Nature
Adv LLM thesis
submitted by
Catarina Nascimento Jordani
in fulfilment of the requirements of the
'Advanced Master of Laws in International Tax Law'
degree at the University of Amsterdam
supervised by
PERSONAL STATEMENT
Regarding the Adv LLM Thesis submitted to satisfy the requirements of the 'Advanced Master of Laws in International Tax Law' degree:
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Table of Contents
Table of Contents ... III
List of Abbreviations used ... IV
Executive Summary ... V
Main Findings ... VI
1.
Introduction ... 1
2.
Article 9(1) of the OECD and UN Model Conventions ... 1
2.1. Background ... 2
2.2. Scope 4 2.2.1. How should undefined terms be interpreted? ... 4
2.2.1.1. Does the context require a different interpretation? ... 5
3.
Can states deviate from the arm’s length principle? ... 9
3.1. The OECD’s Model Convention Commentary and Transfer Pricing Guidelines ... 9
3.1.1. Treaties concluded by OECD member countries ... 15
3.2. UN’s Model Convention Commentary and Practical Manual on Transfer Pricing for Developing Countries ... 16
3.2.1. Treaties concluded by non-OECD members ... 19
3.3. Case law 20
4.
Observations and Conclusions ... 21
Bibliography ... 23
List of Abbreviations used
AL Arm’s Length
ALP Arm’s Length Principle
Art., Arts. Article, Articles
C-, T- Court Case Number
OECD Organisation for Economic Cooperation and Development OECD Model OECD Model Convention
OECD TPG OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations
TP Transfer Pricing
UN United Nations
Executive Summary
This thesis discusses the scope and nature of article 9(1) of the OECD and UN Model Conventions. After a brief analysis of the provision’s historical development and how its undefined terms should be interpreted, this contribution focuses on whether article 9(1) should be considered as restrictive or illustrative. In this sense, the thesis discusses OECD and UN documents in order to make considerations for treaties concluded by OECD member countries as well as by states that are not part of the organization, and, lastly, analyses a few selected decisions.
Main Findings
Analysing the historical development behind of what now constitutes article 9(1), it is possible to conclude that the introduction of such provision in model conventions was influenced by domestic transfer pricing legislation. The Draft Model Convention on the Allocation of Profits (1933) is considered to be the first model convention with a provision dealing with the income attribution among associated enterprises in a similar manner to the way is currently done by article 9(1) of the OECD and UN Model Conventions.
The changes in the wording of article 9(1) of the OECD Model Convention (1963) when compared with the previous League of Nations’ Draft do not represent a change in interpretation, according to clarifications of the Fiscal Committee. The provision, which has not changed since its debut in the OECD Model Convention, has the same wording in the UN Model Convention. The analysis of OECD documents and scholarship leads to the conclusion that the undefined terms of article 9(1), and consequently its personal and objective scope, should be interpreted according to the domestic law of the contracting state applying the treaty. In respect of article 9(1)’s nature, this contribution discusses if the provision should be interpreted as restrictive or illustrative. In this sense, the author analyses OECD and UN documents and concludes that, despite the contradicting evidence in the OECD Commentary, a provision such as article 9(1) in a treaty concluded by an OECD member should be interpreted as restrictive. However, if the treaty has an article which, as article 1(3), guarantees the taxing rights of the country when it comes to adjusting the profits of its residents, then the corresponding article 9(1) has to be considered as illustrative.
Although different considerations should be made in respect of treaties concluded by UN members which are not part of the OECD, the conclusion, after analysing the pertinent documents, is the same. Therefore, article 9(1) should be interpreted in a restrictive manner. Nevertheless, a provision like article 1(3) of the UN Model Convention (2017), which does not exempt article 9(1) from the rule that a treaty does not restrict a state’s right to tax its own residents, leads to a different result. This is especially true considering that non-OECD members cannot be considered as committed to follow the non-OECD Transfer Pricing Guidelines. Lastly, aiming to better comprehend how the article is interpreted in practice, the author discusses a few selected decisions. Even though the number of case law considering article 9(1) as restrictive is significant, all the examined decisions that concerned treaties with a saving clause concluded for the non-prohibition of adjustments that do not comply with the arm’s length standard.
The thesis concludes that a restrictive interpretation of article 9(1) is the best way to achieve its purpose of preventing economic double taxation. This, together with evidence given by the OECD and UN documents, confirms that the provision should be seen as restricting the contracting states’ taxing rights. Nonetheless, the adoption of a saving clause like article 1(3) of the OECD and UN Model Conventions brings a distinct perspective and, despite the continuous support of the arm’s length standard by both organizations, assures countries’ rights to tax its own residents without limitations.
1. Introduction
Transactions between independent parties take place, in principle, on normal open market commercial terms. A standalone company usually only accepts to do business with another if the conditions are in accordance with the market’s reality. However, associated enterprises, due to their unique relationship, may be more flexible when transacting with each other. Companies which are part of a group are normally willing to agree with terms that, despite not being advantageous to them as a single entity, are better for the conglomerate as a whole. In this sense, by having more control over the transactions’ conditions, associated enterprises are able to shift profits to the entity located in the country with the lower tax rate.
Seeking the prevention of abusive profit shifting, countries have been enacting transfer pricing legislation since the beginning of the 20th century. The author briefly analyses how this influenced the adoption of
similar provisions in tax treaties as well as in model conventions, eventually leading to article 9(1) of the OECD and UN Model Conventions (section 2.1). In order to assess the provision’s scope and in light of the principal sources of interpretation, this thesis discusses how its undefined terms should be interpreted (section 2.2), and then focusses on the main question regarding article 9(1)’s nature which is whether it restricts a contracting state’s right to tax its own residents.
Thus, this contribution addresses if article 9(1) should be interpreted as obliging the contracting states to comply with the arm’s length principle when adjusting the profits of its residents or if it just provides a non-binding statement of the principle and a framework for the adjustment of profits. In this sense, the author analyses if the provision should be interpreted as restrictive, prohibiting deviations from the arm’s length standard, or as merely illustrative or permissive, by allowing adjustments based on countries’ domestic law regardless of its compliance with the standard.
