[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.