[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.


