Protocol Amending Convention with Australia Regarding Double Taxation and Prevention of Fiscal EvasionSenate Consideration of Treaty Document 107-20

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