U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1

19–118

" SENATE ! 107TH CONGRESS

2d Session 

TREATY DOC. 

2002

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


E:\Seals\Congress.#13
(III)

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.

(V)

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 

VI

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 property situated 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, 

VII

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 assistVerDate 0ct 31 2002 20:16 Nov 19, 2002 Jkt 019118 PO 00000 Frm 00007 Fmt 7633 Sfmt 6602 E:\HR\OC\TD019.XXX TD019
VIII

ance 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 of the 

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.

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