In this article we will discuss about the legal decisions on treaty interpretations:- 1. Legal Interpretations 2. Reference to the VCLT 3. Reference to the OECD MC and Commentaries 4. Other Judicial Decisions 5. Country Examples.
Although double tax treaties are international agreements under public international law, there is no international judicial authority to interpret tax treaties. Most countries accept the right of their Courts to interpret double tax treaties. The judicial bodies act as “the authorities of last resort”. The Courts apply their legal reasoning based on the facts and the law to decide on tax issues.
Legal decisions on treaty interpretation differ widely among countries. The Courts in civil law countries rely on sources, such as laws, treaties, regulations, jurisprudence and doctrine. They tend to stress the exact wording of the law and are generally strict in their legal reasoning.
Common law countries follow similar sources but give more emphasis to judicial decisions and treat doctrinal writings largely as persuasive. They also pay close attention to the facts and are more flexible in their legal reasoning.
Treaty interpretations tend to be either literal, legislative or purposive, as follows:
The Courts adopt a literal meaning of the treaty (i.e. not reading between the lines). This approach encourages certainty and stability but may reduce its effectiveness.
The Courts interpret the treaty according to the original legislative intent, even departing from the literal language of the statute. They take into account the legislative history.
The Courts consider the economic or social purpose, and look at the purpose of the legislation beyond what was contemplated in the words of the treaty. Emphasis is given to substance over form through a contemporary purposive interpretation.
The Courts in many countries still adopt a literal interpretation of the tax law. France, Belgium and South Africa interpret the tax laws in favour of the taxpayer, when in doubt under the maxim “in dubio contra fiscum”, Ireland considers legislative history but follows a literal interpretation.
The Netherlands enforces the legal form but denies an interpretation that has tax avoidance as the dominant purpose under the “fraus legis” doctrine.
However, there is an increasing trend towards a purposive and liberal approach to treaty interpretations. For example, the UK Courts have taken a purposive view on treaties and deviated from the literal text in several decisions in recent years.
The Courts in several countries also apply a broad approach in treaty interpretation to satisfy either historical parliamentary intent or current economic intent. They consider preparatory material, foreign decisions and other legal commentaries.
Several civil law countries follow the legislative approach. Germany follows the VCLT rules of interpretation and gives priority to the ordinary meaning of treaty terms. It also considers the legislative purpose to avoid an absurd result that could not have been intended by the legislature.
The United States interprets treaties according to the legislative intent with an emphasis on substance over form under a purposive approach. The Courts generally assume that, unless there is some clear statement to the contrary, the legislature expects them to apply the interpretation under customary international law, rather than the domestic rules.
Reference to the VCLT:
Tax treaties have a dual character. They are a treaty between States as well as binding nationally as statutes. Therefore, they are subject to the rules of interpretation applicable to both international and domestic law. Several legal decisions have confirmed the application of the VCLT for tax treaty interpretations.
Some specific examples include:
a. The Canadian Supreme Court held in the Crown Forest case that “Articles 31 and 32 of the Vienna Convention on the Law of Treaties indicate that reference may be made to these types of extrinsic materials when interpreting international documents such as taxation conventions”.
b. In the Thiel case in Australia, the judge stated that the VCLT and its Article 31 “seek to codify the international law in relation to treaties”. Similar Australian decisions on the application of VCLT to tax treaties were noted in the Lamesa and Chong cases.
c. In the Gimpey case, Barrington J held: “An international treaty has only one meaning and that is its meaning in international law. For guidance on this subject one must look to the general principles of international law and in particular to the rules of interpretation set out in Article 31 of the Vienna Convention on the Law of Treaties”. “Article 31 is acknowledged to have codified the relevant principles of interpretation”.
d. The Federal Canadian Court applied Article 32 of the VCLT to authorize the examination of the circumstances existing when the treaty was signed in the Gladden case.
Reference to the OECD MC and Commentaries:
The OECD MC and Commentaries are generally considered as supplementary means of interpretation under VCLT Article 32. Under the VCLT Article 32, they can only be used strictly to avoid an ambiguous, obscure, absurd or unreasonable meaning under Article 31, or to confirm the Article 31 result.
