TREASURY DEPARTMENT TECHNICAL EXPLANATION OF THE AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE PEOPLE'S REPUBLIC OF CHINA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF TAX EVASION WITH RESPECT TO TAXES ON INCOME（三） ARTICLE 18 Government Employees and Pensions 　　This article deals with the taxation of remuneration and pensions paid by the government of a Contracting State with respect to the performance of governmental functions for that State. It is based on the corresponding article in the OECD and UN model draft conventions. 　　Paragraph 1 provides that remuneration paid by the government of a Contracting State or a political subdivision or local authority thereof to an individual for services rendered may be taxed only in that State unless the services are performed in the other State and the individual is either a national of that other State or became a resident of that other State other than solely for the purpose of rendering such services. In the latter case, the remuneration may be taxed only in that other State. For example, the United States may tax the remuneration of an employee of the Embassy of the People's Republic of China if the individual is a U.S. citizen or was a U.S. resident prior to being hired by the Embassy, but it may not tax an employee who was a nonresident alien of the United States when assigned to work at the Embassy. 　　Paragraph 2 provides that a pension paid by or out of funds created by the government of a Contracting State or a political subdivision or local authority thereof to an individual for services rendered may be taxed only in that State unless the individual is both a resident and a national of the other Contracting State. Thus, the United States may tax such a pension paid by the People's Republic of China to a U.S. resident citizen but not to a resident alien. In the latter case, the exemption from U.S. tax is preserved by paragraph 3 of the Protocol. 　　The exemptions provided in this article are limited to remuneration and pensions with　respect to services of a governmental nature. Paragraph 3 explains that services and pensions in government owned business are covered by Article 14, 15, 16, or 17 as the case may be. Whether functions are of a governmental nature is determined by reference to the concept of a governmental function in the State in which the income arises. For example, in the United States, employment by a government-owned airline does not constitute employment of a governmental nature. ARTICLE 19 Teachers, Professors and Researchers 　　This article provides that a resident of a Contracting State who goes to the other Contracting State for the primary purpose of teaching, lecturing, or conducting research at an accredited educational institution or scientific research institution in that other State will be exempt from tax in that other State on the remuneration for such activities for a period of up to three years in the aggregate. Thus, for example, a resident of China who visits the United States to conduct research at the National Institute of Health (NIH) for two years, 1986 and 1987,returns to China for a year, and then comes back for another year of research at NIH in 1989 would be exempt from tax on his NIH remuneration for each of the three years. However, if he stayed at NIH in 1990 or returned at a later time the exemption would no longer be available. 　　The exemption provided in this article is not available if the research is not undertaken in the public interest, but for the private gain of a specific person or persons. 　　This article is excepted from the "saving clause" of paragraph 2 of the Protocol, so its benefits are available to persons who otherwise qualify even if they become U.S. residents. ARTICLE 20 Students and Trainees 　　This article provides that a resident of a Contracting State who goes to the other Contracting State for the purpose of education, training or obtaining technical experience shall be exempt from tax in that other State on payments received from abroad for the purpose of his maintenance, education, or training, grants from a tax-exempt organization, and up to $5,000 per year of income for personal services performed in that other State. These exemptions may be claimed only for the period reasonably necessary to complete the education or training. In some cases, the course of study or training may last less than year. For most undergraduate college or university degrees the appropriate period will be four years. For some advanced degrees, such as in medicine, the required period may be longer, e.g., seven years. 　　This article is excepted from the "saving clause" of paragraph 2 of the Protocol, so its benefits are available to persons who otherwise qualify even if they become U.S. residents. ARTICLE 21 Other Income 　　Paragraph 1 provides that any income of a resident of a Contracting State which is not covered by other articles of the Agreement may be taxed only in that State. Prizes or winnings would be taxable under this article. (However, see also paragraph 3, which permits taxation at source.) 　　