Technical Explanation PDF

DEPARTMENT OF THE TREASURY TECHNICAL EXPLANATION OF THE
SECOND PROTOCOL SIGNED ON JULY 14, 2004, AMENDING THE
CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND
BARBADOS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE
PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME,
SIGNED ON DECEMBER 31, 1984
This is a technical explanation of the Second Protocol signed at Washington on
July 14, 2004 (the “Protocol”), amending the Convention between the United States of
America and Barbados for the avoidance of double taxation and the prevention of fiscal
evasion with respect to taxes on income, signed at Bridgetown on December 31, 1984
(the “1984 Convention”), as amended by a protocol signed at Washington, D.C. on
December 18, 1991 (the “1991 Protocol”). The term “Convention” refers to the 1984
Convention as modified by both the 1991 Protocol and the Protocol.
Negotiations took into account the U.S. Treasury Department’s current tax treaty
policy and the Treasury Department’s Model Income Tax Convention, published on
September 20, 1996 (the “U.S. Model”). Negotiations also took into account the Model
Tax Convention on Income and on Capital, published by the Organization for Economic
Cooperation and Development, as updated in January 2003 (the “OECD Model”), and
recent tax treaties concluded by both countries.
The Protocol was accompanied by Understandings (the “Understandings”),
implemented through an exchange of notes, indicating the views of the negotiators and of
the States with respect to Article 22 (Limitation on Benefits) of the Convention. The
Understandings also provided that the Understandings accompanying the 1991 Protocol
(the “1991 Understandings”) continue to apply for purposes of applying Article 22 of the
Convention, except to the extent that the 1991 Understandings are inconsistent with the
provisions of Article 22 (as amended by the Protocol). The Understandings and the 1991
Understandings are discussed in connection with the relevant portions of the Protocol.
The Technical Explanation is an official guide to the Protocol. It reflects the
policies behind particular Protocol provisions, as well as understandings reached with
respect to the application and interpretation of the Protocol. This Technical Explanation
should be read together with the Technical Explanations of the 1984 Convention and the
1991 Protocol.
References in the Technical Explanation to “he” or “his” should be read to mean
“he or she” or “his or her.”
Article I
Article I of the Protocol modifies paragraph 3 of Article 1 of the Convention
which permits the United States to continue to tax as U.S. citizens former citizens whose
loss of citizenship had as one of its principal purposes the avoidance of tax. To reflect
1996 amendments to U.S. tax law in this area, the Protocol extends this treatment to
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former long-term residents whose loss of such status had as one of its principal purposes
the avoidance of tax.
Section 877 of the Internal Revenue Code of 1986 (the “Code”) applies to former
citizens and long-term residents of the United States whose loss of citizenship or long-
term resident status had as one of its principal purposes the avoidance of tax. Under
section 877, the United States generally treats an individual as having a principal purpose
to avoid tax if either of the following criteria exceed established thresholds: (a) the
average annual net income tax of such individual for the period of 5 taxable years ending
before the date of the loss of status, or (b) the net worth of such individual as of the date
of the loss of status. The thresholds are adjusted annually for inflation. Section 877(c)
provides certain exceptions to these presumptions of tax avoidance. The United States
defines “long-term resident” as an individual (other than a U.S. citizen) who is a lawful
permanent resident of the United States in at least 8 of the prior 15 taxable years. An
individual is not treated as a lawful permanent resident for any taxable year if such
individual is treated as a resident of a foreign country under the provisions of a tax treaty
between the United States and the foreign country and the individual does not waive the
benefits of such treaty applicable to residents of the foreign country.
Article II
Article II of the Protocol replaces Article 22 (Limitation on Benefits) of the
Convention.
Structure of the Article
Article 22 follows the form used in other recent U.S. income tax treaties.