Although the OECD Committee on Fiscal Affairs does not intend for them to have a limited role, it is difficult to justify including them as part of context under VCLT Article 31. Very few bilateral treaties have explicitly included the use of the Commentaries as a protocol to a treaty. The Commentaries and judicial decisions also confirm that the expressed provisions in a negotiated tax treaty alone constitute a legally binding agreement.
Few Court decisions have considered their legal status. Although it is still controversial, the OECD MC and Commentaries are widely accepted by the Courts for treaty interpretation. There are legal decisions supportive of the MC and the Commentaries in several countries.
Some specific references to the Model and the Commentaries in cases involving treaty interpretations include:
A. MC Articles 3(1) (c) and 7(1):
The definition of an “enterprise” in Thiel v FCT by the High Court of Australia. A Swiss resident taxpayer converted his mutual fund units into shares in an Australian company and sold them at a profit. The Australian High Court held that an isolated activity could constitute an enterprise for treaty purposes under the OECD Commentary.
B. MC Article 4(1):
In the Crown Forest case, the Court interpreted the term “resident” under the US-Canada tax treaty. It held that “the authority … that only those who are liable to tax on their worldwide income can be justifiably considered residents for the purposes of international taxation conventions is found in the first sentence of Article 4 of the OECD Model Convention…..”.
C. MC Article 26:
In the Burbank case, the Court referred to both the OECD MC and the Commentary as aids to interpretation and stated that the defined purpose of the treaty was to avoid and relieve double taxation as well as to prevent fiscal evasion. The Court held that the US IRS could pass tax information to the Canadian Revenue under the terms of the treaty, even when no US taxes were involved.
D. MC Commentaries:
In Sun Life Assurance Co. of Canada v Pearson, the English High Court held that “it is common ground … that the Commentaries must be referred to as a guide to the interpretation of the treaty”.
E. MC Commentaries:
In the Cudd Pressure case, the Canadian Court held that “the OECD Commentaries, therefore, can provide some assistance in discerning the legal context surrounding double taxation conventions at international law”.
Other Judicial Decisions:
The decisions on tax treaties by the national Courts or authorities in the other Contracting State or third States may be applied but are not mandatory. They tend to be persuasive but not binding.
However, foreign judicial decisions may provide important insights. They may also include countries other than the treaty partner. There are examples of this principle of common interpretation in the legal decisions of many countries.
Common interpretation does not mean acceptance without review. Generally, foreign Court decisions need to be applied with some caution since interpretation principles or approaches towards the application of the VCLT or the domestic law meaning may differ. This principle does not apply where the treaty expects each Contracting State to apply its own domestic laws.
In CIR v JFP Energy Incorporated (New Zealand), the New Zealand Court of Appeal accepted the US Technical Explanation to interpret the phrase: “borne by a permanent establishment” in OECD MC 15(2).
It held: “…it is obviously desirable that the same interpretation answer should be given whether a double taxation treaty question arises in New Zealand or the US and in our view appropriate consideration should be given to the considered official opinion of the other party to the treaty as to its meaning”.
Technical Explanation in the US MC did not form part of the treaty but reflected the unilateral views of the US treaty negotiators. Nevertheless, the Court cited it since it was a help in the treaty interpretation on the case.
Australia ratified the VCLT in 1974 and follows its rules unless there are specific treaty interpretation or application requirements under the domestic law. Tax treaties are implemented as Schedules to the International Tax Agreements Act 1953 and subject to the Acts Interpretation Act 1901 under its domestic law.
The domestic rules under Sections 15AA and 15BB of this Act reflect the parliamentary intention when enacting treaty-implementing laws and theoretically permit specific treaty overrides. Otherwise, customary international law prevails over domestic law.
Several domestic cases have supported the use of the VCLT on tax treaties. In the Tasmanian Dam case, Judge Brennan of the Australian High Court held: “The interpretation of the Convention … should follow the Article of the VCLT, the provisions of which codify existing customary law and furnish presumptive evidence of emergent rules of general international law”. He considered Article 31 of the Convention as “the leading general rule of interpretation of treaties”.
