What to Expect in the New US-Canada Treaty
The US-Canada treaty has been under active negotiation for some time, and it is expected that a new treaty will be signed in the near future. Given recent developments in US treaty policy, further reductions in cross-border withholding taxes seem likely. Provisions that address the increasing mobility of both individuals and corporations are also expected.
The US-Canada treaty, which was signed on September 26, 1980, has been amended four times, most recently by a protocol signed on July 29, 1997.(1) The treaty also has been under active negotiation since 1998, with negotiations held most recently the week of March 26, 2001. Among many observers, the sense is that a new treaty is not far away.
The question, then, is what the new treaty will provide. Crystal balls are difficult to come by, and can be put to more profitable use, but recent trends in US treaty policy as may be discerned in US treaties with the United Kingdom and Australia, suggest the likelihood of lower withholding taxes, including a complete exemption from US withholding tax on dividends paid by certain US subsidiaries to Canadian parent corporations. Provisions that prevent abuse by "dual-resident companies" and limit double taxation of mobile executives and other employees should also be expected.
The Treaty
The treaty, as now in force, is typical in many respects of US treaties. The lowest withholding rate on dividends, generally available to a corporate owner of 10 percent of the voting stock of the corporation paying the dividends, is 5 percent.(2) Prior to recent developments, this was the lowest rate to which the US had ever agreed. Dividends that do not qualify for the 5 percent rate may generally be taxed at a rate not in excess of 15 percent.(3)
The rate applicable to holders of shares in US real estate investment trusts ("REITs") generally is not limited.(4) An individual who holds an interest of less than 10 percent in a REIT, however, will be subject to tax at a maximum rate of 15 percent on dividends paid by the REIT.(5)
The treaty expressly authorizes the imposition of a second-level tax on branch profits, for example, the US branch profits tax ("BPT").(6) The second-level branch tax may not, however, be imposed at a rate in excess of 5 percent. For the purpose of this rule, branch profits are determined after allowance for certain loss carryovers and a US $500,000 exemption.(7) Such allowances for determining branch profits are unusual in US treaties.
Interest and royalties generally may be subject to a withholding tax of 10 percent, although a complete exemption applies in certain circumstances.(8) For example, interest paid to a contracting state, or political subdivision thereof, is exempt from withholding tax.(9) In addition, a complete exemption generally applies to copyright royalties and payments for the use of, or the right to use, computer software, patents, and knowhow.(10)
Like most US tax treaties, the treaty contains a limitation-on-benefits ("LOB") provision, designed to prevent "treaty shopping" by residents of third countries. Under the LOB provision, a Canadian corporation (or trust) generally can qualify for treaty benefits only if it satisfies a "publicly traded" test(11) or an ownership and "base erosion" test.(12)
If neither of these tests is satisfied, a Canadian corporation can qualify for treaty benefits with respect to a given item of income if (1) the income is derived in connection with (or incidental to) an active Canadian business that satisfies certain requirements (the "active conduct of a trade or business" test)(13) or (2) the corporation satisfies a "derivative benefits" test.(14)
Finally, if none of the other tests is satisfied, a Canadian entity may qualify for treaty benefits if the US competent authority determines, in its discretion, that the entity's creation and existence did not have a principal purpose of obtaining treaty benefits that would not otherwise be available and that denial of treaty benefits would be inappropriate the ("discretionary determination" test).(15)
The LOB provisions of the treaty are not reciprocal, although Canada apparently reserves the power to deny treaty benefits in abusive situations.(16)
The Proposed UK Treaty
On July 24, 2001, the United States and the United Kingdom signed a new income tax treaty, together with accompanying diplomatic notes.(17)
The proposed UK treaty will enter into force after it is approved by the US and UK legislatures and instruments of ratification are exchanged. Selected provisions of the proposed UK treaty are described below.
Dividend Withholding Tax
The most noteworthy aspect of the proposed UK treaty is the complete exemption from withholding taxes for certain dividends. Prior to the proposed UK treaty, the US had never agreed to a dividend withholding rate of less than 5 percent.