Paragraph 1 states the general rule that a resident of a Contracting State is entitled to
benefits otherwise accorded to residents only to the extent that the resident satisfies the
requirements of the Article and any other specified conditions for the obtaining of such
benefits and lists a series of attributes of a resident of a Contracting State, any one of
which suffices to make such resident entitled to all the benefits of the Convention.
Paragraph 2 sets forth the active trade or business test, under which a person not entitled
to benefits under paragraph 1 may nonetheless be granted benefits with regard to certain
types of income. Paragraph 3 provides that benefits also may be granted if the competent
authority of the State from which the income arises determines that it is appropriate to
grant benefits in that case. Paragraph 4 defines what constitutes a recognized stock
exchange for purposes of paragraph 1. Paragraph 5 authorizes the competent authorities
to develop agreed applications of the Article and to exchange information necessary for
carrying out the provisions of the Article. Paragraph 6 excludes certain persons that are
residents and that otherwise would qualify for the benefits of the Convention under
paragraphs 1 or 2 of this Article from the benefits of Articles 10 (Dividends), 11
(Interest) and 12 (Royalties).
Article 22 and the anti-abuse provisions of domestic law complement each other,
as Article 22 effectively determines whether an entity has a sufficient nexus to the
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Contracting State to be treated as a resident for treaty purposes, while domestic anti-
abuse provisions (e.g., business purpose, substance-over-form, step transaction or conduit
principles) determine whether a particular transaction should be recast in accordance with
its substance. Thus, internal law principles of the source Contracting State may be
applied to identify the beneficial owner of an item of income, and Article 22 then will be
applied to the beneficial owner to determine if that person is entitled to the benefits of the
Convention with respect to such income.
Paragraph 1
Paragraph 1 provides that, except as otherwise provided, a resident of a
Contracting State will be entitled to all the benefits of the Convention otherwise accorded
to residents of a Contracting State only if the resident is described in one of the
subparagraphs of that paragraph 1.
The benefits otherwise accorded to residents under the Convention include all
limitations on source-based taxation under Articles 6 through 21, the treaty-based relief
from double taxation provided by Article 23 (Relief from Double Taxation), and the
protection afforded to residents of a Contracting State under Article 24 (Non-
Discrimination). Some provisions do not require that a person be a resident in order to
enjoy the benefits of those provisions. Article 25 (Mutual Agreement Procedure) is not
limited to residents of the Contracting States, and Article 27 (Diplomatic Agents and
Consular Officers) applies to diplomatic agents or consular officials regardless of
residence. Article 22 accordingly does not limit the availability of treaty benefits under
these provisions.
Paragraph 1 has six subparagraphs, each of which describes a category of
residents that are entitled to all benefits of the Convention. It is intended that the
provisions of paragraph 1 will be self-executing. Claiming benefits under paragraph 1
does not require advance competent authority ruling or approval. The tax authorities
may, of course, on review, determine that the taxpayer has improperly interpreted the
paragraph and is not entitled to the benefits claimed.
Individuals --Subparagraph 1(a)
Subparagraph (a) provides that individual residents of a Contracting State will be
entitled to all the benefits of the Convention. If such an individual receives income as a
nominee on behalf of a third country resident, benefits may be denied under the
applicable articles of the Conve ntion by the requirement that the beneficial owner of the
income be a resident of a Contracting State.
Governments --Subparagraph 1(b)
Subparagraph (b) provides that the Contracting States and any political
subdivision or local authority thereof will be entitled to all the benefits of the Convention.
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Publicly-Traded Corporations --Subparagraph 1(c)
Subparagraph (c) applies to two categories of companies: publicly traded
companies and subsidiaries of publicly traded companies. A company resident in a
Contracting State is entitled to all the benefits of the Convention under clause (i) of
subparagraph (c) if its principal class of shares is: (a) listed on a recognized stock
exchange located in the Contracting State of which the company is a resident; (b)
primarily traded on a recognized stock exchange located in the Contracting State of
which the company is a resident; and (c) regularly traded on one or more recognized
stock exchanges. In the case of a company that is resident in Barbados, the company
alternatively may satisfy the second requirement if it is primarily traded on either the
Jamaica Stock Exchange or the Trinidad Stock Exchange, each of which is a recognized
stock exchange, as discussed below.