The considerations are made regarding OECD documents, such as the OECD’s Model Convention Commentary and Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations1,
which lead to conclusions concerning the interpretation of a provision identical to article 9(1) in treaties concluded by OECD member countries (section 3.1). The author then examines sources pertinent to the interpretation of a treaty concluded by an UN state which is not part of the OECD (section 3.2). Lastly, the thesis briefly discusses a few selected decisions, in which treaties’ provisions like article 9(1) were interpreted (section 3.3).
2. Article 9(1) of the OECD and UN Model Conventions
Article 9 of the OECD Model Convention has remained unaltered since its introduction. However, whereas the article’s first paragraph was adopted in the OECD Model Convention (1963), its second paragraph was added only in 19772. As for the UN Model Convention, provisions with the same wording
as both paragraphs of the OECD Model Convention’s article 9 were present in the first UN Model Convention published in 19803.
As further examined in section 2.1, the history behind what now constitutes article 9(1) of the OECD
1 OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017). Hereinafter
“OECD Transfer Pricing Guidelines”.
2 OECD, Income and Capital Model Convention (1977). See also Brian D Lepard, ‘Is the United State Obligated to
Drive on the Right? A Multidisciplinary Inquiry into the Normative Authority of Contemporary International Law Using the Arm’s Length Standard as a Case Study’, 10 Duke Journal of Comparative & International Law 43 (1999), pp.43-190, at p.133.
Model Convention involves the development of transfer pricing rules in countries’ legislations and the introduction of similar provisions in tax treaties and in the League of Nations’ first drafts.
2.1. Background
Contemplating what can be considered as the first model conventions, a provision that resembles the income allocation rule of article 9 was present in the 1927 League of Nations’ Draft. However, it was removed in the following year and the version published in 1928, despite stating that each contracting state was entitled to tax the portion of the income generated in its own territory, did not address the income allocation issue, which was left to the competent authorities to reach an arrangement on. In 1930, the League of Nations’ Fiscal Committee requested a survey of the domestic rules on income allocation of a number of countries, which was done by Mitchell B. Carroll, resulting in the report entitled Taxation of Foreign and National Enterprise. Carroll’s report later served as basis4 for the Draft Model
Convention on the Allocation of Profits (1933)5, which is considered to be the first model convention with
a provision dealing with the income attribution among associated enterprises in a similar manner to the way is currently done by article 9(1)6 of the OECD and UN Model Conventions.
The Draft Model Convention on the Allocation of Profits (1933)’s article 5 resembles article IV7 of the tax
treaty between France and the United States signed in 1932. The provision was introduced in the mentioned tax treaty as a result of France’s concern about artificial profit shifting from its jurisdiction to the United States and it was based on the principles of Section 45 of the US Revenue Act of 19288.
Thus, it is possible to identify the rationale behind the arm’s length principle in the United States’ provisions which were enacted in the beginning of the 20th century and aimed at preventing abusive
cross-border profit shifting9. Therefore, the introduction of such provisions in model conventions may
have been inspired by the United States’ regulations. In this sense, the wording of article 5 in the 1933’s Draft Convention on the Allocation of Business Income10 was kept unchanged in its 1935 revision and
influenced the protocols of both the Mexico Model11 in 1943 and the London Model in 194612, which
served as basis for the UN Model Convention (1981) and the OECD Model Convention (1963), respectively.
4 Jens Wittendorff, ‘The Transactional Ghost of Article 9(1) of the OECD Model’, 63 Bulletin for International Taxation 107 (2009), pp.107-130, at p.108.
5 See Fiscal Committee of the League of Nations, Report to the Council on the Work of the Fourth Session of the Committee (1933).
6 See Wittendorff, ‘The Transactional Ghost of Article 9(1) of the OECD Model’ (n 5), at p.108.
7 Despite being signed in 1932, the tax treaty between the United States and France was negotiated in 1930 and
Mitchell B. Carroll was one of the American representatives. Furthermore, this treaty was the first one to include a provision dealing with the allocation of income among associated enterprises and served as basis for many other tax treaties concluded afterwards, including between European countries. See Jens Wittendorff, 'The OECD', Transfer Pricing and the Arm’s Length Principle in International Tax Law (Alphen aan den Rijn: Kluwer Law International, 2010), pp. 83-248, at p.93 and p.94.
8 Wittendorff, ‘The Transactional Ghost of Article 9(1) of the OECD Model’ (n 5), at p.108. 9 Wittendorff, ‘The Transactional Ghost of Article 9(1) of the OECD Model’ (n 5), at p.108.
10 There was a modification in the article’s numbers, but the language remained the same. See Fiscal Committee
of the League of Nations, Report to the Council on the Work of the Fifth Session of the Committee (1935).
11 League of Nations, Model Bilateral Conventions for the Prevention of International Double Taxation and Fiscal Evasion (1943). As a result of the war, participation in the conferences held in Mexico City to discuss a new
model was limited to representatives from the Americas. Therefore, due to the greater representation of capital-importing countries, the new model agreed allocated more taxing rights to source countries, especially when compared to the 1928 Model. Therefore, the Mexico Model later became the basis for the UN Model Convention.
See Wittendorff, ‘The OECD’ (n 8), at p.95.
12 See Wittendorff, ‘The OECD’ (n 8), at p.95. After the second world war, the Fiscal Committee held a meeting in
London to draw a new model. Thus, the London Model was more limiting of the source state’s taxing rights than the Mexico Model. See Fiscal Committee of the League of Nations, Report on the Work of the Tenth Session of
However, despite its resemblance with article VII13 of the London Model, article 9 of the OECD Model
Convention (1963) has a different wording. While the former uses the word “shall”, the latter adopted the term “may”. Furthermore, “dominant” was removed and “control” and “direct or indirect” were introduced. Even though this could reveal that the OECD meant to modify the way the provision should be interpreted, the Fiscal Committee clarified its intention of not making any substantive changes to the provision14.
Since 1963, the only modification that was made to article 9 of the OECD Model was the introduction of its second paragraph in 197715. However, the OECD Commentary on article 9, which still is considered
small when compared to other articles’ commentaries, grew over the years. Furthermore, in 1979, the OECD released a Transfer Pricing Report which was followed by the OECD Transfer Pricing Guidelines in 1995.
