THE ROLES OF PREAMBLE
IN
THE INTERPRETATION OF TAX TREATY
ON
INCOME AND CAPITAL
A Master Thesis, submitted by
ZUL-HASYMI MOHAMAD (Student No.: 11130415)
UvA-IBFD-LLM
University of Amsterdam
Supervisor:
Professor Dr. Otto Marres
Faculteit-der-Rechtsgeleerdheid
2 ABSTRACT
The study attempted to investigate the roles of the Preamble in the interpretation of tax treaty on Income and Capital. In addition, the study will also address the importance of the preamble and the effect of applying the preamble in the tax treaty, whether the preamble will have any influence and relevant to the outcome of the provision in the tax treaty and case law in the court of justice.
About 31 cases from the court all over the world were selected for the research which have an element of preamble has been discussed by the judge and the court decision. Moreover, almost 15 tax treaties which have the preamble clause inserted were analyses from year 1930 until now.
To accomplish the objective and answers all the research questions set up in the beginning of this study, all the analysis was done based on the argument and opinion of the expert in the field of statutory interpretation and tax treaty interpretation where their research and dissertation were referred together with their literature which enlighten the discussion on this subject.
At the conclusion, the writer come out with the answer to all the research questions and clarify the roles of Preamble in the tax treaty on Income and Capital.
3 ACKNOWLEDGEMENT
I would like to express my sincere gratitude to Dr. Joanna Wheeler, the Program Director for Advance Masters International Tax Law from International Bureau of Fiscal Documentation (IBFD) and University of Amsterdam (UvA) for allowing me to undertake this research.
I am grateful to my supervisor Prof. Dr. Otto Marres from the Faculteit-der-Rechtsgeleerdheid, University of Amsterdam for his continuous guidance, advice, effords and invertible suggestion throughout the research.
My utmost gratitude goes to Mr. Andreas Perdelwitz, Mr. Carlos Gutierrez Puerto, Miss Anneke Labots of IBFD – LLM team, without their continous support this study would not be possible. I would like to thank Miss Katharina Beberwiel and IBFD Library Team for helping to carry out my research.
I would also like to thank Dr. Bruno Da Silva and Miss Sanne Van De Heuval from University of Amsterdam for encouraging me to carry out this research.
I would also want to thank all my fellow friends from Advance Masters International Tax Law, Wafa Aliah, Scott Dailey, Abebe Grebhiwot, Sonia Munoz, Zhou Xionong and Virva for all their help throughout the study.
Last but not least, I would like to express my sincere appreciation to my wife and daughter for supporting me throughout this challenging period. Thank you so much for your sacrifice.
4 LIST OF ABBREVIATIONS
BEPS: Base Erosion and Profit Shifting DTC: Double Tax Convention
HMRC: Her Majesty’s Revenue and Customs
IBFD : International Bureau of Fiscal Documentation ILC: International Law Committee
OECD: Organisation for Economic and Co-operation Development UK: United Kingdom
UN: United Nation
US: United States of America UvA: University of Amsterdam
5 TABLE OF CONTENT:
Part I INTRODUCTION
Chapter 1
1.1 Introduction
1.2 Scope and Methodology of the study 1.3 Structure
Part II PREAMBLE AS THE CENTRE OF INTENTION
Chapter 2
2.1 General Criteria of Preamble:-
2.1.1 Introduction and Meaning of Preamble 2.1.2 History of Preamble
2.1.3 The Constructive and Contextual Roles of Preamble in Statutory Interpretation 2.2 Comparative Study on Preamble under Tax Treaties on Income and Capital
2.3 Whether Preamble is part of the Tax Treaties
Part III INTERPRETATION OF TAX TREATY AND THE ROLES OF THE VIENNA
CONVENTION ON THE LAW OF TREATIES Chapter 3
3.1 The Interpretation of Tax Treaties 3.1.1 General
3.2 Vienna Convention on Law of Treaties:-
3.2.1 Preamble of Vienna Convention on Law of Treaties 3.2.2 Article 31 of Vienna Convention on Law of Treaties
3.1.2.1 Article 31(1) of Vienna Convention on Law of Treaties 3.1.2.2 Article 31(2) of Vienna Convention on Law of Treaties 3.1.2.3 Article 31(3) of Vienna Convention on Law of Treaties 3.1.2.4 Article 31(4) of Vienna Convention on Law of Treaties 3.2.3 Article 32 of Vienna Convention on Law of Treaties
3.3 Reference to the Domestic Law for purpose of Interpretation 3.3.1 Article 3 (2) of the OECD Model Tax Convention
3.3.2 The link between Article 3(2) of the OECD Model Tax Convention and the Vienna Convention on Law of Treaties
6
Part IV ROLES OF PREAMBLE IN THE INTERPRETATION OF TAX TREATY ON
INCOME AND CAPITAL Chapter 4
4.1 Preamble as Projector of Desired Contracting State Policy to prevent Double Taxation and Double Non Taxation
4.2 Preamble as an aid of interpretation of other provisions in the tax treaties 4.3 Preamble as the “context” in the tax treaties
