CONVENTION WITH GREAT BRITAIN AND NORTHERN IRELAND WITH RESPECT TO TAXES ON INCOME

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP70-00241R000200090013-2
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 41
• Document Creation Date: November 17, 2016
• Document Release Date: June 20, 2000
• Sequence Number: 13
• Publication Date: June 1, 1946
• Content Type: REPORT

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79Th CONGRESS
Rd Session
SENATE EXECUTIVE REPT.
I No.4
CONVENTION WITH GREAT BRITAIN AND NORTHERN
IRELAND WITH RESPECT TO TAXES ON INCOME
FRIDAY, MAY 10, 1946.-Ordered to be printed
Mr. LUCAS, from the Committee on Foreign Relations, submitted the
following
REPORT
[To accompany Executive D, Seventy-ninth Congress, first session]
The Committee on Foreign Relations has had under consideration
Executive D, Seventy-ninth Congress, first session, a convention
between the United States of America and 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, signed at Washington on April 16, 1945.
This is the second time this convention has been considered by this
committee. It was first referred to this committee on April 24, 1945.
Thereafter it was made the subject of extended consideration by a
subcommittee, in the course of which the subcommittee held public
hearings on May 23, and June 13, 1945. The convention was favor-
ably reported to the full committee under date of June 30, 1945, and
the full, committee made a favorable report to the Senate on July 3,
1945, Executive Report No. 6, Seventy-ninth Congress, first session.
For the information of the Senate there is appended hereto and made a
part of this report the report of the Committee on Foreign Relations
ref .rred to.
On February 6, 1946, however, the convention with its related
Executive E, a convention relating to estate taxes between the
United States and the United Kingdom, was recommitted to the
committee for further hearings with respect to (a) certain objections
raised with respect to paragraph (3) of article XI of. the convention
and (b) the application of article XIV of the convention to the
problem of taxation of so-called refugee aliens present in the United
St tes.
These latter problems have been considered by a subcommittee
of the, Committee on Foreign Relations and hearings were held
before that subcommittee on April 17, 1946, for the purpose of
hearing interested persons. The report of the subcommittee on
these points is also appended hereto and made q part of this report.
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`2 CONVENTION WITH RES CT TO TAXES O
It will be seen from such subcommittee report that the subcom-
mittee recommends (a) that the convention be ratified without amend-
ment; (b) that the objections taken to the presence in the convention
of paragraph (3) of article XI are sound; and (c) that appropriate
steps be taken, after ratification, looking to striking such paragraph
from the convention. The subcommittee is satisfied with assurances
given it that the appropriate agencies of the two Governments will
cooperate in the drafting of a protocol to the convention designed to
accomplish the purpose in (d), which protocol will, in due course and
zit the earliest practicable date, be presented to the Senate, the amend-
ment thus made to the convention taking effect as at the effective
date of the convention itself.
The full committee concurs in the views of the subcommittee and
hereby report the convention favorably to the Senate without amend-
ment and recommend that it advise and consent to its ratification.
UNITED STATES SENATE,
COMMITTEE ON FOREIGN RELATIONS,
Washington, D. C.
REPORT OF SUBCOMMITTEE ON EXECUTIVE D, SEVENTY-NINTH CONGRESS,
FIRST SESSION (A CONVENTION BETWEEN THE UNITED STATES AND
THE UNITED KINGDOM FOR THE AVOIDANCE OF DOUBLE TAXATION
OF INCOME, ETC.)
Hon. TOM CONNALLY,
Chairman, Committee on Foreign Relations,
United States Senate, Washington, D. C.
DEAR SENATOR: The subcommittee appointed to study and report
on Executive D, Seventy-ninth Congress, first session (a convention
between the United States of America and the United Kingdom of
Great Britain and Northern Ireland for the avoidance of double
taxation and the prevention of fiscal evasion with resp:?ct to taxes on
income signed at Washington on April 16, 1945), reported back to the
full committee on June 30, 1945, with recommendation (Executive
Report No. 6, Seventy-ninth Congress, first session). Such report is
readopted by this subcommittee as its report, subject to the qualifica-
tions thereto resulting from the recommittal of Executive D to the
Committee on Foreign Relations as set forth below. On February 6,
1946, Executive D was recommitted to the Committee on Foreign
Relations for further hearing. The subcommittee appointed to study
and report on Executive D as a result of the recommittal hereby report
back to the full committee with recommendation.
The issues constituting the basis for recommittal of Executive D,
as set forth` above and considered by your subcommittee, are as
follows:
(a) The question of striking from the convention paragraph (3) of
article XI thereof ; and
(b) The application of article XIV to the taxation of so-called
refugee aliens present in the United States.
With respect to (a) your subcommittee believes that there exist
substantial grounds for the view which has been urged upon it that
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CONVENTION WITH RE ECT TO TAXES ON INCOME
paragraph (3) of article XI is open to the objection that it is discrimi-
natory in that the reciprocal exemption, granted under paragraphs 1
and 2 of the article by each of the contracting countries with respect
to compensation for personal services performed within such country
by a resident of the other country, is denied to actors, musicians,
athletes, and other public entertainers. While the operation of the
credit given by one of the Governments for the tax which may be
imposed upon such compensation in the case of such individuals by
the other Government does in fact avoid double taxation, it, never-
theless, appears that the paragraph does draw a distinction between
persons falling within its scope and persons falling without it, denying,
as it does, the exemption to the former class and allowing it to the
latter. In addition, the number of taxpayers concerned is small, and
the net balance of revenues resulting from the elimination of the
paragraph is actually and relatively small and hence, such elimination
is not objectionable from the revenue standpoint of the United States.
In any instance in which the United Kingdom imposes a tax on the
earnings of an American actor in England, the United States would
allow a credit, thus reducing our revenue and offsetting to this extent
the United States tax on the British actor. Your subcommittee,
therefore, while fully mindful of the desirability of prompt and
favorable action upon the convention as drawn and in view of the
fact that the British Government ratified the convention many
months ago, sought means designed to bring about the elimination
of the objectionable paragraph without impeding Senate action on
the convention. Assurances have been given your subcommittee
that the appropriate branches of the two Governments are now
engaged in the drafting of a protocol to the convention and the taking
of necessary steps incident thereto for the elimination of such para-
graph. The protocol will, in due course and at the earliest practicable
date, be submitted to the Government of the United Kingdom, the
executive branch of which has, after consultation, signified its willing-
ness to sanction such provision, and to the Senate. Such protocol
will, when adopted, have retroactive effect to the date of the con-
vention itself. It is, therefore, recommended by your committee in
this regard that the convention be ratified as now drafted in the light
of the assurances thus given.
With respect to (b) it will be seen by reference to Executive Report
No. 6 (p. 4) that at the time such report was made the' Bureau of
Internal Revenue had under investigation, on a comprehensive scale,
the taxable status of refugee aliens in the United States, and the
appraisal of the scope of the problem and its relation to article XVI
of the proposed convention. In the meantime such investigation is
in process of being concluded and the results thereof in the form of a
report are spread upon the hearings before your committee incident
to its reconsideration of the convention. (See p. 116 et seq., hearings.)
From a study of such report and discussions based. thereon, the mem-
bers of your committee believe that the so-called refugee-alien taxa-
tion question is a relatively minor problem, and do not regard it
as having any appreciable bearing upon action with respect to the
proposed convention. For the information of the Committee the
report of the Bureau relating to investigation of refugee aliens is
attached hereto and made a part of the report of the subcommittee.
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4 CONVENTION WITH RESPEy,;1' TO TAXES ON INCOME
We believe that the terms of the convention are, on the whole,
advantageous to the United States and that the convention should be
ratified.
Respectfully submitted.
SCOTT W. LUCAS, Acting Chairman.'
MEMORANDUM CONCERNING INVESTIGATION OF ALIEN TAXATION
ORIGIN OF PROBLEM
Beginning about May 1945 there appeared in the press a series of articles ques-
tioning the sufficiency of the existing income-tax law as applied to aliens who were
physically present in the United States. The articles referred to "refugee stock
traders" or "guest speculators" and the like who as war refugees in the United
States were reaping allegedly tax-free profits in this country, especially in their
transactions on domestic stock and commodity exchanges. Some writers Sug-
gested that such profits might be as high as $800,000,000 on which the minimum
tax would be about $200,000,000. In connection with a legislative measure
pending before the Ways and Means Committee and an income-tax convention
pending before the Senate Foreign Relations Committee, consideration was given
to possible enabling legislation but action was suspending pending further check
concerning the adequacy of existing law.
APPLICABLE STATUTORY PROVISIONS
There are outlined below the provisions of existing law, including tax conven-
tions, which are the subject of the present controversy.
For Federal income-tax purposes aliens are classified into resident and non-
resident aliens and the latter are subclassified, as between those (a) not engaged in
trade or business in the United States and (b) those engaged in trade or business
therein. An alien resident in the United States is, like the citizen of the United
States, taxed on his income from all sources, including his capital transactions.
However, in the operation of the credit provisions contained in section 131. of the
Internal Revenue Code he may be denied credits for foreign taxes paid which are
granted to the citizen.
The nonresident alien not engaged in trade or business in the United States is
taxed on all his fixed or determinable annual or periodical income from sources
within the United States, such as dividends, interest, rents, and royalties, but is
exempt from tax on any gains from his transactions in stocks, securities, or com-
modities through a United States resident broker, commission agent, or custodian.
The exemption thus granted to aliens in this category and on this class of trans-
actions takes account, inter alia, of the rate of tax (imposed on a gross basis) on
such periodical items of income and such administrative questions as the imprac-
ticability of determining and enforcing a tax against such aliens incident to their
transactions clearing through our domestic exchanges. House Report No. 2475
and Senate Report No. 2156 on the revenue bill of 1936 recognize the collection
difficulties involved in this type of case.
The system of levying a gross tax on items of fixed and periodical income, with
accompanying provisions for collection at source, has proven very successful since
its adoption in 1936, not only from an administrative but also from a revenue
point of view. The tax collected in this class of cases in 1943, the latest year'. for
which complete statistics are available, was about $50,000,000 which exceeds: by
many times collections from such class of taxpayers under previous principles of
taxation.
Under existing statutory provisions the nonresident alien is not subject to tax
on capital gains merely by reason of his transactions in stocks, securities, or
commodities through a resident broker, commission agent or custodian, but he is
subject to tax on such gains if he is otherwise engaged in trade or business in the
United States and most any sort of activity in this respect, including the per-
formance of personal services within the United States at any time during the
taxable year, constitutes engaging in trade or business. However, it should be
observed that with respect to countries with which we have income-tax conven-
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CONVENTION WITH RESPECT TO TAXES ON INCOME rj
tions (Canada, France, and Sweden), this particular phase of alien taxation is
modified to provide that residents of those countries (other than United States
citizens) are not subject to tax on capital gains unless they have a permanent
establishment in the United States. This forms a ?part of the permanent estab-
lishment base used elsewhere in the conventions, and the base so employed with
those countries has been made a part of the pending convention with the United
Kingdom. The adoption of the permanent establishment principle has been
found in the course of the' investigation referred to below to have little effect on
cases involving nationals of Canada, France, Sweden, or the United Kingdom.
Thus out of 12 cases of British subjects involving potential deficiencies of about
$60,000 none is affected by the permanent establishment principle. Also in the
case of eight French citizens involving proposed deficiencies of about $500,000 the
outcome of only one deficiency of about $250 seems to be dependent on whether
the individual had a permanent establishment in the United States. No cases of
Canadian or Swedish nationals. involving this principle have been discovered.
SCOPE OF INVESTIGATION
The investigation referred to above as to the adequacy of existing law was
opened by the issuance of Commissioner's Mimeograph No. 5883, dated June 27,
1945, for the information of the public and Bureau personnel and contained a
careful analysis of the operation of existing law. The Commissioner accompanied
such mimeograph by a press release calling attention to the narrow scope of
the exemption granted to nonresident aliens deriving income from United States
sources and directing that close scrutiny be made of .all claims for exemption.
Noncitizens were also asked to consult with appropriate Bureau officials in order
to have their tax status clarified and their attention was called to the provisions
of existing law which require departing aliens to' obtain tax clearance before
departure. As a part of the general assistance and investigative plan, intended
to assure fair and proper treatment under existing law and to provide data which
might afford a basis for legislative or administrative improvements, a question-
naire (Form 1044) was prepared and issued in order to elicit all pertinent facts
bearing on the question of proper classification of noncitizens for taxation purposes.
The form did not ask merely that the noneitizen claiming exemption state certain
conclusions of law or fact respecting his status but was of searching character
intended to bring out all his activities from which.the Bureau could form its own
conclusions.
