House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 2 - Protocol amending the Convention with the United States of America

What is the US Protocol?

2.1 The US Protocol, once in force, will amend the Convention of 6 August 1982 between Australia and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.

Why is the Protocol necessary?

2.2 The Protocol is required to amend the existing tax treaty to reflect modern business practice and changes to both countries law and tax treaty policy since the Convention was negotiated. The Protocol will facilitate trade and investment between Australia and the United States by reducing or eliminating withholding taxes in some circumstances and by extending coverage of the Convention to taxes on capital gains.

Main features of the Protocol

2.3 The Protocol will:

•

update the list of taxes covered by the Convention;

•

ensure profits derived through a permanent establishment of a fiscally transparent entity (e.g. a trust) can be taxed in the country where the permanent establishment is located;

•

extend the circumstances where exclusive residence country taxation will apply to profits from the bare boat lease of ships and aircraft used in international traffic and from the use and maintenance of containers used in international traffic;

•

provide that certain intercorporate dividends will be either exempt or subject to a maximum 5% rate of source country tax;

•

remove the limit on US tax on dividends derived from certain substantial holdings in US Real Estate Investment Trusts ;

•

provide an exemption for interest paid to government bodies and financial institutions ;

•

reduce the general rate of source country tax on royalties to 5% of the gross amount. Payments for the use of industrial, commercial or scientific equipment will also cease to be treated as royalties for the purposes of the Convention;

•

provide distributive rules for capital gains and improve arrangements for taxing gains accrued on assets held by departing residents; and

•

insert a new Limitation on Benefits Article to prevent residents of third countries from using interposed companies or other entities resident in one of the treaty countries to inappropriately access treaty benefits (i.e. treaty shopping).

Detailed explanation of changes made by the Protocol

Article 1 of the Protocol

Amends Article 1 of the Convention - Personal Scope

2.4 The Protocol will amend the Personal Scope Article of the Convention to extend the savings clause for former US citizens to also cover former long-term US residents. The current savings clause allows the United States to tax persons as US citizens for up to 10 years if they give up their citizenship to avoid US tax. Following the amendment, former long-term US residents who relinquish their residence status (e.g. green card holders who surrender their cards) to avoid tax may be subject to US tax for up to 10 years following the residence change.

Article 2 of the Protocol

Amends Article 2 of the Convention - Taxes Covered

2.5 Article 2 of the Protocol updates the list of taxes covered by the Convention by replacing paragraph (1) of Article 2 of the Convention. In the case of the United States, the Protocol will remove current references to the accumulated earnings tax and the personal holding company tax as US Federal income taxes not covered by the Convention. In the case of Australia, the Protocol deletes the undistributed profits tax and includes specific references to Australias tax on capital gains and petroleum resource rent tax. [New paragraph (1)]

2.6 The coverage of the US accumulated earnings tax and personal holding company tax by the Convention will have little effect because foreign corporations are normally exempt, or fall outside the parameters of the taxes. Where the taxes apply, the tax payable is likely to be insignificant.

2.7 The Convention currently does not apply to taxes on capital gains. The reference to Australias tax on capital gains is intended to clarify that capital gains are to be covered by the Convention following the Protocol.

2.8 Consistent with Australias recent treaty practice, a specific reference is also included to the petroleum resource rent tax. Although this tax is considered by Australia to be encompassed by the term Australian income tax, a specific reference is included to put beyond doubt that it is a tax covered by the Convention.

Article 3 of the Protocol

Amends Article 4 of the Convention - Residence

2.9 The United States taxes US citizens and resident aliens on their worldwide income. The Protocol will amend the Residence Article of the Convention to ensure that US citizens, wherever resident, will generally be treated as US residents for the purposes of the Convention. A US citizen will not be treated as a resident of the United States, however, if the person is treated as a resident of a third country under an Australian tax treaty with that country. This exclusion will prevent US citizens from cherry picking treaty benefits in Australia under more than one tax treaty. [Subparagraph (1)(b)(ii)]

Article 4 of the Protocol

Amends Article 7 of the Convention - Business Profits

2.10 The Protocol will amend the Business Profits Article of the Convention to clarify that the source country can tax business profits derived by a resident of the other country through one or more fiscally transparent entities where the profits are effectively connected with a permanent establishment of the transparent entity in the source country. The amendments thus ensure that Australia can tax US beneficiaries on their share of business profits derived by a trust operating through a permanent establishment in Australia. [Paragraph (9)]

2.11 The clarification of Australias source country right to tax trust beneficiaries on their share of business profits effectively connected with an Australian permanent establishment is consistent with Australias recent treaty practice and subsection 3(11) of the Agreements Act. The clarification has been expressed in bilateral terms to similarly protect US source country taxing rights. The term fiscally transparent entity has been used to cover any entity, not just trusts, that may be taxed on a look-through basis (e.g. US limited liability companies treated as partnerships for US tax purposes).

Article 5 of the Protocol

Amends Article 8 of the Convention - Shipping and Air Transport

2.12 The Protocol will amend the Shipping and Air Transport Article of the Convention to extend exclusive residence country taxation to certain profits from the bare boat lease of ships or aircraft and from the use and maintenance of containers. This will help to simplify compliance for international shipping and air transport operators.

Removal of the requirement that ships or aircraft leased on a bare boat basis be used in international traffic by the lessee

2.13 Currently profits from the lease of ships or aircraft on a bare boat basis (generally, without crew) or of containers are taxable only in the lessors country of residence where:

•

the lease is incidental to the lessors international transport operations; and

•

the ships, aircraft or containers are used in international traffic by the lessee.

[Article 8(1)(b) of the Convention]

2.14 The Protocol will remove the requirement that the ships or aircraft be used in international traffic by the lessee. Profits derived from a bare boat lease of a ship or aircraft, whether used domestically or in international traffic by the lessee, would thus be taxable only in the lessors country of residence where the lease is incidental to the lessors international transport operations. [Subparagraph (1)(b)]

2.15 The Protocol will also extend exclusive residence country taxation under the Shipping and Air Transport Article to profits from the use, maintenance or rental of containers used in international traffic. [Paragraph (2)]

2.16 Profits from the lease of ships, aircraft or containers that are not covered by the Shipping and Air Transport Article will come within the scope of the Business Profits Article . This follows from changes to the Royalties Article which remove payments for use of equipment from the definition of royalties (paragraph (b) of Article 8 of the Protocol). Profits that would come within the Business Profits Article include:

•

profits from the lease on a full basis of ships or aircraft where the equipment is not operated in international traffic by the lessee or where the lessor only operates ships or aircraft between places in the source country and does not regularly lease ships or aircraft on a full basis;

•

bare boat leases not incidental to the lessors international transport operations; and

•

profits from the lease of containers not used in international traffic by the lessee.

