting the financing of terrorism and illicit finance.
Under Russia's leadership, we committed to push forward implementation of the
action plan adopted last year. This means continuing to improve multilateral asset
freezing systems and to enhance information sharing. It also means enhancing our
financial tools for taking multilateral action against illicit activity like weapons of
mass destruction (WMD) networks. The fight against AMLlCFT is a global
undertaking, and we support the IMF and WB's continued commitment to this effort
as a regular part of their work. It will be particularly important that the IMF's
commitment not waiver as a result of its internal AMLlCFT reorganization.
http://treas.goy/press/releusoo/js4 023 .htm
3/2/2006
Vage
J ot 1
PRESS ROOM
February 13, 2006
JS-4044
U.S. Treasury Names Chief Economist for International Affairs
The Treasury Department announced today that Marvin J. Barth has been named
Chief Economist for International Affairs and Director of Research and Risk
Analysis. He brings to the Department a breadth of international experience from
public, private and multilateral institutions, with a strong background in economics,
finance, and markets.
Prior to joining the Department of the Treasury, Barth was the Global Currency
Economist at Citigroup (2003-2006), where he was responsible for fundamental
analysis of major currency markets, forecasting exchange rates, and advising
Citigroup's top financial and corporate customers on risks and opportunities in
foreign exchange markets. As an Economist in the Division of International Finance
at the Federal Reserve Board (1998-2001 and 2002-2003), Barth monitored all nonU.S. financial markets and reported to the Board on developing risks, with an
emphasis on emerging markets. Early in his tenure at the Board, Barth analyzed
and forecast real economic developments in Southeast Asian economies. From
2001-2002, Barth was a visiting scholar at the Bank for International Settlements in
Basel, Switzerland, where he studied developments in the global economy and
financial markets.
Barth's education in Economics includes a PhD. (1998, University of California,
San Diego), an M.A. (1996, University of California, San Diego), and a B.A. (1992,
University of California, Berkeley).
This is a new position in the International Affairs Office.
1!tp:lltreas,gov/pre£s/releasesljs4044.htm
3/2/2006
Page I of 3
PRESS ROOM
February 13, 2006
js-4045
Remarks of U.S. Treasury Assistant Secretary for International Affairs Clay
Lowery before the National Center for the Asia-Pacific Economic Cooperation
Seattle. Wash. - Thank you for having me here today. This is my first visit to
Seattle since I was confirmed last fall as the Assistant Secretary for International
Affairs at the Treasury Department. In that job it is my responsibility to help
represent the economic interests of the American people to the world.
I especially appreciate the opportunity to speak at the National Center for APEC.
APEC is the cornerstone of American involvement in Asia. The rest of the country
is coming to realize what the Pacific coast has long known, our economic
relationship with Asia is critical to our economic strength and prosperity. As
competition from Asia increases, it is all the more important that America
implements the right policies here at home. Turning to isolationism and retreating
behind protectionist trade barriers is not the answer.
In his State of the Union Address two weeks ago, President Bush set out a positive
agenda for America in a competitive global economy. I am here to echo that same
message so that there will be no doubt that America can and will compete with
confidence and extend our economic leadership in the world.
First, let's take stock of where we are. The American economy is healthy and
growing. In the last two and a half years, the economy has created more than 4.7
million new jobs - more than Japan and the European Union combined. The
unemployment rate has fallen to 4.7 percent - lower than the average for the
1970s, 1980s, and 1990s. And GOP growth was a solid 3.5 percent in 2005 while
core inflation remains low.
When you look at the underlying fundamentals of the economy, it's plain to see that
this strength is deep and solid. Productivity growth is strong, growing 3.2 percent
since the end of 2000, which is faster than any five-year period in the 1~Os, 1980s,
or 1990s. Inflation-adjusted hourly wages are growing - registering over 1.5
percent between September and December, a trend that is expected to continue.
Household net worth - that's assets minus debts - is at a record high, and not just
because of housing. Deposits - the money in checking accounts, savings
accounts, and money market funds - are at a record high and are larger as a share
of disposable income than at any time since 1993. Defaults on residential mortgage
loans at commercial banks are at historic lows.
In the State of the Union address the President laid out a broad agenda for
maintaining this strength, including: reducing health care costs; improving
education; reforming our legal system; breaking America's dependence on oil;
reducing non-security, discretionary spending; and making the tax cuts permanent.
To provide one example, a centerpiece of American competitiveness is our rapid
development and adoption of technology to improve efficiency and create entirely
new fields of human industry. Here in the Pacific Northwest you know a bit about
technological innovation. To support the innovative heart of the American
economy, the President has announced $5.9 billion in his 2007 Budget to increase
investments in research and development, strengthen education, and encourage
entrepreneurship. These investments in things like basic research will help keep
America on the technological cutting edge.
In addition the President emphasized the importance of reforming our immigration
system and opening markets for American trade. Let me discuss each of these in
more detail.
l!tp:lltreas.gov Ipre£s/releaseslj 84045 .htm
3/2/2006
Page 2 ofJ
On trade, this Administration has pursued an aggressive bilateral and multilateral
agenda for opening new markets to American goods and services. The Treasury
Department is a full participant in the Administration's trade agenda, focusing on
services, especially financial services where we have the lead responsibility within
the U.S. government.
The first five years of the Bush Administration have seen a rapid expansion of
America's trade liberalization efforts. In 2001, the U.S. was party to only a handful
of free trade agreements. Today we have completed or are in serious negotiations
for FTAs with over 30 countries, including several in the Asia-Pacific region. We
have signed FTAs with Australia and Singapore and are working toward an
agreement with Thailand. Washington is witnessing firsthand the benefits of free
trade, with Singapore becoming one of the fastest growing export markets for the
state's goods and services. And just two weeks ago we announced that we are
starting negotiations with South Korea, America's seventh largest trading partner.
The fact is that these agreements are creating export opportunities for Americans
and lowering the costs of imports for Americans here at home. U.S. exports to FTA
partners grew at an average annual rate of almost 21 percent between 2001 and
2005, while exports to non-FTA partners grew only 10 percent over that period.
While we continue to pursue openings bilaterally and through regional agreements
like the Central America Free Trade Agreement, we are also focused on making
progress in the WTO's Doha Round of trade negotiations. To put the importance of
the Doha Round to the American economy into context, the University of Michigan
recently did a study showing that if the Doha round is successful, there could be a
dramatic impact on annual incomes here in the United States. The study concluded
that if we eliminate trade barriers all together that a family of four would see a
$7,500 per year increase in their income. If we were to just reduce barriers by onethird, then we would have a $2,500 annual income gain for an American family of
four.
The reason for these benefits is that America can compete with anyone in the
international economy, and we are especially competitive in services and
manufacturing. In services we have almost a $50 billion surplus. In the AsiaPacific region alone, sales of services by foreign affiliates of U.S. multinationals
have more than doubled since 1996.
At Treasury, we take the lead on promoting financial services in the Trade Agenda.
Financial services account for over 8 percent of U.S. GDP - more importantly,
financial services have grown in importance by roughly 70 percent since 1980. For
this reason, Treasury continues to pursue an the lifting of sector caps to allow more
competition from U.S. industry in places like China, India, Korea, and Thailand.
With a comparatively low average tariff on manufactured goods of about 4.5%, we
have very little to give up and a great deal to gain from increased liberalization. The
United States continues to be the number one exporter of manufactured products in
the world. The state of Washington is the fifth largest merchandise exporter in the
country and export-related jobs account for one in nine jobs in the private sector
here.
There is still a great deal to be done to complete the Doha Round, but this
Administration is committed to success, because all the American worker needs to
succeed is a level playing field.
In conclusion, there are a lot of reasons to be optimistic about the American
economy. The government is doing its part, making. sure that the fundamentals for
growth are in place and keeping the burden of taxation low so the rewards for nsk
taking remain high. As the President has said, Americans should not fear the
future, because we are shaping it.
Thank you, I'd be happy to take a few questions.
-30-
It!p://treas.govIpress/releaseslj s404~ .htm
3/2/2006
Page 1 at 1..
PRESS ROOM
February 13, 2006
2006-2-13-17 -29-54-22010
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $64,943 million as of the end of that week, compared to $64,993 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
February 3, 2006
II
I
TOTAL.!
11. Foreign Currency Reserves
64,993
II
Euro
Yen
la. Securities
II
11,230
10,691
I Of which, issuer headquartered in the US.
II
1
II
"II
II
II
TOTAL
21,921
II
0
II
16,204
II
0
II
0
II
February 10, 2006
II
64,943
II
II
Euro
11,148
II
II
Yen
10,804
II
II
II
II
II
TOTAL
21,952
0
lb. Total deposits with:
Ibi. Other central banks and BIS
Ib;; Banks headquartered in the US.
Ib.ii, Of which, banks located abroad
Ib.iii Banks headquartered outside the US.
Ib.iii. Of which, banks located in the U.S.
12. IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2
14. Gold Stock 3
15, Other Reserve Assets
II
II
11,016
II
II
II
II
II
II
II
II
II
II
II
II
II
II
II
5,188
II
10,929
II
I
II
II
5,246
0
0
0
7,621
II
I
8,203
II
11,043
II
II
0
II
16,175
0
II
II
I
0
I
I
I
0
II
II
II
II
7,597
I
8,176
I
11,043
0
I
I
II. Predetermined Short-Term Drains on Foreign Currency Assets
February 3, 2006
II
I
I
Euro
II
Yen
II
TOTAL
II
Euro
I
TOTAL
Yen
0
1. Foreign currency loans and securities
0
II
I
II
II
JI
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
~.a Short positions
~b. Long positions
~. Other
II
II
II
II
II
II
II
II
II
0
0
0
I
February 10, 2006
II
II
II
II
II
II
II
II
II
II
0
I
0
I
0
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
l
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
r
February 3, 2006
II
Euro
Yen
II
II
I
II
II
I
II
II
/I
1\
I
/I
ttP:lltreas.gov/presstreteasest200621317295422010.htm
TOTAL
0
II
II
II
February 10, 2006
Euro
II
TOTAL
II
II
0
II
II
II
/I
1\
1\
II
Yen
3/2/2006
Page 2 of2
11.b. Other contingent liabilities
2. Foreign currency securities with embedded
options
3. Undrawn, unconditional credit lines
@.a. With other central banks
3.b With banks and other financial institutions
~eadquartered in the U. S.
3.c. With banks and other financial institutions
Headquattered outside the U. S
~ Aggregate short and long positions of options
foreign
I
II
II
I
I
I
0
I!
0
!
I
I
I
I
I
II
II
II
II
II
I
II
Currencies vis-a-vis the U.S. dollar
I
4.a. Short positions
I
I
14.a.1. Bought puts
II
I
14.a.2. Written calls
II
II
I
I
14b. Long positions
4.b.1. Bought calls
4.b.2. Written puts
II
II
II
II
II
I
I
II
II
II
II
I
I
II
II
I
0
I
II
0
II
II
11
II
II
II
II
II
II
I
I
I
II
II
II
I
I
I
I
I
I
II
I
I
I
!
I
I
0
I
I
I
0
I
I
II
II
I
I
I
I
II
II
II
I
I
I
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2J The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
lttP:/ltreas.gov/prf'Ss/releases/W06213 173954220 1O.htrn
3/2/2006
Page 1 of 1
PHESS ROOM
February 13, 2006
JS-4046
Tax Relief Legislation
U.S. Treasury Secretary Snow will be joined by Senators Allard (R-CO) and
Bennett (R UT) for a press conference to discuss the benefits of Congress passing
tax relief legislation. The press conference will take place in the Dirksen Senate
Office Building on Capitol Hill prior to the Secretary's testimony before the Senate
Budget Committee.
Who: U.S. Secretary John Snow
What: Press conference to discuss benefits of Congress passing tax relief
legislation.
When: Tuesday, February 14,9:30 - 9:45 a.m. (EST)
Where: Dirksen Senate Office Building
6th Floor Center Hallway/Elevator Alcove
Washington, DC
-30-
~ttp:lltreas.gov/presslreleases/js4046.htm
3/2/2006
page 1 of 1
PRESS ROOM
February 14, 2006
js-4047
U.S. Treasury Secretary John W. Snow Statement Retail Sales and U.S.
Economic Strength
"Today's report on retail sales is yet another unmistakable sign that the U.S.
economy is strong, it is heading in the right direction and Americans are confident.
With a jump of 2.3 percent for January, this was one of the biggest month-to-month
increases in over a decade and a half.
"Today's news is what we expect to see when consumers are confident about the
economy and optimistic about the future. And it is no wonder they are feeling that
way, given the strength in the job market, with low unemployment, new claims for
unemployment insurance at the lowest level since the peak of the high-tech boom
and real wages rising.
''There can be no question that the American economic expansion is continuing and
that's good news for the American people. But, to remain on this positive path we
must maintain the good economic policies that led us here. Low tax rates on
income and investment must be made permanent. Now is not the time for a tax
increase."
~ttp:lltreas.gov/presslreleases/js 4047 .hfrrr
3/212006
page
I
ot
I
PRESS rWOM
February 14, 2006
js-4048
The Honorable John W. Snow
Statement on Extension Lower Tax Rate
on Capital Gains and Dividends
"I commend the U.S. Senate for resisting misguided calls to increase taxes. Today's
Senate vote to support an extension of the President's lower rates on capital gains
and dividends was a step in the right direction toward lower tax rate permanency,
which is vital to maintaining the strength of the American economy: 3.5 percent
growth rate, more than 4.7 million new jobs, and unprecedented Federal revenues
of $2.15 trillion.
"We know that you always get less of something you tax. By lowering the taxes on
capital, the Jobs and Growth Act of 2003 encourages increased long-term
investment. Increased long-term investment in turn improves the long-turn outlook
of the economy. It makes the economy more productive. With additional capital,
labor output rises. And with rising labor output the demand for labor increases and
living standards rise.
"Since the President signed the Jobs and Growth Act of 2003, we have seen a
remarkable turn-around in the US economy, and unemployment is quite low. After
nine consecutive declining quarters of real annual business investment, we have
had ten straight quarters of rising business investment. While many factors
contributed to the improved performance of the economy, the tax reductions on
capital have been at the heart of the progress we have seen. By lowering the cost
of capital the President's proposals improved the inherent efficiency of the
economy, and this will prove effective for both the short and long term.
"I encourage the House and Senate Conferees to extend the 15 percent rate on
capital gains and dividends that was put in place by the Jobs and Growth Act of
2003 indefinitely. Congress owes this to all Americans who benefit from a strong
and growing economy.
"If Congress fails to extend the 15% rate on capital gains and dividends, the
effective increase would strike at the heart of the American economy with damaging
long-term effects on economic growth. A slow down in investment would be
inevitable, and a slow-down in job growth more than likely to follow."
-30-
~ttp:lltreas,gov/presSlreleases/js4048.htm
3/2/2006
J5-4049 - Treasury Intemabonai CapItal Data for December
Page I ot 2
PRESS ROOM
FROM THE OFFICE OF PUBLIC AFFAIRS
We recommend printing this release using the PDF file below
To view or print the PDF content on this page, downloild the free A(ioiJo'<) AcroiJal,") 1~(,d(i(J(1i<"
February 15, 2006
JS-4049
Treasury International Capital Data for December
Treasury International Capital (TIC) data for December are released today and posted on the U,S, Treasury web site (www treas
date, which will report on data for January, is scheduled for March 15, 2006,
gOV!ii(
Net foreign purchases of long-term securities were $56,6 billion,
• Net foreign purchases of long-term domestic securities were $74.2 billion, $10.4 billion of which were net purchases by foreign (
$63.8 billion of which were net purchases by private foreign investors,
• U,S. residents purchased a net $17.6 billion in foreign issued securities.
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
Foreigners' Transactions in Long-Term Securities with U.S. Residents
Billions of dollars, not seasonall ad'usted
Se -
Oct-
2003
2004
2005
13526,0
12806.1
15178.9
14262.4
17049.2
16000.7
1654,1
1538.6
1445.7
1336.9
14:
,).
I'"
3 Domestic Securities Purchased, net (line 1 less line
719.9
916.5
1048.5
115.5
108.8
1C
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonc;ls, net
Equities, net
585.0
159.7
129.9
260.3
35.0
680.9
150.9
205.7
298.0
26.2
933.7
289,6
192.6
372.9
78.7
111.2
22.9
18.6
47.7
22.0
95.9
25.0
28.7
34.4
7.8
9
10
II
12
13
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
Equities, net
134.9
103.8
25.9
5.4
-0.3
235.6
201.1
20.8
11.5
2.2
114.7
61.2
34.2
18.9
0.5
4.3
-1.1
2.2
2.2
1.0
13.0
4.9
6.2
1.7
0.2
2761.8
2818.4
3123.1
3276.0
3688.9
3826.8
319.4
335.6
374.3
377.5
3:
3:
-56.5
-152.8
-137.8
-16.2
-3.2
-J
32.0
-88,6
-67.9
-85.0
-16.2
-121.6
-9.7
-6.5
2.8
-6.0
Gross Purchases of Domestic Securities
2 Gross Sales of Domestic Securities
14 Gross Purchases of Foreign Securities
15 Gross Sales of Foreign Securities
16 Foreign Securities Purchased, net (line 14 less line
17
18
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
11tp:lltreas.goVIpr~sfreleases!j 84049 .htm
Nov-
3/212006
1~-4049
page
lreasury internatIOnal c-apltal Data for December
19 Net Long-Term Flows (line 3 plus line 16)
11
/2
/3
663.3
763.6
910.7
99.3
L
ot
L
105.6
Net foreign purchases of U.S. securities (+)
Includes International and Regional Organizations
Net U.S. acquisitions of foreign securities (-)
REPORTS
• (PDF) Foreigners' Transactions in LOllg- Term Securities with U S. Residents (Billions of dollars, not seasonally adjusted
lltp:lltreas.gov/presslreleases/js4049.htm
3/2/2006
u.s. TREASURY DEPARTMENT OFFICE OF PUBLIC AFFAIRS
EMBARGOED UNTIL 9 A.M. (EST) February 15, 2006
CONTACT Brookly McLaughlin (202) 622-1996
TREASURY INTERNATIONAL CAPITAL DATA FOR DECEMBER
Treasury International Capital (TIC) data for December are released today and posted on the U.S.
Treasury web site (www.treas.gov/tic). The next release date, which will report on data for January,
is scheduled for March 15, 2006.
Net foreign purchases of long-term securities were $56.6 billion.
•
Net foreign purchases of long-term domestic securities were $74.2 billion, $10.4 billion of
which were net purchases by foreign official institutions and $63.8 billion of which were net
purchases by private foreign investors.
•
U.S. residents purchased a net $17.6 billion in foreign issued securities .
Foreigners' Transactions in Long-Term Securities with U.S. Residents
(Billions of dollars, not seasonally adjusted)
I Gross Purchases of Domesltc Securities
2 Gross Sales of Domestic Securities
Domestic Securities Purchased, net (line I less line 2) II
Se -05
Oct-OS
Nov-OS
Dec-OS
2003
2004
2005
135260
12806 I
719.9
15178 9
142624
916.5
170492
16000.7
1048.5
1654 I
15386
115.5
14457
13369
108.8
14266
13209
105.7
12077
1133 5
74.2
4
5
6
7
8
Private, net 12
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
EqUities, net
585.0
1597
1299
2603
350
680.9
ISO 9
2057
2980
262
933.7
289.6
192 6
372.9
787
111.2
229
186
477
220
95.9
250
28.7
34.4
78
99.8
508
87
356
47
63.8
127
74
34.9
88
9
10
II
12
13
Official, net
Treasury Bonds & Notes, net
Gov't Agency Bonds, net
Corporate Bonds, net
EqUities, net
134,9
1038
259
54
-03
235.6
201 I
208
II 5
22
114.7
61 2
342
189
05
4.3
-I I
22
22
10
13.0
49
62
I7
02
5.9
37
04
I7
oI
lOA
56
24
24
-0 I
27618
28184
-56.5
3123 I
32760
-152.8
36889
38268
-137.8
3194
3356
-16.2
3743
377 5
-3.2
3383
352 -+
-14.1
3249
3425
-17.6
320
-88.6
-679
-850
-162
-121 6
-97
-65
28
-60
22
-164
-37
-13 8
663.3
763.6
910.7
99.3
105.6
91.6
56.6
14
IS
16
17
18
19
11
12
13
Gross Purchases of Foreign Secunltes
Gross Sales of Foreign Secunltes
Foreign Securities Purchased, net (line 14 less line IS) 13
Foreign Bonds Purchased, net
Foreign Equities Purchased, net
Net Lon -Term Flows (line 3 Ius line 16)
Net foreign purchases of U S seCUrities (+)
Includes International and Regional Organizaltons
Net US acquIsitions offorelgn securities (-)
Page 1 ot 4
PRESS ROOM
10
view or pnnt me J-'UI- content on mls page. oown/oao tne free JWOIH]"<) !1crol)a~") Hea(1er"J
February 15, 2006
js-4050
Secretary John W. Snow
Opening Statement
The President's FY 2007 Budget
House Committee on Ways and Means
Good morning. Thank you Chairman Thomas and Ranking Member Rangel for
having me here this morning.
I'm pleased to be here today to talk with you about the President's Fiscal Year 2007
budget. This budget represents the President's dedication to fiscal discipline, an
efficient federal government and the continuation of a thriving U.S. economy.
Across the board, agencies were asked by the President to look closely at their
budgets and make tough decisions, because fiscal restraint is not only necessary
for deficit reduction, it is a necessary component of government that is responsible
to the people who employ it.
Those tough decisions were made at all levels of government management, and as
a result the President's budget holds the growth of discretionary spending below the
rate of inflation and cuts spending in non-security discretionary programs below
2006 levels.
The Administration has identified 141 programs that should be terminated or
significantly reduced in size because they aren't performing or could perform better
with consolidation; they aren't giving taxpayers their money's worth. The savings for
the American taxpayer would be 14 billion dollars.
Cutting the programs that aren't working and improving the efficiency of the ones
that are is all part of accountability to the taxpayer. To assist lawmakers in this
shared effort, the Administration launched ExpectMore.gov, a website that provides
candid information about programs that are successful and programs that fall short,
and in both situations, what they are doing to improve their performance next year. I
encourage the members of this Committee and those interested in our programs to
visit ExpectMore.gov, see how we are doing, and hold us accountable for
improving.
This budget, with its policies of economic growth and spending restraint, keeps us
on track to meet the President's steadfast goal of cutting the deficit in half by 2009.
The budget also seeks to avoid a tax increase by making the President's tax cuts
permanent; I want to take a moment to explain why that is entirely consistent with
our deficit-cutting goals.
In short, lower tax rates are good for the economy and a growing economy is good
for Treasury receipts. Indeed, our rate of economic growth led to record levels of
Treasury receipts in 2005. And, going forward, we project that receipts will rise
every year. In 2011 we will again reach, as a percentage of GDP, the levels we've
seen over the average of the last 40 years.
And there can be no question today that well-timed tax relief, combined with
responsible leadership from the Federal Reserve Board, created an environment in
which small businesses, entrepreneurs and workers could bring our economy back
from its weakened state of just a few years ago. Tax relief encouraged investment,
which has ultimately led to job growth. The American economy is now unmistakably
~ttp:lltreas.gov/presslreleases/js4050.htm
3/2/2006
Page L or 4
in a trend of expansion, and those trend lines can clearly be traced to the
enactment of the tax relief.
Since May of 2003, the economy has created 4.7 million jobs, two million of them in
the last year alone.
That's a lot of job growth, and there are a lot of very good jobs in that number.
Industries with above-med~an hourly earnings and particularly large jobs gains since
August 2003 Include: specialty trade contractors (463,000 workers paying an
average hourly wage of $19.55), ambulatory health care services (394,000 workers
$17.86), and building construction (167,000 paying $19.05).
We found out the week before last that unemployment has fallen from 4.9 percent
to 4.7 percent, running lower than the average for the 1970s, 1980s and 1990s.
GOP growth was three and a half percent last year.
U.S. equity markets have risen, and household wealth is at an all-time high.
Additionally, real per capita disposable (after-tax) income has risen by 7.3 percent
from 2000 to 2005 and that's very good news for workers.
The U.S. is, as the President often notes, the economic envy of the world.
When we look at the underlying fundamentals of the economy, its strength proves
deep and solid, and we can see that businesses and workers have every reason to
be optimistic about the future.
For example, we see that productivity growth remains strong. Output per hour in the
non-farm business sector has risen at an average annual rate of 3.2 percent since
the end of 2000, faster than any five-year period in the 1970s, 1980s or 1990s.
Household net worth - that's assets minus debts - is a record high, and not just
because of housing. Deposits - the money in checking accounts, savings accounts,
and money market funds - are at a record high and are larger as a share of
disposable income than at any time since 1993. Defaults on residential mortgage
loans at commercial banks are at historic lows.
In the past two years, the economy has generated about 170,000 jobs per month,
and that includes the two-month slowdown in job growth in the aftermath of
Hurricanes Katrina and Rita. In the past 32 years, new claims for unemployment
insurance have almost never been as low as they have been recently, the only
exception being the peak of the high-tech bubble from November 1999 to June
2000.
Core inflation remains low, and that's good news for everyone.
Independent private-sector forecasts point to continuing good news, and inflationadjusted hourly wages grew 1.6 percent between September and December and
this trend should continue.
We are, it appears, witnessing the tipping pOint on wages - when incomes rise for
workers and business combined, but workers once again increase their incomes
faster than businesses. Once businesses have been doing well for a while, they
ultimately compete those increases in income away by competing harder for
labor. The result is higher wages and higher standards of living for workers.
Both on leading indicators and a deeper background analysis, the American
economy proves to be on solid footing. The question that those of us in government
must look at now is this: why is our economy performing so well and what can we
do to continue these positive trends?
It is a sweeping and important question, so today we'll ask a more focused
question: what can our budget do, or not do, to keep the economy on track?
~ttp:lltreas,gov/presslreleases/js4050.htm
3/2/2006
Page 3 of4
The answer to that is twofold: first, control spending. Second, don't increase taxes let taxpayers keep as much of their money as possible to invest and spend.
And of course I use the term "taxpayer" quite broadly. I ask you to think of the
individual and family budgets that benefit from lower taxes, but also of the smallbusiness budgets. Lower marginal rates, for example, help small firms because
they tend to filetheir taxes as individuals, not as corporations. We are proposing to
allow small bUSinesses to be able to deduct up to $200,000 of business-expanding
Investment as a permanent feature of the tax code, for example. This tax benefit
encourages expansion and job creation in the sector that produces three-quarters
of the nation's net new jobs.
Lower rates and a degree of certainty in the system are absolutely critical to
keeping our economy, and our excellent rate of job creation, on track. And I cannot
say this strongly enough: we can't beat the budget deficit without a strong economy.
Tax mcreases carry an enormous risk of economic damage and I can tell you today
that the President will not accept that risk. He will not accept a tax increase on the
American people.
Fiscal discipline, combined with economic growth, is the correct path to deficit
reduction, period, and we cannot let difficult decisions run us off of that path that we
know is right.
Our government does, of course, face economic demands that are exceptional,
from fighting the war on terror to helping the victims of devastating hurricanes put
their lives back together. These are costly events that lead to unwelcome, brief
deficits. They should be regarded as temporary as they are entirely surmountable
with continued economic strength and spending restraint in the areas where it is
possible and appropriate.
The second way for the budget to help keep the economy on track is to focus the
taxpayers' precious resources on things that we know will make a difference.
In order for America to continue to be a dynamic engine of growth, President Bush
is outlining action in three key areas: healthcare, energy, and America's
competitiveness.
Affordable and Accessible Health Care. The President's reform agenda will help to
make health care more affordable and accessible. Health Savings Accounts putting patients in charge of their health care - will contribute to this goal. We need
to make health insurance portable, make the system more efficient, and lower
costs. We also need to level the playing field for individuals and the employees of
small business by allowing small businesses to form Association Health Plans.
The expansion of high deductible health plans and HSAs is something I'd
particularly like to emphasize. Combined with a high deductible health plan, HSAs
allow people to save for future health care expenses while providing immediate
protection against catastrophic health expenses. Furthermore, by giving people
more control over their health care spending, they offer a more affordable
alternative to traditional health insurance.
Today, millions of Americans - many of whom were previously uninsured -are
enjoying access to more affordable health insurance because of the increased
availability of HSA-qualified HD health plans. These plans are more available and
becoming more popular, because saving for health care needs in an HSA now has
the same tax advantages as a traditional health insurance plan.
It only makes sense to expand the scope of HSA qualified health insurance by
making their premiums deductible from income taxes and payroll taxes when
purchased by individuals. This is an important innovation that will significantly
reduce the cost of health insurance purchased by individuals, particularly important
for working people who don't have a federal income tax liability. As many of my
friends on the Democratic side of the aisle have pointed out to me - payroll taxes
are one of the most significant tax burdens for the poor. This innovation will enable
more individuals to purchase affordable health insurance. Expanding HSAs so
that policy holders and their employers can make annual contributions to cover all
out-of-pocket costs under their HSA policy will further encourage adoption of
~ttp:lltreas.gov/presslreleases/js4050.htm
3/2/2006
Page 4 ot4
qualified HDHP plans.
All told, the President's HSA proposals are projected to increase the number of
HSAs from the current projected for 14 million to 21 million.
Advanced Energy Initiative. The President has said that the best way to break
America's dependence on foreign sources of energy is through new technology. So
the President announced the Advanced Energy Initiative, which provides for a 22
percent increase in clean-energy research at the Department of Energy. This
initiative also builds on the energy legislation finally passed by the Congress last
year that encourages and rewards energy conservation activity.
American Competitiveness Initiative. This ambitious strategy by the President will
significantly increase federal investment in critical research, ensure that the U.S.
continues to lead the world in opportunity and innovation, and provide American
children with a strong foundation in math and science.
This budget also gives us an opportunity to look at the other ways - in addition to
keeping tax rates low - that the federal government can make adjustments that add
to a growth-friendly environment for the businesses, entrepreneurs and workers
that produce that economic growth. Tax code reform remains a priority for this
President and the President's Advisory Panel on Federal Tax Reform provided us
this year with a strong foundation for a national discussion on ways to ensure that
our tax system better meets the needs of our dynamic, 21 st century economy. I
appreciate the fine work of Senators Mack and Breaux, for their outstanding
leadership of the Panel.
You'll notice that the budget provides for a one-year patch to protect the middle
class from the AMT. It is a temporary fix because the AMT needs to be resolved
through broader tax reform.
This issue is also reflected in the budget through the proposed creation of a new
Dynamic Analysis Division within Treasury's Office of Tax Policy. Understanding the
full range of behavioral responses to tax changes, including how tax changes affect
the size of the economy and, subsequently, tax revenues, is critical to designing
meaningful, effective tax reform, and we believe this small expenditure will have an
enormous pay-off for the American taxpayer.
With a focus on these and other good policies, we'll keep America competitive in
the world and keep our economy strong as it has been for some time now.
In closing, I want to point out that a lot of good can come from a smart federal
budget, and a considerable amount of harm can come from a bad one. Let's use
the FY 2007 budget to make good policy - restrained as the circumstances dictate
on spending but aggressive on the expansion of opportunity.
I look fOrNard to working with all of you on enacting this budget. Thank you for
having me here today; I'm pleased to take your questions now.
###
REPORTS
•
Secretary John W. Snow Opening Statement The President's FY 2007
Budget House Committee on Ways and Means (charts included)
~ttp:lltreas.gov/presslreleases/js40S0.htm
3/2/2006
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DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS
FOR IMMEDIATE RELEASE February 15,2006
CONTACT Tony Fratto (202) 622-2910
SECRETARY JOHN W. SNOW
OPENING STATEMENT
THE PRESIDENT'S
FY 2007 BUDGET
HOUSE COMMITTEE ON WAYS AND MEANS
Good morning, Thank you Chairman Thomas and Ranking Member Rangel for having
me here this morning.
I'm pleased to be here today to talk with you about the President's Fiscal Year 2007
budget. This budget represents the President's dedication to fiscal discipline, an efficient
federal government and the continuation of a thriving U ,So economy.
Across the board, agencies were asked by the President to look closely at their budgets
and make tough decisions, because fiscal restraint is not only necessary for deficit
reduction, it is a necessary component of government that is responsible to the people
who employ it.
Those tough decisions were made at all levels of government management, and as a
result the President's budget holds the growth of discretionary spending below the rate of
inflation and cuts spending in non-security discretionary programs below 2006 levels.
The Administration has identified 141 programs that should be terminated or
significantly reduced in size because they aren't performing or could perform better with
consolidation; they aren't giving taxpayers their money's worth, The savings for the
American taxpayer would be 14 billion dollars.
Cutting the programs that aren't working and improving the efficiency of the ones that
are is all part of accountability to the taxpayer. To assist lawmakers in this shared effort,
the Administration launched ExpectMore.gov, a website that provides candid infonnation
about programs that are successful and programs that fall short, and in both situations,
what they are doing to improve their perfonnance next year. I encourage the members of
this Committee and those interested in our programs to visit ExpectMore.gov, see how
we are doing, and hold us accountable for improving.
