E The interpretation of DTCs:

Treaties are governed by public international law as opposed to domestic law => problems of interpretation. Treaties need to be interpreted in a number of contexts

Settling the tax liability of a resident taxpayer e.g. by granting double tax relief in accordance with the treaty. In such cases the judge may have to have recourse to domestic law principles

In determining in which of the 2 states an amount of income or gain is primarily taxable - e.g. in determining profits attributable to a PE the tax authority in the residence state may need to consult the tax authority of the source state

In acting in a capacity as an independent arbitrator, for instance, on a transfer pricing dispute.

1. The general approach to interpretation 3

Different states approach matters of legal interpretation in different ways. There are 3 main approaches;

The objective approach - using ordinary meanings of words (this is prone to problems of translation/culture)

The subjective approach - where the intention of the parties is examined

The teleological approach - which looks at the aims and objectives of the treaty

Each treaty must be construed individually - although it is highly likely that a state will strive for some consistency in the interpretation of its treaties.

Court cases can be useful - e.g. definition of "beneficial ownership" in the Indofood case. The term is widely used in treaties but rarely specifically defined.

Treaties will usually define important terms such as "person", "enterprise" or "permanent establishment" and Article 3(2) of the OECD model also provides some general rules of definition.

2. The Vienna Convention on the Law of Treaties 2

Article 31 - 33 Vienna Convention (page 1737 Materials)

Art 31 - General rule of interpretation

Art 32 - supplementary rules of interpretation

Art 33 - interpretation of treaties authenticated in 2 languages

3. The use of external aids for interpretation – the status and use of the OECD

Commentaries 2

States may not use any material prepared unilaterally to aid interpretation - only the text itself, the preamble, the annexes and any other material prepared on a bilateral basis such as protocols, memoranda of understanding etc that were agreed upon by both parties at the time the treaty was concluded.

Art 32 of the VC provides that recourse may be had to the supplementary means of interpretation ( such as the travaux preparatoires - not generally available to the public). Art 32 provides practical means of applying the Art 31 general principles.

OECD model commentary

Key source of interpretation for OECD model based treaties

Also for US and UN based models where appropriate as these are adaptions of the OECD model

Model & Commentary are work of the Committee of Fiscal Affairs (CFA) of the OECD, composed of senior government officials in OECD MS.

Status as official aid is sometimes questioned (no direct reference is made in the VC Art 31 so they fall under 32 only) but there is ample evidence of its widespread acceptance (e.g. UK case Sun Life v Pearson "the views of the experts who sat on the fiscal committee …. are entitled to a very great weight"

OECD itself has stated that members should follow the commentaries when interpreting their OECD based bilateral treaties (Baker - 2002)

Status of subsequent OECD amendments to the commentary - static or dynamic interpretation?

IRC v Commerzbank the subsequent material was considered to have persuasive value only
However OECD in 2008 stated that where the provision in question is substantially the same as the current model version, the most recent commentary should be used (best reflects the consensus of the OECD)

Smallwood case - confirmed the correct version to use was the one that was contempraneous to the facts, not the commentary in effect on the date the treaty in question was signed (this is known as the ambulatory principle)

US Technical Explanations:

Not acceptable as a means of interpretation (as it is unilateral) unless where the treaty partner publicly declares its recognition for that explanation.

4. The application of Art. 3(2) OECD MTC 2

Art 3(2) - undefined terms have the meaning under the domestic law of the state for the purposes of the taxes covered (unless the context demands otherwise). If the domestic definition is altered afterwards the consensus is that the ambulatory approach should be used.

5. Resolving interpretation issues by competent authority

proceedings – Art. 25(3) OECD MTC 2

The mutual agreement procedure provided for in Article 25 will often be used to agree on a common definition of a term.

Generally the rule is that the term be given the meaning which it has in the domestic tax law of the states. What if the local tax law definition changes over time? - generally the ambulatory definition is used - i.e. the most up to date definition.

	Created by floughnane about 10 years ago

Principles of International Tax Law (Double Tax Conventions) Note on Double Tax Convention Notes, created by floughnane on 07/05/2014.

Double Tax Convention Notes