In general, the exemption is available to a UK company that has held at least 80 percent of the voting power of its US subsidiary for the 12-month period ending on the date the dividend is declared, provided that the company (1) owned shares representing, directly or indirectly, at least 80 percent of the voting power of the US subsidiary prior to October 1, 1998, (2) satisfies the publicly traded test of the LOB article, or (3) is entitled to treaty benefits with respect to dividends (but not necessarily other items) under either the derivative benefits test or the discretionary determination test of the LOB article.(18)
In theory, the exemption is also available to US companies that satisfy the above criteria with respect to their UK subsidiaries, but at present this aspect of the treaty is superfluous, since UK withholding taxes are not imposed under internal UK law.
The complete exemption also applies to dividends paid to "pension schemes," provided that the dividends are not derived from the carrying on of a business, directly or indirectly, by the pension scheme.(19)
Dividends ineligible for the complete exemption generally qualify for a withholding rate of 5 percent, provided that the beneficial owner owns shares representing, directly or indirectly, at least 10 percent of the voting power of the corporation paying the dividend.(20) Dividends that fail to qualify for either the complete exemption or the 5 percent rate generally are subject to tax at a rate not in excess of 15 percent.(21)
The rules applicable to the BPT, as well as any similar UK tax, are similar (but not identical) to those applicable to dividends. The proposed UK treaty prevents imposition of the BPT or similar UK tax if the corporation (1) was engaged prior to October 1, 1998 in activities giving rise to profits attributable to the branch (or certain similarly treated items), (2) satisfies the publicly traded test, or (3) is entitled to treaty benefits with respect to dividends (but not necessarily other items) under either the derivative benefits test or the discretionary determination test of the LOB article.(22)
If none of these alternative requirements is satisfied, the BPT or similar UK tax may be imposed, but at a rate not in excess of 5 percent.(23)
Other Withholding Taxes
As a general rule, the proposed UK treaty prohibits all withholding taxes on interest and royalties.(24) This prohibition, however, does not extend to contingent interest, which, consistent with current US tax treaty policy, may be taxed at a rate of 15 percent.(25) Contingent interest subject to the higher withholding rate is interest determined by reference to receipts, sales, income, profits, or other cash flow of the debtor or a related person; to any change in the value of any property of the debtor or a related person; or to any dividend, partnership distribution, or similar payment made by the debtor to a related person.(26) The contingent-interest rule does not apply where the interest rate under a loan fluctuates solely as a result of changes in the debtor's creditworthiness.(27) Presumably, the contingent-interest rule also does not apply to a floating rate that reflects contemporaneous variations in the cost of newly borrowed funds, such as LIBOR (the London interbank offering rate).
LOB Provision
Unlike the LOB Provision in the US-Canada treaty, the LOB provision in the proposed UK treaty is reciprocal. A US or UK entity may qualify for treaty benefits (1) generally, by satisfying a publicly traded test, an ownership and base erosion test, or a discretionary determination test,(28) or (2) with respect to a particular item of income, by satisfying either the active conduct of a trade or business test or the derivative benefits test.(29)
Dual Resident Corporations
The provisions of the proposed UK Treaty will not be appealing to multinationals seeking to arbitrage the US and UK tax systems through the use of dual-resident corporations ("DRCs"). If, under the general rules of the residence article, a person other than an individual would be a resident of both contracting states, the two states "shall endeavor to determine by mutual agreement the mode of application of this Convention to that person."(30) If agreement is not reached, the DRC is not entitled to the benefits of the treaty, except those provided by the double taxation relief provision, the non-discrimination provision, and the mutual agreement provision.(31)
Stock Options and Pensions
The proposed UK treaty attempts to address some of the difficulties faced by executives and other employees who work in both contracting states prior to the exercise of a stock option. Preliminarily, the diplomatic notes confirm that income or gains enjoyed by employees under stock option plans are treated as remuneration similar to salaries and wages for the purposes of Article 14 (Income from Employment). This itself may be sufficient to avoid taxation in the non-residence source state, if the employee was not present there for more than 183 days and certain other requirements are satisfied.(32)
Otherwise, the diplomatic notes provide that, if the employee's option gain would be subject to tax in both contracting states, the non-residence state will tax only the gain attributable to the period (or periods) in which the employee was employed therein.(33)
In addition to the standard provisions relating to pension plans, the proposed UK treaty also generally allows US citizens resident in the UK to deduct their cross-border pension contributions for US tax purposes.(34) Among other requirements, the US competent authority must agree that the UK pension plan "generally corresponds to a pension scheme established in the United States."(35)
These provisions relating to options and pensions reflect a recognition of the increasing frequency with which executives and other employees change residence during their careers, and the need to limit disincentives to such mobility.