This budget, with its policies of economic growth and spending restraint, keeps us on
track to meet the President's steadfast goal of cutting the deficit in halfby 2009.
Cutting the Deficit in Half
Percent of GOP
5~--------------------------------------------,
February 2004
,....
4
Projection
/
,
o
February 2005
, . / Projection
•
Projections
Actuals
3
40-year Historical Average 2.3%
2
1
o
2004
2005
2006
2007
2008
2
2009
2010
2011
Declining Federal Debt
Debt held by the public as a percent of GOP
120.---------------------------------______
110
100
90
80
70
60
50
40
30
20
10
O~~~~~~~~~~~~~~~--~----~--~
1940
1950
1960
1970
1980
1990
2000
2010
The budget also seeks to avoid a tax increase by making the President's tax cuts
permanent; I want to take a moment to explain why that is entirely consistent with our
deficit-cutting goals.
In short, lower tax rates are good for the economy and a growing economy is good for
Treasury receipts. Indeed, our rate of economic growth led to record levels of Treasury
receipts in 2005. And, going forward, we project that receipts will rise every year. In
2011 we will again reach, as a percentage of GDP, the levels we've seen over the average
of the last 40 years.
And there can be no question today that well-timed tax relief, combined with responsible
leadership from the Federal Reserve Board, created an environment in which small
businesses, entrepreneurs and workers could bring our economy back from its weakened
state of just a few years ago. Tax relief encouraged investment, which has ultimately led
to job growth. The American economy is now unmistakably in a trend of expansion, and
those trend lines can clearly be traced to the enactment of the tax relief.
3
Since May of2003, the economy has created 4.7 million jobs, two million of them in the
last year alone.
4
That's a lot of job growth, and there are a lot of very good jobs in that number. Industries
with above-median hourly earnings and particularly large jobs gains since August 2003
include: specialty trade contractors (463,000 workers paying an average hourly wage of
$19.55), ambulatory health care services (394,000 workers $17.86), and building
construction (167,000 paying $19.05).
5
We found out the week before last that unemployment has fallen from 4.9 percent to 4.7
percent, running lower than the average for the 1970s, 1980s and 1990s. GOP growth
was three and a half percent last year.
u.s. equity markets have risen, and household wealth is at an all-time high.
Additionally, real per capita disposable (after-tax) income has risen by 7.3 percent from
2000 to 2005 and that's very good news for workers.
The U.S. is, as the President often notes, the economic envy of the world.
When we look at the underlying fundamentals of the economy, its strength proves deep
and solid, and we can see that businesses and workers have every reason to be optimistic
about the future.
For example, we see that productivity growth remains strong. Output per hour in the nonfarm business sector has risen at an average annual rate of 3.2 percent since the end of
2000, faster than any five-year period in the 1970s, 1980s or 1990s.
Household net worth - that's assets minus debts - is a record high, and not just because
of housing. Deposits - the money in checking accounts, savings accounts, and money
market funds - are at a record high and are larger as a share of disposable income than at
any time since 1993. Defaults on residential mortgage loans at commercial banks are at
historic lows.
6
In the past two years, the economy has generated about 170,000 jobs per month, and that
includes the two-month slowdown in job growth in the aftermath of Hurricanes Katrina
and Rita. In the past 32 years, new claims for unemployment insurance have almost never
been as low as they have been recently, the ollly exception being the peak of the hightech bubble from November 1999 to June 2000.
Core inflation remains low, and that's good news for everyone.
Independent private-sector forecasts point to continuing good news, and inflationadjusted hourly wages grew 1.6 percent between September and December and this trend
should continue.
We are, it appears, witnessing the tipping point on wages - when incomes rise for
workers and business combined, but workers once again increase their incomes faster
than businesses. Once businesses have been doing well for a while, they ultimately
compete those increases in income away by competing harder for labor. The result is
higher wages and higher standards of living for workers.
Both on leading indicators and a deeper background analysis, the American economy
proves to be on solid footing. The question that those of us in government must look at
now is this: why is our economy performing so well and what can we do to continue these
positive trends?
It is a sweeping and important question, so today we'll ask a more focused question: what
can our budget do, or not do, to keep the economy on track?
The answer to that is twofold: first, control spending. Second, don't increase taxes -let
taxpayers keep as much of their money as possible to invest and spend.
And of course I use the term "taxpayer" quite broadly. I ask you to think of the individual
and family budgets that benefit from lower taxes, but also of the small-business budgets.
Lower marginal rates, for example, help small firms because they tend to file their taxes
as individuals, not as corporations. We are proposing to allow small businesses to be able
to deduct up to $200,000 of business-expanding investment as a permanent feature of the
tax code, for example. This tax benefit encourages expansion and job creation in the
sector that produces three-quarters of the nation's net new jobs.
Lower rates and a degree of certainty in the system are absolutely critical to keeping our
economy, and our excellent rate of job creation, on track. And I cannot say this strongly
enough: we can't beat the budget deficit without a strong economy. Tax increases carry
an enormous risk of economic damage and I can tell you today that the President will not
accept that risk. He will not accept a tax increase on the American people.
Fiscal discipline, combined with economic growth, is the correct path to deficit reduction,
period, and we cannot let difficult decisions run us off of that path that we know is right.
7
Our government does, of course, face economic demands that are exceptional, from
fighting the war on terror to helping the victims of devastating hurricanes put their lives
back together. These are costly events that lead to unwelcome, brief deficits. They should
be regarded as temporary as they are entirely surmountable with continued economic
strength and spending restraint in the areas where it is possible and appropriate.
The second way for the budget to help keep the economy on track is to focus the
taxpayers' precious resources on things that we know will make a difference.
In order for America to continue to be a dynamic engine of growth, President Bush is
outlining action in three key areas: healthcare, energy, and America's competitiveness.
Affordable and Accessible Health Care. The President's reform agenda will help to make
health care more affordable and accessible. Health Savings Accounts - putting patients in
charge of their health care - will contribute to this goal. We need to make health
insurance portable, make the system more efficient, and lower costs. We also need to
level the playing field for individuals and the employees of small business by allowing
small businesses to form Association Health Plans.
The expansion of high deductible health plans and HSAs is something I'd particularly
like to emphasize. Combined with a high deductible health plan, HSAs allow people to
save for future health care expenses while providing immediate protection against
catastrophic health expenses. Furthermore, by giving people more control over their
health care spending, they offer a more affordable alternative to traditional health
Insurance.
Today, millions of Americans - many of whom were previously uninsured -are enjoying
access to more affordable health insurance because of the increased availability of HSAqualified HD health plans. These plans are more available and becoming more popular,
because saving for health care needs in an HSA now has the same tax advantages as a
traditional health insurance plan.
It only makes sense to expand the scope ofHSA qualified health insurance by making
their premiums deductible from income taxes and payroll taxes when purchased by
individuals. This is an important innovation that will significantly reduce the cost of
health insurance purchased by individuals, particularly important for working people who
don't have a federal income tax liability. As many of my friends on the Democratic side
of the aisle have pointed out to me - payroll taxes are one of the most significant tax
burdens for the poor. This innovation will enable more individuals to purchase affordable
health insurance. Expanding HSAs so that policy holders and their employers can make
annual contributions to cover all out-of-pocket costs under their HSA policy will further
encourage adoption of qualified HDHP plans.
All told, the President's HSA proposals are projected to increase the number of HSAs
from the current projected for 14 million to 21 million.
8
Advanced Energy Initiative. The President has said that the best way to break America's
dependence on foreign sources of energy is through new technology. So the President
announced the Advanced Energy Initiative, which provides for a 22 percent increase in
clean-energy research at the Department of Energy. This initiative also builds on the
energy legislation finally passed by the Congress last year that encourages and rewards
energy conservation activity.
American Competitiveness Initiative. This ambitious strategy by the President will
significantly increase federal investment in critical research, ensure that the U.S.
continues to lead the world in opportunity and innovation, and provide American children
with a strong foundation in math and science.
This budget also gives us an opportunity to look at the other ways - in addition to
keeping tax rates low - that the federal government can make adjustments that add to a
growth-friendly environment for the businesses, entrepreneurs and workers that produce
that economic growth. Tax code reform remains a priority for this President and the
President's Advisory Panel on Federal Tax Reform provided us this year with a strong
foundation for a national discussion on ways to ensure that our tax system better meets
the needs of our dynamic, 21 st century economy. I appreciate the fine work of Senators
Mack and Breaux, for their outstanding leadership of the Panel.
You'll notice that the budget provides for a one-year patch to protect the middle class
from the AMT. It is a temporary fix because the AMT needs to be resolved through
broader tax reform.
This issue is also reflected in the budget through the proposed creation of a new Dynamic
Analysis Division within Treasury's Office of Tax Policy. Understanding the full range
of behavioral responses to tax changes, including how tax changes affect the size of the
economy and, subsequently, tax revenues, is critical to designing meaningful, effective
tax reform, and we believe this small expenditure will have an enormous pay-off for the
American taxpayer.
With a focus on these and other good policies, we'll keep America competitive in the
world and keep our economy strong as it has been for some time now.
In closing, I want to point out that a lot of good can come from a smart federal budget,
and a considerable amount of harm can come from a bad one. Let's use the FY 2007
budget to make good policy - restrained as the circumstances dictate on spending but
aggressive on the expansion of opportunity.
I look forward to working with all of you on enacting this budget. Thank you for having
me here today; I'm pleased to take your questions now.
###
9
Page 1 of 1
PRESS ROOM
February 15, 2006
js-4051
Treasury Assistant Secretary to Speak to Hartford Area Business Economists
U.S. Treasury Assistant Secretary for Economic Policy Mark Warshawsky will
speak to Harford Area Business Economists (HABE) on the Administration's
economic policies as well as the current strength of the U.S. economy.
Who
Assistant Secretary for Economic Policy
Mark Warshawsky
What
Speech to Hartford Area Business Economists
When
Thursday, February 16, 8:00 - 9:00 a.m. (EST)
Where
Connecticut Business and Industry Association
Conference Center
350 Church St. Hartford, CT
Note
contact sean.kevelighan@do.tre3S.g0Y to schedule interviews.
-30-
~ttp:lltreas.gov/presslreleases/js 405 l.htm
3/2/2006
Page 1 of 5
PRESS ROOM
February 16, 2006
js-4052
Speech to Hartford Area Business Economists
Assistant Secretary Mark J. Warshawsky
The US Economy and the Administration's Health Care Policies
In recent years, the economy's resilience in the face of a range of unprecedented
shocks has been perhaps its most outstanding characteristic. That resilience was
evident once again this year in the face of the energy price shock generated by the
Gulf of Mexico hurricanes. Despite, at times, record high oil prices, the expansion
has continued with solid growth of real GOP, steady job creation, and low core
inflation. The economy remains well-positioned to maintain healthy economic and
employment growth with benign inflation.
The year 2005 marked the fourth straight year of expansion and, in our view,
economic performance was right on target. Real GOP grew 3.5 percent on an
annual average basis, in line with the Administration's projection of 3.6 percent
growth made at the beginning of the year. Personal consumption expenditures grew
by 3.6 percent while business investment in equipment and software rose at a
double-digit pace for the second straight year. Residential building was a source of
strength again in 2005: housing starts hit a 33-year high, and single family homes
sales posted a fresh record. The economy generated 2 million jobs in 2005, and the
unemployment rate trended down throughout the year.
This performance was particularly remarkable given the continued hike in energy
prices. The energy component of the consumer price index rose by 17 percent
during 2005 for the second straight year, as hurricanes battered oil- and gasproducing facilities in the Gulf of Mexico. While headline consumer price inflation
was 3.4 percent last year, core price inflation (excluding food and energy) remained
low at 2.2 percent, the same as in 2004. The ability of the economy to grow strongly
in the face of the energy price increases without these costs being passed into
other prices is a tribute to the flexibility and ingenuity of American business. The
economy recovered quickly from the hurricanes and the related spike in energy
prices and is now on firm footing.
Although real gross domestic product rose by a fairly modest 1.1 percent annual
rate in the fourth quarter, a deeper look at the GOP numbers shows that growth
was restrained by a number of special factors. Real consumer spending slowed
sharply after employee pricing incentives in the auto industry pulled motor vehicle
sales into the third quarter; oil imports surged to replace domestic oil production
disrupted by the hurricanes; and defense spending plunged temporarily because of
budget and accounting issues. All of these developments are expected to be
transitory. Indeed, consumer spending already appears on track for a significant
rebound in the first quarter of 2006, oil imports are slowing as domestic production
comes back on line, and the drop in defense spending is unlikely to be repeated.
Labor market statistics for January were favorable. The economy created 193,000
jobs in January, and job gains have averaged 229,000 in the three months since
October. From the low point in labor market activity in August 2003, the economy
has generated almost 4.8 million new jobs. The unemployment rate dropped to 4.7
percent in January, the lowest since July 2001.
The recent data on labor earnings has also been good. Real average hourly
earnings of production and non-supervisory workers increased 1.6 percent during
the last three months of 2005, when declining energy prices lowered the overall CPI
inflation rate. The longer-term trend in real hourly earnings is positive: real average
hourly earnings are up 1.5 percent since December 2000. During the same period
in the previous business cycle, real average hourly earnings were down 2.5
It!p:lltreas .govlpresstreleasesljs4052.hlm
3/2/2006
Page 2 of S
percent.
A more comprehensive measure of labor compensation published by the Bureau of
Labor Statistics IS the Employment Cost Index, which allows us to separate the
compensation package Into wages and salaries, and benefits. For private industry
workers, total compensation grew 3.0 percent over the four quarters of 2005, down
from 3.8 ~ercent dUring 2004. Wages and salaries increased 2.5 percent during
2005, an Improvement over the 2.4 percent rise in 2004. The slowdown in overall
compensation was due to a deceleration in benefit costs from 6.9 percent during
2004to 4.1 percent last year, the lowest rate since 1999. Growth in employer
contnbutlons for health Insurance slowed from 7.3 percent during 2004 to 6.4
percent during 2005.
Benefit cost growth has exceeded wage and salary growth every year since 1999,
taking a progressively larger bite out of the overall compensation package and
leaving a smaller share for wages and salaries. In the third quarter of 2005 - the
latest data available - wages and salaries accounted for about 70 percent of labor
compensation, compared with about 72.5 percent in 1999. Health care costs made
up about 5.8 percent of total compensation in 1999 but have jumped to 7.6 percent
of compensation in the latest data.
The rise in benefit costs poses a problem for employers, employees, and
government alike. For employers, benefit costs put upward pressure on the whole
business cost structure, and potentially reduce profits, which immediately affects
stockholders and could reduce expansion plans. For employees, as businesses
resist raising the overall compensation package, the effect of riSing benefit costs is
a reduction in discretionary income. Government also faces significant costs not
only for its employees but also for citizens covered by Medicare and Medicaid.
Getting a handle on rising health care costs poses a special challenge for
policymakers, but also an opportunity to raise worker discretionary income, reduce
downward pressure on profits, and control government costs.
This is a long-term challenge. Health care cost growth has been exceeding GOP
growth by two percentage points annually since 1940. Health care spending
currently stands at 16 percent of GOP, and it is predicted to come to 18.7 percent of
GOP by 2014. Thus, the strain of high and rising health care costs on the
government, among employers, and on consumers is not projected to go away
anytime soon. And if we do not begin to face these challenges, the strain on our
SOCiety will become far worse than anything we are seeing today. Over the next 75
years, the Medicare program is expected to cost taxpayers $29.7 trillion more than
the revenue dedicated to it; that's 4.7 percent of the GOP over that time period.
Thus, we have to begin to find ways to reduce the growth of unproductive health
care spending while preserving the incentives for the health care sector to innovate
to provide people with longer and healthier lives.
We are already witnessing one important consequence of rapidly rising health
insurance costs in the continued erosion of the group health insurance market,
particularly in the small group market. According to the Kaiser Family Foundation's
annual survey, nearly 100 percent of firms with 200 or more workers offer health
insurance to their employees, yet only 59 percent of firms with between 3 and 199
workers do, a drop of 9 percentage pOints from 2000. Rising health insurance costs
and concerns about access are a significant public policy challenge. The
experience of the early 1990s showed that the American public has little appetite for
a wholesale overhaul of the health system to fix the gaps in insurance coverage. In
addition, this Administration is very cognizant of the problems that ensue when the
.
government crowds out the private sector. Therefore, the Administration is
proposing a set of incremental reforms that will help restrain health care spending
and help people get and maintain insurance coverage despite income, health, or
employment shocks.
Many of the proposals are anchored in the expansion Of. health savings accounts,
and because HSAs are a relatively new product innOvation, I would like to explain a
little about what these accounts are and why the Administration believes they hold
promise.
Health savings accounts are accounts that individuals can contribute tax free to
save for future medical expenses. Contributions can be made to them as long as
you have an HSA-qualified high-deductible health plan, what I'll call an HOHP, a
ntIp:lltreas .gov/presslreleases/js4052.hlm
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Page 3 of 5
comprehensive health insurance policy with deductibles of at least $1,050 for selfonly coverage and $2,100 for family coverage. Annual out-of-pocket expenses
associated with the HDHP are limited to $5,250 for self-only coverage and $10,500
for family coverage. Annual contributions can currently be made up to the amount
of the deductible. Withdrawals from the HSA can be made, tax free, at any time for
qualified health expenses, which includes most out-ot-pocket medical expenses.
Thus, someone with an HDHP can contribute, every year, an amount equal to the
deductible to his HSA and use those funds, which are exempt from income taxes, to
meet the deductible. Any amount remaining in his HSA at the end of the year is
rolled over to future years, to be used for future health care expenses.
The reason we believe these accounts should be encouraged is to correct the
distortions created by the tax code that incent an inefficiently large amount of
sometimes wasteful health care consumption, and to help people better plan for
future health care needs.
The tax code encourages health insurance take-up by allowing employer
contributions to insurance premiums to be excluded from taxable income. The
combined income and payroll tax deductibility leads to discounts for health
insurance of over 40 percent in some cases relative to other forms of consumption.
The effect of this is to encourage over-insurance among the working population, so
that people are encouraged to purchase insurance through their employers that has
generous coverage and little cost-sharing.
This trend wipes out any notion of a market for routine or non-emergency
expenses. The "first-dollar" or close-to-it structure of employer provided coverage a structure induced by rational responses to tax incentives - leads to overconsumption of health care. Because of the coverage, people make health care
decisions without comparing the price of the good or service to the benefit they
receive from it.
HSAs reduce the incentive to purchase overly generous health insurance by
equalizing the tax treatment of out-ot-pocket expenses and covered care. If routine
or non-emergency expenses purchased out-of-pocket are taxed the same way
routine expenses are under health insurance, then the demand tor insurance
coverage for those goods and services falls, and people will consume those
services in a way that takes into account the price and benetit they receive. HSAs
still encourage insurance take-up, but they also discourage over-insurance that
effectively removes market signals from the health care sector and inefficiently
drives up the price of health care. Obviously, people may have concerns about
whether individuals will stop getting needed care once they are in an HDHP. The
famous RAND health experiment of the 1970s found that people in high deductible
plans had 40 percent lower expenditures than those who paid no deductible, but
there were no measurable differences in health status. This evidence suggests that
people can distinguish between low value care and high value care at low levels of
expenditures.
And because I have already spoken at length about the burdens associated with
the rising cost of health insurance, I would like to bring up another characteristic of
HSAs that often gets lost in discussions--that they actually encourage savings for
future health care needs. Obviously, the funds in an HSA can be used to pay for
health care consumed while enrolled in a health plan to meet the deductible or to
pay for coinsurance. But after accumulating, they can serve as savings that may
insulate an individual from the shock of losing employer-sponsored health
insurance.
The uninsurance rate is twice for the unemployed than it is for the employed, and
less than a quarter of the COBRA-eligible population takes up COBRA coverage.
It's no surprise, with average family insurance premiums now exceeding $10,000 a
year that someone without employment would forego health insurance. With health
care consuming 16 percent of the economy, public policy is finally recognizing and
addressing the shock of losing one's employer-sponsored health insurance subsidy
by giving people an incentive to save for that possibility, because HSA-accumulated
funds may be used to pay for COBRA premiums or for someone receiving..
unemployment insurance to pay for health insurance premiums on the individual.
market. Or, for that matter, to purchase long-term care insurance to insulate against
post-retirement health shocks.
nttp:lltreas.gov/presSlreleases/js40~2.hlm
3/212006
yage
4
of 5
With the benefits of HSAs in mind, the Administration has crafted a set of proposals
to furth.er encourage HSAlHDHP participation. The Administration is proposing that
the limit on annual. HSA contnbutlons be raised from the deductible to the policy's
out-of-p~~ket maximum. Next, the Administration proposes full income tax
deductibility of premiums on all HSA-qualified policies, whether the premiums are
paid for by an employer or by an individual. These proposals are designed to
encourage people to move Into HSA-qualified plans, for the reasons I outlined
above, and toencourage health insurance take-up by people without group
Insurance. ThiS IS Important because millions of taxpayers have no access to health
Insurance through their employer. Small business owners are also not on equal
footing With workers who get their insurance through the employer system.
A further expansion of deductibility being proposed by the Administration would
allow for an income tax credit equivalent to the payroll tax on premiums for HSAqualified plans and HSAs, whether the plan is purchased on the individual or group
market. ThiS, we hope, Will make health insurance more affordable to the lowincome populations -- groups that often have significant payroll tax liability but little
Income tax liability. Another proposal to help the low-income population has been in
the President's budget for several years. It is a refundable tax credit to help lowIncome people purchase health insurance on the individual market. As structured In
this year's budget, low-income families could get up to $3,000 in a refundable tax
credit to purchase HSA-qualified insurance. If enacted, we believe the tax credits
will be a significant help to low-income individuals who would otherwise be unable
to afford health insurance.
Taken together, we expect these proposals to increase take-up of HDHP/HSA
plans from a projected 14 million to 21 million by 2010.
The Administration is not only looking at HSA expansions to address the
shortcomings of the health insurance market. One of the major changes
accompanying the run-up in health care costs is the greater emphasis on treating
people with chronic health problems, who now account for 75 percent of the health
care expenses in this country. This group, of course, is more difficult to insure
because of their predictably high expenses.
One new proposal in this year's budget to help these people get health insurance
coverage is a new fund of $500 million annually that would provide competitive
grants to up to ten states to find innovative ways to increase health insurance
coverage among the chronically ill. States are trying various approaches to cover
the chronically ill, such as with high risk pools and reinsurance, and the
Administration believes these grants can accelerate the process of testing other
solutions to covering the chronically ill.
Another new idea that we are developing is one that would allow greater portability
of health insurance. Although COBRA and HIPAA provide some portability, the
Administration would like to go further to allow people to maintain the same health
insurance policy regardless of their employment status. We recognize that this is
not an easy undertaking, but the payoff is potentially great. Workers would no
longer fear losing insurance coverage if they left a job that provided it, reducing job
lock and improving long-term access to the health insurance market.
In a world in which people assume more responsibility for their health care
expenses, they need better information about prices and quality to make more
informed decisions. The Administration is encouraging private providers of health
care to publicize information that allows consumers to make informed decisions.
And the Administration is using public programs to help collect quality information,
through programs like the hospital quality reporting program in Medicare. I'd also
like to point out that we are impressed by the efforts of private insurers like Aetna,
who are making price and quality information more available to their enrollees.
And while we believe it is important for consumers to have better information about
quality, we also believe the government has a role in pr~moting q~ality itself. One of
the greatest opportunities for improving health care quality, redUCing errors and
unnecessary tests and procedures, and lowering costs is through the greater
application of health information technology. We've got 21 st century clinical care,
but a 19th century paperwork system. The Administration IS pursuing a broad range
of policy initiatives to further the President's vision of widespread adoptton of
electronic health records within 10 years.
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The policy initiatives underway include demonstrating success with high-tech
electronic health record systems for the Veterans and Defense communities,
removing regulatory barriers, establishing standards for health data transmission,
and certifying health IT systems to high standards of interoperability, privacy, and
functionality. Guiding this agenda is the American Health Information Community, of
which I am fortunate to be a member. We are a group of government officials,
health care professionals, and business executives who are giving HHS
recommendations on how to implement electronic health records smoothly and
effectively.
In conclusion, I would like to emphasize that the situation we find ourselves in -high, rising health care costs, some people consuming too much health care, while
others are consuming too little -- is not hopeless. And there are many features
about our health care system -- innovation, widespread availability of technological
advances, strong degree of consumer choice of providers and treatment -- that are
worth preserving. We need to address the shortcomings in the health care system
so as to make business and government finances sustainable now and in the longrun.
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PRESS ROOM
February 16, 2006
JS-4053
Testimony of Robert W. Werner, Director
Office of Foreign Assets Control
U.S. Department of the Treasury
Before the House Financial Services Subcommittee on
Oversight and Investigations
Chairwoman Kelly, Ranking Member Gutierrez and distinguished members of the
Subcommittee, thank you for this opportunity to discuss the Administration's efforts
to combat the financial underpinnings of the proliferation of weapons of mass
destruction (WMD). The Office of Foreign Assets Control (OFAC), through the
leadership and guidance of Treasury's Office of Terrorism and Financial Intelligence
(TFI), is responsible for implementing the President's Executive Order targeting
WMD proliferators and their support structures (Executive Order 13382). The Office
of Intelligence Analysis (OIA), established in 2004, provides considerable support
and expertise to this effort as well.
In addition to a brief general discussion of OF AC's sanctions authorities and
programs, my testimony today will review the background, scope and 'process by
which OFAC, in conjunction with other executive branch departments and agencies,
carries out Executive Order 13382. I will also discuss, to the extent possible given
the short period in which this program has been in effect, our assessment of its
impact to date. Although the obvious sensitivities of the WMD program preclude, in
an open forum, my ability to provide detailed information, I believe it is important to
review with the Committee the steps Treasury and OFAC are taking to help protect
American citizens from the threat of weapons of mass destruction. I thank you for
your longstanding leadership and support in fostering an on-going dialogue on this
and other national security issues that affect all Americans.
Mission and Jurisdiction
OFAC, through its workforce of approximately 125 staff, is dedicated to carrying out
the complex mission of administering and enforcing economic sanctions based on
U.S. foreign policy and national security goals.
OF AC administers approximately 30 economic sanctions programs against foreign
countries, targeted regimes, and entities and individuals, including residual
enforcement actions associated with programs that have been lifted. Although
these many programs differ in terms of their scope and application, they all involve
the exercise of the President's national emergency powers to impose controls on
transactions and trade and to freeze foreign assets that come within the jurisdiction
of the United States. Most of the programs administered and enforced by OFAC
presently arise from the President's authorities under the International Emergency
Economic Powers Act (IEEPA), the Trading with the Enemy Act (TWEA), the
Foreign Narcotics Kingpin Designation Act (Kingpin Act), and the United Nations
Participation Act (UNPA). In administering and enforcing these economic sanctions,
it is imperative that OFAC maintain a close working relationship with other federal
departments and agencies in order to ensure both that these programs are
implemented in a manner consistent with U.S. national security and foreign policy
interests and that they are enforced effectively. To fulfill its mission, OFAC works
directly with the Departments of State (State); Commerce; and Justice, including
the Federal Bureau of Investigation and the Drug Enforcement Administration; the
Department of Homeland Security's U.S, Customs and Border Protection and U.S.
Immigration and Customs Enforcement; the Department of Defense; bank
regulatory agencies; and other law enforcement and intelligence community
agencies.
I would also note, Madam Chair, that all of the programs we administer require that
we work closely with a broad range of industries. We are presently making efforts to
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expand and im~rove our communication with our diverse constituencies, ranging
from the financial and services sectors to manufacturing and agricultural industries.
In turn, the cooperation we receive from U.S. corporations in complying with
sanctions is generally excellent.
I would now lik~ to turn to the primary reason we are gathered here today: to
discuss Executive Order 13382, the President's new Order targeting proliferators of
WMD and their supporters. I will provide you with some background on
circumstances leading to the issuance of the new Order, its objectives, its
implementation by OFAC, the impact we are seeing from it, and what future impact
we aim to achieve based on our experience in other economic sanctions programs.
Background to Executive Order 13382
In the aftermath of the September 11, 2001 attacks, the horrifying prospect of WMD
falling into the hands of terrorists or rogue regimes has become all the more real to
each of us. Recent events involving the nuclear weapons programs of North Korea
and Iran demonstrate the challenge we face. The exposure of the WMD
proliferation network headed by A. Q. Khan - father of Pakistan's nuclear bomb
and, more recently, nuclear technology dealer to Libya, Iran, and North Koreaprovided the world with a concrete example of how a network of individuals, with
access to sensitive technology and expert knowledge, motivated by greed and
personal ambition, can endanger our security by peddling WMD-related wares to
rogue regimes.
Prior to the President issuing the new Order, the U.S. government had imposed a
variety of other sanctions to counter the proliferation of WMD. For example,
Executive Order 12938 of November 14, 1994, as amended by Executive Order
13094 of July 28, 1998, authorized the Secretary of State to impose certain
measures against foreign entities and individuals determined to have contributed
materially to the proliferation efforts of any foreign country, project, or entity of
proliferation concern. The measures that the Secretary of State may choose to
impose under Executive Order 12938, as amended, are a ban on U.S. government
procurement from designated foreign parties: a ban on U.S. government assistance
to designated foreign parties; and a ban on imports into the United States from
designated foreign parties. The ban on imports called for in Executive Order 12938
is implemented by OFAC through the Weapons of Mass Destruction Trade Control
Regulations, 31 C.F.R. Part 539.
With very real threats confronting us, however, the question for policy makers was
whether we were doing all we could to address these threats. In examining the
existing arsenal of financial sanctions tools available to combat proliferation, the
President and others, including the members of the Silberman-Robb WMD
Commission, believed that more could be done. Recognizing the need for additional
financial sanctions tools to combat the threat posed by proliferation networks, the
President issued Executive Order 13382 on June 29, 2005.
Overview of Executive Order 13382
In the broadest sense, Executive Order 13382 adds powerful tools - a broad based
transactions prohibition and an asset freeze - to the array of options available to
combat WMD trafficking. The strong new blocking (freezing) provisions imposed by
the President apply to property and interests in property of entities and individuals
designated under the Order. By prohibiting U.S. persons from engaging in
transactions with entities and individuals targeted by the Order, we can effectively
deny proliferators and their supporters access to the U.S. financial and commercial
systems, cutting them off from the benefits of our economy and trade. An essential
element to understanding the importance of the President's new Order is that It
provides us with broad new authorities to target not only those engaged in
proliferation activities, but also the network of entities and individuals providing
support or services to proliferators. As part of issuing Executive Order 13382, In
June 2005 the President also identified and targeted eight entities in North Korea,
Iran, and Syria, thereby prohibiting U.S. persons from engaging in transactions with
them and requiring any assets of those entities within the control of U.S. persons to
be frozen. The President also authorized the Secretary of State and the Secretary
of the Treasury to designate additional proliferators of WMD and their supporters
under the new authorities provided by the Order.
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This new sanctions program also underscores the President's commitment to work
with our international partners to foster cooperative efforts against WMD
proliferation, including those undertaken through the Proliferation Security Initiative
(PSI). In addition, we hope that this program can provide a model for other nations
to draw upon as they develop their own laws to stem the flow of financial and other
support for proliferation activities as called for in United Nations Security Council
Resolution 1540. Moreover, the G-8 has been even more specific in its call for
action; in July 2005, at the Gleneagles Summit, G-8 leaders called on countries to
enhance "efforts to combat proliferation networks and illicit financial flows by
developing, on an appropriate legal basis, co-operative procedures to identify, track
and freeze relevant financial transactions and assets." In this regard, Treasury,
State, and other federal agencies have been engaged in aggressive international
outreach in order to promote this important concept.
Targets Identified by the President in the Annex to Executive Order 13382
The eight entities initially identified by the President, based on evidentiary packages
developed by OFAC investigators in close cooperation with colleagues in various
agencies, reflect some of our government's primary proliferation concerns, namely
the development of WMD and their means of delivery.
With respect to North Korea, the President designated three entities involved in
proliferation:
• The Korea Mining Development Trading Corporation (KOMID) is
Pyongyang's premier arms dealer and main exporter of goods and
equipment related to ballistic missiles and conventional weapons. KOMID
offices are located in multiple countries with the main goal of facilitating
weapons sales while seeking new customers for its weapons. U.S.
sanctions for trading in missile technology have been repeatedly applied to
the KOMID organization in the past ten years.
• The North Korean defense conglomerate Korea Ryonbong General
Corporation specializes in acquisition for North Korean defense industries
and support to Pyongyang's military-related sales. It is identified in export
control watch lists in the United States and among U.S. allies. The
Ryonbong trade group has been a focus of U.S. and allied efforts to stop the
proliferation of controlled materials and weapons related goods, particularly
ballistic missiles.