The term “recognized stock exchange” is defined in paragraph 4. It includes the
NASDAQ System and any stock exchange registered with the Securities and Exchange
Commission as a national securities exchange for purposes of the Securities Exchange
Act of 1934, as well as the Barbados Stock Exchange, the Jamaica Stock Exchange and
the Trinidad Stock Exchange. The term also includes any other stock exchange agreed
upon by the competent authorities of the Contracting States.
The term “principal class of shares” is not defined in the Convention. In
accordance with paragraph 2 of Article 3 (General Definitions), this term will have the
meaning it has under the laws of the State concerning the taxes to which the Convention
applies, generally the source State. Generally, under U.S. tax law, the “principal class of
shares” is defined as the common shares of the company representing the majority of the
aggregate voting power and value of the company. If the company does not have a class
of ordinary or common shares representing the majority of the aggregate voting power
and value of the company, then the “principal class of shares” is that class or any
combination of classes of shares that represents, in the aggregate, a majority of the voting
power and value of the company. “Shares” include depository receipts for shares or trust
certificates for shares.
The term “primarily traded” is not defined in the Convention. In accordance with
paragraph 2 of Article 3 (General Definitions), this term will have the meaning it has
under the laws of the State concerning the taxes to which the Convention applies,
generally the source State. In the case of the United States, this term is understood to
have the meaning it has under Treas. Reg. section 1.884-5(d)(3), relating to the branch
tax provisions of the Code. Accordingly, stock of a corporation is “primarily traded” on
a recognized stock exchange in the Contracting State of which the company is a resident
if the number of shares in the company’s principal class of shares that are traded during
the taxable year on all recognized stock exchanges in that Contracting State exceeds the
number of shares in the company’s principal class of shares that are traded during that
year on established securities markets in any other single foreign country.
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The term “regularly traded” is not defined in the Convention. In accordance with
paragraph 2 of Article 3 (General Definitions), this term will have the meaning it has
under the laws of the State concerning the taxes to which the Convention applies,
generally the source State. In the case of the United States, this term is understood to
have the meaning it has under Treas. Reg. section 1.884-5(d)(4)(i)(B), relating to the
branch tax provisions of the Code. Under these regulations, a class of shares is
considered to be “regularly traded” if two requirements are met: trades in the class of
shares are made in more than de minimis quantities on at least 60 days during the taxable
year, and the aggregate number of shares in the class traded during the year is at least 10
percent of the average number of shares outstanding during the year. Treas. Reg. section
1.884-5(d)(4)(i)(A), (ii) and (iii) will not be taken into account for purposes of defining
the term "regularly traded" under the Convention.
The regular trading requirement can be met by trading on any recognized
exchange or exchanges. Trading on one or more recognized stock exchanges may be
aggregated for purposes of this requirement. Authorized but unissued shares are not
considered for purposes of this test.
A company resident in a Contracting State is entitled to all the benefits of the
Convention under clause (ii) of subparagraph (c) of paragraph 1 if: (a) at least 50 percent
of the company’s principal class of shares is owned directly or indirectly by companies
that are publicly traded as provided above ; and (b) the company satisfies the requirements
of the base erosion clause of paragraph 1(d) of this Article. Furthermore, in the case of
indirect ownership, each intermediate owner must be a person entitled to benefits of the
Convention under this clause (ii). Thus, for example, a Barbados company, all the shares
of which are owned by another Barbados company, would qualify for benefits under the
Convention if the principal class of shares of the Barbados parent company were listed on
the Barbados Stock Exchange, primarily traded on the Barbados Stock Exchange and
regularly traded on the Barbados Stock Exchange and the New York Stock Exchange.
