Post on 15-Jan-2022
International Tax Law I (2019 – 2020)
Università degli studi di Bergamo &
Eötvös Loránd Budapest
Frans.vanistendael@law.kuleuven.be
Prof. em. KU Leuven
Content International Taxation
• International tax rules for income and capital &
double and multiple taxation
• Unilateral measures to relieve double taxation
• DOUBLE TAX CONVENTIONS (OECD & UN)
Content Double Tax Conventions (DTC)
• History
• Integration of DTC’s into national law, Objectives
& interpretation of DTC’s,
• Scope of application of DTC’s (persons & taxes)
• Distributive rules of taxing power
• Mechanisms of relief of double taxation
• Non-discrimination
• Mutual agreement procedure
• Exchange of information
• New art. 29: anti-avoidance (BEPS)
Content International Taxation
• 2015 BEPS action plan, 2017 Multilateral
Convention: a fundamnetal change of paradigm in
international taxation.
• Basic concepts of international taxation for sales,
turn-over & VAT: principles of origin & destination,
elimination of cross-border taxation and export
subsidies.
• Customs duties
• WTO principles to eliminate trade and tax barriers
International tax rules & double taxation
• In order to be able to tax a state needs a nexus
(link or connection) to apprehend the person of
the taxpayer or the matter of taxation (tax base).
• To be subject to a tax jurisdiction a taxpayer
needs a nexus with a state, either in person, or
through one of the sources of the matter of
taxation. If there is no nexus, there is neither an
obligation, nor a practical way to contribute (or to
collect) to the public finances of a state.
International tax rules & double taxation
Basic tax pattern: residence as nexus for person
• Most developed countries tax on the basis of
residence, i.e. individuals and entities established
in their jurisdiction. Taxation of residents is their
worldwide income regardless where the source
of that income is being situated. This is in
accordance with the ability to pay principle.
• A few countries tax residents on a strict territorial
basis: foreign source income is not taxed.
International tax rules & double taxation
Basic tax pattern: source as nexus for income
• Countries also tax specific categories of income
that have their source in their territory. Taxation at
source is effectuated on the limited basis of that
specific category of income. Tax is often on a
gross basis, regardless of where the beneficiary of
such income is established, whether he is taxed
on this income and regardless whether the
beneficiary has other income elsewhere.
International tax rules & double taxation
Nexus for the person of the taxpayer
• Individuals: domicile, residence, habitual abode,
address, centre of social & economic interest,
nationality or citizenship.
• Legal entities: law of incorporation, registered
office, place of central or effective management
(POEM).
• Regardless of where income is sourced.
International tax rules & double taxationNexus for the source of income
• Business & professional income: (permanent)
establishment, place of performance of activities.
• Employment income: place of employment.
• Subsidies: state paying the subsidies.
• Income & capital gains from real property: place
where real property is situated.
International tax rules & double taxationNexus for the source of income
• Dividends, interests & royalties: place where the
debtor or payor is located.
• Capital gains from personal property: place where
assets are being held.
• New source?: for services income and royalties
for intangibles: the market where services are
performed or intangibles are used.
International tax rules & double taxation
Double taxation
• Combination of the two different rules of personal
nexus in one jurisdiction and source nexus in
another jurisdiction result into double taxation.
• There are two forms of double taxation: double
juridical taxation and double economic taxation.
International tax rules & double taxation
Double juridical taxation
• Double juridical taxation means that the same or a
similar tax is imposed twice (by two different
states) on the same taxpayer, on the same basis
(income).
International tax rules & double taxation
Causes of double juridical taxation
• The combination of full and unlimited tax
liability of the taxpayer in his country of
residence and a limited tax liability on part of
the same income in the country of source.
International tax rules & double taxation
Causes of double juridical taxation
• Dual residence, i.e. overlapping concepts of
residence on the nexus for full and unlimited tax
liability: residence, domicile, nationality, POEM.
International tax rules & double taxation
Causes of double juridical taxation
• Dual source, i.e. conflicts on limited tax liability
because of conflicts on the concept of source of,
when income of the same taxpayer is sourced
in several states: shareholder in France receives
dividend from co. incorporated and registered in
NL and with POEM in Belgium. WHT in NL and B.