Treatment of Hybrid Entities
The proposed UK treaty provides that an item of income, profit, or gain that is derived through a person that is "fiscally transparent" under the laws of either contracting state shall be considered derived by a resident of a contracting state to the extent that the item is treated for tax purposes under the internal laws of that state as the income, profit, or gain of the resident.(36) Thus, the treaty clarifies, among other things, the treatment of income earned through limited liability companies (LLCs). For example, if a US corporation pays a dividend to a US LLC owned by a UK citizen, and the LLC is disregarded for US tax purposes but treated as a corporation for UK tax purposes, the dividend would not be considered derived by the UK citizen and would not qualify for treaty benefits.(37)
If applied without exception, this rule might preclude US taxation of a US "reverse hybrid" entity, that is, a US entity treated as a corporation for US tax purposes and as a passthrough entity for foreign tax purposes.(38) The diplomatic notes accompanying the proposed UK treaty clarify, in effect, that the savings clause takes precedence in this situation:
With reference to paragraph 8 of Article 1 (General Scope):
it is understood that where an item of income, profit or gain is derived through a person which is a resident of a Contracting State the provisions of the paragraph shall not prevent the Contracting State from taxing the item as the income, profit or gain of that person.
It is further understood that, where, by virtue of the paragraph, an item of income, profit or gain is considered by a Contracting State to be derived by a person who is a resident of that Contracting State, and the same item is considered by the other Contracting State to be derived by that person or by a person who is a resident of that other Contracting State, the paragraph shall not prevent either Contracting State from taxing the item as income, profit or gain of the person considered by that State to have derived the item of income, profit or gain."(39)
These rules are essentially the same as those imposed under existing US regulations,(40) but apparently the current US practice is to avoid conflicts by expressly including such provisions in its newer treaties.
Taxation of Business Profits
The business profits article of the proposed UK treaty contains additional guidance regarding the attribution of profits to a permanent establishment ("PE"). For example, the revised article provides that
the business profits to be attributed to the permanent establishment shall include only the profits derived from the assets used, risks assumed and activities performed by the permanent establishment.(41)
The diplomatic notes further provide that the OECD transfer pricing guidelines(42) will apply, by analogy, for the purposes of determining the profits attributable to the PE. For these purposes, the diplomatic notes add that the PE is treated as having the same amount of capital that it would need to support its activities if it were a distinct and separate enterprise engaged in the same or in similar activities.(43)
The guidance set forth in the proposed UK treaty and diplomatic notes apparently is drawn from the OECD's February 2001 discussion draft on the attribution of profits to a PE.(44) This is not surprising since both the US and the UK were active in the project.
The Australian Protocol
On September 27, 2001, the United States and Australia signed a protocol amending the US-Australia income tax treaty.(45) The pending Protocol will enter into force after it is approved by the US and Australian legislatures and instruments of ratification are exchanged. Selected provisions of the pending Protocol are described below.
Dividend Withholding Tax
The most significant aspect of the pending Protocol is that it provides a complete exemption from withholding taxes for certain dividends, marking both the second time ever and the second time in two months that the US has agreed to such a provision.