Although the investigation was of comprehensive scope and one of continuing
application, activities were centered largely on certain groups in which the Bureau
had the most immediate interest. Thus, there were first brought under investi-
gation those aliens who brought with them or otherwise transferred property in
considerable amounts into the United States. With the cooperation of officials
of the New York Stock and Commodity Exchanges, Bureau agents examined all
accounts in such exchange houses of the above and any other groups who had
engaged in transactions on those exchanges. In making such check there were
set aside all accounts of noncitizens who were subclassified as between resident
and nonresident aliens. Altogether in excess of 700,000 accounts were examined
and from these about 15,000 accounts of noncitizens were located. Similarly,
a check was made of all custody, safekeeping, and investment agency accounts
in the banks of the New York area and from this check a list of 5,000 noncitizen
accounts was compiled. Cases were also located through standard Bureau pro-
cedure and a good many names of aliens sent in by the public or mentioned in
the press were included in the Bureau's investigation. As a part of the plan it
was necessary to eliminate duplications incident to one party having an account
with more than one brokerage or financial house and also to transfer a good many
cases from one district to another because of changes in addresses. Upon making
such adjustments there remained for investigation in the New York area alone
about 12,200 cases and for the country as a whole about 15,000 cases.
Satisfactory methods of cooperation having been perfected between the Bureau
and the New York brokerage and banking institutions, the Bureau field offices
were asked to enter into similar arrangements with such institutions in their
respective territories. A similar spirit of cooperation was found to exist in such
territories; in fact, the program was greatly facilitated in the New York and other
areas by the publicity and public interest which it attracted.
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CONVENTION WITH RESPECT TO TAXES ON INCOME
RESULTS OF INVESTIGATION
The investigation to date has uncovered 79 cases where dispute exists as to
whether the noncitizen is a nonresident or resident of the United States or whether
he was engaged in trade or business within the United States. The amount of
taxes proposed by the Bureau in such cases is $3,953,253 attributable to a variety
of causes which are difficult to summarize. However, the two largest deficiencies
amounting to about $1,500,000 and $500,000, respectively, are proposed against
former citizens who, after renouncing their citizenship, have been in the United
States since the early days of the war. The deficiencies in these cases may be
attributed almost entirely to causes other than capital transactions; 5 of the 79
cases account for about $2,900,000 of the total proposed deficiencies. Out of
the 79 cases 43 involving $3,579,339 in proposed deficiencies, are situated in the
New York area. These cases were located as the result of processing about
10,500 cases. Of the 10,500 aliens investigated about 80 percent were found to
have filed returns on the basis of being resident in the United States or engaged
in trade or business therein, thus conceding that they were subject to tax on their
income from capital transactions in the United States. About 15 percent of the
group of 10,500 cases were found not to merit further investigation because of the
small amounts involved. About 3 percent of the remaining 5 percent are classified
principally as resident aliens not required to file returns because their income was
less than allowable exemptions. The balance is composed of nonresident aliens
not engaged in business in the United States who were not required to file returns
because their taxes had been fully satisfied at source and nonresident aliens
who had filed returns reporting their taxes which had not been fully satisfied
at source. Only a few of such nonresidents were found to have been in the
United States during the taxable periods involved and their stays here were of
very limited duration. Of the 12,200 potential noncitizen taxpayers in the
New York area about 800 have not yet been contacted and about 900 cases are
still in process of audit. After giving special attention for the past several
months to cases where there was delayed response to Bureau letters, it has been
found that such delay was in nearly all instances due to ordinary causes, such as
changes in address, so it is not anticipated that the group of 800 cases will be
productive of substantial deficiencies; in fact, based on past experience, it is
thought that practically all of these cases will be dropped because of the small
amounts involved. Moreover, considering that all cases where contacts had been
made were examined in selecting the 43 cases, representing those where defi-
ciencies were most likely to develop, it is not believed that substantial deficiencies
are likely to be uncovered in the final audit of the group of 900 cases.
Altogether it seems that the figure $3,953,253 is not likely to be increased when
the 79 cases are finally adjusted. It is known that adjustments will be upward
in some cases when the years 1944 and 1945 are considered but it is also known
that in computing tentative taxes making up the $3,953,253 figure gross income
has been used in many instances, pending ascertainment of the cost of securities
and other deductible items, and that, pending further investigation as to the time
the capital assets were held, tax has been computed on the basis of short-term
gains. It also seems unlikely that the Government will be successful in assert-
ing its claim of residence or engaged in business in all cases. However, even if
the figure $3,953,253 were doubled to take care of the above and other contin-
gencies, such as the discovery of new cases, it would still be quite small from a
revenue point of view considering the amount of effort which has been put into
the project. In this general connection, the current additional taxes being
asserted as the result of audits of other cases and other investigative projects of
the Bureau are now exceeding $1,000,000,000 per year.
SUMMARY OF INVESTIGATION
The claims made in the press and financial circles that aliens present in the
United States were engaged in business transactions on substantial basis in this
country, especially on our exchanges, seem to have been well founded but there
seems to be little justification for the charge that they have attempted to avoid
taxation under the provisions of existing law. On the contrary, the studies indi-
cate that all except a comparatively small number of the aliens having any
potential liability have heretofore filed tax returns on the basis of being resident
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CONVENTION WITH RESPECT TO TAXES ON INCOME
in the United States or engaged in trade or business therein, thereby admitting
that they are subject to tax on their capital transactions in this country. As
with respect to citizens, errors may be found upon audit of their returns but it is
important to note that they _have not tried to hide or to avoid their responsibili-
ties under our tax laws. Moreover, a test check made of the more important
returns filed indicates that the percentage of accuracy and error is comparable
to that found in the returns of citizens. Even in the 79 cases many of the aliens
had filed returns on a nonresident basis.
However, aside from the immediate results of the investigation, reflected pri-
marily in the 79 cases, there are certain over-all considerations which should be
mentioned. Although such immediate results have been quite negligible from
a revenue point of view, the matter of alien taxation becomes active every few
years and it is believed that the statistics gathered will be found to be of substan-
tial benefit for future legislative and administrative purposes. Also, upon con-
sidering the publicity given to the investigation and the thoroughness with
which the alien field was combed, it is believed that the program is entitled to
credit for certain indirect benefits looking toward a better understanding and
enforcement of taxes in the alien field.
PRIOR LEGISLATIVE CONSIDERATIONS
This subject is reflected primarily in H. R. 3138, May 7, 1945; the report of
the Committee on Foreign. Relations concerning the proposed income-tax con-
vention between the United States and the United Kingdom (executive report
No. 6, July 3, 1945, 79th Cong., 1st sess.) ; and in the discussion between Senator
McMahon and Senator Maybank on the subject of alien taxation (vol. 91, July
19, 1945, 79th Conga, 1st sess., pp. 7916--7919). The legislative changes consid-
ered were those involving (1) a statutory definition of "residence" and (2) a
modification of the existing statutory definition of engaging in trade or business.
In executive report No. 6 the conclusion was reached that any statutory definition
of residence would be equally applicable to cases coming within the pending con-
vention with the United Kingdom, since residence is not defined in such conven-
tion. The conclusion was also reached that although a change in the definition
of what constitutes engaging in trade or business might not affect all cases coming
within such convention there were important compensating factors. In the
course of discussion between Senator McMahon and Senator Maybank the former
stated, in effect, that although he was first inclined to feel that the importance
of the subject was such as to warrant the consideration of an amendment to
existing law to define what constitutes "residence" he had since concluded that
the defect was not so much a matter of statutory law as of interpretation thereof
and that upon careful study of the revised rulings of the Treasury in this regard
he was not prepared to say that the situation had not been taken care of. Senator
McMahon also gave assurances to Senator Langer that the revised rulings of the
administrative branch would be applied retroactively to cover those aliens who
had been in the United States during the war period; and, it should be added, that
such rulings have been so applied and their application so reflected in the above-
mentioned results of the recent drive. It should also be noted that, for the
reasons above stated, any interpretation of residence by the administrative or
judicial branches is equally applicable to our several income-tax treaties.
Although considerable attention has heretofore been given to the legislative
approach to a solution or improvement of the problem, the purpose of the present
memorandum is merely to set forth the facts recently ascertained by the Bureau
with respect to the taxability of income, particularly capital gains, derived from
sources within the United States by refugee aliens. It is thought that further
development of the subject would be somewhat premature until the interested
committees of Congress have had an opportunity to consider the recent factual
development of the problem.
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8 CONVENTION WITH RESPECT TO. TAXES ON INCOME
Noncitizen taxpayers' cases assigned, New York area field divisions, as of Apr. 15,
1946
Second
Now
York
Upper
New
York
Brooklyn) Total
Total letters mailed ---------------------------------
1,461
8,517
2,658
12,636
Replies received
---------------------------------- - -
No reply ------------------------------ ---
1,414
47
8,208
309
2,6511
None
12,280
356
Replies received --------- _ _____________________________
Transferred ----- ----------------------------------- ---
1,414
16
-
8,208
218
---
2,658
166
--
12,280
400
Replies to be accounted for
1,398
7,990
----
2,492
11,880
Replies to be accounted for--
Cases in _______________________
process _____________
1, 1,398
231
7,090
614
2,492
62
11,880
907
Investigation completer]
1,167
----
7,376
2,430
10,973
-
Result to date:
Closed, no change 2_______-__ _____
---------------------
Closed, survey 3--------------- ----------------------------
617
513
--
682
6,657
2, 127
271
_
-
3, 426
7,441
anges Total made or proposed or p
roposed_____________________________________
1,130
37
7,339
37
2,398
32
10,867
106
Total ------------
1,167
7,376
2,430
10,073
Letters mailed out 12
636
Cases transf
rr
d
,
e
e
-- _____-----_ --__-_ 400
----------------------------'
Cases retained ----------------------------------------------------------------------- 12
236
No re
l
,
p
y-- ------------------------------- 356
Cases to beinvestigated ____________
Cases in process - _ ------- 11,880
------------------------- -------- 907
Cases processed--------------------------------------- -- ---- ------ 10
973
Closed
n
ch
,
o
,
ange---------------------------- :10
867
,
Changed cases------------------------------ ------ 106
I Or (a) nonresidence, (6) income less than exemption, verified from reliable source.
2 After verification as to nonresident status or, if resident, examination of returns.
2 Found unworthy of examination of resident returns or, if no return, account too small to warrant'nrther
investigation.
Executive Report No. 6, Seventy-ninth Congress, first session, sub-
mitted by Mr. Lucas on Tuesday, July 3, 1945, follows:
The Senate Committee on Foreign Relations, having had. under
consideration. Executive D, Seventy-ninth Congress, first session, a
convention between the United States of America and 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, signed at Washington on April 16, 1945, hereby
report the same favorably to the Senate without amendment and
recommend that it advise and consent to its ratification.
For the information of the Senate, there is appended hereto,.and
made a part of this report, the report of the subcommittee under
date of June 30, 1945. There is also appended for the information
of the Senate the message from the President, transmitting the con-
vention and the accompanying report of the Secretary of State.
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CONVENTION WITH R T N I
UNITED STATES SENATE,
COMMITTEE ON FOREIGN RELATIONS,
Washington, D. C.,. June 80, 1945.
REPORT OF SUBCOMMITTEE ON EXECUTIVE D, SEVENTY-NINTH
CONGRESS, FIRST SESSION (A CONVENTION BETWEEN THE UNITED
STATES AND THE UNITED KINGDOM FOR THE AVOIDANCE OF DOUBLE
TAXATION OF INCOME, ETC.)
Hon. Tom CONNALLY,
Chairman, Committee on Foreign Relations,
United States Senate, Washington, D. C.
DEAR SENATOR: The subcommittee appointed to study and report
on Executive D, Seventy-ninth Congress, first session (a convention
between the United States of America and 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 signed at Washington on April 16, 1945), hereby report back
to the full committee with a recommendation.
Incident to your subcommittee's consideration of the proposed
convention, four certain questions have attracted its special atten-
tion, namely:
(1) The desirability of transmitting to the Senate for its
advice and consent any contemplated extension of the proposed
convention to a British colony or to a United States possession,
as the case may be;
(2) The relation of the provisions of the convention to our
domestic principles of.taxation of capital gains (primarily stocks,
securities, and commodities) as applied to the alien resident in the
United States and the nonresident alien who is engaged in trade
or business in the United States;
(3) Whether the proposed convention should be regarded as
a precedent for future conventions with other countries;
(4) The desirability of affording to business and its representa-
tives an opportunity to present to the executive departments
concerned, preliminary to any tax conventions discussions with
any foreign country, taxation problems existing with respect to
such foreign country.