• Tanchon Commercial Bank, headquartered in Pyongyang, inherited from
the Korea Changgwang Credit Bank Corporation (KeeBe) the role as the
main North Korean financial agent for sales of conventional arms, ballistic
missiles, and goods related to the assembly and manufacture of such
weapons. Since the late 1980s, Tanchon's predecessor, KeeBe, collected
revenue from weapons-related sales that were concentrated in a handful of
countries mainly located in the Mid-East and several African states. These
revenues provide North Korea with a significant portion of its export
earnings and financially aid Pyongyang's own weapons development and
arms-related purchases.
With respect to Iran, the President designated four entities in the annex to
Executive Order 13382:
• The Atomic Energy Organization of Iran (AEOI), which reports directly to
the Iranian President, is the main Iranian institute for research and
development activities in the field of nuclear technology, including Iran's
centrifuge enrichment program and experimental laser enrichment of
uranium program, and manages Iran's overall nuclear program.
• The Aerospace Industries Organization (AIO), a subsidiary of the Iranian
Ministry of Defense and Armed Forces Logistics, is the overall manager and
coordinator of Iran's missile program. AIO overseas all of Iran's missile
industries.
• The Shahid Hemmat Industrial Group (SHIG) is responsible for Iran's
ballistic missile programs, most notably the Shahab series of medium range
ballistic missiles which are based on the North Korean-designed No Dong
missile. The Shahab is capable of carrying chemical, nuclear, and biological
warheads and has a range of at least 1500 kilometers. SHIG has received
help from China and North Korea in the development of this missile.
• The Shahid Bakeri Industrial Group (SBIG) is an affiliate of Iran's AIO.
SBIG is also involved in Iran's missile programs. Among the weapons SBIG
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produces are the Fateh-110 missile, with a range of 200 kilometers, and the
Fajr rocket systems, a series of North Korean-designed rockets produced
under license by SBIG with ranges of between 40 and 100 kilometers. Both
systems are capable of being armed with at least chemical warheads.
With respect to Syria, the President designated the Scienlific Studies and Research
Center (SSRC). SSRC is the Syrian government agency responsible for developing
and prodUCing non-conventional weapons and the missiles to deliver them. SSRC
also has an overtly promoted civilian research function; however, its activities focus
substantively on the development of biological and chemical weapons.
Executive Order 13382 Designation Criteria and OFAC's Approach
By publicly designating entities and individuals that engage in proliferation activities
and those that support them, the WMD sanctions program is designed to
complement existing proliferation-related authorities by blocking proliferators'
assets and prohibiting U.S. persons from engaging in transactions with them. In
taking these steps we aim to:
•
•
•
Expose their activities publicly, removing the veil of legitimacy behind which
proliferators and their supporters hide. Through public designation we intend
to inform third parties, who may be unwittingly facilitating proliferation
through what they believe to be legitimate business activity, of their
association with WMD proliferators and deter others from engaging in
business with proliferators.
Isolate proliferators financially and commercially by denying them access to
the benefits of trade and transactions with the United States; and
Disrupt and impede the operations of WMD proliferators and their
supporters.
While the public identification of these entities by the President, which exposes their
illegitimate activities to the light of public scrutiny, is very important, OFAC's
continuing role as part of administering the sanctions program is to look behind
these entities. For our investigators, the entities named by the President represent
a starting pOint as we seek to unravel the support networks that enable these
entities to function. In addition, the subsequent designation of any entity or
individual serves as an additional basis for aggressive investigation by OFAC in
pursuit of designating additional parties. We refer to these as derivative
designations, and it is this approach - targeting the broader support network - that
has, over time, proved to be a critical factor behind successful designations in many
OF AC-administered programs.
I would like to spend a few moments explaining how we are implementing this new
Executive Order and where we intend to go with it. As you already know, the Order
blocks the property and interests in property in the United States, or in the
possession or control of U.S. persons, of:
(1) Those listed in the Annex to the Order (Le., the eight
organizations originally identified by the President)
(2) Any foreign entity or individual determined by the Secretary of
State, in consultation with the Secretary of the Treasury, the
Attorney General. and other relevant agencies, to have engaged. or
attempted to engage, in activities or transactions that have materially
contributed to, or pose a risk of materially contributing to, the
proliferation of WMD or their means of delivery (inclu~ing missiles
capable of delivering such weapons) by any entity or indiVidual or
foreign country of proliferation concern;
(3) Any entity or individual determined by the Secretary of the
Treasury, in consultation with the Secretary of State, the Attorney
General, and other relevant agencies, to have provided, or
attempted to provide. financial, material, technological or other
support for, or goods or services in support of, proliferation-related
activities or any entity or individual whose property has been blocked
pursuant to the Order; and
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(4) Any entity or individual determined by the Secretary of the
Treasury, in consultation with the Secretary of State, the Attorney
General, and other relevant agencies, to be owned or controlled by,
or acting or purporting to act for or on behalf of, directly or indirectly,
any blocked party.
What does this mean in practical terms and how do we strive to implement it
successfully? The simplified answer, as I mentioned earlier, is that we target the
underlying support networks of identified proliferators. With decades of experience
in administering and enforcing dozens of economic sanctions programs, one lesson
is clear to OFAC: true success is based not on isolated designation actions, actions
undertaken only once with no follow-up. Quite the contrary - our greatest areas of
success have been based on sustained, aggressive action over time that evolves
and adapts to match the ever-changing methods of our adversaries. As we apply
the designation criteria of the Order to strike our adversaries again and again, we
disrupt their attempts to disguise their illicit activities in the stream of legitimate
commerce. In the context of this new program, this means we target not only the
missile or bomb maker, but also the procurement fronts, the brokers and
middlemen, the logistical apparatus used to move dangerous weapons to market,
and the financiers that provide the financial mechanisms that facilitate proliferation
activities.
Designations to Date under Executive Order 13382
Though an open forum does not permit me to give you details of our ongoing
investigations, I can assure you that more designations are on the way. Despite the
fact that this new program came mid-budget cycle, OFAC has committed
substantial resources to the effort. We have also leveraged resources from OIA and
sister agencies. As a result of this commitment, since the end of June 2005, OFAC
has already designated ten additional entities under the new authorities provided by
the Order. In addition to continuing OFAC's efforts in this critical area, the
President's FY2007 Budget provides for ten additional positions to continue to
implement and administer E.O. 13382 as well as 15 additional positions for other
areas of OFAC.
On October 21,2005, Treasury announced the designation of eight North Korean
entities that were determined to be owned or controlled by, or acting for or on behalf
of, two North Korean entities named by the President. More specifically, we
determined that KOMID, which was identified by the President, is the parent
company of two Pyongyang-based entities, Hesong Trading Corporation and
Tosong Technology Trading Corporation. These direct associations met the criteria
for designation because the entities are owned or controlled by, or act or purport to
act for or on behalf of, KOMID. In addition, we determined that Korea Ryonbong
General Corporation, also named in the annex to the Order, is the parent company
of six Pyongyang-based entities: Korea Complex Equipment Import Corporation,
Korea International Chemical Joint Venture Company, Korea Kwangsong Trading
Corporation, Korea Pugang Trading Corporation, Korea Ryongwang Trading
Corporation, and Korea Ryonha Machinery Joint Venture Corporation. As
subsidiaries of KOMID and Korea Ryonbong General Corporation, many of these
entities have engaged in proliferation-related transactions.
On January 4, 2006, we announced the designation of two Tehran-based entitiesNovin Energy Company and Mesbah Energy Company - thar we determined are
owned or controlled by, or acting for or on behalf of, the Atomic Energy
Organization of Iran (AEOI), an entity named by the President in the annex ~o the
Order. Novin has transferred millions of dollars on behalf of the AEOI to entities
associated with Iran's nuclear program. Novin is owned and operated by the AEOI
and is located at an address associated with AEOI. Mesbah is a state-owned
company subordinate to the AEOI. Through its role as a front for the AEOI, Mesbah
has been used to procure products for Iran's heavy water project. Heavy water IS
essential for Iran's heavy-water-moderated reactor, which will provide Iran with a
potential source of plutonium well suited for nuclear weapons. Heavy water IS .
believed to have no credible use in Iran's civilian nuclear power program, whIch IS
based on light-water reactor technology.
The Designation Process
As previously discussed, one of the primary components in the implementation of
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this program is the need to investigate WMO prollferators and their networks offront
companiesand individuals. Those investigations lead to the compilation of an
administrative record thatserves as the factual basis for designating targets under
the broad authontles provided by the new Executive Order. Although simplified for
purposes of discussion, we follow a three-step process in accomplishing this task,
which consists of:
1) identifying the target;
2) construction and deconfliction of an evidentiary package; and
3) public announcement of the designation.
Let me walk you through these three broad stages in more detail. Like our
colleagues in law enforcement and the intelligence community, we follow leads.
Those leads may present themselves in a variety of ways, ranging from highly
classified intelligence reporting, tips received from the public, and law enforcement
referrals, to open source media reports. In pursuing any lead, our investigators
consider whether the lead may be a candidate for designation by reviewing the
information they can identify in the context of whether it fits within the criteria of the
Executive Order and appears sufficient to meet the required evidentiary burden. In
addition, investigators, assisted by the information and expertise of our interagency
partners, consider whether designation of the candidate would actually assist in
disrupting or impeding the activities of a larger target, such as a proliferation
network. If the initial investigation of a lead shows promise, then OFAC
investigators move into the second stage of the designation process - the
evidentiary process.
In the WMO proliferation context, as well as our other programs, such as the highly
successful counter-narcotics programs, we engage in "all-source" investigation and
research and, quite often, extensive field work. By "all-source" investigation, I mean
to say that our investigators seek to use any and all information available to them.
Historically, this has included corporate records, from both open sources and those
that may be seized in the course of law enforcement or intelligence operations, law
enforcement reports redacted to protect sources, foreign law enforcement reports
gained through cooperation in the field with foreign counterparts, foreign and
domestic indictments or court transcripts, and intelligence reports from across the
spectrum of the intelligence community. An additional source of information, which
has proved to be key to our efforts in other programs, is source statements derived
from debriefings conducted by U.S. law enforcement investigators and OFAC
investigators. This very sensitive information requires excellent cooperation
between OFAC and its law enforcement colleagues combined with careful
implementation.
Of course, in reviewing these evidentiary sources, we are also sorting through
reams of information for facts and data that permit us to conclude, as a legal matter,
that there is a reasonable basis for believing that a target meets the specific criteria
for deSignation under the terms of the Executive Order. For example, for a targeted
entity we would typically look for information that substantiates ownership or control
by another designated party or thai a target is acting for or on behalf of, or providing
material, financial, technological or other support for, or goods or services in
support of, a designated party. To help us assess ownership or control we ask such
questions as: Who are the shareholders? Who are the officers, directors, or
managers? What is the entity's current address? What is its taxpayer 10 number?
Similarly, for individuals, we look for information indicating that they are acting for,
or on behalf of, or providing material support to a designated party. To help us
assess this, we try to understand their exact relationships with designated parties.
Moreover, and this cannot be overstated, in order to make our sanctions effective,
we have to have adequate unclassified identifiers for our targets that can be
included in publication of the deSignation. This is essential in order to enable the
private sector to distinguish among individuals and companies With Similar names,
so that they can interdict or reject transactions that are prohibited by the.
designation while, at the same time, avoiding interference With their ability to .
process their normal business transactions efficiently and effectively. There Will be
occasions when we need to proceed Without particular bits of IIlformation, but
ideally our identifiers will include a target's known aliases and such information as
date of birth, place of birth, address, passport numbers, or other national
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identification numbers.
Once this evidence is collected, our investigators draft an evidentiary document
summarizing the various exhibits acquired through their investigation and research.
This "summary" document - which can run into hundreds of pages of text and
supporting exhibits - meticulously lays out how the information provides us with
reason to believe that the target meets the specific criteria for designation. Once
drafted, the evidentiary packages undergo internal review by senior OFAC
investigators, and a back and forth process of editing and the collection of
additional evidence begins,
After an evidentiary package has been thoroughly reviewed within OFAC, it is then
reviewed for legality by Treasury's attorneys, Based on the feedback from the
attorneys, who are examining the case to ensure that among other things we have
met our evidentiary threshold and our investigators may engage in further
investigation and research and revise the package to address any legal concerns.
The Department of Justice's Civil Division, which represents OFAC in court if our
designations are challenged by our targets, also gives the case a thorough legal
review.
The next formal stage of our evidentiary process involves interagency coordination.
In most of our cases, it is somewhat misleading to present this as a distinct stage
because we are normally very engaged with colleagues, in a variety of agencies,
throughout the investigation process. In fact, initial targets are suggested through
an interagency working group, and closely coordinated and vetted within
appropriate agencies in the early stages of development. Depending on the amount
of intelligence involved in constructing a case, we also work closely with colleagues
in OIA and from elsewhere in the intelligence community to develop our case.
Nonetheless, we do go through a more formal coordination phase designed to deconflict our proposed designations with the operational and policy interests of other
agencies, and to ensure that the targets are consistent with and further the strategic
national security and foreign policy goals of the United States In fact, such
coordination is required by the language of Executive Order 13382, The Order
specifically directs that designations by Treasury or State be undertaken in
consultation with one another, as well as in consultation with Justice and other
relevant agencies.
Interagency coordination is clearly a critical part of the process because it ensures
that our public designation of entities and individuals comprising a network do not
jeopardize the ongoing operations of our colleagues in the law enforcement or the
intelligence communities, and are consistent with our government's foreign policy
and national security objectives and interests. We are acutely mindful of the
importance of ensuring that we do not compromise sensitive sources or methods
that would harm our national interest, and that our actions are coordinated with
ongoing diplomatic efforts in order to achieve effectively our national security and
foreign policy objectives, Our experience is that any potential conflicts can be fully
and successfully resolved by fostering the early and ongoing working-level contacts
between our investigators and their counterparts in the law enforcement and the
intelligence communities.
Once this very thorough interagency review process has been completed, the final
evidentiary package is presented for my signature, Among my chief concerns in
reviewing a completed evidentiary package is verifying that we have, in fact,
received concurrences from our interagency colleagues, Moreover, at the same
time that the package is moving to me for my consideration, two other important
processes are in motion.
First, OFAC's team of compliance officers and information technology professionals
are working closely with our investigators to prepare the information about a target
for possible public release. If I approve the proposed designation and sign a related
blocking order, our team moves into action to push the critical information on the
target - the names, the aliases, the locations, the identifying information such as ,
dates of birth, passport numbers, national identification numbers, etc, - to the publiC
through OFAC's List of Specially DeSignated Nationals and Blocked Persons (SON
list), This list is used by thousands of companies around the country and around the
world to screen real-time transactions and accounts for the possible involvement of
one of our targets.
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Yage
~
ot l:S
The second process, which is similarly complex, arises when our investigators
become aware of a designation target having a presence in the United States. If
such a presence is detected, our investigators from both the Designation
Investigations Division and our Enforcement Division work to prepare an operation
to block any property that can be identified. Often this involves serving blocking
orders or cease and desist orders on U.S. persons involved with a designation
target. It can also involve blocking homes, commercially leased space, and
vehicles, possibly at several locations throughout the country. As you can imagine,
informing someone that they can no longer deal in blocked property - which may
mean they have to cease doing business or apply to OFAC for a license to continue
residing in a now-blocked property - can elicit a strong response. For the protection
of all involved, we closely coordinate our domestic enforcement operations with law
enforcement officers from other federal agencies and local authorities. At times, we
are also able to coordinate our action with a law enforcement action, such as the
execution of a search warrant.
Impact of OFAC Designations
Although the sanctions program established by Executive Order 13382 is in its early
stages, and while I am limited in what I can say in this public forum, I am pleased to
be able to assure you that we are already seeing a true impact on our targets.
More importantly, our successes in many other programs, especially our highly
effective counter-narcotics programs, provide us with a road map for effectively
implementing new programs called for by the President or the Congress The lesson
we have learned, in more than 10 years of work in the narcotics arena, is that
success is not the result of limited, isolated action. It is the result of aggressive
implementation sustained over a period of years. It is grounded in tenacious followup to previous designations, adapting our target list to meet the ever-changing face
of our adversary, and it is based on targeting the entire network. Though our
resources are relatively limited, I believe that OFAC, Treasury and our interagency
partners have the experience and tenacity to make our new WMD proliferation
program successful.
Again, thank you for this opportunity to address OFAC's role in the new WMD
sanctions program. I look forward to answering any questions you may have at this
time.
~ttp:lltreas.govIprt"SsfreleaseslJ s40~ 3.ntm
3/2/2006
Vage 1 of 4
PRESS ROOM
February 16, 2006
js-4054
The Honorable John W. Snow Prepared Remarks to: The Chicago Council on
Foreign Relations
Thank you, Tom and Marshall, and thank you all for having me here tonight. It's a
pleasure to be In Chicago, and I'm delighted to be spending some time with this fine
group.
I had the opportunity today to visit with members and traders at two of the great
exchanges you have here in Chicago - the Chicago Mercantile Exchange and the
Chicago Board of Options Exchange - and tomorrow I'll be stopping by to visit with
the Chicago Board of Trade. Seeing these operations in action is such a clear
reminder to all of us how this American economy of ours, which is the envy of the
world. continues to be so dynamic and productive. What all of our exchanges do,
through millions upon millions of transactions every day, is direct investment capital
to its best use in the most efficient way possible. These exchanges provide such an
enormous benefit to our economy that we should never take them for granted.
I'd like most of our time together to be spent in dialogue, but I'll begin with a few
thoughts and, I hope, some perspective.
As you know, I've recently returned from the G8 meetings in Moscow. We had an
excellent meeting, hosted for the first time by Russia and Minister Kudrin. We also
had the opportunity to have a working lunch meeting with President Putin.
The meetings in Moscow reminded me, as they often do, of the leadership
responsibility of the United States. We are the undisputed economic leader of the
world, and my G8 and G7 colleagues consistently look to our economic policies for
direction when crafting their own. I'm encouraged by that, particularly considering
the fact that we do face a growth imbalance in the world today. It is critical for our
trading partners to stimulate economic growth in their countries.
Our leadership, of course, goes beyond economics - but our economic strength is
tied to our founding, and guiding, principles. We represent freedom and justice to
the world community, and with that honor comes a level of responsibility.
We are living up to that responsibility in Iraq and Afghanistan. We do so not only for
the safety and security of our own citizens, but for the good and safety of the
citizens of the world As the President pointed out in his State of the Union Address,
"The only way to protect our people, the only way to secure the peace, the only way
to control our destiny is by our leadership - so the United States of America will
continue to lead."
He went on to point out that "Abroad, our nation is committed to an historic, longterm goal- we seek the end of tyranny in our world."
A key part of that historic effort involves economic proficiency that leads to higher
levels of standards of living throughout the world. Where there is economic
opportunity, tyranny will not last.
At home, we seek to implement and maintain policies that are conducive to growth
_ in other words, our growth is not an accident and I'd like to get back to that topic
in a moment - and the steady path of growth in the U.S. also enhances
international economic stability.
The President has also been a tireless supporter of free trade and of debt relief two more areas that enhance economic freedom and therefore both opportunity and
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stability abroad. The current positive outlook for the world economy has made this
an opportune time to push for progress on trade liberalization, and that has been a
priority of mine at the G8 meetings. The potential rise of protectionism represents
the most significant risk to the global economy today. In our discussions in Moscow
we saw clearly the need to obtain an ambitious outcome from the Doha
Development Round by the end of 2006. I welcomed progress made at the Hong
Kong Ministerial meeting but recognize that further urgent efforts are necessary.
We need to make significant progress on market access in agriculture and industria
products. In addition, if this round is to be truly development-focused, substantial
progress on services is essential, since gains from services liberalization are
estimated to be over four times greater than the gains from goods trade alone.
Financial services trade, in particular, is important because it acts as a link to
increased economic growth and development.
I also want to mention that I thought it was appropriate that Minister Kudrin placed a
heavy emphasis on energy security in the G8 discussions because of the risk high
energy prices pose for the global economy. There are many sides to energy
security, but, as Finance Ministers, we emphasized market-based solutions,
transparency, and the institutional framework necessary to encourage a friendly
investment climate in energy development and infrastructure. Energy is a high
priority issue for President Bush, and I had the opportunity in Moscow to review his
ambitious new Advanced Energy Initiative to increase clean-energy research at the
U.S. Department of Energy. In developing countries the lack of energy access is a
critical obstacle to development.
Getting back to the international significance of economic growth, I believe, and my
G8 colleagues believe, that the U.S. is playing its economic leadership role very
well. Our policies and our growth are admired. But we all know that it is not enough,
that the U.S. cannot be the lone engine of growth in this world.
There is good news beyond our borders, of course. The global economy is strong,
and there are signs that the expansion will continue. However, relative growth
performance, especially among the larger economies, continues to be uneven.
More progress is needed to implement reform policies that will raise potential
growth and to promote high sustainable growth of the world economy. All countries,
including the United States, but also the countries of Europe, Japan, developing
Asia and even the oil exporters, bear a responsibility to help effect global
adjustment in a way that maximizes and sustains global growth. An increased rate
of growth among our trading partners will also increase the investment opportunities
in their countries, and citizens should be able to invest in opportunity at home.
Today, they are investing here in this country and that adds to the current account
imbalance.
I continue to emphasize to my G8 colleagues the importance of this shared
responsibility of global growth and the importance of their growth to the current
account balancing act.
And although the U.S. is currently fulfilling its end of that shared responsibility, we
must be ever-vigilant if we are to continue to be an economic success and an
economic leader.
It all comes back to good, smart economic policy for us, just like it does for our
trading partners. Looking back, there can be no question today that well-timed tax
relief, combined with responsible leadership from the Federal Reserve Board,
created an environment in which small businesses, entrepreneurs and workers
could bring our economy back from its weakened state of just a few years ago. Tax
relief encouraged investment, which has ultimately led to job growth. The American
economy is now unmistakably in a trend of expansion, and those trend lines can
clearly be traced to the enactment of tax relief.
A couple weeks ago we learned that unemployment has fallen from 4.9 percent to
4.7 percent -- lower than the average for the 1970s, 1980s and 1990s. Since May of
2003, the economy has created 4.7 million jobs, two million of them in the last year
alone.
In the past two years, the economy has generated about 170,000 jobs per month,
and that includes the two-month slowdown in job growth in the aftermath of
Hurricanes Katrina and Rita. In the past 32 years, new claims for unemployment
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Page 3 of 4
insura~ce have almost never been as low as they have been recently, the only
exception being the peak of the high-tech bubble from November 1999 to June
2000.
Good, steady job growth is no surprise, given that GDP growth was three and a half
percent last year. Core inflation also remains low, and that's good news for
everyone.
u.S,. equity markets have ris~n, and household wealth is at an all-time high.
Additionally, real per capita disposable (after-tax) income has risen by 7.3 percent
from 2000 to 2005 and that's very good news for workers.
This week's report on retail sales was yet another unmistakable sign that the U.S.
economy is strong, it is heading in the right direction and Americans are confident.
With a jump of 2.3 percent for January, this was one of the biggest month-to-month
increases in over a decade and a half. That's the kind of number we expect to see
when consumers are confident about the economy and optimistic about the future.
And it is no wonder they are feeling that way, given the strength in the job market.
Independent private-sector forecasts point to continuing good news. Inflationadjusted hourly wages grew 1.6 percent between September and December and
this trend should continue.
Both on leading indicators and a deeper background analysis, the American
economy proves to be on solid footing. The question that those of us in government
must look at now is this: what can we do to continue these positive trends?
The answers as I see them: First, keep taxes lower on both incomes and
investment. Since the implementation of a lower, 15 percent rate on investment
capital in May of 2003 we have seen a remarkable turn-around in the economy.
After nine consecutive declining quarters of real annual business investment, we
have had 10 straight quarters of rising business investment. This business
expansion led to a substantial increase in employment, as I just mentioned - 4.7
million new jobs. There can be no question that we need to keep the tax rate on
capital gains and dividends where it is; a tax increase would be a terrible mistake.
While many factors contributed to the improved performance of the economy, the
tax reductions on capital have been at the heart of the progress we have seen.
Lower tax rates on individual income are important because, as the President says,
they let the people make their own decisions about their own money - and
individuals make better financial decisions than governments.
There is also a significant small-business component to lower marginal rates. Since
small-business owners often file their business income on personal forms, lower
marginal rates help this sector that creates two-thirds of the country's net new jobs.
The President is also placing an emphasis on affordable health care, innovation
competitiveness (with an emphasis on education) and reducing our dependency on
foreign energy through new technology. These are all central to keeping our
economy on track for generations to come.
As I've said, our growth here in America is important to us, but it's also important to
the global economy. When I meet my finance minister colleagues - at the G8 and
elsewhere - the first question they ask me is, "How is the U.S. economy doing? Will
it continue to be strong?" They know that a slowdown here affects all of their
economies, whether in the major industrialized countries, in emerging market
countries like China, India or Brazil, or in the developing countries of Latin America,
central and eastern Asia, or in Africa.
My response, fortunately, has been that we're doing quite well, but that they need to
make the structural reforms necessary to generate growth in their own economies.
Since improvements in standards of living can only come from increased economic
growth, I can't help but wonder how many of the world's citizens would be lifted out
of poverty if the other major economies - in particular Europe and Japan - were
growing at the same rate of the United States. Conversely, how many people would
see declining standards of living if the United States had posted the same anemic
growth rates of other major economies? We have a responSibility to keep our
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3/2/2006
Page 4 ot 4
economy strong, and that's the focus I keep every day I'm on this job.
Before I take your questions, I want to express my gratitude for the work that you do
here in Chicago to keep the economy healthy and job creation strong. The people
here tonight represent the energy and the backbone of the most high-powered
economy in the world, and you are to be commended. In government, our goal is to
provide you with a good environment for innovation and growth and then, simply, let
you do what you do best.
Thanks for having me here tonight; I'd be happy to take your questions now.
-30-
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PRESS ROO M
February 17, 2006
JS-4055
Secretary Snow Names Robert W. Werner
as the New Director of FinCEN
U.S. Treasury Secretary John W. Snow today named Robert W. Werner as the new
Director of the Financial Crimes Enforcement Network (FinCEN), a bureau of the
U.S. Treasury Department. Werner currently serves as the Director of the
Treasury's Office of Foreign Assets Control (OFAC).
"OFAC and FinCEN are two premier agencies at the heart of an unparalleled
campaign to combat terrorist financing and financial crime across the globe.
Fortunately, the Treasury will continue to benefit from Bob's talents and vision, as
he takes over FinCEN's critical efforts to safeguard the financial sector from illicit
activity," said Snow.
"Bob's expertise and steady leadership brought OFAC into the 21 5t Century by
enhancing the Office's administration of economic and trade-based sanctions and
highlighting its potential to address a wide range of threats to our national and
economic security," Snow continued. "Under Bob's leadership, OFAC has greatly
strengthened its relationships with the financial sector and other U.S. Government
agencies, as well as with foreign counterparts around the world."
"I have full confidence that Bob will continue to protect our country against terrorist
financiers, money launderers and other financial criminals in his new role as
Director of FinCEN," said Snow.
As Director of OFAC, Werner oversaw the administration and enforcement of the
U.S. Government's economic and trade sanctions, based on foreign policy and
national security goals. Beforehand, Werner served as the Treasury's Assistant
General Counsel for Enforcement and Intelligence and as the Chief of Staff of the
Financial Crimes Enforcement Network. Werner began his career at the Treasury
Department in the Office of the General Counsel, including serving as Counselor to
the General Counsel.
Before coming to the Treasury, Werner served in the Justice Department's Office of
Legal Counsel. He also served as a federal prosecutor in the U.S. Attorney's Office
in Connecticut, Associate Attorney General in the State of Connecticut, and he
headed Connecticut's gaming regulatory agency.
His private sector experience includes work as a partner at Bingham Dana LLP
(now Bingham McCutchen) and as an officer at The Phoenix Home Life Mutual
Insurance Company (now The Phoenix Companies). Werner is also a former law
clerk to Associate Justices Lewis F. Powell, Jr. (retired) and Anthony M. Kennedy.
Werner earned his Juris Doctorate from New York University School of Law, his
masters from Columbia University and his bachelors from Amherst College. He
graduated with honors from each institution. Werner currently resides in Virginia
with his wife and three children.
The Financial Crimes Enforcement Network is a bureau within the Treasury
Department charged with safeguarding the financial system from money laundering
and other illicit financial activity through the administration of the Bank Secrecy Act.
FinCEN supports the law enforcement and intelligence communities, as well as the
regulatory agencies, through the sharing and analysis of financial intelligence.
Werner replaces William Fox, who departed FinCEN in January to pursue a career
in the private sector. Barbara Hammerle will serve as Acting OFAC Director.
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PRESS ROOM
February 17, 2006
JS-4056
Treasury Secretary Visits Associated Material
Handling Industries, Inc.
Company to Offer Health Savings Accounts to Employees
Chicago, III. - Treasury Secretary John Snow visited Associated Material Handling
Industries in Carol Stream, Illinois this morning for the company's announcement
that it will be offering Health Savings Accounts (HSAs) as a health-coverage option
to their employees beginning this summer.
"With the addition of HSAs to your health coverage options, Associated Material
Handling Industries is joining large and small employers across America who are
choosing to offer this affordable option to their employees," Snow said. "I think it's a
great option to have because choosing an HSA over traditional insurance plans
puts patients in charge of their health-care purchasing decisions. That's why the
creation of HSAs was so important - it was historic, really, because it embraces a
philosophy that favors the individual, versus an employer or the government."
In remarks to company employees, Secretary Snow also detailed the President's
proposals to expand Health Savings Accounts by making premium costs deductible
from income and payroll taxes when purchased by individuals, raising the cap on
the amount of money that can be saved in an HSA and making the high-deductible
insurance plan that accompanies an HSA fully portable.
"HSAs are a good product. They're working," Snow said. "Savvy employers are
offering them to their employees, and they are opening up an affordable option to
small employers that might not have been able to afford health insurance otherwise,
I'm thrilled that the employees of Associated Material Handling Industries, Inc. are
going to have the option of HSAs soon, and I hope that in the near future all
Americans have a chance to start HSAs that have all the tax benefits of traditional
health insurance."
~ttp:lltreas.gov/prt'SS/releaseS!JS4U56.htm
3/2/2006
PRESS ROOM
February 17, 2006
js-4057
Media Advisory:
Treasury Secretary John W. Snow to Visit Connecticut to Discuss Innovation
and Home Building Tax Credits
U.S. Treasury Secretary John W. Snow will travel to Danbury and Torrington,
Connecticut next Wednesday to discuss innovation and the Administration's energy
initiative including home building tax credits. While in Connecticut, Secretary Snow
will visit FuelCell Energy, Inc. and T&M Building Company. The following events are
open to credentialed media:
Who:
U. S. Treasury Secretary John W. Snow
What:
Site Visit
When:
Wednesday, February 22, 9:30 a.m. (EST)
Where:
FuelCell Energy, Inc.
3 Great Pasture Road
Danbury, CT
Note: Media must RSVP to Steven Eschbach at 203-825-6000 or
seschbach@fce.com
What:
Site Visit
When:
Wednesday, February 22, 11 :30 a.m. (EST)
Where:
T&M Building Company
2270 Torringford West St.
Torrington, CT
http://treas.gov/press/rcletl3e3/jsJ.057 htm
3/2/200~
Page
J 011.
U
~~··s
.~
.,...,-<..
PRESS ROOM
February 19, 2006
js-4058
Treasury Freezes Assets of Organization Tied to Hamas
The U.S. Department of the Treasury today blocked pending investigation accounts
of KindHearts, an NGO operating out of Toledo, Ohio, to ensure the preservation of
its assets pending further investigation.
"KindHearts is the progeny of Holy Land Foundation and Global Relief Foundation,
which attempted to mask their support for terrorism behind the fayade of charitable
giving," said Stuart Levey, Treasury Under Secretary for Terrorism and Financial
Intelligence. "By utilizing this specialized designation tool, we're able to prevent
asset flight in support of terrorist activities while we further investigate the activities
of KindHearts."
This action was taken pursuant to E.O. 13224, which is aimed at denying financial
and material support to terrorists and their facilitators.
Following the December 2001 asset freeze and law enforcement actions against
the Hamas-affiliated Holy Land Foundation for Relief and Development (HLF) and
the al Qaida-affiliated Global Relief Foundation (GRF), former GRF official Khaled
Sma iii established KindHearts from his residence in January 2002. Smaili founded
KindHearts with the intent to succeed fundraising efforts of both HLF and GRF,
aiming for the new NGO to fill a void caused by the closures. KindHearts leaders
and fundraisers once held leadership or other positions with HLF and GRF.
Support to Hamas in Lebanon
KindHearts officials and fundraisers have coordinated with Hamas leaders and
made contributions to Hamas-affiliated organizations. Specially Designated Global
Terrorist (SDGT) Usama Hamdan, a leader of Hamas in Lebanon, reportedly
phoned a top fundraiser for KindHearts during a September 2003 KindHearts
fundraiser. During the call, Hamas leader Hamdan reportedly communicated to the
fundraiser his gratitude for KindHearts' support. The KindHearts fund raiser
reportedly also provided advice to Hamdan, telling him not to trust the United
Nations Relief and Works Agency.