International tax rules & double taxation
Causes of double juridical taxation
• Different interpretation of identical facts, resulting in the
application of different allocation rules:
• Ex.: remuneration is qualified as employment income in
one state and pension income in another. In tax treaties
employment income taxed in the work state and pension
income in the residence state.
• Ex.: premium paid at redemption of a bond is qualified as
interest in one state and as capital gain in the other. In
tax treaties interest is taxable in the source state and
capital gains in the residence state.
International tax rules & double taxation
Double economic taxation
• Double economic taxation means that the same flow of
income is taxed twice in the person of two different
taxpayers. Double economic taxation can occur within the
same tax system or in two different tax jurisdictions.
• Ex.: Taxation of a company on its profits and of the
shareholders on the dividend.
• Ex.: transfer pricing dispute involving two cos. of the same
group in two different tax jurisdictions: Co. A profit is 50 =
100 – 50, Co. B profit of 50 = 50 – 0 is increased to 100 ->
50 is taxed to co. A and Co. B!
International tax rules & double taxation
International double taxation
• The core problem is not so much double taxation,
but double taxation resulting in excessive taxation
& the competitive disadvantage of double taxation
compared to single taxation.
• Historically double taxation has been challenged
(before WWII) before excessive taxation.
• There is no world standard for excessive taxation
cfr. Tax havens <-> high tax countries.
International tax rules & double taxation
International double non-taxation
• The nexus rules on taxable persons and source of
income may result into double non-taxation as a
consequence of different interpretation or different
application of similar concepts on the same facts,
or the application of different concepts on the
same facts.
International tax rules & double taxation
International double non-taxation
• Ex.: Business income is taxable in state A, if PE >
12 months, while in B a PE is > 6 months.
Business income of PE of 9 months in A owned by
co. resident in B is not taxed in A and exempt in B.
• Ex.: severance pay is qualified as pension by
state of employment (taxable in residence state),
while it is qualified as employment income
(taxable in state employment) in state of
residence, i.e. no taxed in either state.
National measures of unilateral relief
• Within their national tax systems countries can
apply rules to mitigate or eliminate double juridical
or economic international taxation.
• National unilateral provisions may apply only
when there is no DTC or no relief available under
a DTC, or they may apply on top of DTC
provisions,if unilateral relief is more favourable.
• Ex.: participation exemption on dividends in EU
states, regardless of DTC or EU directive.
National measures of unilateral relief
• Territorial tax system: taxes only income sourced
within the tax jurisdiction.
• Strictly territorial tax system may still result in
double taxation: different transfer price between
associated cos. in two territorial juridictions.
• Deduction as an expense of the amount of foreign
tax paid from the tax base.
• Ex.: Foreign net profit 100, domestic net profit
500, foreign tax on 100 = 30. Domestic tax base
100-30 = 70 + 500. Double tax on 70.
National measures of unilateral relief
• Foreign tax credit: deduction of the amount of
foreign tax paid from the amount of domestic tax
due on foreign source income.
• Ex.: Foreign profit 100, tax 30% = 30. Domestic
profit 500, tax 40% = 200. Total taxable income in
residence state 600 x 0,4 = 240 – 30 = 210.
• Exemption of foreign source income.
• Ex.: Foreign profit 100, taks 30% = 30. Domestic
profit 500, tax 40% = 200. Total taxable income in
residence state 500, exempt 100.
Double tax conventions
History
• Historically tax rules can be found in treaties of
friendship, commerce and navigation (19 century)
with tax exemptions and equal treatment for non-
nationals. (US – Brunei 1850, US - Argentina
1853, Kanawaga convention 1854 between US -
Japan).
Double tax conventions
History
• The objective of these treaties was to end the old
tradition (Jewish quarters, Decima), whereby
foreigners were granted only limited access and
limited protection in a country to do business.
• The objective was not avoidance of double
taxation, but equal treatment of foreigners living in
the country compared to treatment of nationals for
business purposes. Cfr. non-discrimination
provision based on nationality in OECDMC.
