April 17, 1984 The Honorable Maxwell M. Rabb Embassy of the United States of America Rome Excellency: 　　I have the honor to refer to the Convention and Protocol between Italy and the United States of America for the avoidance of double taxation with respect to taxes on income and the prevention of fraud or fiscal evasion, signed today at Rome, and I should like to state on behalf of the Government of the Republic of Italy our understanding with respect to an important unresolved issue. It is the position of the Government of Italy that the so-called "unitary apportionment" method used by certain states of the United States to allocate income to the United States offices or subsidiaries of Italian companies results in inequitable taxation and imposes excessive administrative burdens on Italian companies doing business in those states. Under that method, the profit of an Italian company on its United States business is not determined on the basis of arm's length relations but is derived from a formula taking account of the income of the Italian company and its worldwide subsidiaries as well as the assets, payroll, and sales of all such companies. For an Italian multinational company with many subsidiaries in different countries to have to submit its books and records for all of these companies to a United States state in English imposes a costly burden. 　　It is understood that the Senate of the United States has not consented to any limitation on the taxing jurisdiction of the states by treaty and that a provision which would have restricted the use of unitary apportionment in the case of United Kingdom corporations was rejected by the Senate. The Government of Italy continues to be concerned about this issue as it affects Italian multinationals. If an acceptable provision on this subject can be devised, the United States agrees to reopen discussions with Italy on this subject. 　　It is further understood that in the event the methods of taxation employed by states of the United States should change after today's date in such a way as to have a substantial negative effect upon Italian residents, Italy reserves the right to reopen discussions with the United States. 　　It is further understood that if any State or locality of the United States imposes tax on profits of enterprises of Italy from the operation in international traffic of ships or aircraft, Italy may impose its local income tax (ILOR) on such profits of enterprises of the United States, notwithstanding subparagraph 2 (b) (iii) of Article 2 (Taxes Covered) and Article 8 (Shipping and Air Transport). 　　I have furthermore the honor to propose that the present Note and Your Excellency's reply confirming the acceptance by the Government of the United States of America of the above proposals shall be regarded as constituting an agreement between the two Governments concerning the matters above mentioned. 　　Accept, Excellency the renewed assurances of my highest consideration. 　　　　　　　　　　　　　　　　　　　　　　　　　　　Guilio Andreotti 　　　　　　　EMBASSY OF THE UNITED STATES OF AMERICA 　　　　　　　　　　　　　　　　　　　　　　　　　　　　April 17, 1984 No. 330 His Excellency Giulio Andreotti Minister of Foreign Affairs of Italy Excellency: 　　I have the honor to acknowledge receipt of your letter of today's date which reads as follows: 　　"I have the honor to refer to the Convention and Protocol between Italy and the United States of America for the avoidance of double taxation with respect to taxes on income and the prevention of fraud or fiscal evasion, signed today at Rome, and I should like to state on behalf of the Government of the Republic of Italy our understanding with respect to an important unresolved issue. It is the position of the Government of Italy that the so-called "unitary apportionment" method used by certain states of the United States to allocate income to the United States offices or subsidiaries of Italian companies results in inequitable taxation and imposes excessive administrative burdens on Italian companies doing business in those states. Under that method, the profit of an Italian company on its United States business is not determined on the basis of arm's length relations but is derived from a formula taking account of the income of the Italian company and its worldwide subsidiaries as well as the assets, payroll, and sales of all such companies. For an Italian multinational company with many subsidiaries in different countries to have to submit its books and records for all of these companies to a United States state in English imposes a costly burden. 　　It is understood that the Senate of the United States has not consented to any limitation on the taxing jurisdiction of the states by treaty and that a provision which would have restricted the use of unitary apportionment in the case of United Kingdom corporations was rejected by the Senate. The Government of Italy continues to be concerned about this issue as it affects Italian multinationals. If an acceptable provision on this subject can be devised, the United States agrees to reopen discussions with Italy on this subject. 　　It is further understood that in the event the methods of taxation employed by states of the United States should change after today's date in such a way as to have a substantial negative effect upon Italian residents, Italy reserves the right to reopen discussions with the United States. 　　It is further understood that if any State or locality of the United States imposes tax on profits of enterprises of Italy from the operation in international traffic of ships or aircraft, Italy may impose its local income tax (ILOR) on such profits of enterprises of the United States, notwithstanding subparagraph 2 (b) (iii) of Article 2 (Taxes Covered) and Article 8 (Shipping and Air Transport). I have furthermore the honor to propose that the present Note and Your Excellency's reply　confirming the acceptance by the Government of the United States of America of the above proposals shall be regarded as constituting an agreement between the two Governments concerning the matters above mentioned." 　　I have the honor to inform you that the Government of the United States of America is in agreement with the above proposals. 　　Accept. Excellency the renewed assurances of my highest consideration. 　　　　　　　　　　　　　　　　　　　　　　　　　　(s) Maxwell M. Rabb