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'') [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 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. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]