Information developed from abroad corroborates connections between KindHearts
and Hamas in Lebanon. As of late December 2003, KindHearts was supporting
Hamas and other Salafi groups in the Palestinian refugee camps in Lebanon.
Haytham Fawri was identified as a KindHearts official who reportedly collected
funds and sent them to Hamas and other Salafi groups. Haytham Fawri is believed
to be a reference to Haytham Maghawri, who has served as KindHearts' manager
in Lebanon, and is one of a number of HLF officials indicted by a federal grand jury
in Dallas, Texas on charges of providing material support to Hamas. From 1998 2000, during his tenure as Social Services Director for the HLF, Maghawri approved
fifty wire transfers by the HLF in the amount of $407,512 USD, to nine zakat
committees identified as being owned, controlled, or directed by Hamas.
According to the information source from abroad, KindHearts began working
secretly and independently in the camps in Lebanon after the closure of the offices
of the Sanabil Association for Relief and Development (Sanabil), a Hamas-affiliated
entity in Lebanon that was named an SDGT in August 2003. KindHearts reportedly
attempted to maintain a distance from Hamas to avoid drawing attention to its
support for the terrorist organization. In early 2003, KindHearts president Smaili
complained that scrutiny by U.S. law enforcement and intelligence officials was
making it almost impossible for KindHearts to assist Hamas.
Between July and December 2002, KindHearts sent more than $100,000 USD to
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3/2/2006
page L ot 1.
the Lebanon-based SDGT Sanabil, according to information available to the U.S.
Financial investigation revealed that between February 2003 and July 2003,
KindHearts transferred over $150,000 USD to SanabiL KindHearts deposited the
funds into the same account used by HLF when it was providing funds to the
Hamas-affiliated Sanabil, according to FBI analysis.
Support to Hamas in the West Bank
In addition to providing support to Hamas in Lebanon, KindHearts reportedly
provides support to Hamas in the West Bank. An individual identified as integral to
assisting KindHearts deliver aid to Palestinians in the West Bank, also reportedly
was responsible for dividing money raised by KindHearts in the U.S to ensure that
some funds went to Hamas. KindHearts founder and president Smaili told a Texasbased associate that his organization was raising funds to support the Palestinian
Intifada.
Cooperation with U.S.-Based Hamas Leader
Mohammed EI-Mezain, who coordinated KindHearts' fundraising, is a former HLF
official indicted by a federal grand jury in Dallas, Texas on charges of providing
material support to Hamas. Information indicates that SDGT Khalid Mishaal,
Hamas' Secretary General based in Damascus, Syria, identified EI-Mezain as the
Hamas leader for the U.S. At the time, Mishaal advised that all financial
contributions to Hamas from individuals in the U.S. should be channeled through EIMezain.
Following the closure of HLF, U.S.-based Hamas leader EI-Mezain transferred his
fundraising skills to Kindhearts. EI-Mezain assisted other KindHearts senior leaders
in directing the coordination of KindHearts' fund raising strategy. During a 2003
Islamic conference, KindHearts leaders, including Smaili, met with EI-Mezain to
discuss KindHearts fundraisers. The leaders concluded that there would be only
two fundraising dinners for KindHearts in September 2003 and thereafter, all
fundraising efforts would target Friday prayers at mosques and Islamic centers
throughout the U.S.
At a September 2003 KindHearts fund raising event, a KindHearts fundraiser spoke
and encouraged the crowd to appreciate the efforts of the terrorist group Hizballah
in supporting Hamas. The fundraiser then encouraged the crowd to give money and
manpower as support against Israel. EI-Mezain also spoke at this KindHearts
fundraiser, encouraging people to donate to KindHearts.
In October 2003, EI-Mezain spoke at an event held in Baton Rouge Louisiana
where $500,000 was pledged. Though EI-Mezain's speech reportedly focused
almost entirely on raising funds for a new mosque in Baton Rouge, only a small
amount was to be retained locally and the vast majority was to be sent to Hamas
overseas.
Today's action freezes any assets KindHearts may have under U.s. jurisdiction and
prohibits U.s. persons from engaging in transactions with the NGO.
-30-
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ot 1.
j
PRESS ROOM
February 21, 2006
2006-2-21-15-36-56-23727
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $64,742 million as of the end of that week, compared to $64,943 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
I
February 10, 2006
February 17, 2006
I
64,943
64,742
I
TOTAL
I
It
Foreign Currency Reserves
Euro
1
11,148
la. Securities
Of which, issuer headquartered in the US.
/I
Yen
II
10,804
II
I
TOTAL
II
II
21,952
II
16,175
Euro
11,142
0
II
Yen
II
II
10,728
I
5,211
/I
TOTAL
II
21,870
II
0
II
16,131
I
I
I
lib. Total deposits with:
b.i. Other central banks and BIS
10,929
II
5,246
10,920
I
b.ii, Banks headquartered in the US,
II
II
0
Ib,ii Of which, banks located abroad
II
II
0
0
Ibiii, Banks headquartered outside the US,
II
0
0
Ib,iii, Of which, banks located in the U,S,
II
0
0
II
/I
7,597
7,560
I
/I
8,176
8,137
I
I
11,043
11,044
I
II
0
0
I
12, IMF Reserve Position 2
13. Special Drawing Rights (SDRs) 2
14. Gold Stock 3
15. Other Reserve Assets
II
II
II
II
I
0
II. Predetermined Short-Term Drains on Foreign Currency Assets
February 10, 2006
II
I
I
Euro
1. Foreign currency loans and securities
II
II
Yen
II
II
TOTAL
II
II
II
0
0
II
II
II
February 17, 2006
Euro
II
Yen
II
II
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
12,a, Short positions
~b,
II
II
Long positions
II
II
[3. Other
II
II
0
0
II
II
II
II
II
II
I
II
I
TOTAL
I
0
I
II
0
I
II
0
I
II
0
I
III. Contingent Short-Term Net Drains on Foreign Currency Assets
[
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
r
February10, 2006
II
I
Euro
I
II
II
I
II
\I
http://treas.gov/prcss/reteasesIW0622115365623727.htm
I
Yen
II
TOTAL
II
0
II
\I
February 17, 2006
II
II
II
II
/I
Euro
Yen
II
I
I
II
II
\I
\I
II
I
TOTAL
0
I
I
I
I
3/212006
Page 1. ot 1.
11.b.
Other contingent liabilities
II
2. Foreign currency securities with embedded
options
I
I
0
3. Undrawn, unconditional credit lines
/I
0
3.a. With other central banks
/I
I
I
1/
1/
II
1/
/I
I
1/
I
3.b With banks and other financial institutions
IHeadquartered in the US.
3.c. With banks and other financial institutions
I
IHeadquartered outside the US.
4. Aggregate short and long positions of options
in foreign
1/
II
0
/I
I
0
I
I
I
I
1/
"/I
/I
I
I
I
"
1/
1/
I
I
1/
I
I
0
I
14.a.1. Bought puts
I
"
114.a.2. Written calls
1/
14.b Long positions
1/
I
I
1/
1/
1/
1/
1/
1/
14.b.2. Written puts
II
II
0
14.a. Short positions
14.b.1. Bought calls
1/
1/
I
ICurrencies vis-a-vis the U.S. dollar
I
/I
I
I
I
I
I
Notes:
1/ Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
{SOMA}, valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2/ The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
3/ Gold stock is valued monthly at $42.2222 per fine troy ounce.
http://treas.gov/prc5s/rdc~wW0622115165623727.htm
3/2/2006
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',;,.
"f>--:_'
•
PRESS fWOM
"
February 22, 2006
JS-4059
Statement by Under Secretary for International Affairs
Timothy D, Adams
Manila
First let me express my deepest condolences and sympathy for those who lost
loved ones in the disaster in Leyte. Our thoughts and prayers are with those
families,
While here in Manila, I've met with President Arroyo, members of her economic
team, senior members of Congress, and leaders of the Philippine and U.S.
business communities. I also met with Asian Development Bank President Kuroda
and senior members of the ADB staff.
The message that I gave to all was this: The United States remains deeply engaged
in East Asia. Our relationship with this region is long and deep, and I want to
ensure that it remains vibrant. Our longest, and in many ways our strongest
relationship in the region is with the Philippines, and I am pleased that this is the
first country I visited on this trip,
I congratulated President Arroyo and the congressmen I met on difficult but
necessary measures they introduced in the last year to reduce the fiscal deficit and
the cut losses in the power sector. The importance of these decisions is clear in
the strong and positive response of the financial markets, The resulting appreciation
of the peso has lowered the cost of petroleum and other products for Philippine
citizens and the reduction of interest spreads have lowered the cost of servicing
Philippine debt.
But all whom I met agreed that much work remains to be done - both in further
reducing the deficit and in bringing about more rapid growth in incomes and
employment in the Philippines, Raising investment is key to boosting growth, and
this requires greater confidence and willingness to invest in the Philippines by
domestic residents, by foreign companies like those from the U,S" and by Filipinos
living overseas,
There are many steps that need to be taken in order to raise investment. The first
is achieving macroeconomic stability, for which the fiscal and energy measures of
the last year were critical. A commerCially run, vibrant, and privately-owned power
sector, one that invests in the capacity required for Philippine growth is a second.
A sound and efficient financial sector is also a requirement for robust growth, This
requires financial institutions that are adequately capitalized, have the skills to
assess risk, and have supervisors who are able and willing to act at an early stage
to force prompt corrective action before problems grow. Participation by foreign
firms can greatly contribute to the efficiency and health of financial markets, It is
important that the Philippines finally ratify the WTO financial services commitments
that it made in 1997, as well as making, and ratifying, new commitments in the
Doha Round,
Finally, raising investment requires creating an environment in which the rules are
clear and transparent, contracts are enforced, and intellectual property is
protected, The Philippines has taken important steps in the protection of intellectual
property rights and we look forward to continued progress in this area.
By building on and extending the momentum created over the past year, the Arroyo
Administration and Congress can continue to raise the level of Philippine economic
performance.
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PRESS HOOM
February 22, 2006
JS-4060
Treasury Secretary Visits Hydrogen Fuel Cell Manufacturer
Danbury, Conn. - Furthering the Administration's dedication to improving
innovation and energy efficiency, Treasury Secretary John W. Snow this morning
visited FuelCell Energy Inc., a developer and manufacturer of high-temperature
hydrogen fuel cells. During his visit, he discussed the importance of hydrogen fuel
cell technology with company owners, managers and employees.
"The potential for hydrogen-powered fuel cells to power vehicles, homes and
businesses with no pollution or greenhouse gases is tremendous, and it is
important to the U.S. from environmental, economic and national security
perspectives," Snow said. "That's why the President is dedicated to promoting the
development of commercially-viable cells, announcing in his State of the Union
Address a $1.2 billion Hydrogen Fuel Initiative aimed at developing the technology
for hydrogen fuel cells."
Snow went on to say that "The work being done here at FuelCell Energy, Inc. is a
wonderful example of how American innovation and technology will lead us to a
new day of reduced reliance on foreign sources of energy. Clean, efficient
alternative sources of energy for our vehicles, homes and businesses are of vital
importance to America's ability to remain competitive and safe, and those energy
sources will be developed and produced by American scientists and entrepreneurs
like the folks here at FuelCell Energy, Inc."
###
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PRESS ROOM
February 21, 2006
JS-4061
Treasury Secretary John W. Snow to Visit
Memphis to Discuss Innovation
U.S. Treasury Secretary John W. Snow will travel to Memphis, Tennessee
Wednesday to discuss innovation and the Administration's energy initiative. While
in Memphis, Secretary Snow will visit Sharp Electronics. The following event is
open to credentialed media:
WHO
U. S. Treasury Secretary John W. Snow
WHAT
Site Visit
WHEN
Thursday, February 23, 11: 15 a.m. (EST)
WHERE
Sharp Electronics
4050 South Mendenhall
Memphis, TN
NOTE
Media must arrive no later than 10:45 a.m. and rsvp to Chris Loneto at
Lonctoc@sharpcsoc.cQm or 201-529-8680 or Ryan Murphy at
rnwrphy@stantoncrensbaw.com or 646-502-3569.
http://treas.gov/pfCSslIeleasesljs4001.htm
3/212006
Page 1 of2
PRess ROOM
10 view or pnnt the /-'UJ- content 011 thiS page. C1ownloaC1 the tree A(lo/Je r'l ) I~cro/)ati") l--Ie<JOefii<)
February 22, 2006
JS-4062
Treasury Secretary Promotes Energy-Efficient Home Construction
Torrington, Conn. - Treasury Secretary John W. Snow visited T&M Building
Company in Torrington, Conn. this morning to discuss the availability of new tax
credits for homebuilders that construct energy-efficient homes and homeowners
who improve the energy efficiency of their existing homes.
"Improving the energy-efficiency of new homes and increasing the energy-efficiency
of existing homes are both highly effective ways of reducing our national energy
consumption, which is a priority that the President set forth in his State of the Union
Address this year," Snow said. "Guidance for two new tax credits, issued yesterday
by the IRS, will provide incentive and reward for these energy-saving efforts."
The tax credits described by Snow are part of the Energy Policy Act signed by
President Bush last summer. Snow pointed out that "Homes and homeowners who
qualify for these credits will showcase a win-win scenario where precious energy is
conserved while families also save money on heating and cooling bills - both goals
of the President's Energy Policy Act of 2005."
After touring the T&M facilities, Snow spoke to company managers and employees.
"I applaud the owners and employees of T&M for the contributions they have made
by building homes in over 40 Connecticut communities, and I encourage them and builders all over the country - to continue with efforts to make new homes more
energy-efficient. As the President has said, the power of technology and the
innovative spirit of America - through both energy production and efficiency - will
reduce our reliance on foreign sources of energy, which will help ensure a growing
and prosperous America in the 21 st Century ," Snow continued. "There can be no
question that energy savings should start at home - and that's what these tax
credits are all about."
Homebuilder Credit Guidance
• Timing: Credits available in 2006 and 2007.
• Who Qualifies & How Much:
o Site-built homes qualify for a $2,000 credit if they reduce energy
consumption by 50 percent (relative to the International Energy
Conservation Code standard).
o Manufactured homes qualify for a $1,000 or $2,000 credit depending
on the level of energy savings achieved.
• IRS Guidance:
o Establishes a process that homebuilders can use to obtain a
certification that they are entitled to the credit.
o Provides certainty to homebuilders who will be permitted to rely on
certifications by independent experts when claiming the credit on
their returns.
o Supplies a public list of software programs that may be used to
calculate energy savings.
Homeowner Credit Guidance
• Timing: Credits can be claimed in 2006 or 2007.
3/2/200
• WhofWhat Qualifies & How Much:
•
•
o Homeowners may claim up to $500 in credits over the two-year
period.
o Energy-efficient improvements to the building envelope qualify for a
10 percent credit, e.g. insulation, exterior windows and doors
(including storm windows and doors), and metal roofs (International
Energy Conservation Code or the Environmental Protection
Agency's Energy Star program standards may apply).
o Certain heating and cooling equipment that meets the energyefficiency standards specified in the Internal Revenue Code.
IRS Guidance:
o Establishes a process that manufacturers can use to certify their
product(s) qualifies for the credit.
o Affords certainty to homeowners, who will be permitted to rely on the
manufacturer's certification when claiming the credit on their returns.
Relating IRS News Releases:
Treasury and IRS Provide Guidance for energy Credits for Homeowners
IR-2006-34, Feb. 21, 2006 -- Homeowners can rely on certifications from
manufacturers of energy efficient items to claim tax credits.
Treasury and IRS Issue Guidance for Coal Project Credit and Gasification
Project Credit
IR-2006-33, Feb. 2 2006 -- Companies are provided guidance for engaging in
getting tax credit for Coal Project Program and Gasification Project Program.
Treasury and IRS Provide Guidance on Energy Credit To Home Builders
IR-2006-32, Feb 21, 2006 -- Homebuilders may be eligible for up to $2,000 for
credits related to building homes that are more energy efficient.
IRS Has $2 Billion for People Who Have Not Filed a 2002 Tax Return
IR-2006-31, Feb. 21,2006 -- The deadline for filing a 2002 income tax return to
claim a refund for that year is April 17, 2006.
REPORTS
•
•
•
Energy GuidanceHomeown
Energy Guidance Homebuild 1
Energy Guidance Homehuild 2
Part III - Administrative, Procedural, and Miscellaneous
Credit for Nonbusiness Energy Property
Notice 2006-26
SECTION 1. PURPOSE
This notice sets forth interim guidance, pending the issuance of regulations,
relating to the credit for nonbusiness energy property under § 25C of the Internal
Revenue Code. Specifically, this notice provides procedures that manufacturers may
follow to certify property as either an Eligible Building Envelope Component or
Qualified Energy Property, as well as guidance regarding the conditions under which
taxpayers seeking to claim the § 25C credit may rely on a manufacturer's certification
(or, in the case of certain windows, an Energy Star label). The Internal Revenue Service
and the Treasury Department expect that the regulations will incorporate the rules set
forth in this notice.
SECTION 2. BACKGROUND
.01 Section 1333 of the Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat.
594 (2005), added § 25C to the Internal Revenue Code. Section 25C provides a credit
against tax for the taxable year in an amount equal to the sum of--
-2(I) Ten percent of the amount paid or incurred by the taxpayer for
qualified energy efficiency improvements (that is, property described in section 4.01 of
this notice) installed during the taxable year; and
(2) The amount of expenditures for residential energy property (that is,
property described in section 5.01 of this notice) paid or incurred by the taxpayer during
the taxable year.
.02 Under § 25C(b), the maximum amount of the credit allowable to a taxpayer
under § 25C(a) for all taxable years is $500 ($200 in the case of amounts paid or incurred
for exterior windows (including st0l111 windows and skylights)). In addition, the
maximum amount of credit allowed is-(I) $50 for any advanced main air circulating fan;
(2) $150 for any qualified natural gas, propane, or oil fUl11ace or hot water
boiler; and
(3) $300 for any item of energy-efficient building property (that is,
property described in section 5.0 J (1 )-(7) of this notice) .
. 03 Section 25C(g) and § J333(c) of the Energy Policy Act provide that the credit
applies to property placed in service after December 31, 2005, and before January J,
2008.
SECTION 3. REFERENCES TO INTERNATIONAL ENERGY CONSERVATION
CODE
Manufacturers and taxpayers may treat any reference in this notice to the
International Energy Conservation Code (IECC) as a reference to either the 2001
-3Supplement of the 2000 Intcmational Energy Conservation Code or the 2004 Supplement
of the 2003 International Energy Conservation Code.
SECTION 4. QUALIFIED ENERGY EFFICIENCY IMPROVEMENTS
.01 Eligible Bllildillg EI/velope Compollell/s.
The credit for qualified energy efficiency improvements is allowed with respect to
the following building envelope components (Eligible Building Envelope Components):
(I) An insulation material or system (including any vapor retarder or seal
to limit infiltration) that-(a) Is specifically and primarily designed (within the meaning of
section 4.04 of this notice) to reduce heat loss or gain ofa dwelling unit when installed in
or on the dwelling unit; and
(b) May be taken into account in determining whether the building
thermal envelope requirements established by the IECe are satisfied;
(2) An exterior window, skylight, or door (other than a storm window or
storm door) that meets or exceeds the prescriptive criteria established by the IEee for the
climate zone in which the window, skylight, or door is installed;
(3) A storm window that, in combination with the exterior window over
which it is installed, meets or exceeds the prescriptive criteria established by the IEee
for the climate zone in which such storm window is installed;
(4) A storm door that, in combination with a wood door assigned a default
U-factor by the IEee, does not exceed the default U-factor requirement assigned to such
combination by the IEee; and
(5) Any metal roofthat--
- 4-
(a) Has appropriate pigmented coatings that are specifically and
primarily designed to reduce the heat gain of a dwelling unit when installed on the
dwelling unit; and
(b) Meets or exceeds Energy Star program requirements (as in
effect at the time of installation) .
.02 Manufacturer's Cert(fication.
(I) Requirements Applicable to Manufacturer. The manufacturer of a
building envelope component may certify to a taxpayer that the component is an Eligible
Building Envelope Component by providing the taxpayer with a certification statement
that satisfies the requirements of section 4.02(4) of this notice. The certification
statement may be provided by including a written copy of the statement with the
packaging of the component, in printable form on the manufacturer's website, or in any
other manner that will permit the taxpayer to retain the certification statement for tax
recordkeeping purposes.
(2) Taxpayer Reliance. Except as provided in section 4.02(3) and (6) of
this notice, a taxpayer may rely on a manufacturer's certification that a building envelope
component is an Eligible Building Envelope Component. A taxpayer is not required to
attach the certification statement to the return on which the credit is claimed. However,
§ 1.600 \-1 (a) of the Income Tax Regulations requires that taxpayers maintain such books
and records as are sufficient to establish the entitlement to, and amount of, any credit
claimed by the taxpayer. Accordingly, a taxpayer claiming a credit for an Eligible
Building Envelope Component should retain the certification statement as part of the
taxpayer's records for purposes of § 1.6001-1 (a).
-5-
(3) Reliance Permitted Oll~vfor Illstallation Consistent with Certification.
A taxpayer may rely on a manufacturer's certification that a building envelope
component is an Eligible Building Envelope Component-(a) In the case of an exterior window, skylight, or door (other than
a stoml window or stoml door), only if the component is installed in a climate zone
identified in the certification statement; and
(b) In the case ofa storm window, only if the component is
installed over an exterior window of a class identified in the certification statement and in
a climate zone identified for that class of exterior window.
(4) Content of Manufacturer's Certification Statement. A manufacturer's
certification statement must contain the following:
(a) The name and address of the manufacturer;
(b) Identification of the component as an insulation material or
system, an exterior window or skylight, an exterior door, or a metal roof;
(c) The make, model number, and any other appropriate identifiers
of the component;
(d) A statement that the component is an Eligible Building
Envelope Component that qualifies for the credit allowed under § 25C;
(e) In the case of an exterior window, skylight, or door (other than
a storm window or storm door), the climate zone or zones for which the applicable
prescriptive criteria are satisfied;
(f) In the case ofa storm window--
-6(i) The classes of exterior window (e.g., single pane; double
pane, clear glass; double pane, Low-E coating) over which the storm window may be
installed and that, in combination with the storm window, satisfy the applicable
prescriptive criteria for one or more climate zones; and
(ii) For each such class of exterior window, the climate
zone or zones for which the applicable prescriptive criteria are satisfied; and
(g) A declaration, signed by a person currently authorized to bind
the manufacturer in such matters, in the following form:
"Under penalties of perjury, I declare that I have examined this certification
statement, and to the best of my knowledge and belief, the facts are true, correct, and
complete."
(5) Manufacturer's Records. A manufacturer that certifies to a taxpayer
that a component is an Eligible Building Envelope Component must retain in its records
documentation establishing that the component satisfies the applicable conditions of
section 4.01 of this notice including, in the case of an exterior window, its National
Fenestration Rating Council (NFRC) rating. The manufacturer must, upon request, make
such documentation available for inspection by the Service.
(6) Effect of Erroneous Certification or Failure to SatisJY Documentation
Requirements. The Service may, upon examination (and after any appropriate
consultation with the Department of Energy (DOE) or Environmental Protection Agency
(EPA», determine that a component that has been certified under this section is not an
Eligible Building Envelope Component. In that event, or if the component's
manufacturer fails to satisfy the requirements relating to documentation in section 4.02(5)
-7of this notice, the manufacturer's right to provide a certification on which future
purchasers of the component can rely will be withdrawn, and taxpayers purchasing the
component after the date on which the Service publishes an announcement of the
withdrawal may not rely on the manufacturer's certification. Taxpayers may continue to
rely on the certification for components purchased on or before the date on which the
announcement of the withdrawal is published (including in cases in which the component
is not installed and the credit is not claimed until after the announcement of the
withdrawal is published). Manufacturers are reminded that an erroneous certification
statement may result in the imposition of penalties-(a) Under § 7206 for fraud and making false statements; and
(b) Under § 670 I for aiding and abetting an understatement of tax
liability (in the amount of $1 ,000 per return on which a credit is claimed in reliance on
the certification).
(7) Availability of Cert(fication Information.
Manufacturers are
encouraged to provide a listing of qualified components and applicable certification
information on their websites to facilitate taxpayer identification of qualified
components .
.03 Special Rulefor Energy Star Windows alld Skylights. A taxpayer may treat an
exterior window or skylight that bears an Energy Star label and is installed in the region
identified on the label as an Eligible Building Envelope Component and may rely on such
Energy Star label, rather than on a manufacturer's certification statement, in claiming the
§ 25C credit.
-8.04 SpeCifically alld Primarily Designed. A component is not specifically and
primarily designed to reduce heat loss or gain of a dwelling unit if its principal purposes
are to provide structural support, to provide a finished surface, as in the case of drywall or
siding, or to serve any other function unrelated to the reduction of heat loss or gain. The
principal purpose of a component serves functions unrelated to the reduction of heat loss
or gain if production costs attributable to features other than those that reduce heat loss or
gain exceed production costs attributable to features that reduce heat loss or gain .
.05 Additional Requirements. A taxpayer may claim a credit with respect to
amounts paid or incurred for an Eligible Building Envelope Component only if the
following additional requirements are satisfied:
(I) The component is installed in or on a dwelling unit located in the
United States and, at the time of installation, the dwelling unit is owned and used by the
taxpayer as the taxpayer's principal residence (within the meaning of § 121);
(2) The original use of the component commences with the taxpayer; and
(3) The component reasonably can be expected to remain in use for at
least five years. For this purpose, a component will be treated as reasonably expected to
remain in use for at least five years if the manufacturer offers, at no extra charge, at least
a two-year warranty providing for repair or replacement of the component in the event of
a defect in materials or workmanship. If the manufacturer does not offer such a warranty,
all relevant facts and circumstances are taken into account in determining whether the
component reasonably can be expected to remain in use for at least five years .
.061nstallatioll Costs. With respect to Eligible Building Envelope Components,
the credit is allowed only for amounts paid or incurred to purchase the components. The
-9credit is not allowed for amounts paid or incurred for the onsite preparation, assembly, or
original installation of the components.
SECTION 5. RESIDENTIAL ENERGY PROPERTY
.0 I Qual(fied Energy Properzv. The credit for residential energy property
expenditures is allowed with respect to the following property (Qualified Energy
Property):
(I) An electric heat pump water heater that yields an energy factor of at
least 2.0 in the standard DOE test procedure;
(2) An electric heat pump that has a heating seasonal performance factor
(HSPF) of at least 9, a seasonal energy efficiency ratio (SEER) of at least 15, and an
energy efficiency ratio (EER) of at least 13;
(3) A closed loop geothermal heat pump that has an EER of at least 14.1
and a heating coefficient of performance (COP) of at least 3.3;
(4) An open loop geothermal heat pump that has an EER of at least 16.2
and a heating COP of at least 3.6;
(5) A direct expansion geothermal heat pump that has an EER of at least
15 and a heating COP of at least 3.5;
(6) A central air conditioner that achieves the highest efficiency tier that
has been established by the Consortium of Energy Efficiency and is in effect on January
1,2006;
(7) A natural gas, propane, or oil water heater that has an energy factor of
at least 0.80;
- 10(8) A natural gas, propane, or oil furnace or hot water boiler that achieves
an annual fuel utilization efficiency rate of not less than 95; and
(9) A fan that is used in a natural gas, propane, or oil furnace and has an
annual electricity use of no more than 2 percent of the total annual site energy use of the
furnace (as determined in the standard DOE test procedure) .
.02 Malll{(acturer's Certification. (I) Requiremellfs Applicable to Manufacturer. The manufacturer of a
product may certify to a taxpayer that the product is Qualified Energy Property by
providing the taxpayer with a certification statement that satisfies the requirements of
section 5.02(3) of this notice. The certi fication statement may be provided by including a
written copy of the statement with the packaging of the product, in printable form on the
manufacturer's website, or in any other manner that will permit the taxpayer to retain the
certification statement for tax recordkeeping purposes.
(2) Taxpayer Reliance. Except as provided in section 5.02(5) of this
notice, a taxpayer may rely on a manufacturer's certification that a product is Qualified
Energy Property. A taxpayer is not required to attach the certification statement to the
return on which the credit is claimed. However, § 1.6001-1(a) of the Income Tax
Regulations requires that taxpayers maintain such books and records as are sufficient to
establish the entitlement to, and amount of, any credit claimed by the taxpayer.
Accordingly, a taxpayer claiming a credit for Qualified Energy Property should retain the
certification statement as part of the taxpayer's records for purposes of § 1.600 I-I (a).
- II (3) COlltellt Of Ma III !fa C(1I rer 's Certification Statement. A manufacturer's
certification statement to be provided to taxpayers who purchase Qualified Energy
Propel1y must contain the following:
(a) The name and address of the manufacturer;
(b) The class of Qualified Energy Property (as listed in section
5.01 of this notice) in which the product is included;
(c) The make, model number, and any other appropriate identifiers
of the product;
(d) A statement that the product is Qualified Energy Property that
qualifies for the credit allowed under § 25C; and
(e) A declaration, signed by a person currently authorized to bind
the manufacturer in these matters, in the following form:
"Under penalties of perjury, I declare that I have examined this certification
statement, and to the best of my knowledge and belief, the facts presented are true,
correct, and complete."
(4) Manufacturer's Records. A manufacturer that certifies to a taxpayer
that a product is Qualified Energy Property must retain in its records documentation
establishing that the product satisfies the applicable conditions of section 5.01 of this
notice. The manufacturer must, upon request, make such documentation available for
inspection by the Service. The documentation-(a) In the case of the EER for a central air conditioner or electric
heat pump, must include measurements based on published data that are the result of
manufacturer tests at 95 degrees Fahrenheit and may be based on the certified data of the
- 12 Air Conditioning and Refrigeration Institute that are prepared in partnership with the
Consortium for Energy Efficiency; and
(b) In the case ofa geothermal heat pump, must be based on testing
under the conditions of ARI/ISO Standard 13256-1 for Water Source Heat Pumps or ARI
870 for Direct Expansion GeoExchange Heat Pumps, as appropriate, and include
evidence that water heating services have been provided through a desuperheater or
integrated water heating system connected to the storage water heater tank.
(5) Effect of Erroncolls Certification or Failure to SatisfY Documentation
Reqllirements. The Service may, upon examination (and after any appropriate
consultation with DOE or EPA), determine that a product that has been certified under
this section is not Qualified Energy Property. In that event, or if the product's
manufacturer fails to satisfy the requirements relating to documentation in section 5.02(4)
of this notice, the manufacturer's right to provide a certification on which future
purchasers of the product can rely will be withdrawn, and taxpayers purchasing the
product after the date on which the Service publishes an announcement of the withdrawal
may not rely on the manufacturer's certification. Taxpayers may continue to rely on the
certification for products purchased on or before the date on which the announcement of
the withdrawal is published (including in cases in which the product is not installed and
the credit is not claimed until after the announcement of the withdrawal is published).
Manufacturers are reminded that an erroneous certification statement may result in the
imposition of penalties-(a) Under § 7206 for fraud and making false statements; and
- 13 (b) Under ~ 6701 for aiding and abetting an understatement of tax
liability (in the amount of $1 ,000 per return on which a credit is claimed in reliance on
the certification).
(6) Availahili(\' oreertificatio/l b!formatioll. Manufacturers are
encouraged to provide a listing of qualified products and applicable certification
infonnation on their websites to facilitate taxpayer identification of qualified products .
.03 Additional Requirements. A taxpayer may claim a credit with respect to
expenditures paid or incurred for Qualified Energy Property only if the following
additional requirements are satisfied:
(I) The property is instalIed on or in connection with a dwelling unit
located in the United States and, at the time of instalIation, the dwelling unit is owned and
used by the taxpayer as the taxpayer's principal residence (within the meaning of § 121);
and
(2) The property is originally placed in service by the taxpayer.
.04 Installation Costs. The credit is allowed for amounts paid or incurred to
purchase Qualified Energy Property and for expenditures for labor costs properly
allocable to the onsite preparation, assembly, or original installation of the property.
SECTION 6. PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 U.S.c. 3507) under control number 1545-1989.
- 14 -
An agency may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the collection of information displays a valid OMB
control number.
The collections of information in this notice are in sections 4 and 5. This
information is required to be collected and retained in order to ensure that property meets
the requirements for the Nonbusiness Energy Credit under § 25C. This information will
be used to determine whether the property for which manufacturers provide certifications
is property that qualifies for the credit. The collection of information is required to obtain
a benefit from manufacturers' certification statements that property qualifies for the
credit. The likely respondents are corporations, partnerships, and individuals.
The estimated total annual reporting burden is 350 hours.
The estimated annual burden per respondent varies from 2 hours to 3 hours,
depending on individual circumstances, with an estimated average burden of 2.5 hours to
complete the requests for certification required under this notice. The estimated number
of respondents is 140.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any Internal Revenue law.
Generally, tax returns and tax return infornlation are confidential, as required by 26
U.S.c. 6103.