4.4 BEPS Action 6 on Preventing the Granting of Treaty Benefits in Inappropriate Circumstances
Part V SUMMARY AND CONCLUSION
Chapter 5 Summary and Conclusion
5.1 Preamble is relevant for the interpretation of treaties and statute.
5.2 The scope of application of the rules of interpretation laid down in Articles 31 and 32 of the Vienna Convention and Article 3(2) of OECD Model Tax Convention are inter-related. 5.3 Preamble have effects on the interpretation of treaties provision.
5.4 Preamble is an Anti Abuse Instrument for the Interpretation of Rules in the Tax Treaty for both Contracting State
BIBLIOGRAPHY APPENDIX
7
PART I
INTRODUCTION8 Chapter 1
1.1 Introduction
This study will examine the roles of Preamble in the interpretation of Tax Treaties on Income and Capital. People will only refer to the Preamble of the treaty as an indication on how the signatories or the lawmakers wanted the treaty to be interpreted based on its object and purpose. But, lack of understanding of the principles and rules regarding the interpretation of the Preamble and tax treaties in general emancipates several problems and confusions between the court and the taxpayers who use the treaty to claim certain benefits upon its implementation. It must be emphasized that, this study does not purport to give a detailed overview of all that has ever been said on this subject. Nor does it purport to give a detailed overview of the many decisions of courts relevant to this subject from all over the world.
The primary focus of this study is thus on the roles of the Preamble in the interpretation of tax treaty on income and capital. Where necessary, reference is made to the jurisprudence of the international courts and tribunals. This will be the basis of this study to show the importance of the Preamble of tax treaty for the purpose of the interpretation of tax treaties.
Tax Treaties are instead have a dual status, where it involves treaties between states and laws which domestic rights of taxpayers and states are at stake.1 Treaties between states are governed by the Public International Law, where the applicability and their interpretation have been codified in the 1980 Vienna Convention on the Law of Treaties – See Chapter 3. However, tax treaties are also incorporated into domestic law – which taxpayers acquiring rights and obligations vis-à-vis states. Hitherto, there has been little recognition of the roles of the Preamble in the tax treaty interpretation. Most of the discussions on the roles of the Preamble in statutory interpretation are focussing on the Preamble to the Constitution of the country. Those specializing in statutory interpretation of the Preamble have hardly focussed on tax treaties. For example, I have been unable to find a single specific reference to tax treaties in either Maxwell (1969) or Bennion (1992) or John Bell and Sir George Engle (1995) or Winckel, A. (1999).
Similarly, no one specializing in tax treaty interpretation, until recently focused, in-depth on the roles of the Preamble in the tax treaty interpretation. My reference to the work done by J. Avery –Jones
(1984) or K. Vogel (1986) or Micheal Edwardes-Ker (1994) or M. Lang (2001) or F. Engelen (2004) or M. Schilcher and P. Weninger (2008) or P. Arginelli (2015) basically indicates that there are more
research to be conducted on this topic are much welcome and needed because of the recent development of Base Erosion and Profit Shifting (BEPS) Project by the OECD and G20 Countries
1
9
and the United States of America (USA) Tax Treaty Model 2016 where they clearly insist on putting the “Preamble To The Convention” which will be the clear statement of the intention of the signatories to a tax treaty that appears in the preamble will be relevant to the interpretation and application of the provisions of that treaty.