2.17 Source country taxation is only permitted under the Business Profits Article to the extent the profits are effectively connected with a permanent establishment in that country.

No change to rules dealing with participation in a pool service or for internal traffic

2.18 New paragraphs dealing with participation in a pool service and internal traffic reflect recent treaty language and are not different in substance to the paragraphs replaced. [Paragraphs (3) and (4)]

Article 6 of the Protocol

Substitutes new Article 10 of the Convention - Dividends

2.19 The Protocol will substitute a new Dividends Article into the Convention that introduces a number of exceptions to the general 15% limit on source country taxation of dividends. The new Article will:

•

provide that certain cross border intercorporate dividends will be either exempt or subject to a maximum 5% rate of source country tax;

•

remove the limit of US tax on dividends derived from certain substantial holdings in US REITs;

•

generally prevent Australia from taxing dividends paid by US companies out of profits derived from sources in Australia; and

•

permit dividend equivalent taxation of profits attributable to a permanent establishment or real property situated in the source country.

Certain cross border intercorporate dividends to be exempt or subject to reduced rates of source country tax

2.20 No tax will be chargeable in the source country on dividends where a beneficially entitled company resident in the other country holds 80% or more of the voting power of the company paying the dividends and satisfies certain requirements in the Limitation on Benefits Article [paragraph (3)] . A limit of 5% will apply for other company shareholdings that constitute a voting interest of 10% or greater [subparagraph (2)(a)] . These limits will apply in Australia to both franked and unfranked dividends.

2.21 The exemption provides broadly reciprocal treatment for the dividend withholding tax exemption provided by Australia for franked dividends paid to non-residents. The United States does not provide a comparable exemption for dividends paid from profits taxed previously at the corporate level.

Requirements that must be satisfied to qualify for the dividend exemption

2.22 Anti-treaty shopping rules will apply to prevent residents of third countries from using interposed companies resident in one of the treaty countries to inappropriately access the dividend exemption. To qualify for the dividend exemption, a company beneficially entitled to the dividends must, in addition to the general requirement that it holds 80% or more of the voting power of the company paying the dividends, be a qualified person based on one of the following tests from the Limitation on Benefits Article :

•

the principal class of shares in the company receiving the dividends must be listed on a recognised US or Australian stock exchange [new Article 16, subparagraph (2)(c)(i)] ;

•

at least 50% of the vote and value of the shares in the receiving company must be owned directly or indirectly by 5 or fewer companies that satisfy the stock exchange listing requirements [new Article 16, subparagraph (2)(c)(ii)] ; or

•

the competent authority in the source country must determine in accordance with the domestic law that the establishment, acquisition or maintenance of the receiving company and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the Convention [new Article 16, paragraph (5)] .

2.23 Refer to the discussion on the Limitation on Benefits Article (Article 10 of the Protocol) for a further explanation of these requirements.

No exemption or reduced rate for dividends paid by US Regulated Investment Companies or Real Estate Investment Trusts

2.24 Consistent with recent US treaty practice, the dividend exemption and 5% rate limitation will not apply for dividends paid by a RIC or REIT [subparagraph (4)(a)] . These are types of US collective investment vehicles that are taxed differently to other companies in the United States. Generally profits derived through companies are taxed in the United States at the company level and again on distribution to shareholders. In contrast, profits derived through a RIC or REIT are typically deductible to the extent they are allocated to shareholders, subject to the RIC or REIT satisfying a minimum distribution requirement. This deduction has the effect that the profits are generally only taxed at the shareholder level.

2.25 The US tax payable on dividends derived from a RIC or REIT will generally be capped at the standard treaty rate of 15%. [Subparagraphs (4)(b) and (c)]

No rate limit for dividends derived from certain substantial holdings in REITs

2.26 Also consistent with recent US tax treaty practice, no rate limit will apply for dividends derived from certain substantial holdings in REITs. These dividends may therefore be taxed at the US domestic law rate which is currently 30% for companies.

2.27 The higher rate reflects that REITs primarily derive income from US real property and are intended to facilitate collective investment. US treaty practice is to tax income derived through a REIT at full rates where a holding is sufficient to be comparable to holding real property directly.

2.28 The current treaty rate limit of 15% on REIT dividends will continue to be available if:

•

the person beneficially entitled to the dividends is an individual holding an interest of not more than 10% in the REIT;

•

the dividends are paid with respect to a class of stock that is publicly traded and the person beneficially entitled to the dividends holds an interest of not more than 5% of any class of the REITs stock; or

•

the person beneficially entitled to the dividends holds an interest of not more than 10% in the REIT and the gross value of no single interest in real property held by the REIT exceeds 10% of the gross value of the REITs total interest in real property.

2.29 A class of stock will be taken to be publicly traded (relevant to the second test) if all the shares in the class or classes of shares that represent more than 50% of the voting power and value of the company are regularly traded on a recognised stock exchange located in either country. Refer to the discussion on new subparagraph (2)(c) of the Limitation on Benefits Article for a further explanation of the publicly traded requirement.

Treaty rate limit to generally apply for REIT dividends derived by a listed Australian property trust

2.30 The 15% dividend rate limit will generally continue to apply for REIT dividends derived by a LAPT regardless of its holding in the REIT. Dividends paid by a REIT may, for instance, qualify for the 15% dividend rate where the REIT is wholly-owned by a LAPT. These arrangements reflect that LAPTs are used for collective investment in Australia and that investments held through these trusts are generally widely-held. [Subparagraph (4)(d)]

2.31 Look-through rules will apply where the responsible entity for a LAPT knows, or has reason to believe, that a unitholder has a beneficial interest in the LAPT of 5% or more. In this case, the REIT holding limits will be tested at the unitholder level and the treaty rate limit of 15% will only apply to the unitholders share of a REIT dividend where the unitholder satisfies one of the REIT holding limit tests discussed above. This may mean that the portion of a REIT dividend allocated to a unitholder for the purposes of applying the tests may be subject to full rates of US tax whereas the balance of the dividend derived by the LAPT is subject to the standard treaty rate limit of 15%.