Besides its role in the introduction of such a provision in the first model conventions, the United States’ weight in the development of the arm’s length principle as an international standard is also brought to light by the resemblance of some OECD documents to the United States’ legislation. For instance, the OECD Transfer Pricing Guidelines and the IRC’s Section 482 regulations reach many of the same conclusions regarding comparable problems. As a matter of fact, the influence is better perceived in this document than in the OECD Commentary, since in the latter member states can make reservations and observations, whereas in the former this is not possible.
In this sense, the OECD Transfer Pricing Guidelines (1995) and its predecessor, the OECD Transfer Pricing Report (1979), seem to be based on the 1968 and 1994 versions of the IRC’s Section 482 regulations, which is the successor of Section 4516. The exportation of the United States’ regulations to
OECD members as well as to non-OECD countries was part of its tax policy to generate an international consensus regarding transfer pricing rules17. Even when there were doubts regarding the arm’s length
principle in its domestic environment, the country decided to maintain its support, as it considered that would be troublesome to reach a new consensus in the international arena about a new approach18. 13 Article VII stated: “When an enterprise of one contracting State has a dominant participation in the management
or capital of an enterprise of another contracting State, or when both enterprises are owned or controlled by the same interests, and, as the result of such situation, there exist in their commercial or financial relations conditions different from those which would have existed between independent enterprises, any item of profit or loss which should normally have appeared in the accounts of one enterprise, but which has been, in this manner, diverted to the other enterprise, shall be entered in the accounts of such former enterprise”.
14 Wittendorff, ‘The Transactional Ghost of Article 9(1) of the OECD Model’ (n 5), at p.109. See also OECD Fiscal
Committee, The Elimination of Double Taxation, Third Report (1960), para. 18: “The rules proposed by the Fiscal Committee in these Articles are not an innovation. Most of the existing double taxation agreements contain solutions based on the Mexico and London Model Conventions of the League of Nations, and are thus to some extent uniform. The Fiscal Committee considered that the principles underlying those solutions are still valid. It has, therefore, readopted them, formulating them as clearly as possible and defining their practical application on a basis which is acceptable to all Member countries. The Fiscal Committee has not entered in detail into all the problems which can arise when an enterprise in one country makes profits in another, or attempted to draw up precise rules for each individual case. Indeed, this would not have been possible in the relatively restricted scope of an Article in a Convention, in view of the very many forms that international business assumes nowadays. Moreover, the settlement of any special cases which may arise should not give rise to serious difficulties when satisfactory general directives have been established and agreed by all States concerned”.
15 OECD, Income and Capital Model Convention (n 2).
16 Eduardo Baistrocchi, ‘Article 9: Associated Enterprises - Global Tax Treaty Commentaries’ (2019), at p.14. See also Wittendorff, ‘The Transactional Ghost of Article 9(1) of the OECD Model’ (n 5), at p.122.
17 Baistrocchi (n 17), at p.14 and 15.
18 Lepard (n 2), at p.79: “In the United States, a 1981 report prepared by the General Accounting Office (GAO)
disputed the 1979 OECD Report’s categorical rejection of formulary methods. It acknowledged, however, that formulary apportionment would be incompatible with the OECD Models and recommended that the United
In respect of the UN Model Convention, its article 9(1) always had the same wording as OECD Model’s. The UN Commentary makes references to parts of the OECD Commentary and to the OECD Transfer Pricing Guidelines. However, as further explored in section 3.1.2, the organization also expresses some of its members’ concerns and, as a result of that, published the Practical Manual on Transfer Pricing for Developing Countries.
2.2. Scope
Article 9(1)19 of the OECD and UN Model Conventions applies to commercial and financial relations
between associated enterprises with conditions which differ from those which would be made between independent enterprises.
Therefore, article 9(1)’s personal scope is limited to associated enterprises. According to the wording adopted, associated enterprises can be considered as configured when an enterprise participates directly or indirectly in the participation in the capital, management or control of other enterprise or when the same persons perform the before mentioned participation in two other enterprises. The object scope of the provision regards commercial and financial relations with conditions which differ from those which would be made between independent enterprises.
However, many of the terms used are not defined in the Model Conventions. Thus, in order to fully understand article 9(1)’s scope, it is necessary to comprehend how those undefined terms should be interpreted.
2.2.1. How should undefined terms be interpreted?
Article 3(2) of the OECD Model Convention (2017)20 establishes that any undefined term should have
the meaning that it has under the law of the contracting state applying the convention unless context otherwise requires or the competent authorities agree to a different meaning under the mutual agreement procedure (MAP). In contrast, article 3(2) of the UN Model Convention (2017)21 does not
States not adopt formulary apportionment unilaterally, but instead educate other states about its benefits. (…) During the mid-1980s, the U.S. Congress expressed renewed concern about transfer pricing abuses. In 1986, Congress noted that “[m]any observers have questioned the effectiveness of the ‘arm’s length’ approach of the regulations under section. (…) In response to a congressional request for “a comprehensive study of intercompany pricing rules,” the Treasury Department issued the 1988 White Paper. (…) the 1988 White Paper concluded: ‘(…) It is equally clear as a policy matter that, in the interest of avoiding extreme positions by other jurisdictions and minimizing the incidence of disputes over primary taxing jurisdiction in international transactions, the United States should continue to adhere to the arm’s length standard’”.
19 Article 9(1) states: “Where
a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or
b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,
and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”.
20 OECD, Model Tax Convention on Income and on Capital (2017), art. 3(2) establishes that: “As regards the
application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires or the competent authorities agree to a different meaning pursuant to the provisions of Article 25, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State”. Hereinafter “OECD Model”.
21 United Nations, Model Double Taxation Convention between Developed and Developing Countries (2017), art.
3(2) establishes that: “As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the
foresee the application of a different meaning, derived from an agreement between the competent authorities, as one of the exceptions to the interpretation according to the domestic law of the applying state. Nevertheless, for the purposes of this paper, the following considerations are made under the assumption that there is no agreement between the competent authorities regarding the meaning of article 9’s undefined terms.
2.2.1.1. Does the context require a different interpretation?
Apart from the situation in which the competent authorities agree to a common interpretation, a term should only have an autonomous meaning if the context requires the non-application of the domestic law’s definition22. The hierarchy established determines that any term not defined in the treaty should
first be assessed under the context and then, if the context does not require a certain meaning, be interpreted according to the domestic law of the contracting state which is applying the treaty.
