Preface

Tax treaties have existed for well over a century and have undoubtedly improved the legal framework for the exercise of taxing powers on cross-border economic relations. They are usually bilateral in scope and result from the negotiation of package deals that have yielded a highly diversified constellation of agreements. Since the 1920s the desire to achieve internationally accepted tax treaty practice has led international organisations to undertake activities in this domain, aimed at developing a reliable and policy-sound tax treaty framework that states would be able to take into account when concluding their own bilateral treaties. However, it was only after decades of activity by the Organisation for Economic Co-operation and Development (OECD) and the United Nations (UN) in this field that a convergence in the content of tax treaties could be seen. Meanwhile, the number of bilateral tax treaties around the world as well as their complexity have been increasing dramatically, giving rise to a highly varied set of rules in the absence of a proper customary international tax law and opening up room for a considerable growth in international tax planning. Some academics have successfully supplemented the efforts of the international organizations by writing works that have guided the evolution of scholarly legal debate over the interpretation of tax treaty clauses following the Models. However, the international academic legal thinking on tax treaties has so far generally focused only on such clauses, neglecting those that depart from them. Clauses deviating from the Models have been relegated to the area of regional dialogue or even to each country's national tax scene and have then been examined solely with a view to ascertaining their consistency with the respective national tax treaty policy. From the time the editors began to carry out interdisciplinary research activities with other scientists on international tax coordination and tax treaties, further repercussions have become evident. In particular, due to the needs of economists to streamline the information they analyse for the purpose of obtaining results from their research, they sometimes equate tax treaties with the clauses contained in the Models, simply assuming that no relevant differences exist with the bilateral treaties actually in force around the world. This book aims to fill a gap in legal tax literature by providing an innovative scientific support for establishing the boundaries of the influence of the OECD and UN Models on the drafting and interpretation of bilateral tax treaties around the world.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of UK tax treaties

The view from the UK

Since the publication by the OECD Fiscal Committee of its Draft Double Taxation Convention in 1963 and its Model Convention in 1977, all tax treaties concluded by the UK have been based on that draft and its successors, with appropriate variations to cater for UK preferences and to take into account, where necessary, the differing economic circumstances, and tax and legal systems, of the two contracting states. The UK was a founding Member country of the OECD and has regularly provided chairmen both of the Committee on Fiscal Affairs and of its Working Party No. 1. Over the years it has taken a leading part in the consideration of the changes that have been made to the text of both the Model and its Commentaries.

It is therefore not surprising that the official position of the UK is that, where the text of a provision of a bilateral treaty follows the wording of a provision in the OECD Model, the Commentary on the provision in the OECD Model may be used as an aid to the interpretation of the treaty provision, whether the Commentary on the Model provision was written before or after the date of the treaty provision in question. The positions of the courts and of scholarly writers in the UK, however, have not always been so clear and the legal basis for referring to the Commentaries, and in particular the question whether reference may properly be made to a Commentary later in date than the provision of a bilateral treaty, will accordingly be discussed later in this chapter.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Argentine tax treaties

Introduction

Argentina's concern for double taxation started very early. In 1961 a special commission in the Treasury Department was formed to deal with treaty negotiations. Even before this, as early as 1946, Argentina had entered into several tax treaties, limited to income derived from international transport activities. Argentina was probably one of the first countries in South America to enter into a general tax treaty. Its treaty with Sweden was signed on 3 September 1962 and became effective on 1 January 1963, even before the publication of the first version of the OECD Model.

