Study course on interpretation of tax statutes · · 2017-09-08Study course on interpretation of...

Geeta Jani

24 March 2017

Study course on interpretation of tax statutes

Rules governing construction of DTAAs, International Agreements, and Treaties

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Interpretation of Tax TreatiesPage 2 24 March 2017

Contents

► Overview

► Genesis of treaty : Authority : Formulation

► Interpretation principles from SC Ruling in ABA

► Texture of Treaty

► Other principles and aids to interpretation of treaties.


Overview

► Nation has sovereign right of imposing tax at its discretion,

subject to territorial nexus of person or income

► Determinants of residence / nexus may vary

► Examples of territorial nexus connect qua taxpayer or qua his

income

► India : Residence, extensive source Rule

► USA : Citizenship

► Hong Kong : Territorial

► Potential exposure of multi country taxation for transnational

operators

► Multi country taxation injures flow of cross border activities


Triangular (Multiangular) cases

US CO

Who will tax this income?

Deputation of Mr A

to work in the project

of I Co

Tax Resident Sweden

Citizenship USA

Employer UK Company

Project of US Co India

Receipt of salary Netherlands

►Fact pattern of Mr A who is deputed by US Co

to work in a project of I Co for six months

Project of

US Co

India


► Section 91

► Relief from double taxation if India has no tax treaties

► Person resident in India is allowed credit of foreign taxes paid against

amount of Indian taxes

► Section 90 / S. 90A

► Regulates a case where India has a tax treaty

► Treaty has much larger purpose

► Treaty relief can be broader and may extend to UTC, tax sparing, etc.

Relief in India from double taxation


Genesis of treaty: Authority: Formulation


Meaning of treaty

► The Oxford Companion to Law definition of treaty:

"an international agreement, normally in written form, passing under various titles

(treaty, convention, protocol, covenant, charter, pact, statute, act, declaration,

concordat, exchange of notes, agreed minute, memorandum of agreement)

concluded between two or more States, on subjects of international law intended to

create rights and obligations between them and governed by international law"

► Vienna Convention on Law of Treaties 1969 :

“an international agreement concluded between States in written form and

governed by international law, whether embodied in a single instrument and

whatever its particular designation.”

Can extend to all walks of national and international life


Treaty: Agreement between Governments

► Treaties are signed by two national jurisdictions to regulate matters

concerning taxes

► Taxpayer is not a party to a tax treaty

► Desire of signatories to make business environment in their jurisdictions tax

friendly

► Treaty represents understanding as to rights and obligations of respective

country

► to forego its right to tax,

► to limit scope or rate of taxation,

► to grant credit of tax paid directly or indirectly in other jurisdiction/s etc.

► Understanding between Governments is to share tax revenues equitably as

between themselves, while mitigating hardship for taxpayers


Genesis of authority: Article 51 of Constitution

► Article 51 of the constitution sets out the following as one of

the Directive Principles of State Policy

"The State shall endeavour to -

(a) promote international peace and security;

(b) maintain just and equitable relations between nations;

(c) foster respect for international law and treaty obligations in the

dealings of organised people with one another;

(d) encourage settlement of international disputes by arbitration"


Genesis of authority: Grant of legislative power

► Power to legislate treaties conferred on the Parliament by

Entries 10 and 14 of List I of the Seventh Schedule

“10. Foreign affairs; all matters which bring the Union into relation with

any foreign country

14. Entering into treaties and agreements with foreign countries and

implementing of treaties, agreements and conventions with foreign

countries”

S. 90(1)/90A(1) authorizes Central Government to enter into

agreement with Government of other country/specified territory


Steps in effecting a Tax treaty

Negotiation (MoF)

Drafting (MoF)

Signing (Chairman of CBDT

Ratification

Notification(CBDT)

Coming to effect

Interpretation of treaties

Unlike other countries, in India, treaties do not

need to be placed before the parliament. S. 90 of

ITA enables and empowers the Central

Government to issue a notification for

implementation of DTAA

Treaty becomes a law in India without any

further legislation having to be enacted

(ABA(SC))


