European and International Conventions
States impose taxes on the basis of their own tax laws and the rules within the tax treaties presume that the taxation is done according to domestic laws of the Contracting States. Tax treaty rules are consequently not leading to the application of foreign law, but limiting the tax laws of both states either by excluding domestic law or by forcing the States to al-low a credit for the tax already paid in the other state. The international taxation rules within the treaties are therefore not conflicting rules, but limiting rules. Private interna-tional law is often embodied in the rules of the domestic law, but with the tax treaty rules it is different, they have an independent origin and legal foundation.62
Double tax treaties are international agreements; following the rules of the Vienna Conven – tion which is a convention that codifies the norms and customs of international law.63 The agreements creating the treaty are concluded through negotiations and in most of the states The Minister of Foreign Affairs is responsible for these negotiations. Though, when it comes to tax treaties the Minister of Finance is more often the responsible negotiator. It is during these negotiations that the treaty text is drawn up.64 The treaty is concluded when the treaty is approved and signed by the negotiating parties. The signing is equal to a com-mitment by the state to the bound by the conclusion of the treaty, but even if a state has signed a treaty it may according to Art. 46(2) of the Vienna Convention be invalid under in-ternational law, if absence of parliamentary consent is at hand.65 With the term “parliamen-tary consent” is meant a mandate through which the treaty becomes applicable in domestic law.66 The tax treaty itself comes into existence when both Contracting States makes a dec-laration of consent, but the way the state concerned makes it’s declaration is an individual decision.67 When it comes to treaties there are different agreed rules, for example that the conclusion comes into effect when it is ratified by the states.68 Irrespective of the way the declaration of consent has been done, it is through the declaration that the treaty becomes binding under international law. The binding effect of the treaty is however not applicable on self-executing treaties, or treaties with an internal applicability. National tax authorities should apply the tax treaties.69 Treaties will in most states with the mandate of the legislator attain the same weight, or even higher priority, than the statuary domestic law.70 This is for example the case with double taxation treaties based on the OECD MC. The double taxa-tion treaty has priority and domestic legislation becomes through Art. 3(2) only an alternative to be used when the answer cannot be found in the treaty. In this Chapter compari-sons are made between the wording of Art. 9 OECD MC and the wordings of other con-ventions and regulations, to see if any guidance on the matter may be found.
The notion of control is not the first treaty term that has been in need of interpretation. Therefore, before proceeding with the search for a meaning of the term control in connec-tion to Art. 9, it is of importance to understand on which ground the interpretation of the undefined notion of control must rely.
The Vienna Convention on the Law of Treaties
The problem with the undefined notion of control will often lead to additional problems when applying domestic law, lex fori. In fact, it has been suggested that domestic law only should be applied when it can be justified by the principles of Art. 31 and 32 of the Vienna Convention on the Law of Treaties, hereafter the VCLT.71
Since DTAs are agreements between states they are often subject to different interpretation rules than those used by domestic law. The interpretation of treaties entered into between states is governed by the VCLT.72 The general international law does not have any rules concerning written agreements. The few existing rules have therefore grown from interna-tional case law and doctrine and later been codified in the VCLT.73 When ratifying the VCLT, many international policies have been interpreted and defined.
According to Art. 1 of the VCLT, the convention applies to treaties between states, which means that double tax conventions are covered since they are international bilateral or mul-tilateral treaties. The rules on interpretation of treaties are presented in Arts. 31 to 33. The general rules, explained in Art. 31(1), are divided into three principles.
- A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose.
- The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text; its preamble and annexes:
- any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty
- any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
- It shall be taken into account, together with the context: subsequent agreement between the parties regarding the interpretation of the subsequent agreement between the parties regarding the interpre-tation of the treaty or the application of its provisions; any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation, any relevant rules of international law applicable in the relations between the parties.
- A special meaning shall be given to a term if it is established that the parties so intended.
- Vogel, Klaus, Klaus Vogel on Double Taxation Conventions (1997), p. 43.
- Barenfeld, Jesper, Taxation of Cross-Border Partnerships (2005), p. 37.