2.32 A unitholder will be taken under the look-through rules to hold an interest in a REIT equal to the persons proportionate interest in the LAPT multiplied by the LAPTs direct interest in the REIT. A unitholder with a 10% interest in a LAPT that has a 60% interest in a REIT would, for instance, be taken to have a 6% (10% 60%) interest in the REIT. In applying the tests, the person is taken to be beneficially entitled to the REIT dividends and the dividends are taken to be paid with respect to a class of stock that is publicly traded. This allows the holding limit tests to be satisfied for an indirect interest in a REIT dividend.

2.33 Changes made by the Protocol to the Dividends Article will not apply to REIT dividends derived by a LAPT where the shares on which the dividends are paid were:

•

owned by the LAPT on 26 March 2001 (i.e. the time of the first round of negotiations on the Protocol);

•

acquired by the LAPT pursuant to a binding contract entered into on or before 26 March 2001; or

•

acquired by the LAPT pursuant to a reinvestment of dividends (ordinary or capital) with respect to such shares.

2.34 Rules in the current Dividends Article that limit US tax payable to 15% on the gross amount of these dividends will thus continue to apply. [Paragraph (3) of Article 13 of the Protocol]

2.35 A LAPT is defined as an Australian unit trust registered as a Managed Investment Scheme under the Australian Corporations Act. The principal class of units must also be listed on a recognised stock exchange in Australia and be regularly traded on one or more recognised stock exchanges [subparagraph (4)(d)] . Refer to the discussion on paragraph (6) in the new Limitation on Benefits Article for an explanation of recognised stock exchanges (i.e. Article 10 of the Protocol).

Dividends paid by a company resident in one of the countries will generally be taxable exclusively in that country

2.36 Dividends paid by a company resident in one of the countries will be taxable exclusively in that country, unless:

•

the person deriving the dividends is a resident of the other country; or

•

the shareholding in respect of which the dividends are paid is effectively connected with a permanent establishment or fixed base in that other country.

[Paragraph (7)]

2.37 This rule will not apply to dividends paid by companies that are residents of both Australia and the United States because they are not treated as residents of either country for the purposes of applying the Convention (Article 3(1)(g) of the Convention). Australia will thus continue to be able to tax dividends paid by dual resident companies.

2.38 The rule will, however, prevent Australia from taxing dividends paid by a US company out of profits derived from sources in Australia (i.e. dividends taxable under paragraph 44(1)(b) of the ITAA 1936) unless the dividends are derived by an Australian resident or the shareholding is effectively connected with an Australian permanent establishment. Australia can currently tax dividends paid by a US company from these Australian source profits if the profits are attributable to an Australian permanent establishment and the gross income attributable to the permanent establishment constitutes at least 50% of the companys gross income from all sources (subparagraph (5)(c) of the Convention). The new Dividends Article does not, however, contain an equivalent provision. This is consistent with Australias other tax treaties and the changes will thus place US companies operating in Australia on an equal footing with companies from other tax treaty countries.

Dividend equivalent taxation of profits attributable to a permanent establishment or real property situated in the source country

2.39 The source country will generally be able to impose additional tax on notional dividends attributable to a permanent establishment or real property situated in that country [paragraph (8)] . This treatment reflects current US treaty practice and replaces rules for dividend equivalent taxation in existing paragraph (6) of the Convention. The rules will equate the taxation treatment of profits from activities conducted through a permanent establishment and income from real property investments with profits from similar activities conducted through a subsidiary resident in the source country. In this regard, profits derived through a subsidiary can be taxed at both the corporate level and again on distribution as dividends. Australia does not seek to impose dividend equivalent taxation.

2.40 No dividend equivalent taxation will apply to such profits where a company is a qualified person based on one of certain tests specified in the Limitation on Benefits Article [paragraph (8)] . These tests are the same as those discussed above for determining whether a company can qualify for the dividend exemption (refer to the discussion on paragraph (3)). A 5% limit will apply to source country tax that can be charged on the dividend equivalent amount for companies that do not satisfy one of these tests [paragraph (9)] .

2.41 The following notes reflect agreements reached during the negotiation of the Protocol with regard to the operation of the rules:

In relation to Article 10 (Dividends), both delegations agreed that, where a Contracting State may impose additional tax in accordance with paragraph (8) of that Article on the dividend equivalent (or analogous) amount of profits, income or gains of a company which is a resident of the other Contracting State, no further additional tax may be imposed by the first-mentioned State on such amount under any other provision of the Convention.

It was further agreed that an amount analogous to the dividend equivalent amount of a company resident in one Contracting State is the amount equal to the after-tax earning attributable to the companys business profits attributable to a permanent establishment in the other Contracting State and income or gains that may be taxed in that other Contracting State on a net basis under Article 6 (Income from Real Property) or under paragraphs (1) or (3) of Article 13 (Alienation of Property), reduced by any increase in the companys net investment in assets in that other Contracting State, or increased by any reduction in the companys net investment in assets in that other Contracting State.

Substantially similar provisions

2.42 Paragraphs (1), (5) and (6) dealing with dividends paid by resident companies, dividends derived by a permanent establishment and the definition of the term dividends respectively reflect recent treaty language and are not different in substance to the paragraphs replaced.

Article 7 of the Protocol

Substitutes new Article 11 of the Convention - Interest

2.43 The Protocol will substitute a new Interest Article into the Convention that will generally maintain a 10% limit on source country taxation of interest flows. This rate accords with the general rate of interest withholding tax applicable under Australias domestic law. The new Article will:

•

provide an exemption for interest paid to government bodies and financial institutions;

•

modify the definition of interest to include premiums attached to bonds, debentures and government securities and to exclude penalty charges and amounts covered by the Dividends Article ;

•

allow interest calculated with reference to profits to be taxed at the standard dividend rate limit of 15%;

•

remove the interest rate limit for amounts derived from a residual interest held in a US REMIC; and

•

deem notional interest to arise where deductions for interest claimed in determining profits attributable to a permanent establishment or connected with real property situated in the source country exceeds the interest paid by the permanent establishment or on the debt secured by the real property.

Exemption for interest paid to government bodies and financial institutions

2.44 The Protocol will provide an exemption from source country tax for interest paid to:

•

a government body of the other country (i.e. a political or administrative subdivision or a local authority thereof, or any other body exercising governmental functions in Australia or the United States, or a bank performing central banking functions); and

•

a financial institution resident in the other country (subject to certain safeguards relating to back-to-back loans).

