Extrinsic Aids to Interpretation of a Tax Treaty - International Taxation - Income Tax

Extrinsic Aids to Interpretation of a Tax Treaty A wide range of extrinsic material is permitted to be used in interpretation of tax treaties- Interpretative Protocols, Resolutions and Committee Reports, setting out agreed interpretations; A subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; Subsequent conduct of the state parties, as evidence of the intention of the parties and their conception of the treaty; Parallel treaties, in pari materia (i.e., relating to the same subject matter), in case of doubt.- If the language used in two tax treaties (say treaties: X and Y) are same and one treaty is more elaborative or clear in its meaning (say treaty X) can one rely on the interpretation/explanations provided in a treaty X while applying provisions of a treaty Y? Though the interpretation or explanations in treaty X would not be binding while interpreting the treaty Y, however, if the language is similar between the two treaties, one can make a reference to treaty X for understanding the intention of the Contracting parties. The views of the Indian Judiciary are, however, not consistent in this respect. There are contradictory judgments by Indian courts/Tribunal in this regard. International Articles/Essays/reports Cahiers published by International Fiscal Association (IFA), Netherlands Preamble - Preamble to a tax treaty could guide in interpretation of a tax treaty. BEPS Action Plan 6 recommendation and Multi-lateral Instrument (MLI), the new text has been added to the Preamble to reflect that the treaties are not intended for creating opportunities for double-non taxation and treaty shopping arrangements. Mutual Agreement Procedure [MAP] - MAP helps to interpret any ambiguous term/provision through bilateral negotiations. MAP is more authentic than other aids as officials of both countries are in possession of materials/documents exchanged at the time of signing the tax treaty which would clearly indicate the object or purpose of a particular provision. Successful MAPs also have persuasive value in case of subsequent applications. Technical Explanation on US MC It highlights differences and provides basic explanation of US treaty policy for all interested parties. In the Indian context, it may be noted that a technical explanation for the India-US tax treaty has been provided which goes a long way in enabling a person to interpret the tax treaty provisions. Protocol- Protocol is like a supplement to the treaty. In many treaties, in order to put certain matters beyond doubt, there is a protocol annexed at the end of the treaty, which clarifies borderline issues. A protocol is an integral part of a tax treaty and has the same binding force as the main clauses therein. Protocol to India France treaty contains the Most Favoured Nation(MFN) Clause. Thus, one must refer to protocol before arriving at any final conclusion in respect of any tax treaty provision. Under MFN clause a country agrees to extend the benefits to the residents of the other country, which it had (first country) promised to the residents of third country. It tries to avoid discrimination between residents of different countries. Example: Suppose as perIndia-Japan treaty resident of Japan liable to pay tax in India on Fees for Technical Services derived from India @10%. And Subsequently India entered into DTAA with Russia as per India-Russia DTAA, resident of Russia liable to pay tax in India on FTS derived from India @5%. Now, in this example suppose India-Japan treaty contain MFN clause then Resident of Japan liable to pay tax in India only @5%. CBDT clarifies in Circular No. 3/2022 - that the applicability of the MFN clause and benefit of the lower rate or restricted scope of source taxation rights in relation to certain items of income (such as dividend, interest income, royalties, Fees for technical services, etc) provided in India s DTAA with the third states will be available to the first (OECD) state only when all the following conditions are met; The second treaty (with the third State) is entered into after the signature/ Entry into Force (depending upon the language of the MFN clause) of the treaty between India and the first State; The second treaty is entered into between India and a State which is a member f the OECD at the time of signing the treaty with it; India limits its taxing rights in the second treaty in relation to rate or scope of taxation in respect of the relevant items of income; and A separate notification has been issued by India, importing the benefits of the second treaty into the treaty with the first State, as required by the provisions of Section 90(1) of the Income Tax Act, 1961. If all the conditions enumerated in Paragraph 5(i) to (iv) are satisfied, then the lower rate or restricted scope in the treaty with the third State is imported into the treaty with an OECD State having MFN clause from the date as per the provisions of the MFN clause in the DTAA, after following the due procedure under the Indian tax law.