The problem in (1) relating to affording an opportunity of review
by the Senate of contemplated adherence to the convention of any
colony, overseas territory, or other areas over which one of the con-
tracting countries exercises authority has been discussed with both
the State and Treasury Departments. As a result, the committee is
now in receipt of the following letter from the Secretary of State in
which it is set forth that the State Department will recommend to the
President that any such formal declaration under article XXII by
either country will be transmitted to the Senate for its advice and
consent before admitting such colony or such possession within the
framework of the convention. Your subcommittee views such arrange-
fiiont as _entirely satisfactory and as laying the basis for working out
the problem satisfactorily as it arises.
S. Ex. Rept. 4, 79-2-2
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CONVENTION WITH RESPE JT TO TAXES ON INCOME
Hon. TOM CONNALLY, JUNE 27, 1945.
Chairman, Committee on Foreign Relations,
United States Senate, Washington, D. C.
MY DEAR SI NATOR CONNALLY: Reference is made to discussions before a'', sub-
committee of the Committee on Foreign Relations regarding the convention
between the United States of America and 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, signed at Washington on April
16, 1945 (Senate Executive D, 79th Cong., 1st less.).
During those discussions a question was presented respecting the procedure to
be followed by this Government in accepting or giving a notification of extension
of the convention, under the provisions of article XXII thereof, to colgnies,
overseas territories, or other areas over which one of the contracting parties
exercises authority. I am glad to inform you that in connection with any 'such
notification of extension of the convention, the Department of State will recom-
mend to the President that the matter be submitted to the Senate for its advice
and consent before any notification of extension is accepted or given on behalf
of the United States.
Sincerely yours,
JOSEPH C. GREw, Acting Secretary.
With respect to the taxation of capital gains, where the alien is
found to be resident in the United States he is under existing law taxed
on his income from all sources, including his capital gains, but where
he is found to be a mere transient, or sojourner, or for other reasons
not resident in the United States, he is not taxable on his capital
transactions unless he is engaged in trade or business in the United
States. The convention does not disturb the existing residence
principle but does contain some modification of taxation on the basis
of being engaged in trade or business, in that the test prescribed. in! the
convention is whether the alien has a permant establishment (branch,
agency, or other fixed place of business) in the United States as dis-
tinguished from being engaged in trade or business therein. Although
an alien having a permanent establishment in the United States would
in nearly all cases be engaged in business therein, certain cases could
arise where he could engage in trade or business without having a
permanent establishment and in such instances he would be exempt
from tax on capital gains. Respecting this variation, however, there
is an important compensating factor, in that it is not practicable to
trace, in the absence of the convention, transactions on the United
States exchanges carried on through British brokers by a British
resident who under existing law is classed as being engaged in business
in the United States. Under the convention, however, the means
have been provided, through exchange of tax information, to ascertain
the British resident having a permanent establishment in the United
States and to locate and tax his transactions on the United States
exchanges even though carried on from sources in Britain. Thus
there has been substituted for a theoretical and ineffective basis of
taxation a more realistic and effective one.
The effect of the permanent establishment principle on British
methods of taxation on the securities and commodities exchanges
was also considered. Comparisons between the United States and
British systems respecting taxation of such transactions become some-
what involved because of the divergent taxation concepts of the two
countries but the following more important principles are noted:i A
United States citizen, regardless of his place of residence or domicile,
can deal on the British stock or security exchanges free from British
tax unless his transactions are under British law regarded as trading
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profits, and the permanent establishment provision of the convention
does not modify this principle. The United States law as modified
by the permanent establishment principle is less liberal, in that the
British resident upon having a permanent establishment in the United
States is taxable on profits from his transactions on the exchanges.
For example, the United States lawyer or engineer having a branch
office (permanent establishment) in London could deal extensively on
the London exchanges without being subject to British tax on his
resulting profits while the British lawyer or engineer with a branch
office in the United States would be subject to United States tax on
profits from exchange transactions in the United States. Thus, in
such instances the United States taxes its citizen on his profits on the
British exchanges and the British resident having an office or other
form of permanent establishment in the United States on his profits
on United States exchanges. Since Britain in such instances imposes
no tax the United States tax, is not reduced because there is no credit
for the nonexistent British tax. It is again noted that the convention
makes provisions for the exchange of information so that the United
States is in a better position to follow the transactions of its citizens
and residents on the British markets and, where pertinent, of the
transactions of British residents on the United States markets.
There are other instances,, however, where in practice the permanent-
establishment concept adopted in the convention may overlap. Thus,
if a United States bank with a branch in London should sell securities'
on the London exchange it would be subject to British tax since it
would have a permanent establishment in Britain and its sales of
securities would be regarded as part of the trading profits of the bank.
On the converse side, the United States would also tax profits of a
British bank having a branch in the United States. It is also noted
that in the first illustration the United States tax would be reduced by
a credit for the British tax under the existing United States law and
the convention and in the second illustration the British tax would be
reduced by the United States tax under the convention which modifies
British law in this regard.
In considering this general subject, the subcommittee is aware of
the fact that the Bureau of Internal Revenue has under active investi-
gation the taxation of capital transactions of refugee aliens in the
United States and the possibility of legislation, if found necessary, to
supplement such program. As above indicated, there may be certain
cases falling in between the test of being engaged in trade or business
and having a permanent establishment where the convention is more
liberal than existing law, but there are other compensating factors
and no such technical conflict exists where the test of taxation is
residence. Moreover, the same provisions found in the British con-
vention are now in effect under the conventions with Canada, Sweden,
and France.
It is believed that satisfactory reconciliation has been made between
technical principles of the two systems, and that the adjustments
agreed upon are, on the whole, advantageous to the United States,
especially when the provisions relating to exchange of tax information
are considered.
With respect to the third point, your subcommittee has been given
to understand that neither this convention nor any of our existing
conventions are regarded by the executive branches concerned as
precedents for future tax conventions. The conditions encountered
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12 CONVENTION WITH RESPELL TO TAXES ON INCOME
in negotiations with foreign countries are found to vary widely as
between the respective countries and thus any specific provisions
found in one convention may not be found, from the United States
standpoint, to be acceptable in a convention with another country.
A concession made to a particular country by the United States in! a
tax convention with such country may not be made in the case of
another country in the absence of compensating concessions by such
country.
With respect to (4) it is the understanding of your subcommittee
that the executive departments concerned have in the past encouraged
American business interests to present their views relating to taxation
problems with foreign countries and that, wherever practicable, such
policy will in the future be expanded. It is understood, however,
that many foreign countries are disinclined to publicize the advent
of their negotiations with other countries. To the extent that such
and other like considerations will permit, your subcommittee is satis-
fied that every effort will be made to invite expression of views by
domestic interests involved prior to undertaking future tax negotia-
tions. In this regard, the executive departments concerned, are
anxious in the interests of tax conventions effecting their purposes,
of being fully informed of all taxation problems existing between the
United States and any foreign country with which it proposes entering
upon negotiations.
We have had the benefit of testimony by the Chief of Staff, Joint
Committee on Internal Revenue Taxation, and a representative of
the Treasury Department as well as a technical memorandum sub-
mitted by the Treasury Department, all of which have received careful
study.
We believe that the terms of the convention are on the whole ad-
vantageous to the United States, and that the convention should be
ratified.
We further believe, however, that in the interest of promoting
closer coordination between future income-tax conventions and ta~a-
tion measures or studies, which may be pending or under consideration
in Congress, closer cooperation be established in this regard between
the appropriate executive and legislative branches.
For the information of the committee, the memorandum referred
to is attached hereto and made a part of the report of the subcom-
mittee.
Respectfully submitted.
ALBEN W. BARKLEY.
CARL A. HATCH.
SCOTT W. LUCAS.
ROBERT M. LA FOLLETTE, Jr.
WALLACE H. WHITE, Jr.
TECHNICAL MEMORANDUM OF THE TREASURY DEPARTMENT ON THE
CONVENTION
There is transmitted herewith for your consideration with recom-
mendation that it be approved and transmitted in due course to the
Department of State, the draft of a proposed income-tax convention
between the United States and the United Kingdom. Such conven-
tion had its inception in discussions at London beginning in April
1944, which were resumed at Washington during November, And
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CONVENTION WITH RESPECT TO TAXES ON.INCOME 13
represents the culmination of developments since prior exploratory
discussions in London in 1937.
The proposed convention represents the first instance in which the
United Kingdom is party to a convention of comprehensive scope
corresponding in subject matter substantially to the existing bilateral
conventions between the United States on the one hand and Canada,
Sweden, and France on the other.
This article enumerates the taxes with which the convention is
concerned in general. Where any given article is inapplicable to one
or more of such taxes the article so states. The article contains the
usual provisions that the convention will apply to other taxes of sub-
stantially similar character imposed by either contracting party or by
a territory concerned subsequent to the date of signature of the
convention.
ARTICLE II
This article defines various terms used in the convention. Clauses
(a), (b), and (c) are routine and appear to require no specific con-
sideration. Clauses (g) and (h) are of vital importance and constitute
the key to the application of articles III, VI, VII, VIII, IX, XI,
XII, and XIV. Thus it will be observed that the term "resident of
the United Kingdom" excludes a citizen of the United States, a
resident of the United States and a United States domestic corpora-
tion. Hence, a citizen of the United States and a United States
domestic corporation even though actually resident in the United
Kingdom remain subject to United States tax upon dividends, inter-
est, rents, royalties, and business income as though the convention
had not come into effect. If, however, a corporation organized, for
example, under the laws of France is managed and controlled in the
United Kingdom, such corporation constitutes a resident of the
United Kingdom and is entitled to the exemptions or partial exemp-
tions provided in the cited articles. Thus such corporation. selling
its manufactured goods in the United States through a broker or
commission agent in the United States and having no branch or other
installation in the United States will be exempt from United States
tax upon its business income from United States sources. On the
other hand a corporation organized under the laws of the United
Kingdom but having its control and management in, for example,
India, is not entitled to such exemption. However, article V relating
to shipping and aircraft profits should be contrasted in this regard.
On the other hand a resident of the United States (whether or not
a United States citizen) and a United States domestic corporation not
resident in the United Kingdom is entitled to exemption from United
Kingdom tax as to its business income if it sells its products on the
English market through a broker or commission agent in the United
Kingdom. These exemptions will be more fully treated in the various
articles upon which article II and the definitions therein found have.
as already pointed out, a most important bearing.
The definitions of "United Kingdom enterprise" and "United
States enterprise" tie into "residents of the United Kingdom" and
"residents of the United States," respectively.
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14 CONVENTION WITH RESPECT TO TAXES ON INCOME
The definition of "permanent establishment" found in. clause (1)
corresponds to, and is substantially identical with, that contained in
clause (f) of the protocol to the Canadian convention and to para-
graph (1) of the protocol to the existing Swedish convention.
Paragraph (2) of the article, when read in association with articles
VI, VII, VIII, IX, and XIV, has the effect as will be more fully dealt
with under those respective articles, of rendering applicable the exemp-
tions there provided in the case of individuals performing personal
services within the United States or the United Kingdom, as the ease
may be, even though such individuals are engaged in trade or business
therein by reason of the performance of such services.
This article corresponds to article I of the Canadian, to article II
of the Swedish, and to article 3 of the existing French, convention
and follows the principle of "permanent establishment" in the field of
business income. Under such principle, the United States will,, upon
a reciprocal basis, subject to such taxation the business income of a
United Kingdom enterprise only if such enterprise has a permanent
establishment in the United States. The article has application only
to business income, or "industrial and commercial" profits as it is
designated in the convention. The article has no application, for ex-
ample, to investment income or income arising from the rendition of
personal services, which items are in terms exempt from tax in whole
or in part in accordance with separate articles of the convention and,
in the absence of such rules with respect to any particular item, by
the Internal Revenue Code. Clauses (g), (h), (i), (j), (k), and (1) of
article II should be read in association with article III, since such
clauses define "resident of the United States," "resident of the United
Kingdom," "enterprise of one of the contracting States," and "per-
manent establishment." The effect of these definitions upon taka-
tion by the United States or by the United Kingdom is traced under
article II in the consideration of the definitions.
It will be observed from a reading of paragraph (2) of article III
that the United Kingdom reserves from the application of the article
those provisions of her excess-profits tax and her national defense
contribution under which the profits of the United States subsidiary
corporation are consolidated with those of its United Kingdom parent
corporation and could not see fit to waive her taxes of the subsidiary
profits even though the subsidiary had no branch or other installation
in the United Kingdom (see Finance Act of 1940, fifth schedule, pt. 1).
The principles of taxation found in article III thus are recognized
and followed in the three existing conventions to which the United
States is a party and are substantially in harmony with existing United
States law. For a more detailed treatment of such, see Executive
Report No. 18 (pp. 6 and 7) relating to the Swedish convention, a
copy of which report is attached hereto.
This article corresponds to article IV (1) (a) of the Canadian, to
article III of the Swedish, and to article 5 of the French, convention.
