Basic Principles of Interpretation of law for interpreting a Treaty - International Taxation - Income Tax

Basic Principles of Interpretation of law for interpreting a Treaty Principles or rules of interpretation of a tax treaty would be relevant only where terms or words used in treaties are ambiguous, vague or are such that different meanings are possible. Prior to the Vienna Convention, treaties were interpreted according to the customary international law. Some of the important principles of Customary International law in interpretation of tax treaties are as follows: Golden Rule - Objective Interpretation : - Ideally any term or word should be interpreted keeping its objective or ordinary or literal meaning in mind. The term has to be interpreted contextually. However, if the grammatical interpretation would result in an absurdity, or in marked inconsistency, it should not be adopted. Subjective Interpretation : - Treaty are to be interpreted according to the common intention of the contracting parties at the time the treaty was concluded. Purposive Interpretation Objects and Purposive method:- Treaty is to be interpreted so as to facilitate the attainment of the aims and objectives of the Treaty. Principle objective of tax treaties To protect tax payers against double taxation (whether direct or indirect) To eliminate double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax avoidance or evasion (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States) To encourage free flow of international trade and investment To encourage transfer of technology To prevent discrimination between tax payers To provide a reasonable element of legal and fiscal certainty to investors and traders To arrive at an acceptable basis to share tax revenues between two States To improve the co-operation between taxing authorities in carrying out their duties The Principles of Effectiveness: - A treaty should be interpreted in a manner to have effect rather than make it void. Principle of Contemporanea Expositio: A treaty s terms are normally to be interpreted on the basis of their meaning at the time the treaty was concluded. However, this is not a Universal Principle. Liberal Construction: - It is a general principle of construction with respect to treaties that they shall be liberally construed so as to carry out the apparent intention of the parties. Treated as a whole Integrated Approach:- A treaty should be construed as a whole and effect should be given to each word which would be construed in the same manner wherever it occurs. Any provision should not be interpreted in isolation; rather the entire treaty should be read as a whole to arrive at its object and purpose. Reasonableness and consistency:- Treaties should be given an interpretation in which the reasonable meaning of words and phrases is preferred, and in which a consistent meaning is given to different portions of the instrument. In accordance with the principles of consistency, treaties should be interpreted in the light of existing international law. An important aspect to be noted regarding the rules of interpretation is that they are not rules of law and are not to be applied like the rules enacted by the legislature in an Interpretation Act.