Interpretation of double taxation treaties

Double taxation treaties now affect anyone whose income is related to more than two sovereign states. If, for example, an individual works abroad but is a citizen of the Slovak Republic or a company is registered in Slovakia but also has income from abroad, how is this income taxed and where? These questions are answered by tax treaties and the way they are interpreted.

The interpretation of double taxation treaties (hereinafter referred to as “tax treaties”) is primarily based on the text of the specific treaty in question. The text itself is the basic springboard for interpretation, to be used solely on its own without the use of other interpretive techniques. Therefore, the key question in interpretation is not what the treaty intended to say, what its purpose and meaning was, and what the parties intended to achieve, but what is essential is what is written in the treaty. To go further than the text of the treaty in the interpretation of the treaty would be a flagrant violation of the principle of textual interpretation as set out in Articles 31 and 32 of the Vienna Convention on the Law of Treaties. In this regard, it should be noted that in interpreting tax treaties, the text is given the standard meaning naturally flowing from the words and sentences written. What is considered to be the standard meaning of a written text varies and depends on the parties to the contract, but it must in fact be the customary substantive meaning ascribed to the word, sentence or text in question. The meaning of the text in question at the time when the tax treaty was concluded is decisive for the text in question.

According to R. Rhatgi, the order of interpretation of tax treaties after not excluding doubts and ambiguities from the text of the tax treaty is as follows:

• the intent of the parties as evidenced by the context of the contract, which must, however, be express and determined by reference to the actual wording of the text; and
• interpretation according to the objective objective and purpose of the tax treaty.

Thus, if the content of the provision is not clear from the text of the tax treaty, the other interpretative techniques are followed in turn.

F. Engelen analyses the interpretation of tax treaties in greater depth. He considers teleological interpretation to be the most basic interpretive technique for clarifying an ambiguous treaty text. The basic aim of the treaties is to avoid double taxation. This means that if the treaty text offers two possible interpretations, the one that is most consistent with the basic objective of the treaty, which is the avoidance of double taxation, is used. In addition, effective exchange of information between contracting states and mutual assistance in tax collection are subsidiary objectives of tax treaties.

The latest objective of tax treaties is to prevent aggressive tax optimisation and tax evasion. Interpretation of tax treaties follows a holistic approach and thus when looking at the provisions of tax treaties, one should look primarily at the tax treaty as a whole and not just at its individual parts.

As we mentioned above, theological interpretation of treaties cannot be applied a priori everywhere, and thus even where the text of the treaty offers a clear answer to a legal question. If this were not the case, there would be a violation of Articles 31 and 32 of the Vienna Convention on the Law of Treaties. If, despite the application of teleological interpretation, the content of the contract is unclear, the contract provides for the resolution of disputes by mutual discussion. The legal binding nature of the parties’ agreement on the interpretation of the contract, and thus effectively the conclusion of a new legal transaction, is in full compliance with the Vienna Convention on the Law of Treaties, which even provides for such a situation in Article 31 para. 3(a).

There is a very large legal debate in relation to the comments on the OECD Model Treaty. These are widely regarded as a kind of guide to tax treaties which can be consulted if some provisions of a tax treaty are unclear. However, the question of the legal binding force of these comments is associated with a number of question marks. In particular, some theorists struggle with the question of how to legally incorporate the OECD Model Treaty Commentaries into the legal framework of the Vienna Convention on the Law of Treaties. The OECD Commission on Fiscal Affairs would certainly like the OECD Model Treaty Commentary to be more than a supplementary means of interpretation in accordance with Article 32 of the Vienna Convention on the Law of Treaties. According to Van Raad, given that the comments were adopted by consent by OECD member states and each member state had the right to comment on the comments, they could be considered a legally binding document for the purposes of tax treaty interpretation in accordance with Article 31(1) of the OECD Tax Treaty. 2(b) of the Vienna Convention on the Law of Treaties. However, Van Raad’s opinion was influenced by the time in which he expressed it, as there was only one commentary on the OECD Model Treaty at that time. His opinion gradually took shape until he came to believe that the OECD comments on the Model Treaty could hardly be subsumed under Article 31(1) of the OECD Model Treaty. 2(b) of the Vienna Convention on the Law of Treaties also because the OECD Model Treaty to which the commentaries refer is itself a non-legally binding document[3]. Vogel takes a similar view and, while he does not consider the Commentaries to be a legally binding source of law, he also does not consider it correct to regard them merely as a supplementary means of interpretation under Article 32 of the Vienna Convention on the Law of Treaties. According to Vogel, if the content of a tax treaty is identical to the content of the OECD Model Treaty, it can be assumed that the contracting parties accept the interpretation of the provisions of the concluded tax treaty in accordance with the OECD Model Treaty Commentaries. Vogel distinguished three different variants of the binding effect of the OECD Model Treaty Commentaries for States Parties that are also OECD members. However, it must be a comment that was controlling at the time the tax treaty was entered into[4]:

• If a tax treaty concluded between two countries is identical to the OECD Model Treaty, the parties are presumed to have understood the content and meaning of the OECD Model Treaty Commentaries and thus the OECD Model Treaty Commentaries are legally binding on the parties. This does not apply if at least one Contracting Party has reserved the text of the OECD Model Treaty or the Commentary to the OECD Model Treaty;
• If a tax treaty is concluded between two countries that is similar but not identical to the wording of the OECD Model Treaty or the context of the treaty suggests a different interpretation than that of the OECD Model Treaty, the parties are nevertheless presumed to have accepted the interpretation under the Commentaries;
• If a tax treaty is concluded with a different content than that of the OECD Model Treaty or the context of the concluded tax treaty suggests a different interpretation than that set out in the Commentary to the OECD Model Treaty, the Commentary shall not be binding on the parties to the treaty.

In this regard, Vogel further noted that in the case of tax treaties that have not been concluded between two OECD member states, the presumption of the binding nature of the commentaries to the OECD model treaty applies only if the treaty in question is identical in content to the OECD model treaty. Given that commentaries, like most sources of law, are a living organism that is constantly changing, the question of the binding force of any amendments to the OECD Model Treaty Commentaries is equally relevant.

The frequency of amendments to the OECD Model Treaty Commentaries increased in the 1990s, which forced Vogel to modify his view on the binding nature of the Commentaries as a means of interpretation. In his view, the OECD Model Treaty commentaries have lost accuracy and reliability and therefore need to be treated with greater caution in determining their binding nature.

Currently, the OECD Model Treaty Commentaries are subsumed under Article 32 of the Vienna Convention on the Law of Treaties, and are thus considered a supplementary means of interpretation that can be used either to confirm the meaning implied by Article 31 of the Vienna Convention on the Law of Treaties, or to determine the meaning when an interpretation made under that Article either leaves the meaning ambiguous or unclear, or leads to a result that is manifestly unreasonable or unreasonable. On the other hand, if the parties explicitly include a commentary as a protocol to the treaty, some courts have already accepted the OECD Model Treaty Commentary in a tax treaty so drafted as a legally binding document.

[1] ENGELEN, F. 2004: Interpretation of tax treaties under international law. IBFD Publications. 2004. s. 427. ISBN 90-76078-72-6.
[2] Modelová zmluva OECD: Úvod, para. 29.
[3] RAAD, C. 1996: Interpretation and application of tax treaties by tax courts. 36 ET 1. 1996. s. 4.
[4] ENGELEN, F. 2004: Interpretation of tax treaties under international law. IBFD Publications. 2004. s. 427. ISBN 90-76078-72-6.