Objective of Tax Treaties

► Elimination of double taxation

► Exchange of information to combat tax avoidance / tax evasion

► Assistance in recovery and collection of tax

► Promotion of mutual economic relations, trade and investment

► Certainty on nature of income and quantum of tax payable

irrespective of tax laws of overseas state

► Treaties also endeavor to promote:

► Resolution of tax disputes

► Prevention of tax discrimination


Evolution of purpose of tax treaties

► Preamble to India- USA DTAA:

The Government of the United States of America and the Government of the

Republic of India, desiring to conclude a Convention for the avoidance of double

taxation and the prevention of fiscal evasion with respect to taxes on income,

have agreed as follows….

► Preamble to India- Mauritius DTAA:

The annexed Convention between the Government of the Republic of India and the

Government of Mauritius for the avoidance of double taxation and the

prevention of fiscal evasion with respect to taxes on income and capital gains

and for the encouragement of mutual trade and investment has come into force

on the notification by both the Contracting States to each other on completion of the

procedures required by their respective laws, as required by Article 28 of the said

Convention


Evolution of purpose of tax treaties

► Preamble in Multilateral Convention (BEPS Action 15)

Intending to eliminate double taxation with respect to the taxes covered by

this agreement without creating opportunities for non-taxation or

reduced taxation through tax evasion or avoidance (including through

treaty-shopping arrangements aimed at obtaining reliefs provided in this

agreement for the indirect benefit of residents of third jurisdictions)


Fundamental principle: Treaty cannot create a charge

► Treaties can only relieve tax burden (Principle of non-aggravation). Treaties do

not create any charge

“A tax treaty neither generates a tax claim that does not otherwise exist under

domestic law nor expands the scope or alters the type of an existing claim” - Vogel

► Treaty, to the extent it is more beneficial in any respect, can override the

domestic law

► In India, s. 90(2) makes ITL applicable only if beneficial

“In relation to the assesse to whom such (DTAA) agreement applies, the provisions

of this Act shall apply to the extent they are more beneficial to that assesse.” -

S.90(2) :

► Use of treaty by taxpayer is optional

► Choice available on year on year basis

► Choice could be qua each source of income

► Whether a person in India can take advantage of treaty for determining his local

tax liability in India?


Interpretation Principles culled out from SC ruling in ABA


Interplay between tax treaty and ITA

► SC in ABA referred to following observation from Karnataka HC ruling in

R.M. Muthaiah (202 ITR 508)

"The effect of an 'agreement' entered into by virtue of section 90 of the Act would

be : (i) if no tax liability is imposed under this Act, the question of resorting

to the agreement would not arise. No provision of the agreement can possibly

fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax

liability is imposed by this Act, the agreement may be resorted to for

negativing or reducing it; (iii) in case of difference between the provisions of

the Act and of the agreement, the provisions of the agreement prevail over the

provisions of this Act and can be enforced by the appellate authorities and the

Court.”


Interplay between tax treaty and ITA

“The very object of drafting the said two sections (i.e. S. 90 and

90A) with the said clause is to enable the Central Government

to issue a notification under section 90 towards implementation

of the terms of the DTAs which would automatically override

the provisions of the Income-tax Act in the matter of

ascertainment of chargeability to income tax and ascertainment

of total income, to the extent of inconsistency with the terms of

the DTAC”.


Role of DTAA and double non-taxation

“According to Klaus Vogel "Double Taxation Convention establishes an independent

mechanism to avoid double taxation through restriction of tax claims in areas where

overlapping tax-claims are expected, or at least theoretically possible. In other words,

the Contracting States mutually bind themselves not to levy taxes or to tax only to a

limited extent in cases when the treaty reserves taxation for the other contracting States

either entirely or in part. Contracting States are said to 'waive' tax claims or more

illustratively to divide 'tax sources', the 'taxable objects', amongst themselves.….. To

the extent that an exemption is agreed to, its effect is in principle independent of

both whether the other contracting State imposes a tax in the situation to which

the exemption applies, and of whether that State actually levies the tax. The treaty

prevents not only 'current', but also merely 'potential' double taxation………….. only in

exceptional cases, and only when expressly agreed to by the parties, is exemption in

one contracting State dependent upon whether the income or capital is taxable in the

other contracting state, or upon whether it is actually taxed there.”