Double tax conventions
History
• 19th. Century tax treaties in the Nord-Deutsche
Bund as part of the integration and unification
process in Germany. Treaty between Prussia and
Saxony (1869), Austria – Germany (1899) and
Austria-Hungary (1909).
• Objective is avoidance of double taxation based
on the place of real estate or the situs of business
activity and on residence (farming).
Double tax conventions
History
• After WWI the League of Nations was established
with a fiscal committee drafting a tax convention
on the basis of a report of 15.04.1923 by Bruins
(Rotterdam), Einaudi (Torino), Seligman
(Columbia) and Stamp (UK).
Double tax conventions
History
• Heated discussion on priority of residence or
source states for income tax. League of Nations
report 1925 with compromise: priority for
residence for personal income tax (business
income) and source for non-personal income tax.
• Studies in the History of Taxation, John Tiley ed. Vol. 6, chap. 1,
John Avery Jones, Sir Josiah Stamp and Double Income Tax.
Taxtreatieshistory.org
• Michael Graetz & Michael O’Hear, The “original intent” of US
International Taxation, Duke Law Journal, Vol. 46, 1021 (1997).
Double tax conventions
History
• League of Nations Fiscal Committee London &
Mexico, Draft Model Tax Convention 01.11.1946.
• In 1963 OECD Model Tax Convention, revised in
1977 and 1992 and many times thereafter.
Double tax conventions
History
• In 1966 Model Tax Convention of Inheritance
Taxes, revised in 1982.
• In 1980 UN Model Tax Convention, revised in
2001 and 2011. Largely follows OECD model, but
puts more emphasis on taxation in source
jurisdiction.
• Commentaries on OECD and UN model:
explanation of MC without binding legal force,
value of informed expert opinion.
Double tax conventions
History
• Multilateral tax conventions: 1983 Nordic
Multilateral Tax Convention, 1988 Convention on
Mutual Administrative Assistance in Tax Matters.
• 2002 TIEA’s: OECD Agreement on Exchange of
Information on Tax Matters
• 2012 IGA’s: intergovernmental agreements on
automatic Exchange of Information.
• National model conventions: US, UK,NL.
OECD model convention
Objectives
• In the 1963/1977 OECD “MC on income and
capital for the avoidance of double taxation” the
reduction or elimination of double taxation was
the major if not the only aim of the MC.
OECD model convention
Objectives change in BEPS action 6
• To the title of the MC for the elimination of double
taxation is added: “the prevention of tax
avoidance and evasion”.
OECD model convention
Objectives change in BEPS action 6
• New preamble: “Intending to conclude Convention
for the elimination of double taxation … without
creating opportunities for non-taxation or
reduced taxation through tax evasion or
avoidance (including treaty shopping … aimed at
obtaining benefits for residents of third states.)
• The title and the preamble form part of the
context of the Convention and as such play a role
in the interpretation of the convention.
OECD model convention
Structure
• Persons covered (1)
• Taxes covered (2)
• Definitions (3-5)
• Allocation rules for different types of income (6-22)
- Income from immovable property (6)
- Business profits (7)
- International shipping and air transport (8)
- Arm’s length principle (9)
OECD model convention
Structure
• Allocation rules for different types of income
- Dividends (10)
- Interests (11)
- Royalties (12)
- Capital gains (13)
- Independent personal services (14 deleted)
- Employment income (15)
- Director’s fees (16)
OECD model convention
Structure
• Allocation rules for different types of income
- Artistes and sportsmen (17)
- Pensions (18)
- Government service (19)
- Students (20)
- Other income (21)
- Taxation of capital (22)
OECD model convention
Structure
• Methods elimination double juridical taxation (23)
• Non-discrimination rules (24)
• Mutual agreement procedure (25)
• Exchange of information (26)
• Assistance in collection of taxes (27)
• Tax status of diplomats (28)
• New anti-abuse provision, PP test (29)
• Extension, entry into force, termination (30-32)
OECD model convention
Integration of DTC in national law
• Integration of international treaties (including tax
treaties) in national law is a constitutional issue.