Paragraph 2 provides an exception for income (other than income from real property) which is attributable to a permanent establishment or fixed base which the resident maintains in the other Contracting State. Such income, which includes dividends, interest and royalties derived by a resident of a Contracting State from third States which are attributable to a permanent establishment or fixed base of that resident in the other Contracting State, is taxable under the provisions of the Article 7 and 13. The exception for income from real property means that income of a resident of a Contracting State from real property which is situated in a third State may not be taxed by the other Contracting State even if attributable to a permanent establishment of the resident in that other State. 　　Paragraph 3 overrides paragraphs 1 and 2 to permit a Contracting State to tax income derived by a resident of the other Contracting State and not dealt with in the preceding articles, if it arises in that first-mentioned State. ARTICLE 22 Elimination of Double Taxation This article describes the manner in which each country will undertake to avoid double taxation of its residents, and in the case of the United States, its citizens. 　　Paragraph 1 provides that China shall allow a foreign tax credit for income taxes paid to the United States up to the amount of Chinese tax on that income. A credit is also granted for U.S. income tax paid with respect to the profits of a U.S. company out of which dividends are paid to a Chinese company which owns at least 10 percent of the shares of the company paying the dividend. 　　Paragraph 2 provides that the United States, in accordance with its law, shall allow a foreign tax credit for income taxes paid to China by or on behalf of a U.S. resident or citizen and for Chinese income tax paid with respect to the profits of a Chinese company out of which dividends are paid to a U.S. company owning at least 10 percent of the voting rights of the company paying the dividends. For this purpose, the Chinese taxes referred to in Article 2 (paragraph 1(a) and 2) are considered income taxes. The guarantee of a foreign tax credit provided in this paragraph is independent of the statutory grant of a credit under sections 901- 903 of the Code, but the amount of the credit to be allowed is determined in accordance with the limitations provided in the Code, (e.g., section 904(g)). 　　For purposes of applying the foreign tax credit for Chinese taxes provided in this Article, paragraph 3 provides that income derived by a resident of a Contracting State will be deemed to arise in the other Contracting State if such income may be taxed in the other State in accordance with this Agreement. Thus, for example, dividends, interest and royalties which may be taxed by China in accordance with Articles 10, 11 or 12 will be considered Chinese source income. 　　This article is not affected by the "saving clause". Thus, the benefits may be claimed by a U.S. resident or citizen. Alternatively, a U.S. resident or citizen may rely on the rules of the Code. However, the taxpayer may not make inconsistent choices between the rules of the Code and Agreement. ARTICLE 23 Nondiscrimination 　　This article prohibits discriminatory application of the taxes covered by the Agreement. 　　Paragraph 1 prohibits discrimination based solely on nationality. It provides that nationals of a Contracting State, wherever resident, shall not be taxed less favorably or subject to more burdensome requirements connected with taxation in the other Contracting State, the nationals of that other State who are in the same circumstances. U.S. citizens who are not residents of the United States are not in the same circumstances as citizens of China who are not residents of the United States, because nonresident U.S. citizens generally are subject to U.S. tax on their world- wide income whereas nonresident aliens of the United States generally are subject to U.S. tax only on their U.S. income. 　　Paragraph 2 provides that a Contracting State may not impose more burdensome taxes or related requirements on a permanent establishment of an enterprise of the other Contracting State than it imposes on its own enterprises carrying on the same activities. However, when the permanent establishment is maintained by an individual resident of the other State, the State in which the permanent establishment is maintained is not obligated to grant to that individual the same personal allowances it grants to its own residents to reflect differing family responsibilities. 　　Paragraph 3 prohibits discrimination in the matter of deductions. interest, royalties, and other disbursements by a resident of a Contracting State to a resident of the other Contracting State must be deductible for determining taxable profits in that other State under the same conditions as if they had been paid to a resident of the first-mentioned State. The term "other disbursements" is understood to include a reasonable allocation of executive and administrative expenses incurred for the benefit of a group of related enterprises. 　　Paragraph 4 requires that a Contracting State not impose more burdensome taxation on a subsidiary corporation owned by residents of the other State than it imposes on similar corporations which are locally owned. ARTICLE 24 Mutual Agreement 　　This Article provides for cooperation between the competent authorities to resolve problems of double taxation. 　　