It recognizes the principle found in section 45 of the Internal Revenue
Code to adjust the accounts as between interlocking businesses and
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CONVENTION WITH RESPECT TO TAXES ON INCOME 15
allocation of business income as between the two countries to the end
that a reasonable tax basis will be allocated to each. From the United
States side there will be framed regulations corresponding to section
.7.25 of Treasury Decision 5206, approved December 31, 1942, being
regulations under the tax convention between the United States and
Canada.
This article provides for the reciprocal exemption of earnings derived
from the operation of ships and aircraft. It has application only to
business income from such activities and has no application to divi-
dends which might be paid by a corporation engaged in whole or in
part in maritime or aircraft operations. Insofar as the article concerns
maritime operations it conforms to the reciprocal exemption which has
existed for more then 20 years between the two countries and is based
upon exchange of notes dated at various times from 1921 .to 1924.
Insofar as it concerns aircraft operations, it represents an objective,
the accomplishment of which has been frequently desired by the
Department and which has been embodied in all other income-tax
conventions to which the United States is a party.
It will be observed. that the article applies to corporations organized
under the laws of the United Kingdom and to corporations organized
under the laws of the United States regardless of the place where
such corporations are managed or controlled. This principle was
agreed upon in order to adhere to the provisions underlying the
existing reciprocal exemptions of shipping profits.
ARTICLE VI
Under this article the nonresident alien residing in the United
Kingdom, the foreign corporation controlled and managed in the
United Kingdom, and the trust or partnership in the United Kingdom
will be subject to United States tax at the flat rate of 15 percent
upon dividends from sources within the United States if such indi-
vidual, corporation, or entity is not engaged in trade or business
in the United States at any time during the year in which such divi-
dend is paid. When read in association with article II (2) it will be
seen that such alien, even. though lie performs personal services
within the United States in such taxable year, is entitled to the
reduced rate of tax. Thus, assuming that A, a British subject
residing in the United Kingdom, performs personal services in the
United States for a period of 4 months in 1945 as a consulting engineer
employed by a United States domestic corporation and is paid com-
pensation therefor of $10,000. A holds 100 shares of X company
stock on which he received in 1945 dividends amounting to $900.
Such dividends are subject to tax at the rate of 15 percent. His
earned income is subject to tax under sections 11 and 12 after allow-
ance of the appropriate deductions and exemptions. For the pur-
poses of such tax he is engaged in trade or business within the United
States but is not so engaged for the purposes of the application of
the rate of 15 percent with respect to his dividends.
The United Kingdom does not impose its "standard" tax upon
dividends but does impose surtax upon such dividends if the over-all
income exceeds #2,000 or about $8,000. Paragraph 2 of article VI
exempts from United Kingdom surtax dividends derived from United
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16 CONVENTION WITH RESPECT TO TAXES ON INCOME
Kingdom sources by residents of the United States. A citizen of the
United States residing in Brazil is not, however, entitled to such exemp-
tion. Likewise, reduction in the rate of United States tax to 15 per-
cent applies only to residents of the United Kingdom and does not
apply to British subjects residing outside the United Kingdom.
The proviso found in paragraph (1) corresponds to and is applied
subject to the same conditions substantially as is that found in article
XI-2 of the Canadian convention.
The exchange of information at the source which naturally flows
from reduction in the rate of tax or exemption from tax will be dealt
with under article IX below.
This article exempts upon a reciprocal basis interest flowing from
United States sources to residents of the United Kingdom. The
individuals in the United Kingdom entitled to such exemption are
identical as to classification with those entitled to the 15-percent rate
in the case of dividends, namely, nonresident aliens resident in the
United Kingdom and nonresident in the United. States; and foreign
corporations controlled or managed in the United Kingdom. It will
be observed that the article does not, in terms, refer to interest on
United States obligations nor to United Kingdom Government securi-
ties, but merely refers to interest from sources within the respective
countries. Interest on United States Government securities is, of
course, interest from sources within the United States (sec. 110 (a)
(1), Internal Revenue Code). The article contains an exception to
the general rule, the effect of which exception is to deny exemption
in the case of interest paid by a subsidiary corporation in one country
to its parent corporation in the other. The exception has the desir-
able effect of eliminating the possibility of the parent taking the
profits of the subsidiary in the nominal form of interest and (thus
avoiding tax on the subsidiary by the country in which it is situated.
This article exempts upon a reciprocal basis royalties and thei like
from United States sources flowing to the United Kingdom. The
classification of individuals and corporations entitled to such exemp-
tion is identical with the classification of those persons entitled. to
the reduced rate of tax on dividends and to the exemption with
respect to interest. The inclusion of film rentals within the scope of
the term "royalties" is solely for the purposes of article VIII and does
not disturb the essential nature of film rentals.
Under the British practice neither yearly interest nor royalties) can
be taken as deductions by the payor of such items in the computation
of the payor's United Kingdom tax. Thus the payor pays the. tax
in the first instance to the Crown. However, when the interest or
the royalty is disbursed the tax thus paid to the Crown is withheld
from the gross amount of the interest or the royalty at the current
rates of United Kingdom tax. Thus, if the gross amount of the
receipt is $1,000 there is actually paid to the holder of the patent
only $500, the remaining $500 being withheld by the payor to rim-
burse him for the tax previously paid to the Crown. In keeping with
the principle of Biddle v. Commissioner, supra, the recipient inch .des
00 'n h' gross . o to t r o
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CONVENTION WITH RE ECT TO TAXES ON INCOME
no credit is allowed with respect to the $500 tax withheld at the source.
Irving Air Chute Co., Inc. v. Commissioner (1 T. C. 880, affirmed 1/43
Fed. 2d (d) 266 certiorari denied). In the proposed convention no
withholding will take place in the United Kingdom hence there will
be included in gross income under the assumed facts the amount of
$1,000. No credits will be involved since there is no United Kingdom
tax imposed upon such item.. Articles VII and VIII, therefore, while
producing a decrease in the revenue through exemption from tax on
items of interest and royalties going to a resident of the United
Kingdom also tend to increase the revenue by reason of exemption
from United Kingdom tax on such items flowing to the United States
from the United Kingdom.
ARTICLE IX
Mineral royalties and real property rentals are subject to United
Kingdom tax at the standard rate of 50 percent, not however upon the
gross amount thereof but upon what is substantially net income from
that source. Thus the taxpayer is subject to tax, upon his net rentals
arising from real property and shown in schedule A of the British
Income Tax Act. The reduction in our rate from 30 to 15 percent
upon the gross amount of the rentals is intended to constitute a tax
burden corresponding as nearly as may be to the British rate of 50
percent upon the net rentals. Under the article, however, the non-
resident alien resident in the United Kingdom and the foreign corpo-
ration controlled in the United Kingdom may elect as to any taxable
year to be subject to United States tax as though lie or it were engaged
in trade or business within the United States in such taxable year,
thus permitting deductions and credits against the gross rentals.
Paragraph 2 exempts from the United Kingdom surtax the items
forming the subject matter of the article.
ARTICLE X
This article, corresponding in subject matter to article VI of the
Canadian, to article X of the Swedish, and to article 8 of the French
convention deals with the exemption from tax imposed by one of
the contracting parties of salaries and the like. paid by the other
contracting party to individuals other than citizens of the former
state. Thus the article is in substantial harmony with section 116
of the Internal Revenue Code. The article has, however, a feature
not found in any other convention to which the United States is a
party. Under United Kingdom law a United States citizen (female)
marrying a British subject becomes ipso facto a British subject. As
such, she is subject to tax by the United Kingdom if resident therein
as are other British subjects and hence is subject to tax on income
from sources in the United Kingdom. Thus, if such United States
citizen while retaining her United States citizenship is employed in
the American Embassy in London, the United Kingdom has hereto-
fore asserted its right to tax such individual on her compensation for
such services, but under the proposed convention the United Kingdom
exempts such individual from United Kingdom tax upon her salary
and the like as an employee of the United States. ` Reciprocally, the.
United States will not subject to its tax salaries and other compensa-
tion for services rendered the United Kingdom by a United States
citizen who is also a British subject under the circumstances set forth
above.
11, Ex. Rept. 4, 79-2-
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TO TAXES ON INCOME
This article corresponds to article VII of the Canadian and to
article XI of the Swedish convention. The article provides upon a
reciprocal basis for the exemption from United States tax of a resi-
dent of the United Kingdom upon his earned income from United
States sources if--
(a) he is present in the United States for a period or periods
aggregating not more than 183 days during the taxable year;. and
(b) such income is paid by a United Kingdom employer.
No limitation is placed upon the amount of compensation for such
services. It has no application to the remuneration of public: enter-
tainers such as actors, musicians, and athletes.
ARTICLE XII
This article exempts upon it reciprocal basis nongovernmental
pensions and life annuities derived from sources within one country
by a resident of the other. Through the definition "resident ofi the
United Kingdom" it leaves untouched taxation of United Stittes
citizens. It covers only a minute segment of income.
In this article the United Kingdom adopts, with respect to United
States income and excess-profits taxes, the system of credit for foreign
income tax found in section 131 of the Internal Revenue Code, the
credit provided in this article is, of course, one limited to the scope
of section 131. and hence does not extend to the tax, if any, under
section 102 or under section 500. The second sentence of paragraph
(1), in effect, revokes the principle of Biddle v. Commissioner, supra.
Thus in unusual instances a deduction may be allowed a British or-
poration for British tax while a credit will be allowed the United
States shareholder of such corporation for portion of the same tax.
However, it should be observed that the credit in such case is largely
neutralized by reason of the inclusion in gross income of the amount
of the British tax. It will also be seen that section 131 (f), Internal
Revenue Code, allows a credit to the domestic parent corporation for
its foreign subsidiary's foreign tax but does not require the inclusion
of such foreign tax in the gross income of the parent. The foreign
subsidiary may also be doing business in the United States, thus getting
a deduction for it proportionate part of such foreign subsidiary's
foreign tax.
Paragraph (3) of the article appears to merit some further considera-
tion here. The adoption of the credit provisions by the IJnited
Kingdom will require allowance of the credit by the United Kingdom
in cases in which individuals will be classed as residents of the United
Kingdom by reason of the fact that such individuals sojourned in the
United Kingdom for more than 6 months within the year of assess
ment. Thus, in example I, an engineer or other technician and a
citizen of the IJnited States is employed by a British concern at a
salary of $18,000 ,per year. He spends 8 months of the year in
England and the remaining 4 months, in the United States. The
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CONVENTION WITH R Oq4F0002qg090043-2
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United Kingdom will subject him to tax upon his entire income.
However, in the application of the credit, the United Kingdom will
recognize that one-third of his earned income for such year has been
derived from sources within the United States. Assume, however, in
example II that he is employed by a United. States domestic corpora-
tion and spends the same period of time in the United Kingdom,. In
this instance the United Kingdom would tax him only upon the
amount of his income which he brings into the United Kingdom. In
case I, the United Kingdom tax extends to the entire income, while
the United States would in the converse situation tax only the salary
allocable to the 8 months spent in the United States. In case II,
however, the United States law would impose its tax upon the $12,000
'regardless of whether such income was brought into the United States
while the United Kingdom imposes its tax only if, and to the extent,
the earned income is brought by the taxpayer into the United Kingdom.
On the other hand, if a British-controlled corporation pays director's
fees to a United States citizen and resident such fees are subject to
United Kingdom tax even though the recipient never was present in
the United Kingdom. Again, the rules of taxation employed by the
United Kingdom as between those (a) resident in the United Kingdom,
(b) ordinarily resident in the United Kingdom, (c) domiciled in the
United Kingdom are so complex that it is difficult, if not impossible
to make a comparison between that system and the United States
taxation of nonresident aliens. Because of such multiplicity of laws,
the United Kingdom was disinclined to say that for all purposes
earned income derived from sources within the United Kingdom by
the residents of the United States would be subject to tax only with
respect to such income attributed to services actually rendered in the
United Kingdom. For the purposes of the credit, the United King-
dom will recognize such principles found in section 119 (a) (3) of the
Internal Revenue Code.
This article corresponds to article VIII of the Canadian, article IX
of the Swedish, and article 11 of the French convention. The rendi-
tion of personal services within the United States by a resident of the
United Kingdom will not prevent the exemption from tax on capital
gains even though such resident is thus engaged in trade or business
within the United States.
The United Kingdom does not include capital gains within the tax
base, unless the individual, corporation, or other entity, is a "trader"
and registered as such, then such individual, corporation, or other
entity, whether or not resident in the United Kingdom, is never sub-
t to tax with respect to capital gains. The number of transactions
has nothing to do with the liability. For example, a retired business-
man may, be actively engaged in stock-market transactions in his
private capacity and not as a" trader" but he is not considered because
of that fact liable to tax upon his gains. On the other hand the gain
from a single securities sale by a bank is treated as trading profits of
the bank and taxed as such. It is because of this factor that it was
found impracticable to make the ' article reciprocal on its face even
though it is so in fact.