- Vogel, Klaus, Klaus Vogel on Double Taxation Conventions (1997), p. 21.
The first section gives a rather broad description of how to interpret treaties. It seems gen-erally accepted that an objective or textual definition shall be followed, which has also been explained in the commentaries to the Convention.74 The textual approach corresponds with the legality principle and endorses predictability, which is of great importance regarding DTAs since they have a direct impact on the taxation of the taxpayers.
In international case law, the court has in many instances when interpreting the “ordinary meaning”, referred to the dictionary meaning. However, the term “ordinary meaning” does not necessary mean the everyday use of the word, but can have a certain meaning depend-ing on the judicial or professional tradition or a special meaning if the parties so intend.75 Some examples where the court has started the interpretation with the text are the case in Rhodesia where the term “industrial or commercial profit” where to be interpreted in Commissioner of Taxes v. Aktiebolaget Tetra Pak76, or in Canada where the terms “retire” and “pension” where to be defined in Specht v. R77. This objective view does not exclude the use of additional sources in the interpretation; it only limits the acceptable result of the wording to not expand outside the “ordinary meaning”. When establishing the ordinary meaning, the interpretation shall according to Art 31(1) be based on the “context” of the treaty. All kind of evidences besides those explained in 31(2), could be used to prove the context of the agreement, not only the text itself but also other documents and agreements that have been used to reach the agreement. In Henry H. Kimball v. Commissioner78 the court stated that since the treaty was based on a model treaty (the Model Convention of the League of Nations), the undefined term should be interpreted according to the model con-vention, its commentaries and the circumstances surrounding the drafting of the MC. The US. Tax Court referred to the history of the MC and the fact that uniform definitions where being formulated, the main meaning of the term in question was analysed and an in-ternational tax language was being developed.
It has been suggested that the underlying will of the parties should be investigated in order to establish the ordinary meaning. The result would be that the object and purpose of a treaty would be the same as the intention of the parties, since the object or the purpose could hardly be anything but the intention of the parties.79 It has already been stated that the purpose of the OECD MC is to prevent juridical double taxation and prevent interna-tional tax avoidance, which according to this point of view would result in the fact that the underlying will of the parties would be the same.80 It has contrary been said that the inten-tion of the parties only is significant to the degree it has been expressed in the text of the agreement. A third point of view is that the object and purpose of the treaty shall be regarded as secondary means in the interpretation, since it should be considered “in the light of the purpose”.81
According to Art. 31(3) subsequent agreements and subsequent practices are not part of the context but should still be taken into consideration together with the context for inter-preting purposes. The VCLT refer to ordinary and special meanings in Art. 31(4). A special meaning shall prevail if it is the underlying will of the parties. The difference between ordi-nary and special meaning can only be determined by examining the purpose of the treaty. Therefore the meaning to prevail is the one that comply with this.82
To prevent that a result becomes unrealistic, Art. 32 states that supplementary means of in-terpretation may be utilized either to support the outcome of the interpretation conducted according to Art. 31, or to reach a clear and reasonable conclusion, where this is not achieved under Art. 31. It is noticeable that the reference only regards sources of the treaty. This proves the importance of the common intention of the parties when interpreting a DTA. If language differences occur, Art. 33 states that the languages have the same power if nothing else has been agreed to. Once again, the underlying will of the parties shall be searched and the purpose of the treaty shall be determined.
