Some Thoughts on Convergence and Tax Treaty Interpretation

Transcription

1 Some Thoughts on Convergence and Tax Treaty Interpretation The author, in this article, provides his views on convergence of the interpretation of tax treaties, considers the various solutions available and concludes that making available treaty case law via a comprehensive database is one way in which to achieve this. Author: Wim Wijnen Date: October 2013 Issue: Bulletin for International Taxation, 2013 (Volume 67), No Introduction Tax treaties are concluded to avoid double taxation and double non-taxation. Nevertheless, the conclusion of a tax treaty is not an automatic guarantee that these objectives will be achieved. In many cases, tax treaties are the odd man out in the national legal game. There are no international courts to give guidance in the interpretation of tax treaties, which currently falls within the jurisdiction of national courts. These courts interpret tax treaties using the national means at their disposal. Consequently, courts in various countries may well give different judgements. And this leads back to the beginning: the very double taxation or double non-taxation that such treaties aimed to avoid. Despite the existing remedies, such as the mutual agreement procedure (MAP), the guidance of the Commentaries on the OECD Model, [1] the Commentaries on the UN Model [2] and the resolution of divergent interpretations through arbitration, the convergence of the interpretation of tax treaties is still an issue of importance. Over recent decades, various ideas have been discussed in the international arena to resolve this issue, such as an international tax language, the validity of a common interpretation principle and the notification of relevant case law to the treaty partner state, but none appear to have sufficient gravity. But what does appear to help in a practical way is the simple availability of information regarding the judgements delivered in other countries, information which, currently, is most conveniently delivered through a database. 2. Divergent Interpretation of Tax Treaties Few subjects have been covered in the international tax literature as thoroughly as the interpretation of tax treaties. Tax treaties, with fewer than 100 to 120 provisions in some 30 articles, cover the national legislation of two states, legislation that is generally both extensive and detailed. Tax treaties are necessarily worded in a general and abstract way and, consequently, do not always fit seamlessly into national legislation. Courts dealing with treaty issues, therefore, often encounter fundamental problems of interpretation that may differ from country to country. The interpretative methodology of courts may also vary from country to country. In some countries, for example, the United Kingdom, the emphasis is on the letter and structure of the law, but, in other countries, for example, Germany and the Netherlands, there is greater scope for a teleological interpretation. As a result, the interpretation of treaty provisions by courts in treaty partner states can diverge and, consequently, lead to double taxation. And, of course, it may also result in double non-taxation, although this is something that taxpayers generally consider to be less than disastrous IBFD 1

2 3. Available Interpretative Instruments Courts are not entirely free in the interpretation of tax treaties. The Vienna Convention of the Law of Treaties (1969) (the Vienna Convention ) [3] provides a number of important guidelines. But although the case law on treaty interpretation has seen a growth in interest in the Vienna Convention (1969), it does not offer a comprehensive solution for a common interpretation. Tax treaties themselves also usually contain rules of interpretation. Almost all tax treaties contain a general rule along the lines of article 3(2) of the OECD Model [4] and the UN Model [5] regarding the interpretation of undefined treaty terms. However, as this provision refers to the domestic law of the treaty partner, it is not, in general, of use in respect of a more harmonized interpretation of tax treaties. With regard to multilingual tax treaties, the closing text states which versions of the text are authentic and, if necessary, which is decisive. [6] But this provision does little to resolve the problem of a divergent interpretation of treaty terms. Without doubt, the Commentaries on the OECD Model and the Commentaries on the UN Model are a very important aid in the interpretation of tax treaties. However, courts are not bound by these Commentaries. The importance that courts attach to the Commentaries also differs from country to country. In OECD member countries, such as Australia, Canada, the Netherlands and the United Kingdom, the OECD Commentaries are very important and have persuasive value. Courts in Austria and Germany usually rely on them. However, in France, the OECD Commentaries are merely used as a technical guide and courts in Italy consider them to be of limited