- 15 -
SECTION 7. DRAFTING INFORMATION
The principal author of this notice is Kelly R. Morrison-Lee of the Office of
Associate Chief Counsel (Passthroughs and Special Industries). For further information
regarding this notice contact Jennifer Bernardini at (202) 622-3120 (not a toll-free call).
Part III - Administrative, Procedural, and Miscellaneous
Certification of Energy Efficient Home Credit
Notice 2006-27
SECTION 1. PURPOSE
This notice sets forth a process under which an eligible contractor who constructs
a dwelling unit (other than a manufactured home) may obtain a certification that the
dwelling unit is an energy efficient home that satisfies the requirements of
§
45L(c)(1 }(A) and (B) of the Internal Revenue Code. This notice also provides for a
public list of software programs that may be used in calculating energy consumption for
purposes of obtaining a certification that satisfies the requirements of § 45L(d).
Guidance relating to manufactured homes will be provided in a separate notice.
SECTION 2. BACKGROUND
.01 In General. Section 45L provides a credit to an eligible contractor who
constructs a qualified new energy efficient home. For qualified new energy efficient
homes (other than manufactured homes), the amount of the credit is $2,000. A dwelling
unit qualifies for the credit if-(1) It is located in the United States;
2
(2) Its construction is substantially completed after August 8, 2005;
(3) It meets the energy saving requirements of § 45L(c)(1); and
(4) It is acquired from the eligible contractor after December 31,2005,
and before January 1, 2008, for use as a residence .
.02 Energy Saving Requirements. To meet the energy saving requirements of §
45L(c)(1), a dwelling unit must be certified to provide a level of heating and cooling
energy consumption that is at least 50 percent below that of a comparable dwelling unit
constructed in accordance with the standards of section 404 of the 2004 Supplement to
the 2003 International Energy Conservation Code (2004 IECC Supplement), and to
have building envelope component improvements that provide for a level of heating and
cooling energy consumption that is at least 10 percent below that of a comparable
dwelling unit. For this purpose, heating and cooling energy and cost savings must be
calculated in accordance with the procedures prescribed in Residential Energy Services
Network (RESNET) Publication No. 05-001 (Nov. 17,2005).
SECTION 3. CERTIFICATION
A contractor must obtain the certification required under § 45L(c)(1) with respect
to a dwelling unit (other than a manufactured home) from an eligible certifier before
claiming the energy efficient home credit with respect to the dwelling unit. A contractor
is not required to file the certification with the return on which the credit is claimed.
However, § 1.6001-1 (a) of the Income Tax Regulations requires that taxpayers
maintain such books and records as are sufficient to establish the entitlement to, and
amount of, any credit claimed by the taxpayer. Accordingly, an eligible contractor
3
claiming a $2,000 credit under § 45L should retain the certification as part of the eligible
contractor's records to satisfy this requirement. The certification will be treated as
satisfying the requirements of § 45L(c)(1) if all construction has been performed in a
manner consistent with the design specifications provided to the eligible certifier and the
certification contains all of the following:
.01 The name, address, and telephone number of the eligible certifier.
.02 The address of the dwelling unit.
.03 A statement by the eligible certifier that-(1) The dwelling unit has a projected level of annual heating and cooling
energy consumption that is at least 50 percent below the annual level of heating and
cooling energy consumption of a reference dwelling unit in the same climate zone;
(2) Building envelope component improvements alone account for a level
of annual heating and cooling energy consumption that is at least 10 percent below the
annual level of heating and cooling energy consumption of a reference dwelling unit in
the same climate zone; and
(3) Heating and cooling energy and cost savings have been calculated in
the manner prescribed in section 2.02 of this notice .
.04 A statement by the eligible certifier that field inspections of the dwelling unit
(or of other dwelling units under the sampling protocol described below) performed by
the eligible certifier during and after the completion of construction have confirmed that
all features of the home affecting such heating and cooling energy consumption comply
with the design specifications provided to the eligible certifier. With respect to builders
4
who build at least 85 homes a year or build subdivisions with the same floor plan using
the same subcontractors, the eligible certifier may use the sampling protocol found in
the current ENERGY STAR® for Homes Sampling Protocol Guidelines instead of
inspecting all of the homes. The sampling protocols can be found at the following web
address:
http://www.energystar.gov/index.cfm?c=bldrs_'enders_raters.pC homes_policies#SamplingProtocol
.05 A list identifying-(1) The dwelling unit's energy efficient building envelope components and
their respective energy performance rating as required by section 401.3 of the 2004
IECC Supplement; and
(2) The energy efficient heating and cooling equipment installed in the
dwelling unit and the energy efficiency performance of such equipment as rated under
applicable Department of Energy Appliance Standards test procedures .
.06 Identification of the listed software program used to calculate energy
consumption (see section 5 of this notice) .
.07 A declaration, applicable to the certification and any accompanying
documents, signed by a person currently authorized to bind the eligible certifier in these
matters, in the following form:
"Under penalties of perjury, I declare that I have examined this
certification, including accompanying documents, and to the best of my
knowledge and belief, the facts presented in support of this certification
are true, correct, and complete."
5
SECTION 4. DEFINITIONS
The following definitions apply for purposes of this notice:
(1) Building envelope components are basement walls, exterior walls, floor, roof,
and any other building element that encloses conditioned space, including any boundary
between conditioned space and unconditioned space.
(2) A climate zone is a geographical area within which all locations have similar
long-term climate conditions as defined in Chapter 3 of the 2004 IECC Supplement.
(3) A dwelling unit is a single unit providing complete independent living facilities
for one or more persons, including permanent provisions for living, sleeping, eating,
cooking, and sanitation, within a building that is not more than three stories above grade
in height.
(4) An eligible certifier is a person that is not related (within the meaning of
§ 45( e)( 4)) to the eligible contractor and has been accredited or otherwise authorized by
RESNET (or an equivalent rating network) to use energy performance measurement
methods approved by RESNET (or the equivalent rating network). An employee or
other representative of a utility or local building regulatory authority may qualify as an
eligible certifier if the employee or representative has been accredited or otherwise
authorized by RESNET (or an equivalent rating network) to use the approved energy
performance measurement methods.
(5) An eligible contractor is the person that constructed a qualified new energy
efficient home.
(6) A manufactured home is a dwelling unit constructed in accordance with the
6
Federal Manufactured Home Construction and Safety Standards (24 C.F.R § 3280).
(7) A reference dwelling unit is a dwelling unit that is comparable to the dwelling
unit constructed by the eligible contractor except that-(a) The comparable dwelling unit is constructed in accordance with the
minimum standards of Chapter 4 of the 2004 IECC Supplement;
(b) The comparable dwelling unit's air conditioners have a Seasonal
Energy Efficiency Ratio (SEER) of 13, measured in accordance with 10 C.F.R.
430.23(m); and
(c) The comparable dwelling unit's heat pumps have a SEER of 13 and a
Heating Seasonal Performance Factor (HSPF) of 7.7, measured in accordance with 10
C.F.R. 430.23(m).
SECTION 5. SOFTWARE PROGRAMS
.01 In General. The Internal Revenue Service will create and maintain a public
list of software programs that may be used to calculate energy consumption for
purposes of providing a certification under section 3 of this notice. A software program
will be included on the original list if the software developer submits the following
information to the Service and RESNET:
(1) The name, address, and telephone number of the software developer;
(2) The name or other identifier of the program as it will appear on the list;
(3) The test results, test runs, and the software program with which the
test was conducted; and
(4) A declaration by the developer of the software program, made under
7
penalties of perjury, that the software program has satisfied all tests required to conform
to the software accreditation process prescribed in RESNET Publication No. 05-001
(Nov. 17, 2005) .
.02 Addresses. Submissions under this section must be addressed as follows :
Submissions to the Service submitted by U. S. mail:
Internal Revenue Service
Attn : Program Administrator
CC :PSI :7, Room 4315
P.O. Box 7604
Ben Franklin Station
Washington , DC 20044
Submissions to the Service submitted by a private delivery service:
Internal Revenue Service
Attn : Program Administrator
CC :PSI :7, Room 4315
1111 Constitution Ave ., N.W.
Washington, DC 20224
Submissions to RESNET:
Residential Energy Services Network
P.O. Box 4561
Oceanside, CA 92052-4561
.03 Original and Updated Lists. A software program will be included on the
original list if the software developer's submission is received before March 1, 2006.
The list will be updated as necessary to reflect submissions received after February 28,
2006 .
.04 Removal from Published List. The Service may, upon examination (and
after appropriate consultation with the Department of Energy), determine that a software
program is not sufficiently accurate to justify its use in calculating energy consumption
for purposes of providing a certification under section 3 of this notice and remove the
8
software program from the published list. The Service may undertake an examination
on its own initiative or in response to a public request supported by appropriate analysis
of the software program's deficiencies .
.05 Effect of Removal from Published List. A software program may not be used
to calculate energy consumption for purposes of providing a certification that satisfies
the requirements of § 45L after the date on which the software is removed from the
published list. The removal will not affect the validity of any certification provided with
respect to a dwelling unit on or before the date on which the software is removed from
the published list.
.06 Public Availability of Information. RESNET may make available for public
review any information provided to it under section 5.01 of this notice.
SECTION 6. PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under control number 1545 -1995.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid OMB
control number.
The collections of information in this notice are in sections 3 and 5. This
information is required to be collected and retained in order to ensure that a dwelling
unit (other than a manufactured home) meets the requirements for the energy efficient
home credit under § 45L. This information will be used to determine whether property
9
for which certifications are provided is property that qualifies for the credit. The
collection of information is required to obtain a benefit. The likely respondents are
corporations and partnerships.
The estimated total annual reporting burden is 180 hours.
The estimated annual burden per respondent varies from 2.5 hours to 4 hours,
depending on individual circumstances, with an estimated average burden of 3 hours to
complete the certification required under this notice. The estimated number of
respondents is 45.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any Internal Revenue
law. Generally, tax returns and tax return information are confidential, as required by 26
U.S.C.6103.
SECTION 7. DRAFTING INFORMATION
The principal author of this notice is Jennifer C. Bernardini of the Office of
Associate Chief Counsel (Passthroughs & Special Industries). For further information
regarding this notice contact Jennifer C. Bernardini at (202) 622-3120 (not a toll-free
call).
Part III - Administrative, Procedural, and Miscellaneous
Energy Efficient Home Credit; Manufactured Homes
Notice 2006-28
SECTION 1. PURPOSE
This notice sets forth a process under which an eligible contractor who constructs
a manufactured home may obtain a certification that the dwelling unit is an energy
efficient home that satisfies the requirements of § 45L(c)(2) or (3) of the Internal
Revenue Code. This notice also provides for a public list of software programs that may
be used in calculating energy consumption for purposes of providing a certification that
satisfies the requirements of § 45L(d). Guidance relating to other dwelling units will be
provided in a separate notice.
SECTION 2. BACKGROUND
.01 In General. Section 45L provides a credit to an eligible contractor who
constructs a qualified new energy efficient home. For qualified new energy efficient
homes that are manufactured homes, the amount of the credit is $1,000 or $2,000,
depending on the energy savings that are achieved. A manufactured home qualifies for
the credit if:
2
(1) It is located in the United States;
(2) Its construction is substantially completed after August 8, 2005;
(3) It meets the energy saving requirements of § 45L(c)(2) or (3); and
(4) It is acquired, directly or indirectly, from the eligible contractor after
December 31,2005, and before January 1,2008, for use as a residence .
.02 Energy Saving Requirements. To meet the energy saving requirements of
§ 45L(c)(2) or (3), a manufactured home must meet one of the following standards:
(1) To meet the energy saving requirements of § 45L(c)(2) and qualify for
the $2,000 credit, a manufactured home must be certified to provide a level of heating
and cooling energy consumption that is at least 50 percent below that of a comparable
manufactured home constructed in accordance with the standards of section 404 of the
2004 Supplement to the 2003 International Energy Conservation Code (2004 IECC
Supplement), and to have building envelope component improvements that provide for
a level of heating and cooling energy consumption that is at least 10 percent below that
of a comparable dwelling unit (see section 3 of this notice); or
(2) To meet the energy saving requirements of § 45L(c)(3) and qualify for
the $1,000 credit, a manufactured home must either-(a) be certified to provide a level of heating and cooling energy
consumption that is at least 30 percent below that of a comparable manufactured home
constructed in accordance with the standards of section 404 of the 2004 IECC
Supplement, and to have building envelope component improvements that provide for a
3
level of heating and cooling energy consumption that is at least 10 percent below that of
a comparable dwelling unit; or
(b) meet the current requirements established by the Administrator
of the Environmental Protection Agency under the ENERGY STAR® Labeled Homes
Program in effect on the date construction is substantially completed (See section 4 of
this notice) .
.03 For purposes of section 2.02 of this notice, heating and cooling energy and
cost savings must be calculated in accordance with the procedures prescribed in
Residential Energy Services Network (RESNET) Publication No. 05-001 (Nov. 17,
2005).
SECTION 3. REQUIREMENTS TO CLAIM THE $2,000 CREDIT
An eligible contractor must obtain the certification required under § 45L(c)(2) with
respect to a manufactured home from an eligible certifier before claiming the $2,000
energy efficient home credit with respect to the manufactured home. An eligible
contractor is not required to attach the certification to the return on which the credit is
claimed. However, § 1.6001-1(a)ofthe Income Tax Regulations requires that
taxpayers maintain such books and records as are sufficient to establish the entitlement
to, and amount of, any deduction claimed by the taxpayer. Accordingly, an eligible
contractor claiming a $2,000 credit under § 45L should retain the certification as part of
the eligible contractor's records to satisfy this requirement. The certification will be
treated as satisfying the requirements of § 45L(c)(2) if all construction has been
4
performed in a manner consistent with the design specifications provided to the eligible
certifier and the certification contains all of the following:
.01 The name, address, and telephone number of the eligible certifier;
.02 The dwelling unit's serial or other identification number;
.03 A statement by the eligible certifier that-(1) The dwelling unit has a projected level of annual heating and cooling
energy consumption that is at least 50 percent below the annual level of heating and
cooling energy consumption of a reference dwelling unit in the same climate zone;
(2) Building envelope component improvements alone account for a level
of annual heating and cooling energy consumption that is at least 10 percent below the
annual level of heating and cooling energy consumption of a reference dwelling unit in
the same climate zone; and
(3) Heating and cooling energy and cost savings have been calculated in
the manner prescribed in section 2.02(3) of this notice;
.04 A statement by the eligible certifier that field inspections of the dwelling unit
(or of other dwelling units under the sampling protocol described below) performed by
the eligible certifier after installation on the permanent site have confirmed that such
heating and cooling energy consumption complies with the design specifications
provided to the eligible certifier. With respect to manufacturers who manufacture at
least 85 homes a year, the certifier may use the sampling protocol found in the current
standards of the ENERGY STAR® Qualified Manufactured Homes - Design,
Manufacturing, Installation, and Certification Procedures, located at the following web
5
address:
http://www.energystar.gov/index.cfm?c=bldrs_'enders_raters.pC builder_manufactured
.05 A list identifying-(1) The dwelling unit's energy efficient building envelope components and
their respective energy performance rating as required by section 401.3 of the 2004
IECC Supplement; and
(2) The energy efficient heating and cooling equipment installed in the
dwelling unit and the energy efficiency performance of such equipment as rated under
applicable Department of Energy Appliance Standards test procedures;
.06 A statement identifying the listed software program used to calculate energy
consumption (see section 6 of this notice); and
.07 A declaration, applicable to the certification and any accompanying
documents, signed by a person currently authorized to bind the eligible certifier in such
matters, in the following form:
"Under penalties of perjury, I declare that I have examined this
certification, including accompanying documents, and to the best of my
knowledge and belief, the facts presented in support of this certification
are true, correct, and complete."
SECTION 4. REQUIREMENTS TO CLAIM THE $1,000 CREDIT
.01 Certified Homes. Except as provided in section 4.02 of this notice, an eligible
contractor must obtain the certification required under § 45L(c)(3)(A) with respect to a
manufactured home from an eligible certifier before claiming the $1,000 energy efficient
6
home credit with respect to the manufactured home. An eligible contractor is not
required to attach the certification to the return on which the credit is claimed. However,
§ 1.6001-1(a) requires that taxpayers maintain such books and records as are sufficient
to establish the entitlement to, and amount of, any deduction claimed by the taxpayer.
Accordingly, an eligible contractor claiming a $1,000 credit under § 45L should retain
the certification as part of the eligible contractor's records to satisfy this requirement.
The certification will be treated as satisfying the requirements of § 45L(c)(3)(A) if all
construction has been performed in a manner consistent with the design specifications
provided to the eligible certifier and the certification contains all of the following:
(1) The name, address, and telephone number of the eligible certifier;
(2) The dwelling unit's serial or other identification number;
(3) A statement by the eligible certifier that-(a) The dwelling unit has a projected level of annual heating and
cooling energy consumption that is at least 30 percent below the annual level of heating
and cooling energy consumption of a reference dwelling unit in the same climate zone;
(b) Building envelope component improvements alone account for
a level of annual heating and cooling energy consumption that is at least 10 percent
below the annual level of heating and cooling energy consumption of a reference
dwelling unit in the same climate zone; and
(c) Heating and cooling energy and cost savings have been
calculated in the manner prescribed in section 2.02(3) of this notice;
7
(4) A statement by the eligible certifier that field inspections of the
dwelling unit (or of other dwelling units under the sampling protocol described below)
performed by the eligible certifier after installation on the permanent site have confirmed
that such heating and cooling energy consumption complies with the design
specifications provided to the eligible certifier. With respect to manufacturers who
manufacture at least 85 homes a year, the certifier may use the sampling protocol found
in the current standards of the current ENERGY STAR® Qualified Manufactured Homes:
Guide for Retailers, located at the following web address:
http://www.energystar.gov/index.cfm?c=bldrs_lenders_raters.pLbuilder_manufactured
(5) A list identifying-(a) The dwelling unit's energy efficient building envelope
components and their respective energy performance rating as required by section
401.3 of the 2004 IECC Supplement; and
(b) The energy efficient heating and cooling equipment installed in
the dwelling unit and the energy efficiency performance of the eqUipment as rated under
applicable Department of Energy Appliance Standards test procedures;
(6) A statement identifying the listed software program used to calculate
energy consumption (see section 6 of this notice); and
(7) A declaration, applicable to the certification and any accompanying
documents, signed by a person currently authorized to bind the eligible certifier in these
matters, in the following form:
8
"Under penalties of perjury, I declare that I have examined this
certification, including accompanying documents, and to the best of my
knowledge and belief, the facts presented in support of this certification
are true, correct, and complete."
.02 Energy Star Homes. An eligible contractor may claim the $1,000 energy
efficient home credit with respect to a manufactured home by meeting the applicable
certification requirements established by the Administrator of the Environmental
Protection Agency under the ENERGY STAR® Labeled Homes Program in effect on the
date construction is substantially completed.
SECTION 5. DEFINITIONS
The following definitions apply for purposes of this notice:
.01 Building envelope components are basement walls, exterior walls, floor, roof,
and any other building element that encloses conditioned space, including any
boundary between conditioned space and unconditioned space;
.02 A climate zone is a geographical area within which all locations have similar
long-term climate conditions as defined in Chapter 3 of the 2004 IECC Supplement;
.03 A dwelling unit is a single unit providing complete independent living facilities
for one or more persons, including permanent provisions for living, sleeping, eating,
cooking, and sanitation, within a building that is not more than three stories above grade
in height;
.04 An eligible certifier is a person that is not related (within the meaning of
9
§ 45(e)(4)) to the eligible contractor and has been accredited or otherwise authorized by
RESNET (or an equivalent rating network) to use energy performance measurement
methods approved by RESNET (or an equivalent rating network). An employee or other
representative of a utility or local building regulatory authority may qualify as an eligible
certifier if the employee or representative has been accredited or otherwise authorized
by RESNET (or an equivalent rating network) to use the approved energy performance
measurement methods;
.05 An eligible contractor in the case of a qualified new energy efficient home
that is a manufactured home is the manufactured home producer of the home;
.06 A manufactured home is a dwelling unit constructed in accordance with the
Federal Manufactured Home Construction and Safety Standards (24 C.F.R. § 3280);
and
.07 A reference dwelling unit is a dwelling unit that is comparable to the
manufactured home produced by the eligible contractor except that-(a) The comparable dwelling unit is constructed in accordance with the
minimum standards of Chapter 4 of the 2004 IECC Supplement;
(b) The comparable dwelling unit's air conditioners have a Seasonal
Energy Efficiency Ratio (SEER) of 13, measured in accordance with 10 C.F.R.
430.23(m); and
(c) The comparable dwelling unit's heat pumps have a SEER of 13 and a
Heating Seasonal Performance Factor (HSPF) of 7.7, measured in accordance with 10
C.F.R. 430.23(m).
10
SECTION 6. SOFTWARE PROGRAMS
.01 In General. The Internal Revenue Service will create and maintain a public
list of software programs that may be used to calculate energy consumption for
purposes of providing a certification under section 3 or 4 of this notice. A software
program will be included on the list if the software developer submits the following
information to the Service and RESNET:
(1) The name, address, and telephone number of the software developer;
(2) The name or other identifier of the program as it will appear on the list;
(3) The test results, test runs, and the software program with which the
test was conducted; and
(4) A declaration by the developer of the software program, made under
penalties of perjury, that the software program has satisfied all tests required to conform
to the software accreditation process prescribed in RESNET Publication No. 05-001
(Nov. 17,2005).
.02 Addresses. Submissions under this section must be addressed as follows:
Submissions to the Service submitted by U. S. mail:
Internal Revenue Service
Attn: Program Administrator
CC:PSI:7, Room 4315
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Submissions to the Service submitted by a private delivery service:
Internal Revenue Service
Attn: Program Administrator
CC:PSI:7, Room 4315
11
1111 Constitution Ave., N.W.
Washington, DC 20224
Submissions to RESNET:
Residential Energy Services Network
P.O. Box 4561
Oceanside, CA 92052-4561
.03 Original and Updated Lists. A software program will be included on the
original list if the software developer's submission is received before March 1, 2006.
The list will be updated as necessary to reflect submissions received after February 28,
2006.
.04 Removal from Published List. The Service may, upon examination (and
after appropriate consultation with the Department of Energy), determine that a software
program is not sufficiently accurate to justify its use in calculating energy consumption
for purposes of providing a certification under sections 3 and 4 of this notice and
remove the software from the published list. The Service may undertake an
examination on its own initiative or in response to a public request supported by
appropriate analysiS of the software program's deficiencies .
.05 Effect of Removal from Published List. A software program may not be
used to calculate energy consumption for purposes of providing a certification that
satisfies the requirements of § 45L after the date on which the software is removed from
the published list. The removal will not affect the validity of any certification provided
with respect to a dwelling unit on or before the date on which the software is removed
from the published list.
.06 Public Availability of Information. RESNET may make available for public
review any information provided to it under section 6.01 of this notice.
12
SECTION 7. SALES TO DEALERS
.01 In General. In the case of a manufactured home sold by an eligible
contractor to a dealer of manufactured homes, the eligible contractor may rely on a
statement by the dealer to establish the date on which a manufactured home is
acquired, that it is located in the United States, and that it is acquired for use as a
residence. The eligible contractor is not required to attach the statement to the return
on which the credit is claimed. However, § 1.6001-1 (a) requires that taxpayers
maintain such books and records as are sufficient to establish the entitlement to, and
amount of, any deduction claimed by the taxpayer. Accordingly, an eligible contractor
claiming a $1,000 credit under § 45L should retain the statement as part of its records to
satisfy this requirement, and is not entitled to rely on the statement unless the statement
is so retained .
.02 Content of Statement. The eligible contractor may not rely on the statement
by the dealer unless the statement specifies the date of the retail sale of the
manufactured home, that the dealer delivered the manufactured home to the purchaser
at an address in the United States, and that the dealer has no knowledge of any
information suggesting that the purchaser will use the manufactured home other than as
a residence. The statement must also contain the following information:
(1) The name, address, and telephone number of the dealer; and
(2) A declaration, applicable to the statement made by a dealer and any
accompanying documents, signed by a person currently authorized to bind the dealer in
such matters, in the following form:
13
"Under penalties of perjury, I declare that to the best of my knowledge and
belief, the facts presented with respect to this sale transaction are true,
correct, and complete."
SECTION 8. PAPERWORK REDUCTION ACT
The collections of information contained in this notice have been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under control number 1545-1994.
An agency may not conduct or sponsor, and a person is not required to respond
to, a collection of information unless the collection of information displays a valid OMB
control number.
The collections of information in this notice are in sections 3, 4, 6, and 7. This
information is required to be collected and retained in order to ensure that a
manufactured home meets the requirements for the energy efficient home credit under
§ 45L. This information will be used to determine whether property for which
certifications are provided is property that qualifies for the credit. The collection of
information is required to obtain a benefit. The likely respondents are corporations,
partnerships, and individuals.
The estimated total annual reporting burden is 75 hours.
The estimated annual burden per respondent varies from 3.5 hours to 5 hours,
depending on individual circumstances, with an estimated average burden of 4 hours to
complete the certification required under this notice. The estimated number of
respondents is 15.
14
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any internal revenue law.
Generally, tax returns and tax return information are confidential, as required by 26
U.S.C. 6103.
SECTION 7. DRAFTING INFORMATION
The principal author of this notice is Jennifer C. Bernardini of the Office of
Associate Chief Counsel (Passthroughs & Special Industries). For further information
regarding this notice contact Jennifer C. Bernardini at (202) 622-3120 (not a toll-free
call).
page 1 ot 1
PRESS ROOM
February 23, 2006
js-4063
MEDIA ADVISORY:
Press Briefing: Treasury Department Reaction to the Rudman Report
Please join Randy Quarles, the Treasury Department's Under Secretary for
Domestic Finance, for a press briefing on the Rudman Report on Government
Sponsored Enterprises.
WHO:
Randy Quarles, Under Secretary for Domestic Finance
WHA T:
Press Briefing
WHEN:
TODAY, February 23 at 10:30 AM EST
WHERE: Department of the Treasury, Media Room - 4121
Media without TreasU/y press credentia.5 (including media with White House
credentials) planning to attend should contact Carmen Alvarado in Treasury's Office
of Public Affairs at (202) 622-2920 or Carmenalvarado@do.treas.gov. Please be
prepared to provide her with the following information: full name, social security
number, citizenship and date of birth.
-30-
http://treas,gov/prcss/rclcascslj 54063.htm
3/212006
Page
1 at 1
PRESS ROOM
February 23, 2006
JS-4064
Statement by Under Secretary for International Affairs Timothy D. Adams
Kuala Lumpur, Malaysia
Thank you for coming today. Malaysia is my second stop on an extended trip
through East Asia. I met and will meet today with senior economic officials as well
as members of the Malaysian and international business community. What I told
them, and what I will emphasize throughout this trip, is that the United States
remains committed to East Asia. Our relationships here are deep and strong and
we will continue to maintain these critical partnerships.
The past few years have been very good ones for the world economy, with high and
widespread growth and low inflation. Economies in East Asia have made a very
large contribution to this good performance. In rny meetings with government
officials I congratulated them on the sound monetary and fiscal policies that have
underpinned Malaysia's growth.
I encourage Malaysia to continue with structural reforms, improvements to the
investment climate and strengthening of the financial services sector. One
important way that Malaysia can continue to strengthen its financial services sector
is through increased foreign participation. It is essential that Malaysia continue the
opening of this market in the context of the ongoing Doha trade round.
The trade relationship between our two countries is deep: the U.S. has been
Malaysia's top trade partner since 1999 and Malaysia is the tenth largest trade
partner for the U.S. I look forward to discussing ways to provide new trade
opportunities that will benefit both the U.S. and Malaysia.
I am also here to discuss the July 21 changes to the Malaysian exchange rate
regime and the contributions that exchange rate policy could make to sustaining
future growth. While recognizing the value of a stable exchange rate for a highly
open economy like Malaysia,
I believe that greater exchange rate flexibility under the new regime would help
Malaysia adjust to changes in the world economy and help ensure continued
economic growth.
We at U.S. Treasury feel strongly that continuing to open the doors to vibrant trade
relations, as well as ensuring the free flow of capital and market-based exchange
rates, are the keys to strong global growth.
-30-
•
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February 23, 2006
js-4065
Statement of Under Secretary Randy Quarles on Treasury's Reaction to the
Rudman Report
The Rudman report lays bare the earnings-at-any-cost culture that had developed
over many years at Fannie Mae, and the substantial abuses that resulted. A
principal vehicle for generating these earnings was the enormous growth in the
portfolio of retained mortgages, and that remains the principal legacy of this decade
of abuse. While Senator Rudman's report indicates that a number of the specific
accounting violations and corporate governance problems are in the process of
repair, the broad systemic risks inherent in the retained portfolio that was at the
heart of the process remain unchanged . In addition , the retained portfolio provides
little added value to achieving the GSE's mission. That is why we need legislative
reform. Treasury remains committed to seeing the presence of a world class
regulator for the GSEs and ensuring a legislative mandate for reduction of the
retained portfolios to reduce systemic risk .
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3/2/2006
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February 23, 2006
js-4066
TREASURY SECRETARY VISITS MEMPHIS SOLAR PANEL MANUFACTURER
MEMPHIS, TENN. - Treasury Secretary John Snow is in Memphis, Tenn. this
morning, where he toured Sharp Electronics and discussed tax incentives for solar
energy with company leaders.
"Solar energy is one of the many alternative energy sources that President Bush
would like to see developed and used more in the coming years as we seek to
reduce our dependence on foreign oil," Snow said. "It's wonderful to see the
innovation and research going on here at Sharp Electronics - from here it's easy to
see how much promise there is in this clean, abundant, widespread and renewable
energy resource."
Snow went on to speak about the President's commitment alternative energy
resources, such as innovative technologies that can harness the energy of the sun.
"As part of his Advanced Energy Initiative, the President proposed a new $148
million Solar America Initiative in his 2007 Budget to accelerate the development of
advanced photovoitaic (PV) materials that convert sunlight directly to electricity. The
goal there is to make solar PV cost-competitive with other forms of renewable
electricity by 2015," Snow explained.
The Secretary also emphasized that tax incentives for solar energy were included in
Energy Policy Act that President Bush signed last summer. "The President's
commitment to the expanded use and further development of solar energy was
evident in his Energy Policy Act, and it continues tOday."
ENERGY POLICY ACT SOLAR TAX INCENTIVES:
Residential:
• A 30-percent tax credit, subject to a $2,000 annual cap is available through the
end of 2007.
Businesses:
• Temporary increase in the tax credit allowed to business investments in solar
energy equipment - 30 percent credit for 2006 & 2007, 10 percent after 2007.
"Solar energy will be a vital part of the Nation's energy supply for future
generations, and tax incentives for American consumers and businesses
developing solar technologies like Sharp is the best thing our government can do to
spur innovation and increase demand," Snow concluded.
For more information on the President's Advanced Energy Initiative go to:
www.whilehouso.go v/sI2[coftheunion/200G/enorgy/index.hlrnl
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February 23, 2006
js-4067
Snow Letters to Tax Relief Conferees
To:
Members of the Press
From: Tony Fratto
Assistant Secretary of Public Affairs
U.S. Department of the Treasury
Re:
Letters to Tax Relief Conferees
Please find, attached, copies of letters from Treasury Secretary John Snow to the
conference committee on tax relief reconciliation. This letter was sent today to
Chairmen Grassley and Thomas as well as Senators Baucus and Kyl,
Congressmen Stark, Rangel, McCrery and Camp.
REPORTS
• Chairmen Grassley
• Chj1irmen Thomas
hUp:lltreas.gov/press/releo.ses/js406 7,htlll
3/3/2006
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
SECRETARY OF THE TREASURY
February 23,2006
The Honorable Charles Grassley
Chainnan
Committee on Finance
United States Senate
Washington, DC 20510
Dear Chainnan Grassley:
As you work through the conference on tax relief reconciliation, I write to offer the
Administration's views on major issues raised by this important legislation. In particular, I
would like to reaffirm the position expressed in our Statements of Administration Policy to the
House and Senate of the Administration's strong support for tbe extension in this legislation of
dividends and capital gains tax relief included in the House-passed bill.
Since the dividends and capital gains tax relief was enacted in 2003, it has contributed
directly to the strengthening of our economy, helping to create over four and a half million new
jobs and raise living standards. Business investment has rebounded and grown for 10 straight
quarters, and, since higher investment brings jobs, it is not surprising that we have also had 10
straight quarters of steady job growth. And most of these jobs are paying above the median
wage. With the unemployment rate now at 4.7%, there can be little doubt that this tax reliefhas
benefited American workers, families, and businesses. This is in addition to the direct benefit
seen by the 50% of American households that own equities, many of whom are seniors and
approximately 40% of whom earn less than $50,000 per year. It is essential that this tax reEefbe
extended for as long as possible and that Congress prevent a tax increase on the American people
that would damage the very engine of job creation.
The Senate-passed bill contains a number of provisions that are consistent with the
President's objective to promote charitable giving. Enactment of charitable giving incentives,
such as those included in the President's FY 2007 Budget, is a high priority for the
Administration. We look forward to working with the conferees on these provisions.