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ARTICLES XV, XVI, AND XVII
These articles correspond, respectively, to articles XII, XII[, and
XIV of the Canadian convention. Under section 119 (a) (]l) (B)
and section 119 (a) (2) (B), Internal Revenue Code, interest and
dividends paid by a foreign corporation constitute, provided the
conditions laid down are met, income from sources within the United
States and hence are subject to United States tax in the hands of
residents of the United Kingdom. In practice it is recognized that
only in rare instances is it practicable for the Bureau to ascertain
whether a British corporation derives more than the requisite per-
centage of its gross income from United States sources so as to consti-
tute its interest or its dividends income from sources within the.
United States. The situation is, therefore, highly theoretical and
hence the article cannot be regarded as having any effect in terms of
revenue, other than in those instances in which there is encountered a
United Kingdom subsidiary corporation carrying on practically all
its activities, and having its fiscal offices, in the United States.
Article XVI provides that a corporation organized under the laws
of the United Kingdom shall not be subject to the tax imposed by
(a) section 102 and (b) section 500 of the Internal Revenue Code
if such corporation is controlled directly or indirectly by alien resi-
dents of the United Kingdom. Hence the article cannot be employed
by United States citizens or residents in an effort to avoid the impo-
sition of surtax. Thus, if two. United States citizens undertake to
create a United Kingdom corporation to avoid surtax, it is apparent
from the text of the article that they must first surrender control over
their capital into the hands of alien residents of the United Kingdom.
It is suggested that, as reasonable men, they will not do so in order to
avoid tax upon income arising from such capital.
In addition, United Kingdom law provides for the imposition: of
surtax on companies under the control of not more than five persons,
such provisions being akin to section 500 in its terms and objectives-
section 22, Finance Act of 1921, as amended by various subsequent
finance acts. Under such provisions a reasonable part of the income
of the company is deemed to have been distributed and thus is subject
to surtax in the hands of the shareholders.
Article XVII corresponds to article XIV of the Canadian conven-
tion and has for its purposes the solution of problems growing out! of
provisions of our internal revenue laws existing prior to 1936 in accord-
ance with which the great majority of nonresident aliens and foreign
corporations deriving income from United States sources were subject
to tax upon gains derived from transactions upon United States
security and commodity exchanges. In practice, owing to faet9rs
beyond our control, it was found extremely difficult, if not impossible,
to ascertain the identity of such aliens and, consequently, the tax was
not as a practical matter enforceable. Beginning with the Revenue
Act of 1936 such aliens were generally not subject to tax upon such
gain but only taxable upon investment income and the like from
United States sources. However, there remained a number of un-
settled cases pending before the Commissioner concerning tax liability
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CONVENTION WITH RE T TO
for years prior to 1936. While it is believed that few cases involving
British residents and corporations are outstanding, the British dele-
gation considered it essential, in principle, that there be inserted in
the proposed convention an article corresponding to that found in
the Canadian convention and relating to the pre-1936 problem.
This article finds no counterpart in any previous tax convention
to which the United States is a party. Its effect is to exempt from
United States tax, upon a reciprocal basis, compensation for personal
services rendered in the United States by a resident of the United
Kingdom who is temporarily present in the United States for the
purpose of teaching at a United States university or other educational
institution in the United States. The intent is to allow an exemption
for 2 years in any event. Thus, if the individual comes to the United
States under circumstances which indicate a stay within the United
States in excess of 2 years, the exemption will apply in such case for
the first 2 years. Such instances will, it is anticipated, be rare. It is
the purpose of the article that such exemption shall cease at the end
of 2 years from the date of his initial arrival in the United States.
Thus, if he reaches the United States on July 1, 1945, he is exempt
with respect to his remuneration earned in the United States up to
June 30, 1947. If he then leaves the United States on vacation but
resumes his duties in the United States at the beginning of the school
term in the fall of 1947, he is not exempt with respect to his remunera-
tion earned' thereafter. If, however, he leaves the United States for
an entire year or more and then returns to the United States, it is the
intendment of the article that he will then enter upon another
exemption period of 2 years. In the normal case, however, the
article will be concerned with a situation in which the exchange
professor will be present in the United States only during the period
covered by one academic year.
This article corresponds to article IX of the Canadian, to article
XII of the Swedish, and to article 12 of the French convention.
From the United States standpoint it has little or no practical effect
since the amounts involved are not ordinarily gross income in any
event in the hands of the recipients thereof.
This article corresponds to articles XIX, XX, and XXI of the
Canadian convention, to articles XV, XVI, XVIII, and XIX of the
Swedish convention and to articles 20, 21, and 22 of the French
convention. While the terms of article XX are quite general, it is
the intendment of such article to exchange such information upon a
broad scale between the revenue authorities of the two countries both
with respect to periodic information covering recurring income and
also as to specific cases. The problems arising in this general field
are akin to those encountered in .the administration of our existing
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0 o:ME
tax conventions, especially that with Canada. The details of !. the
regulatory measures necessary to implement the convention in this
regard will be formulated, as was done in the case of Canada, after
consultations between the two revenue services with a view toward
bringing the terms of the convention into effect as early as practicable
and at the same time safeguard the interests of the revenue.
This article is in principle identical with paragraph' 12 of the
protocol to the Canadian convention, paragraph 7 of the protocol to
the Swedish convention, and to paragraph V of the protocol to'the
French convention. It is, however, more elaborately drawn in order
to bring within its scope British subjects residing in areas to whi:chthe
convention is applicable and United States citizens residing in areas
to which the convention is applicable and extension to juridical
persons. It will be observed that this article extends to all taxes,
both Federal and local. Such extension, however, is in keeping with
several commercial treaties (such as that with Norway, of 1928, and
that with Germany, of 1923) to which the United States is now a
party. It has no practical effect, since our domestic taxation does hot
discriminate as between United States citizens and British nationals
residing in the United States.
This article finds no counterpart in any convention to which the
United States is now a party. Its basic purpose is to make possible
extension of the convention to colonies, overseas territories, or other
areas over which one of the countries exercises authority. Each
country has reserved veto power over applications for extensions
made by the other country. The article has no application to
sovereign members of the British Commonwealth of Nations, such as
Canada, Australia, and New Zealand.
This article provides that the convention comes into effect with
the calendar year 1945, as to United States tax, and on the 6th of
April 1945, for the purposes of United Kingdom tax, thus bringing
the convention into effect coincident in the respective countries with
the commencement of new taxable years. However, in the case) of
the United Kingdom, the surtax is a year behind the income tax.
Thus, the surtax for the year of assessment 1944-45 is based on the
income for the year ended April 5, 1945, and is payable on or before
January 1, 1946. The excess-profits tax and national defense con-
tribution follow conventional accounting periods and not the historical
dates associated with the income tax and surtax. Since the conven-
tion is retroactive to January 1, 1945, it is anticipated that the initial
effects of the convention from the United States standpoint will be
to release excess taxes withheld by withholding agents in the United
States as was done in the case of Canada (see T. D. 5157, C. !B.
1942-2, 137).
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ARTICLE XXIV
This article provides the usual conditions under which the con-
vention may be terminated and specifies the dates upon which the
convention shall cease to be effective, the dates thus stated being
such as will allow the convention to be in effect in one country for
the same length of time.as in the other.
MESSAGE FROM THE PRESIDENT OF THE UNITED STATES, TRANS-
MITTING A CONVENTION BETWEEN THE UNITED STATES OF AMERICA
AND 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, SIGNED AT WASHINGTON ON APRIL 16, 1945
THE WHITE HOUSE, April 24, 1945.
To the Senate of the United States:
With a view to receiving the advice and consent of the Senate to
ratification, I transmit herewith two conventions between the United
States of America and the United Kingdom of Great Britain and
Northern Ireland, which were signed in Washington on April 16, 1945,
as follows: (1) A convention for the avoidance of double taxation and
the prevention of fiscal evasion with respect to taxes on income, and
(2) a convention for the avoidance of double taxation and the pre-
vention of fiscal evasion with respect to taxes on the estates of deceased
persons.
The conventions have the approval of the Department of State
and the Treasury Department.
I also transmit herewith, for the information of the Senate, the
report of the Secretary of State with respect to the conventions.
HARRY S. TRUMAN.
(Enclosures: (1) Report of the Secretary of State; (2) convention
between the United States and the United Kingdom, signed April 16,
1945, relating to taxes on income; (3) convention between the United
States and the United Kingdom, signed April 16, 1945, relating to
taxes on the estates of deceased persons.)
DEPARTMENT OF STATE,
Washington, April 16,194-5.
The PRESIDENT,
The White House:
The undersigned, the Secretary of State, has the honor to lay before
the President, with a view to their transmission to the Senate to receive
the advice and consent .of that body to ratification, if his judgment
approve thereof, two conventions between the United States of Amer-
ica and the, United Kingdom of Great Britain and Northern Ireland,
which were signed'in Washington on April 16, 1945, as follows: (1) A
convention for the avoidance of double taxation and the prevention
of fiscal evasion with respect to taxes on income, and (2) a convention
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24 CONVENTION WITH RESPEuT TO TAXES ON INCOME
for the avoidance of double taxation and the prevention of fiscal, eva-
sion with respect to taxes on the estates of deceased persons.
The Department of State and the Treasury Department collabo-
rated in the negotiation of the conventions. The conventions have
the approval of both Departments.
Realizing that the imposition and collection of taxes upon the same
income or upon the same estate by both the United States of America
and the United Kingdom may, and often do, result in double taxation
of a severe character, representatives of this Government have
engaged in technical discussions with representatives of the British
Government with a view to determining the bases upon which con-
ventions between the two Governments might be concluded for the
purpose of avoiding double taxation, insofar as practicable, modifying
certain conflicting principles of taxation for this purpose and estab-
lishing certain procedures for the exchange of information between the
two countries in relation to taxation. The two conventions sub-
mitted herewith were formulated as a result of those discussions.'
In matters of principle and substance, most of the provisions of the
convention relating to taxes on income are consistent, if not identical,
with provisions in one or another of the existing income-tax conven-
tions between the United States of America and certain foreign
countries, namely, (1) the convention and protocol of March 23, 1939,
with Sweden, which became effective on January 1, 1940; (2) ''the
convention and protocol of March 4, 1942, with Canada, which was
made effective as of January 1, 1941; and (3) the convention and
protocol of July 25, 1939, with France, which became effective on
January 1, 1945.
The convention relating to taxes on the estates of deceased persons
is similar, in substantial respects, to the existing convention of June
8, 1944, between the United States of America and Canada, relating
to double taxation in the case of estate taxes and succession duties,
which, upon the exchange of instruments of ratification, became
effective as of June 14, 1941.
It is believed that the application of the provisions of an incoiue-
tax convention of the kind submitted herewith will constitute a
definite step toward the removal of an undesirable impediment to
international trade which results from the double taxation of incomes,
and that the application of the provisions of an estate-tax convention
of the kind submitted herewith will go far toward eliminating double
taxation in connection with the settlement in either country of estates
in which nationals of the other country have interests. The two
conventions establish a satisfactory basis for the ultimate accomplish-
ment of objectives in the mutual interest of the two countries.
Considering each of the two conventions separately, statements; in
further explanation are made in the paragraphs below.
The major features of the income-tax convention may be summa-
rized as follows:
(1) Specific reference to the taxes to which the convention relates
and extensive definition of terms found in the convention (arts.' I
and II).
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(2) Adoption of principles affecting the determination of amount,
and affecting the taxation, of business income derived by business
enterprises of one country from sources within the other country
(arts. III, IV, and V).
(3) Reduction in the United States rate of tax at the source from
30 to 15 percent in the case of dividends moving from the United
States to the United Kingdom and, correspondingly, continuance of
the existing British system of exemption from income tax, and adop-
tion of exemption from United Kingdom surtax, in the case of divi-
dends moving from the United Kingdom to the United States
(art. VI).
(4) Exemption from taxation of (a) interest, (b) royalties, (c) Gov-
ernment salaries, (d) annuities and pensions, and (e) earned income
derived from sources in one country by residents or corporations of
the other country not engaged in trade or business in the former
country (arts. VII, VIII, IX, X, XI, and XII).
(5) Continuation and expansion by the United States of the credit
for foreign income taxes, and adoption by the United Kingdom of the
principle of credit for United States income tax (art. XIII).
(6) Alleviation, with respect to residents of the United Kingdom,
of taxation by the United States of nonresident aliens and foreign
corporations in the case of certain taxes alleged to have an extra-
territorial character (arts. XIV, XV, and XVI).