Since the term “context” is not defined in the OECD Model, it is worth noticing that paragraph 12 of the OECD Commentary states:
“The context is determined in particular by the intention of the Contracting States when signing the Convention as well as the meaning given to the term in question in the legislation of the other Contracting State (an implicit reference to the principle of reciprocity on which the Convention is based). The wording of the Article therefore allows the competent authorities some leeway.”
However, this paragraph has been the subject of criticism as the reference to the meaning given to the analysed term in the legislation of the other contracting state can create paradoxical results23. This is
exemplified by a situation in which a state (State A), whose domestic law provides a term with a different meaning than the one given by another state (State B)’s legislation, adopts State B’s meaning while State B uses State A’s definition.
Consequently, it has been argued that the OECD Commentary does not provide much guidance for the understanding of the term “context” in article 3(2). In this sense, article 31 of the Vienna Convention on the Law of Treaties24 establishes that, for the interpretation of a treaty, its text, along with any agreement
and instrument connected with the conclusion of the treaty and accepted by both parties as an instrument related to the treaty, shall compose the context. Nonetheless, regarding the interpretation process, article 31 also states that “a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”. Therefore, the ordinary meaning of the text of the treaty is the starting point for the
applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State”. Hereinafter referred to as “UN Model”.
22 John F Avery Jones, ‘Treaty Interpretation - Global Tax Treaty Commentaries’ (2019), at p.2. 23 Wittendorff, ‘The OECD’ (n 8), at p.133.
24 Unites Nations, Vienna Convention on the Law of Treaties (1969), art. 31:
“1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) Any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty;
(b) Any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
(a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) Any relevant rules of international law applicable in the relations between the parties. 4. A special meaning shall be given to a term if it is established that the parties so intended.”
interpretation process, but the terms and individual provisions should also be interpreted in view of the object and purpose of the treaty. Thus, a term’s context is not only the provision in which appears, but the rest of the treaty as well25.
Once concluding a treaty, the parties usually have the intention of eliminating double taxation. In this sense, most articles aim at preventing juridical double taxation, which generally happens when the same income is taxed twice in the hands of the same taxpayer. However, although there is no definition of the concept of economic double taxation in the OECD and UN Commentaries as there is for judicial double taxation26, it is possible to affirm that, unlike other provisions, article 9 deals with the economic type27
given that its second paragraph provides relief for situations in which different countries’ taxes are levied on the same income in the hands of different persons28.
Therefore, even though generally the object of a tax treaty is to prevent judicial double taxation, the contracting states’ intention when adopting article 9 may differ from states’ habitual purpose when signing treaties. Additionally, it must be considered that, besides the elimination of double taxation, the preamble of the current Model Convention also mentions the aim of not creating opportunities for tax avoidance and evasion. Thus, one might wonder the weight that this post-BEPS addition to the preamble has when analysing the purpose and intention of the treaty partners when introducing article 9.
Nevertheless, tax treaties do not create taxing rights, which are provided by countries’ domestic law. Therefore, without a provision in the state’s legislation permitting certain measure, i.e. the taxation of a specific income, a state could not take action even if the treaty allowed. Consequently, in the absence of a domestic provision allowing the adjustment of a resident company’s profits, article 9(1) itself does not permit it. In contrast, when this article is not present, but transfer pricing rules exist in the local context, the country is free to increase the tax on its own residents provided that it respects the non-discrimination rule of article 2429. Thus, the author agrees with the majority position that article 9’s main
objective is the elimination of economic double taxation30. Furthermore, considering paragraph 7 of the
OECD Transfer Pricing Guidelines’ preface, Article 9’s secondary purpose is to achieve an equitable inter-nation allocation of taxing rights between the contracting states31.
When it comes to the undefined terms of article 9, the OECD Model and Commentary provide little guidance about whether the context of the treaty requires an interpretation disconnected from the definition given by the contracting states’ legislation. However, the reference32 to situations in which
there is disagreement regarding the realised primary adjustment suggests the recognition by the OECD
25 Wittendorff, ‘The OECD’ (n 8), at p.115 and 116.
26 OECD, Model Tax Convention on Income and on Capital (n 21), para. 3 of the Commentary on art. 23; United
Nations, Model Double Taxation Convention between Developed and Developing Countries (n 22), para. 14 of the Commentary on article 23.
27 However, it has been stated that not all types of economic double taxation are dealt with by article 9. In this sense,
four examples which do not fall under the scope of the provision are: “(1) different object qualification, where income is qualified differently according to the domestic laws of the contracting states; (2) different subjective qualification where, for tax purposes, an enterprise qualifies as a separate entity in one state and as a transparent entity in another state; (3) chain taxation of a company’s profits both at the level of the company and of dividends at the level of the shareholder; and (4) the absence of harmonization between two states of the rules for the calculation of income, whereby income is taxable in one state and the related expenditure in the other state”. See Wittendorff, ‘The OECD’ (n 8), at p.149 and 151.
28 Georg Kofler, ‘Article 9: Associated Enterprises’, Klaus Vogel on Double Taxation Conventions (Alphen aan den
Rijn: Kluwer Law International, 2015), accessed 24 May 2020, pp. 577–704, at p.4.
29 Kofler (n 29), at p.20.
30 Wittendorff, ‘The Transactional Ghost of Article 9(1) of the OECD Model’ (n 5), at p.109. 31 Wittendorff, ‘The OECD’ (n 8), at p.148.
32 OECD, Model Tax Convention on Income and on Capital (n 21), para. 6 on the Commentary on art. 9 establishes
that the contracting states are not obliged to provide a corresponding adjustment. In this sense, the interpretation given by the country that made the primary adjustment does not bind the other state.
that the interpretation of article 9’s undefined terms is made according to the domestic law of each treaty partner.
Moreover, the OECD Transfer Pricing Guidelines clarifies that differences in domestic law may result in an initial lack of consensus between the contracting states regarding the appropriateness of the primary adjustment and, therefore, can lead to the application of article 25. Therefore, the fact that the OECD indicates that conflicting definitions in each treaty partner’s legislation can cause one of the states to believe the primary adjustment made by the other is not justified contributes to the conclusion that undefined terms under article 9(1) should be interpreted according to the domestic law of each state when applying the treaty.