After this occurred, Argentina entered into various tax treaties. The first one (the second overall) was signed with the Federal Republic of Germany on 13 July 1966. At the end of 1972, with effect from 1 January 1974, Argentina terminated this tax treaty, but it was renegotiated and a new treaty was signed in 1978. Also, even though Argentina was not a party to the Andean Pact, in 1976 it signed two – very similar – tax treaties with Bolivia and Chile based on the Andean Pact Model. In 1979 it signed tax treaties with Austria, France and Italy, and in 1980 with Brazil. All of these tax treaties were based on the 1977 OECD Model, with some differences. In 1980 Argentina signed a tax treaty with the USA, which resembled the 1977 OECD Model and the 1977 US Model, but included a tax sparing provision. This treaty, however, did not obtain the approval of the US Senate.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Swedish tax treaties

Introduction

Sweden has currently concluded almost 100 double taxation conventions that are still in force, most of which closely follow the OECD Model Tax Convention on Income and on Capital (OECD Model). This is also the case for the Swedish Model Tax Convention (Swedish Model), which was updated in September 2009. In this chapter I will concentrate on the deviations between Swedish policy (as expressed both in the treaty practice and in the Swedish Model) and the OECD Model. Since the differences in relation to the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model) are more frequent, I will rather point to the occasions where Swedish policy corresponds to the UN solutions. However, when Swedish policy is in conformity with both the OECD and the UN Models, this will also be stated.

The general, and formal, reason for the close conformity with the OECD Model is of course that Sweden is a Member country of the OECD. Another more pragmatic reason would be that Sweden is a developed country which exports capital to developing countries. It is true that the export of capital hardly dominates over the import of capital in Sweden, but the latter is foremost due to an inflow from other developed countries and, in relation to these countries, the levels of inflow and outflow are relatively similar.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Hungarian tax treaties

Most of the tax treaties concluded by Hungary follow the OECD Model Tax Convention on Income and on Capital (OECD Model). This trend has been in place since 1976 when the first treaty after the Second World War was concluded. After the fall of the Iron Curtain in 1989, the OECD and the IMF assisted Hungary in developing domestic and international tax policy. In 1996 Hungary became a Member of the OECD. The Corporate Income Tax Law (81/1996) (CIT Law) and the Personal Income Tax Law (117/1995) (PIT Law) are clear on Hungary's position when declaring that the OECD Model was also taken into consideration during drafting. But Hungary does not only have treaties that follow the OECD Model; there are some (newer) treaties in the Hungarian treaty network that follow the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model).

More sources, including the Rules of Taxation Law (92/2003) and the Corporate Income Tax Law, ensure the supremacy of double tax treaties over domestic law in Hungary; however, these sources are silent about the applicability of Commentaries. Judgments (available to the public) do not necessarily mention every detail of the decision-making process and it cannot be said whether the courts have taken Commentaries into consideration unless there is a direct reference to the OECD Model, which is quite rare. There is direct reference to the OECD Model, for example, in the case decided by the Supreme Court (Legfelsőbb Bíróság) on Article 23 concerning the avoidance of double taxation. The case concerned a sportsman who earned income from several treaty countries. The domestic law stipulated the credit method. The relevant treaties used the term ‘may be taxed’, but the articles on the elimination of double taxation clearly exempted the income in Hungary. Irrespectively, the Hungarian tax administration applied the credit method. According to the Court's interpretation, the OECD Model Convention and Commentary were nothing more than recommendations and countries were free to decide which method to apply. The Court further explained that the tax administration only had to make sure that the provisions of the treaty were applied prior to the provisions of the domestic law, but it did not exclude the applicability of both even if the domestic law was in conflict with the treaty.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Belgian tax treaties

Introduction

Relatively few cases relating to cross-border situations are submitted to the courts in Belgium. Being a small country with close neighbours, one may suppose that questions and difficulties are mostly resolved through negotiations with the tax authorities.

Belgium has a large treaty network, which increases annually; the first double tax agreement in the field of income taxes was signed in the 1930s. To date, Belgium has a treaty network covering almost ninety countries (not including the exchange of information agreements). Moreover, it has signed double tax conventions (not yet in force) with a dozen countries and has entered into negotiations with around thirty.

The power to conclude (tax) treaties belongs to the king, while according to the principle of legality, the tax law has to be decided by the Parliament. Treaties must be approved by the Parliament; however, it has no power of amendment of a treaty that has been negotiated and signed by the king; it could only refuse its approval, which is not sufficient to have a significant impact on the framing of Belgium’s international tax policy.