Ownership/Base Erosion -- Subparagraph 1(d)
Subparagraph 1( d) provides an additional test that applies to any form of legal
entity that is a resident of a Contracting State. The test provided in subparagraph (d), the
so-called ownership and base erosion test, is a two-part test. Both prongs of the test must
be satisfied for the resident to be entitled to benefits under subparagraph 1( d).
The ownership prong of the test, under clause (i), requires that more than 50
percent of the beneficial interest in that person (or in the case of a company, more than 50
percent of the number of shares of each class of whose shares) is owned, directly or
indirectly, on at least half the days of the taxable year by residents of that State that are
entitled to the benefits of this Convention under subparagraphs (a), (b), (c)i), (e) or (f)
(other than a person described in paragraph 6 of this Article). Furthermore, in the case of
indirect ownership, each intermediate owner must be a resident of that Contracting State.
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Trusts may be entitled to benefits under this provision if they are treated as
residents under Article 4 (Resident) and they otherwise satisfy the requirements of this
subparagraph. For purposes of this subparagraph, the beneficial interests in a trust will be
considered to be owned by its beneficiaries in proportion to each beneficiary's actuarial
interest in the trust. The interest of a remainder beneficiary will be equal to 100 percent
less the aggregate percentages held by income beneficiaries. A beneficiary's interest in a
trust will not be considered to be owned by a person entitled to benefits under the other
provisions of paragraph 1 if it is not possible to determine the beneficiary's actuarial
interest. Consequently, if it is not possible to determine the actuarial interest of any
beneficiaries in a trust, the ownership test under clause (i) cannot be satisfied, unless all
possible beneficiaries are persons entitled to benefits under the other subparagraphs of
paragraph 1.
The base erosion prong of clause (ii) of subparagraph (d) disqualifies a person if
50 percent or more of the person’s gross income for the taxable year is paid or accrued,
directly or indirectly, to persons who are not residents of that same Contracting State
entitled to the benefits of this Convention under subparagraphs (a), (b), (c)i), (e) or (f)
(other than a person described in paragraph 6 of this Article) in the form of payments that
are deductible for the purposes of the taxes covered by this Convention in the State of
which the person is a resident. The term “gross income” is not defined in the
Convention. Thus, in accordance with paragraph (2) of Article 3 (General Definitions),
in determining whether a person deriving income from United States sources is entitled to
the benefits of the Convention, the United States will ascribe the meaning to the term that
it has in the United States. In the case of the United States, the term "gross income" has
the same meaning as such term in section 61 of the Code and the regulations thereunder.
To the extent they are deductible from the taxable base, trust distributions are
deductible payments. However, depreciation and amortization deductions, which do not
represent payments or accruals to other persons, are disregarded for this purpose.
Deductible payments also do not include arm’s length payments in the ordinary course of
business for services or tangible property.
Tax Exempt Organizations --Subparagraph 1(e)
A tax-exempt organization other than an exempt pension trust is entitled to all the
benefits of the Convention, without regard to the residence of its beneficiaries or
members. Entities qualifying under this subparagraph are those that are organized and
operated exclusively for religious, charitable, scientific, literary or educational purposes
and that, by virtue of that status, are generally exempt from income taxation in their
Contracting State of residence.
Exempt Employee Benefits Organizations – Subparagraph 1(f)
A plan, scheme, fund, trust, company or other arrangement established in a
Contracting State that is operated exclusively to administer or provide employee benefits
and that, by reason of its nature as such, is generally exempt from income taxation in that
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State is entitled to all the benefits of the Convention if more than half of the beneficiaries,
members or participants, if any, in such organization are persons that are entitled, under
this Article, to the benefits of this Convention. For purposes of this provision, the term
“beneficiaries” should be understood to refer to the persons receiving benefits from the
entity.