[Paragraphs (3) and (4)]

Exemption for interest paid to government bodies

2.45 The exemption for interest paid to government bodies will apply to interest derived in the course of exercising governmental functions but will not extend to interest derived by a government body from the conduct of a trade or business. Similar exemptions apply in a number of Australias tax treaties.

Exemption for interest paid to financial institutions

2.46 The exemption for interest paid to financial institutions reflects that the current 10% rate on gross interest can be excessive given their cost of funds. The exemption will also align the treatment of interest paid to US financial institutions with the domestic law exemption for interest paid on widely distributed arms length corporate debenture issues (section 128F of the ITAA 1936). The term financial institution means a bank or other enterprise substantially 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.

2.47 The exemption will not be available for interest paid as part of an arrangement involving back-to-back loans or other arrangement that is economically equivalent and intended to have a similar effect to back-to-back loans. The denial of the exemption for these back-to-back arrangements is directed at preventing related party and other debt from being structured through financial institutions to gain access to a withholding tax exemption. The exemption will only be denied for interest paid on the component of a loan that is considered to be back-to-back.

2.48 A back-to-back arrangement would include, for instance, a transaction or series of transactions structured in such a way that:

•

a US financial institution receives or is credited with an item of interest arising in Australia; and

•

the financial institution pays or credits, directly or indirectly, all or substantially all of that interest (at any time or in any form, including commensurate benefits) to another person who, if it received the interest directly from Australia, would not be entitled to similar benefits with respect to that interest.

2.49 However, a back-to-back arrangement would generally not include a loan guarantee provided by a related party to a US financial institution.

2.50 Australia currently reserves the right to apply its general anti-avoidance rules where there is a conflict with the provisions of a tax treaty (subsection 4(2) of the Agreements Act). New subparagraph (4)(b) will clarify that the above safeguards do not restrict the general application of any anti-avoidance rule.

Changes to the definition of interest

2.51 The new definition of interest largely accords with Australias treaty practice. The definition encompasses items of income such as discounts on securities and payments made under certain hire purchase agreements which, in the case of Australia, are treated as interest or amounts in the nature of interest. [Paragraph (5)]

2.52 Consistent with US treaty practice, the new interest definition includes premiums attached to bonds, debentures and government securities. An amount paid by an issuer of a loan security on redemption in excess of the amount paid by the subscriber would, for instance, be treated as interest paid to the subscriber. Source country tax would thus be limited to 10% of the gross amount of the premium paid on redemption. Australias domestic law does not provide for a reduction in the interest liable to withholding tax where a security is issued at a premium (e.g. where the amount paid by a subscriber exceeds that repaid on redemption).

2.53 The new interest definition will also exclude income dealt with by the Dividends Article. This will clarify that the Dividends Article takes precedence over the Interest Article in cases where both Articles can apply. The exclusion from the definition of penalty charges for late payment will have little effect in Australia because Australias domestic law generally does not permit the imposition of these types of penalties.

Standard dividend rate limit to apply for interest calculated with reference to profits

2.54 The new Interest Article will permit the source country to tax interest paid to a resident of the other country at a higher rate of 15% if the interest is calculated with reference to profits of the issuer or of one of its associated enterprises. This will equate the rate of source country tax on such interest with the rate that generally applies to dividends. [Subparagraph (9)(a)]

2.55 An enterprise will be associated with the issuer if:

•

it participates directly or indirectly in the management, control or capital of the issuer; or

•

the same persons participate directly or indirectly in the management, control or capital of the enterprise and the issuer.

[Paragraph (1) of the Associated Enterprises Article of the Convention]

No interest rate limit for amounts derived on residual interests in US Real Estate Mortgage Investment Conduits

2.56 A REMIC is a US tax vehicle that holds a fixed pool of real estate loans and issues debt securities with serial maturities and differing rates of return backed by those loans. Through a REMIC, a financial institution can repackage and sell long-term mortgages to the investing public. A REMIC generally does not pay US income tax. Its tax liability is paid by holders of its residual interests , which include in income their share of the REMICs income or loss each year.

2.57 Consistent with recent US treaty practice, the new Interest Article will permit the United States to charge US tax at full rates on the purchasers of residual interests in REMICs. This will ensure that foreign purchasers do not have a competitive advantage over US purchasers. It will also counter tax avoidance opportunities that could arise in the United States from differences in the timing of taxable and economic income on residual interests.

2.58 Full US tax will be limited to the amount of interest paid on a residual interest that exceeds the normal rate of return on publicly-traded debt instruments with a similar risk profile. The share of REMIC income attributable to a normal rate of return is generally treated as portfolio interest and is exempt from withholding tax under US domestic law. [Subparagraph (9)(b)]

Notional interest in respect of excess interest expenses

2.59 Consistent with US treaty practice, the new Interest Article will allow the source country to tax an amount of notional interest where deductions for interest claimed in determining profits attributable to a permanent establishment or connected with real property in that country exceed the interest paid by the permanent establishment or on the debt secured by the real property. The notional interest will equal the amount of the excess of interest deductions over interest paid and be deemed to be interest arising in the source country to which a resident of the other country is beneficially entitled. [Paragraph (10)]

2.60 The notional interest would, for instance, be calculated as the difference between interest expenses of an Australian company allocated and claimed as a deduction in determining the taxable profits of its US permanent establishment over the amount of interest paid by the permanent establishment. Currently the US can charge withholding tax on the component of interest borne by the permanent establishment on indebtedness connected with that permanent establishment, and this will continue to be the case under new paragraph (7). Paragraph (10) will allow the US to charge withholding tax on an interest expense claimed by the Australian company in determining the profits of the US permanent establishment in cases where the interest expense is not actually paid by the permanent establishment. To achieve this result, the interest expense in excess of that actually paid by the permanent establishment will be deemed to be interest arising in the United States to which a resident of Australia is beneficially entitled.

2.61 Australia does not have similar rules for taxing notional interest under its domestic law.

Substantially similar provisions

2.62 Paragraphs (1), (2) and (6) to (8) dealing with general limits on source country tax, interest derived by a permanent establishment, rules for determining when interest arises in a country and adjustments for non-arms length amounts reflect recent treaty language and are not different in substance to the paragraphs replaced.