Paragraph 4.31 of the OECD Transfer Pricing Guidelines further contributes to this line of reasoning by stating that:
“(…) Where a particular bilateral treaty does not contain an arbitration provision similar to paragraph 5 of Article 25, the competent authorities are not obliged to reach an agreement to resolve their dispute; paragraph 2 of Article 25 requires only that the competent authorities “endeavour ... to resolve the case by mutual agreement”. The competent authorities may be unable to come to an agreement because of conflicting domestic laws or restrictions imposed by domestic law on the tax administration’s power of compromise. (…)”.
Furthermore, when it comes to the personal scope of the provision, despite being the title of the article, the term “associated enterprises”33 is not mentioned in article 9(1)’s text. Nonetheless, the wording of
the article’s first paragraph leads to the conclusion that its personal scope is configured where an enterprise participates directly or indirectly in the capital, management or control of another or where the same persons perform the beforementioned participation in two other enterprises.
In this sense, the interpretation of “control” can be decisive for the application of the provision, especially considering that it is not defined in the Model Conventions and it is one of the terms whose definition can vary most among countries. In this sense, the OECD and UN Commentaries34 also do not provide
for a meaning of “control” nor does the OECD Transfer Pricing Guidelines, which only makes reference to the conditions given by article 935. However, the Explanatory Notes on Section 2 of the Draft
Legislation in the OECD Secretariat's paper on “Transfer Pricing Legislation – A Suggested Approach” provides some evidence. The paper mentions the different ways in which countries interpret the term and makes reference to states’ domestic laws which consider “de facto” control and those who only cover “de jure” situations. Consequently, it contributes to the view that the term should be interpreted according to the meaning given by the domestic law of the contracting states36.
33 Wittendorff, ‘The OECD’ (n 8), para. 21 of the Commentary on article 9 states “this Article deals with adjustments
to profits that may be made for tax purposes where transactions have been entered into between associated enterprises (parent and subsidiary companies and companies under common control) on other than arm’s length terms”. However, although the wording between brackets can be taken as an indication of context, the terms actually used in article 9(1) must be the ones interpreted.
34 It has been argued that, in the case of terms that are not defined in the treaty but that the OECD Commentary
provides a definition for, the OECD document should take priority over the domestic tax law meaning. See Wittendorff, ‘The OECD’ (n 8), at p.127.
35 OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (n 1), para. 11 of the
preface states: “(…) For purposes of these Guidelines, an “associated enterprise” is an enterprise that satisfies the conditions set forth in Article 9, sub-paragraphs 1a) and 1b) of the OECD Model Tax Convention. (…)”.
36 Moreover, the fact that different subjective qualifications are not considered to be dealt with by article 9 also
contributes to this view. One example of such difference in qualification is where, for tax purposes, an enterprise qualifies as a separate entity in one state and as a transparent entity in another state. Thus, as this would never happen if the countries were not allowed to interpret the terms according to its legislations, one must conclude that the domestic law meaning should be the one used by the contracting states. See Wittendorff, ‘The OECD’
In this sense, most scholars agree that the personal and objective qualifications should be made according to the legislation of the contracting state applying the treaty37. Therefore, if the terms are to
be interpreted according to the domestic law, the country making the primary adjustment could interpret the terms according to its tax law and the state making the corresponding adjustment could also refer to its own legislation. Thus, it is foreseeable that the meaning under the domestic law of distinct states might be different which may lead to unrelieved economic double taxation, unless the treaty establishes prevalence of the definition given by one of the states, which the OECD and UN Model Conventions do not. In this sense, one might wonder if the mechanism of article 23 could offer a solution for such situation. However, while article 23 is aimed at relieving juridical double taxation, since it specifically refers to the same resident having its income taxed in both contracting states, the primary adjustment governed by article 9 can lead to economic double taxation, which happens when the same income is taxed in the hands of two different taxpayers. Hence, article 23 is not applicable to double taxation which may result from the application of article 9(1).
Furthermore, whereas the OECD Commentary on article 23 clarifies that the residence state must give relief even if its classification of the income is different from the source state’s classification, as long as taxation by the source State is in accordance with provisions of the Convention, such statement is not present in the Commentary on article 9(2). The OECD Commentary explains that the contracting states do not have to provide a corresponding adjustment if they believe that the primary adjustment is not “justified both in principle and by the amount”38. In this sense, the term “principle” is understood as
concerning qualifications for tax purposes39.
Thus, as article 9’s terms should be interpreted according to the legislation of the state applying the treaty and the contracting states are not bound by each other’s qualifications, the double taxation that can arise from distinct definitions is not addressed by the arm’s length principle, since it results from the lack of international harmonization of domestic laws40.
Nonetheless, although a domestic law meaning could increase the risk for unrelieved double taxation, article 25(5) of the OECD Model and article 25(5)B of the UN Model appear to provide a solution41.
Moreover, outside the ambit of MAP, the risk also seems to be somewhat relieved. This is due to case law which understands that the existence of divergent interpretations by the relevant countries should be considered in the application of the treaty. Therefore, if one of the contracting states does not oppose the interpretation given by the other, then the domestic law’s meaning is permitted42. In this context, for
(n 8), at p. 149 and p.151. See also Jens Wittendorff, ‘Article 9(1) of the OECD Model’, Transfer Pricing and the
Arm’s Length Principle in International Tax Law (Alphen aan den Rijn: Kluwer Law International, 2010), pp.
314-317, at p.314.
37 Kofler (n 29), at p.69. See also Jens Wittendorff, ‘The Object of Art. 9(1) of the OECD Model Convention:
Commercial or Financial Relations’, 17 International Transfer Pricing Journal 200 (2010), pp. 200-212, at p.204.
38 OECD, Model Tax Convention on Income and on Capital (n 21), para. 6 on the Commentary on article 9. 39 Scholarship understands that the expression “in principle” refers to qualifications for tax purposes. See
Wittendorff, ‘The Object of Art. 9(1) of the OECD Model Convention: Commercial or Financial Relations’ (n 38), p 204.