Treaty and Literal Interpretation

► SC noted following from international rulings:

"we cannot expect to find the same nicety or strict definition as in modern

documents, such as deeds, or Acts of Parliament; it has never been the

habit of those engaged in diplomacy to use legal accuracy but rather to

adopt more liberal terms".

“The interpretation of a treaty imported into municipal law by indirect

enactment was described by Lord Wilberforce as being 'unconstrained

by technical rules of English law, or by English legal precedent, but

conducted on broad principles of general acceptation”……….

► “The drafting of treaties is notoriously sloppy usually for very good reason.

To get agreement, politic uncertainty is called for……………………..”


SC concludes on object and purpose

► “An important principle which needs to be kept in mind in the interpretation

of the provisions of an international treaty, including one for double taxation

relief, is that treaties are negotiated and entered into at a political level

and have several considerations as their basis”………………….

► Treaty aids commercial relations…………….

► Treaty represents bargain between two countries :

“Because treaty negotiations are largely a bargaining process with each

side seeking concessions from the other, the final agreement will often

represent a number of compromises, and it may be uncertain as to

whether a full and sufficient quid pro quo is obtained by both sides."


SC concludes on object and purpose

► India- Mauritius DTAA object includes "encouragement of

mutual trade and investment" and this aspect of the matter

cannot be lost sight of while interpreting the treaty.

► Apart from the allocation of tax between the treaty partners, tax

treaties can also help to resolve problems and can obtain

benefits which cannot be achieved unilaterally.


Treaties are mini legislation

► Madras HC in case of S.R.M Firm

“Tax treaties are for that matter considered to be mini legislation containing

themselves all the relevant aspects or features which are at variance with the

general taxation laws of the respective countries. Such variations are in some

cases in addition to the existing local tax laws and in other cases in lieu thereof. That

being the legal position, the exposition of the said position also by the CBDT in their

Circular No. 333 dated 2-4-1982 (vide [1982] 137 ITR (St.) 1), assumes significance

and importance inasmuch as they can also be traceable to the powers of the Board

under section 119. Consequently, wherever the double taxation avoidance

agreement provides for a particular mode of computation of income, the said

method alone is required to be followed, irrespective of the provisions of the

Act, and it is only where there is no specific provision in the agreement to the

contrary the basic tax law in force in the country will get attracted and govern

the taxation of such income”.


Mumbai ITAT decision in case of Mashreqbank PSC:

“Unlike a piece of tax legislation, which is creature of a sovereign state, a tax treaty is a

result of bilateral negotiations. Therefore, the wordings of a tax treaty are essentially

dependent on the priorities of, and acceptability by, the Contracting States which are

parties to such a tax treaty. It is only elementary that these factors vary from one set of

Contracting States to another set of contracting States. The same purpose, therefore,

can indeed be intended even by radically different phraseology employed in tax treaties

to which a particular country is one of the parties. The tax treaties being product of

bilateral negotiations, deviation in language of the tax treaties entered into by a

country, does not necessarily indicate a deviation in objectives and purpose that

these tax treaties seek to achieve. Once a Contracting State enters into a tax

treaty, it cannot be open to that Contracting State to shy away from implementing

such a tax treaty on the ground that the consequences of its implementation

could be contrary to the intentions of the treaty. However, what is needed to be

implemented is a clear and unambiguous provision. At best, if there is an

ambiguity in the provisions, it needs to be resolved by way of harmonious

construction in accordance with the well settled principles of tax

treaties”………………..