1.2 Scope and Methodology of the study
This study will consider the interpretation of tax treaties primarily from the viewpoint of Public International Law. The main consideration of this study is to analyse and discuss the roles of Preamble in the interpretation of a tax treaty of the rules establish by the Public International Law and their application to tax treaties in general. The rules of international law embodied under the Article 31 and 32 of the Vienna Conventionon on the Law of Treaties are therefore central to the discussion of this study. Not only that, people misunderstanding and misinterpreting the Preamble of the tax treaties, but they are also misrepresenting the true “object and purpose” of the treaties which are enshrined in the Preamble of the tax treaties itself. Furthermore, the clear understanding of Articles 31 and 32 will shed the lights on more purposive approach to be taken instead of literal interpretation of tax treaties by people in practice or even the taxpayers.
The primary focus of this study is thus on the Preamble itself. In the research, the discussion will start with the nature of the Preamble in general. What is the meaning of the Preamble, history of the Preamble, the constructive and contextual roles of the Preamble in statutory interpretation and whether the preamble is part of the tax treaty. The research will also involve the discussion on the status and applicability of the Preamble in tax treaties in particular and also the Preamble recommended in BEPS Action 6 by the OECD and the G20 Countries. This entire question is pivotal to the foundation on the roles of the preamble to the tax treaties. This will also concern on rules establish by the international law governing the interpretation of statute and tax treaties. This study will be somehow new and fresh for discussion where there is no single research been done by any experts on this subject matter to date. Most of the materials are mainly on the interpretation of tax treaty in general and there is no specific study on this topic.
This study will also make some comparison to the old treaties signed by the contracting state, back from the year 1930 until now which have Preamble clause inserted inside the tax treaties. This comparable analysis will examine and reveal the roles of the Preamble and how it should be interpreted for its object and purpose of the tax treaties.
There is also Article 3 (2) under the tax treaties in undefined treaty terms where we need to refer it back to the domestic law of contracting state to determine the meaning of the related terms. This requirement is the standard qualification by international law governing the tax treaty interpretation. With this study, we will refer to the case law, domestic law of contracting state and some soft law,
10
such as the OECD and UN Model Convention Commentaries to find out the best possible option to interprete tax treaty Preamble without jeopardizing its main object and purpose of the tax treaty. There will also be a discussion to verify the relevance of the preamble. We will see the case law where there has been relevant influence of the Preamble and also a different outcome expected by the inclusion of the Preamble in the Tax Treaty as suggested by the BEPS Action 6. These analyses of the case law and tax treaty with or without the Preamble, which have a different outcome will answer the question arises whether the Preamble has any relevance at all for the interpretation and application of the tax treaty.
1.3 Structure
This study will include 4 parts including the General introduction of the study. Part I comprises the general remarks and structure of the study. On the general remarks also there is some clarification on the scope and methodology of the study and overall structure of this study.
Part II of this study will focus on the General criteria of the Preamble. This will represent the general understanding on what exactly the roles of the Preamble under the tax treaties. Several comparable analyses will be made on how the preamble is being applied on tax treaties, the meaning, the history with the constructive and contextual roles of the Preamble in statutory interpretation of the Preamble. This part also will answer the question whether Preamble is considered as part of the tax treaty. Part III will deal with the introduction of Public International Law on how the interpretation of tax treaties should be applicable. This part will focused on the interpretation of tax treaty in general and the Vienna Convention on Law of Treaties on the position of the International Law Committee on how systematically the interpretation of international agreement or treaty should be interpreted. This will give a general standard or frameworks on how the Preamble should be interpreted by the practitioners and taxpayers.
Part IV will illustrate the interpretation value of the preamble on tax treaties. The discussion will carry out positive legal analysis on how preamble plays the roles as projector of desired contracting state policy to prevent double taxation and double non taxation other than promoting income and capital activity in cross border trade and transaction. This part also will further demonstrate the roles of preamble as an aid of interpretation of other provisions in the tax treaties. Moreover, it will also crystallize the roles of preamble as the “context” in the tax treaties. The writer will also address the needs of the contracting state entering into future tax treaties to include suggested by the OECD BEPS Action 6 on preventing the granting of treaty benefits in inappropriate circumstances.
11
Part V will cover the summary and conclusion of this study where the study will also answer the entire research question given in the earlier discussion on Part I to IV on what are the roles of preamble of tax treaties and its object and purpose interpretation of the other tax treaty provision.
