NO.074

Protocol Amending the Australia-United States Of America Double

Taxation Convention

The United States Ambassador to Australia and I have signed a Protocol today that will amend the double taxation convention between Australia and the United States of America for the avoidance of double taxation and the prevention of fiscal evasion.

This Protocol reflects the close economic relations between Australia and the United States and is a major step in facilitating a competitive and modern tax treaty network for companies located in Australia. It will significantly assist trade and investment flows between the two countries.

The Protocol will remove withholding tax on certain dividends, enabling major Australian public companies to bring profits made by their US subsidiaries back to Australia without any further tax being payable. This 0 per cent withholding tax on dividends will provide a benefit to the majority of Australian corporate groups with US operations.

Dividends derived by companies from other direct investment (where the shareholding is 10 per cent or more) will now be subject to 5 per cent withholding tax (compared with the current 15 per cent). The new rules will apply to franked and unfranked dividends and achieve equal treatment between Australia and the United States.

Proposed exemptions from withholding tax for interest paid to financial institutions and governmental bodies will improve Australia’s standing as a financial centre. The reduction in withholding tax on royalties from 10 to 5 per cent will reduce business costs for technology and knowhow. The Protocol will also protect Australia’s rights to tax capital gains.

Other changes include an updated list of taxes covered and a new provision dealing with interposed trusts in relation to permanent establishments. The Attachment provides further details of the Protocol.

The Protocol will enter into force when both countries have formally ratified it. Legislation for this purpose will be introduced in the Australian Parliament as soon as practicable.

Copies of the Protocol are available at offices of the Australian Taxation Office (ATO) and on the ATO’s internet site at: http://www.ato.gov.au under “What’s New in ATOassist”.

CANBERRA

27 September 2001

Contacts: James Kelly (02) 6263 4450

Treasury

ATTACHMENT

The Protocol will amend the existing double tax convention in a number of important respects.

Subject to the exceptions outlined below, dividends, interest and royalties will generally remain taxable in both countries, but with limits on the tax that the source country may charge on residents of the other country who are beneficially entitled to the income.

Dividends

The Protocol provides for a number of broad exceptions to the current limit of 15 percent on dividends. No tax will be chargeable in the source country on dividends where a beneficially entitled company resident in the other country holds 80 per cent or more of the voting power of the company paying the dividends and satisfies public listing requirements in the Limitation on Benefits Article.

A limit of 5 per cent will apply for other company shareholdings of 10 per cent or greater.

These limits will apply to both franked and unfranked dividends.

Consistent with the taxation of dividends, no dividend equivalent taxation will apply to notional distributions of branch profits where a company satisfies the public listing requirements in the Limitation on Benefits Article. A 5 per cent limit will apply for companies if the listing requirements are not met.

No limit will apply to the tax that can be charged by the United States on dividends paid on non-portfolio (at least 5 percent or greater) holdings of Australian residents in United States real estate investment trusts (REITs). In practical terms this means that tax on these dividends will increase from 15 per cent to the current United States domestic law rate of 30 per cent. The 15 per cent rate will be retained for non-portfolio REIT investments made by certain listed Australian property trusts subject to the underlying ownership requirements not exceeding certain levels. Existing investments in REITs by listed Australian property trusts acquired before 26 March 2001 will be protected from the increased rate.

Interest

Source country tax on interest will continue to be limited to 10 per cent. However, no tax will be chargeable in the source country on interest derived by:

· a government body of the other country (including a body exercising governmental functions or a bank performing central banking functions); or

· a financial institution resident in the other country (subject to certain safeguards).

Rules consistent with United States tax treaty policy and practice will allow:

· interest calculated by reference to the profits of the payer to be taxed at a higher 15 per cent rate (ie, at the same rate that generally applies to dividends); and

· tax to be charged on notional intra-entity interest payments between a branch and its head office.

Royalties

The limit on source country taxation of royalties will be reduced from 10 to 5 per cent.

In addition, amounts derived from equipment leasing (including container leasing) will be excluded from the royalty definition. Exclusive residence country taxation will apply to amounts derived from the leasing of containers used for international transport. Amounts derived from other types of equipment leasing will be treated as business profits.

A comprehensive Alienation of Property Article consistent with Australia’s current treaty practice will apply (including a source country sweep-up provision that allows the source country to tax capital gains not otherwise dealt with). New rules will remove double taxation of capital gains in the case of departing residents and ensure that foreign tax credit rules operate effectively for them.

The Protocol will update the existing Convention in various respects in line with Australia’s current tax law and treaty policies and practice. Among these are a revised list of taxes covered by the Convention, a clause to provide that non-resident beneficiaries of a trust will be deemed to have a permanent establishment in Australia if the trust has a permanent establishment, a revised article on shipping and air transport and a revised article on other income.

The Protocol will enter into force when instruments of ratification have been exchanged between Australia and the United States.

In Australia, the process involves the Protocol and a National Interest Analysis being tabled in the Parliament for review by the Joint Standing Committee on Treaties. Legislation will also be required to complete the necessary procedures for entry into force, and a Bill for that purpose will be introduced into Parliament as soon as practicable. In the United States, the signed Protocol will be required to be transmitted to the United States Senate Foreign Relations Committee for its advice and consent to ratification.

Upon entry into force, the Protocol will have effect in Australia for withholding tax purposes in relation to dividends, interest and royalties derived by a resident of the United States on or after the later of 1 July 2003 and the first day of the second month next following the day on which the Protocol enters into force.

In respect of other Australian tax, the Protocol will have effect in relation to income, profits or gains of a year of income beginning on or after 1 July in the calendar year next following that in which the Protocol enters into force.