Under the proposed Australian treaty, the exemption generally is available to an Australian company that has held at least 80 percent of the voting power of its US subsidiary for the 12-month period ending on the date the dividend is declared, provided that the company satisfies the publicly traded test or the discretionary determination test of the LOB article.(46)
Dividends ineligible for the complete exemption generally may qualify for a maximum withholding rate of 5 percent, provided that the beneficial owner is a corporation that directly holds at least 10 percent of the voting power of the corporation paying the dividend.(47) Dividends that do not qualify for either the complete exemption or the 5 percent rate generally are subject to tax at a rate not in excess of 15 percent.(48)
The pending protocol generally does not limit the withholding tax that the United States may impose on holders of REITs.(49) Certain portfolio holders, however, may qualify for a maximum withholding rate of 15 percent.(50)
Treatment of branch profits mirrors the treatment of dividends. In general, a company that would be entitled to the complete exemption from withholding on dividends if it conducted its US business through a subsidiary is exempt from the BPT.(51) In other cases, the BPT rate is limited to 5 percent.(52)
Other Withholding Taxes
The pending Protocol eliminates the withholding tax on interest payments to unrelated "financial institutions" and to federal governments and their political subdivisions.(53)
Other interest payments generally may be subject to withholding tax of 10 percent in the source state.(54) Interest determined by reference to the profits of the issuer of one of its associated enterprises, however, generally may be subject to withholding a maximum rate of 15 percent.(55)
The pending Protocol generally reduces the withholding tax on royalties from 10 percent to 5 percent.(56)
The United States had attempted to secure a complete exemption but was unable to do so. A substantial majority of royalty payments between Australia and the United States are Australian-source, however, so Australia's refusal to capitulate entirely is understandable.
LOB Provision
Under the LOB provision of the proposed Australian treaty, a US or Australian entity may qualify for treaty benefits (1) generally, by satisfying a publicly traded test, an ownership and base erosion test, or a discretionary determination test,(57) or (2) with respect to a particular item of income, by satisfying the active conduct of a trade or business test.(58) Notably, the proposed Australian treaty does not contain a derivative benefits provision. Treaty benefits are, however, available to a "recognized headquarters company for a multinational corporate group."(59)
Mark-to-Market Election
Individuals who move from one contracting state to another may be subject to double taxation if the former residence state deems the individual to have disposed of his personal property at a gain, and the new residence state treats the individual as retaining his or her historic (low) tax basis in the property. The pending Protocol solves this problem by permitting the individual to elect to be treated, for the purposes of taxation in the new residence state, as having disposed of (and repurchased) the property immediately prior to the change of residence.(60)
Treasury Department News Release
In September 2000, the US Treasury Department announced that the US and Canada intend to clarify the treaty relating to the effect on a corporation's residence of continuing from one country to the other.(61)
A corporation that continues from one country to the other is thereafter considered a resident of the latter country for the purposes of the treaty.(62) Under the internal tax laws of the former country, however, the corporation arguably may take the position that its status as a domestic entity is unaffected.
In order to avoid potential abuse, the US and Canada have agreed that a corporation that is incorporated in one country and continued into another will still be treated as a resident of the former country, unless that country's internal laws no longer regard it as such. The corporation will not be entitled to the benefits of the treaty, except to the extent agreed upon by the competent authorities.
Mark-to-Market Election
The news release also indicates that the US and Canada will modify the treaty to permit an individual who moves from one country to the other to elect mark-to-market treatment in the new residence country with respect to property that he or she is considered to have disposed of under the laws of the former country of residence.
Conclusion: What Changes to Expect
The most important change in the next US-Canada treaty is likely to be a complete exemption from US withholding tax on dividends for public Canadian multinationals with US subsidiaries. We can't make any promises, but in light of the proposed UK treaty and the pending protocol to the Australian treaty, this appears to be emerging US treaty policy. Notably, although the United States has expressly provided for complete exemption in only two instances to date, a most-favored-nation provision in the US-Mexico treaty effectively increases the number to at least three.(63) In light of the close relationship between the US and Canada, inclusion of a similar provision in the next US-Canada treaty should be expected.
Further, it is likely that public Canadian corporations that conduct business in the US in branch form will benefit from a complete exemption from the BPT. Corporations not entitled to the complete exemption, however, may be subject to less favorable treatment under the new treaty. As noted above, the current treaty contains an unusual provision that determines branch profits after allowance for certain loss carryovers and a US $500,000 exemption. This allowance may not be permitted under the new treaty.