Article 8 of the Protocol

Amends Article 12 of the Convention - Royalties

2.63 The Protocol will amend the Royalties Article of the Convention. Broadly, both countries will continue to be able to tax royalty flows with a limit generally applying to the tax that the source country can charge. The changes will:

•

reduce the general rate of source country tax on royalties to 5% of the gross amount;

•

exclude payments for the use of industrial, commercial or scientific equipment from the scope of the Royalties Article ; and

•

extend the royalties definition to cover additional types of broadcasting media.

Reduction in the general rate of source country tax on royalties

2.64 The Protocol will reduce the limit on source country taxation of royalties from 10% to 5%. [Paragraph (a) of Article 8 of the Protocol]

Exclusion of payments for the use of industrial, commercial or scientific equipment

2.65 The definition of royalties currently includes payments for the use of industrial, commercial or scientific equipment other than equipment let under a hire purchase agreement. The Protocol will amend the definition to exclude these payments [subparagraph 4(a)] . Consequential amendments to ensure these payments are excluded from the scope of the domestic law royalty withholding tax provisions are discussed in Chapter 3.

2.66 The effect of the change to the royalties definition is that the Royalties Article will cease to apply to payments previously treated as equipment royalties, and the Business Profits Article will apply to these payments. The source country will therefore only be able to tax the payments to the extent they are connected with a business carried on through a permanent establishment in that country.

2.67 The exclusion of payments for the use of equipment from the Royalties Article reflects that source country taxation on a gross basis may be excessive given low profit margins.

Inclusion of additional broadcasting media

2.68 The Protocol will extend the royalties definition in respect of broadcasting media to reflect modern technologies. The definition will include payments for the use of video or audio disks, or any other means of image or sound reproduction or transmission for use in connection with television, radio or other broadcasting (e.g. satellite and internet broadcasting). The changes will clarify that the source country can tax these payments as royalties. [Subparagraph (4)(a)(iii)]

2.69 The following notes were agreed during the negotiation of the Protocol with regard to the definition:

In relation to Article 12 (Royalties), both delegations agreed that the definition of royalties in subparagraph (4)(a)(iii), in referring to a payment for a transmission in connection with broadcasting, does not include payments made for the reception of images or sounds for personal use by the payer.

Article 9 of the Protocol

Amends Article 13 of the Convention - Alienation of Property

2.70 Consistent with the extension of the Convention to cover tax on capital gains (new subparagraph (1)(b)(i) of Article 2), the Protocol amends the Alienation of Property Article to delete paragraph (3) (which deals with certain income or gains from the alienation of ships, aircraft and containers) and to insert a number of new provisions designed to deal comprehensively with gains from the alienation of property.

2.71 The Protocol will amend the Alienation of Property Article to:

•

include distributive rules for alienation of business property connected with a permanent establishment or fixed base;

•

update the distributive rules for dealing with alienation of ships, aircraft and containers used in international traffic;

•

improve arrangements for taxing gains accrued on assets held by departing residents by reducing compliance difficulties and ensuring appropriate relief is provided from double taxation; and

•

provide for capital gains not covered by specific distributive rules to be taxed in accordance with the domestic laws of each country.

Capital gains to be covered

2.72 References to income or gains in the Alienation of Property Article will cover capital gains as well as revenue gains following the changes made by the Protocol. Changes to the Taxes Covered Article specifically include Australias tax on capital gains as a tax covered by the Convention. The amended Alienation of Property Article will therefore allocate between Australia and the United States taxing rights in relation to income or capital gains arising from the alienation of real property and other items of property.

Source country taxation permitted on amounts derived from direct and indirect alienation of land rich entities

2.73 It has been Australias treaty practice following the decision of the Full Federal Court in the Commissioner of Taxation v Lamesa Holdings BV to include a provision that expressly allows Australia to tax amounts from the direct or indirect alienation of entities that principally hold Australian real property. An equivalent provision has not been included in the amended Alienation of Property Article because existing subparagraph (2)(b) of Article 13 in the Convention is sufficient to cover these disposals. The following notes were agreed by the delegations to clarify that disposals of entities that indirectly hold an interest in a land rich entity can be taxed in the country where the property is situated.

For purposes of subparagraphs (2)(b)(ii) and (iii) of Article 13 (Alienation of Property), both delegations agreed that assets which consist wholly or principally of real property situated in Australia include assets consisting wholly or principally of such real property which is held directly or indirectly, including through one or more interposed entities (e.g. through a chain of companies).

Source country taxation of amounts derived from alienation of business property

2.74 New paragraph (3) deals with income or gains arising from the alienation of property (other than real property covered by paragraph (1)) forming part of the business assets of a permanent establishment of an enterprise or pertaining to a fixed base used for performing independent personal services. It also applies where the permanent establishment itself (alone or with the whole enterprise) or the fixed base is alienated. Such income or profits may be taxed in the country in which the permanent establishment or fixed base is situated. This corresponds to the rules for taxation of business profits and income from independent personal services contained in Articles 7 and 14 respectively.

2.75 Paragraph (3) does not deal with the taxation of amounts arising from the alienation of other business property (i.e. property not connected with a permanent establishment or fixed base in that country). Capital gains from the alienation of this property will be taxed in accordance with new paragraph (7). Revenue gains will generally be covered by the Business Profits Article .

Update of distributive rules dealing with alienation of ships, aircraft and containers used in international traffic

2.76 The Protocol will provide for exclusive residence country taxation of income and capital gains from the alienation of ships, aircraft or containers operated or used in international traffic. A current exception that allows source country taxation to recoup depreciation will be removed consistent with recent tax treaty practice in both countries. The exception for income described in subparagraph (4)(c) of the Royalties Article will also be deleted because payments for the use of equipment will no longer be covered by that Article. [Paragraph (4)]

Taxation of gains accrued on assets held by departing residents

2.77 Changes made by the Protocol will help prevent double taxation that may arise when an individual changes residence. Unrealised gains on assets that do not have the necessary connection with Australia are generally taxable under Australias domestic law when a person ceases to be a resident of Australia (section 104-160 of the ITAA 1997). Double taxation can potentially arise in the new country of residence if the country taxes the gain on the subsequent disposal of the asset and does not provide a credit for the Australian tax.