• There are monist and dualist states.
OECD model convention
Integration of DTC in national law
• In monist states the approval of the treaty has
direct effect.
• In dualist states the treaty has to be integrated in
the national legal system, by a national
legislative act. As long as it is not integrated it
has no effect: non-integration may delay
application of DTC.
OECD model convention
Integration of DTC in national law
• The question of integration of a DTC in national
law is different from the question of priority
between treaties and national law.
• Ratification in federal states may require approval
of all regional governments. Ex.: Belgium:
Brussels region has to ratify tax treaties.
OECD model convention
Priority of DTC over national tax law
• Constitution determines whether DTC integrated
in national law has priority on national tax law.
• In the US statutory law and treaties are of equal
status: lex posterior derogat priori.
• Most other countries accept that a treaty that has
been integrated into national law has in principle
priority over national statutory provisions: Ex.:
Canada explicit priority in implementing act.
Exception: Anti-avoidance rule in Australia.
OECD model convention
Priority of DTC over national tax law
• If international treaties, including DTC’s, have to
make any sense treaties must have priority over
national statutory tax law.
• Priority of DTC is grounded on its nature as lex
specialis in relation to domestic tax law. The DTC
determines whether the application of the national
tax law will be authorised in relation to competing
tax claims of other tax jurisdictions.
OECD model convention
Priority of DTC over national tax law
• Treaty has the same rank as constitutional rule
which remains valid even to posterior national law.
• Problem of the lex posterior: tax statutes change
frequently, while DTC’s are difficult to renegotiate
and remain valid for a long period of time. The
impact of a lex posterior is a question of
interpretation of treaties. If interpretation leads
to application in which domestic law prevails over
DTC -> infringement of international law.
OECD model convention
Priority of DTC over national tax law
• Priority of DTC cannot mean that a state is
prohibited from adapting its tax law for example to
protect its tax base and to prevent tax avoidance
or tax evasion.
• Ex.: Switch from exemption to credit in DE
Aussensteuergesetz, against tax avoidance: C-
298/05, Columbus Container.
OECD model convention
Priority of DTC ove national tax law
• If there is an interpretative provision in later
domestic law that specifically derogates from DTC
-> treaty override and DTC has priority.
• Ex. Abolition in domestic law of foreign tax credit
for individuals that was agreed in treaty: C-540/11,
Daniël Levvy, Carine Sebbag v Belgium,
19.09.2012.
OECD model convention
Priority of DTC over national tax law
• Later tax reforms should take into account
obligations under DTC’s and the scope of the
concept of tax avoidance is very important.
• If the national interpretation of treaties holds that
later domestic law, which derogates from DTC,
has priority on DTC -> treaty override.
OECD model conventionEffects of DTC
DTC does not create taxing rights
• States exercise full tax sovereignty and levy tax under their
national law on any person or source that is connected to
that State.
• States freely accept to limit the exercise of this tax
sovereignty in DTC.
• DTC only allocates taxing rights to states that have
effectively exercised these rights, it does not create
taxing rights.
OECD model convention
Effects of DTC
DTC does not create taxing rights
• If a DTC allocates the taxing power on income to one CS,
and that state does not tax that income according to its
national law, the DTC neither creates taxing rights for that
state, nor does it create taxing rights for the other C.S.
OECD model convention
Effects of DTC
DTC does not create taxing rights
• A DTC does not provide an independent legal basis for
taxing if there is no legal basis in its national law.
• The traditional rule is that if a CS does not exercise its
taxing right, the DTC does not fully apply and the other CS
can only exercise its taxing rights, when it has claimed a
specific reservation to that effect in the DTC.
OECD model convention
Effects of DTC
DTC does not create taxing rights
• For a domestic tax claim to exist under international law, a
state must fulfil an additional condition of having tax
jurisdiction under the DTC allocation rules.
• For an international tax liability to exist DTC rules of
allocation act as a condition on top of national rules. The
DTC acts as a stencil slid over the mould of domestic law,
covering and thereby excluding part of it.