Despite the minor role played by Parliament in this matter, there seems to be a consensus on the general guidelines regarding the international tax policy of Belgium when concluding treaties, amongst which is the need to increase the attractiveness of the country for foreign investors by eliminating tax obstacles to cross-border entrepreneurship and to guarantee the competitiveness of Belgian enterprises investing abroad. Consequently, Belgium as a rule favours the exemption method for its capital export neutrality.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Czech tax treaties

The Commentaries of the OECD Model Tax Convention on Income and on Capital (OECD Model) were translated and published in the Czech language for the first time in 2009, together with the text of the Convention itself, as a joint project of Wolters Kluwer and the Czech and Slovak Chamber of Tax Consultants. The aim of the project was to make the Commentaries available to those users who do not have an adequate level of English. Although the Commentaries are not considered as a direct source of law and the Ministry of Finance has not yet officially commented on the role of the translation, the Czech and Slovak Chamber of Tax Consultants hopes to promote knowledge of the Commentaries and their practical application not only to tax consultants but also to the courts and the tax administration. The Commentaries are based on Article 5(b) of the OECD Model, decreed by the Ministry of Foreign Affairs by Decree No. 266/1998 Coll., based on which the OECD can provide recommendations to its Member countries.

The importance of the Commentaries in the Czech Republic is perceived mainly with regard to the experience of the states with the application of the arrangements. Commentaries are neither considered as a direct source of law nor as a binding legal regulation within the meaning of the Vienna Convention on the Law of Treaties (Vienna Convention). Instead, they are perceived as an interpretative tool in accordance with Article 32 of the Vienna Convention. The Czech Republic therefore does not have any international obligation to follow the OECD Model Commentaries.

The relevance of the OECD and the UN Model Conventions and their Commentaries for the interpretation of Portuguese tax treaties

Sometimes a careful reproduction, other times no more than a confused copy. The way in which Portuguese tax treaties effectively follow the OECD Model Tax Convention on Income and on Capital (OECD Model) and the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model) is not uniform and has changed noticeably during the last decades.

Accessing comprehensively the full impact of both the OECD and the UN Models on the Portuguese treaty network is certainly not an easy task: first of all, because of the large timeframe that we have to work with; even restricting the analysis to the conventions currently in force, we have to deal with treaties signed over a forty-year period; second, because of the dimension of that network, which includes fifty-two treaties currently in force; third, because the position assumed in negotiations is quite polymorphic – early treaties were based on an understanding of Portugal as a capital importer, a position that has also received expression in several reservations and observations – this position, however, has changed over the last decade. Portuguese treaty negotiations became more pragmatic and even those early reservations and observations began to be taken into consideration on a case-by-case basis; fourth, because no documents of the negotiations are available to the public and there are no explanations concerning the solutions enshrined in the existing treaties.

The relevance of the OECD and the UN Model Conventions and their Commentaries for the interpretation of Liechtenstein tax treaties

The Principality of Liechtenstein, a non-OECD Member country, has only recently started to develop a network of comprehensive double tax treaties. Negotiations with several countries, including Germany and the UK, to conclude tax treaties are at an advanced stage. Liechtenstein's newly concluded treaty with both OECD and non-OECD Member countries closely follow the different provisions of the OECD Model Tax Convention on Income and on Capital (OECD Model), thereby making the relevance of the OECD Model for Liechtenstein treaties obvious. However, so far there has been little experience with regard to the relevance of the OECD Model and the OECD Commentaries to treaty interpretation.