value. [7] The situation in non-oecd countries is not much different. There are countries, such as India, where courts make use of the OECD Commentaries. However, there are also courts in those countries that disregard the OECD Commentaries simply because their country is not a member of the OECD. [8] A further complicating factor is that the OECD Commentaries and UN Commentaries that are intended to be an aid to the interpretation of tax treaties are themselves, to an increasing degree, the subject-matter of interpretation by the courts. Instead of being an aid to the treaty interpreter, the Commentaries themselves give rise to interpretative problems. In addition, the UN Commentaries do not provide for reservations or observations in the same way as the OECD Commentaries do, so there is nowhere for states to record deviating interpretations in the UN Model. Consequently, despite all these intrinsic remedies, a uniform interpretation of tax treaties is still far away. 4. MAPs Under article 25 of the OECD Model and the UN Model, tax treaties usually allow the treaty partners to resolve interpretative problems by way of a MAP. MAPs resolve the direct needs in a bilateral situation, but no more than that. There is no guarantee that, for a given treaty issue, State A will reach the same agreement regarding this issue with State C as it had previously reached with State B. Therefore, with regard to the convergence of the interpretation of tax treaties, the MAP is of limited value, because there is no obligation for the treaty partner states to publish the outcome of the procedure. In addition, courts are not bound by MAPs IBFD 2

3 5. Arbitration Despite all discussion on this issue, [9] there is no international court or arbitration commission with a general judicial authority in treaty cases. Such a court or arbitration commission would greatly contribute to the convergence of the interpretation of tax treaties. However, it is rather unlikely that such an authority will be established in the near future, as the OECD and, in its wake, the United Nations have opted, following the example of the Arbitration Convention (90/436), [10] for arbitration on a per treaty basis. And, to date, there is hardly any practical experience in this field. Since the entry into force of the Arbitration Convention (90/436) on transfer pricing matters in 1995, only two cases have resulted in an arbitration procedure. In addition, since 1990, a number of countries have started to include arbitration provisions in their tax treaties. These arbitration provisions are not limited to transfer pricing issues, but refer to all issues that might arise under tax treaties. Although, currently, approximately 200 tax treaties contain such provisions, to the best knowledge of the author, no case has been submitted for arbitration. It seems that treaty partners rather efficiently make use of the two-year period in which they should arrive at a solution under a MAP. Therefore, as long as arbitration is only possible if the treaty partners do not find a solution with regard to mutual agreement within two years, it is to be expected that arbitration will not flourish in the foreseeable future. However, even if the arbitration were one day to become a regular judicial phenomenon, there is little chance that arbitration on a per treaty basis would ever result in a uniform interpretation of tax treaties. As arbitration commissions are not bound by the laws of the two treaty partner states, their decisions are not automatically taken as a precedent by the courts of these states. In addition, within the concept of the Arbitration Convention (90/436) and article 25(5) of both the OECD Model and the UN Model, each tax treaty has its own arbitration commission. This means that there is no guarantee that arbitration under the State A-State B Tax Treaty will be identical to the arbitration in a similar case under the State A-State C or State B-State C Tax Treaties. From a worldwide perspective, if it were assumed that of all tax treaties provided for arbitration, each tax treaty had its own arbitration commission, it is unquestionable that similar cases would not be dealt with by all the arbitration commissions all over the world in the same way. Consequently, it cannot be expected that arbitration on a per treaty basis could have the potential to contribute significantly to the convergence of the interpretation of tax treaties. 6. International Tax Language However useful reference to domestic law through the general interpretation rule of article 3(2) of both the OECD Model and the UN Model might be, this also gives rise to the possibility of diverging interpretations by the local courts in the treaty partner states. As, in this treaty provision, the term requires as part of the sentence unless the context otherwise requires has a strong meaning, there is little room for courts to distance themselves from domestic law to develop an international tax language. Nevertheless, there are courts that referred explicitly to the existence of an international tax language that is not linked with the domestic law. [11] There are also decisions where courts seem to refer to it implicitly. [12] However, even if there were more room for manoeuvre in this respect, it is questionable whether a generally accepted international language could be developed by courts in their domestic isolation. Apart from this, it remains to be seen whether or not the governments of countries would enthusiastically welcome such a development. As a rule, governments are greatly attached to their own domestic laws. Article 3(2) gives them a firm control over the matter. A relaxation of the strict formulation of this treaty 2013 IBFD 3