OECD model convention
Effects of DTC
DTC does not create taxing rights
• However BEPS & the new draft of the 2017 OECDMC now
promotes the objective of prohibition of double non
taxation, justifying a state to retake its taxing rights when
the other state to which those rights have been allocated
does not tax. Ex. Anti-hybrids rule.
• This results in a reversal of tax jurisdiction and
automatic taxation in the other C.S., if the latter claims
taxing rights under its domestic law.
OECD model convention
Effects of DTC
DTC does not create taxing rights
• However, although some DTC’s in force contain a specific
reversal rule, the reversal rule and the preamble on non-
double-taxation are not articles of the OECDMC.
• The new art. 29 and the ML convention contain a rule
denying the benefit of the convention to taxpayers who are
not “qualified residents” or covered by a “principal purpose
test”, potentially resulting in a reversal of tax jurisidiction.
• That reversal can only result into effective taxtion if the
arrangement is subject to tax in the other CS.
OECD model convention
Effects of DTC
Interpretation of DTC in national law
• Where to start DTC or domestic law?
• DTC refers to domestic tax concepts, if the concepts are
not defined in the DTC I.e. domestic concepts are the
starting position.
• Domestic law establishes the national tax claim.
• When there is no domestic tax claim there is no problem
and the DTC does not need to be consulted.
• But DTC may still limit taxing rights in the other CS, except
for the rule of avoiding double non-taxation.
OECD model convention
Effects of DTC
Allocation of taxing rights & mitigation of double
taxation
• Full taxation: DTC allocates taxing power to the two C.S.:
source state and residence state. Double juridical taxation
is eliminated or mitigated by limiting the tax rates in the
source state and obliging the residence state to apply
exemption or tax credit.
• Double taxation is eliminated when foreign source income
is exempt, or when foreign tax can be fully credited against
tax in residence state.
OECD model convention
Effects of DTC
Allocation of taxing rights & mitigation of double
taxation
• Incomplete taxation: allowing limited source taxation in
combination with full exemption in residence state.
• Double juridical taxation is fully eliminated by allocating
exclusive taxing rights to one of the two CS. This results
sometimes in incomplete (reduced) or limited single
taxation in the source state and exemption in residence
state.
OECD model convention
Interpretation of tax treaties
• Principles of interpretation of all treaties including DTCs
are in the Vienna Convention on the Law of Treaties
(VCLT)(signed in 1969, effective as of 1980).
• 124 countries have signed and ratified this convention,
with the major exceptions of France and the US.
OECD model convention
Interpretation of tax treaties
Interpretation principles of VCLT
• Art. 31(1): treaty must be interpreted in “good faith within
ordinary meaning to be given to the terms of the treaty in
their context and in the light of its object and purpose”.
Pacta sunt servanda.
• The context includes the text, its preambles, annexes &
any agreement or instrument made by one of the parties in
connection with the treaty and accepted by the other
parties.
OECD model convention
Interpretation of tax treaties
Interpretation principles of VCLT
• Art. 31(3): subsequent agreement on the interpretation of
a provision of the treaty or subsequent practice when
established in agreement between contracting parties can
also be taken into account and change the way in which
the treaty is applied. However this can never change the
clear wording of a treaty.
• Quid: prohibition of double non-taxation? Only when CS
agree that MLConvention covers existing DTC’s prohibition
of double non-taxation applies.
OECD model convention
Interpretation of tax treaties
Interpretation principles of VCLT
• Ex.: Taxpayer is frontier worker and exempt in country of
employment if he returns home every day to his state of
residence under F/DE DTC. Mutual agreement between
F&DE that he does not lose his status as frontier worker if
he does not return < 45 days per calendar year.
• Taxpayer relied on mutual agreement. DE federal tax
court: MA cannot amend provisions of domestic law after
incorporation of DTC in domestic law. DE BFH 10.12.2001,
IB 94/01
OECD model convention
Interpretation of tax treaties
Interpretation principles of VCLT
• All methods of interpretation are allowed without
hierarchy: grammatical, systematic, teleological and
historical interpretation are allowed.