Tax Treaty v Domestic Law

Tax treaty Domestic Law

Agreement between two States

Involves closed door negotiation

process

Relief from double tax

No additional tax burden

Sharing of tax revenue

No frequent changes

International law

In-built dispute resolution option

Approval from Parliament not needed

in India unlike certain other countries

Act of Legislation

No negotiation

Collection of tax

Earning of tax revenue

Frequent amendments

National Legislation

Dispute settled by appellate forum/

Court


Texture of Treaty


► Each treaty codifies respective understanding between parties.

► Parties may adopt a standard draft : Say, UN Model, OECD Model

► This is hardly the case

► Organization for Economic Co-operation and Development (OECD)

► Established in 1961 with developed countries as its members

► Essentially a model treaty between two developed nations with comparable tax

systems and tax objectives

► Advocates residence principle

► Lays emphasis on the right of state of residence to tax

► Currently 35 countries including Australia, US, UK, France, Germany etc are

OECD members

► India not a OECD member

► Currently has been granted the “Observer” status

Texture of Treaty: OECD Model


UN model

► Tax treaties between countries with unequal economic status -

Developed and lesser developed countries, or between developing

countries

► Drafted in 1980, designed to encourage flow of investments from

the developed to developing countries

► Is a compromise between source principle and residence principle

► Gives more weightage to source principle, i.e., income should be

taxed where it arises [e.g. service PE, royalty taxation in source

country]


Articles of a Treaty

SCOPE PROVISIONS

1. Article 1 - Personal Scope

2. Article 2 - Taxes covered

3. Article 29 - Entry into force

4. Article 30 - Termination

ANTI-AVOIDANCE

1. Art 9 - Associated Enterprise2. Art 26 - Exch of Info

ELIMINATION OF DOUBLE TAXATION

1. Article 23 - Elimination of double

taxation

2. Article 25 - Mutual Agreement

DEFINITION PROVISIONS

1. Article 3 - General definitions

2. Article 4 - Residence

3. Article 5 - Permanent

Establishment

SUBSTANTIVE PROVISIONS

1. Article 6 - Immovable property2. Article 7 - Business Profits3. Article 8 - Shipping, etc4. Article 10 - Dividends5. Article 11 - Interest6. Article 12 - Royalties & FTS7. Article 13 - Capital gains8. Article 14 - Independent Personal Services9. Article 15 - Dependent Personal Services10. Article 16 - Directors11. Article 17 - Artistes & Sports persons12. Article 18 - Pensions13. Article 19 - Government service14. Article 20 - Students15. Article 21 - Other income16. Article 22 - Capital

MISCELLANEOUS PROVISIONS

1. Article 24 - Non-discrimination

2. Article 27 - Diplomats

3. Article 28 - Territorial Extension


Tax treaties are not uniform

► Conditions need not be uniform in all treaties

► E.g. Absence of equipment royalty source taxation

► There are no constraints on terms of agreement

► E.g. India Finland treaty : Restrictive scope of source of income

► There are no strings to originality

► E.g. Credit of residence country tax by source country, (Indo-Swiss

treaty – capital gains article )

► Impact of MFN Clause

► MFN Country may achieve more favorable treatment compared to treaty

trigger


Illustrative allocation of Distributive Rights

Exclusive right to Country of Residence

(COR)

Capital gains Article, other income Article (Ex:

erstwhile India-Mauritius DTAA)

Exclusive right to COR – but, sacrifice by

COS on subject to tax condition

Capital gains Article in India-Sweden DTAA

Exclusive right to Country of Source

(COS)

PE income in India-Bangladesh Treaty

Concurrent right of taxation to both the

countries:

Subject to upper cap on rate of tax in

COS

Passive sources of income (i.e. say, royalties,

interest)

Without any limitation as to rate of tax

in COS

Say, PE taxation

Exclusive right to country of effective

management

Shipping income


Interpretation of Treaties


Vienna Convention on the Law of Treaties (VCLT)► VCLT is a treaty concerning the international law on treaties (in written form)

between states

► Drafted by the International Law Commission (ILC) of the UN

► It was adopted on 22 May 1969 and opened for signature on 23 May 1969.

