    [Senate Treaty Document 107-19]
    [From the U.S. Government Publishing Office]

    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'')

     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.