• Art. 31(4): special meaning to be given to a treaty term
must be observed, “if it is established that the parties so
intended”.
• OECD rule: concepts are defined by national law, unless
clearly defined in DTC.
OECD model convention
Interpretation of tax treaties
Is OECD Commentary part of the context?
• The Commentary is not the context in the sense of the
preamble or the annex of a DTC, neither its preparatory
work, nor the circumstances of its conclusion.
• If the C.S. adopt “ne varietur” the literal text of the OECD
MC, it can be argued that the Commentary is part of the
historical interpretation material, giving a special
meaning to treaty terms.
OECD model convention
Interpretation of tax treaties
Interpretation principles of VCLT
• Sometimes concepts are losely, or incompletely defined in
the DTC. What is the role of OECD MC & Commentary?
• Belgian resident receives severance pay from DE co. DE
tax administration claims taxing rights under OECD
wording: salaries, wages and other remuneration with
respect to employment. DE court decided that DE law
requires close connection between payment and work
performance and rejected OECD Commentary. BEH
02.09.2009, IR 111/08
OECD model convention
Interpretation of tax treaties
Is OECD Commentary part of the context?
• Some tax autorities take the position that the Commentary
should also be used for DTC’s that do not follow the OECD
MC.
• But if the C.S. did not take the OECD MC as the guideline
for their negotiations, the Commentary cannot be used as
a guideline for the interpretation of a DTC.
OECD model convention
Interpretation of tax treaties
Is OECD Commentary part of the context?
• Should a DTC be interpreted in the sense of a later revised
Commentary?
• OECD position: If later Commentary relates to a change in
the MC, it is not relevant for prior DTC. If the revised
Commentary covers an unamended text of the MC it can
be used for interpretation of prior DTC’s. Contra: M. Lang
later Commentary versions are not “context” of prior DTC,
because Commentary is changed by OECD, not by the
CS.
OECD model convention
Interpretation of tax treaties
Is OECD Commentary part of the context?
• Cayman co. holding shares in Can co. relocated to Lux.
and then sold Can shares claiming exemption under 1990
Can-Lux DTC. Can. tax authority claimed tax in Can.
Under an inherent anti-abuse principle in the 2003 OECD
Commentary that it applied to 1990 DTC.
• Can TC decided that only 1977 Commentary was relevant
for interpretation of 1990 DTC, which required specific
provision in DTC tekst in order to apply anti-abuse rule.
• TCCan, 18.08.2006, MIL investments v. Queen.
OECD model convention
Interpretation of tax treaties
Is OECD Commentary part of the context?
• Some recent DTC’s contain a specific rule of interpretation
that later Commentaries should be taken into account (AT,
BE, NL). Such a rule makes the use of later Commentaries
for interpretation mandatory.
• Commentaries are often changed even before the text of
the MC is amended: it is not clear which recent
Commentary should then be used.
OECD model convention
Interpretation of tax treaties
Other instruments of interpetation
• When the text of a DTC is not clear, or when there are new
legal, technical or factual developments any reasonable
support for interpretation can be used: new
Commentaries, expert opinions and foreign court
decisions.
• However the use of those instruments is not binding.
Courts often stick to the text of a DTC, because of principle
of legality.
OECD model convention
Interpretation of tax treaties
Object and purpose of OECD MC
• Art. 31(1): DTC must be interpreted “in the light of its
object and purpose”. The main objective of the MC/DTC’s
is avoidance of double taxation, as reflected in its
original title (1963 and 1977).
• However this objective can only be achieved within the
text and scope of the MC. It does not allow to eliminate
double taxation outside the scope of the MC.
OECD model convention
Interpretation of tax treaties
Object and purpose of OECD MC
• Title of the OECDMC was amended adding: “the
prevention of tax avoidance and evasion”.
• The preamble mentions as objective preventing the
reduction of tax burdens through treaty shopping for
residents of third states.
• The UNMC of 2011 does not mention the avoidance of
double taxation in its title.