The relevance of the OECD Commentaries for treaty interpretation is limited. There has not much been experience with treaty interpretation to date, as the only treaty that has been in force long enough to have been subject to interpretation by tax courts is that with Austria. Taking into consideration the jurisprudence on this treaty, most of the interpretative difficulties concern the difference between business profits (Article 7) and independent personal services (Article 14) derived by a permanent establishment (PE) and fixed base, respectively, situated in Liechtenstein by a person resident in Austria. The reason for this is the fact that only the latter is exempt under the treaty provisions, whereas business profits would be subject to the credit method. It seems likely, however, that any changes in the OECD Commentaries made after the conclusion of a relevant treaty will not be taken into account when interpreting this treaty. In a mutual agreement procedure (MAP) with Austria in 2001, Liechtenstein applied a static approach when interpreting Article 3(2) of the treaty, thus only referring to the domestic laws as at the date of the conclusion of the treaty. This static approach will probably also be followed with regard to the OECD Commentary when interpreting a treaty provision. Other guidance for interpreting treaties in the absence of experience on the matter will probably be Switzerland's administrative practice, as Liechtenstein tends to follow the Swiss practice in those areas of tax law where it lacks its own provisions (for example, reorganizations prior to the enactment of the tax reform) and/or administrative guidelines because of the close political, legal and economic links between the two countries.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Russian tax treaties

Introduction

The tax treaty network of the Russian Federation is broad and at present comprises seventy-eight treaties in force (as of January 2011). Two of the treaties, those with Japan and Malaysia, were concluded by the USSR in 1987 and 1988 respectively, and were on the whole based on the 1977 OECD Model Tax Convention on Income and on Capital (OECD Model). As a legal successor of the USSR, Russia continues to apply these agreements; however, all other Soviet double taxation conventions were renegotiated by Russia. The country was especially active in the negotiation process from 1994 to 2000, when between five and fourteen treaties were concluded per year. The main reason for such enthusiasm was the attempt of a newborn state system to be integrated into the world's community as soon as possible. It is no surprise that in the 1990s in the State Duma it was believed that the primary purpose of negotiating the treaties was the reciprocal encouragement of investments. In time a better understanding of the nature of tax agreements developed. It has become obvious to the Russian authorities that tax treaties do not necessarily encourage investment. Nowadays, double taxation conventions are considered as the main tool to prevent double taxation, as well as double non-taxation.

Since 2000, Russia has not concluded as many double taxation conventions as it had in the 1990s. In 2008 and 2009 there was not a single new agreement. Furthermore, the Main Directives of Russian Tax Policy for the years 2010–12, adopted by the government in 2009, do not touch upon double taxation issues and international cooperation in this sphere at all. The possible reason is the broad scope of the existing treaties. Russia enjoys agreements with practically all its main trading partners.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Austrian tax treaties

The Austrian tradition in concluding double tax treaties dates back to the end of the nineteenth century when the first Austrian tax treaty between Austria and Prussia was concluded. Today, around eighty treaties are in force.

Most of the Austrian tax treaties follow the OECD Model Tax Convention on Income and on Capital (OECD Model). However, the following chapters will show that some elements of the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model) can also be found in Austrian double tax treaties, especially when the latter were concluded with non-OECD Member countries. However, in general terms, the OECD Model current at a time the respective treaties were/are concluded played and still plays a major role. Only some of the treaties were amended after they had been concluded, following the changes made in the posterior OECD Model. Hence, there is an ongoing debate on how old treaties should be interpreted. Legal scholars and the Austrian tax administration only agree on some points, especially on the question of how a treaty should be interpreted at the point in time when it is concluded. In the case of contracting states which do not only use the OECD Model as a basis when agreeing on their own treaties, but later on adopt the provisions of the OECD Model exactly as they are, there should be no doubt that the contracting states should also attribute the same meaning to the provisions included in their treaties as they have in the OECD Model and its Commentary. States agreeing on a wording which is different from the OECD Model, although no different meaning was intended, must also interpret the treaty as suggested by the OECD Model and its Commentary. If (one of) the contracting states (has) have entered a reservation on a certain provision of the OECD Model or simply agree(s) on a provision with a different meaning, neither the OECD Model nor the Commentary is applied. Similarly, the Commentary has to be disregarded where the contracting states have agreed on including an observation in their treaties.