40 Wittendorff, ‘The Object of Art. 9(1) of the OECD Model Convention: Commercial or Financial Relations’ (n 38),
at p.204.
41 Kofler (n 29), at p.64. However, there has been argued that only a treaty meaning would assure the elimination
of the economic double taxation. Consequently, an autonomous treaty definition has been suggested. For more on this, see Ramon SJ Dwarkasing, ‘The Concept of Associated Enterprises’, 41 Intertax 412 (2013), pp. 412-429, at p.428. Nonetheless, based on the Commentary, as well as reservations and observations, it seems that, even though the elimination of double taxation is the main objective of the treaty, it is not the states’ intention to let go of its sovereignty in such a length way, committing themselves with the elimination of double taxation even in cases that does not constitute juridical double taxation. Thus, states might want to maintain the right to rely on their domestic law regarding what is understood as control, for example.
instance, Denmark’s Eastern High Court has considered relevant that the French tax authorities, being aware of it, did not challenge the Danish interpretation of the Demark-France tax treaty43.
3. Can states deviate from the arm’s length principle?
As demonstrated above, this contribution supports the position that the undefined terms of article 9(1) should have the meaning provided in the domestic law of the contracting state applying the treaty. In this sense, personal and objective qualifications should be made according to countries’ legislation. However, it is important to assess if article 9(1) restricts a state’s rights to adjust the profits of its residents.
In view of the above, the author analyses if article 9(1) prohibits a primary adjustment that, despite being allowed by a state’s domestic law, would not be considered in accordance with the arm’s length standard and, therefore, if provision’s nature should be considered as restrictive or illustrative.
3.1. The OECD’s Model Convention Commentary and Transfer Pricing Guidelines
The OECD Commentary’s legal status in the interpretation of tax treaties is not clear. For OECD member states, there is a recommendation by the Council that the OECD Commentary should be followed in the application and interpretation of concluded tax treaties that were based on the Model44. However, the
recommendations of the Council are not binding for OECD members45 and paragraph 29 of the
Introduction to the OECD Model clarifies that, unlike the conventions signed by countries, the Model and its Commentary are not legally binding international instruments. Nonetheless, the majority position is that the OECD Commentary falls under the category of primary means of interpretation as follows from the Vienna Convention’s article 3146. Therefore, it is important to take it into consideration when
analysing how tax treaties’ provisions should be interpreted, especially when they are identical to the articles of the OECD Model.
The OECD Commentary on article 9 always was and still is significantly small, in particular when compared with the Commentary on other articles. The OECD Model Convention Commentary (1963) stated that the article “seems to call for very little comment”. Nevertheless, considering the later developments regarding transfer pricing as well as the elaboration of the OECD Transfer Pricing Guidelines, this particular statement has been considered an underestimate47. Notwithstanding, there
are some statements in the current OECD Commentary that give some guidance as to article 9(1)’s nature as restrictive or merely illustrative or permissive.
Nonetheless, before assessing the OECD Commentary, consideration must be made to article 9(1)’s wording itself. In this sense, it is worth noticing that the provision uses “may” and not “shall”, which is
that the terms of the Danish treaties with the United States and Canada could be interpreted according to the domestic tax rules since there was not information to show that the other contracting states disagreed with the Danish interpretation.
43 See Wittendorff, ‘The OECD’ (n 8), at p.126.
44 Recommendation of the Council C(97)195/FINAL (1977). See Wittendorff, ‘The OECD’ (n 8), footnote 248:
“Revisions of the OECD Model and Commentaries were previously accompanies by a separate recommendations of the Council. This has not been the case since 1977, when the words ‘as modified from time to time’ were added to the recommendation. The intention has this been to make it possible for the Committee on Fiscal Affairs to make changed to the Commentaries from time to time without having to resort to the Council for a new recommendation. The 2000 revision was only adopted by the Committee on Fiscal Affairs, while the revisions in 2003, 2005, and 2008 were adopted by the Council, but without drawing up new recommendations”.
45 Wittendorff, ‘The OECD’ (n 8), at p.123. See also OECD, Rules of Procedure of the Organization (1992), art.
18(b).
46 Wittendorff, ‘The OECD’ (n 8), at p.124. 47 See Wittendorff, ‘The OECD’ (n 8), at p.97.
present in many of the Model Conventions’ articles. In the other instances in which the word “may” is used, there is usually an understanding that the treaty allows states to act in a specific way, but do not oblige them or restrict its taxing rights48. Therefore, the country is free whether to tax or not, which is
done according to its domestic law. In this sense, the wording49 of the article may indicate that, in case
of transactions between associated enterprises with different conditions than those imposed between independent companies, the provision does not require, but merely permits a state to adjust the profits of its residents. Thus, it could be argued that article 9(1), by not saying anything about a country’s right to tax in excess of the arm’s length profits, does not prohibit the contracting state to make an adjustment that leads to such taxation.
However, while it is true that most provisions that adopt “may” are permissive, there are some provisions that appear to have a permissive and restrictive nature simultaneously. As example is article 7, which allows the non-residence state to tax the company’s business profits and, subsequently, restricts this taxing right to the amount that is attributable to the permanent establishment. Therefore, even though article 9(1) deals with two residence states, it also determines, similarly to how article 7 does, the limit to which a contracting state’s domestic law may impose tax on a non-resident given that it establishes how much should be attributed to each one of the associated enterprises and, consequently, taxed by the corresponding country.
In this sense, paragraph 72 of the OECD Commentary on article 1 provides that article 9(1) “authorizes the application of domestic rules”, but only “in the circumstances defined by that Article”. Accordingly, it is arguable that “may” should not be interpreted in the way the term usually is and neither as “shall”, but as “may only” since, although it does not oblige states to make primary adjustments, article 9(1) restricts the taxing rights to the circumstances allowed by it. Besides the mentioned statement50, other parts of
the OECD Commentary also contribute to this reading and, therefore, to the restrictive interpretation. Examples are paragraphs 74 and 79 on the Commentary on article 24 which also state that domestic rules are permit as long as they are compatible with article 9(1).