The Canadian Courts usually take a purposive view on treaty interpretations. In Stickel v MNR, the judge held that the “treaties are to be construed in the most liberal spirit provided, however, that the sense is not wrested from their plain and obvious meaning; the Courts should examine treaty provisions to ascertain and give effect to the intention of the Contracting States as expressed in the words used by them”.
In the Gladden Estate case, the judge added, “a literal or legalistic interpretation must be avoided when the basic purpose of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned”. In the Crown Forest case, the judge reviewed the intentions of the drafters of the treaty.
Canada ratified the VCLT in 1970 and its Courts have mentioned the VCLT in several tax cases. They accept that the Convention codifies the existing public international law. Grant J held in the Hunter Douglas case: “The Vienna Convention on the Law of Treaties, to which both Canada and the Netherlands are parties, contains the general rules of interpretation of international conventions”.
The Cudd Pressure case reaffirmed that: “It is generally accepted that the Vienna Convention on the Law of Treaties codifies previously existing public international law. The principles set out in this Convention and what it says in Articles 31 and 32 regarding interpretation of treaties are applicable to the issues at hand”.
The interpretative principles under VCLT were mentioned by the Canadian Supreme Court in the Crown Forest case to justify the use of extrinsic materials such as Model Conventions and Commentaries.
Canada passed a new law after the Melford case. Under the Income Tax Conventions Interpretation Act of 1985, unclear treaty terms are interpreted on an ambulatory basis. Thus, under the Canadian domestic law the meaning when the treaty is applied now supersedes the definition of the terms at the time of signing the treaty.
Until 1990, the French Courts were not permitted to interpret treaties, unless the meaning was clear (the doctrine of “acte clair”), or the matter was under dispute. Only the Ministry of Foreign Affairs could issue rulings on treaty interpretations, which were held to be binding on the Courts.
Under a 1990 decision of the Conseil d’Etat (“Supreme Court”), the French Courts are now empowered to interpret a treaty even if its provisions are not clear. Moreover, an interpretation ruling of the Ministry is no longer binding upon the Courts.
Generally, tax treaties are given a strictly literal interpretation by the two highest Courts in France (e.g. the Cour de Cassation and Conseil d’Etat) under Article 34 of the French Constitution. They are interpreted against the tax authorities in case of doubt. Although France is not a party to the VCLT, it follows the rules as customary international law.
Germany signed the VCLT in 1970 and ratified it in 1987. The German Courts generally follow the VCLT approach to comply with the legislative intent in treaty interpretation. Under the VCLT, the treaty intentions must be evidenced in the actual text of the treaty. The parties should also attempt to find a common interpretation, wherever possible.
The requirement to interpret the treaty “in the light of its object and purpose” requires that parties should look for an interpretation acceptable to both Contracting States and examine the meaning of the terms in the other partner’s jurisdiction.
The Indian Courts normally follow a literal approach on treaty interpretations, as in domestic tax law. Nonetheless, a decision of the Andhra Pradesh High Court in 1983 did provide for a more liberal treaty interpretation.
Two decisions in the 1990s took an even more liberal viewpoint in favour of taxpayers. The Indian Courts held that under the India-Malaysia tax treaty, the term “may be” was meant not only to give the source country the option to tax, but also to deprive the residence country its right to tax. As a result, “may be” was interpreted as “shall only be” and the taxpayer was granted tax exemption rather than tax credit under the treaty.
The judgments ignored the OECD Commentary as irrelevant in the concerned legal cases. These decisions were confirmed by the Indian Supreme Court in May 2004 in a similar case of CIT v P.V.A.L. Kulandagan Chettiar.
A purposive decision was given in a 1998 Tax Tribunal case. It held that a retroactive amendment of the treaty could not be enforced under the principle of promissory estoppel. Here, a change in the India-Germany tax treaty provisions levied tax on certain royalties. The payments were exempt under the previous treaty.
The new protocol was made effective from a date earlier than the date of notification and entry into force. The Tribunal maintained that a retroactive operation of a treaty could not be applied to impair an existing treaty benefit by an executive action.