12
PART II
PREAMBLE AS THE CENTRE OF INTENTION AND
13 Chapter 2
2.1 General Criteria of Preamble
2.1.1 Introduction and Meaning of Preamble
In formal terms, a preamble constitutes the introduction to the constitution or treaty and usually bears
the formal heading “Preamble” or some alternative or equivalent title, 2 while in other cases it appears without a heading. The formal classification provides a simple and technical identification of a preamble. Alongside a formal classification, it is possible to identify a preamble through its content.
In substantive terms, a preamble does not require a specific location in the constitution but, rather,
specific content.3
From the practical point of view, preamble is an amendable, descriptive component of the statute, and it is generally placed after the long title and enacting words and before the substantive sections. It is the useful guide with the intention of the signatories or parliament in that it may details the mischief to which the treaty or Act is directed, explain the reason, purpose, objects or scope of the treaty or Act and details facts or values which are relevant to the treaty or Act.4
The Preamble also meant to express the intention of both parties with a clear statement on how the aim should be achieved and what is the main purpose of this treaty or Act. Under the tax treaty, preamble was used to express the objective and purpose of the treaty for the elimination of double taxation with respect to taxes on income and capital without creating opportunities for non-taxation or the reduced taxation through tax evasion or avoidance.
2.1.2 History of Preamble
The words Preamble was discovered from the Medieval Latin period, as early as 1350 to 1400 centuries.5 The Medieval Latin word “praeambulum”, which is the noun use of neuter of late Latin
2The preamble to the constitutions of Albania and Bahrain is called “Foreword.” The preamble to the
Constitution of Japan is called “Preface.”
3
The Charter of the United Nations, for example, has a formal preamble and a substantive preamble; the latter appears in chapter I of the Charter. See Hans Kelsen, The Preamble of the Charter—a Critical Analysis, 8(2) J. POL. 134 (1946).
4
Winckel, A. The Contextual Role of a Preamble in Statutory Interpretation (1999) MULR 7; (1999) 23 Melbourne see also Bennion, FAR Statutory Interpretation: A Code (2nd.ed.) 1992 p. 483. The Preamble is part of the Act A.G. v. PrinceErnest Augustus of Hanover (1957) AC 436, 467. Powell v. Kempton Park Racecourse Co. Ltd. (1899) AC 143, 184, Brett. v. Brett (1826) 3 Add 210; 162 ER 456, John Bell and Sir George Engle, Cross on Statutory Interpretation (3rd.ed.) 1995 pp. 126-7
14
word “praeambulus” which means “walking before”. On the late 14th century, the word is taken further from Old French word “preambule” which now means “preliminary”.
The idea of having the preamble in statute starts as early as 1778 when the United States of America Constitution were signed to be the first constitution to begin with the Preamble. The Preamble to the United States of America Constitution is a brief introductory statement of the Constitution's fundamental purposes and guiding principles for all the American citizens. This preamble has become the basis and important fundamental on drafting constitution for other countries.
From the analysis of a non-representative sample of fifty democratic countries revealed that most have included a formal preamble in their constitutions.6 Thirty-seven countries have a preamble which is 74 percent.7 While thirteen countries do not, which is 26 percent.8 Countries that do not have a formal preamble often include introductory articles that may be regarded, in substantive terms, as a preamble.9 A preamble is, thus, a common constitutional feature. Moreover, most of the countries that have adopted a constitution in recent years, particularly in Eastern and Central Europe, have included a preamble. This analysis shows that preamble has become significantly important in the constitution where 74 percent of countries adopt it to be part of their constitution.
2.1.3 The Constructive and Contextual Roles of Preamble in Statutory Interpretation
2.1.3.1 The Constructive Role of the Preamble
The use of preambles in legislation is like that of a recital in deed. The preamble does not normally constitute an operative part of the statute.10 Preambles are relevant to interpretation of statutes where
6
Constitution defined here as a group of binding fundamental principles characterizing a state or society on a permanent basis. Therefore, a constitution could be either a formal document or substantive legal norms a society refers to as a binding constitution. See, e.g., A.V. Dicey, Introduction to the Study of the Law of the Constitution 22 (8th ed., 1915).