The relevance of the OECD and the UN Model Conventions and their Commentaries for the interpretation of Polish tax treaties

Since the 1970s Poland has concluded over eighty tax treaties on the avoidance of double taxation. Most of the treaties that form this network closely follow the OECD Model Tax Convention on Income and on Capital (OECD Model), despite the fact that Poland reached the status of a regular observer to the OECD no earlier than July 1991 and became an OECD Member country in 1996. The treaty concluded in the 1970s with the Federal Republic of Germany was the first treaty whose structure and wording of the articles corresponded in general with the first OECD Model of 1963. It should be noted, however, that the above-mentioned treaty lacked the non-discrimination clause, deviating from the Model in this respect. The treaty with Germany became a kind of a model convention for the treaties concluded by Poland in the following years. The constantly increasing number of Polish tax treaties was the natural consequence of the increasing significance of economic relations with the countries of Western Europe. The treaties signed during that time were in principle based on the 1977 OECD Model. Poland has also concluded some treaties with Asian developing countries like Malaysia, Pakistan and Thailand, but these did not have any economic significance as they were motivated mostly by political considerations – direct investments between those countries and Poland did not exist, and economic relations were rather poor. These treaties were influenced by the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model), mostly in respect of the taxation of profits derived by permanent establishments (PEs) and profits from transport.

Poland's status as an OECD Member country coincided with its regaining full independence and the burst of investments this entailed, as well as with the disintegration of the Union of Soviet Socialist Republics. The former members of the Council for Mutual Economic Assistance (an economic organization comprising the countries of the Eastern Bloc along with a number of communist states elsewhere in the world) aimed to build a network of tax treaties that would replace the former multilateral agreements. In the 1990s Poland concluded most of its present tax treaties, the majority of which were with the countries from the former Soviet Bloc. Some old tax treaties have been replaced by new ones which better suit the current economic environment. At this point in time, most of Poland's tax treaties are based on the OECD Models of 1963, 1977 and 1992.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Chilean tax treaties

Introduction

Chile has twenty-four tax treaties currently in force and another three treaties already concluded awaiting parliamentary ratification. Furthermore, it is now negotiating several tax treaties.

Chile's experience as a tax treaty partner is relatively recent. Its first tax treaty was signed with Argentina in 1976 and entered into force in 1986. This treaty follows the Andean Pact Model (1971). As of 1999, Chile became more active in negotiating and concluding tax treaties mainly based on the OECD Model Tax Convention on Income and on Capital (OECD Model) and the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model) with some differences derived from Chile's particular tax system.

The policy that Chile has followed in its tax treaty negotiations after signing its treaty with Argentina has been very consistent. Such policy has not been modified by the recent accession of Chile to the OECD, with the exception of the introduction of the new standard on the exchange of information which has been agreed in the recent treaties signed with Australia and the USA.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Slovak tax treaties

The relevance of the OECD Model Tax Convention on Income and on Capital (OECD Model) and the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model) for Slovak tax treaty negotiations is obvious. In concluding its bilateral tax treaties, Slovakia generally follows the OECD Model (except for the treaty with the USA (1993), which more or less follows the US Model) and has a high degree of respect for the OECD Commentaries. However, as a typical capital-importing country, Slovakia has historically concentrated on source taxation. The focus on source taxation has resulted in making certain reservations and observations on the OECD Model's concept of the allocation of taxing rights between two contracting states, as well as on the application of the concept of the UN Model in some of its treaties, at least with respect to certain kinds of income.

