FROM THE OFFICE OF PUBLIC AFFAIRS

The Treasury Department announced Tuesday that Secretary of the Treasury Paul H. O'Neill and U.K. Chancellor of the Exchequer Gordon Brown signed a new income tax Convention between the United States and the United Kingdom during Secretary O'Neill's trip to London. The new Convention will replace the existing Convention between the United States and the United Kingdom, which has been in effect since 1980.

Welcoming the Convention, Secretary O'Neill commented:

"The new Convention we have signed today will modernize the tax treatment of cross-border trade and investment between the United States and the United Kingdom to reflect the increasing importance of international activity to our economies and developments in our tax laws during the last two decades. What has not changed over these many years, however, is the importance of our transatlantic relationship in the field of taxation. The similarities in our tax systems and the high level of investment in both directions make this treaty unique in the U.S. tax treaty program. As a reflection of this continuing cooperation and our close economic ties, the new Convention is the first U.S. tax treaty to eliminate in certain cases the withholding tax on dividends. By eliminating this tax, the new Convention will encourage cross-border investment and foster still-closer economic ties between our two great nations."

Diplomatic notes interpreting a number of provisions of the new Convention were exchanged at the time of signing. The proposed Convention is subject to ratification in accordance with the procedures of each country. In the United States, this requires that the signed treaty be transmitted to the Senate for its advice and consent to ratification.

The new agreement generally will modernize the bilateral relationship, with an emphasis on the treatment of cross-border investment and the tax treatment of pension contributions.

The most significant changes from the existing Convention deal with the treatment of cross-border dividends. Under the proposed Convention, most dividends received by a company in one country from its subsidiary in the other country will be exempt from tax in the subsidiary's home country. The existing Convention allows the source country to impose withholding tax on such dividends at a maximum rate of 5%.

This is the first U.S. income tax treaty to provide a zero rate of withholding tax on dividends from subsidiaries. In addition, the treaty provides a zero rate of withholding tax on dividends received by qualifying pension funds. The treaty also eliminates several provisions of the existing treaty that dealt with the recently-repealed U.K. Advance Corporation Tax and therefore are no longer necessary.

The new treaty contains provisions dealing with cross-border contributions to pension plans and the taxation of gain upon the exercise of stock options that are designed to eliminate some of the tax barriers that might otherwise discourage executives and other workers from accepting overseas assignments. In addition to the standard provisions that are in many of our treaties, the new treaty will be the first to allow U.S. citizens resident in another country to deduct, for U.S. tax purposes, contributions made to a foreign pension plan. These provisions relating to pensions and options represent a recognition of the increasing frequency with which executives and other employees move between countries during their careers.

Copies of the new convention and the exchange of notes are available on the Internet at www.treas.gov/taxpolicy/library/uktreaty.pdf and www.treas.gov/taxpolicy/library/uknotes.pdf respectively, or from the Office of Public Affairs, Treasury Department, Room 2321, Washington, D.C. 20220.