No retrospective effect can be given to a particular term of the protocol, unless the protocol itself authorizes it. A change in treaty provisions with adverse effect can only be prospective.
India is not a party to the VCLT but generally follows the VCLT rules as codification of customary international law. In a landmark decision in 2003, the Indian Supreme Court held that treaties should be interpreted liberally to implement the true intentions of the parties. Despite this view, the Court took a literal view of the India-Mauritius treaty. It stated that its duty was to decide what the law was and apply it and not to make it.
The United Kingdom Courts have usually adopted a literal approach to domestic tax legislation and avoided a purposive interpretation. Each word is given its natural meaning, and no account is taken of any extrinsic material. The judge is bound to follow the statute on tax law, and ignore the legislative intention or equity considerations.
The purposive approach or liberal interpretation is used under the “mischief rule” only if the result is absurd. Before this rule can be applied, the legislation must be ambiguous, or misleading. In such cases, one may look at the intention of Parliament to determine what mischief the law was intending to prevent.
However, the UK Courts have taken a broad approach on treaty interpretations and used preparatory materials as an interpretation aid in many cases. They have applied the maxim “ut res magis valeat quam pereat” (so that the thing has validity rather than perishes) to give effect to the underlying treaty provisions.
For example, the judge in the Stag-line case mentioned “the language of the rules should be construed on broad principles of general acceptation”. A similar view was also expressed in another UK case, where the judge stated that conventions are apt to be more loosely worded than Acts of Parliament.
In Fothergill v Monarch Airlines Ltd, Lord Diplock said:
“The language of an international convention has not been chosen by an English Parliamentary draftsman. It is neither couched in the conventional English legislative idiom, nor designed to be construed exclusively by English judges. It is addressed to a much wider and more varied judicial audience than an act of Parliament that deals purely with domestic law. It should be interpreted unconstrained by technical rules of English law or by English legal precedent, but on broad principles of general acceptation”.
The Fothergill case involved the UK Carriage by Air Act, 1961. The Court held that “a strict literal approach to interpretation is not appropriate in construing legislation which gives effect to or incorporates an international treaty”.
In case of ambiguity, “it may be possible to resolve the ambiguity by giving a purposive construction to the Convention, looking at it as a whole by reference to its language as set out in the relevant legislative instrument”.
The judges agreed that Courts may use the legislative history, the “travaux preparatoires”, the international case laws and the writings of jurists for interpretation of treaties. However, in their view, they should be used only as aids.
They are not a substitute for the terms of a treaty and their use by the Courts is not mandatory, but discretionary. The Court also approved of the use of parallel judicial decisions in other countries. They mentioned, “The decision of a superior court, or the opinion of a court of cassation, will carry great weight”.
In the Commerzbank case, the UK Court also concluded that a strictly literal approach may be inconsistent with interpreting an international treaty and accepted the rules under the Vienna Convention. The treaty interpretation should look at the “clear meaning” in good faith, unconstrained by the domestic law. Supplementary means of interpretation may be used if the results are ambiguous, but in a discretionary, non-mandatory manner.
The OECD Commentary, travaux preparatoires and foreign Court decisions on tax treaties have persuasive value only. Finally, “the primary necessity of giving effect to the plain terms of a treaty or construing words according to the general and ordinary meaning or their natural significance are to be the starting point or prima facie guide and cannot be allowed to obstruct the essential quest in the application of treaties, namely, the search for the real intention of the Contracting parties in using the language employed by them”.
In Memec pic v IRC, the Court of Appeal followed a similar approach. It held that a literal interpretation will be “inconsistent with the purposes of the provisions or treaty in question”. Such interpretation should address a wider judicial audience in both Contracting States.
The United States signed the VCLT in 1970. Although it has not ratified it yet, it accepts its principles under customary international law. The Courts usually adopt a liberal interpretation to give effect to the apparent intentions of the contracting parties and the purpose of the treaty.
They also look at extra-textual materials such as legislative history in the Senate and Congress proceedings and the US Treasury reports, to implement congressional intent. This approach is arguably against the VCLT (or customary international law) since they are unilateral material.