MODEL TREATY ARTICLE SHOULD EXTEND TO INLAND TRANSPORT OF CONTAINERS IN INTERNATIONAL TRAFFIC UNDER TREATY WITH BRAZIL, SAYS CSX CORP.

SUMMARY: Joel W. Pangborn, associate tax counsel for CSX Corp., Iselin, N.J., has suggested that the income tax treaty being negotiated with Brazil should make it clear that the provisions of the transportation article of the U.S. model treaty extend to revenue derived from the inland transportation of containers in international traffic and from the performance of ancillary services related to the movement of containers in international traffic. Exempting this type of income from host country taxation, he writes, is beneficial because it simplifies tax administration for the tax authorities of both treaty partners and their resident taxpayers. Pangborn also submits proposed language for addition to the treaty.

On behalf of Sea-Land Service, Inc., a wholly owned subsidiary of CSX Corporation, I would like to submit the attached suggested language for inclusion in the proposed transportation article of the income tax treaty (or the explanatory notes related thereto) which soon will be negotiated with Brazil. This language is intended to expand upon the general language used in the transportation article of the U.S. model treaty, to make it clear that the provisions of the article extend to revenue derived from the inland transportation of containers in international traffic and from the performance of ancillary services related to the movement of containers in international traffic. (Exempting such income from host country taxation is beneficial because, among other reasons, it simplifies tax administration for the tax authorities of both treaty partners and their resident taxpayers.) To the best of our knowledge, this is the interpretation which the United States presently accords to foreign shipping companies from treaty countries which are engaged in business in this country. Our experience overseas indicates that clarifying language of this nature is necessary to insure that U.S. carriers receive equivalent treatment from our treaty partners.

If you have any questions, please feel free to call me at 201- 603-2496.

Sincerely,

(2) For purposes of this Article, profits from the operation in international traffic of ships or aircraft include profits derived from the rental on a bareboat, time, voyage, space, slot, or other charter basis of ships or aircraft if operated in international traffic by the lessee or if such rental profits are incidental to other profits described in paragraph (1).

(3) Profits of an enterprise of a Contracting State:

(a) derived from the use, maintenance, or rental of containers (including trailers, barges, and related equipment for the transport of containers) used for the transportation in international traffic of goods or merchandise;

(b) derived from the alienation of ships, aircraft, or containers (including trailers and related equipment for the transport of containers) to the extent such profits are incidental to the operation in international traffic of ships or aircraft; and

(c) derived from services directly related to the use of ships or aircraft (e.g., terminal, stevedoring, cargo handling, and similar services) which are performed by any person engaged in the operation in international traffic of such ships or aircraft,

shall be taxable only in that State.

(4) The provisions of paragraphs (1) and (3) shall apply also to profits from the participation in a pool, a joint venture, a joint service arrangement (including the use of slot charters or space charters to perform contracts of carriage) of an international operating agency.

(5) For purposes of paragraph (1), the term "profits" shall include profits which an enterprise derives from the international operation of ships and aircraft generated by the inland transportation of cargo when the inland transport is an extension of the international journey, irrespective of whether the cargo is transported inland by that person or by a third party under contact with or on behalf of that person.