It is difficult to speculate as to whether the current 10 percent withholding rate on interest and royalties generally will be reduced (or eliminated). Either way, there is a strong possibility that contingent interest will be subject to the higher rate generally applicable to cross-border dividends, that is, 15 percent. Current US policy does not seem inclined toward permitting avoidance of the normal dividend withholding rate through the use of contingent-interest loans.(64)
Given the DRC provision in the proposed UK treaty, as well as the Treasury Department news release, the continued availability of treaty benefits for DRCs (e.g., corporations formed under the laws of the US and continued into Canada) is highly doubtful. Companies with existing DRC structures would be well advised to re-evaluate the utility of such structures as soon as possible, if they have not already done so.
Finally, executives and other employees who are contemplating a move to, or are asked to accept an assignment in, the other country probably will have fewer tax-based excuses for staying put. Given the mark-to-market provision of the pending Protocol and the Treasury Department news release, such individuals generally should be able to avoid double taxation on property gains accruing prior to their relocations. Deductions for cross-border pension plan contributions may also be available.
FOOTNOTES____________________
1. The Convention Between the United States of America and Canada With Respect to Taxes on Income and on Capital, signed at Washington, DC on September 26, 1980, as amended by the protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, and July 29, 1997 (herein referred to as "the treaty").
2. Ibid., article X(2)(a).
3. Ibid., article X(2)(b).
4. Ibid., article X(7)(b).
5. Ibid., article X(7)(c).
6. Ibid., article X(6). The BPT, imposed when profits are considered to have been repatriated by the US branch to the foreign corporation's home office, is designed to approximate the dividend withholding tax that would have been imposed if the foreign corporation had conducted its US activities through a US subsidiary. See generally section 884 of the Internal Revenue Code of 1986, as amended (herein referred to as "the Code").
7. Article X(6) of the US-Canada treaty.
8. Ibid., articles XI and XII. Article XII(4) defines royalties as follows: "payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including motion pictures and works on film, videotape or other means of reproduction for use in connection with television), any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, tangible personal property or for information concerning industrial, commercial or scientific experience, and, notwithstanding the provisions of Article XIII (Gains), includes gains from the alienation of any intangible property or rights described in this paragraph to the extent that such gains are contingent on the productivity, use or subsequent disposition of such property or rights."
9. Ibid., Article XI(3)(a).
10. Ibid., Article XII(3).
11. A corporation or trust generally will satisfy the publicly traded test if (1) there is substantial and regular trading of its principal class of shares or units on a recognized stock exchange or (2) a majority of its shares or units (measured by vote and value) is directly or indirectly owned by five or fewer corporations or trusts the shares or units of which are so traded, provided that any intermediate corporation or trust qualifies for treaty benefits. Ibid., articles XXIX A(2)(c) and (d).
12. A Canadian corporation or trust generally will satisfy the ownership and base erosion tests if (1) a majority of its shares or beneficial interests (measured by vote and value) is not directly or indirectly owned by persons who do not qualify for the benefits of the treaty, and (2) less than 50 percent of its gross income for the preceding fiscal period was eroded through deductible expenses to persons who do not qualify for treaty benefits. Ibid., article XXIX A(2)(e).
13. Ibid., article XXIX A(3).
14. Pursuant to the derivative benefits test, a Canadian corporation will be entitled to treaty benefits under the dividend, interest, or royalties article if it satisfies a base erosion test (described above) and at least 90 percent of its shares (measured by vote and value) are directly or indirectly owned by persons who are entitled to the benefits of the treaty or (1) are entitled to the benefits of another US tax treaty, (2) would be entitled under that treaty to an equal or lower tax rate on the class of income for which treaty benefits are claimed, and (3) would qualify for the benefits of the treaty if they were Canadian and, for purposes the of the active conduct of a trade or business test, carried on their residence-country businesses within Canada. Ibid., article XXIX A(4).
15. Ibid., article XXIX A(6).
16. See ibid., article XXIX A(7).
17. 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 (herein referred to as "the proposed UK treaty"). Copies of the proposed UK treaty and the exchange of notes can be found on the Web at http://www.treas.gov/taxpolicy/library/uktreaty.pdf and http://www.treas.gov/taxpolicy/library/uknotes.pdf.