4 provision is, therefore, not realistic, such that as yet little may be expected with regard to the convergence of the interpretation of tax treaties from the development of an international tax language. 7. A Common Interpretation Requirement As there is no international court and as it cannot be expected that arbitration as set out in the Arbitration Convention (90/436), the OECD Model and the UN Model will offer a solution, how could a common interpretation of tax treaties be realized in the near future? Could it even be said that there is a requirement for a common interpretation? The late Professor Klaus Vogel answered this question with a clear yes. In his opinion, there is something akin to a Gebot der Entscheidungsharmonie, which can be translated into English as a common interpretation requirement or a common interpretation obligation. In their General Report on Interpretation of Double Taxation Conventions for the International Fiscal Association (IFA) Congress 1993 in Florence, Italy, Vogel and Prokisch (1993) explained this as follows: This principle means that courts... of one Contracting State should look at decisions made by courts... of the other Contracting State when confronted with problems of interpretation and that they test whether their interpretation can be transferred. If they are plausible and if their application may lead to the avoidance of double taxation, they should at least be considered and any deviation from them should be explained explicitly and convincingly. [13] However desirable this might be, this statement is too idealistic. It remains to be seen how judges could be compelled to take foreign decisions into account and how they could be forced to indicate in their decisions why they deviate from a decision of their foreign colleague in the treaty partner state. Without far-reaching international and national legal measures, this seems destined to remain wishful thinking. However, even if this utopia were to materialize, not all problems would be automatically resolved. Judges dealing with treaty cases would be confronted with a new intrinsic problem. Assume that State A has a tax treaty with State B and with State C and that a treaty issue is interpreted by a judge in State B differently than by his colleague in State C. Which interpretation should the judge in State A follow if he has to deal with the same treaty issue? If he has to deal with a case under the State A-State B Tax Treaty, he should follow the decision of his colleague in State B. This means, however, that, if he subsequently has to deal with the same treaty issue under the State A-State C Tax Treaty, he should follow his colleague in State C. It is clear that in the bilateral situations with regard to the State A-State B and State A-State C Tax Treaties, the desired common interpretation would be realized. However, the odd effect is that State A is left with two different interpretations of the same treaty issue under its tax treaties with State B and State C. Consequently, a common interpretative principle could not offer a definite solution to the divergent interpretation of tax treaties by courts. Even with such a principle, the interpretation of tax treaties would remain inconsistent. 8. Awareness of Foreign Case Law One of the fundamental problems regarding treaty interpretation is that judges are not aware of the decisions of their colleagues in other countries. Judges are, therefore, unable to benefit from each other s views and from the solutions found to specific issues. If one were a judge, where should one start to look, in particular, if decisions are not published or recorded in one central place? A similar practical obstacle 2013 IBFD 4