Option to align the taxation of residence change gains

2.78 New paragraph (5) allows an individual to elect in the new country of residence to be treated as having alienated property at the residence change time. The election will be available where property is taken as a result of a residence change to have been alienated under the laws of the former country of residence and the individual is taxable in that country on the residence change gain (or loss) that arises. Where the election applies, the property will be taken to have been alienated and reacquired in the new country of residence at the time the individual ceased to be a resident of the country of former residence (according to the taxation laws of that country). The alignment of the taxing point in both jurisdictions will help ensure appropriate relief is provided in the country that the individual is leaving for foreign tax that may have accrued in the other country. [Paragraph (5)]

Example 2.1

An individual departing Australia may, for instance, hold a less than 10% shareholding in an Australian public company. This shareholding will not have the necessary connection with Australia and thus the individual may be taken to have alienated the shares at the residence change time. Double taxation could arise if the United States taxes the pre-residence change component of the gain on a subsequent alienation of the shares.

If the election in paragraph (5) is exercised, the individual would be taken in the United States to have alienated the shareholding immediately before ceasing to be a resident of Australia under Australian tax law. The provisions of the Convention would then operate to ensure appropriate relief is provided from double taxation. Relief may not be required because the United States is unlikely to tax a non-US resident on the disposal of a foreign (Australian) asset unless the individual is a US citizen. The United States would be able to tax the post-residence change gain on the subsequent disposal of the shareholding.

2.79 A residence change disposal will generally not give rise to a gain in the other country unless the asset has some connection with that country (e.g. the asset is real property situated in that country). Paragraph (5) will crystallise a gain immediately before an individual changes residence and the country in which the individual is resident at that point in time would generally be required to provide a credit for tax, if any, that arises in the new country of residence. Australia would therefore provide a credit for US tax that may be paid on the deemed disposal of a US asset when an individual ceases to be a resident of Australia. The United States would, however, be required to provide a credit for the Australian tax if the residence change gain is taxable in the United States solely by reason of citizenship (Articles 22(1) and (2) of the Convention).

Exemption from former residence country taxation

2.80 The taxation of unrealised gains can give rise to cash flow problems because proceeds from the gains are not available to pay the tax. Australias domestic law provides relief by allowing departing individuals to defer tax on unrealised gains if they elect to treat assets to which the gains relate as having the necessary connection with Australia (subsections 104-165(2) and (3) of the ITAA 1997). The effect of the election is that a gain on the subsequent disposal of the property will be taxable in Australia even though the individual is not an Australian resident.

2.81 The Protocol will provide an exemption from former residence country taxation for gains deferred by an individual on ceasing to be a resident of that country if the individual is a resident of the other country when the gains are crystallised [paragraph (6)] . An individual departing Australia who defers tax by electing for an asset to have the necessary connection with Australia will, for instance, be exempt in Australia on a gain arising from a subsequent disposal of the asset if the individual is a resident of the United States at the time of the disposal. This will reduce compliance difficulties for departing residents, ensure post-residence change gains on foreign assets are not taxable in Australia (the US can still tax post-residence change gains derived by departing citizens on a citizenship basis (Article 1(3) of the Convention)) and that appropriate relief is provided from double taxation.

2.82 Paragraph (6) will not affect the taxation of gains derived from the disposal of assets that, prior to a residence change, already have the necessary connection with Australia. A requirement of paragraph (6) is that an individual must elect to defer tax on a residence change gain. This requirement will not be satisfied for assets that have the necessary connection with Australia because there is no deemed disposal of these assets when an individual ceases to be an Australian resident. Australia may therefore continue to tax gains realised on the disposal of these assets.

2.83 Similarly, paragraph (6) will not affect the inclusion in assessable income of a discount on a qualifying share or right that has been deferred under an employee share acquisition scheme. Again, this is because there is no taxation deferred as a result of a residence change. Paragraph (6) could operate, however, to exempt gains accrued on shares after allocation where an individual ceases to be a resident of Australia and elects to defer the residence change gain.

Capital gains not covered by specific distributive rules to be taxed in accordance with the domestic laws of each country

2.84 The Protocol inserts a sweep-up provision in relation to capital gains which enables each country to tax such gains in accordance with its domestic law, except where different treatment is provided in the preceding paragraphs of the Article [paragraph (7)] . Thus, except where Australias right to tax capital gains is limited by the other paragraphs (e.g. new paragraphs (4) and (6)) or otherwise affected by those paragraphs (e.g. new paragraph (5)), the provision preserves the application of Australias domestic law relating to the taxation of capital gains. Australia will thus continue to be able to tax, for instance, capital gains derived by US residents on the disposal of Australian entities.

2.85 The taxation of revenue gains (including revenue gains assessable under the CGT rules) will not be covered by new paragraph (7). In this regard, the term capital gains is intended to have the same meaning in Australia as gains of a capital nature . Revenue gains not covered by the distributive rules of the Alienation of Property Article may be covered by other Articles of the Convention (e.g. the Business Profits or Other Income Articles ).

Article 10 of the Protocol

Substitutes new Article 16 of the Convention - Limitation on Benefits

2.86 The Protocol will insert a new Limitation on Benefits Article into the Convention.

2.87 The Limitation on Benefits Article is intended to prevent residents of third countries from using interposed companies or other entities resident in one of the treaty countries to inappropriately access treaty benefits (i.e. treaty shopping). The new Article sets out a series of objective tests to determine the extent to which a person resident in one of the countries can claim benefits under the treaty. These tests generally avoid reference to a persons purpose or intent (a relevant factor when applying the current Article).

2.88 Treaty benefits will generally only be available for qualified persons specified in the Limitation on Benefits Article [paragraph (1)] . Certain items of income derived by other persons may also qualify for treaty benefits if the income is derived from an active trade or businessconducted in the United States or Australia [paragraph (3)] . Persons other than qualified persons may also be granted treaty benefits if the relevant competent authority is satisfied that the establishment, acquisition or maintenance of such person and the conduct of its operations did not have as one of its principal purposes the obtaining of treaty benefits [paragraph (5)] .

Qualified persons

2.89 Qualified persons entitled to claim treaty benefits are specified in new paragraph (2). Only residents of the United States or Australia for the purposes of the Convention can be qualified persons.