Paragraph 2
Paragraph 2 sets forth a test under which a resident of a Contracting State that is
not entitled to all benefits of the Convention may receive treaty benefits with respect to
certain items of income that are connected to an active trade or business conducted in its
State of residence.
Subparagraph (a) sets forth the general rule that a resident of a Contracting State
engaged in the active conduct of a trade or business in that State may obtain the benefits
of the Convention with respect to an item of income derived in the other Contracting
State. The item of income, however, must be derived in connection with or incidental to
that trade or business.
The term “active trade or business” is defined in clause (iii) of subparagraph 2(d).
In general, a trade or business comprises activities that constitute (or could constitute) an
independent economic enterprise carried on for profit. To constitute a trade or business,
the activities conducted by the resident ordinarily must include every operation which
forms a part of, or a step in, a process by which an enterprise may earn income or profit.
The determination of whether the activities of a resident of a Contracting State constitute
an active trade or business is determined under all the facts and circumstances. A
resident of a Contracting State actively conducts a trade or business if it regularly
performs active and substantial management and operational functions through its own
officers or staff of employees. In this regard, one or more of such activities may be
carried out by independent contractors under the direct control of the resident. However,
in determining whether the corporation actively conducts a trade or business, the
activities of independent contractors shall be disregarded.
The business of making or managing investments for the resident’s own account
will be considered to be a trade or business only when part of banking or insurance
activities conducted by a bank or an insurance company. Such activities conducted by a
person other than a bank or an insurance company will not be considered to be the
conduct of an active trade or business, nor would they be considered to be the conduct of
an active trade or business if conducted by a bank or insurance company but not as part
of the company’s banking or insurance business.
For this purpose, a resident will be treated as a bank only if: (a) it is licensed to
accept deposits from residents of the Contracting State of which it is a resident and to
conduct, in that State, lend ing or other banking activities; (b) it regularly accepts deposits
from customers who are residents of the Contracting State of which it is a resident in the
ordinary course of its business and the amount of deposits shown on the company’s
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balance sheet is substantial; and (c) it regularly makes loans to customers in the ordinary
course of its trade or business. Furthermore, a resident will be treated as an insurance
company only if: (a) it is licensed to insure risks of residents of the Contracting State of
which it is a resident; and (b) it regularly insures (not including reinsurance) risks of
customers who are residents of the Contracting State of which it is a resident.
Because a headquarters operation is in the business of managing investments, a
company that functions solely as a headquarters company will not be considered to be
engaged in an active trade or business for purposes of subparagraph (a).
An item of income is derived in connection with a trade or business if the income-
producing activity in the State of source is a line of business that “forms a part of” or is
“complementary” to the trade or business conducted in the State of residence by the
income recipient. A business activity generally will be considered to form part of a
business activity conducted in the State of source if the two activities involve the design,
manufacture or sale of the same products or type of products, or the provision of similar
services. The notes clarify that the line of business in the State of residence may be
upstream, downstream, or parallel to the activity conducted in the State of source. Thus,
the line of business may provide inputs for a manufacturing process that occurs in the
State of source, may sell the output of that manufacturing process, or simply may sell the
same sorts of products that are being sold by the trade or business carried on in the State
of source.
For two activities to be considered to be “complementary,” the activities need not
relate to the same types of products or services, but they should be part of the same
overall industry and be related in the sense that the success or failure of one activity will
tend to result in success or failure for the other. Where more than one trade or business is
conducted in the State of source and only one of the trades or businesses forms a part of
or is complementary to a trade or business conducted in the State of residence, it is
necessary to identify the trade or business to which an item of income is attributable.
Royalties generally will be considered to be derived in connection with the trade or
business to which the underlying intangible property is attributable. Dividends will be
deemed to be derived first out of earnings and profits of the treaty-benefited trade or
business, and then out of other earnings and profits. Interest income may be allocated
under any reasonable method consistently applied. A method that conforms to U.S.
principles for expense allocation will be considered a reasonable method.