5 is language. How can a judge search a country s jurisprudence if he does not understand the language? However, as a rule, many courts do not even get this far. Judges are generally fully oriented towards their national situation. It is their own national case law that influences their decisions. In this regard, foreign case law is an alien phenomenon. This may result from the constitutional role that judges have to fulfil or from the fact that being influenced by foreign case law is simply not done. There is, therefore, generally little recognition that foreign case law can offer important advantages on treaty issues. Such national isolationism is less evident in the Anglo-Saxon world. Aided by sharing the same language, courts in the Anglo-Saxon countries commonly look at decisions given by their colleagues in the Commonwealth. In countries such as Australia Canada and India, courts frequently refer to foreign decisions. The same applies to courts in the United Kingdom, although to a lesser extent. In Germany and Austria, courts sometimes refer to foreign decisions, albeit in Austria only to German case law. However, in France, reference to foreign case law is rather limited and such references in Italy are non-existent. [14] 9. Notification of Case Law to Treaty Partner States It has been suggested that the problem of the awareness of foreign case law could be resolved by extending the notification requirement of article 2(4) of both the OECD Model and the UN Model to judicial decisions dealing with the interpretation of a tax treaty. In the IFA Report referred to in section 7., Vogel and Prokisch (1993) made a firm statement in this respect. [15] In addition, in the US Model (1981), such an extension was included. Article 2(2) of the US Model (1981) [16] stated that, in addition to significant changes in their respective taxation laws, the contracting states should notify each other of any officially published material concerning the application of the Convention, including explanations, regulations, rulings or judicial decisions. This extension, however, disappeared from the US Model (2006) [17] without any explanation. The reasons for this can only be guessed. In this regard, the handling of a steady stream of treaty case law creates an extra burden for the competent authorities of the treaty partner states. In particular, case law in foreign languages can exceed the practical capacity of competent authorities. It is, therefore, perhaps not surprising that this extension of the notification requirement did not survive the revision of the US Model (2006) and that it is not adopted in the OECD Model or the UN Model. Given the extensive treaty networks that so many countries currently have, the notification of judicial decisions is not realistic and is condemned to remain a dead letter. For the purpose of the convergence of the interpretation of tax treaties, such an extension of notification to judicial decisions would only work if the competent authorities of the recipient state had to forward the cases onto the judiciary. Without an explicit order to the competent authorities to this effect in a tax treaty, it could not be expected that the competent authorities would do so on their own volition. However, even if the judiciary were to, in one way or another, obtain foreign treaty case law, the problems would remain, as the various judiciaries would not have the capacity to deal with foreign cases in so many different foreign languages. 10. Convergence of Interpretation through a Database One way to stimulate the use of foreign decisions by courts would be an international database in which the domestic case law on the interpretation of tax treaties would be made both available and accessible. Various authors have noted that such a database would be useful for legal practice and the development of the law. [18] Increasing the awareness of case law is in itself a much simpler way to encourage convergence in the interpretation of tax treaties than the establishment of an arbitration commission or an 2013 IBFD 5

6 international tax court. The institutionalization of such a commission or court would inevitably result in a loss of authority on the part of treaty partners. The magnitude of such a database and the costs involved have, however, generally prevented any initiatives being undertaken for a long period of time. At present, there are approximately 6,000 decisions dealing with the interpretation of tax treaties that would have to be collected from around the world and summarized in English. Given the number of cases, the translation into English of cases from non-english speaking countries has been regarded from the outset as being prohibitive. Currently, there are approximately 4,000 comprehensive tax treaties worldwide. The number of countries that do not have any tax treaties is falling rapidly. In contrast, the number of countries that have three or more cases dealing with the interpretation of tax treaties is astonishingly small, being no more than 30 altogether. For the most part, these are Canada, India, New Zealand, South Africa, the Western European countries, the United States and a few countries, such as Brazil and Mexico, where a number of decisions have been given in recent years. Only 14 countries have a treaty case law of more than 50 decisions, i.e. the Netherlands (800), Germany (700), Belgium (450), France (250), the United States (230), Italy (215), Canada (200), Austria (175), Spain (155), Switzerland (130), Sweden (110), Norway (80), Denmark (70), and India, in respect of which it is not yet possible to provide an accurate