Moreover, as tax treaties do not give taxing rights, but merely restrict those given by the contracting states’ domestic law, an illustrative interpretation of its wording would make article 9(1) superfluous51
and deprive it of any normative value. A provision that does not represent any restriction would not have a purpose within the context of a tax treaty as it would merely confirm the general principle that countries have the right to tax their residents according to their legislation as long as the provisions in article 24 are observed52.
Conversely, one might argue that article 9(1) serves a purpose when read in conjunction with articles 9(2) and 24(4). However, these two provisions were only introduced in 1977 while article 9(1) was already present in the OECD Model Convention (1963). Consequently, this line of reasoning would mean that article 9(1) was superfluous when adopted and remained that way for many years, which would be strange. Furthermore, regarding article 9(2), the OECD Commentary states that the absence of article 9(2) should not preclude the economic double taxation resulting from the application of the
48 Brian J Arnold, ‘The Relationship Between Restrictions on the Deduction of Interest Under Canadian Law and
Canadian Tax Treaties’, 67 Canadian Tax Journal 1051 (2019), pp.1051-1076, at p.1073.
49 Jacques Sasseville, ‘A Tax Treaty Perspective: Special Issues’, Tax Treaties and Domestic Law (Amsterdam:
IBFD, 2006), accessed 6 May 2020, p.13, at p.9.
50 OECD, Model Tax Convention on Income and on Capital (n 21), para. 72 of the Commentary on article 1. When
referring to the application of domestic anti-abuse rules, it expressly says that article 9 “authorises” the application of domestic rules in certain circumstances.
51 Georg Kofler and Isabel Verlinden, ‘Unlimited Adjustments: Some Reflections on Transfer Pricing, General
Anti-Avoidance and Controlled Foreign Company Rules, and the “Saving Clause”’, 74 Bulletin for International
Taxation 1 (2020), accessed 9 April 2020, at p.8. 52 Wittendorff, ‘The OECD’ (n 8), at p.147.
primary adjustment to fall within the scope of the mutual procedure agreement. Considering this, it is unlikely that article 9(1)’s solely purpose would be its relationship with articles 9(2) and 24(4)53.
Nonetheless, the OECD Commentary provides contradicting evidence regarding how article 9 should be interpreted. For instance, paragraph 4 of the OECD Commentary on article 9 recognizes that “a number of countries interpret the article in such a way that it by no means bars the adjustment of profits under national law under conditions that differ from those of the article”54. Thus, by recognizing the
existence of different interpretations and not declaring one of the them as the correct one, the OECD does not seem to reject the interpretation that the adjustment can be made also according to other standards defined by the contracting state’s domestic law. In this sense, the statement suggests that the OECD does not have, nor it gives, a “correct” interpretation, but, instead, accepts that more than one is possible.
Moreover, paragraph 50 of the OECD Thin Capitalization Report (1986)55 expresses that there are
different opinions about whether the article should be held as “restrictive” or merely “illustrative” in its nature and that a group of countries is of the position that article 9(1) permits the adjustment of profits up to the arm’s length amount but “does not go beyond that to prohibit the taxation of a higher amount in appropriate circumstances”. Hence, it has been argued that article 9 should not be interpreted as restricting a state’s right to tax its residents, but merely providing a non-binding statement of the arm’s length principle and a framework for the adjustment of profits56.
In this sense, OECD Commentary’s observations and reservations57 show that there are countries that
reserve the right not to include article 9(2) in their tax treaties, which may indicate their belief that states are allowed to make non-arm’s length adjustments, to which they do not want to be bound. This is also arguable regarding countries that are willing to introduce article 9(2) with the condition that corresponding adjustments will be made only if they consider the primary adjustment as justified or solely in bona fide cases. Consequently, these positions indicate that, in some countries’ perspective, article 9’s anti-abuse character surpasses its allocation nature58.
Furthermore, these reservations also seem to suggest a different opinion from the one manifested in the OECD Commentary in which “the absence of article 9(2) does not preclude the economic double taxation resulting from the application of the primary adjustment to fall within the scope of the mutual procedure agreement”59. However, as stated by the OECD, this view expressed in the OECD
Commentary is shared by most of its members. Thus, despite the fact that the absence of a country’s observation should not necessarily indicate that it concurs with the interpretation provided in the OECD Commentary60 and although the reservations indicate that there is no unanimous consensus61 regarding
the arm’s length principle among OECD member states, the majority opinion appears to be in favour of its application under article 9.
Moreover, even though the OECD recognizes different views, in paragraph 2 of the OECD Commentary
53 Kofler and Verlinden (n 52), at p.7.
54 OECD, Model Tax Convention on Income and on Capital (n 21), para. 4 of the Commentary on article 9. 55 OECD, Thin Capitalisation Report (1986).
56 Arnold (n 49), at p.1072.
57 Czech Republic, Italy, Australia, Hungary and Slovenia made reservations while the United States made an
observation.
58 Otto Marres, ‘Interest Deduction Limitations: When To Apply Articles 9 and 24(4) of the OECD Model’, 56
European Taxation 1 (2016), pp. 1-14, at p.3.
59 OECD, Model Tax Convention on Income and on Capital (n 21), para. 11 on the Commentary on article 25. 60 Wittendorff, ‘The OECD’ (n 8), at p.126; See also Guglielmo Maisto, ‘The Observations on the OECD
Commentaries in the Interpretation of Tax Treaties’, 59 Bulletin for International Fiscal Documentation 14 (2005), pp.14-19.
on article 9, the organization states:
“(…) the taxation authorities of a Contracting State may, for the purpose of calculating tax liabilities of associated enterprises, re-write the accounts of the enterprises if, as a result of the special relations between the enterprises, the accounts do not show the true taxable profits arising in that State. It is evidently appropriate that adjustment should be sanctioned in such circumstances. The provisions of this paragraph apply only if special conditions have been made or imposed between the two enterprises. No re-writing of the accounts of associated enterprises is authorised if the transactions between such enterprises have taken place on normal open market commercial terms (on an arm’s length basis).” (emphasis added).
In this sense, the last part of the paragraph clearly provides that adjustments are only permitted when the associated enterprises’ transactions did not occur on normal open market commercial terms. More importantly for interpretation purposes, however, is the part between brackets in which the paragraph clarifies what “open market commercial terms” would mean in this specific case. Therefore, adjustments are restricted to those situations in which the transactions did not take place on an arm’s length basis. Consequently, this statement supports the view that article 9(1) only allows a country to adjust the profits of an enterprise until the arm’s length amount is reached.