(7) Settlement of pending cases affecting residents of the United
Kingdom or United Kingdom corporations and involving the taxation
of capital gains and the application of principles to which (6), above,
relates (art. XVII).
(8) Exemption, upon certain conditions, of professors or teachers
and students or business apprentices from taxes on their remuneration
or on payments made to them (arts. XVIII and XIX).
(9) Cooperation between the contracting countries with a view to
the prevention of evasion of taxation imposed by the respective
countries (art. XX).
(10) Extension of the principle, expressed in many treaties of the
United States, respecting national treatment of resident aliens in tax
matters with a view to equality of taxation (art. XXI).
(11) Laying the ground work for application of the provisions of
the convention to colonies or other territories which impose taxes
substantially similar to the taxes to which the convention relates
(art. XXII).
Some of the significant provisions of the convention may be ex-
plained further as follows, particularly with a view to indicating the
extent to which the convention may modify the existing revenue
laws of the United States:
By article I, the convention is made applicable, in respect of the
United States, only to Federal income taxes, including surtaxes and
excess-profits taxes. Consequently, the convention does not apply
to taxes imposed by the several States of the United States, with one
exception, namely, article XXI, to which further reference is made
hereinafter.
By article VI the 30-percent rate of United States tax generally
applied with respect to nonresident aliens and nonresident foreign
corporations, and the higher rates of normal tax and surtax when
applicable to such aliens, are reduced to 15 percent in the case of
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C NVENTION WITH RESPECT TO TAXES ON INCOME
dividends in general, or to 5 percent in the case of dividends paid by a
United States domestic subsidiary corporation to its British parent
corporation. A like reduction to 15 percent is applied, under article
IX, to gross mineral royalties and to gross real-property rentals
derived from United States sources by residents of the United King-
dom, such reduced rate being considered substantially equivalent to
the rate of 50 percent upon net rentals flowing from the United King-
dom to the United States. The United Kingdom, in effect, imposes no
tax on dividends as such, but does impose surtax with respect to divi-
dends; under the proposed convention dividends moving to the
United States from the United Kingdom will thus be exempt from
United Kingdom standard tax and surtax.
By articles VII and VIII interest and royalties are wholly exempt
upon a reciprocal basis. Accordingly, interest and royalties will inove
to the United States from the United Kingdom free from United King-
dom tax (otherwise generally imposed at the rate of 50 percent) and
from the United States to the United Kingdom free from United
States tax (otherwise generally imposed at the rate of 30 percent).
By article XI the United States agrees to continue, during the life-
time of the convention, its existing system of credit for foreign tax
insofar as credit for United Kingdom income tax is concerned, and to
liberalize such system so as to allow credit for United Kingdom tax on
earnings out of which dividends are paid to United States shareholders
of United Kingdom corporations. The United Kingdom, on the
other hand, agrees to adopt the system of credit for United States tax
imposed upon income derived from United States sources by residents
of the United Kingdom or by United Kingdom corporations.
It has long been a provision of United States revenue laws that,
upon certain. conditions, dividends paid by a. foreign corporation to
nonresident aliens or foreign corporations are to be regarded as income
from sources within the United States and, as such, taxable by the
United States even though the recipient of such dividends and the
foreign corporation paying them are not resident in the United States.
The United Kingdom law does not contain any corresponding pro-
vision. That provision of the United States revenue laws has been
the object of frequent objections, it being charged that such a pro-
vision has an extraterritorial character. The existing income-tax
convention with Canada makes that provision inapplicable to resi-
dents of Canada. Article XV of the convention with the United
Kingdom makes the provision inapplicable to residents of the United
Kingdom.
Similarly, article XVI makes the personal-holding-company provi-
sions of the United States revenue laws inapplicable to United King-
dom corporations which are controlled by residents of the United
Kingdom. In this respect article XVI is identical in principle with
article XIII of the income-tax convention between the United States
and Canada (S. Executive B, 77th Cong., 2d sess., contains a detailed
statement concerning art. XIII of the convention with Canada),
which makes the. personal-holding-company provisions inapplicable to
Canadian corporations. Article XVI of the convention with the
United Kingdom contains safeguards against the exemption. being
used as a means of tax avoidance.
Article XVII is identical in principle with article XIV of the income-
tax convention with Canada. Under article XIV of that convention
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the settlement of cases involving Canadians and Canadian corpora-
tions with respect to taxable years beginning prior to 1936, and gen-
erally involving the taxation of capital gains from sources within the
United States, has been facilitated. While. the number of similar
cases involving United Kingdom residents and United Kingdom corpo-
ratidns is believed to be small, it is considered desirable to extend to the
United Kingdom the same provisions in this respect as are found in the
existing convention with Canada.
Article XX marks an important step in the direction of fiscal
cooperation between the United States and the United Kingdom in
the field of income taxation. Under this article there will be 'ob-
tained by the United States, upon a reciprocal basis, information
with respect to income derived by residents of the United States
from sources in the United Kingdom, as well as information in cases
of specific taxpayers with respect to whom information is available
to the revenue authorities of the United Kingdom. The principle
here adopted materially complements the. United States domestic.
system of information at the source and, it is anticipated, will be of
considerable utility in the administration of United States revenue
laws, even though the British system of information at source is
less comprehensive than that employed by the United States.
Article XXI gives expression to principles, long recognized in
practice in the United States and found in many commercial or gen-
eral-relations treaties of the United States, relating to equality of
taxation in the United States as between United States citizens
residing in the United States and aliens resident in the United States.
Article XXI effects no change in existing United States revenue laws.
Article XXII is an innovation so far as tax conventions of the
United States are concerned. It lays the basis for application of the
convention to colonies, overseas territories, and certain other areas
over which authority is exercised by the respective Governments.
It is anticipated that many of the British colonies or other territories,
which have tax systems closely analogous to that existing in the
United Kingdom, will elect, in the course of time, to come within the
scope of the convention. This, it is expected, will have the effect of
providing a solution to problems in the field of income taxation which
may exist between the United States and such colonies or other
territories, and of stimulating the economic ties between the United
States and such areas. Inasmuch as the United States revenue laws
do not extend to overseas Possessions, such as Puerto Rico, those
Possessions will be free to elect to come within the scope of the con-
vention as they see fit.
Article XXIII provides for ratification and for the exchange of
instruments of ratification and prescribes the effective dates of the
convention. Under article XXIII the convention will become effec-
tive with respect to taxable years beginning on or after January 1,
1945, as to the United States, and, as to the United Kingdom, with
respect to years of assessment beginning in accordance with the cor-
responding British tax system. It is provided in article XXIV that
the convention shall continue in effect indefinitely, but may be ter-
minated by the giving of a notice for that purpose by either Govern-
ment to the other Government on or before June 30 in any year after
1046, so that as to the United States the convention may be terminated
with respect to taxable years beginning on or after January 1, 1947,
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CONVENTION WITH RESPECT TO TAXES ON INCOME
and as to the United Kingdom the convention may be terminated with
respect to years of assessment beginning on or after April 6, 1947.
The provisions of article VI, relating to dividends, are made subject
to termination, without affecting the remaining provisions. of the
convention, at the end of a 2-year period or thereafter b the giving
of a notice along the lines of.that prescribed in article XXIV..
CONVENTION RELATING TO TAXES ON ESTATES
The estate-tax convention with the United Kingdom, like the estate
tax and succession duty convention of June 8, 1944, with Canada
(S. Executive G, 78th Cong., 2d sess.), has for its principal purpose
the elimination, insofar as practicable, of double taxation which
otherwise would result from the application to the same estate of ;both
Federal estate taxes and British estate duties. The convention also
contains provisions relating to mutual administrative assistance
through the exchange of information, with a view to discouraging
tax evasion.
As in the case of the convention with Canada, the convention with
the United Kingdom extends in its application, insofar as the United
States is concerned, only to estate taxes imposed by the .Federal
Government. The imposition and collection of inheritance or estate
taxes by States or Territories of the United States or by the District
of Columbia are not restricted by the convention. As to the United
Kingdom, the convention is applicable to the estate duty but does not
apply to United Kingdom legacy or succession duties.
In the technical discussions which resulted in the formulation of
the convention, consideration was given to the basic differences
between the American and British systems of taxation affecting the
settlement of estates. The two systems were found to be sufficiently
comparable to make it possible for the taxing authorities of the two
Governments to reach a satisfactory understanding with respect to
a number of important matters of principle.
The provisions of the convention are contained in 11 articles. The
following explanations of the provisions may be useful (the word
"convention," unless otherwise indicated, is here used in reference
to the convention with the United Kingdom):
Article I specifies the taxes to which the convention applies. This
is analogous to article I of the convention of 1944 with Canada. The
taxes are the Federal estate tax imposed by the United States and the
United Kingdom estate duty imposed in Great Britain.
Article II contains definitions of terms found in the convention.
It corresponds, in general, to article XIII of the convention of 1944
with Canada.
Article III contains rules, for the purposes of the operation of the
convention, relating to the situs of rights and interests forming part
of an estate to which the convention may be applicable. This article
corresponds, in general, to articles II, III, and IV of the convention
of 1944 with Canada. The treatment is considerably different in a
number of respects, but the object is essentially the same in that the
provisions are designed mainly to establish a greater degree of uniform-
ity in administering the applicable revenue laws and to facilitate,
upon a reasonable basis, the settlement of estates.
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CONVENTION WITH RESECT TO TAXES ON INCOME
Articles IV, V, and VI contain fundamental provisions relating to
the bases upon which estate taxes shall be computed and upon which
relief from double taxation shall be accorded. The plan which would
be made effective by these provisions is consistent with the principles
expressed in existing tax conventions of the United States. The
provisions in articles IV, V, and VI are analogous to, but in som e
respects simpler than, provisions in articles V and VI of the con-
vention of 1944 with Canada.
Article VII contains provisions relating to the exchange of informa-
tion, leading to administrative cooperation in preventing fiscal
evasion. It corresponds to article VII of the convention of 1944 with
Canada, except that paragraph (2) of article VII (containing certain
definitions) of the convention with the United Kingdom is analogous
to paragraph 1 of article XIII of the convention with Canada.
The provisions of article VIII do not correspond to any provisions
of existing tax conventions of the United States. Like article XXII
of the income-tax convention with the United Kingdom, it lays the
basis for application of the convention to colonies, overseas territories,
and certain other areas over which authority is exercised by the
respective Governments. The statements which have been made
hereinbefore concerning article XXII of the income-tax convention
are applicable, in a general way, to article VIII of the estate-tax
convention.
Article IX, which is to be considered in conjunction with article'
VIII, represents a formula proposed by the British authorities, in
accordance with British constitutional procedure, with a view to
making the convention applicable in respect of Northern Ireland..
Article X provides for ratification and prescribes that the conven-
tion shall come into force on the date of the exchange of instruments
of ratification, to be effective only (1) as to estates of persons dying
on or after that date, and (2) at the option of the personal representa-
tive, upon appropriate conditions, as to the estate of any person dying
before that date and after December 31, 1944.
It is provided in article XI that the convention shall remain in
force not less than 3 years, but may be terminated at the end of that
3-year period or at any time thereafter by the giving of a notice for
that purpose by either Government to the other Government, the
termination to be effective as to the estates of persons dying on or
after the date specified in the notice, such date being not less than 60
days after the date of the notice, or, if no date of termination be speci-
fied, the termination is to be effective as to the estates of persons dying
on or after the sixtieth day after the date of the notice.
The fundamental provisions of the convention may be summarized
as follows:
(1) The uniform rules relating to the situs of property, as set forth
in article III. The determination of situs with respect to certain
types of property is necessary for the purposes of the convention,
first, in order to ascertain the property that may be included for tax
computation if jurisdiction be based on situs of property within the
country, and, second, in order to ascertain the credit for estate taxes
attributable to property situated as prescribed in the credit article.
For example, a simple rule for the determination of the situs of shares
of corporate stock is provided, namely, that the situs shall be where
the issuing corporation was created or organized. This uniform rule
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30 CONVENTION WITH RESPECT TO TAXES ON INCOME
is adopted by the United Kingdom in place of a complexity of rules
now applicable in such cases. This uniform rule is one of long stand-
ing in the United States, but under the convention the United States
relinquishes another and inconsistent rule, namely, that the situs of
corporate stock is where the stock certificate is located.
(2) The credit provisions, as set forth in article IT, whereby the
country of the decedent's domicile, or the country of the decedent's
citizenship in the case of the United States, allows a credit against its
tax for the tax paid the other country with respect to property which
otherwise would be subjected to taxation by both countries. The
credit authorized by the convention is subordinated to and has no
effect upon the credit against the Federal estate tax authorized by
section 813 (b) of the Internal Revenue Code for inheritance!; and
estate taxes paid to the States, Territories, or possessions of, the
United States, or to the District of Columbia.
Respectfully submitted.