Individuals and government bodies

2.90 Individuals need only be residents of the United States or Australia to be treated as qualified persons. Government bodies (including Federal, State and local governments and other political subdivisions) of the United States or Australia will also be treated as qualified persons. [Subparagraphs (2)(a) and (b)]

Publicly traded companies

2.91 A company resident in the United States or Australia will be treated as a qualified person if the companys principal class of shares is listed on a recognised US or Australian stock exchange and is regularly traded on one or more recognised stock exchanges. [Subparagraph (2)(c)(i)]

2.92 The principal class of shares of a company is the class that accounts for more than half of the voting power and value of the company. If no single class accounts for more than half of the companys voting power and value, the listing and trading requirements must be satisfied for each class of a group that taken together account for more than half of the voting power and value of the company. A class of shares would be taken in Australia to account for more than half of the voting power in a company if they convey more than half the number of votes that can be cast on a poll at, or arising out of, a general meeting of a company as regards all questions that can be submitted to such a poll.

2.93 Recognised US and Australian stock exchanges on which the companys principal class of shares must be listed are specified in new paragraph (6). Recognised US stock exchanges are the NASDAQ System and any stock exchange registered with the US Securities and Exchange Commission as a national securities exchange under the US Securities Exchange Act 1934 [subparagraph (6)(a)] . Recognised Australian stock exchanges are the Australian Stock Exchange and any other Australian stock exchange recognised as such under Australia law [subparagraph (6)(b)] .

2.94 Trading of the companys principal class of shares can occur on any stock exchange agreed upon by the competent authorities [subparagraph (6)(c)] . These stock exchanges may be located in third countries. The term regularly traded is not defined in the Convention and will therefore have, for Australian purposes, the meaning that it has under domestic law.

2.95 Companies resident in the United States or Australia held directly or indirectly by companies that satisfy the above listing and trading requirements may also be treated as qualified persons. To qualify, at least 50% of the aggregate vote and value of shares in the company must be owned directly or indirectly by 5 or fewer companies that satisfy the listing and trading tests. Each intermediate company through which an interest is being traced must be a qualified person. [Subparagraph (2)(c)(ii)]

Other publicly traded entities

2.96 An entity other than a company (e.g. a public unit trust) resident in the United States or Australia will be treated as a qualified person if the entitys principal class of units is listed or admitted to dealings on a recognised US or Australian stock exchange and is regularly traded on one or more recognised stock exchanges [subparagraph (2)(d)(i)] . These entities may also be treated as qualified persons where they are held directly or indirectly by entities that satisfy the listing and trading requirements. To qualify, at least 50% of the beneficial interests in the entity must be owned directly or indirectly by 5 or fewer entities that satisfy the listing and trading tests [subparagraph (2)(d)(ii)] .

Benevolent organisations

2.97 Benevolent organisations established and maintained in the United States or Australia are also specified as qualified persons. These include entities set up and maintained in the United States or Australia exclusively for religious, charitable, educational, scientific or other similar purposes even if the entities are exempt from tax in their home country. [Subparagraph (2)(e)]

Pension funds

2.98 A trust or other fund resident in the United States or Australia that is established and maintained in that country to provide pensions or similar benefits to employees or self-employed persons will be treated as a qualified person (even if exempt) if the majority of the funds beneficiaries, members or participants are individuals resident in either Australia or the United States. [Subparagraph (2)(f)]

Entities principally owned by qualified persons

2.99 Entities resident in the United States or Australia that are principally owned directly or indirectly by specified qualified persons for at least half the tax year may be treated as qualified persons if the entities satisfy a base erosion test. [Subparagraph (2)(g)]

2.100 Qualified persons who must principally own the entity either directly or indirectly are:

•

individuals resident in the United States or Australia (i.e. qualified persons covered by new subparagraph (2)(a));

•

government bodies of the United States or Australia (i.e. qualified persons covered by new subparagraph (2)(b)); and

•

entities resident in the United States or Australia that satisfy public listing and trading requirements (i.e. qualified persons covered by new subparagraphs (2)(c)(i) and (d)(i)).

2.101 These persons must own at least 50% of the aggregate vote and value of the shares or other beneficial interests in the entity. Each intermediate entity through which an interest is being traced must also be a qualified person. [Subparagraph (2)(g)(i)]

2.102 The base erosion test will be satisfied if less than 50% of an entitys gross income for a taxable year is paid or accrued, directly or indirectly, to residents of third countries in the form of payments that are deductible in the entitys country of residence. Deductions for arms length payments made in the ordinary course of business for services or tangible property will not be treated as base-eroding and count towards the 50% of gross income limit. Nor will deductions for payments made on financial obligations to a bank resident in a third country if the payments are attributable to a permanent establishment of the bank in either the United States or Australia. [Subparagraph (2)(g)(ii)]

2.103 The term gross income is not defined for the purposes of the base erosion test. In this context it is intended that, consistent with US treaty practice, gross income in Australia will be taken to be gross receipts less cost of goods sold.

Headquarters company

2.104 A recognised headquarters company resident in the United States or Australia will be treated as a qualified person even though it is owned by persons resident in third countries. [Subparagraph (2)(h)]

2.105 To qualify as a recognised headquarters company:

•

a headquarters company must provide in its country of residence a substantial portion of the overall supervision and administration of a group of companies. The headquarters role can include group financing functions but these cannot be its principal headquarters functions. The company must also exercise independent discretionary authority in conducting its headquarters functions;

•

the group of companies that the headquarters company supervises must consist of companies resident in, and engaged in an active business in, at least 5 countries. The business activities conducted in each of these 5 countries must also generate at least 10% of the gross income of the group. Holdings in countries can be grouped together for the purposes of applying these requirements but the requirements must be satisfied for at least 5 countries or groups of countries;

•

the business activities of the group conducted in any one country other than the headquarters companys country of residence must not generate 50% or more of the gross income of the group;

•

the headquarters company must not generate more than 25% of its gross income from the other treaty country. Income derived by the company group from the other treaty country must also be derived in connection with, or be incidental to, the active business of the group; and

•

the headquarters company must be subject to the taxation laws generally applicable in the country where it is resident.

2.106 A headquarters company may still be recognised if any of the above gross income tests are not fulfilled provided that the required percentages are met when averaging the gross income of the previous 4 years.