OECD model convention
Interpretation of tax treaties
Object and purpose of OECD MC
• BEPS action plan 6 proposes to introduce prohibition of
double non-taxation or reduced taxation as an objective
of the MC at the same level as avoidance of double
taxation.
• But the text of the MC contains only rules to avoid double
taxation, but its objective is also to avoid double non-
taxation. However a new art. 29 has been introduced in the
2017 text of the MC and is part of the MLC
OECD model convention
Interpretation of tax treaties
Priority of DTC definitions
• Art. 3 (2): “any term not defined shall, unless the context
otherwise requires, have the meaning that it has at that
time under the law of the State for the purposes of the
taxes to which the DTC applies”.
• However terms defined in the DTC have priority over the
definitions in domestic law.
• Ex.: PE, residence, national, interest, royalty etc.
• Undefined: dividends
OECD model convention
Interpretation of tax treaties
Priority of DTC definitions
• Art. 3 OECDMC contains a number of “definitions” that are
not complete, full meaning is to be completed by national
law. Ex.: Enterprise: “carrying on any business”.
• Business: includes performance of services and any other
independent activity.
• Taxation of business requires PE, quid of services without
PE, can we apply new concept of services PE?
OECD model convention
Interpretation of tax treaties
Priority of DTC definitions
• Lang finds reference to domestic law controversial,
becasue that reference is limited by “unless the context
requires otherwise”.
• Reference to domestic law often does not resolve the
conflict between C.S. and can only be applied if all
possible interpretation methods under DTC have been
exhausted and failed. The question then is: which
domestic law has priority?
OECD model convention
Interpretation of tax treaties
Static & dynamic method
• Two methods of interpretation of DTC over time:
static & ambulatory or dynamic method of
interpretation.
OECD model convention
Interpretation of tax treaties
Static & dynamic method
• The static method maintains that concepts and rules of a
treaty should be applied in accordance with their meaning
at the time that the treaty was signed (ratified?).
• The ambulatory method maintains that the concepts and
rules of a treaty should be applied in accordance with their
meaning at the time that the treaty is being applied.
Compare to constitutional interpretation of national law.
OECD model convention
Interpretation of tax treaties
Static & dynamic method
• The dynamic method results in a situation where,
depending on developments in law, technology
and business, identical treaty texts lead to
different outcomes.
• The static method freezes a treaty situation and
makes it difficult to adapt to changing
circumstances.
OECD model convention
Interpretation of tax treaties
Static & dynamic method
• In this respect it is important whether a concept is
defined or not defined in the DTC. In case of
explicit reference to domestic law, changes in
domestic law should be taken into account.
• In case of concepts defined in the DTC, changes
in domestic law and later Commentaries are not
relevant. The DTC text is controlling.
OECD model convention
Interpretation of tax treaties
Static & dynamic method
• In 1995 the MC Commentary inlcuded a
recommendation to use the dynamic method
across the board.
• However M. Lang maintains an exception for the
use of later Commentaries for concepts that are
clearly and autonomously defined in earlier DTC’s.
OECD model convention
Interpretation of tax treaties
Static & dynamic method
• The interpretation of DTC’s in accordance with
dynamic method, including later OECD
Commentaries results into tensions with the
principles of legality and legal certainty that taxes
can only be levied by national law and DTC’s
approved in parliament, because of retroactive
application of new rules.
OECD model convention
Interpretation of tax treaties
Multilateral Instrument MLC
• BEPS action 15 contains a proposal for a “Multilateral
Instrument” (MI) open for signature as of 1 January 2017.
Has MI priority on national law?
• New rules are to be included in MLC. Is signature of MLC
equivalent to signing protocol amending existing treaties?
No. MLC should be approved by national parliament. (See
CETA).
OECD model convention
Interpretation of tax treaties
Multilateral Convention MLC
• Signature of MLC is not equivalent to protocol
because a protocol is always signed by two C.S.
and the purpose is the application of some
specific DTC provisions.
• The MLC contains new rules with lots of options.
There are still many decisions to be made on how
to amend the rules after the signature of the MLC,
which need to be approved by parliament.