E. R. STETTINIUS, Jr.
(Enclosures: (1) Convention between the United States and' the
United Kingdom, signed April 16, 1945, relating to taxes on income;
(2) convention between the United States and the United Kingdom,
signed April 16, 1945, relating to taxes on the estates of deceased
persons.)
CONVENTION WITH GREAT BRITAIN AND NORTHERN
IRELAND WITH RESPECT TO TAXES ON INCOME!
The Government of the United States of America and the Govern-
ment of the United Kingdom of Great Britain and Northern Ireland,
Desiring to conclude a Convention for the avoidance of double taxa-
tion and the prevention of fiscal evasion with respect to taxes on
income,
Have appointed for that purpose as their Plenipotentiaries:
The Government of the United States of America:
Mr. Edward R. Stettinius, Jr., Secretary of State, and
The Government of the United Kingdom of Great Britain and
Northern Ireland:
The Right Honorable the Earl of Halifax K. G., Ambassador
Extraordinary and Plenipotentiary in Washington,
Who, having exhibited their respective full powers, found in good
and due form, have agreed as follows:
ARTICLE I
(1) The taxes which are the subject of the present Convention are:
(a) In the United States of America: The Federal income taxes,
including surtaxes and excess profits taxes (hereinafter referred
to as United States tax).
(b) In the United Kingdom of Great Britain and Northern
Ireland: The income tax (including surtax), the excess profits
tax and the national defense contribution (hereinafter referred to
as United Kingdom tax).
(2) The present Convention shall also apply to any other taxes of a
substantially similar character imposed by either Contracting Party
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CONVENTION WITH RESPECT TO TAXES ON INCOME 31
subsequently to the date of signature of the present Convention or by
the government of any territory to which the present Convention is
extended under Article XXII.
(1) In the present Convention, unless the context otherwise
requires :
(a) The term "United States" means the United States of
America, and when used. in a geographical sense means the States,
the Territories of Alaska and of Hawaii, and the District of
Columbia.
(b) The term "United Kingdom" means Great Britain and
Northern Ireland, excluding the Channel Islands and the Isle of
Man.
(c) The terms "territory of one of the Contracting Parties"
and "territory of the other Contracting Party" mean the United
States or the United Kingdom as the context requires.
(d) The term "United States corporation" means a corpora-
tion, association or other like entity created or organized in or
under the laws of the United States.
(e) The term "United Kingdom corporation" means any kind
of juridical person created under the laws of the United Kingdom.
(f) The terms "corporation of one Contracting Party" and
"corporation of the other Contracting Party" means a United
States corporation or a United Kingdom corporation as the
context requires.
(g) The term "resident of the United Kingdom" means any
person (other than a citizen of the United States or a United
States corporation) who is resident in the United Kingdom for
the purposes of United Kingdom tax and not resident in the
-United States for the purposes of United States tax. A cor-
poration is to be regarded as resident in the United Kingdom if
its business is managed and controlled in the United Kingdom.
(h) The term ",resident of the United States" means any
individual who is resideiA in the United States for the purposes
of United States tax and not resident in the United Kingdom for
the purposes of United Kingdom tax, and any United States
corporation and any partnership created or organized in or under
the laws of the United States, being a corporation or partnership
which is not resident in the United Kingdom for the purposes of
United Kingdom tax.
(i) The term "United Kingdom enterprise" means an in-
dustrial or commercial enterprise or undertaking carried on by a
resident of the United Kingdom.
(j) The term "United States enterprise" means an industrial
or commercial enterprise or undertaking carried on by a resident
of the United States.
(k) The terms "enterprise of one of the Contracting Parties"
and "enterprise of the other Contracting Party" mean a United
States enterprise or a United Kingdom enterprise, as the context
requires.
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(1) The term "permanent establishment" when used with
respect to an enterprise of one of the Contracting Parties means
a branch, management, factory or other fixed place of business,
but does not include an agency unless the agent has, and habitu-
ally exercises, a general authority to negotiate and conclude con-
tracts on behalf of such enterprise or has a stock of merchandise
from which he regularly fills orders on its behalf. An enterprise
of one of the Contracting Parties shall not be deemed to have a
permanent establishment in the territory of the other Contract-
ing Party merely because it carries on business dealings in the
territory of such other Contracting Party through a bona fide
commission agent, broker or custodian acting in the ordinary
course of his business as such. The fact that an enterprise of
one of the Contracting Parties maintains in the territory of the
other Contracting Party a fixed place of business exclusively for
the purchase of goods or merchandise shall not of itself constitute
such fixed place of business a permanent establishment of such
enterprise. The fact that a corporation of one Contracting
Party has a subsidiary corporation which is a corporation of
the other Contracting Party or which is engaged in trade or
business in the territory of such other Contracting Party (whether
through a permanent establishment or otherwise) shall not of
itself constitute that subsidiary corporation a permanent estab-
lishment of its parent corporation.
(2) For the purposes of Articles VI, VII, VIII, IX and XIV a
resident of the United Kingdom shall not be deemed to be engaged in
trade or business in the United States in any taxable year unless such
resident. has a permanent establishment situated therein in such
taxable year. The same principle shall be applied, mutatis mutandis,
by the United Kingdom in the case of a resident of the United States.
(3) In the application of the provisions of the present Convention
by one of the Contracting Parties any term not otherwise defined. shall,
unless the context otherwise requires, have the meaning which it has
under the laws of that Contracting Party relating to the taxes which
are the subject of the present Convention.
ARTICLE III
(1) A United Kingdom enterprise shall not be subject to United
States tax in respect of its industrial or commercial profits unless it is
engaged in trade or business in the United States through a permanent
establishment situated therein. If it is so engaged, United States tax
may be imposed upon the entire income of such enterprise from sources
within the United States.
(2) A United States enterprise shall not be subject to United
Kingdom tax in respect of its industrial or commercial profits unless
is is engaged in trade or business in the United Kingdom through a
permanent establishment situated therein. If it is so engaged,
United Kingdom tax may be imposed upon the entire income of such
enterprise from sources within the United Kingdom: Provided that
nothing in this paragraph shall affect any provisions of the law of the
United Kingdom regarding the imposition of United Kingdom excess
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CONVENTION WITH RES T TO TAXES ON INCOME 33
profits tax and national defence contribution in the case of inter-
connected companies.
(3) Where an enterprise of one of the Contracting Parties is engaged
in trade or business in the territory of the other Contracting Party
through a permanent establishment situated therein, there shall be
attributed to such permanent establishment the industrial or com-
mercial profits which it might be expected to derive if it were an inde-
pendent enterprise engaged in the same or similar activities under the
same or similar conditions and dealing at arm's length with the enter-
prise of which it is a permanent establishment, and the profits so
attributed shall, subject to the law of such other Contracting Party,
be deemed to be income from sources within the territory of such
other Contracting Party.
(4) In determining the industrial or commercial profits from sources
within the territory of one of the Contracting Parties of an enterprise
of the other Contracting Party, no profits shall be deemed to arise
from the mere purchase of goods or merchandise within the territory
of the former Contracting Party by such enterprise.
Where an enterprise of one of the Contracting Parties, by reason of
its participation in the management, control or capital of an enter-
prise of the other Contracting Party, makes with or imposes on the
latter, in their commercial or financial relations, conditions different
from those which would be made with an independent enterprise,
any profits which would but for those conditions have accrued to one
of the enterprises but by reason of those conditions have not so accrued,
may be included in the profits of that enterprise and taxed accordingly.
ARTICLE V
(1) Notwithstanding the provisions of Articles III and IV of the
present Convention, profits which an individual (other than a citizen
.of the United States) resident in the United Kingdom or a United
Kingdom corporation derives from operating ships documented or
aircraft registered under the laws of the United Kingdom, shall be
exempt from United States tax.
(2) Notwithstanding the provisions of Articles III and IV of the
present Convention, profits which a citizen of the United States not
resident in the United Kingdom or a United States corporation derives
from operating ships documented or aircraft registered under the
laws of the United States, shall be exempt from United Kingdom tax.
(3) This Article shall be deemed to have superseded, on and after
the first day of January, 1945, as to United States tax, and on and
after the 6th day of April, 1945, as to United Kingdom tax, the ar-
rangements relating to reciprocal exemption of shipping profits from
income tax effected between the Government of the United States
and the Government of the United Kingdom by exchange of Notes
dated August 11, 1924, November 18, 1924, November 26, 1924,
January 15, 1925, February 13, 1925 and March 16, 1925, which
shall accordingly cease to have effect.
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ARTICLE VI
(1) The rate of United States tax on dividends derived from a
United States corporation by a resident of the United Kingdom who
is subject to United Kingdom tax on such dividends and not engaged
in trade or business in the United States shall not exceed 15 percent:
Provided that such rate of tax shall not exceed five percent if such
resident is a corporation controlling, directly or indirectly, at least 95
percent of the entire voting power in the corporation paying the divi-
dend, and not more than 25 percent of the gross income of such paying
corporation is derived from interest and dividends, other than interest
and dividends received from its own subsidiary corporations. Such
reduction of the rate to five percent shall not apply if the relationship
of the two corporations has been arranged or is maintained primarily
with the intention of securing such reduced rate.
(2) Dividends derived from sources within the United Kingdom by
an individual who is (a) a resident of the United States, (b) subject to
United States tax with respect to such dividends, and (c) not engaged
in trade or business in the United Kingdom, shall be exempt from
United Kingdom surtax.
(3) Either of the Contracting Parties may terminate this Article
by giving written notice of termination to the other Contracting
Party, through diplomatic channels, on or before the thirtieth day of
June in any year after the year 1945, and in such event paragraph (1)
hereof shall cease to be effective as to United States tax on and after
the first day of January, and paragraph (2) hereof shall cease to be
effective as to United Kingdom tax on and after the 6tb. day of April,
in the year next following that in which such notice is given.
(1) Interest (on bonds, securities, notes, debentures, or on any other
form of indebtedness) derived from sources within the United States
by a resident of the United Kingdom who is subject to United Kingdom
tax on such interest and not engaged in trade or business in the
United States, shall be exempt from United States tax; but' such
exemption shall not apply to such interest paid by a United States
corporation to a corporation resident in the United Kingdom controll-
ing, directly or indirectly, more than 50 percent of the entire voting
power in the paying corporation.
(2) Interest (on bonds, securities, notes, debentures, or on any
other form of indebtedness) derived from sources within the United
Kingdom by a resident of the United States who is subject to United
States tax on such interest and not engaged in trade or business in
the United Kingdom, shall be exempt from United Kingdom tax;
but such exemption shall not apply to such interest paid by a cor-
poration resident in the United Kingdom to a United States cor-
poration controlling, directly or indirectly, more than 50 percent of
the entire voting power in the paying corporation.
ARTICLE VIII
(1) Royalties and other amounts paid as consideration for the use
of, or for the privilege of using, copyrights, patents, designs, secret
processes and formulae, trade-marks, and other like property, and
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derived from sources within the United States by a resident of the
United Kingdom who is subject to United Kingdom tax on such
royalties or other amounts and not engaged in trade or business in
the United States, shall be exempt from United States tax.
(2) Royalties and other amounts paid as consideration for the use
of, or for the privilege of using, copyrights, patents, designs, secret
processes and formulae, trade-marks, and other like property, and
derived from sources within the United Kingdom by a resident of the
United States who is subject to United States tax on such royalties
or other amounts and.not engaged in trade or business in the United
Kingdom, shall be exempt from United Kingdom tax.
(3) For the purposes of this Article the term "royalties" shall be
deemed to include rentals in respect of motion picture films.
ARTICLE IX
(1) The rate of United States tax on royalties in respect of the
operation of mines or quarries or of `other extraction of natural
resources, and on rentals from real property or from an interest in such
property, derived from sources within the United States by a resident
of the United Kingdom who is subject to United Kingdom tax with
respect to such royalties or rentals and not engaged in trade or business
in the United States, shall not exceed 15 percent: Provided that any
such resident may elect for any taxable year to be subject to United
States tax as if such resident were engaged in trade or business in the
United States.
(2) Royalties in respect of the operation of mines or quarries or of
other extraction of natural resources, and rentals from real property
or from an interest in such property, derived from sources within the
United Kingdom by an individual who is (a) a resident of the United
States, (b) subject to United States tax with respect to such royalties
and rentals, and (c) not engaged in trade or business in the United
Kingdom, shall be exempt from United Kingdom surtax.
ARTICLE X
(1) Any salary, wage, similar remuneration, or pension, paid by the
Goverglnent of the United States to an individual (other than a
British subject who is not also a citizen of the United States) in re-
spect of services rendered to the United States in the discharge of
governmental functions, shall be exempt from United Kingdom tax.