The Administration has significant concerns with a number of revenue offset provisions
in the Senate-passed bill, especially those that increase the complexity of the tax code or target
taxpayers in specific industries. For example, the Administration has strong concerns with the
provision in the Senate-passed bill that would codify the "economic substance" doctrine and
urges Congress to eliminate this provision from the final legislation. The Administration also
opposes the provision in the Senate-passed bill that would disallow use of the last-in, first-out
(LIFO) method of accounting for certain taxpayers. This provision would result in a retroactive
tax increase by changing a long-accepted accounting practice. As_ we have stated previously, the
President's senior advisors would recommend that the President veto the legislation if this
provision remains in the final legislation.
The Administration supports the extension of a number of important expired or expiring
tax provisions, as provided for in both the House and Senate-passed bills. The Administration
strongly supports extension of the Research and Experimentation tax credit [or as long a period
of time as possible. We will work with the conferees to ensure that any extension of this
important provision is properly crafted and improves the effectiveness of the credit. The
Administration also strongly supports extension of increased expensing for small businesses,
which would provide a nwnber of benefits to small business taxpayers and the economy.
Both the House and Senate have passed measures that would provide relief from the
alternative minimum tax (AMT) for 2006. As outlined in the FY 2007 Budget, the
Administration supports a one-year "patch" for the AMT. We urge Congress to enact an AMT
patch this year.
Finally, the Administration has serious concerns with non-tax-related items in the Senatepassed tax relief bill that are unrelated to the purposes of the bill and strongly urges that such
items not be included in the final legislation.
On behalf of the Administration, let me express our willingness to provide assistance
during the deliberations of the conference committee. I look forward to working with you to
enact legislation that will ensure that the tax relief for dividends and capital gains passed in 2003
continues to be an engine for economic growth_
Sincerely,
John W. Snow
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C.
SI;:CRETARY OF THE TREASURY
Februmy 23,2006
The Honorable William M. Thomas
Chainnan
Ways and Means Committee
U.S. House of Representatives
Washington, DC 20515
Dear Chainnan Thomas:
As YOll work through the conference on tax relief reconciliation, I write to offer the
Administration's views on major issues raised by this important legislation. In particular, I
would like to reaffirm the position expressed in our Statements of Administration Policy to the
House and Senate of the Administration's strong support for the extension in this legislation of
dividends and capital gains tax relief included in the House-passed bill.
Since the dividends and capital gains tax relief was enacted in 2003, it has contributed
directly to the strengthening of our economy, helping to create over four and a half million new
jobs and raise living standards. Business investment has rebounded and grown for 10 straight
quarters, and, since higher investment brings jobs, it is not surprising that we have also had 10
straight quarters of steady job growth. And most of these jobs are paying above the median
wage. With the unemployment rate now at 4.7%, there can be little doubt that this tax relief has
benefited American workers, families, and businesses. This is in addition to the direct benefit
seen by the 50% of American households that own equities, many of whom are seniors and
approximately 40% of whom earn less than $50,000 per year. It is essential that this tax relief be
extended for as long as possible and that Congress prevent a tax increase on the American people
that would damage the very engine of job creation.
The Senate-passed bill contains a number of provisions that are consistent with the
President's objective to promote charitable giving. Enactment of charitable giving incentives,
such as those included in the President's FY 2007 Budget, is a high priority for the
Administration. We look forward to working with the conferees on these provisions.
The Administration has significant concerns with a number of revenue offset provisions
in the Senate-passed bill, especially those that increase the complexity of the tax code or target
taxpayers in specific industries. For example, the Administration has strong concerns with the
provision in the Senate-passed bill that would codify the "economic substance" doctrine and
urges Congress to eliminate this provision from the finallegis\ation. The Administration also
opposes the provision in the Senate-passed bill that would disallow use of the last-in, first-out
(LIFO) method of accounting for certain taxpayers. This provision would result in a retroactive
tax increase by changing a long-accepted accounting practice. As we have stated previously, the
President's senior advisors would recommend that the President veto the legislation ifthis
provision remains in the final legislation.
The Administration supports the extension of a number of important expired or expiring
tax provisions, as provided for in both the House and Senate-passed bills. The Administration
strongly supports extension of the Research and Experimentation tax credit for as long a period
of time as possible. We will work with the conferees to ensure that any extension of this
important provision is properly crafted and improves the effectiveness of the credit. The
Administration also strongly supports extension of increased expensing for small businesses,
which would provide a number of benefits to small business taxpayers and the et:onomy.
Both the House and Senate have passed measures that would provide relief from the
alternative minimum tax (AMT) for 2006. As outlined in the FY 2007 Budget, the'
Administration supports a one-year "patch" for the AMT. We urge Congress to enact an AMT
patch this year.
Finally, the Administration has serious concerns with non-tax-related items in the Senatepassed tax relief bill that are unrelated to the purposes of the bill and strongly urges that such
items not be included in the finallegisJation.
On behalf of the Administration, let me express our willingness to provide assistance
during the deliberations of the conference committee. I look forward to working with you to
enact legislation that will ensure that the tax relief for dividends and capital gains passed in 2003
continues to be an engine for economic growth.
Sincerely,
John W. Snow
page 1 or 1
PRESS ROOM
February 23, 2006
js-4068
U.S. Treasury Secretary John W. Snow to Visit Richmond to Promote New Tax
Credits for Home Energy Efficiency
U.S. Treasury Secretary John W. Snow will visit Richmond, Virginia Friday,
February 24, 2006 to promote new tax credits for home energy efficiency. While in
Richmond, Secretary Snow will visit the home of the Chjrles Donato family to
discuss the availability of new tax credits for homeowners who improve the energy
efficiency of their existing homes. The new tax credits are part of President Bush's
Energy Policy Act. The following event is open to credentialed media:
Who
U. S. Treasury Secretary John W. Snow
What
Site Visit
When
Friday, February 24, 10 a.m. (EST)
Where Home of the Charles Donato family
2906 Brixham Drive
Richmond, VA
Note: Media must RSVP to Jim Norvelle or Daisy Pridgen of Dominion at (804) 7716115
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February 24, 2006
JS-4069
Treasury Secretary Encourages Energy
Efficiency at Home
Richmond, Va - Treasury Secretary John W, Snow, accompanied by a
weatherization expert from Dominion, visited the home of Charles and Martha
Donato today to discuss energy efficiency in the home, Snow highlighted the
availability of new tax credits for homeowners who take steps to improve the energy
efficiency of their homes,
"Improving the energy-efficiency of our homes is a highly effective ways of reducing
our national energy consumption, which is a priority that the President set forth in
his State of the Union Address this year," Snow said, "Guidance for two new tax
credits, issued this week by the IRS, will provide incentive and reward for energysaving efforts,"
The tax credits described by Snow are part of the Energy Policy Act signed by
President Bush last summer. Snow pointed out that "There can be no question that
energy savings should start at home - and that's what these tax credits are all
about. Homeowners who qualify for these credits will showcase a win-win scenario
where precious energy is conserved while families also save money on heating and
cooling bills - both goals of the President's Energy Policy Act of 2005,"
Homeowner Credit Guidance
• Timing: Credits can be claimed in 2006 or 2007,
• WholWhat Qualifies & How Much:
o Homeowners may claim up to $500 in credits over the two-year
period,
o Energy-efficient improvements to the building envelope qualify for a
10 percent credit, e,g, insulation, exterior windows and doors
(including storm windows and doors), and metal roofs (International
Energy Conservation Code or the Environmental Protection
Agency's Energy Star program standards may apply), •
o Certain heating and cooling equipment that meets the energyefficiency standards specified in the Internal Revenue Code,
• IRS Guidance:
o Establishes a process that manufacturers can use to certify their
product(s} qualifies for the credit.
o Affords certainty to homeowners, who will be permitted to rely on the
manufacturer's certification when claiming the credit on their returns,
For more information on the President's Advanced Energy Initiative go to:
www.whitehouse.gov/stateoftheuniol1/2Q06ienergy/index.html
REPORTS
•
Energy Guidance Homeown
1!tp:lltreas,gov/pre.iS/releasesIjS4069.htm
3/3/2006
Part III - Administrative, Procedural, and Miscellaneous
Credit for Nonbusiness Energy Property
Notice 2006-26
SECTION 1. PURPOSE
This notice sets forth interim guidance, pending the issuance of regulations,
relating to the credit for nonbusiness energy property under § 25C of the Internal
Revenue Code. Specifically, this notice provides procedures that manufacturers may
follow to certifY property as either an Eligible Building Envelope Component or
Qualified Energy Property, as well as guidance regarding the conditions under which
taxpayers seeking to claim the § 25C credit may rely on a manufacturer's certification
(or, in the case of certain windows, an Energy Star label). The Internal Revenue Service
and the Treasury Department expect that the regulations will incorporate the rules set
forth in this notice.
SECTION 2. BACKGROUND
.01 Section 1333 of the Energy Policy Act of2005, Pub. L. No. 109-58, 119 Stat.
594 (2005), added § 25C to the Internal Revenue Code. Section 25C provides a credit
against tax for the taxable year in an amount equal to the sum of--
-2-
(1) Ten percent of the amount paid or incurred by the taxpayer for
qualified energy efficiency improvements (that is, property described in section 4.01 of
this notice) installed during the taxable year; and
(2) The amount of expenditures for residential energy property (that is,
property described in section 5.01 of this notice) paid or incurred by the taxpayer during
the taxable year.
.02 Under § 25C(b), the maximum amount of the credit allowable to a taxpayer
under § 25C(a) for all taxable years is $500 ($200 in the case of amounts paid or incurred
for exterior windows (including storm windows and skylights». In addition, the
maximum amount of credit allowed is-(1) $50 for any advanced main air circulating fan;
(2) $150 for any qualified natural gas, propane, or oil furnace or hot water
boiler; and
(3) $300 for any item of energy-efficient building property (that is,
property described in section 5.01(1)-(7) of this notice) .
.03 Section 25C(g) and § 1333(c) of the Energy Policy Act provide that the credit
applies to property placed in service after December 31, 2005, and before January 1,
2008.
SECTION 3. REFERENCES TO INTERNATIONAL ENERGY CONSERVA nON
CODE
Manufacturers and taxpayers may treat any reference in this notice to the
International Energy Conservation Code (IECC) as a reference to either the 2001
-3Supplement of the 2000 International Energy Conservation Code or the 2004 Supplement
of the 2003 International Energy Conservation Code.
SECTION 4. QUALIFIED ENERGY EFFICIENCY IMPROVEMENTS
.01 Eligible BlIildillg Ellvelope Components.
The credit for qualified energy efficiency improvements is allowed with respect to
the following building envelope components (Eligible Building Envelope Components):
(1) An insulation material or system (including any vapor retarder or seal
to limit infiltration) that-(a) Is specifically and primarily designed (within the meaning of
section 4.04 of this notice) to reduce heat loss or gain of a dwelling unit when installed in
or on the dwelling unit; and
(b) May be taken into account in determining whether the building
thermal envelope requirements established by the IECC are satisfied;
(2) An exterior window, skylight, or door (other than a storm window or
storm door) that meets or exceeds the prescriptive criteria established by the IECC for the
climate zone in which the window, skylight, or door is installed;
(3) A storm window that, in combination with the exterior window over
which it is installed, meets or exceeds the prescriptive criteria established by the IECC
for the climate zone in which such storm window is installed;
(4) A storm door that, in combination with a wood door assigned a default
V-factor by the IECC, does not exceed the default V-factor requirement assigned to such
combination by the IECC; and
(5) Any metal roofthat--
-4-
(a) Has appropriate pigmented coatings that are specifically and
primarily designed to reduce the heat gain of a dwelling unit when installed on the
dwelling unit; and
(b) Meets or exceeds Energy Star program requirements (as in
effect at the time of installation) .
.02 Manufacturer's Certification.
(1) Requirements Applicable to Manufacturer. The manufacturer of a
building envelope component may certify to a taxpayer that the component is an Eligible
Building Envelope Component by providing the taxpayer with a certification statement
that satisfies the requirements of section 4.02(4) of this notice. The certification
statement may be provided by including a written copy of the statement with the
packaging of the component, in printable form on the manufacturer's website, or in any
other manner that will permit the taxpayer to retain the certification statement for tax
recordkeeping purposes.
(2) Taxpayer Reliallce. Except as provided in section 4.02(3) and (6) of
this notice, a taxpayer may rely on a manufacturer's certification that a building envelope
component is an Eligible Building Envelope Component. A taxpayer is not required to
attach the certification statement to the return on which the credit is claimed. However,
§ 1.6001-1(a) of the Income Tax Regulations requires that taxpayers maintain such books
and records as are sufficient to establish the entitlement to, and amount of, any credit
claimed by the taxpayer. Accordingly, a taxpayer claiming a credit for an Eligible
Building Envelope Component should retain the certification statement as part of the
taxpayer's records for purposes of § 1.6001-1 (a).
-5-
(3) Reliance Permitted OIl~V for Installatioll COllsistent with Certification.
A taxpayer may rely on a manufacturer's certification that a building envelope
component is an Eligible Building Envelope Component-(a) In the case of an exterior window, skylight, or door (other than
a storm window or storm door), only if the component is installed in a climate zone
identified in the certification statement; and
(b) In the case ofa storm window, only if the component is
installed over an exterior window of a class identified in the certification statement and in
a climate zone identified for that class of exterior window.
(4) Content of Manufacturer's Certification Statement. A manufacturer's
certification statement must contain the following:
(a) The name and address of the manufacturer;
(b) Identification of the component as an insulation material or
system, an exterior window or skylight, an exterior door, or a metal roof;
(c) The make, model number, and any other appropriate identifiers
of the component;
(d) A statement that the component is an Eligible Building
Envelope Component that qualifies for the credit allowed under § 25C;
(e) In the case of an exterior window, skylight, or door (other than
a storm window or storm door), the climate zone or zones for which the applicable
prescriptive criteria are satisfied;
(f) In the case of a storm window--
-6(i) The classes of exterior window (e.g., single pane; double
pane, clear glass; double pane, Low-E coating) over which the stonn window may be
installed and that, in combination with the stonn window, satisfy the applicable
prescriptive criteria for one or more climate zones; and
(ii) For each such class of exterior window, the climate
zone or zones for which the applicable prescriptive criteria are satisfied; and
(g) A declaration, signed by a person currently authorized to bind
the manufacturer in such matters, in the following fonn:
"Under penalties of perjury, I declare that I have examined this certification
statement, and to the best of my knowledge and belief, the facts are true, correct, and
complete."
(5) Manufacturer's Records. A manufacturer that certifies to a taxpayer
that a component is an Eligible Building Envelope Component must retain in its records
documentation establishing that the component satisfies the applicable conditions of
section 4.01 of this notice including, in the case of an exterior window, its National
Fenestration Rating Council (NFRC) rating. The manufacturer must, upon request, make
such documentation available for inspection by the Service.
(6) Effect of Erroneous Certification or Failure to Satisfy Documentation
Requirements. The Service may, upon examination (and after any appropriate
consultation with the Department of Energy (DOE) or Environmental Protection Agency
(EPA)), detennine that a component that has been certified under this section is not an
Eligible Building Envelope Component. In that event, or if the component's
manufacturer fails to satisfy the requirements relating to documentation in section 4.02(5)
-7of this notice, the manufacturer's right to provide a certification on which future
purchasers of the component can rely will be withdrawn, and taxpayers purchasing the
component after the date on which the Service publishes an announcement of the
withdrawal may not rely on the manufacturer's certification. Taxpayers may continue to
rely on the certification for components purchased on or before the date on which the
announcement of the withdrawal is published (including in cases in which the component
is not installed and the credit is not claimed until after the announcement of the
withdrawal is published). Manufacturers are reminded that an erroneous certification
statement may result in the imposition ofpenalties-(a) Under § 7206 for fraud and making false statements; and
(b) Under § 6701 for aiding and abetting an understatement of tax
liability (in the amount of $1 ,000 per return on which a credit is claimed in reliance on
the certification).
(7) Availability of Certification Information. Manufacturers are
encouraged to provide a listing of qualified components and applicable certification
information on their websites to facilitate taxpayer identification of qualified
components .
.03 Special Rule for Energy Star Windows and Skylights. A taxpayer may treat an
exterior window or skylight that bears an Energy Star label and is installed in the region
identified on the label as an Eligible Building Envelope Component and may rely on such
Energy Star label, rather than on a manufacturer's certification statement, in claiming the
§ 25C credit.
-8-
.04 Specijically and Pril1/ari~v Designed. A component is not specifically and
primarily designed to reduce heat loss or gain of a dwelling unit if its principal purposes
are to provide structural support, to provide a finished surface, as in the case of drywall or
siding, or to serve any other function unrelated to the reduction of heat loss or gain. The
principal purpose of a component serves functions unrelated to the reduction of heat loss
or gain if production costs attributable to features other than those that reduce heat loss or
gain exceed production costs attributable to features that reduce heat loss or gain .
.05 Additional Requirements. A taxpayer may claim a credit with respect to
amounts paid or incurred for an Eligible Building Envelope Component only if the
following additional requirements are satisfied:
(1) The component is installed in or on a dwelling unit located in the
United States and, at the time of installation, the dwelling unit is owned and used by the
taxpayer as the taxpayer's principal residence (within the meaning of § 121);
(2) The original use of the component commences with the taxpayer; and
(3) The component reasonably can be expected to remain in use for at
least five years. For this purpose, a component will be treated as reasonably expected to
remain in use for at least five years if the manufacturer offers, at no extra charge, at least
a two-year warranty providing for repair or replacement of the component in the event of
a defect in materials or workmanship. If the manufacturer does not offer such a warranty,
all relevant facts and circumstances are taken into account in determining whether the
component reasonably can be expected to remain in use for at least five years .
.06 Installation Costs. With respect to Eligible Building Envelope Components,
the credit is allowed only for amounts paid or incurred to purchase the components. The
-9-
credit is not allowed for amounts paid or incurred for the onsite preparation, assembly, or
original installation of the components.
SECTION 5. RESIDENTIAL ENERGY PROPERTY
.01 Qualified Energy Property. The credit for residential energy property
expenditures is allowed with respect to the following property (Qualified Energy
Property):
(1) An electric heat pump water heater that yields an energy factor of at
least 2.0 in the standard DOE test procedure;
(2) An electric heat pump that has a heating seasonal performance factor
(HSPF) of at least 9, a seasonal energy efficiency ratio (SEER) of at least 15, and an
energy efficiency ratio (EER) of at least 13;
(3) A closed loop geothermal heat pump that has an EER of at least 14.1
and a heating coefficient of performance (COP) of at least 3.3;
(4) An open loop geothermal heat pump that has an EER of at least 16.2
and a heating COP of at least 3.6;
(5) A direct expansion geothermal heat pump that has an EER of at least
15 and a heating COP of at least 3.5;
(6) A central air conditioner that achieves the highest efficiency tier that
has been established by the Consortium of Energy Efficiency and is in effect on January
1,2006;
(7) A natural gas, propane, or oil water heater that has an energy factor of
at least 0.80;
- 10 (8) A natural gas, propane, or oil furnace or hot water boiler that achieves
an annual fuel utilization efficiency rate of not less than 95; and
(9) A fan that is used in a natural gas, propane, or oil furnace and has an
annual electricity use of no more than 2 percent of the total annual site energy use of the
furnace (as determined in the standard DOE test procedure) .
.02 Manufacturer's Certificatioll. (1) Requirements Applicable to Manufacturer. The manufacturer of a
product may certify to a taxpayer that the product is Qualified Energy Property by
providing the taxpayer with a certification statement that satisfies the requirements of
section 5.02(3) of this notice. The certification statement may be provided by including a
written copy of the statement with the packaging of the product, in printable form on the
manufacturer's website, or in any other manner that will permit the taxpayer to retain the
certification statement for tax recordkeeping purposes.
(2) Taxpayer Reliance. Except as provided in section 5.02(5) of this
notice, a taxpayer may rely on a manufacturer's certification that a product is Qualified
Energy Property. A taxpayer is not required to attach the certification statement to the
return on which the credit is claimed. However, § 1.6001-1(a) of the Income Tax
Regulations requires that taxpayers maintain such books and records as are sufficient to
establish the entitlement to, and amount of, any credit claimed by the taxpayer.
Accordingly, a taxpayer claiming a credit for Qualified Energy Property should retain the
certification statement as part of the taxpayer's records for purposes of § 1.6001-1 (a).
- II -
(3) Content ofManllfacturer's Certification Statement. A manufacturer's
certification statement to be provided to taxpayers who purchase Qualified Energy
Property must contain the following:
(a) The name and address of the manufacturer,
(b) The class of Qualified Energy Property (as listed in section
5.01 of this notice) in which the product is included;
(c) The make, model number, and any other appropriate identifiers
of the product;
(d) A statement that the product is Qualified Energy Property that
qualifies for the credit allowed under § 25C; and
(e) A declaration, signed by a person currently authorized to bind
the manufacturer in these matters, in the following form:
"Under penalties of perjury, I declare that I have examined this certification
statement, and to the best of my knowledge and belief, the facts presented are true,
correct, and complete."
(4) Manufacturer's Records. A manufacturer that certifies to a taxpayer
that a product is Qualified Energy Property must retain in its records documentation
establishing that the product satisfies the applicable conditions of section 5.01 of this
notice. The manufacturer must, upon request, make such documentation available for
inspection by the Service. The documentation-(a) In the case of the EER for a central air conditioner or electric
heat pump, must include measurements based on published data that are the result of
manufacturer tests at 95 degrees Fahrenheit and may be based on the certified data of the
- 12 Air Conditioning and Refrigeration Institute that are prepared in partnership with the
Consortium for Energy Efficiency; and
(b) In the case of a geothennal heat pump, must be based on testing
under the conditions of ARIIISO Standard 13256-1 for Water Source Heat Pumps or ARI
870 for Direct Expansion GeoExchange Heat Pumps, as appropriate, and include
evidence that water heating services have been provided through a desuperheater or
integrated water heating system connected to the storage water heater tank.
(5) Effect of Erroneous Certification or Failure to Satisfy Documentation
Requirements. The Service may, upon examination (and after any appropriate
consultation with DOE or EPA), detennine that a product that has been certified under
this section is not Qualified Energy Property. In that event, or if the product's
manufacturer fails to satisfy the requirements relating to documentation in section 5.02(4)
of this notice, the manufacturer's right to provide a certification on which future
purchasers of the product can rely will be withdrawn, and taxpayers purchasing the
product after the date on which the Service publishes an announcement of the withdrawal
may not rely on the manufacturer's certification. Taxpayers may continue to rely on the
certification for products purchased on or before the date on which the announcement of
the withdrawal is published (including in cases in which the product is not installed and
the credit is not claimed until after the announcement of the withdrawal is published). .
Manufacturers are reminded that an erroneous certification statement may result in the
imposition of penalties-(a) Under § 7206 for fraud and making false statements; and
- 13 (b) Under ~ 6701 for aiding and abetting an understatement of tax
liability (in the amount of $1 ,000 per return on which a credit is claimed in reliance on
the certification).
(6) Availability a/Certification In/ormation. Manufacturers are
encouraged to provide a listing of qualified products and applicable certification
information on their websites to facilitate taxpayer identification of qualified products .
.03 Additional Requirements. A taxpayer may claim a credit with respect to
expenditures paid or incurred for Qualified Energy Property only if the following
additional requirements are satisfied:
( 1) The property is installed on or in connection with a dwelling unit
located in the United States and, at the time of installation, the dwelling unit is owned and
used by the taxpayer as the taxpayer's principal residence (within the meaning of § 121);
and
(2) The property is originally placed in service by the taxpayer.
.041nstallatioll Costs. The credit is allowed for amounts paid or incurred to
purchase Qualified Energy Property and for expenditures for labor costs properly
allocable to the onsite preparation, assembly, or original installation of the property.
SECTION 6. PAPERWORK REDUCTION ACT
The collection of information contained in this notice has been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork
Reduction Act (44 U.s.c. 3507) under control number 1545-1989.
- 14 An agency may not conduct or sponsor, and a person is not required to respond to,
a collection of information unless the collection of information displays a valid OMB
control number.
The collections of information in this notice are in sections 4 and 5. This
information is required to be collected and retained in order to ensure that property meets
the requirements for the Nonbusiness Energy Credit under § 25C. This information will
be used to determine whether the property for which manufacturers provide certifications
is property that qualifies for the credit. The collection of information is required to obtain
a benefit from manufacturers' certification statements that property qualifies for the
credit. The likely respondents are corporations, partnerships, and individuals.
The estimated total annual reporting burden is 350 hours.
The estimated annual burden per respondent varies from 2 hours to 3 hours,
depending on individual circumstances, with an estimated average burden of 2.5 hours to
complete the requests for certification required under this notice. The estimated number
ofrespondents is 140.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as long
as their contents may become material in the administration of any Internal Revenue law.
Generally, tax returns and tax return information are confidential, as required by 26
U.S.c. 6103.
- 15 -
SECTION 7. DRAFTING INFORMATION
The principal author of this notice is Kelly R. Morrison-Lee of the Office of
Associate Chief Counsel (Passthroughs and Special Industries). For further information
regarding this notice contact Jennifer Bernardini at (202) 622-3120 (not a toll-free call).
page
1
or
1
PRESS ROOM
February 24, 2006
JS-4070
Treasury Assistant Secretary to Hold Weekly Press Briefing
US. Treasury Assistant Secretary for Public Affairs Tony Fratto will hold the weekly
media briefing on Monday, February 27 in Treasury's Media Room. The event is
open to all credentialed media.
Who
Assistant Secretary for Public Affairs Tony Fratto
What
Weekly Briefing to the Press
When
Monday, February 27, 3:00 PM (EST)
Where
Treasury Department
Media Room (Room 4121)
1500 Pennsylvania Ave., NW
Washington, DC
Note
Media without Treasury press credentials should contact Frances Anderson at
(202) 622-2960, or francos.anderson@do.troas.gov with the following information:
name, Social Security number, and date of birth.
http://treas.gov/press/releaBeBlj54()70.htm
3/3/2006
Page 1 ot L
PRESS ROOM
February 24, 2006
JS-4071
CFIUS and the Protection of the National Security in the
Dubai Ports World Bid for Port Operations
History of the Dubai Ports World proposed acquisition of P&O
All members of the Committee on Foreign Investment in the United States (CFIUS)
understand that their top priority is to protect our national security, including
homeland security.
On November 29 of last year, two companies publicly announced a proposed
transaction: Dubai Ports World (DPW), a state-owned company located in the
United Arab Emirates, proposed to acquire The Peninsular and Oriental Steam
Navigation Company (P&O), a British firm that operates in a number of U.S. ports
and other ports around the world. The acquisition would include terminal port
operations at a number of U.S. ports - not the ports themselves. The Department
of Homeland Security (DHS), particularly the Coast Guard and U.S. Customs and
Border Protection, is in charge of port security.
DPW and P&O believed that this proposed transaction could raise national security
issues that should appropriately be reviewed by the U.S. Government. The
companies contacted CFIUS on October 17 and voluntarily told the Committee of
their intention to file a notification with CFIUS for a national security review. They
also held a complete briefing for DHS and other CFIUS members with security,
defense, or law enforcement responsibilities on October 31.
Each of the CFIUS 12 members (departments and agencies) conducts its own
internal analysis. In this case, the Departments of Transportation and Energy were
also brought in to the CFIUS review to widen the scope and to add the expertise of
those agencies reviewing the transaction.
On November 2, well before DP World and P&O filed with Treasury, CFIUS
requested an intelligence assessment of the foreign acquirer. A little more than 30
days later -- still well before the companies formally filed with CFIUS or the review
began -- the intelligence community provided CFIUS with a threat assessment
regarding whether the foreign acquirer -- DPW - has the intention or capability to
threaten U.S. national security.
•
On December 6, the companies held another pre-filing briefing for all CFIUS
agencies.
On December 16, the companies officially filed their formal notice with CFIUS,
requesting a review. The 30-day formal review began on December 17. During
that 3~-day review period, DHS, which is the CFIUS agency with specific expertise
on port security, negotiated an assurances letter with the companies. DHS also
consulted with all other CFIUS members before the assurances letter was finalized
on January 6.
On January 17, roughly 90 days after the parties to the transaction first approached
CFIUS about the transaction and roughly 75 days after a thorough investigation of
the transaction had begun, all CFIUS members agreed that this particular
transaction should be allowed to proceed, pending any other regulatory hurdles
before the companies.
Background on the Committee (CFIUS):
CFIUS operates under the authority granted by Congress in the Exon-Florio
http://treas.gov/press/releaBeB/j54071.htm
3/3/2006
t'age
L
or 2
amendment (Section 721 of the Defense Production Act of 1950).
CFIUS brings together twelve department and agencies with diverse expertise to
ensure that transactions are considered from a variety of perspectives and that all
national security issues are identified and considered in the review of a foreign
acquisition.
The Secretary of the Treasury serves as the Chair of CFIUS. Other CFIUS member
agencies are: The Departments of State, Defense, Commerce, Homeland Security,
and Justice, and the Office of Management and Budget, the Council of Economic
Advisors, the National Security Council, the National Economic Council, the Office
of Science and Technology Policy, and the US Trade Representative.
The Departments of Energy and Transportation, the Nuclear Regulatory Agency,
and other U.S. agencies sometimes participate in the consideration of transactions
that have an impact on the industries under their respective jurisdictions.
Treasury receives notices of transactions, serves as the contact point for the private
sector, establishes a calendar for review of each transaction, and coordinates the
interagency process.
The intelligence community also provides CFIUS with an independent assessment
of whether the foreign acquirer poses a threat to the national security.
Upon receipt of a filing, CFIUS conducts a 30-day review, during which time each
CFIUS member agency conducts its own internal analysis of the effects on national
security implications of the notified transaction, and particularly an analysis of the
foreign acquirer. The agency(ies) with primary concern with a particular transaction
will take the lead in negotiations with the foreign company.
All CFIUS decisions are made by consensus of the entire committee. The review
process allows for any agency that sees a potential threat to the national security,
as is its obligation, to raise those concerns within the review process. In such a
case, an extended 45-day investigation period would commence.
The Exon-Florio amendment prohibits disclosure to the public of any documents or
information about a transaction that is provided to CFIUS or the President pursuant
to Exon-Florio. Federal employees could be subject to cnminal and other sanctions
for making an unauthorized disclosure of such information.
G:ITICFIUS Case 05-60 Dubai-P&OE-F Fact Sheet wit
hltp:lltreas,gov/press/relea8eB/j54071.htrn
3/3/2006
l'age
1
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1
PRESS ROOM
February 26, 2006
JS-4072
CFIUS Welcomes Dubai Ports World's Announcement to Submit to New
Review
The Committee on Foreign Investment in the United States (CFIUS) today
welcomed the announcement by Dubai Ports World (DPW) that it will submit for
review its proposed acquisition of control of U.S. port terminal operations.
Specifically, DPW has asked for a CFIUS review, including the 45-day investigation
under the Exon-Florio amendment, based on a restructured transaction that the
company intends to file with the Committee. Upon receipt of the new notification,
CFIUS will promptly initiate the review process and fulfill DPW's request for a full
investigation.
Over a nearly three-month period starting in October 2005, representatives of the
12 departments and agencies that comprise CFIUS, with assistance from the
Intelligence Community, thoroughly investigated the transaction for national security
concerns. CFIUS brought the Departments of Transportation and Energy into the
review process to widen the scope and expertise of the national security scrutiny.
These agencies will again be invited to participate in this new review process.
Background on CFIUS
CFIUS operates under the authority granted by Congress in the Exon-Florio
amendment (Section 721 of the Defense Production Act of 1950). CFIUS brings
together 12 departments and agencies with diverse expertise to ensure that all
national security issues are identified and considered in the review of a foreign
acquisition.
CFIUS member agencies are: The Departments of Treasury (Chair), State,
Defense, Justice, Commerce, ;;md Homeland Security, as well as the National
Security Council, National Economic Council, United States Trade Representative,
Office of Management and Budget, Council of Economic Advisors, and the Office of
Science and Technology Policy.
The Departments of Energy and Transportation and other U.S. agencies are invited
to participate in the consideration of transactions that have an impact on the
industries under their respective jurisdictions.