18. Ibid., article 10(3)(a).
19. Ibid., article 10(3)(b). Among other requirements, a pension scheme must be exempt from income tax in its own contracting state. Ibid., article 3(1)(o).
20. Ibid., article 10(2)(a).
21. Ibid., article 10(2)(b).
22. Ibid., article 10(7). In contrast, the current US-UK treaty does not expressly authorize the BPT. Absent such express authorization, the US will not attempt to impose the BPT on a UK company that is entitled to the benefits of the treaty and satisfies an LOB-type test set forth in the regulations. Treas. Reg. section 1.884-1(g)(3).
23. Proposed UK treaty, article 10(8).
24. Ibid., articles 11(1) & 12(1). For the purposes of the proposed UK treaty, royalties are defined as follows:
(a) any consideration for the use of, or the right to use, any copyright of literary, artistic, scientific or other work (including computer software and cinematographic films) including works reproduced on audio or video tapes or disks or any other means of image or sound reproduction, any patent, trade mark, design or model, plan, secret formula or process, or other like right or property, or for information concerning industrial, commercial or scientific experience; and
(b) any gain derived from the alienation of any right or property described in sub-paragraph a) of this paragraph, to the extent that the amount of such gain is contingent on the productivity, use, or disposition of the right or property.
25. Ibid., article 11(5)(a).
26. Ibid.
27. Ibid., article 11(5)(b).
28. Ibid., article 23(2)(c), (d) and (f). These tests are similar (but not identical) to their counterparts under the US-Canada treaty.
29. Proposed UK treaty, articles 23(3) and (4). These tests are similar (but not identical) to their counterparts under the US-Canada treaty.
30. Ibid. As discussed below, the US Treasury Department has announced that the United States and Canada intend to implement a similar rule under the US-Canada treaty.
31. Ibid. As discussed below, the US Treasury Department has announced that the US and Canada intend to implement a similar rule under the US-Canada treaty.
32. See Art. 14(2) of the proposed UK treaty. In contrast to Article 15 of the US-Canada treaty, article 14 of the proposed UK treaty, consistent with the United States Model Income Tax Convention of September 20, 1996, does not limit the amount of remuneration to which treaty benefits may apply.
33. In contrast to the Australian Protocol, discussed below, the proposed UK treaty does not, however, appear to permit an individual who moves from one contracting state to the other contracting state, and is treated by the former residence state as disposing of any property immediately prior to the change in residence, to mark the property to market for tax purposes in the new state of residence.
34. Proposed UK treaty, article 18(5)(a).
35. Ibid., article 18(5)(d). Query what procedures will have to be followed in order to secure agreement from the US competent authority.
36. Ibid., article 1(8).
37. It is possible, however, that the dividend would qualify for a dividends-received deduction pursuant to Code section 243.
38. In contrast, a "hybrid" entity is one classified as a passthrough entity for US tax purposes and as a corporation for foreign tax purposes.
39. See the exchange of notes, supra note 17. Notably, savings clause provisions may take on added importance. An emerging issue in the European Union is whether the business profits provision (which makes taxation of business profits conditional on the presence of a PE) precludes taxation under regimes comparable to the US "subpart F" rules, which permit a US parent to be taxed on certain income earned by a foreign subsidiary. A subsidiary is a separate entity and presumably should not be considered a PE. In light of the savings clause, the United States' right to apply subpart F is apparently well preserved.
40. See Treas. Reg. section 1.894-1(d)(2).
41. Proposed UK treaty, article 7(2).
42. Organization for Economic Co-operation and Development, Transfer Pricing Guidelines for Multinational Enterprises and tax Administrations (Paris: OECD) (looseleaf).
43. In the case of financial institutions other than insurance companies, the diplomatic notes also provide that a contracting state may determine the amount of capital to be attributed to the PE by allocating the institution's total equity among its various offices on the basis of the proportion of the institution's risk-weighted assets attributable to each office.