(2) Any salary, wage, similar remuneration, or pension, paid by the
Government of the United Kingdom to an individual (other than a
citizen of the United States who is not also a British subject) in respect
of services rendered to the United Kingdom in the discharge of gov-
ernmental functions, shall be exempt from United States tax.
(3) The provisions of this Article shall not apply to payments in
respect of services rendered in connection with any trade or business
carried on by either of the Contracting Parties for purposes of profit.
AI;TICLE XI
(1) An individual who is a resident of the United Kingdom shall be
exempt from United States tax, upon compensation for, personal.
(including professional) services performed during the taxable year
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36 CONVENTION WITH RESPECT TO TAXES ON INCOME
within the United States if (a) he is present within the United States
for a, period or periods not exceeding in the aggregate 183 days during
such taxable year, and (b) such services are performed for or on behalf
of a person resident in the United Kingdom.
(2) An individual who is a resident of the United States shall be
exempt from United Kingdom tax upon profits, emoluments or other
remuneration'in respect of personal (including professional) services
performed within the United Kingdom in any year of assessment if
(a) he is present within the United Kingdom for a period or periods
I not exceeding in the aggregate 183 days during that year, and (b)
such services are performed for or on behalf of a person resident, in
the United States. '
(3) The provisions of this Article shall not apply to the compensa-
tion, profits, emoluments or other remuneration of public entertainers
such as stage, motion picture or radio artists, musicians and athletes.
t
ARTICLE XII
(1) Any pension (other than a pension to which Article X applies),
and any life annuity; derived from sources within the United States
by an individual who is a resident of the United Kingdom shall be
exempt from United States tax.
(2) Any pension (other than a pension to which Article X applies),
and any life annuity, derived from sources within the United Kingdom
by an individual who is a resident of the United States shall. be exempt
from United Kingdom tax.
(3) The term "life annuity" means a stated sum payable periodically
at stated times, during life or during a specified or ascertainable period
of time, under an obligation to make the payments in consideration
of money paid.
ARTICLE XIII
(1) Subject to section 131 of the United States Internal Revenue
Code as in effect on the first day of January, 1945, United Kingdom
tax shall be allowed as a credit against United States tax. For ;this
purpose, the recipient of a dividend paid by a corporation which .is a
resident of the United Kingdom shall be deemed to have paid the
United Kingdom income tax appropriate to such dividend if such
recipient elects to include in his gross income for the purposes of United
States tax the amount of such United Kingdom income tax.
(2) Subject to such provisions (which shall not affect the general
principle hereof) as may be enacted in the United Kingdom, United
States tax payable in respect of income from sources within ; the
United States shall be allowed as a credit against any United Kingdom
tax payable in respect of that income. Where such income is an 9rdi-
nary dividend paid by a United States corporation, such credit shall
take into account (in addition to any United States income tax de-
ducted from or imposed on such dividend) the United States income
tax imposed on such corporation in respect of its profits, and where it is
a dividend paid on participating preference shares and representing
both a dividend at the fixed rate to which the shares are entitled{ and
an additional participation in profits, such tax on profits shall like-
wise be taken into account in so far as the dividend exceeds such fixed
rate.
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CONVENTION WITH RESPECT TO TAXES ON INC,
(3) For the purposes of this Article, compensation, profits, emolu-
ments and other remuneration for personal (including professional)
services shall be deemed to be income from sources within the terri-
tory of the Contracting Party where such services are performed.
ARTICLE XIV
A resident of the United Kingdom not engaged in trade or business
in the United States shall be exempt from United States tax on gains
from the sale or exchange of capital assets.
ARTIGLE XV
Dividends and interest paid on or after the first day of January 1945
by a United Kingdom corporation shall be exempt from United States
tax except where the recipient is a citizen of or a resident of the United
States or a United States corporation.
ARTICLE XVI
A United Kingdom corporation shall be exempt from United States
tax on its accumulated or undistributed earnings, profits, income or
surplus, if individuals who are residents of the United Kingdom con-
trol, directly or indirectly, throughout the last half of the taxable year,
more than 50 percent of the entire voting power in such corporation.
ARTICLE XVII
(1) The United States income tax liability for any taxable year
beginning prior to January 1, 1936 of any individual (other than a
citizen of the United States) resident in the United Kingdom, or of
any United Kingdom corporation, remaining unpaid on the (late of
signature of the present Convention, may be adjusted on a basis
satisfactory to the United States Commissioner of Internal Revenue:
Provided that the amount to be paid in settlement of such liability
shall not exceed the amount of the liability which would have been
determined if
(a) the United States Revenue Act of 1936 (except in the case
of a United Kingdom corporation in which more than 50 percent
of the entire voting power was controlled, directly or indirectly,
throughout the latter half of the taxable year, by citizens or
residents of the United States), and
(b) Articles XV and XVI of the present Convention,
had been in effect for such year. If the taxpayer was not, -within
the meaning of such Revenue Act, engaged in trade or business in
the United States and had no office or place of business therein
during the taxable year, the amount of interest and penalties shall
not exceed 50 percent of the amount of the tax with respect to which
such interest and penalties have been computed.
(2) The United States income tax unpaid on the date of signature
of the present Convention for any taxable year beginning after the
thirty-first day of December 1935 and prior to the first day of January
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CONVENTION WITH RESPECT TO TAXES ON INCOME
1945 in the case of an individual (other than a citizen of the United
States) resident of the United Kingdom, or in the case of any United
Kingdom corporation shall be determined as if the provisions of
Articles XV and XVI of the present Convention had been in effect
for such taxable year.
(3) The provisions of paragraph (1) of this Article shall not apply-
(a) unless the taxpayer files with the Commissioner of Internal
Revenue on or before the thirty-first day of December 1947 a
request that such tax liability be so adjusted and furnishes such
information as the Commissioner may require; or
(b) in any case in which the Commissioner is satisfied that
any deficiency in tax is due to fraud with intent to evade the 'tax.
ARTICLE XVIII
A professor or teacher from the territory of one of the Contracting
Parties who visits the territory of the other Contracting Party for
the purpose of teaching, for a period not exceeding two years, at a
university, college, school or other educational institution in the
territory of such other Contracting Party shall be exempted by such
other Contracting Party from tax on his remuneration for such teach-
ing for such period.
ARTICLE XIX
A student or business apprentice from the territory of one of the
Contracting Parties who is receiving full-time education or training
in the territory of the other Contracting Party shall be exempted'-. by
such other Contracting Party from tax on payments made to him by
persons within the territory of the former Contracting Party for thee
purposes of his maintenance, education or training.
ARTICLE XX
(1) The taxation authorities of the Contracting Parties shall
exchange such information (being information available under the
respective taxation laws of the Contracting Parties) as is necessary
for carrying out the provisions of the present Convention or for the
prevention of fraud or the administration of statutory provisions
against legal avoidance in relation to the taxes which are the subject
of the present Convention. Any information so exchanged shall be
treated as secret and shall not be disclosed to any person other than
those concerned with the assessment and collection of the taxes which
are the subject of the present Convention. No information shall be
exchanged which would disclose any trade secret or trade process.
(2) As used in this Article, the term "taxation authorities" means,
in the case of the United States, the Commissioner of Internal Revenue
or his authorized representative; in the case of the United Kingdom,
the Commissioners of Inland Revenue or their authorized representa-
tive; and, in the case of any territory to which the present Convention
is extended under Article XXII, the competent authority for the
administration in such territory of the taxes to which the present
Convention applies.
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CONVENTION WITH RESPECT TO TAXES ON INCOME
ARTICLE XXI
(1) The nationals of one of the Contracting Parties shall not, while
resident in the territory of the other Contracting Party, be subjected
therein to other or more burdensome taxes than are the nationals of
such other Contracting Party resident in its territory.
(2) The term "nationals" as used in this Article means
(a) in relation to the United Kingdom, all British subjects
and British protected persons, from the United Kingdom or any
territory with respect to which the present Convention is appli-
cable by reason of extension made by the United Kingdom under
Article XXII; and
(b) in relation Co the United States, United States citizens,
and all persons under the protection of the United States, from
the United States or any territory to which the present Conven-
tion is applicable by reason of extension made by the United
States under Article XXII;
and includes all legal persons, partnerships and associations deriving
their status as such from, or created or organized under, the laws in
force in any territory of the Contracting Parties to which the present
Convention applies.
(3) In this Article the word "taxes" means taxes of every kind or
description, whether national, Federal, state, provincial or municipal.
ARTICLE XXII
(1) Either of the Contracting Parties may, at the time of exchange
of instruments of ratification or thereafter while the present Conven-
tion continues in force, by a written notification of extension given to
the other Contracting Party through diplomatic channels, declare its
desire that the operation of the present Convention shall extend to
all or any of its colonies, overseas territories, protectorates, or terri-
tories in respect of which it exercises a mandate, which impose taxes
substantially similar in character to those which are the subject of the
present Convention. The present Convention shall apply to the
territory or territories named in such notification on the date or dates
specified in the notification. (not being less than sixty days from the
date of the notification) or, if no (late is specified in respect of any such
territory, on the sixtieth day after the date of such notification, unless,
prior to the date on which the Convention would otherwise become
applicable to a particular territory, the Contracting Party to whom
notification is given shall have informed the other Contracting Party
in writing through diplomatic channels that it does not accept such
notification as to that territory. In the absence of such extension,
the present Convention, shall not apply to any such territory.
(2) At any time after the expiration of one year from the entry
into force of an extension under paragraph (1) of this Article, either
of the Contracting Parties may, by written notice of termination
given to the other Contracting Party through diplomatic channels,
terminate the application of the present Convention to any territory
to which it has been extended under paragraph (1), and in such event
the present Convention shall cease to apply, six months after the date
of such notice, to the territory or territories named therein, but
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40 CONVENTION WITH RESPECT TO TAXES ON INCOME
without affecting its continued application to the United States, the
United Kingdom or to any other territory to which it has been ex-
tended under paragraph (1) hereof.
(3) In the application of the present Convention in relation to any
territory to which it is extended by notification by the United States
or the United Kingdom references to the "United States" or, as the
case may be, the "United Kingdom" shall be construed as references
to that territory.
(4) The termination in respect of the United States or the United
Kingdom of the present Convention under Article XXIV or of
Article VI shall, unless otherwise expressly agreed by both Con-
tracting Parties, terminate the application of the present Convention
or, as the case may be, that Article to any territory to which the
Convention has been extended by the United States or the United
Kingdom.
(5) The provisions of the preceding paragraphs of this Article shall
apply to the Channel Islands and the Isle of Man as if they were
colonies of the United Kingdom.
ARTICLE XXIII
(1) The present Convention shall be ratified and the instruments of
ratification shall be exchanged at Washington as soon as possible.
(2) Upon exchange of ratifications, the present Convention shall
have effect
(a) as respects United States tax, for the taxable years' be-
ginning on or after the first day of January 1945;
(b) (i) as respects United Kingdom income tax, for the year of
assessment beginning on the 6th day of April 1945 and subsequent
years; (ii) as respects United Kingdom surtax, for the year of
assessment beginning on the 6th day of April 1944 and subse-
quent years; and (iii) as respects United Kingdom excess profits
tax and national defence contribution, for any chargeable ac-
counting period beginning .on or after the first day of April 1945
and for the unexpired portion of any chargeable accounting
period current at that date.
ARTICLE XXIV
(1) The present Convention shall continue in effect indefinitely but
either of the Contracting Parties may, on or before the 30th day of
June in any year after the year 1946, give to the other Contracting
Party, through diplomatic channels, notice of termination and, in such
event, the present Convention shall cease to be effective
(a) as respects United States tax, for the taxable years begin-
ning on or after the first day of January in the year next following
that in which such notice is given;
(b) (i) as respects United Kingdom income tax, for any year
of assessment beginning on. or after the 6th day of April in the
year next following that in which such notice is given; (ii) as
respects United Kingdom surtax, for any year of assessment be-
ginning on or after the 6th day of April in the year in which such
notice is given; and (iii) as respects United Kingdom excess profits
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CONVENTION WITH RESPECT TO TAXES ON INCOME 41
tax and national defence contribution, for any chargeable account-
ing period beginning on or after the first day of April in the year
next following that in which such notice is given and for the unex-
pired portion of any chargeable accounting period current at that
date.
(2) The termination of the present Convention or of any Article
thereof shall not have the effect of reviving any treaty or arrange-
ment abrogated by the present Convention or by treaties previously
concluded between the Contracting Parties.
IN WITNESS WHEREOF the above-mentioned Plenipotentiaries have
signed the present Convention and have affixed thereto their seals.
Done at Washington, in duplicate, on the 16th day of April, 1945.
For-the Government of the United States of America:
E. R. STETTINIUS, Jr.
For the Government of the United Kingdom of Great Britain and
Northern Ireland:
IIALIFAX.
0
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