estimate. India is the country with most treaty cases and, to date, more than 1,500 Indian cases dealing with treaty issues have been identified. Judicial protection under tax treaties is, therefore, not yet widely accepted. Various reasons can be given for this. There are countries where there is no judicial appeal at all in tax matters. It is also possible that taxpayers simply do not know how to take their case to court. In addition, it is possible that taxpayers do not have much faith in the decisions of courts because of the lack of expertise among the judges. Furthermore, there are countries in which it is considered to be a loss of face to go to court if a dispute with the tax authorities cannot be resolved through a compromise. Then, there are the countries, such as Ireland and the United Kingdom, where litigation is so time-consuming, and, therefore, so expensive, that taxpayers only go to court if no other option is available. For this reason, the number of cases in the United Kingdom is, at present, around 46 and in Ireland it is only 5. Given the very large number of cases, it cannot be said that there is a lack of judicial protection in India. However, Indian case law is not only important for its numbers. India is the only non-oecd country with an established treaty case law. Therefore, India is in a unique position to develop case law on issues that are not dealt with in the case law of OECD member countries. In respect of subjects such as the distinction between the transfer of know-how and the furnishing of services in all their variations, capital gains on the alienation of shares, international shipping business, transfer pricing and, it goes without saying, the concept of a permanent establishment, India has taken the lead among the non-oecd countries and has developed case law in respect of which there is no equivalent within the OECD. In 2000, IBFD began to record treaty case law and create a database for cases dealing with the interpretation of tax treaties, i.e. limited to comprehensive tax treaties on income and capital, as well as tax treaties concerning estates, inheritances and gifts. The ambition is ultimately to include every national court decision: not only the decisions of the supreme courts, but also those of the lower courts, and not only recent decisions, but also older ones. [19] The expectation is that the database will become a point of reference, in particular, because of its comprehensiveness. The IBFD Tax Treaty Case Law collection was launched at the beginning of [20] At the time of the writing of this article, the collection contained 2013 IBFD 6

7 approximately 5,000 decisions, around 3,500 of which are summarized and have the text in the original language included. The IBFD Tax Treaty Case Law collection is also linked to the IBFD Treaties collection. [21] This makes it possible to navigate from a treaty article to the relevant cases and from the cases to the relevant tax treaty. All of the cases in the world dealing with the same treaty issue are directly searchable, as the search system is based on the articles and provisions of the OECD Model and the UN Models. In addition, in order to facilitate the understanding of foreign cases, the Tax Treaty Case Law collection contains an extensive description of the organizational structure and the procedures of the judiciaries of the countries cited in the collection. The Tax Treaty Case Law collection has the potential to contribute to the development of a uniform case law regarding tax treaties and, therefore, to be of particular interest to those judges who are concerned with tax treaty cases. [22] This is true not only for the countries that have already built up a respectable amount of case law, but even more so for those where this has not yet happened. The Tax Treaty Case Law collection also has a role to play in the settlement of disputes regarding tax treaties through MAPs between competent authorities. In addition, the collection is of use to the European Commission in the design of a tax treaty for the Member States of the European Union. This is additionally true for the Court of Justice of the European Union (ECJ), which increasingly gives decisions involving tax treaties. [23] It goes without saying that the collection is useful for practitioners, and, last but not least, for scholars and researchers. 11. Convergence of Interpretation through an International Association of Tax Judges With regard to the convergence of the interpretation of tax treaties, having a collection where judges can become aware of the decisions of their foreign colleagues is one thing. An international organization where judges can meet regularly to discuss the subjects that they find relevant and the problems that they encounter in their daily practice is another indispensable component. In this respect, the eight judges attending the IFA Congress 2009 in Vancouver in Canada came together and decided to set up an International Association of Tax Judges (IATJ). [24] The IATJ has been set up under Netherlands law and its seat, following the example of the European Association of Tax Law Professors (EATLP), is, for organizational reasons, established at IBFD in Amsterdam. Membership is open to all judges throughout the world dealing with tax cases. At the time of the writing of this article, the IATJ had approximately 150 members from around 30 countries. Assemblies were held in 2010 in Rome, 2011 in Paris, 2012 in Munich and in 2013 in Amsterdam. 