New US/UK Tax Treaty Includes Information Exchange Wording

by Jason Gorringe, Tax-News.com, London

26 July 2001

Although the double tax treaty signed with much fanfare on Tuesday by US Treasury Secretary Paul O'Neill and UK Chancellor Gordon Brown does contain some of the hoped-for goodies, it also contains exchange of information language which will disappoint those who hoped that the US was going to stand out against indiscriminate international information-swapping.

US tax authorities will be able to seek information about income earned by US citizens in Britain, their assets and their bank account details even if they are not resident in the UK. At present the Inland Revenue is only authorised to provide income information on American nationals to the US if the person is resident in Britain.

A government official said the changes reflected the leading role being played by Mr Brown in international efforts to improve exchange of information between tax authorities (the EU is trying to agree a wholesale exchange-of-information regime among most leading economies by the end of 2002); but then backtracked by claiming that the agreement was a standard article which had appeared in other bilateral treaties signed recently by the US.

Depending on how the very broad wording of the treaty are to be put into practice, the provisions could prove controversial with rightwing Republicans in the US, who have been lobbying hard against the OECD's drive for enhanced information exchange. The treaty has to be ratified by the UK Parliament and the US Senate before it can go into effect, and even with a divided Senate that cannot be taken for granted. Subject to ratification, the new treaty is due to come into effect in early 2002.

Gordon Brown said the agreement represented a "significant step forward" in the economic relationship between the two countries, being the first time that the US had agreed to waive withholding taxes on dividend income - the existing 5% tax is being scrapped, although only for US subsidiaries owned at least 80% by their UK parents. Other provisions include the abolition of withholding tax on dividends paid to pension funds (it was 15% previously).

The treaty makes no mention of the Internet, although there is a section on 'permanent establishments' which sharpens up considerably on the equivalent text in the previous treaty.

The full text of the treaty is available at the UK Inland Revenue website and in the Tax-News Resources Section.

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