Paragraph 1 provides that a tax payer who considers that the actions of one or both of the Contracting States may result in taxation not in accordance with the Agreement may present his case to the competent authority of the Contracting State of which he is a resident or, in the case of claims concerning discrimination on the basis of nationality, to the competent authority of the Contracting State of which he is a national. In either case, the claim must be made within three years from the first notification of the action resulting in taxation not in accordance with the Agreement. 　　Paragraph 2 provides that the competent authority to which the case is presented, if it considers the objection to be justified and if it is not itself able to arrive at a solution, shall endeavor to resolve the case through consultation with the competent authority of the other Contracting State. Any agreement reached shall be implemented without regard to any statutory time limits of the Contracting States. Thus, if a Contracting State agrees that its tax was overstated, a refund of the excess tax paid will be made, even though the statute of limitations under domestic law may have expired. The waiver of the statute of limitations applies only for refunds and not for the imposition of additional taxes. 　　Paragraph 3 provides that the competent authorities shall endeavor to resolve by mutual agreement any difficulties or doubts which may arise in the interpretation or application of the Agreement. For example, the competent authorities may agree on the same allocation of income, deductions, credits, or allowances, on the same characterization of items of income, and on a common meaning of terms used in the Agreement. The competent authorities also may consult together to eliminate double taxation in cases not provided for in the Agreement. The authority to consider cases not covered in the Agreement is not a broad grant of authority to expand the scope of the Agreement, but is intended to permit the competent authorities to apply the principles of the Agreement to settle specific cases of double taxation which are not expressly addressed. 　　Paragraph 4 provides that the competent authorities may communicate with each other directly for the purpose of reaching agreements in accordance with this article. ARTICLE 25 Exchange of Information 　　This article provides for exchanges of information between the tax authorities of the two Contracting States to avoid double taxation and prevent fiscal evasion. 　　Paragraph 1 provides that the competent authorities shall exchange such information as is　necessary for carrying out the provisions of the Agreement or of their domestic laws concerning taxes covered by the Agreement, in particular with the objective of preventing tax evasion. Such information may be provided whether or not the requested Contracting State has a tax interest in the case in question. It also provides assurances that information so exchanged will be protected in the same manner as information obtained under domestic laws with respect to secrecy and disclosure. Persons involved in the administration of taxes covered by the Agreement include legislative bodies involved in the administration of taxes and their agents such as, for example, the U.S. General Accounting Office. Information may be disclosed to such persons, subject to the limitations of this article and the domestic law of the respective Contracting State. 　　Paragraph 2 explains that the obligation undertaken in paragraph 1 to exchange information does not require a Contracting State to carry out measures contrary to the laws and administrative practice of either Contracting State, to supply information not obtainable under its laws or in the normal course of its administration, or to supply information which would disclose trade secrets or other information the disclosure of which would be contrary to public policy. ARTICLE 26 Diplomats and Consular Officers 　　This article clarifies that the Agreement does not affect taxation privileges of diplomatic or consular officials under other special agreements or under international law. ARTICLE 27 Entry into Force 　　The Agreement is subject to approval in each Contracting State according to its legal requirements. Each State will notify the other, in writing, through diplomatic channels when those requirements have been completed. The Agreement enters into force on the thirtieth day after the date of the later of such notification. Once it enters into force, its provisions will take effect for income derived during taxable periods of the recipient beginning on or after January 1 of the year following the entry into force. ARTICLE 28 Termination 　　The Agreement remains in force indefinitely unless terminated by one of the Contracting States. Either Contracting State may terminate the Agreement after five years from the date on which it enters into force by giving at least six months prior notice through diplomatic channels prior to June 30. In that event, the Agreement will cease to have effect with respect to income derived during taxable years of the recipient beginning on or after January 1 following the termination date.