12. Conclusions As long as there is no overarching international court that can provide guidance in the interpretation of tax treaties, there can be no definite solution to the divergent interpretation of tax treaties by courts. The development of an international tax language, arbitration on a per treaty basis, notification of the treaty partner or a common interpretation requirement that is not adopted in the treaty and the domestic laws of the treaty partner states are not likely to solve the problem. For the time being, a comprehensive treaty case law database is a most useful complement to the existing remedies. Such a database, where judges can benefit from the work of their foreign colleagues, and regular meetings where judges can exchange views and discuss among themselves the subjects that are most relevant to their professional activities have the potential to offer a significant contribution 2013 IBFD 7

8 to the convergence of the interpretation of tax treaties. The beauty is here that no governmental institutionalization is required. Author: Wim Wijnen Counsel to the Director of the Knowledge Centre, IBFD, Amsterdam, Professor of International Tax Law, LUISS, Rome, deputy judge, Court of Appeal, s-hertogenbosch, the Netherlands and Member of the Board of Directors of the International Association of Tax Judges. The views expressed in this article are the personal views of the author. He can be contacted at 1. Most recently, OECD Model Tax Convention on Income and on Capital: Commentaries (22 July 2010), Models IBFD. 2. Most recently, UN Model Tax Convention on Income and on Capital: Commentaries (1 Jan. 2011), Models IBFD. 3. UN Vienna Convention of the Law of Treaties (23 May 1969), Treaties IBFD. 4. Most recently, OECD Model Tax Convention on Income and on Capital (22 July 2010), Models IBFD. 5. Most recently, UN Model Tax Convention on Income and on Capital (1 Jan. 2011), Models IBFD. 6. Multilingual Texts and Interpretation of Tax Treaties and EC Tax Law EC and International Tax Law Series, vol. 1 (G. Maisto ed., IBFD 2005), Online Books IBFD. 7. Seminar F, The Use of Foreign Court Rulings for Treaty Interpretation Purposes IFA Congress Brussels (2008). 8. See, for example, CN: Huancui District of Weihai City (Shandon Province), 3 Sept. 2010, Donghwa Industrial Corporation, No. (2010), weihuan xingchuzi No See M. Züger, Arbitration under Tax Treaties, Improving Legal Protection in International Tax Law IBFD Doctoral Series No. 5 (IBFD 2003), Online Books IBFD and Z. Altman, Dispute Resolution under Tax Treaties IBFD Doctoral Series No. 11 (IBFD 2005), Online Books IBFD. 10. Convention 90/436/EEC of 23 July 1990 on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises, EU Law IBFD. 11. See, for example, ZA: AC, 19 Aug. 1975, Downing v. Secretary for Inland Revenue, Tax Treaty Case Law IBFD and AU: HCA, 22 Aug. 1990, Thiel v. Federal Commissioner of Taxation, Tax Treaty Case Law IBFD. 12. See, for example, NL: HR, 3 July 1991, No (BNB 1991/248). 13. K. Vogel & R. Prokisch, General Report, in Cahiers de droit fiscal international: Interpretation of Double Taxation Conventions, Vol. LXXVIIIa, sec. 4.aa. (Kluwer L. & Taxn. Pub. 1993), Online Books IBFD IBFD 8

9 14. See supra n Vogel & Prokisch, supra n US Model Tax Convention on Income (16 June 1981), Models IBFD. 17. US Model Tax Convention on Income (15 Nov. 2006), Models IBFD. 18. See, for example, Vogel & Prokisch, supra n. 13 and K. van Raad, Tax Treaty Issues Current and Future Developments, 36 Eur. Taxn. 1 (1996), Journals IBFD. 19. There are other case law collections, such as P. Baker, International Tax Law Reports (LexisNexis/Butterworths Tolley, 1999), but none have the ambition to include all treaty case law on a worldwide basis. 20. Tax Treaty Case Law IBFD, available at A free two-week trial to this database is available on request. 21. Treaties IBFD, also available at IBFD has made the Tax Treaty Case Law collection freely available to the members of the International Association of Tax Judges (see section 11.). 23. For example, DE: ECJ, 14 Feb. 1995, Case C-279/93, Finanzamt Köln-Altstadt v. Roland Schumacker, ECJ Case Law IBFD; NL: ECJ, 11 Aug. 1995, Case C-80/94, G.H.E.J. Wielockx v. Inspecteur der Directe Belastingen, ECJ Case Law IBFD; FR: ECJ, 12 May 1998, Case C-336/96, Gilly v. Directeur des services fiscaux du Bas-Rhin, ECJ Case Law IBFD; and DE: ECJ, 21 Sep. 1999, Case C-307/97, Compagnie de Saint-Gobain, Zweigniederlassung Deutschland v. Finanzamt Aachen-Innenstadt, ECJ Case Law IBFD. 24. See IBFD 9