An item of income derived from the State of source is “incidental to” the trade or
business carried on in the State of residence if production of the item facilitates the
conduct of the trade or business in the State of residence. An example of incidental
income is the temporary investment of working capital of a person in the State of
residence in securities issued by persons in the State of source.
Subparagraph (b) of paragraph 2 states a further condition to the general rule in
subparagraph (a) in cases where the trade or business generating the item of income in
question is carried on either by the person deriving the income or by any associated
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enterprises. Subparagraph (b) states that the trade or business carried on in the State of
residence, under these circumstances, must be substantial in relation to the activity in the
State of source. The requirement is intended to prevent a narrow case of treaty-shopping
abuses in which a company attempts to qualify for benefits by engaging in de minimis
connected business activities in the treaty country in which it is resident (i.e., activities
that have little economic cost or effect with respect to the company business as a whole).
The determination of substantiality is made based upon all the facts and
circumstances and takes into account the comparative sizes of the trades or businesses in
each Contracting State (measured by reference to asset values, income and payroll
expenses), the nature of the activities performed in each Contracting State, and the
relative contributions made to tha t trade or business in each Contracting State. In any
case, in making each determination or comparison, due regard will be given to the
relative sizes of the U.S. and Barbados economies.
In addition to this subjective rule, subparagraph (b) provides a safe harbor under
which the trade or business of the income recipient may be deemed to be substantial
based on three ratios that compare the size of the recipient's activities to those conducted
in the other State with respect to the preceding taxable year, or the average of the
preceding three years. The three ratios compare: (i) the value of the assets in the
recipient's State to the assets used in the other State; (ii) the gross income derived in the
recipient's State to the gross income derived in the other State; and (iii) the payroll
expense in the recipient's State to the payroll expense in the other State. The average of
the three ratios must exceed 10 percent, and each individual ratio must equal at least 7.5
percent. For purposes of this test, if the income recipient owns, directly or indirectly, less
than 100 percent of the activity conducted in either State, only its proportionate share of
the activity will be taken into account.
The determination in subparagraph (b) also is made separately for each item of
income derived from the State of source. It therefore is possible that a person would be
entitled to the benefits of the Convention with respect to one item of income but not with
respect to another.
If a resident of a Contracting State is entitled to treaty benefits with respect to a
particular item of income under paragraph 2, the resident is entitled to all benefits of the
Convention insofar as they affect the taxation of that item of income in the State of
source.
The application of the substantiality test only to income from related parties
focuses only on potential abuse cases, and does not hamper certain other kinds of non-
abusive activities, even though the income recipient resident in a Contracting State may
be very small in relation to the entity generating income in the other Contracting State.
For example, a small Barbados bank that makes a loan to a very large unrelated U.S.
business would not have to pass a substantiality test to receive treaty benefits under
Paragraph 2.
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As discussed above, paragraph 1 of the Understandings provides that the 1991
Understandings continue to apply for purposes of applying Article 22 of the Convention,
except to the extent that the 1991 Understandings are inconsistent with the provision of
Article 22 (as amended by the Protocol). In this regard, the 1991 Understandings make
clear that this provision is self executing; unlike the provisions of paragraph 3, discussed
below, it does not require advance competent authority ruling or approval. The 1991
Understandings contain a number of examples illustrating the intention of the negotiators
with respect to the interpretation of the active trade or business provisions in the 1991
Protocol.
Subparagraph (c) of paragraph 2 provides special rules for determining whether a
resident of a Contracting State is engaged in the active conduct of a trade or business
within the meaning of subparagraph (a). Subparagraph (c) attributes the activities of a
partnership to each of its partners. Subparagraph (c) also attributes to a person activities
conducted by persons “connected” to such person. A person (“X”) is connected to
another person (“Y”) if X possesses 50 percent or more of the beneficial interest in Y (or
if Y possesses 50 percent or more of the beneficial interest in X). For this purpose, X is
connected to a company if X owns shares representing 50 percent or more of the
aggregate voting power and value of the company or fifty percent or more of the
beneficial equity interest in the company. X also is connected to Y if a third person
possesses 50 percent or more of the beneficial interest in both X and Y. For this purpose,
if X or Y is a company, the threshold relationship with respect to such company or
companies is 50 percent or more of the aggregate voting power and value or 50 percent or
more of the beneficial equity interest. Finally, X is connected to Y if, based upon all the
facts and circumstances, X controls Y, Y controls X, or X and Y are controlled by the
same person or persons.