Furthermore, the OECD Commentary establishes that the second paragraph of article 9 requires contracting states to make corresponding adjustments only when they find the primary adjustment “justified (…) by the amount”62. In this sense, it could be argued that an illustrative interpretation could
lead to economic double taxation which would not be relieved. If one assumes that article 9(1) does not restrict a country’s right to tax its residents, then a contracting state is free to make primary adjustments in consonance with its domestic law even when those would not be considered in conformity with the arm’s length standard. Accordingly, since treaty partners are not obliged to make corresponding adjustments if they do not consider the primary adjustment as justified, then where the amount adjusted went beyond the arm’s length price, the corresponding adjustment would not be made, and the income would remain taxed twice. Thus, if article 9(1) does not provide any restriction, the appropriate tax base in each jurisdiction would not necessarily be achieved and economic double taxation could “persist systematically within the framework of article 9”63, which would be significantly undesirable considering
tax treaties’ main objective of eliminating double taxation and, in particular, article 9’s principal purpose of preventing the economic kind.
Another factor that must be considered and that could provide evidence on how article 9 should be interpreted is its relationship with thin capitalisation rules. The OECD Thin Capitalisation Report (1986) stated that, under the view that article 9 should be considered as merely illustrative, the provision should be interpreted as not prohibiting the application of thin capitalisation rules that include “more than the arm’s length profit in the taxable profit of the domestic enterprise”64. Following this rationale, if article 9
were to be interpreted as restrictive, thin capitalisation rules would be limited to the arm’s length amount. In this sense, the OECD BEPS Project Action 4 Final Report65 recommends interest deduction rules that
apply regardless of whom is the recipient, covering payments made to associated as well as to independent enterprises. Accordingly, deduction would be limited to a percentage of the enterprise’s earnings before interest, taxes, depreciation and amortisation independently of the relationship between the two persons and even if the transactions complied with the arm’s length standard. Thus, as one
62 OECD, Model Tax Convention on Income and on Capital (n 21), para. 6 on the Commentary on article 9. 63 Kofler and Verlinden (n 52), at p.9.
64 OECD, Thin Capitalisation Report (n 56), para. 50.
65 OECD, OECD/G20 Base Erosion and Profit Shifting Project Limiting Base Erosion Involving Interest Deductions and Other Financial Payments Action 4: 2015 Final Report (2015).
might argue that a restrictive interpretation of article 9 would prohibit the operation of a fixed ratio rule that applies regardless of the fact that the associated enterprises’ transactions are within the arm’s length standard66, these recommendations could be considered as an indication that the provision
should be interpreted as illustrative.
However, the OECD Commentary, reflecting the conclusions of the OECD Thin Capitalisation Report, indicates67 that thin capitalisation rules are contrary to article 9(1) to the extent that they result in the
taxation of more than the arm’s length profits of an enterprise. Therefore, paragraph 3(c) of the OECD Commentary on article 9, alongside paragraph 49 and 5068 of the OECD Thin Capitalisation Report,
provide significant evidence to support the restrictive interpretation. Nonetheless, these statements should not be interpreted as meaning that domestic rules that limit interest deductions to a percentage of earnings before interest, taxes, depreciation, and amortisation are prohibited by article 9(1).
Since the OECD Commentary does not define thin capitalisation rules, this subject has been object of debate among scholars, which, without questioning the restrictive character of article 9(1), sustained that fixed debt-to-ratio provisions would not fall within the scope of the article if they are not aimed at assimilating the profits to an arm’s length amount69. Consequently, if the measure is not directed at
non-arm’s length situations, then it is not restricted by article 9(1), even under the perspective that the provision should be interpreted as restricting the contracting states’ rights to tax its own residents. Thus, a thin capitalisation rule that applies also to transactions between third parties could not be considered a profit allocation rule, but, instead, a tax base computation rule that does not fall under the scope of article 9 and it is only restricted by a tax treaty’s non-discrimination provisions70.
Consequently, the argument under which a restrictive interpretation would prevent the application of domestic rules that limit interest deductions to a percentage of EBITDA does not seem to sustain itself. The application of such rules is not based on whether the transaction’s conditions are different than those between independent enterprises. Like other disallowances of deductions, in respect of meals or entertainment expenses, they do not result in a reduction of taxable profits in the other contracting state or “a claim to a larger share of ‘profits’ from transactions with the other associated enterprise”71.
Therefore, article 9(1) of the OECD Model does not prohibits every kind of deduction restriction regarding arm’s length payments since it only applies to thin capitalisation provisions if their aim is “to assimilate the profits of the borrower to an amount corresponding to the profits which would have accrued in an arm’s length situation”72. Thus, if the rule’s purpose is not to reach an arm’s length profit,
which is the case of those recommended by the OECD in Action 473, then it is not restricted by the
article74.
Hence, a restrictive article 9(1) would also not prevent the application of CFC rules since such
66 Arnold (n 49), at p.1074.
67 OECD, Model Tax Convention on Income and on Capital (n 21), para. 3(c) on the Commentary on article 9. 68 Despite acknowledging that some states consider article 9(1) as illustrative, para. 50 concludes that “The
Committee generally agreed that, in principle, the application of rules designed to deal with thin capitalisation ought not normally to increase the taxable profits of the relevant domestic enterprise to any amount greater than the arm's length profit, that this principle should be followed in applying existing tax treaties (…)”. Para. 3 of the OECD Commentary on article 9 reflects the conclusions reached on the OECD Thin Capitalisation Report.
69 Marres (n 59), at p.4. 70 Marres (n 59), at p.4.
71 Kofler and Verlinden (n 52), at p.10.
72 OECD, Model Tax Convention on Income and on Capital (n 21), para. 3 of the Commentary on article 9. 73 Since Action 4’s recommendations apply regardless of who is the recipient of the payment. Furthermore, even
though a non-arm’s length dealing may have a high debt/equity ratio as one of its indicators, assimilation of the profits to an amount corresponding an arm’s length profit does not seem to be the aim of rules that only determine the non-deductibility through a standard debt/equity ratio test. See Marres (n 59), at p.5.
