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T.Doc.107-20 PROTOCOL AMENDING CONVENTION WITH AUSTRALIA REGARDING DOUBLE TAXATION ...
107th Congress Treaty Doc. SENATE 2d Session 107-19 _______________________________________________________________________ CONVENTION WITH GREAT BRITAIN AND NORTHERN IRELAND REGARDING DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION __________ MESSAGE from THE PRESIDENT OF THE UNITED STATES transmitting CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL GAINS, SIGNED AT LONDON ON JULY 24, 2001, TOGETHER WITH AN EXCHANGE OF NOTES, AS AMENDED BY THE PROTOCOL SIGNED AT WASHINGTON ON JULY 19, 2002 (THE ``CONVENTION'') <GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT> November 14, 2002.--Convention was read the first time, and together with the accompanying papers, referred to the Committee on Foreign Relations and ordered to be printed for the use of the Senate LETTER OF TRANSMITTAL ---------- The White House, November 14, 2002. To the Senate of the United States: I transmit herewith, for Senate advice and consent to ratification, the Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, signed at London on July 24, 2001, together with an exchange of notes, as amended by the Protocol signed at Washington on July 19, 2002 (the ``Convention''). I also transmit the report of the Department of State concerning the Convention. The proposed Convention transmitted herewith would replace the Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, signed at London on December 31, 1975, as modified by a subsequent agreement and protocols. This Convention, which is similar to tax treaties between the United States and other developed nations, provides for maximum rates of tax to be applied to various types of income, protection from double taxation of income, and for the exchange of information. The Convention also contains rules making its benefits unavailable to persons who are engaged in treaty shopping. The proposed Convention is the first U.S. income tax convention to provide a zero rate of withholding on certain direct investment dividends. I recommend that the Senate give early and favorable consideration to this Convention, and that the Senate give its advice and consent to ratification. George W. Bush. LETTER OF SUBMITTAL ---------- Secretary of State, Washington, October 7, 2002. The President, The White House. The President: I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, the Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on income and on Capital Gains, signed at London on July 24, 2001, together with an exchange of notes, as amended by the Protocol signed at Washington on July 19, 2002 (``the Convention''). This Convention would replace the current convention between the United States of America and the United Kingdom of Great Britain and Northern Ireland signed at London on December 31, 1975, as modified by a subsequent agreement and protocols. This proposed Convention generally follows the pattern of the U.S. Model Tax Treaty while incorporating some features of the OECD Model Tax Treaty and recent U.S. tax treaties with developed countries. There are, however, as with all bilateral tax conventions, some variations from these norms. In the case of proposed Convention, these differences reflect particular aspects of U.K. law and treaty policy, the interaction of U.S. and U.K. law and U.S.-U.K. economic relations. The proposed Convention provides for maximum rates of tax to be applied to the various types of income, protection from double taxation of income, and exchange of information. It also contains rules making its benefits unavailable to persons who are engaged in treaty shopping. Like other U.S. tax conventions, this Convention provides rules specifying when income that arises in one of the countries and is derived by residents of the other country may be taxed by the country in which the income arises (the ``source'' country). In terms of taxation of investment income, the proposed Convention is the first U.S. income tax convention to provide a zero rate of withholding on certain direct investment dividends (i.e., those from certain 80 percent owned corporate subsidiaries) (Article 10). The zero rate also applies to dividends owned by pension plans. Otherwise, the withholding rates on investment income are essentially the same as those in the U.S. Model Treaty, the existing U.S.-U.K. convention and, in most respects, recent U.S. treaties with OECD countries. Dividends from direct investment that are not eligible for the zero rate are subject to withholding tax by the source country at a maximum rate of 5 percent. The ownership threshold for direct investment is 10 percent. Portfolio dividends are taxable at a maximum rate of 15 percent. Dividends paid by non- taxable conduit entities, such as Real Estate Investment Trusts, are subject to special rules to prevent these entities from obtaining lower tax rates on income than would otherwise apply. In the proposed Convention (Articles 11 and 12), interest and royalties arising in one State and derived by a resident of the other State are generally subject to taxation only by the residence country. Like the existing convention, the proposed Convention contains special rules to account for the U.K. remittance tax system (Article 1), which taxes certain U.K. residents on income earned outside that country only when such income is repatriated to the United Kingdom. As with the U.S. and OECD Models, the proposed Convention (Article 7) provides generally for the taxation by one State of the business profits of a resident of the other State only when such profits are attributable to a permanent establishment located in that first State. The proposed Convention will also accommodate a provision of the 1986 Tax Reform Act that attributes to a permanent establishment income that is earned during the life of the permanent establishment, but is deferred, and not received until after the permanent establishment no longer exists. Although not found in the U.S. Model or most U.S. income tax treaties, the proposed Convention confirms that, as a result of the combination of U.S. law and the Convention, the United States generally will not impose the excise tax on insurance policies issued by foreign insurers if the policy premiums are derived by a U.K. enterprise. As do all recent U.S. treaties, this Convention preserves the right of the United States to impose its branch taxes in addition to the basic corporate tax on a branch's business income. Consistent with U.S. treaty policy, the proposed Convention (Article 8) permits only the country of residence to tax profits from international carriage by ships or aircraft and income from the use, maintenance or rental of containers used in international traffic. The reciprocal exemption also extends to income from the rental of ships and aircraft if the rental income is incidental to income from