-30-
For more information on CFIUS, the DP World Transaction and securing U.S.
ports, please visit the following links:
LINKS
•
•
•
The White House
U.S. Department of the Treasury
U.S. Department of Homeland Security
http: //WWw.treas.gov/preBSIrelell3e3t'js'4012-.htrn
3/3/2006
page
Fact Sheet: The CFIUS Process And The DP World Transaction
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For tmmediate Release
Office of the Press Secretary
February 22. 2006
Fact Sheet: The CFIUS Process And The DP World Transaction
"If there was any chance that this transaction would jeopardize the security of the United States. it would
not go forward. The company has been cooperative with the United States government. The company will
not manage port security, The security of our ports will continue to be managed by the Coast Guard and
Customs. The company is from a country that has been cooperative in the war on terror, been an ally in
the war on terror. The company operates ports in different countries around the world, ports from which
cargo has been sent to the United States on a regular basis."
lim RSS Feeds
- President George W. Bush, February 21, 2006
News by Date
President Bush Strongly Supports The Decision To Move Forward With The DP World Transaction
•February 2006
.January 2006
.December 2005
•November 2005
•October 2005
•September 2005
.August 2005
.July 2005
·June 2005
•May 2005
•April 2005
.March 2005
.February 2005
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•December 2004
·November 2004
·October 2004
.September 2004
•August 2004
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·June 2004
.May 2004
'Apri12004
•March 2004
•February 2004
•January 2004
.December 2003
.November 2003
.October 2003
,September 2003
•August 2003
.July 2003
.June 2003
'May 2003
.Apri12003
·March 2003
•February 2003
.January 2003
.December 2002
.November 2002
.October 2002
'September 2002
'August 2002
·Ju1Y2002
'June 2002
.May 2002
'Afin12002
•March 2002
.February 2002
The Administration, As Required By Law, Has Reviewed The Transaction To Make Certain That It Does
Not In Any Way Jeopardize National Security. Under the process conducted by the Committee on
Foreign Investment in the United States (CFIUS), officials carefully reviewed the national security issues
raised by the transaction and its effect on our national security. Twelve Federal agencies and the
government's counterterrorism experts closely and carefully reviewed the transaction to make certain it
posed no threat to national security .
DP World Has Provided Strong Security Assurances To The United States. DP World has signed a letter
of assurances making commitments to meet and maintain security standards for the port terminals that
they will own and operate in the United States. There are a number of safeguards that are in place in the
agreement, and the American people should feel confident that the transaction will in no way harm the
security of the Nation's ports .
DP World's Bid For The London-Based Peninsular And Oriental (P&O) Steam Navigation Company Was
Announced Last Fall. DP World, a UAE-based commercial entity, is purchasing the U,S. subsidiary of the
London-based P&O Steam Navigation Company. The announcement of DP World's bid for P&O was
made in November 2005, and the news was widely reported in the press and international financial trade
publications. The formal CFIUS process was set into motion in December, and the Federal government
conducted a thorough review to ensure that port security would in no way be compromised by the deal.
The Administration Has Taken A Principled Position Based On The Security Of Our Nation And Careful
Review Of The Transaction. The President has made clear that he stands firmly behind the decision to
allow the DP World transaction to move forward. Preventing this transaction by a reputable company to
go forward after careful review would send a terrible signal to friends and allies that investments in the
United States from certain parts of the world are not welcome .
The Port Security Of the United States Is The Administration's First And Foremost Concern
The Department of Homeland Security (DHS) Is Always In Charge Of The Nation's Port Security, Not The
Private Company That Operates Facilities Within The Ports. Nothing will change with this transaction.
DHS, along with the U.S. Coast Guard, U.S. Customs and Border Protecti.~n, and other Federal
agencies, sets the standards for port security and ensures that all port factllty owners and operators
comply with these standards .
Ittp:IIWWw.whitehoU3e.govlncmlldcZI3~/2006/02120060222-11.html
3/3/2006
. Tfie CFIUS Process A1'ld The DP World 1 ransactlOl1
F3ct Shee(.
•January 2002
•December 2001
•November 2001
• October 2001
•September 2001
•August 2001
.July 2001
.June 2001
.May 2001
.Apri1200 1
•March 2001
.February 2001
•January 2001
Interact
.Ask the White House
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Appointments
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.Application
The Transa?tion Is Not About Port S~curity Or Even Port Ownership, But Only About Operations In Port.
DP World wtll not manage port security, nor will it own any ports. DP World would take on the functions
now performed by the British firm P&O - basically the off- and on-loading of cargo. Employees will still
have to be U.S . cttlzens or legal permanent residents. No private company currently manages any U.S.
port. Rather, private companies such as P&O and DP World simply manage and operate individual
terminals within ports .
Background On The CFIUS Process
The CFIUS Process Was Rigorously Followed, And CFIUS Agencies Carefully Reviewed The
Transaction Ensuring the protection of our national security is the top priority of all members of CFIUS. In
reviewing a foreign transaction, CFIUS brings together 12 Federal agencies with diverse expertise to
consider transactions from a variety of perspectives and identify and analyze all national security issues.
• The Department of the Treasury, which chairs CFIUS, receives notices of transactions, serves as
the contact point for the private sector, establishes a calendar for review of each transaction, and
coordinates the interagency process.
• During the initial 30-day review, each CFIUS member agency conducts its own internal analYSis of
the national security implications of the transaction under review. CFIUS also consults with the
intelligence community. In this case, the Departments of Transportation and Energy were also
brought in to widen the scope and add to the expertise of the CFIUS agencies involved in the
review process.
PHOTO ESS.\ IS
• All CFIUS decisions are made by consensus of the entire committee. The review process allows
any agency that sees a potential credible threat to the national security to raise those concerns.
FEATURES
Federal Facts
.Federal Statistics
• In the course of the review of this transaction, DHS reached an agreement with DP World to
mitigate security concerns.
DP World Has Played By The Rules, Has Cooperated With The United States, And Is From A
Country That Is A Close Ally In the War on Terror. The United Arab Emirates (UAE) has been a
solid partner in the War on Terror. The UAE has been extremely cooperative on counter-terrorism
and counter-proliferation and has provided considerable support to U.S. forces in the Gulf and to
the governments and people of Iraq and Afghanistan.
WeslWing
,History
• The UAE Is A Partner In Shutting Down Terror Finance Networks. The UAE has worked with us to
stop terrorist financing and money laundering, including by freezing accounts, enacting aggressive
anti-money-Iaundering and counter-terrorist financing laws and regulations, and exchanging
information on people and entities suspected of being involved in those actions.
• The UAE Is An Established Partner In Protecting America's Ports. Dubai was the first Middle
Eastern entity to join the Container Security Initiative (CSI) - a multinational program to protect
global trade from terrorism. Dubai was also the first Middle Eastern entity to join the Department of
Energy's Megaports Initiative, a program aimed at stopping illicit shipments of nuclear and other
radioactive material.
Port Security Begins Abroad. U.S. Customs and Border Protection (CBP) created the CSI to
enable CBP to inspect 100% of high-risk containers at foreign seaports before they are loaded
on board vessels destined for the United States. Dubai was the first Middle Eastern entity to join
CSI. Cooperation with Dubai has been outstanding and a model for other operations.
• DP World currently manages 19 container terminals and has operations in 14 countries. The
United States government has a strong working relationship with DP World.
###
http://WWw.whitehouse.gov/newslr dczt~c,,/2006/02120060222-11.htrnl
3/3/2006
Fact Sheet: The CFIUS Process And The DP World Transaction
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3/3/2006
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f
ot 1.
PRESS ROOM
February 24, 2006
JS-4071
CFIUS and the Protection of the National Security in the
Dubai Ports World Bid for Port Operations
History of the Dubai Ports World proposed acquisition of P&O
All members of the Committee on Foreign Investment in the United States (CFIUS)
understand that their top priority is to protect our national security, including
homeland security.
On November 29 of last year, two companies publicly announced a proposed
transaction: Dubai Ports World (DPW), a state-owned company located in the
United Arab Emirates, proposed to acquire The Peninsular and Oriental Steam
Navigation Company (P&O), a British firm that operates in a number of U.S. ports
and other ports around the world. The acquisition would include terminal port
operations at a number of U.S. ports - not the ports themselves. The Department
of Homeland Security (DHS), particularly the Coast Guard and U.S. Customs and
Border Protection, is in charge of port security.
DPW and P&O believed that this proposed transaction could raise national security
issues that should appropriately be reviewed by the U.S. Government. The
companies contacted CFIUS on October 17 and voluntarily told the Committee of
their intention to file a notification with CFIUS for a national security review. They
also held a complete briefing for DHS and other CFIUS members with security,
defense, or law enforcement responsibilities on October 31.
Each of the CFIUS 12 members (departments and agencies) conducts its own
internal analysis. In this case, the Departments of Transportation and Energy were
also brought in to the CFIUS review to widen the scope and to add the expertise of
those agencies reviewing the transaction.
On November 2, well before DP World and P&O filed with Treasury, CFIUS
requested an intelligence assessment of the foreign acquirer. A little more than 30
days later -- still well before the companies formally filed with CFIUS or the review
began -- the intelligence community provided CFIUS with a threat assessment
regarding whether the foreign acquirer -- DPW - has the intention or capability to
threaten U.S. national security.
On December 6, the companies held another pre-filing briefing for all CFIUS
agencies.
On December 16, the companies officially filed their formal notice with CFIUS,
requesting a review. The 30-day formal review began on December 17. During
that 30-day review period, DHS, which is the CFIUS agency with specific expertise
on port security, negotiated an assurances letter with the companies. DHS also
consulted with all other CFIUS members before the assurances letter was finalized
on January 6.
On January 17, roughly 90 days after the parties to the transaction first approached
CFIUS about the transaction and roughly 75 days after a thorough investigation of
the transaction had begun, all CFIUS members agreed that this particular
transaction should be allowed to proceed, pending any other regulatory hurdles
before the companies.
Background on the Committee (CFIUS):
CFIUS operates under the authority granted by Congress in the Exon-Florio
http: //WWw.treas.gov/press!relell3e3fjs4071.htm
3/3/2006
Page 2 or 2
amendment (Section 721 of the Defense Production Act of 1950).
CFIUS brings together twelve department and agencies with diverse expertise to
ensure that transactions are considered from a variety of perspectives and that all
national security issues are identified and considered in the review of a foreign
acquisition.
The Secretary of the Treasury serves as the Chair of CFIUS. Other CFIUS member
agencies are: The Departments of State, Defense, Commerce, Homeland Security,
and Justice, and the Office of Management and Budget, the Council of Economic
Advisors, the National Security Council, the National Economic Council, the Office
of Science and Technology Policy, and the US Trade Representative.
The Departments of Energy and Transportation, the Nuclear Regulatory Agency,
and other U.S. agencies sometimes participate in the consideration of transactions
that have an impact on the industries under their respective jurisdictions.
Treasury receives notices of transactions, serves as the contact point for the private
sector, establishes a calendar for review of each transaction, and coordinates the
interagency process.
The intelligence community also provides CFIUS with an independent assessment
of whether the foreign acquirer poses a threat to the national security.
Upon receipt of a filing, CFIUS conducts a 30-day review, during which time each
CFIUS member agency conducts its own internal analysis of the effects on national
security implications of the notified transaction, and particularly an analysis of the
foreign acquirer. The agency(ies) with primary concern with a particular transaction
will take the lead in negotiations with the foreign company.
All CFIUS decisions are made by consensus of the entire committee. The review
process allows for any agency that sees a potential threat to the national security,
as is its obligation, to raise those concerns within the review process. In such a
case, an extended 45-day investigation period would commence.
The Exon-Florio amendment prohibits disclosure to the public of any documents or
information about a transaction that is provided to CFIUS or the President pursuant
to Exon-Florio. Federal employees could be subject to criminal and other sanctions
for making an unauthorized disclosure of such information.
G:ITICFIUS Case 05-60 Dubai-P&OE-F Fact Sheet wit
http://WWw.treas.gov/pre551relellseJijs4(}71.htm
3/3/2006
DHS I Depvtment of Home1and Se~nty I Fact Sheet: Secunng U.S. Ports
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Fact Sheet: Securing U.S. Ports
Testimony
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The Administration has dramatically strengthened port security since 9/11.
Legislation
Press Kit
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Library
En Espanol
• Funding has increased by more than 700% since September 11, 2001.
• Funding for port security was approximately $259 million in FY 2001.
• DHS spent approximately $1.6 billion on port security in FY 2005.
Following 9/11, the federal government has implemented a multi-layered defense strategy
to keep our ports safe and secure. New technologies have been deployed with additional
technologies being developed and $630 million has been provided in grants to our largest
ports, including $16.2 million to Baltimore; $32.7 million to Miami; $27.4 million to New
Orleans, $43.7 million to New York/New Jersey; and $15.8 million to Philadelphia.
NEWS BY DATE
March 2006
February 2006
January 2006
December 2005
Who Secures The Ports:
U.S. Customs and Border Protection (CBP): CBP's mission is to prevent terrorists and
terrorist weapons from entering the United States by eliminating potential threats before
they arrive at our borders and ports.
November 2005
October 2005
September 2005
CBP uses intelligence and a risk-based strategy to screen information on 100% of cargo
before it is loaded onto vessels destined for the United States. All cargo that is identified as
high risk is inspected, either at the foreign port or upon arrival into the U.S.
August 2005
July 2005
June 2005
May 2005
April 2005
Archive
Coast Guard: The Coast Guard routinely inspects and assesses the security of U.S. ports
in accordance with the Maritime Transportation and Security Act and the Ports and
Waterways Security Act. Every regulated U.S. port facility is required to establish and
implement a comprehensive security plan that outlines procedures for controlling access to
the facility, verifying credentials of port workers, inspecting cargo for tampering,
designating security responsibilities, training, and reporting of all breaches of security or
suspicious activity, among other security measures. Working closely with local port
authorities and law enforcement agencies, the Coast Guard regularly reviews, approves,
assesses and inspects these plans and facilities to ensure compliance.
Terminal Operator: Whether a person or a corporation, the terminal operator is
responsible for operating its particular terminal within the port. The terminal operator is
responsible for the area within the port that serves as a loading, unloading, or transfer
point for the cargo. This includes storage and repair facilities and management offices. The
cranes they use may be their own, or they may lease them from the port authority.
Port Authority: An entity of a local, state or national government that owns, manages and
maintains the physical infrastructure of a port (seaport, airport or bus terminal) to include
wharf, docks, piers, transit sheds, loading equipment and warehouses.
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Ports often provide additional security for their facilities.
The role ~f the P~rt Authority is to facilitate and expand the movement of cargo through the
port, provide facilities and services that are competitive, safe and commercially viable. The
Port manages marine navigation and safety issues within port boundaries and develops
marine-related businesses on the lands that it owns or manages.
A Layered Defense:
Screening and Inspection: CBP screens 100% of all cargo before it arrives in the U.S.using intelligence and cutting edge technologies. CBP inspects all high-risk cargo.
CSI (Container Security Initiative): Enables CBP, in working with host government
Customs Services, to examine high-risk maritime containerized cargo at foreign seaports,
before they are loaded on board vessels destined for the United States. In addition to the
current 42 foreign ports participating in CSI, many more ports are in the planning stages.
By the end of 2006, the number is expected to grow to 50 ports, covering 90% of
transpacific maritime containerized cargo shipped to the U.S.
24-Hour Rule: Under this requirement, manifest information must be provided 24 hours
prior to the sea container being loaded onto the vessel in the foreign port. CBP may deny
the loading of high-risk cargo while the vessel is still overseas.
C-TPAT (Customs Trade Partnership Against Terrorism): CBP created a public-private
and international partnership with nearly 5,800 businesses (over 10,000 have applied)
including most of the largest U.S. importers -- the Customs-Trade Partnership Against
Terrorism (C-TPAT). C-TPAT, CBP and partner companies are working together to
improve baseline security standards for supply chain and container security. (We review
the security practices of not only the company shipping the goods, but also the companies
that provided them with any services.)
Use of Cutting-Edge Technology: CBP is currently utilizing large-scale X-ray and
gamma ray machines and radiation detection devices to screen cargo. Presently, CBP
operates over 680 radiation portal monitors at our nation's ports (including 181 radiation
portal monitors at seaports), utilizes over 170 large scale non-intrusive inspection devices
to examine cargo, and has issued 12,400 hand-held radiation detection devices. The
President's FY 2007 budget requests $157 million to secure next-generation detection
equipment at our ports of entry. Also, over 600 canine detection teams, who are capable
of identifying narcotics, bulk currency, human beings, explosives, agricultural pests, and
chemical weapons are deployed at our ports of entry.
UAE/Dubai Ports World Acquisition
DP World will not, nor will any other terminal operator, control, operate or manage any
United States port. DP World will only operate and manage specific, individual terminals
located within six ports.
• The recent business transaction taken by DP World, a United Arab Emirates based
company, to acquire British company Peninsular and Oriental Steam Navigation
Company (P&O) does not change the operations or security of keeping our nation's
ports safe. The people working on the docks also will not change as a result of this
transaction.
• This transaction is not an issue of controlling United States' ports. It is an issue of
operating some terminals within U.S. ports.
• DP World will operate at the following terminals within the six United States' ports
currently operated by the United Kingdom company, P & 0:
o Baltimore - 2 of 14 total
o Philadelphia - 1 of 5 (does not include the 1 cruise vessel terminal)
o Miami - 1 of 3 (does not include the 7 cruise vessel terminals)
o New Orleans - 2 of 5 (does not include the numerous chemical plant terminals up
and down the Mississippi River, up to Baton Rouge)
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o Houston - 4 of 12 (P&O work alongside other stevedoring* contractors at the
terminals)
o Newark/Elizabeth - 1 of 4
o (Note: also in Norfolk - Involved with stevedoring activities at all 5 terminals, but
not managing a specific terminal.)
*Stevedoring - provides labor, carries physical loading and unloading of cargo.
• P&O and DP World made a commitment to comply with current security programs,
regulations and partnerships to which P&O currently subscribes, including:
o The Customs-Trade Partnership Against Terrorism (C-TPAT);
o The Container Security Initiative (CSI);
o The Business Alliance on Smuggling and Counterfeiting (BASC); and,
o The Megaports Initiative MOU with the Department of Energy.
• All P&O security arrangements will remain intact, including cargo security
cooperation with CBP, compliance with USCG regulations (lSPS and MTSA)
regarding port facilities/terminals, and foreign terminal operations within CSI ports.
• Dubai was the first Middle Eastern entity to join the Container Security Initiative
(March 2005). As a result, CBP officer are working closely with Dubai Customs to
screen containers destined for the U.S. Cooperation with Dubai officials has been
outstanding and a model for other operation within CSI ports.
U.S. Recommended Standards for Container Security Initiative (CSI)
The Container Security Initiative consists of four core elements. These are: (1) establishing
security criteria to identify high-risk containers; (2) pre-screening those containers
identified as high-risk before they arrive at U.S. ports; (3) using technology to quickly prescreen high-risk containers; and (4) developing and using smart and secure containers.
In order to be eligible to participate in CSI, the Member State's Customs Administration
and the seaport must meet the following three requirements:
1.
2.
3.
The Customs Administration must be able to inspect cargo originating, transiting,
exiting, or being transshipped through a country.
Non-intrusive inspectional (Nil) equipment (including gamma or X-ray imaging
capabilities) and radiation detection equipment must be available and utilized for
conducting such inspections. This equipment is necessary in order to meet the
objective of quickly screening containers without disrupting the flow of legitimate
trade.
The seaport must have regular, direct, and substantial container traffic to ports in
the United States.
As part of agreeing to participate in CSI, a Member State's Customs Administration
and the seaport must also:
4.
5.
6.
7.
Commit to establishing a risk management system to identify potentially high-risk
containers, and automating that system. This system should include a mechanism
for validating threat assessments and targeting decisions and identifying best
practices.
Commit to sharing critical data, intelligence, and risk management information with
the United States Customs Service in order to do collaborative targeting, and
developing an automated mechanism for these exchanges.
Conduct a thorough port assessment to ascertain vulnerable links in a port's
infrastructure and commit to resolving those vulnerabilities.
Commit to maintaining integrity programs to prevent lapses in employee integrity
and to identify and combat breaches in integrity.
###
Feb. 22,2006
http://WWW.dhs.goytdh~lidintcTllpplpress Jelease/press _release _ 0865 .xml
3/3/2006
DHSl Department of Homeland Secunty l Fact Sheet: Secunng U.S. Ports
s
s
Home . FAQs
No FEAR
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FirstGov· Accessibility . Site Map
page 4 ot 4
DHS Agencies
U.S. Department of Homeland Security
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3/3/2006
PRESS ROO M
February 27, 2006
JS-4073
The Honorable JohnW. Snow
Prepared Remarks
Credit Union National Association (CUNA)
Government Affairs Conference
Thank you so much for having me here today.
This is the fourth year that I've been able to come to this great conference, and it's
always a pleasure to work with your group.
I meet and work with financial leaders every day, but I can easily say that Credit
Unions have the most heart. Your motto rings true to your culture: "not for charity,
not for profit, but for service."
You do good work: loans to small business, home mortgages, financial education
and working in partnership with the government to fight the financial war on terror.
You were wonderful in your response to hurricane Katrina, in a time when
American's helping each other meant so very much.
Each one of these efforts is critical to our country's economic health and strength,
and I applaud you for doing good while you do business.
I believe I told you last year that this administration understands the basic economic
principle that you get less of anything you tax -- and we don't want less of what you
do. Well, that principle, and that position, remains true today.
We don't want less small-business lending. We don't want fewer home mortgages.
We want a continuation of your tax exemption and we want to continue to have a
strong relationship with a group of financial institutions that are dedicated to their
communities, who want to see their customers educated and financially literate.
And we want to continue working with you as we cut off the flow of blood money to
the terrorists who seek to do our country harm. While hatred fuels the terrorist
agenda, cash helps to make it possible. America's credit unions have shown
tremendous resolve in this fight, and I want to personally thank you for your efforts.
After the 9/11 terrorist attacks, the dark side of the threat we face became terribly
clear, and the U.S. Government needed to focus on protecting itself through
proactive, preventive policies. This shift included the need for greater domestic and
international accountability - including financial accountability. Ensuring the integrity
_ the safety, soundness, and security - of our financial system was viewed clearly as
a national security issue. In this new environment, the private sector had an
obligation not only to facilitate the movement of capital around the world, but also to
prevent that capital from supporting terrorism or crime. And in this charge, you have
been a true partner.
For the U.S. financial sector, this has meant the need to adjust to a more vigilant
mindset. The application of the Bank Secrecy Act (BSA) - prinCipally aimed at
achieving the appropriate level of financial transparency to detect and prevent illicit
financial activities - is absolutely critical. We are, of course, also sensitive to the
burdens on financial institutions and seek to ensure that those burdens are never
unnecessary.
Fighting the financial war on terror also meant the need for acute awareness of the
USA PATRIOT Act (Patriot Act) and applying targeted financial sanctions to ensure
that dirty money is kept out of the U.S. and out of the hands of rogue actors.
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Our efforts are working. We are driving terrorist financiers out of the traditional
financial sector by m~king it harder, costlier and riskier for them to move money.
We are seeing terrorist groups avoiding formal financing channels and instead
reso~ing to riskier and more cumbersome conduits, like bulk cash smuggling. Our
work IS by no means complete, but we've made considerable strides under these
authorities. Our commitment to identifying and disrupting terrorist funding has been
and continues to be very robust.
Our country must be safe in order to be prosperous and create jobs. I emphasized
loans for small-business start-ups and expansions because that leads to job
creation, which is the ultimate goal of a strong economy.
Credit unions have been there for entrepreneurs when they needed you most. You
understand their needs, and our President does, too. When small business needed
tax relief to grow and create new jobs, President Bush responded with reduced
marginal rates, an increase in expensing and a whack at the death tax. Small
business has responded with growth and job creation.
The first time I spoke to this group, you may remember, our economy was
struggling. But look at the U.S. economy today. Looking back, there can be no
question today that well-timed tax relief, combined with responsible leadership from
the Federal Reserve Board, created an environment in which small businesses,
entrepreneurs and workers could bring our economy back from its weakened state
of just a few years ago. Tax relief encouraged investment, which has ultimately led
to job growth. The American economy is now unmistakably in a trend of expansion,
and those trend lines can clearly be traced to the enactment of tax relief.
Early this month we learned that unemployment has fallen from 4.9 percent to 4.7
percent -- lower than the average for the 1970s, 1980s and 19905. Since May of
2003, the economy has created 4.7 million jobs, two million of them in the last year
alone.
In the past two years, the economy has generated about 170,000 jobs per month,
and that includes the two-month slowdown in job growth in the aftermath of
Hurricanes Katrina and Rita. In the past 32 years, new claims for unemployment
insurance have almost never been as low as they have been recently, the only
exception being the peak of the high-tech bubble from November 1999 to June
2000.
Good, steady job growth is no surprise, given that GOP growth was three and a half
percent last year. Private forecasters, like the National Association for Business
Economics and others, are expecting very strong growth to continue this quarter.
Core inflation also remains low, and that's good news for everyone. U.S. equity
markets have risen, and household wealth is at an all-time high. Additionally, real
per capita disposable (after-tax) income has risen by 7.3 percent from 2000 to 2005
and that's very good news for workers.
A recent report on retail sales was yet another unmistakable sign that the U.S.
economy is strong, it is heading in the right direction and Americans are confident.
With a jump of 2.3 percent for January, this was one of the biggest month-to-month
increases in over a decade and a half. That's the kind of number we expect to see
when consumers are confident about the economy and optimistic about the future.
And it is no wonder they are feeling that way, given the strength in the job market.
Independent private-sector forecasts point to continuing good news. Inflationadjusted hourly wages grew 1.6 percent between September and December and
this trend should continue.
Both on leading indicators and a deeper background analysis, the American
economy proves to be on solid footing. The questIOn that those of us In government
must look at now is this: what can we do to continue these POSitive trends?
The answers as I see them: First, keep taxes lower on both incomes and
investment. I sent a letter last week to the conference committee on tax relief
reconciliation urging them to do so.
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I know that, in your .business, you see the economic benefits of investment every
day. Money for business expansion or development improves the communities
where it's invested. So I'm sure it's no surprise to people in this room that since the
implementation of a lower, 15 percent rate on investment capital in May of 2003 we
have seen a remarkable turn-around in the economy. After nine consecutive
declining quarters of real annual business investment, we have had 10 straight
quarters of rising business Investment. This business expansion led to a substantial
increase in employment, as I just mentioned - 4.7 million new jobs. There can be
no question that we need to keep the tax rate on capital gains and dividends where
it is; a tax increase would be a terrible mistake. While many factors contributed to
the improved performance of the economy, the tax reductions on capital have been
at the heart of the progress we have seen.
Lower tax rates on individual income are important because, as the President says,
they let the people make their own decisions about their own money - and
individuals make better financial decisions than governments.
There is also a significant small-business component to lower marginal rates. Since
small-business owners often file their business income on personal forms, lower
marginal rates help this sector that creates two-thirds of the country's net new jobs.
The President is also placing an emphasis on affordable health care, innovation
competitiveness (with an emphasis on education) and reducing our dependency on
foreign energy through new technology. These are all central to keeping our
economy on track for generations to come.
Our economic challenges are not over, of course; we still have plenty of work to do.
Credit unions are in an excellent position to help their customers - both small
businesses and individuals - to afford health-care coverage. You can do that by
offering Health Savings Accounts (HSAs) as a product to your customers.
HSAs are really rising in popularity and I wouldn't be surprised if a lot more of you
are offering them than when I saw you last.
I think HSAs are a great option to have because choosing an HSA over traditional
insurance plans puts patients in charge of their health-care purchasing decisions.
That's why the creation of HSAs was so important - it was historic, really, because
it embraces a philosophy that favors the individual, versus an employer or the
government.
As you know, the President's is proposing to expand HSAs by making premium
costs deductible from income and payroll taxes when purchased by individuals,
raising the cap on the amount of money that can be saved in an HSA and making
the high-deductible insurance plan that accompanies an HSA fully portable.
Congress should help him make that broader vision of HSAs a reality. It would be
very good news for Americans struggling to afford health insurance.
As you know, the President supports this type individual control and ownership in
many areas. He wants to see as many Americans as possible own their own
homes, their own businesses if they want, their own health care and their own
retirement savings.
As credit union operators, you are also dedicated to individual ownership and
savings, so I know the concept is not a new one to you.
You understand as well as anyone in the financial community the benefits that
come from financial ownership and independence. It's one of the reasons you've
been such a great partner in the effort to increase financial literacy in this country.
Of course credit unions have long been known for their strong commitment to
meeting the needs of their members, and you know that financial literacy IS one of
those needs. And I'm proud to say that Treasury has been at t~e forefront of the
cause of financial literacy. Since 2002 Treasury has had an office dedicated to
financial education and more recently I've been pleased to chair the Financial
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Literacy and Education Commission, a group of 20 federal agencies committed to
spreading financial literacy. I'm sure many of you use and link to the Commission's
web site mymoneygov for free financial literacy materials.
We are proud to count the credit union industry as a valued partner in the
continuing efforts to help Americans learn about money. Whether it is saving for a
college education or a first home, learning how to manage credit or avoiding fraud,
financial education is the way so many Americans can live better lives. We hope
your industry continues to playa key role in financial education when Treasury
launches its National Strategy for Financial Literacy this spring. I'd like to see
CUNA and individual credit unions work with us to implement that strategy so we
can help all Americans understand and manage their money.
As with so many other things, we accomplish the most when we work together.
Whether it's fighting terrorists, or teaching teenagers about financial responsibility,
or helping entrepreneurs pursue their American Dreams.
I'm glad to work with the nation's credit unions on all these efforts.
I thank you for the work you do, and the chance to speak to you today.
Have a great conference.
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PRESS ROOM
February 27, 2006
JS-4074
U.S. Treasurer to Visit Denver to Discuss
Competitiveness and the U.S. Economy
U.S. Treasurer Anna Escobedo Cabral will travel to Denver, Colorado Tuesday to
discuss American competitiveness and the President's agenda to maintain the
economy's momentum and ensure that America remains the leader of the global
economy. While in Denver, Treasurer Cabral will visit the 2 nd National Head Start
Hispanic Institute. The following event is open to credentialed media:
WHO
U. S. Treasurer Anna Escobedo Cabral
Treasurer Cabral's bio: http://www.treasury.govlorganization/bios/cabral-e.html
History of the Treasurer's Office: http://wvvwJreas.govlofficesltreasurerfofficehistory .shtml
WHAT
Keynote address to 2nd National Head Start Hispanic Institute
WHEN
Tuesday, February 28, 9:00 a.m. (MST)
WHERE
Denver Convention Center
700 14th Street
Denver, CO
NOTE
Media should RSVP to Darlene Fisher at (301) 512-6592
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Page 1 012
PRESS ROOM
February 27, 2006
2006-2-27 -16-42-42-25294
U.S. International Reserve Position
The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S. reserve assets
totaled $64,959 million as of the end of that week, compared to $64,742 million as of the end of the prior week.
I. Official U.S. Reserve Assets (in US millions)
February 17, 2006
February 24, 2006
64,742
64,959
II
TOTAL.i
I
11. Foreign
Currency Reserves
1
a. Securities
II
I
Of which, issuer headquartered in the U. S.
Euro
11,142
I
II
Yen
10,728
II
I
I
TOTAL
Euro
II
II
21,870
11,113
II
16,131
II
0
1/
II
Yen
I
I
II
TOTAL
I
21,978
10,865
0
0
b. Total deposits with:
b.i. Other central banks and BIS
5,211
10,920
b.ii. Banks headquartered in the U.S.
II
,b.ii. Of which, banks located abroad
II
b.iii. Banks headquartered outside the U.S.
II
II
II
Ib.iii. Of which, banks located in the U.S.
12. IMF Reserve Position 2
13. Special
Drawing Rights (SDRs) 2
14. Gold Stock 3
"II
II
II
II
15. Other Reserve Assets
II
10,903
5,281
I
16,184
0
0
0
II
I
0
0
0
0
7,560
7,587
8,137
II
8,166
11,044
II
II
11,044
0
1/
0
I
I
I
"
II. Predetermined Short-Term Drains on Foreign Currency Assets
February 17.2006
II
I
I
Yen
Euro
Febru~ry
II
II
II
TOTAL
II
II
II
0
I
24, .2006
Yen
Euro
I
TOTAL
0
0
I
II
II
2. Aggregate short and long positions in forwards and futures in foreign currencies vis-a-vis the U.S. dollar:
1. Foreign currency loans and securities
"
[2.8. Short positions
I
II
[2.b Long positions
II
II
~ Other
II
II
0
0
II
II
II
II
II
II
II
0
II
0
I
0
I
I
I
III. Contingent Short·Term Net Drains on Foreign Currency Assets
[
1. Contingent liabilities in foreign currency
1.a. Collateral guarantees on debt due within 1
year
r
February 17. 2006
1I
Euro
I
II
II
Yen
II
II
c=Jc=J1
"
ottp://treas.gov/pr~rclefl3e3120062271€i424225294.htm
"
"
February 24. 2006
II
Euro
TOTAL
II
0
I
II
II
II
II
"
II
Yen
I
II
TOTAL
I
I
0
I
II
II
II
3/3/2006
Page 2 of2
11.b. Other
contingent liabilities
2. Foreign currency securities with embedded
options
[3. Undrawn, unconditional credit lines
@.a With other central banks
3.b. With banks and other financial institutions
[Headqualtered in the U. S.
3.c. With banks and other financial institutions
[Headquartered outside the U.S.
