Treaty violations could be either the result of a treaty breach or a fundamental change of circumstances. A treaty breach could arise when the State legislates in breach of a treaty provision, and applies its law to actual tax situations. Such legislation will be treated as an override only if the treaty partner disapproves of it unequivocally.

It then violates the rule “pacta sunt servanda” (i.e. must be performed in good faith) under VCLT Article 26. The Contracting States have a general obligation under the international law to seek a negotiated solution to treaty violations.

There is little that a State can do to stop the other State if it unilaterally passes a domestic law to override the tax treaty. The steps it can take are limited. It can terminate or suspend either part (breached or un-breached provisions) or the whole of the treaty, and demand renegotiation.

It may also be possible to demand compulsory independent adjudication and penalties through an international forum. It may threaten or impose retaliatory measures. Some treaties and treaty provisions, which are conditional upon reciprocity, may cease to have effect.


Extenuating or “fundamental change of circumstances” can lead to treaty termination in certain circumstances, but it does not justify a treaty override (VCLT Article 62). The fundamental change must not be the result of a treaty breach by the party invoking it.

Similarly, an “impossibility of performance may not be invoked by a party as a ground for terminating, withdrawing from, or suspending the operation of a treaty if the impossibility is the result of a breach by that party either of an obligation under the treaty or of any other international obligation owed to any other party to the treaty” (VCLT Article 61(2)).

Thus, in the case of a treaty violation either Contracting State could:

a. Make an official protest and invoke the mutual agreement procedures under OECD MC Article 25; or


b. Retaliate with a similar domestic override; or

c. Appeal to an international forum, e.g. International Court of Justice (VCLT Article 66); or

d. Terminate or suspend the treaty as a “material breach” (but cannot sue) under customary international law and practice (VCLT Article 60).

The VCLT provides for the termination and suspension of international treaties, if there is a treaty breach. The breach must be “material”, as defined in VCLT Article 60(3), i.e. a “violation of a provision essential to the accomplishment of the object or purpose of the treaty”.


It should relate to a provision that was material in inducing a party to enter into the treaty. Depending on the gravity of the “material” breach, it could lead to partial or full suspension, or the termination of the treaty. Very often treaty overrides do not lead to full termination, but part suspension by a Contracting party.

VCLT provides the procedures to be followed for treaty termination under the international law. The treaty remains in effect between the two States until it is terminated or suspended under VCLT Article 60.

A treaty also remains in force under the domestic law until it is terminated or overridden under the domestic legislation. Therefore, if the injured State does not terminate or suspend the treaty, it continues to apply.