Commentaries on OECD/UN Model Conventions and their importance - International Taxation - Income Tax

Commentaries on OECD/UN Model Conventions and their importance There are two model conventions OECD Model Convention and the UN Model Convention. The OECD Model was framed by the members from the developed countries. It gives importance to residence based taxation. UN Model Convention represents a compromise between the developing and developed countries. UN Model focusses on source based taxation. The OECD or UN Model Convention provides template to the tax administrations for negotiating the tax treaties. There are commentaries annexed to the Model Convention which helps in interpreting the model conventions. The OECD Model Commentaries represent the views of the Members of OECD from different countries. The UN Model Commentaries represent the views of the Group of Experts from different countries who represent in their individual capacity. Therefore, commentaries are one of the important rules of interpretation of tax treaties. Views expressed in the commentaries carry great authority. However, the same are not binding on the countries even where the countries are signatories to the Model Convention. This is since the actual treaties may be different from the model convention. Where Contracting States adopt the text of the Article as per OECD Model convention or UN Model Convention without any change, reliance can be placed on the Model Commentaries for interpreting the tax treaties. In the Azadi Bachao Andolan case, the Supreme Court has referred to the OECD convention while interpreting terms used in DTAA. OECD Model Commentary has been widely used in interpretation of tax treaties. The Commentary on the OECD MC states that: the Commentaries have been cited in the published decisions of the courts of the great majority of Member countries. In many decisions, the Commentaries have been extensively quoted and analysed, and have frequently played a key role in the judge s deliberations. Phillip Baker regards the OECD Commentaries as an aid to tax treaty interpretation in several countries. In US v. Al Burbank Co. Ltd. the US Second Circuit Court of Appeal referred to the Commentaries as an aid to interpretation . In CIT v. Vishakhapatnam Port Trust s case, the Andhra Pradesh High Court observed that the OECD provided its own commentaries on the technical expressions and the clauses in the Model Convention. Lord Radcliffe in Ostime v. Australian Mutual Provident Society (1960) AC 459, 480; 39 ITR 210, 219 (HL), has described the language employed in these agreements as the international tax language. OECD has framed a model convention to guide countries to draft DTAAs. In the Azadi Bachao Andolan case, the Supreme Court has made reference to the OECD convention while interpreting terms used in DTAA. Both UN and OECD Model Commentaries are a great help in interpretation of tax treaties. Their importance in interpretation of tax treaties can hardly be over emphasized. [Credit Lyonnais v. DCIT (2005) 94 ITD 401 (Mum)] Model Commentaries give the authoritative interpretation of the provisions of DTAAs. [Sonata Information Technology Ltd. v. ACIT (2006) 103 ITD 324 (Bang.)] When the definition of royalties is seen in all the DTAAs that we are concerned with, it is found that royalties is defined in a manner either identical with or similar to the definition contained in Article 12 of the OECD Model Tax Convention. This being the case, the OECD Commentary on the provisions of the OECD Model Tax Convention then becomes relevant. [Engineering Analysis Centre of Excellence Private Limited [TS-106-SC-2021] UN Commentary reproduces significant part of the OECD Model Commentary but adopts a different approach in certain aspects since some articles in the UN Model Convention also differ from the OECD Model or the UN Committee of Experts felt that the interpretation in the OECD Commentary is not suitable in the context of developing countries. The UN Commentary is also an important aid to interpret treaties, especially those modelled on the UN Model.