The United States Senate Committee on Foreign Relations was this week urged by the Treasury Department to take “prompt and favourable” action with respect to approving the taxation treaty signed between the US and Malta last year.
In a nutshell, the agreement provides for reduced withholding rates on cross-border dividend payments generally with the elimination of withholding on cross-border dividend payments to pension funds.
It also provides for withholding at a 10 per cent rate on interest, royalties and other income.
The treaty additionally contains a comprehensive limitation of benefits provision and provides for the exchange of information between the competent authorities to facilitate the administration of each country’s tax laws.
The treaty had been signed in August 2008 by Finance Minister, Tonio Fenech, and former US Ambassador to Malta, Molly Bordonaro, and was transmitted to the Senate for consent and ratification by former President, George Bush, on 15 January, as one of his last acts as president before handing over to Barack Obama just five days later. The Committee itself is chaired by former presidential candidate John Kerry.
Now the agreement – Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income – is before the Senate for ratification.
Appearing before the Senate’s Committee on Foreign Relations on Tuesday, International Tax Counsel with the Treasury Department, Manal Corwin, urged both the Committee and the Senate to “take prompt and favourable action on all of these agreements” – with respect to the pending treaties with Malta, France and New Zealand.
The tax treaty with Malta effectively re-establishes a tax treaty relationship that had been interrupted when the United States terminated a prior tax treaty with Malta that had been signed in 1980.
The proposed agreement, Mr Corwin explained to the Committee, is general consistent with the current US model income tax treaty as well as with treaties the United States holds with other countries
It does, on the other hand, incorporate special rules to take into account special features of Malta’s domestic tax law.
Under the proposed convention, the United States may impose withholding taxes on cross-border portfolio dividend payments at a maximum rate of 15 per cent. When the beneficial owner of the dividend is a company that directly owns at least 10 per cent of the stock of the company paying the dividend, the United States may impose withholding tax at a maximum rate of five per cent.
The proposed convention, Mr Corwin explained, also incorporates rules provided in the US Model tax treaty for certain classes of investment income such as dividends paid by RICs and REITs being subject to special rules to prevent the use of these entities to transform what is otherwise higher-taxed income into lower-taxed income.
The proposed agreement generally limits withholding taxes on cross-border interest and royalty payments to a maximum rate of 10 per cent. The interest article of the proposed convention also contains the US Model rules regarding contingent interest and REMICs.
It also limits the taxation by one country of the business profits of a resident of the other country. The source country’s right to tax such profits is generally limited to cases in which the profits are attributable to a permanent establishment located in that country.
Consistent with current US tax treaty policy, Mr Corwin pointed out, the convention includes a comprehensive limitation on benefits article, which takes into account unique features of Malta’s tax system and is designed to deny treaty shoppers the benefits of the convention.
The proposed convention provides for non-discriminatory treatment by one country to residents and nationals of the other country and additionally provides for the full exchange of information between the tax authorities of each country of information relevant to carrying out the provisions of the agreement or the domestic tax laws of either country.
This, Mr Corwin observes, will facilitate the enforcement of US domestic tax rules.
The convention provides that information exchanged may, with the written consent of the country providing the information, be used for certain non-tax purposes as permitted under the provisions of an existing mutual legal assistance treaty between the two countries that allows for the exchange of tax information.
The convention will enter into force upon the exchange of instruments of ratification between the two countries and will have effect, with respect to taxes withheld at source, for amounts paid or credited on or after the first day of the second month next following the date on which it enters into force.
With respect to other taxes contemplated in the agreement, it will have effect for the taxable years beginning on or after the first day of January in the year following the date upon which the convention enters into force.