Paragraph 3
Paragraph 3 provides that a person that is not entitled to the benefits of this
Convention pursuant to the provisions of paragraph 1 may, nevertheless, be granted the
benefits of the Convention at the discretion of the competent authority of the State in
which the income in question arises. The paragraph itself provides no guidance to
competent authorities or taxpayers as to how the discretionary authority is to be
exercised. The 1991 Understandings, which generally continue to apply, as discussed
above, provide that, for purposes of implementing paragraph 3, taxpayers will be
permitted to present their cases to the competent authority for an advance determination
based on the facts, and will not be required to wait until the tax authorities of one of the
Contracting States have determined that benefits are denied. In these circumstances, it is
also expected that if the competent authority determines that benefits are to be allowed,
they will be allowed retroactively to the time of entry into force of the relevant treaty
provision or the establishment of the structure in question, whichever is later.
The 1991 Understandings further provide that, in making determinations under
paragraph 3, the competent authorities will take into account all relevant facts and
circumstances. The factual criteria that the competent authorities are expected to take
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into account include the existence of a clear business purpose for the structure and
location of the income-earning entity in question; the conduct of an active trade or
business (as opposed to a mere investment activity) by such entity; and a valid business
nexus between that entity and the activity giving rise to the income.
The 1991 Understandings also note that the discretionary authority granted to the
competent authorities is particularly important in view of, and should be exercised with
particular cognizance of, the developments in, and objectives of, international economic
integration, such as that among the member countries of the CARICOM and under the
North American Free Trade Agreement.
In this regard, the Understandings provide specific guidance in the case of an
employee benefits organization that fails to satisfy the requirements of subparagraph (f)
of paragraph 2 solely because 50 percent or less of its beneficiaries, members or
participants are persons entitled to the benefits of the Convention. In such case, the U.S.
Competent Authority will favorably consider the following factors: (a) the organization
is established in Barbados; (b) the sponsoring employer of the organization is a resident
of Barbados entitled to the benefits of the Convention (other than a person described in
paragraph 6 of Article 22); (c) more than 30 percent of the beneficiaries, members or
participants of the organization are persons entitled to the benefits of this Convention;
and (d) more than 70 percent of the beneficiaries, members or participants of the
organization are individuals resident in a member of the Caribbean Community.
The competent authority may determine to grant all benefits of the Convention, or
it may determine to grant only certain benefits. For instance, it may determine to grant
benefits only with respect to a particular item of income in a manner similar to paragraph
2. Further, the competent authority may set time limits on the duration of any relief
granted.
Paragraph 4
Paragraph 4 defines the term “recognized stock exchange.” See the paragraph 1
discussion above.
Paragraph 5
Paragraph 5 of Article 22 authorizes the competent authorities both to develop
procedures for the application of the Article, and to exchange information necessary to
carry out its provisions. Thus, for example, if a Barbadian resident corporation claims
benefits on the basis of having satisfied the ownership/base erosion tests of subparagraph
1(d), the U.S. competent authority may request information from the Barbados competent
authority to confirm that these tests have, in fact, been satisfied.