► The Convention entered into force on 27 January 1980.

► Has 45 signatories and is ratified by 114 countries

► Several treaties have resulted from VCLT. For example:

► Tax treaties on avoidance of double taxation

► Treaty on protection of ozone layer

► Treaty on international road traffic

► Treaty on diplomatic relations


Regarded as part of customary law and codifies

bedrock of contemporary international law


Vienna Convention on the Law of Treaties (VCLT)

► Codifies existing norms of customary international laws

► Binding on signatories

► Most nations, whether they are party to it or not, recognize it as the pre-

eminent “Treaty of Treaties”

► Widely recognized as the authoritative guide vis-à-vis the formation and

effects of treaties

► India scenario

► India is neither a signatory nor has ratified VCLT

► SC acknowledged persuasive value of general rules of interpretation of VCLT

(Ram Jethmalani v Union of India [(2012)(339 ITR 107)] SC)

► Delhi HC applied various Articles of VCLT(AWAS Ireland v. Directorate General

of Civil Aviation [2015] (W.P.(C) 671/2005)



Vienna convention on interpretation

Article 26 : Every treaty in force is binding upon the parties to it

and must be performed by them in good faith

Article 31(1) : 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 the light

of its object and purpose

Article 31(2) : Context is defined to include texts and subsequent

agreements/instruments related to the treaty


Vienna convention on interpretation

Article 32 : Preparatory work and circumstance of its conclusion

to be considered if context rule creates ambiguity

Article 33 : If a treaty is drafted in more than one language,

each language of treaty is authoritative, unless

otherwise provided.

Article 34 : A treaty does not create either obligations or rights

for a third state without its consent


Other Aids to treaty interpretation


Tax Treaty Models and Commentaries

► Common format and wording for drafting bilateral tax treaties

► Helps in uniform interpretation but no legal force

► Referred to as “common interpretative principles”

► Reflects the current views on existing provisions and on their application to

a specific situation

► Material shared or commented upon by various nations; it is an important

aid for interpretation

► Federal Court of Appeal of Canada in Cudd Pressure Control Inc v. Her

Majesty The Queen 98 DTC 6630- “the UN and OECD are multilateral

forums and their main purpose is to provide a method of uniformly settling

the most common problems which arise in the area of international double

taxation.”



OECD MC - What the OECD Commentary says about its significance ► Para 3 to ‘Introduction to OECD Commentary’

“Member countries…. should conform to this Model Convention as

interpreted by the Commentaries thereon … and their tax authorities should

follow these Commentaries… when applying and interpreting the provisions

of their bilateral tax conventions that are based on the Model Convention.”

► Para 15 to ‘Introduction to OECD Commentary’

“ the worldwide recognition of the provisions of the Model Convention and their

incorporation into a majority of bilateral conventions have helped make the

Commentaries on the provisions of the Model Convention a widely-accepted

guide to the interpretation and application of the provisions of existing

bilateral conventions. This has facilitated the interpretation and the

enforcement of these bilateral conventions along common lines.”

India is not a member of OECD: has been granted ‘observer’ status


UN MC - What does UN Commentary say about its significance?

► Para 35 & 36 of Introduction to UN Commentary

“ Like all model conventions, the United Nations Model Convention is not

enforceable. Its provisions are not binding and furthermore should not be

construed as formal recommendations of the United Nations… If the

negotiating parties decide to use in a treaty wording suggested in the

United Nations Model Convention, it is to be presumed that they would

also expect to derive assistance in the interpretation of that wording from

the relevant Commentary. The Commentaries, which may prove to be very

useful in the implementation of a treaty concluded by the negotiating

parties and in the settlement of any dispute relating thereto, are not

intended to be annexed to such a treaty, the text of which in itself would

constitute the legally binding agreement.”



