    [Senate Treaty Document 107-20]
    [From the U.S. Government Publishing Office]

    107th Congress                                             Treaty Doc.
     2d Session                      SENATE                    107-20
    _______________________________________________________________________

    PROTOCOL AMENDING CONVENTION WITH AUSTRALIA REGARDING DOUBLE TAXATION
                       AND PREVENTION OF FISCAL EVASION

                                   __________

                                    MESSAGE

                                      from

                       THE PRESIDENT OF THE UNITED STATES

                                  transmitting

     PROTOCOL AMENDING THE CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED
    STATES OF AMERICA AND THE GOVERNMENT OF AUSTRALIA FOR THE AVOIDANCE OF
     DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO
        TAXES ON INCOME, SIGNED AT CANBERRA ON SEPTEMBER 27, 2001 (THE
                                 ``PROTOCOL'')

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    November 14, 2002.--Protocol 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, a Protocol Amending the Convention Between the
    Government of the United States and the Government of Australia
    for the Avoidance of Double Taxation and the Prevention of
    Fiscal Evasion with Respect to Taxes on Income, signed at
    Canberra on September 27, 2001 (the ``Protocol''). I also
    transmit, for the information of the Senate, the report of the
    Department of State concerning the Protocol.
        The Convention, as amended by the Protocol, would be
    similar to recent tax treaties between the United States and
    other developed nations. It provides maximum rates of tax to be
    applied to various types of income and protection from double
    taxation of income. The Convention, as amended by the Protocol,
    also provides for resolution of disputes and sets forth rules
    making its benefits unavailable to residents that are engaged
    in treaty shopping.
        I recommend that the Senate give early and favorable
    consideration to this Protocol, and that the Senate give its
    advice and consent to ratification.

                                                        George W. Bush.

                              LETTER OF SUBMITTAL

                                  ----------

                                        The Secretary of State,
                                      Washington, DC, November 5, 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 Protocol Amending the Convention Between
    the Government of the United States of America and the
    Government of Australia for the Avoidance of Double Taxation
    and the Prevention of Fiscal Evasion with Respect to Taxes on
    Income, signed at Canberra on September 27, 2001 (``the
    Protocol'').
        The proposed Protocol to the Income Tax Convention with
    Australia was negotiated to bring the existing Convention,
    concluded in 1982, up to date and in closer conformity with the
    1996 U.S. Model Income Tax Convention, while also incorporating
    some provisions found in the Australian Model Income Tax
    Convention. The Convention, as amended by the Protocol, would
    continue to provide for maximum rates of tax to be applied to
    various types of income, protection from double taxation of
    income, and exchange of information, along with more detailed
    rules making its benefits unavailable to persons that are
    engaged in treaty shopping. The withholding tax rates on
    investment income in the proposed Protocol are the same or
    lower than those in the existing Convention.
        New withholding rates are applicable to certain dividends,
    pursuant to Article 6 of the proposed Protocol, which replaces
    Article 10 of the existing Convention. Whereas the existing
    Convention allows for taxation at source of a maximum rate of
    15 percent on all dividends, the proposed Protocol provides for
    a maximum withholding tax rate of 5 percent on direct dividends
    meeting a 10-percent ownership threshold (consistent with the
    U.S. Model Convention) and a maximum withholding tax rate of
    zero on dividends from certain 80-percent owned corporate
    subsidiaries. Portfolio dividends will continue to be subject
    to a maximum withholding tax rate of 15 percent.
        The withholding tax on interest payments would be
    eliminated in two key cases, under Article 7 of the proposed
    Protocol, which replaces Article 11 of the existing Convention.
    Interest that is derived by a financial institution which is
    unrelated to and dealing wholly independently with the payor
    and interest paid to governmental entities will be exempt from
    withholding tax at source. All other types of interest
    (including interest received by financial institutions in back-
    to-back loans or their economic equivalent) will continue to be
    subject to withholding tax at a maximum rate of 10 percent as
    prescribed in the existing Convention.
        The proposed Protocol (Article 8) also reduces the maximum
    level of withholding tax on royalty payments from the 10-
    percent rate in the existing Convention to a 5-percent rate.
    Consistent with the U.S. Model Convention, the proposed
    Protocol also modifies the existing Convention so that payments
    for the use of or the right to use any industrial, commercial
    or scientific equipment will be taxed as business profits which
    are not subject to withholding tax. The existing Convention
    treats this type of rental income as a royalty subject to a
    maximum 10-percent withholding tax rate.
        The reduced withholding rates described above do not apply
    if the beneficial owner of the income is a resident of one
    Contracting State who carries on business in the other
    Contracting State and the income is attributable to a permanent
    establishment or fixed base situated in that other State. If
    the income is attributable to a permanent establishment, it
    will be taxed as business profits, and, if the income is
    attributable to a fixed base, it will be taxed as a payment for
    independent personal services.
        The maximum rates of withholding tax described in the
    preceding paragraphs will be subject to the standard anti-abuse
    rules for certain classes of investment income found in other
    U.S. tax treaties and agreements.
        Articles 5 and 9 of the proposed Protocol bring the
    existing Convention's treatment of income from the operation of
    ships, aircraft and containers in international traffic closer
    to that of the U.S. Model Convention. The proposed Protocol
    provides for exclusive residence-country taxation of profits
    from the rental of ships and aircraft on a bareboat basis when
    the income is incidental to the international operation of
    ships or aircraft by the lessor. All income from the use,
    maintenance or rental of containers used in international
    traffic likewise is exempt from source-country taxation under
    the proposed Protocol.
        The proposed Protocol (Article 2) resolves a case of
    potential double taxation that has arisen under the existing
    Convention by clarifying that Australia's tax on capital gains
    is a covered tax for purposes of the Convention. As a result,
    the income re-sourcing rules of Article 27 (Miscellaneous) of
    the Convention will apply to capital gains taxed by Australia.
    In most other cases, the proposed Protocol preserves the
    existing Convention's tax treatment of capital gains, while
    incorporating some aspects of Australia's domestic law
    regarding expatriation. The proposed Protocol (Article 9)
    provides rules that coordinate both countries' tax systems with
    respect to these expatriation rules.
        The existing Convention preserves the U.S. right to tax
    former citizens whose loss of citizenship had, as one of its
    principal purposes, the avoidance of tax. The proposed Protocol
    (Article 1) expands this right to include former long-term
    residents whose loss of such status had, as one of its
    principal purposes, the avoidance of tax. Therefore, the United
    States may fully apply section 877 of the Internal Revenue Code
    as amended in 1996.
        Article 10 of the proposed Protocol replaces Article 16 of
    the existing Convention with significant new anti-treaty-
    shopping rules, making the benefits of the amended Convention
    unavailable to persons engaged in treaty shopping.
        The Protocol is subject to ratification. In accordance with
    Article 13, it will enter into force when the instruments of
    ratification are exchanged. It will have effect, with respect
    to taxes withheld at source, on the later of the first day of
    the second month next following the exchange of instruments, or
    July 1, 2003. The effective date for other types of Australian
    taxes is for years of income beginning on or after the first
    day of July in the calendar year next following the exchange of
    instruments. The effective date for other types of U.S. taxes
    is for taxable periods beginning on or after the first day of
    January in the calendar year next following the exchange of
    instruments.
        The Department of the Treasury and the Department of State
    cooperated in the negotiation of the Protocol. It has the full
    approval of both Departments.
                Respectfully submitted,
                                                       Colin L. Powell.

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