In cases where the meaning of a treaty provision is unclear even after an interpretation of the common intention of the parties, it has been suggested that the parties has not reached an agreement and that the treaty therefore should not even by applied.83 Since this point of view will in the end affect the taxpayer, it is not a preferable solution. DTAs are based on the principle that they can only limit, not expand a state’s right to tax income according to domestic rules. However, many states rather protect their tax base their the taxpayers. It has, even if it lies outside the area of taxation, been stated by the European Commission on Human Rights that the “function of the Convention is to protect the rights of the individu-als”.84
To sum up, according to the articles in the VCLT, a treaty shall be interpreted according to its wording, which means that the parties by ratifying a treaty, without making any changes, also agree to the definitions therein. However the Convention also focuses on the intention of the parties which for example is proved by the fact that the Convention recognises ma-terials that are drawn up by both parties, but ignore materials concluded unilaterally. Since the will of the parties often is to express their common intentions through the text of the treaty the two opinions are often in harmony. Situations do all the same occur where the wording and the proven intention do not agree. The commentary to Art. 31 support the lit-eral meaning and states that “the text must be presumed to be the authentic expression of the intention of the parties” and that the starting point of the investigation ought to be in the meaning of the text, not on the intention of the parties.85 The literal meaning is also the most commonly one used in case law. The interpretation of the text must never expand be-yond an acceptable meaning of the wording. In cases where neither the wording nor the will of the parties may be determined, a lot speaks for interpreting the treaty according to the second beat alternative for the taxpayer.
The information of the VCLT must be kept in mind when further investigating whether or not a domestic interpretation may be used. As a first step of finding direction in how to in-terpret the notion, other treaties will be considered in order to determine if the meaning of control has been defined therein. It is then the purpose of the rest of the interpretation process to determine what meaning is most appropriate.86
Treaties within the European Union
When DTAs of Member States of the European Union (EU) are applied, the Community Law on International Tax Law must nowadays be considered. The “primary community law” is the EC Treaty (Treaty of Rome) and the EU Treaty (Maastricht Treaty). The most significant objective of the Community law is to market freedoms and the prohibition against discrimination.
One may wonder why no common regulations for transfer pricing exists within the EC law. In the EC Treaty there is no explicit harmonisation of direct taxes. Art. 94 of the Treaty opens the way for providing a legal basis for directives concerning direct taxation, but decisions regarding this requires unanimity of votes in the council. This is where the complexity starts. The Member States within the European Union have not been ready to let go of their own fiscal systems and they are reluctant to compromise over a standardized tax base. The result of this is the existing source taxation, meaning a separate taxation in each of the countries in which the MNE operates, on the basis of the income produced in each jurisdiction. The MNE must for this reason keep separate accounts for each business unit of the different countries in which it operates. When ascribing the items of the MNE to each business, the ALP is of course used since the Member States today follow the OECD principles.87 Though, it was ruled by the European Court of Justice that if national law is in conflict with the Community Law, the Community Law will prevail and domestic law is inapplicable.88 It has further been maintained that if a treaty rule is in violation of the Community law, the treaty rule is inapplicable the same way as with domestic law.89
The ALP has not been satisfactory since, as in previous Chapters described, the principle is difficult to apply on pricing situation in real business life. Because of this the EU has taken steps, if not toward harmonisation, so at least towards a reduction of the obstacles of cross-boarder transactions. Examples of these taken steps are the Merger Directive (90/434), the Parent-Subsidiary Directive (90/435) and the Arbitration Convention on dis-pute resolution in transfer pricing (90/436). These are however just steps towards elimina-tion of double taxation, in reality the consequence of the EU regulations is an almost as bad environment for the MNEs as the other international and bilateral conventions create.90 The relationship of international treaties to ‘primary Community law’ is governed by Art. 307 of the EC Treaty.
1.6 Terms and definitions
2 The OECD Model Convention
2.3 The Arm’s Length Principle
2.4 Article 9 of the OECD Model Convention
2.5 The Criterion of Associated Enterprises.
2.6 Article 3(2) of the OECD Model Convention
3 European and International Conventions
3.2 The Vienna Convention on the Law of Treaties
3.3 Treaties within the European Union
3.4 The US Model Convention
4 Definitions Stated in Domestic Legislation
4.11 The United States
5 A 50-50 Joint Venture Exemplifying the Problem
5.2 A presentation of International Joint Ventures
5.3 How Could the Participants be Considered Associated?
5.4 Methods for Determining Control
5.5 How does Domestic Law Treat 50-50 Joint Ventures?
6.2 The Purpose of Article 9
6.3 How Article 9 Relates to Domestic Legislation
6.4 Should Contractual Relations be Covered by Article 9?
6.5 An Alternative Way of Interpreting Article 9
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Associated Enterprises – What is the meaning of “participation in control”?