OECD Commentary : Reflects international tax language

► Klaus Vogel

“The ‘ordinary meaning’ of the terms is not necessarily that of everyday

usage. Only to the extent that an internationally uniform legal usage or a

legal usage consistent between the Contracting States has developed, or to

the extent that a specific technical language has developed in certain

specialised areas, such as tax law, is this the ‘ordinary’ usage within the

meaning of Article 31(1) VCLT. This is particularly true for those terms

which, under the influence of the OECD MC and its Commentary, have

since developed into an international tax language’.”


Other Aids

► Protocol

► Supplementary document to a treaty concluded based on

negotiations

► Has same binding force as the main clause of a tax treaties –Steria

(India) [TS-416-HC-2016(DEL), DCIT vs. ITC Ltd. [2002] 82 ITD 239

(Kol)

► Few Protocols are self operational (e.g. Clause 7 of Protocol to India-

France treaty)

► Few protocols require further action by the respective Governments

to give effect to the benefit envisaged therein (e.g. Para 4 of protocol

to India-Philippines tax treaty, Para 3 of protocol of India Swiss tax

treaty etc)


Other Aids

► Memorandum of understanding (MOU)

► Agreed upon between the two contracting states on interpretation of

certain terms in the treaty (eg: India – US tax treaty on FIS Article)

► Few treaties specifically mention applicability of India-US MoU (e.g

Protocol to India-Netherlands tax treaty

► India-US MoU relied upon to interpret the term FTS in other similarly

worded tax treaty - Raymond Limited vs. DCIT (2003) 080 TTJ 0120

(TBOM)


Other Aids

► Technical Explanation

► Unilateral understanding of the treaty provisions by one of the

treaty partner country

► US has issued a technical explanation in the context of India USA

tax treaty [From preamble to the technical explanation]

“The technical explanation is an official guide to the

Convention. It reflects the policies behind particular Convention

provisions, as well as understandings reached with respect to

the application and interpretation of the Convention.”

► Offers interpretation of US government on all the articles covered

in India US tax treaty


Other Aids

► International judicial precedents

► World over courts have referred to rulings of foreign courts for

guidance on interpretation of similarly worded tax treaty provisions

► Union of India vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC)

► SC – case of Vodafone has relied on the ruling of Australian court in

the case of Federal Commr of Taxation vs. Lamesa Holdings BV (LN)

(1998) 157 ALR 290 to get an insight as to how "look through"

provisions may need an explicit provision

► International judicial precedents though not binding, have

persuasive value


Other Aids

► Parallel tax treaties

► Treaties on a similar subject matter

► Concluded between third states or between one of the parties and a third state

► Definition of the term in other treaty/protocol may:

► Correspond with its normal meaning (e.g. explanation of term ‘make available’ in MOU

to India-US DTAA)

► Give one of the possible meanings of an otherwise ambiguous term; (e.g. explanation

of term ‘securing orders’ in protocol to India-Swiss DTAA)

► Fictionally extend or restrict the normal meaning (Duration test of service PE /

construction PE in context of India-US DTAA if it extends to two taxable years)

Meaning of debt incurred: is outstanding payable covered?

[Vijay Ship Building Corp. (261 ITR 113) (Guj)]


Impact of interpretation of reservations expressed in OECD Commentaries

► Countries are allowed to express observations and reservations on OECD

Commentary

► India, though not a member of OECD, has expressed its reservations on

various issues

► In the context of India’s reservation on website cannot form a PE, Kolkata

Tribunal in case of Right florist P. Ltd (143 ITD 445), held as under:

“The Government of India's reservations on the OECD Commentary are relevant

only to the extent that OECD Commentary, to that extent, cannot be treated as a

fair index of intention of the Government of India and as contemporanea

expositio in respect of tax treaties entered into by India after so expressing its

reservations. Beyond that, in our humble understanding, these reservations

have no role in judicial analysis.”


Respecting treaty obligations (MAP): Recent Sifto Ruling

► MAP is an alternative available under DTAAs to resolve disputes.

► MAP allows Competent Authorities (CA) of the Contracting States to

interact with the intent to resolve international tax disputes

► In case of Sifto, the Canada Tax Authorities did not follow the price agreed

by Canada CA with US under MAP and charged additional income in

hands of taxpayer.