Slovakia is a member of both the UN and the OECD. Slovakia, as a successor state of the former Czechoslovakia, became a member of the UN in 1993. However, Czechoslovakia was an original member of the UN from 1945. Slovakia joined the OECD only in 2000. However, even before then, as a non-OECD Member country, the former Czechoslovakia concluded tax treaties based on the OECD Model with the countries that were already OECD Members. Deviations towards the UN Model (which was adopted in 1980 and revised in 2001) can be found in those treaties as well. All of the treaties mentioned are still valid.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Peruvian tax treaties

Since 2001 the OECD Model Tax Convention on Income and on Capital (OECD Model) was meant to be used by Peru as a basic proposal in its future tax treaty negotiations as a way to: 1. facilitate the technical work of the Peruvian negotiators; and 2. provide criteria or guidelines that would survive changes in government. Since no administrative or judicial pronouncements recognize the interpretive value of this model, it is not treated here as relevant for interpretive purposes. Although it is interesting to note that an annex published together with the description of the model compares the Peruvian Model to the OECD Model and includes a number of explanatory notes on the differences between the two, it is the author's opinion that neither these explanatory notes nor the Peruvian Model itself allows us to interpret the scope of the tax treaties signed by Peru.

As to whether Peru has any case law, administrative practice or scholarly opinion on how the OECD Model and the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model), as well as the Commentaries thereto, fit into the rules on treaty interpretation, Peruvian case law states that international agreements ratified by Peru – tax conventions included – shall prevail over domestic laws. This approach has been confirmed by many Tax Court decisions which, while not constituting mandatory jurisprudence, uphold the principle that international agreements prevail over domestic laws.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Estonian tax treaties

Estonian tax treaties are based on the OECD Model Tax Convention on Income and on Capital (OECD Model), although certain provisions are historically framed in line with the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model). New tax treaties are generally based on the latest version of the OECD Model.

The positions in Estonian tax treaties that differ from the OECD approach can often be found in the OECD Commentary under the positions of the non-Member countries. These positions can broadly be divided into two categories: the first category consists of the provisions that extend to Estonia's rights to tax the income at source; and the second category contains provisions of an explanatory nature. The provisions in the first category have mostly been taken from the UN Model.

On 10 May 2010 Estonia was invited to join the OECD and the Accession Agreement was signed on 3 June 2010. In Annex 1 to the Accession Treaty – ‘Specific remarks on acceptance of OECD legal instruments’ – Estonia has accepted the recommendation of the Council concerning the OECD Model Tax Convention, but has made certain reservations to the Model. Therefore, as of the moment that the Accession Agreement becomes effective, Estonia’s position as a non-Member country will be replaced by the reservations to the Model.

The relevance of the OECD and UN Model Conventions and their Commentaries for the interpretation of Canadian tax treaties

Canada is a small, open economy dependent on trade for its prosperity. It has an unusually large network of bilateral tax treaties. These include agreements with its NAFTA partners, Mexico and the USA, each of the other OECD Member countries, the so-called ‘BRIC’ group of Brazil, Russia, India and China, and many less significant trading partners. Notably, there are no treaties with Hong Kong or Taiwan, despite the significance of its trade and investment relationships with these two jurisdictions.

As an original Member country of the OECD, Canada has generally concluded its tax treaties on the basis of the most recent OECD Model Tax Convention on Income and on Capital (OECD Model) as it has evolved since 1963. Canada was not represented in the UN's Group of Experts that worked to prepare the first version of the United Nations Model Double Taxation Convention between Developed and Developing Countries (UN Model) published in 1980, or in the Ad Hoc Group of Experts on International Cooperation in Tax Matters that prepared the revisions for the 2001 UN Model, and is not currently represented on the Group of Experts. However, Canada's dual status as both a developed, wealthy, capital-exporting nation and, especially in relation to Japan, the UK and the USA, as a capital-importing country has resulted in some significant divergences from the OECD Model. These are most obvious in its tax treaty with the USA, which in the broader range and detail of its provisions reflects the unique degree of economic integration of Canada with the USA. In addition, Canada follows the UN Model in, for example, insisting on a provision allowing the source state to tax ‘other income’ and retaining the source-state taxation of certain royalties. It has also included an expanded ‘service PE’ provision in its treaty with the USA and in some of its other treaties, notably those with developing countries, such as Armenia and Mongolia.