Access to treaty benefits for persons other than qualified persons

Persons carrying on an active trade or business

2.107 Persons resident in the United States or Australia who are not qualified persons will nevertheless generally be entitled to treaty benefits for income derived from the other State which is connected with, or incidental to, an active trade or business conducted in the persons country of residence. The trade or business activity must, however, be substantial relative to the trade or business activity conducted in the other treaty country that gave rise to the income. Activities conducted by related persons are generally to be taken together for the purposes of determining the extent to which an active trade or business is being conducted. [Paragraph (3)]

2.108 The term trade or business is not defined and will thus have in Australia the meaning it has under Australian tax law. The new paragraph excludes, however, a business of making or managing investments for a persons own account, unless these activities are banking, insurance or securities activities carried on by a bank, insurance company or a registered, licensed or authorised securities dealer. A company that functions solely as a holding company for a company group is managing investments for its own account and thus would not be treated as being engaged in an active trade or business [subparagraph (3)(a)] . Whether a trade or business activity in a persons country of residence is substantial relative to a trade or business activity conducted in the other treaty country is to be determined based on the facts and circumstances [subparagraph (3)(b)] .

2.109 The activity grouping rules for related persons will deem a person to be engaged in an active trade or business where the trade or business is carried on by a connected person or by a partnership in which the person is a partner. The activities of these persons will therefore be taken together in determining whether an active trade or business is being conducted in a persons country of residence and whether the activities are substantial relative to a trade or business activity being conducted in the other treaty country. [Subparagraph (3)(c)]

2.110 A person will be taken to be connected to another if, based on the relevant facts and circumstances, one has control of the other or both are under the control of the same person or persons. This general rule is not limited by the specific connected person tests provided in the subparagraph.

2.111 The specific connected person tests provide that a person will be connected with a trust if the person holds at least half of the beneficial interests in the trust. Similarly, a person will be connected with a company if the person holds at least half of the aggregate vote and value of the companys shares or of the beneficial equity interest in the company. Each person in a group of entities that share 50% common ownership held directly or indirectly by a head entity are also to be treated as connected.

Competent authority discretion to grant treaty benefits

2.112 Persons resident in the United States or Australia who are not qualified persons may be granted benefits of the Convention if the competent authority of the other treaty country determines that the establishment, acquisition or maintenance of the person and the conduct of its operations did not have as one of its principal purposes the gaining of benefits under the Convention. This discretion recognises that there may be cases where significant participation by third country residents in an enterprise resident in one of the treaty countries may be warranted by sound business practice or long-standing business structures and does not necessarily indicate a treaty shopping motive. [Paragraph (5)]

2.113 Paragraph (7) will clarify that the Limitation on Benefits Article will not restrict the application of Australias domestic anti-avoidance rules such as the general anti-avoidance rule.

Treaty benefits not available for disproportionate income streamed to persons other than qualified persons

2.114 Treaty benefits may be denied for income derived by a company resident in a treaty country if the company has outstanding a class of shares that enables a disproportionate share of income derived from the other treaty country to be streamed to holders of that class of shares. Benefits will be denied if persons other than qualified persons hold at least half of the voting power and value of the class of shares. In this case, treaty benefits will not be available for the disproportionate share of income derived from the other treaty country that is streamed to the holders of the class of shares. Treaty benefits will similarly be denied for income derived by a company where more than half of the aggregate vote and value of the company is owned by another company that has outstanding a class of shares that allows a disproportionate share of income derived from the other treaty country to be streamed to persons other than qualified persons. [Paragraph (4)]

2.115 A company will not have outstanding a class of shares in Australia if the shares are unissued or have been cancelled. Similarly, unissued and cancelled shares will not be taken into account when determining whether persons other than qualified persons hold at least half of the voting power and value of a class of shares.

Article 11 of the Protocol

Substitutes new Article 21 of the Convention - Other income (previously Income Not Expressly Mentioned)

2.116 The Protocol will insert a new residual Article to deal with items of income not specifically dealt with by other Articles of the Convention. The new Article reflects recent treaty language and has the same effect as the Article replaced. The source country will thus retain the right to tax income not dealt with by other Articles of the Convention.

Article 12 of the Protocol

Amends Article 22 of the Convention - Relief from Double Taxation

2.117 The Protocol will amend the Relief from Double Taxation Article to specify Australian income taxes considered to be income taxes for the purposes of providing credit relief in the United States. The specified taxes include the Australian income tax, including tax on capital gains, but the petroleum resource rent tax is not specifically covered for these purposes. This leaves it open as to whether the United States will view the petroleum resource rent tax as an income tax. Double taxation will be relieved in respect of such tax where a credit is available under US domestic law.

Article 13 of the Protocol

Entry into force

2.118 Article 13 provides for the entry into force of the Protocol.

2.119 The Protocol will enter into force once both countries have exchanged instruments of ratification [paragraph (1)] . This can only occur after all domestic requirements to give the Protocol the force of law in the respective countries have been completed.

2.120 For withholding tax purposes, the Protocol will generally have effect in Australia from 1 July 2003 if it enters into force during the 2002 calendar year. In this regard, the Protocol cannot apply to withholding taxes on dividends, interest or royalties paid or credited before 1 July 2003 [subparagraph (2)(a)(i)(B)] . For other Australian taxes, the Protocol will apply to income, profits or gains derived by a person in a year of income beginning in the calendar year next following that in which the Protocol enters into force [subparagraph (2)(a)(ii)] . The Protocol would thus apply to these taxes starting from the year of income commencing 1 July 2003 (or substituted period commencing in the 2003 calendar year) if the Protocol enters into force during the 2002 calendar year.

2.121 Different commencement arrangements will apply for withholding taxes if the Protocol does not apply to these taxes from 1 July 2003. Under these arrangements the Protocol would apply to withholding taxes on dividends, interest or royalties paid or credited on or after the first day of the second month next following the date on which the Protocol enters into force. For example, the Protocol would thus apply to dividends paid or credited on or after 1 October 2003 if instruments of ratification are exchanged on 25 August 2003. [Subparagraph (2)(a)(i)(A)]

2.122 The same commencement arrangements will apply for withholding taxes in the United States [subparagraph (2)(b)(i)] . Commencement arrangements in the United States for other taxes will be similar to those in Australia except that the Protocol will apply for taxable periods beginning on or after 1 January in the calendar year next following that in which the Protocol enters into force. The Protocol would thus apply to these taxes starting from the taxable period commencing 1 January 2003 (or substituted period commencing in the 2003 calendar year) if the Protocol enters into force during the 2002 calendar year. The difference in the commencement arrangements reflects that a standard taxable period in the United States commences on 1 January rather than 1 July as in Australia [subparagraph (2)(b)(ii)] .

2.123 The provisions of the new Dividends Article will not affect certain dividends paid by a US real estate investment trust [paragraph (3)] . Provisions in the existing Dividends Article will apply. Refer to the discussion on the Dividends Article for an explanation of these arrangements.