the operation of ships and aircraft in international traffic. However, income from the international rental of ships and aircraft that is not incidental to operation of ships and aircraft in international traffic is treated as business profits. Separately, the proposed Convention 21) generally addresses offshore exploration and exploitation activities in the same manner as the existing convention and certain other U.S. income tax conventions. In terms of taxation of gains, the proposed Convention (Article 13) generally provides for resident-based taxation while preserving the non-exclusive right of the State of source to tax gains attributable to the alienation of real propertysituated in that State. This will permit the United States to apply U.S. tax law to tax gains derived by a resident of the United Kingdom that are attributable to the alienation of real property situated in the United States. The taxation of income from the performance of personal services under the proposed Convention (Articles 14 through 16) is essentially the same as under recent U.S. treaties and the OECD Model, but income from independent person services is now categorized as business profits (making it subject to the permanent establishment concept detailed in Article 5). Accordingly, unlike the U.S. Model, the Convention contains no separate article regarding the treatment of independent personal services. This change simplifies the Convention. The Convention does include provisions for income earned in government service and by students and teachers (Articles 19, 20, and 20A). The rules for the taxation of pension income under the proposed Convention (Articles 17 and 18) contain a variation from the rules found in the existing convention and the U.S. Model in order to provide better coordination between the treatment of U.S. pension plans and those in the United Kingdom. Coordinating provisions also apply to earnings and accretions of pension plans and to cross border contributions to pension plans. Finally, unlike the U.S. Model, the new Convention would extend benefits for cross border pension contributions to U.S. citizens residing in the United Kingdom who contributes to U.K. pension plans. The proposed Convention contains in Article 23 (Limitation on Benefits) comprehensive rules, such as are found other recent U.S. tax treaties, to deny the benefits of the Convention to persons that are engaged in treaty shopping. In addition, the new Convention limits the availability of certain treaty benefits obtained through ``conduit arrangements'' (defined in Article 3) involving the payment of insurance premiums, dividends, interest, royalties, or other income. The conduit test is not contained in the U.S. or OECD Models; it is designed to allow the United Kingdom to combat treaty-shopping transactions that would not otherwise be caught by the Limitation on Benefits provision of the Convention. Although U.K. law does not provide sufficient protection against such transactions, U.S. law does, and the Treasury Department will interpret the term ``conduit arrangement'' in a manner consistent and co-extensive with existing U.S. tax avoidance doctrines and measures. In another anti-abuse provision, the proposed Convention in Article 1 generally gives both the United States and the United Kingdom the right to tax former citizens and long-term residents for ten years following the loss of such status, where the loss of citizenship/residence was principally done for the avoidance of tax. In terms of relief from double taxation (Article 24), the proposed Convention is consistent with the U.S. and OECD Models. Like the existing convention, the proposed Convention contains a resourcing rule, ensuring that a U.S. resident can obtain a foreign tax credit for U.K. taxes paid when the Convention gives the United Kingdom primary taxing rights. The proposed Convention broadens the credit available for the U.K. Petroleum Revenue Tax from the existing convention in a manner consistent with current U.S. domestic law, but caps it at the amount of tax attributable to income derived from sources with the United Kingdom. The proposed Convention provides for non-discriminatory treatment (i.e., national treatment) by one country to residents and nationals of the other (Article 25). Also included in the proposed Convention are the normal rules necessary for administering its provisions, including rules for the resolution of disputes under the treaty and the exchange of information, as well as a provision on assistance in collection of taxes that is similar to the provision in the existing convention (Articles 26 and 27). The proposed Convention will enter into force upon the exchange of instruments of ratification (Article 29). It will have effect, in respect of taxes withheld at the source, for amounts paid or credited on or after the first day of the second month next following the date on which the Convention enters into force. In the United States, its provisions will have effect, in respect of other taxes, for taxable periods beginning on or after the first day of January next following the date on which the Convention enters into force. The provisions of the Convention will have effect in the United Kingdom, in respect of other income taxes and capital gains, for any year of assessment beginning on or after the sixth day of April next following the date on which this Convention enters into force; in respect of corporation taxes, for any financial year beginning on or after the first day of April next following the date on which the Convention enters into force; and in respect of petroleum revenue tax, for chargeable periods beginning on or after the first day of January next following the date on which the Convention enters into force. Taxpayers may elect to continue to apply the provisions of the existing convention in its entirety for one additional year where it affords a more favorable result. Special provisions are also included to further extend this transition period for students. The new Convention will remain in force until terminated by one of the Contracting States (Article 30). Either State may terminate the Convention by giving at least six months prior notice through diplomatic channels. The proposed Convention is accompanied by an exchange of notes, which will be an integral part of the Treaty. The exchange of notes clarifies and supplements the proposed Convention. A technical memorandum explaining in detail the provisions of the proposed Convention will be prepared by the Department ofthe Treasury and will be submitted separately to the Senate Committee on Foreign Relations. The Department of the Treasury and the Department of State cooperated in the negotiation of the Convention. It has the full approval of both Departments. Respectfully submitted, Colin L. Powell. <GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>
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