► Canada court held that

► MAP between CA of two states is legally binding on tax authorities of

both states

► Tax authorities are not permitted to act in a manner inconsistent with

that MAP (relevant extract from decision in next page)


Respecting treaty obligations (MAP)

“The manifest object of Article XXVI of the [Canada/ US treaty] in the context

of transfer pricing is to resolve by mutual agreement issues of juridical and

economic [double] taxation. An issue is not resolved if it is open to one state to

simply disregard the MAP agreement that resolves the issue. It is also

antithetical to the very notion of an agreement between two treaty

partners to suggest that either party may simple choose to ignore the

agreement. Not only is such a suggestion contrary to common sense but

the adoption of such a principle would effectively neuter the mutual

agreement procedure not only in the [Canada/US treaty] but in all of

Canada’s treaties. After all, why would a treaty party agree to the

resolution of a tax treaty issue if Canada could simply ignore that

resolution and assessee as it sees fit?”


Certain concepts/issues in International Taxation


► Article 3(2) of OECD MC

“As regards the application of the Convention at any time by a

Contracting State, any term not defined therein shall, unless the context

otherwise requires, have the meaning that it has at that time under the

law of that State for the purposes of the taxes to which the Convention

applies, any meaning under the applicable tax laws of that State

prevailing over a meaning given to the term under other laws of that

State”

► Meaning under “tax law” to be preferred over meaning under other laws

► Which state’s law should apply ?

► Static v Ambulatory

► R.V Melford development Inc [(1982) 82 D.T.C 6281](SC of Canada):

amendment to interest definition to cover guarantee fees

Meaning of undefined terms


Treaty Shopping

► Treaty Shopping’ is an act of resident of a third country taking advantage of

a fiscal treaty between the two countries.

► If intended, anti-avoidance measure would have been built into the treaty at

the time of negotiation– Vodafone International Holdings B.V v Union of

India [2012] 204 Taxman 408 (SC)

► BEPS Action 6 addresses Treaty Shopping (Limitation on Benefits (LOB)

rule) and all forms of treaty abuse (Principal Purpose Test (PPT) rule)

► India already has general anti-abuse rule in many of India’s tax treaties (akin to

PPT rule) with UK, Luxembourg, Norway, Poland, Finland, UAE, Malaysia, etc

► India-US, Iceland treaties contain detailed anti-abuse rules


Treaty Shopping

► Treaty shopping not illegal, Once a tax payer qualifies as ‘resident’ under treaty, benefit

cannot be denied on the ground of ‘treaty shopping SC in AZB so held based on the

following

► ‘Limitation’ clause absent in Mauritius tax treaty unlike India-US tax treaty

► No express provisions in domestic law against treaty shopping

► Duty of the Court is to decide what the law is and to apply it! Not to make it!

► “Report of the Working Group on Non-Resident Taxation” and Joint Parliamentary

Committee Report signifies what the law ought to be! And not what the law is!

► Motive wholly irrelevant and cannot affect the legality of the transaction

► No lifting of the corporate veil - Purpose of tax treaty is to ensure benefits there under

are available, even if inconsistent with the provisions of the Act

“There are many principles in fiscal economy which, though at first blush might appear to be

evil, are tolerated in a developing economy, in the interest of long term development. Deficit

financing, for example, is one; treaty shopping, in our view, is another….”