4. Aggregate short and long positions of options
in foreign
[Currencies vis-a-vis the U.S. dollar
II
II
I
II
0
I
0
I
I
I
II
I
II
II
II
II
I
II
I
I
4.a. Short positions
4.a.1. Bought puts
I[
I[
I
II
4.a.2. Written calls
b. Long positions
b.1. Bought calls
14.b.2. Written puts
I
0
I
II
II
0
I
I
II
0
I
II
II
II
I
II
II
I
I
I
II
II
II
II
II
I
II
II
I
I
I
I
I
I
0
Notes:
11 Includes holdings of the Treasury's Exchange Stabilization Fund (ESF) and the Federal Reserve's System Open Market Account
(SOMA), valued at current market exchange rates. Foreign currency holdings listed as securities reflect marked-to-market values, and
deposits reflect carrying values. Foreign Currency Reserves for the latest week may be subject to revision. Foreign Currency
Reserves for the prior week are final.
2J The items, "2. IMF Reserve Position" and "3. Special Drawing Rights (SDRs)," are based on data provided by the IMF and are
valued in dollar terms at the official SDR/dollar exchange rate for the reporting date. The entries for the latest week reflect any
necessary adjustments, including revaluation, by the U.S. Treasury to IMF data for the prior month end.
31 Gold stock is valued monthly at $42.2222 per fine troy ounce.
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Page 1 of 7
PRESS ROOM
February 28, 2006
JS-4075
Assistant Secretary for Financial Institutions Emil Henry
Prepared Remarks
Credit Union National Association (CUNA)
Government Affairs Conference
Good morning. I appreciate you having me here today. When Dan Mica asked me
to speak, I was delighted to accept. He continues to be a great advocate for credit
unions and cares deeply about the mission of CUNA and I appreciate his continued
leadership.
Before assuming my position as Assistant Secretary of the Treasury for Financial
Institutions last October, I had spent more than 20 years on Wall Street. Since
then, I am learning quickly that there are many great organizations - such as CUNA
- working to provide financial services to so many hard working Americans. I would
like to thank you for your hard work in communities all over the United States.
I would like to spend my time here on a few topics. Today, I am thrilled to be able to
announce the creation of a new federal forum to focus on consumer financial
issues. Next, I want to discuss an issue that is important to CUNA and Treasury:
data security and its effect on consumer confidence. I would be negligent if I didn't
add issues that I know are close to your hearts - regulatory burden and National
Credit Union Administration's (NCUA) prompt corrective action (PCA) proposal. But
first, let me start out with a few thoughts on the economy.
General Economic Overview
As we sit here today, I am pleased to say that our economy is robust on so many
levels. And in my travels around the country, I find more and more that the skeptics
about our economy these days are both fewer and a lot quieter. The data are just
too compelling. It's impossible to refute the overwhelming evidence that indicates
our economy is firing on all cylinders. Quickly, let me give you some of these facts:
•
•
Our GDP expanded at a solid 3.5 p""rcent pace last year.
More than 4.6 million new jobs have been created since May of 2003; two
million of them in the last year.
• Unemployment is 4.7 percent, running lower than the 1970s, 1980s and
1990s, payrolls are rising and household wealth is at an all-time high.
• Productivity growth remains strong. Output per hour in the non-farm
business sector has risen at an average annual rate of 3.2 percent since
2001, faster than any five-year period in the 1970s, 1980s or 1990s.
• More Americans than ever own their own homes
• Tax revenues are surging to the highest levels ever
• And inflation-adjusted hourly wages are in fact beginning to rise, growing
1.6 percent between September and December.
• The Dow Jones Industrials at 11,1 OO's touching all time highs
• And our home values reflect underlying growth, low interest rates and
confidence about future economic prospects.
It should be heartening to all of us to think for a moment of how we got to this place
amIdst all the obstacles that stood in our way. Let us spend a minute on some
history, and please indulge me while I give you a perspective on this history from
my former perch on Wall Street.
The President took office in January of 2001, a time when it had become clear that
the lofty valuations of the technology, internet and telecommunications boom that
peaked in early 2000 had been premised on forecasts and assumptions that were
unrealistic and unsustainable. As you all saw in the spike and subsequent drop in
your 401 (k) statements, stock market valuations in the period immediately
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preceding this administration were, indeed, a bubble.
So, it is a f~ct that the President inherited an economy in retrenchment. The
consensus IS that the recession began in March of 2001 tied to the natural process
of squeezing out the excesses and exuberance of the latter 1990s. So, it is just not
credible to Pin the economiC decline of that period on this Administration.
Then of course there were the attacks of September 11th.
As you heard in my introduction, I spent over 20 years on Wall Street as an
Investment banker and manager of investment funds before coming to
Washington. One of the benefits of sitting at a prominent Wall Street firm is that
when you deal ~ith the. largest most sophisticated corporations in the world, you
have a window Into their most sensitive, non-public financial and strategic plans.
You often hold and review the most sensitive forecasts of key indicators such as
earnings and capital spending. You deal directly with CEOs and CFOs and are
privy to their key strategic thinking. Indeed, you help mold it.
When there is a dislocation like September 11 th, investment bankers have a quick
and clear view of how wrenching such a dislocation will be by virtue of their access
to information at the highest level. Let me give you a sense of what we saw.
First, we witnessed a phenomenon across Wall Street referred to as "pencils down"
which means every banker, every lawyer, every consultant, and every financial
service provider simply stopped working on the financial imperatives of corporate
America. Merger negotiations ceased. IPOs came to a full stop. Debt financings
were put on hold.
Then, and as we all know, we witnessed economic activity slow to a snail's pace.
Travelers stopped getting on airplanes, and destination spots of the hotel and
leisure industry saw bookings plummet. And all the attendant spending associated
with these activities slowed demonstrably.
And from that window I mentioned, we slowly began to see a ripple effect as the
strategic plans of industry were adjusted to reflect a new paradigm. Capital
spending was reduced. Expansion was limited. Growth plans were curtailed.
Then, as if a recession followed by an attack impacting trillions of dollars of net
worth were not enough, the markets were dealt further uncertainty: two of their
highest flying, most highly valued, most entrepreneurial, most forward thinking nonbubble companies built in the midst of the bubble were suddenly shown to be pure
fiction. I am speaking of course of Enron and WorldCom. When these companies
were shown to be laden with fraud, the market further suffered.
The impact of this realization on the confidence of our markets cannot be
overstated. I sat in my office in the summer of 2002 and watched the markets react
in full plummet. June and July saw equity prices fall 8-9% each month. Credit
spreads blew out to unprecedented levels. We felt like we had been punched in the
stomach. As an investment manager, there simply was no place to hide.
Enron and WorldCom cast a pall over the markets that impaired investor confidence
and reduced financial asset valuations, resulting in a substantial hit to household
net worth. When it was all said and done, the NASDAQ dropped about 75% from its
peak level in early 2000 to its lowest point in 2002. More broadly, equities did
something they have never done in history: they declined for three years in a row
(2000,2001, and 2002). I would bet there are few in this room without a personal
story of their net worth being impacted by these events.
Of course, Enron and WorldCom like the recession of 2001 were born of the bubble
and, like the recession of 2001, their legacies were inherited by this Administration.
Think once again of the sequence of events: recession and industry retrenchment,
terrorist attacks, further retrenchment, fraud and further retrenchment, market
uncertainty, net worths declining. In response, as you know,the President showed
his fine leadership in 2003 to stem this negative tide by passing the Jobs and .
Growth Act with resulting tax relief. This leadership helped create the Impressive
economic statistic that I mentioned earlier We are fighting hard today to make sure
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that tax relief is permanent to keep our economy on the right track.
One. final note: when this Administration lowered taxes, the hue and cry from our
pohtlcal opponents, of course, was that revenues would decline and that we were
being irresponsible. The opposite happened. Tax receipts at the Treasury for the
past 3 quarters have been at their highest level in recorded history. Tax cuts are not
place? under a mattress or locked in a safe. They are spent, invested or saved--all
of which produces or supports economic activity which, of course, leads to further
tax revenue.
Consumer Forum
So, there is good news in the past and I have some good news to announce today.
The strength of our economy and financial services sector depends on confidence
in the system on the part of consumers. Your unique relationship with your
members and their millions of customers makes this a great opportunity to
announce an exciting new endeavor undertaken by the Treasury Department - the
creation of an interagency forum that focuses exclusively on consumer financial
abuses. The name of this group is simply the Consumer Financial Protection
Forum. The goal of the Forum is straightforward - bring senior Treasury officials,
federal regulators, and state regulators together to share information and discuss
evidence of consumer financial abuse by financial institutions. I am happy to report
that your regulator, the NCUA, is a member of this Forum.
The Forum will provide a mechanism for sharing information about patterns of
abuses, including emerging trends and on-going problems at financial institutions
that are subject to federal or state supervision. The Forum will encourage
discussion about consumer protection issues affecting financial institutions. This
will assure that the most effective and pervasive remedies are pursued. The Forum
will review how consumer complaints are handled by the participating agencies,
including how the process currently operates, and develop suggestions as to how it
can be improved. It will also support public education efforts to help consumers
recognize and avoid abusive practices in the financial institutions arena.
The Forum's first meeting will take place at the Treasury Department next month.
We are excited about this effort and we will keep you apprised of the Forum's
activities.
Data Security
Another critical consumer issue that Treasury plays a key role in is data security.
Consumer confidence in our financial system is enhanced if the operating activities
of our financial system are safe and sound. The crime of identify theft, which can
exploit lax data security, is a growing problem that Significantly undermines
consumer confidence in our financial system.
Let me share some troubling information. Between 9 and 10 million consumers per
year are victims of identity theft. I am one of them. I imagine that others in this
room have had their identities stolen from them. Collectively, Identity theft victims
spend millions of hours trying to restore their records. The Federal Trade
Commission estimated that the costs business IS at least $50 billion. Therefore,
this is a problem that requires our attention.
The President recognized the importance of data security and the threat of identify
theft when he recently noted "the crime of identity theft undermines the basic trust
on which our economy depends." Secretary Snow built on the President's wise
remarks when he stated that identify theft presents the most senous threat to
financial consumers today.
In recognizing the importance of data security to foster c.onsumer confidence,
Treasury has partnered with financial services organizations, financial regulators,
and consumer groups to support prudent and safe personal flOanclal.management
and to provide education and best practices and safeguards against Identity theft.
I think it is fair to say that most agree that data security is important and identify
theft is a seriOUS problem. The more difficult question IS what can and should be
done to address these issues? At the outset, I must note that protecting consumer
information is the responsibility of both businesses and consu,mers. Most of the
legislative attention on this issue revolves around bUSinesses responslblhty, but I
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do not want to ignore the responsibility and opportunity for consumers to protect
their identities. Like many people, I get annoyed when my computer prompts me to
change my password or requires that I use a "powerful" password instead of an
easy-to-remember password like 1-2-3-4-5-6. However, these mild annoyances are
nothl~g when compared to the time and expense necessary to reclaim your identify
oncelts stolen. Consumers cannot ignore their responsibility to protect their
Identities. A person's identity is an incredibly valuable asset. It must be treated as
such.
I brought with me some copies of a DVD that Treasury produced about protecting
yourself from identity theft. It is called "Identity Theft - Outsmarting the Crook". It is
an excellent product, and you can go to our website at www.Treasury.gov to find
out how to get your copy. I encourage you to notify your members of this valuable
tool.
As we approach legislative proposals to strengthen businesses' data security
requirements, we must balance the need to take all reasonable steps to ensure that
people are not unnecessarily vulnerable to identity theft and related frauds with the
need to ensure that government requirements do not inhibit the innovation that is
vital to our free enterprise system.
Data security is a complex issue. The best way to deal with these complexities is a
combination of awareness and education, technology, and an increased interest
and effort to punish those who commit these crimes.
Currently, there are a number of legislative proposals that address these issues.
These proposals put forth interesting ideas that have merit and are worth further
study. However, as we move towards a legislative solution to this complex problem,
we must be mindful of a few important considerations.
First, there can be benefits to establishing a uniform, Federal standard of data
security. This could prevent a fragmented approach to an issue that is clearly of
national importance. Because of the absence of a uniform standard, states are
currently filling the void and adopting their own data security standards. This could
lead to inconsistent rules across multiple jurisdictions. Considering a uniform
standard could standardize the process and reduce undue compliance and
notification costs. Of course, if we consider a uniform standard, we should not
sacrifice substance simply to streamline costs and build in efficiencies.
Second, we should recognize that financial institutions are already highly regulated
and actively supervised entities. Any solution should take this into consideration
and avoid duplicative requirements and unnecessary overlap with current regulatory
regimes.
Third, when determining whether and how to notify an affected party of a data
security breach, many factors should be taken into account. Risk-based
notifications, as opposed to arbitrarily-mandated notifications, might provide
consumers with more meaningful and manageable information.
Of course, businesses have an absolute responsibility to protect the information of
their customers. Thus, businesses must quickly notify their customers if they
believe that their customer will be exposed to fraud. That being said, a highly
prescriptive notification requirement, with no room for judgment, could create a
situation in which consumers become overwhelmed by "defensive" notifications in
situations in which they face no reasonable likelihood of harm. Notifications sent to
satisfy a rigid regulatory requirement could load up a consumer's inbox w~th
information that the consumer does not need or want, Similar to the situation we
currently have with privacy notices. Further, if notifications must be sent out prior to
an institution being able to assess or describe the risk associated With the breach, It
might unnecessarily undermine confidence and exi~ting business relationships, or
disrupt a law enforcement investigation Into the InCident.
Finally it might be premature to consider instant file freeze on demand. An "on
demand" file freeze system allows consumers to lift and impose a credit file freeze
instantly. On its face, this approach appears t~ be el~gant for Its SimpliCity.
However, this approach is extremely resource-IntenSive and could lull consumers
into complacency believing that such a file freeze IS adequate protection against
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fraud. Before we go down this road, should we first examine the data gleaned from
fraud alerts, which were mandated under the Fair and Accurate Credit Transactions
Act in 2003? We must give this system time to work and see what lessons can be
learned from it.
Credit Union Issues
I also want to take the opportunity to discuss how you all - credit unions - enjoy a
special place in the financial institution marketplace by offering access to financial
services to millions of Americans. As you know, credit unions have long provided
their 86 million members with valuable financial services that help them to achieve
financial security and enable them to own their own home, automobile, or
business. As a result of strong local ties, credit unions are uniquely situated to
meet the financial services needs of our Nation's communities and encourage
economic growth, job creation, and savings.
Particularly noteworthy in this regard are credit unions' activities promoting
economic development and financial education in their local communities. Both
your organization and the Treasury Department share a strong commitment to
financial education. Treasury is working hard to fulfill the President's vision of an
Ownership Society and an important part of that is equipping people with the skills
they need to understand their money.
As you probably know, to help make Americans more financially literate, Treasury
set up an Office of Financial Education in 2002. I know several of your members
have worked with that office. Under the FACT Act, that office got another job in
2003 - leading a Commission of 19 other federal agencies tasked with raising the
level of financial literacy nationwide. The Commission launched a federal
government web site & hotline in 2004 dedicated to financial education - the web
site is located at mymoney.gov and the number is 1-888-mymoney. We encourage
you take make use of those resources.
In April, the Commission will be launching a National Strategy for Financial
Literacy. That strategy will recognize the essential role of private sector players,
especially credit unions. I invite you to help Treasury implement this important
policy initiative when we launch it in April.
Currently, there a number of efforts underway in Congress to address unnecessary
regulatory burdens imposed on financial institutions. To promote the efficient
operations of our Nation's financial institutions, it is important that we continue to
evaluate the structure of our regulatory oversight. We need to keep an eye towards
eliminating outdated regulations and unnecessary requirements. At the same time,
we must remain aware of the fundamental purpose of existing regulations, both in
terms of chartering differences among financial institutions and basic safety and
soundness requirements.
We understand that there are a number of regulatory burden relief provisions that
credit unions are concerned about:
•
For example, we understand that FASB's new merger accounting guidance
creates problems for credit unions. The new rule will require credit unions
to use the purchase method for pooling the assets, liabilities, and equity of a
merged institution, thus not allowing the "acquiring" credit union to count the
retained earnings of the "acquired" credit union as part of net worth. Such
an outcome could cause a misstatement of the net worth of the "acquiring"
credit union, and we support a targeted fix of this problem.
• Another example is HR. 749, which would authorize federal credit unions to
provide check cashing and money transfer services to a non-member of the
credit union as long as the individual is within the credit union's field of
membership. This provision could help in Treasury's longstanding efforts to
increase access to money transfer services throughout our Nation's
communities.
• Finally, there have been renewed calls to temporarily waive Prompt
Corrective Action (PCA) requirements for depository institutions in the areas
impacted by Hurricane Katrina. Such a waiver could provide an opportunity
for regulators to fully assess the situation before taking action and time for
financial institutions to develop business plans to restart operations. Of
course, any waiver should not persist beyond such a time frame as is
necessary to evaluate the current situation. should only apply to those
institutions directly affected by the hurricanes, and should preserve the
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power of the depository institution regulators to take other enforcement
actions or apply the actions prescribed under PCA if necessary.
Beyond this type of temporary PCA waiver, another area that often falls under the
regulatory relief heading is the overall reform of the PCA rules that apply to credit
unions. The NCUA, CUNA, and other credit union trade associations have been
actively working to develop proposals that alter credit union capital requirements.
This work has led to a number of positive proposals, such as applying a risk-based
framework to more credit unions and properly accounting for credit unions'
investment in the NCUSIF. Thank you for your hard work on this front.
As you know, credit unions are subject to a higher minimum leverage capital
requirement than is required for other insured depository institutions, and the riskbased capital framework that applies to credit unions operates in a slightly different
manner than the framework for other insured depository institutions. One common
thread in capital requirements across types of financial institutions is that either the
leverage or the risk-based requirement is the binding constraint. While the leverage
requirement is currently the binding constraint for most credit unions, this is also the
case for other insured depository institutions that have a relatively low-risk portfolio
of assets.
While often discussed in the context of PCA, the core issue is the minimum capital
standards that apply to credit unions. The most challenging aspect of this debate is
what to do after the credit unions' investment in the National Credit Union Share
Insurance Fund (NCUSIF) is properly accounted for?
The general rationale for imposing a higher minimum leverage capital requirement
on credit unions is that, unlike many other insured depository institutions, credit
unions can generally only build capital through increases in retained earnings.
Other fadors that have been cited for imposing a higher leverage capital
requirement surround the proper accounting for credit unions' investment in the
NCUSIF and their investments in corporate credit unions.
So, should credit unions be subject to the same minimum leverage capital
requirements as other insured depository institutions?
In considering this and other issues related to credit unions, let me make a few
observations:
•
There are fundamental differences between credit unions and other
depository institutions that lead to different types of treatment across these
institutions. Of course, these fundamental differences support the varied
tax treatment of credit unions. Therefore, I feel comfortable reiterating the
Administration's support of credit unions' tax exemption which is based
firmly on the principle that the business models and organizational
structures of credit unions are different from other insured depository
institutions.
• There are also important differences in the capital structure of credit unions
vis a vis other depository institutions. In general, credit unions can only
raise equity capital by increasing retained earnings. This is an important
feature that is grounded in the cooperative nature of credit unions. Thus,
unlike other depository institutions, credit unions do not have access to
other sources of capital to build a capital cushion when financial conditions
are good. Since the basic goal of a minimum leverage capital requirement
is to encourage financial institutions to maintain sufficient capital levels so
that the PCA requirements are not triggered, this argues for somewhat
differing capital requirements between credit unions and other institutions.
Our analysis of this issue is ongoing and we appreciate the assistance that you
have provided to us thus far.
Conclusion
As you can see, we have a full plate of issues and a lot of work to do in 2006 and
I'm looking forward to continuing the dialogue with you all. Thank you again for the
opportunity to be with you this morning and I would be happy to take any questions
you might have at this time.
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PRESS ROOM
-~
February 28, 2006
JS-4076
Statement of Treasury Secretary John W. Snow
On Gross Domestic Product Growth
"The American economy continues to be on a very solid path of economic growth
and job creation, with low unemployment claims, strong retail sales, orders for core
capital goods continuing to grow at a robust rate and today's upward revision of
fourth-quarter 2005 GOP growth.
"With so much good economic news so far this quarter, it is no surprise that private
forecasters expect solid growth for the first quarter of this year.
"The longer this strong growth path continues, the more Americans will be finding
jobs, so it is critically important that Congress extend the lower tax rates that made
this sustained growth possible. Lower rates on investment capital and income have
helped create over four and a half million new jobs and raise living standards. Now
is not the time to raise taxes."
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PRESS HOOM
10 view or print the fJUI- content on thiS page. download the tree AClol)ec<) AcroIJM',) HeaClerl!<)
February 28, 2006
JS-4077
President's Working Group on Financial Markets Seeks
Comments on Long-Term Availability and Affordability of
Terrorism Risk Insurance
Washington. OC- The Treasury Department, as chair of the President's Working
Group on Financial Markets, is submitting for publication a Notice in the Federal
Register today seeking comments on the long-term availability and affordability of
terrorism risk insurance, including terrorism risk insurance coverage for group life
and for chemical, nuclear, biological, and radiological events. The comment period
closes 45 days after the Notice's date of publication in the Federal Register.
The Terrorism Risk Insurance Extension Act of 2005 was enacted on December 22,
2005. It requires the President's Working Group on Financial Markets, in
consultation with the National Association of Insurance Commissioners,
representatives of the insurance industry, representatives of the securities industry,
and representatives of policy holders, to perform an analysiS regarding the longterm availability and affordability of insurance for terrorism risk, including group life
coverage and coverage for chemical, nuclear, biological, and radiological events.
The Federal Register notice seeks comment from these and any other interested
parties as a means of satisfying the consultation requirement in the most open and
efficient manner. The President's Working Group must report its findings to
Congress by September 30,2006.
The President's Working Group on Financial Markets (established by Executive
Order 12631) is comprised of the Secretary of the Treasury, the Chairman of the
Federal Reserve Board, the Chairman of the Securities and Exchange Commission,
and the Chairman of the Commodity Futures Trading Commission. The Secretary
of the Treasury chairs the President's Working Group.
REPORTS
•
Working Group on Financial Markets
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BILLING CODE 4811-37
DEPARTMENT OF THE TREASURY
Analysis by the President's Working Group on Financial Markets on the long-term
availability and afford ability of insurance for terrorism risk.
AGENCY: Department of the Treasury, Departmental Offices.
ACTION: Notice; request for comments.
SUMMARY: The Terrorism Risk Insurance Extension Act of2005 requires the
President's Working Group on Financial Markets to perform an analysis regarding the
long-term availability and affordability of insurance for terrorism risk, including group
life coverage and coverage for chemical, nuclear, biological, and radiological events.
As chair of the President's Working Group, Treasury is issuing this notice seeking
public comment to assist the President's Working Group in its analysis.
DATES: Comments must be in writing and received by [INSERT DATE THAT IS 45
DAYS AFTER DATE OF PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Please submit comments (if hard copy, preferably an original and two
copies) to Treasury's Office of Financial Institutions Policy, Attention: President's
Working Group on Financial Markets Public Comment Record, Room 3160 Annex,
Department of the Treasury, 1500 Pennsylvania Avenue, N.W., Washington, D.C. 20220.
Because postal mail may be subject to processing delay, we recommend that comments
be submitted by electronic mail to: PWGComments@do.treas.gov. All comments should
be captioned with "President's Working Group on Financial Markets: Terrorism Risk
Insurance Analysis." Please include your name, affiliation, address, e-mail address and
telephone number(s) in your comment. Where appropriate, comments should include a
short Executive Summary (no more than five single-spaced pages). All comments
received will be available for public inspection by appointment only at the Reading
Room of the Treasury Library. To make appointments, please call one of the numbers
below.
FOR FURTHER INFORMATION CONTACT: C. Christopher Ledoux, Senior
Policy Analyst, Office of Financial Institutions Policy, 202-622-6813; or Mario U goletti,
Director, Office of Financial Institutions Policy, 202-622- 2730 (not toll free numbers).
SUPPLEMENTARY INFORMATION: On November 26,2002, the President signed
into law the Terrorism Risk Insurance Act of2002 (Pub. L. 107-297, 116 Stat. 2322)
(hereinafter referenced as "TRIA"). TRIA's purposes are to address market disruptions,
ensure the continued widespread availability and affordability of commercial property
and casualty insurance for terrorism risk, and to allow for a transition period for the
private markets to stabilize and build capacity while preserving state insurance regulation
and consumer protections. Title I of TRIA established a temporary federal program of
shared public and private compensation for insured commercial property and casualty
losses resulting from an act of terrorism, as defined in the Act. TRlA authorized
Treasury to administer and implement the Terrorism Risk Insurance Program (Program),
2
including the issuance of regulations and procedures. As originally enacted, the Program
was to end on December 31, 2005.
Congress subsequently approved and on December 22, 2005, the President signed
into law the Terrorism Risk Insurance Extension Act of2005 (Pub. L. 109-144, 119 Stat.
2660) (the Extension Act). The Extension Act continued the Program for two years until
December 31, 2007, revised several structural aspects ofthe Program, and required an
analysis of the availability and affordability ofterrorism risk insurance. Specifically, the
Extension Act amended Section 108 of TRIA to require the President's Working Group
on Financial Markets, I in consultation with the National Association ofInsurance
Commissioners, representatives of the insurance industry, representatives of the securities
industry, and representatives of policy holders, to perform an analysis regarding the longterm availability and affordability of insurance for terrorism risk, including group life
coverage and coverage for chemical, nuclear, biological, and radiological events. This
Notice seeks comment from these and any other interested parties as a means of
satisfying the consultation requirement in the most open and efficient manner. TRIA, as
amended by the Extension Act, requires the President's Working Group on Financial
Markets to submit a report to Congress on its findings no later than September 30, 2006.
Treasury, on behalf of the President's Working Group, is soliciting comments,
including empirical data and other information in support of such comments, where
appropriate and available, regarding the long-term availabi 1:ty and affordability of
I The President's Working Group on Financial Markets (established by Executive Order 12631) is
comprised of the Secretary of the Treasury (who serves as its Chai~an!, the Chairman ?fthe Federal
Reserve Board, the Chairman of the Securities and Exchange CommissIOn, and the ChaIrman of the
Commodity Futures Trading Commission.
3
insurance for terrorism risk, including terrorism risk insurance coverage for group life
and for chemical, nuclear, biological, and radiological events. We request that submitters
distinguish between risk from foreign and domestic terrorism in their comments. In
addition, we seek and solicit comment in response to the following specific questions:
I.
Long-term Availability and Affordability of Terrorism Risk Insurance
1.1
In the long-tenn, what are the key factors that will detennine the availability and
affordability of terrorism risk insurance coverage? How can these factors be measured
and projected?
1.2
What improvements have taken place in the ability of insurers to measure and
manage their accumulation of terrorism risk exposures? How will this evolve in the longtenn?
1.3
What improvements have taken place in the ability of insurers to price terrorism
risk insurance, including in the development and use of modeling? How will this evolve
in the long-tenn?
1.4
How, if at all, were primary insurers' pricing decisions affected by the anticipated
expiration of TRIA at the end of 2005, particularly for insurance policies extending into
2006 that cover terrorism risk? What role did the pricing and availability of reinsurance
play in those decisions?
1.5
What role do mitigation efforts related to terrorism risk play in an insurer's
underwriting and pricing decisions? How will this evolve in the long-tenn?
4
1.6
What is the current availability of reinsurance to cover terrorism risk? Please
distinguish by line or type of insurance being reinsured and on what basis (treaty or
facultative). How will this evolve in the long-term?
1.7
At what policyholder retention levels are insurance programs being structured to
cover terrorism risk; and, with regard to insurers, how are reinsurance programs likewise
being structured? Please comment on the availability and affordability at each level.
1.8
In the long-term, what are the key factors that will determine the amount of
private-market insurer and reinsurer capacity available for terrorism risk insurance
coverage? How will this evolve in the long-term? Please comment on potential entry of
new capital into insurance markets.
1.9
To what extent have alternate risk transfer methods (e.g., catastrophe bonds or
other capital market instruments) been used for terrorism risk insurance, and what is the
potential for the long-term development of these products?
1.10
To what extent have captive insurance companies been used for terrorism risk
insurance, and what is the potential for the use of captive insurers to insure against such
risk long-term?
1.11
Have state approaches made coverage more or less available and affordable, such
as through permitted exclusions and rate regulation? To what extent will the long-term
availability and affordability of terrorism risk insurance be influenced by state insurance
regulation? Please comment on state approaches to ensure the continued availability and
5
affordability of terrorism risk insurance in the absence of the TRIA Program being inplace (include state approaches after September 11, 2001 and before TRIA became law
on November 24, 2002, as well as state approaches in preparation for the expiration of
the TRIA Program).
1.12
What are the differences in availability and affordability of terrorism risk
insurance between the licensed/admitted market and the non-admitted/surplus lines
market, and, if so, to what degree are those changes attributable to the degree and manner
in which each market is regulated?
1.13
What are the differences in availability and affordability of terrorism risk
insurance coverage for losses at US locations as compared to such coverage for losses at
non-US locations?
n.
Long-term Availability and Affordability of Group Life Insurance Coverage
2.1
What impact, if any, does terrorism risk have on the availability and affordability
of group life insurance coverage to the policy holder (e.g., employer) and certificate
holders (e.g., employees)? How will this evolve in the long-term?
2.2
To what extent is an insurer's decision to issue group life coverage influenced by
aggregation or accumulation risk in certain locations? What steps have group life
insurance providers taken or do they plan to take to offset any aggregation or
accumulation risk?
6
2.3
Has terrorism risk made group life coverage less affordable to the policy or
certificate holder? Have group life insurance rates increased or decreased as compared to
rates before and since September 11, 200 1?
2.4
Please explain how group life insurance coverage may be bundled with other
coverages and benefits provided through an employee-benefits program, and how group
life coverage is priced, either separately or collectively, through such programs. Please
describe any effects competition has on such pricing.
2.5
Are group life providers voluntarily providing coverage for loss oflife arising out
of or resulting from acts of terrorism, or is coverage mandated by any state or federal
laws? Are group life providers prohibited by law from excluding terrorism risk from
group life insurance policies?
2.6
Has terrorism risk affected segments of the group life market differently, such as
in the case of sma1Vmedium sized employers, and if so, why?
2.7
In the long-tenn, what are the key factors that will determine the availability and
affordability of terrorism risk insurance coverage for group life insurance?
ill.
Long-Term Availability and Affordability ofInsurance Coverage for
Chemical, Nuclear, Biological, and Radiological (CNBR)2 Events caused by
Terrorism
3.1
What is the current availability and affordability of coverage for CNBR events,
and for what perils is coverage available, subject to what limits, and under what policy
2 Though
CNBR is commonly used to refer collectively to chemical, nuclear, biological, and radiological
losses comments can be narrow in addressing any of the coverages. If the comment makes such a
distin~tion, please make clear which coverage is being addressed.
7
terms and conditions? Is there a difference in the availability and affordability of
coverage for CNBR events caused by acts ofterrorism?
3.2
What was the general availability of coverage for CNBR events prior to the
terrorist attack of September 11, 2001? To what extent, subject to what limits, and for
what perils was coverage available? Did it cover acts of terrorism?
3.3
If coverage for CNBR events caused by acts of terrorism is available, please
describe generally to what extent (i. e., limits, locations, exclusions, etc.) for what kinds of
insurance and from what types of insurers (i.e., large/ small, admitted/surplus lines, etc.).
How will this evolve in the long-term?
3.4
To what extent is terrorism risk coverage available and affordable for nuclear
facilities and for chemical plants, manufacturers, and industrial chemical users?
3.5
To what extent, both prior to and since September 11,2001, have various states
allowed insurers to exclude coverage for CNBR events? Please comment on
requirements for workers' compensation and fire-following coverage.
3.6
It appears that some insurers are unwilling to provide coverage for CNBR events
caused by acts of terrorism even with the federal loss sharing provided by the TRIA
Program. Why would this be the case given that TRIA limits an insurer's maximum loss
exposure?
3.7
In the long-term, what are the key factors that will detennine the availability and
affordability of terrorism risk insurance coverage for CNBR events?
8
Dated:
Emil W. Henry, Jf.
Assistant Secretary of the Treasury
9
page
I 01 I
PRESS ROOM
February 28, 2006
js-4078
MEDIA ADVISORY:
Treasury Assistant Secretary Warshawsky to Hold "February In Review"
Economic Briefing
U.S. Treasury Assistant Secretary for Economic Policy Mark Warshawsky will hold
a media briefing to review economic indicators from the month of February as well
as discuss the state of the U.S. Economy. The event is open to credentialed
media:
Who
U. S. Treasury Assistant Secretary Mark Warshawsky
What
Economic Media Briefing
When
Thursday, March 2, 2:00 p.m. (EST)
Where
Media Room - Main Treasury
1500 Pennsylvania Ave, NW
Washington, DC
Note
*Media without Treasury press credentials should contact
Frances Anderson at (202) 622-2960, or frances.anderson@do.treas.gov with
the following information: name, Social Security number and date of birth.
http://treas.gov/prc!s/rcicascsljs407 8.htm
3/3/2006
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@FedFRASER