44. Organization for Economic Co-operation and Development, Discussion Draft on the Attribution of Profits to a Permanent Establishment (Paris: OECD, February 2001). Related OECD reports also issued in February 2001 include Attribution of Profit to a Permanent Establishment Involved in Electronic Commerce Transactions, A Discussion Paper from the Technical Advisory Group on Monitoring the Application of Existing Treaty Norms for the Taxation of Business Profits (Paris: OECD, February 2001) and Tax Treaty Characterization Issues Arising from E-Commerce, Report to working Party no. 1 of the OECD Committee on Fiscal Affairs by the Technical Advisory Group on Treaty Characterization of Electronic Commerce Payments (Paris: OECD, February 1, 2001).
45. 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 (herein referred to as "the pending protocol"). The pending protocol is available on the Web at http://www.treas.gov/taxpolicy/library/austral.pdf. The US-Australia treaty, to be amended by the pending protocol, is herein referred to as "the proposed Australian treaty."
46. Article 10(3) of the proposed Australian treaty. In theory, the exemption is also available to US companies that satisfy the above criteria with respect to their Australian subsidiaries, but, as in the case of the proposed UK treaty, this rule is superfluous, since Australian withholding taxes are not imposed under internal Australian law.
47. Ibid., article 10(2)(a).
48. Ibid., article 10(2)(b).
49. Ibid., article 10(4)(c).
50. The 15 percent rate generally is available if (1) the holder of the shares is an individual who owns an interest of less than 10 percent in a REIT, (2) the shares with respect to which the dividend is paid are publicly traded and the holder does not own an interest of 5 percent or more in any class of the REIT's stock, (3) the holder of the shares owns an interest of less than 10 percent in the REIT and no single interest in real property held by the REIT exceeds 10 percent of the gross value of the REIT's total interests in real property, or (4) the holder of the shares is a listed Australian property trust (subject to a lookthrough rule for 5 percent holders of the trust). Articles 10(4)(c) and (d) of the proposed Australian treaty.
51. Ibid., article 10(8). The same rule would apply to a US corporation with an Australian branch.
52. Ibid., article 10(9).
53. A "financial institution" is defined as "a bank or other enterprise substantially deriving its profits by raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on a business of providing finance." Article 11(3)(b) of the proposed Australian treaty. Query whether this definition is broad enough to apply to a finance subsidiary.
54. Ibid., article 11(2).
55. Ibid., article 11(9).
56. Ibid., article 12(2)(a). Article 12(4) of the proposed Australian treaty defines royalties as follows:
(a) payments or credits of any kind to the extent to which they are consideration for the use of or the right to use any:
(i) copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right;
(ii) motion picture films; or
(iii) films or audio or video tapes or disks, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting;
(b) payments or credits of any kind to the extent to which they are consideration for:
(i) the supply of scientific, technical, industrial or commercial knowledge or information owned by any person;
(ii) the supply of any assistance of an ancillary and subsidiary nature furnished as a means of enabling the application or enjoyment of knowledge or information referred to in sub-paragraph (b)(i) or of any other property or right to which this Article applies; or
(iii) a total or partial forbearance in respect of the use of supply of any property or right described in this paragraph; or
(c) income derived from the sale, exchange or other disposition of any property or rights described in this paragraph to the extent to which the amounts realized on such sale, exchange or other disposition are contingent on the productivity, use or further disposition of such property or right.
57. Ibid., articles 16(2)(c) and (d) and 16(3). These tests are similar (but not identical) to their counterparts under the US-Canada treaty.
58. Article 16(5) of the proposed Australian treaty. This tests are similar (but not identical) to its counterpart under the US-Canada treaty.
59. Article 16(2)(h) of the proposed Australian treaty.
60. Ibid., article 13(5).
61. United States, Treasury Department, "U.S., Canada Propose Tax Treaty Changes," Treasury News, LS-883, September 18, 2000.
62. Treaty, Art. 4(3).
63. This provision is set forth in article 8(b) of the Protocol to the US-Mexico treaty. See the Convention and Protocol Between the Government of the United States of America and the Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Washington, DC on September 18, 1992.
64. In certain situations, it might be possible to recharacterize a putative loan as equity, but this inquiry requires an analysis of all of the facts and circumstances, and such "substance-over-form" tests are particularly ill-suited to a withholding tax regime.