Treaty Override

► It is the enactment of domestic legislation intended by the legislature to have effects

in clear contradiction to international treaty obligations

► Treaty override constitutes a breach of the tax treaty (infringement of international

obligation) and

► Validity depends on the constitutional interaction between domestic law and international

law

► In countries like USA, UK or Canada treaty override by domestic law is possible

► OECD observed continued cases of treaty override would erode confidence in

international tax treaty network

► India experience

► Explanation to section 90 inserted override non-discrimination article on applicability of tax

rate

► Illustratively, Abu Dhabi Commercial Bank Ltd V JCIT (18 SOT 169 )(Mum)

► Domestic GAAR applicability specifically acknowledge in certain treaties. (e.g. Indian-

Luxembourg tax treaty and India-Singapore tax treaty)


Effect on acts prior to treaty being effective

► Article 28 of Vienna Convention

“Unless different intention appears from the treaty or is otherwise

established, provisions of a treaty does not bind a party in relation to any

act or fact which took place before the date of entry into force of the

treaty”

► A tax Treaty cannot retrospectively apply if it adversely affects rights

of Taxpayers – Tata Iron & Steel Co ltd v DCIT [(1999) 62 TTJ 17

(Mum)]

► Is the ruling a good law?

► Generally, treaty as subsisting as of date of transaction applies


Impact of GAAR on treaty interpretation

► S. 90(2A) of ITA

“Notwithstanding anything contained in sub-section (2), the provisions of

Chapter X-A of the Act shall apply to the assessee even if such provisions

are not beneficial to him.”

► Does GAAR apply even in case where there is a LOB in treaty?

► India Singapore 2016 Protocol inserted Article 28A:

“This Agreement shall not prevent a Contracting State from applying its

domestic law and measures concerning the prevention of tax avoidance or

tax evasion.”

► Is Article 28A clarificatory?


Beneficial ownership

► Some tests to establish Beneficial Ownership

► Klaus Vogel Commentary on Double Taxation Conventions (3rd Edition, Page No.

563, M No. 11)

“If payment was made to the formal owner, though for the benefit of the beneficial

owner, such a payment was invariably also payment to the beneficial owner. ln such

a case, therefore, Arts. l0 to 12 remained applicable, provided the beneficial owner

was a resident of the contracting State. The revised MC 95 now clarifies thus on its

treaty entitlement” –

Possession test User test

Risk test Control test


Requirement of Tax Residency Certificate (TRC)

► S.90(4) makes treaty benefit contingent upon TRC

► TRC is a document certified by Government of Other State about tax

presence of treaty resident

► S.90(5) states that requirement of providing other documents and

information

► Significance of TRC and impact if TRC is unavailable


Concept of BEPS

► Base Erosion and Profit Shifting (BEPS) refers to tax planning

strategies

► that exploit gaps and mismatches in tax rules to make profits ‘erode' for

tax purposes (double non-taxation) or

► to shift profits to locations where there is little or no real activity but the

taxes are low resulting in little or no overall corporate tax being paid

► OECD along with G-20 nations has formulated 15 Action Plans built

around concepts of “Coherence”, Transparency” and “Substance”

► OECD released its Final Action reports on 15 Action Plans in

October 2015


Multilateral Instrument

► Under OECD/ G20 BEPS project, Action 15 was formulated for

“Developing a MI to modify bilateral tax treaties”

► MI to facilitate swift implementation of treaty-related BEPS changes: The

objective is -

► To modify existing bilateral tax treaties in a synchronised and efficient manner to

implement treaty related BEPS measures

► To avoid the need for renegotiation of each tax treaty`

► MI does not replace existing tax treaties (CTA)

► MI will modify tax treaties between two or more parties

► Articles introduced pursuant to MI need to be read with existing tax treaties after

considering replacements/ additions

► MI will not function in the same way as a protocol

► Protocol to treaty directly amends the text of the tax treaty, but MI will be applied

alongside existing tax treaties in order to implement the BEPS measures

Thank you !“This Presentation is intended to provide certain general information existing as at the time of

production. This Presentation does not purport to identify all the issues or developments. This

presentation should neither be regarded as comprehensive nor sufficient for the purposes of decision-

making. The presenter does not take any responsibility for accuracy of contents. The presenter does

not undertake any legal liability for any of the contents in this presentation. The information provided is

not, nor is it intended to be an advice on any matter and should not be relied on as such. Professional

advice should be sought before taking action on any of the information contained in it. Without prior

permission of the presenter, this document may not be quoted in whole or in part or otherwise.”

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