Paragraph 6
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Paragraph 6 excludes certain persons that are residents and that otherwise would
qualify for the benefits of the Convention under paragraphs 1 or 2 of this Article from the
benefits of Articles 10 (Dividends), 11 (Interest) and 12 (Royalties). Paragraph 6 denies
these benefits in the case of a person that is entitled to income tax benefits under the
provisions of a special tax regime. Paragraph 6 also treats a partnership, estate or trust as
a person that is entitled to income tax benefits under the provisions of a special tax
regime to the extent that such partnership, estate or trust is treated as a resident of a
Contracting State under paragraph 1 of Article 4 (Residence) by reason of income of such
partnership, estate or trust being subject to tax in the hands of one or more persons
described in paragraph 6.
The Understandings identify several regimes in Barbados that are special tax
regimes. These regimes are as follows: (1) the Exempt Insurance Act, Cap. 308; (2) the
International Financial Services Act, 2002; (3) the International Business Companies Act,
Cap. 77; (4) the Societies with Restricted Liability Act, Cap. 318B; or (5) the Insurance
(Miscellaneous Provisions) Act, 1998. The Understandings further provide that any
legislation or administrative practice enacted or adopted after the signing of this Protocol
pursuant to which the income of a person is entitled to the same or substantially similar
tax benefits to those granted under the legislation referred to in the previous sentence will
constitute a special regime. In determining whether a person in entitled to the same or
substantially similar benefits to those tax regimes identified in the understandings,
consideration will be given to all facts and circumstances, including, for example,
whether a tax regime imposes tax based on an artificially low taxable base.
Article III
Article III of the Protocol amends Article 26 (Exchange of Information) of the
Convention to add a new paragraph 4. Paragraph 4 makes clear that information
exchanged under Article 26 of the Convention includes information held by financial
institutions, nominees, or persons acting in an agency or fiduciary capacity (but does not
include information that would reveal confidential communications between a client and
an attorney, solicitor or other legal representative, where the client seeks legal advice). In
the case of the United States, the scope of the privilege for such confidential
communications is coextensive with the attorney-client privilege under U.S. law.
Paragraph 4 also makes clear that the Contracting States may obtain and exchange
information relating to the ownership of legal persons.
Article IV
Article IV relates to entry into force of the modifications made by the Protocol.
Paragraph 1
Paragraph 1 provides that the Protocol shall be subject to ratification by both
Contracting States according to their constitutional and statutory requirements.
Instruments of ratification shall be exchanged as soon as possible.
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In the United States, the process leading to ratification and entry into force is as
follows: once a protocol or treaty has been signed by authorized representatives of the
two Contracting States, the Department of State sends the protocol or treaty to the
President who formally transmits it to the Senate for its advice and consent to
ratification, which requires approval by two-thirds of the Senators present and voting.
Prior to this vote, however, it generally has been the practice of the Senate Committee
on Foreign Relations to hold hearings on the protocol or treaty and make a
recommendation regarding its approval to the full Senate. Both Government and
private sector witnesses may testify at these hearings. After receiving the Senate's
advice and consent to ratification, the protocol or treaty is returned to the President for
his signature on the ratification document. The President's signature on the document
completes the process in the United States.
Paragraph 2
Paragraph 2 provides that the Protocol will enter into force upon the exchange of
instruments of ratification. The date on which a treaty or protocol enters into force is not
necessarily the date on which its provisions take effect. Paragraph 2, therefore, also
contains rules that determine when the provisions of the Protocol will have effect.
Under paragraph 2(a), the Protocol will have effect with respect to taxes withheld
at source (principally dividends, interest and royalties) for amounts paid or credited on or
after the first day of the second month following the date on which the Protocol enters
into force. For example, if instruments of ratification are exchanged on April 25 of a
given year, the availability of benefits under Article 10 (Dividends) of the Convention
will be limited under Article 22, as amended by the Protocol, for any dividends paid or
credited on or after June 1 of that year. The delay of one to two months is required to
allow sufficient time for withholding agents to be informed about the change in
withholding rates.
For all other taxes, subparagraph (b) specifies that the Protocol will have effect
for any taxable year beginning on or after January 1 of the year following entry into
force.
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