7
States that have a preamble to their constitution are Andorra, Albania, Argentina, Australia, Bosnia-Herzegovina, Brazil, Bulgaria, Canada, Croatia, the Czech Republic, Estonia, France, Germany, Greece, Hong Kong, Hungary, India, Ireland, Japan, Lithuania, Macedonia, Montenegro, New Zealand, Paraguay, Poland, Portugal, Philippines, Russia, South Africa, Spain, Serbia, Slovakia, Slovenia, Switzerland, Turkey, Ukraine, and the United States. All the preambles’ phrasings were taken from the International Constitutional Law Project Information, available athttp://www.servat.unibe.ch/icl/.
8
States that do not have a formal preamble to their constitutions are Austria, Belgium, Cyprus, Denmark, Finland, Italy, Latvia, Luxembourg, the Netherlands, Norway, Romania, Singapore, and Sweden.
9
This is the case of Denmark (arts. 1–4), Italy (arts. 1–3), Norway (art. 1), Romania (art. I), and Sweden (arts. 1– 2). Therefore, it emerges that only eight of the surveyed states (16 percent) do not have a preamble to their constitution, either in a formal or a substantive sense.
10
15
there is ambiguity or difficulty in ascertaining the intention of the statute. The legal effect of preamble was set out by Tindall, C.J. in Sussex Peerag claims as follows:
“If any doubt arises, from the terms employed in the legislature, it has always been held a safe means of collecting the intention to call in aid the ground and cause in making the statute and to have recourse to the preamble which according to Chief Justice Dyser in Stowe v. Lord Zouch is to open the minds of the makers of the Act and the mischief which they intended to redress”.11
The Constructive role of a preamble in statutory interpretation relates to the effect that a preamble may have in modifying the ordinary meaning of substantive enactments in a statute. If there is an ambiguity in the text, the text may be clarified through reference to the preamble.12 If the preamble is quite clear, then it may “throw light upon” the preferred meaning. 13
As a guide to legislative intent and the object of the Act, the preamble may indicate how various ambiguous enactments may be restrained14 or enlarged15 to better reflect the intentions of Parliament. This intention may be discovered through various types of information provided in preambles, such as information about the mischief to be remedied, the motives behind the legislation, and the purposes, objects and scope of the Act. However, where this is no ambiguity, where the text is plain and clear, the preamble cannot affect the interpretation of the words, either to narrow or enlarge the meaning. But the words must be construed according to their ordinary meaning16. There is a well-known rule that “where the words of a statute are plain and clear, their meaning cannot be cut down by reference to the preamble17, Similarly, the plain and clear enactment cannot be controlled18, restrained19, restricted20, qualified21,
11
Income Tax Commissioners v. Persel (1981) AC 531 at p. 542, Commissioner of Lands v. Oniru (1961) 2 NLR 72, Chief E.J.P. Operola v. S.O.O. Opadiran& Anor. (1994) 5 NWLR (pt. 344) AC 463 at p. 382.
12
John Quick and Robert Garran, The Annotated Constitution of the Australian Commonwealth (1901) 284; Maxwell, p. On the Interpretation of Statutes (1st ed.) 1875 p. 46; The Sussex Peerage Case (1844) ll CL& Fin. 85; 8 ER 1034, 1057 (Lord Tindal CJ).
13
Mason v. Armitage (1806) 13 Ves Jun 25;33 ER 204, 208 (Lord Erskine CJ)
14Powell v. Kempton Park Rececourse Co. Ltd. (1899) AC 143, where the word “place” in the Betting Act 1853
(UK) 16 & 17 Vict, C119, was interpreted narrowly, in line with the object of the Act expressed in the preamble, so as not to prohibit the conduct of bookmakers in an open inclosure at race meetings
15
Eart of Halsbury, Laws of England, vol. 27 (1913).
16Powell v. Kempton Park Racecourse supra
17
Bowtell v. Goldsbrough, Mort & Co. Ltd. (1906) 3 CLR 444, 451 (Griffith CJ). This Statement was affirmed by Gibbs CJ in Wacando v. Commonwealth (1981) 148 CLR1, 16 see also Powell v Kempton Park Racecourse Co. Ltd. (1899) AC 143, 157 (Earl of Halsbury LC)
18
Emanuel v. Constable (1827) 3 Russ 436; 38 ER 639, 640 (Sir John Leach MR); Powell v. Kempton Park Racecourse Co. Ltd. (1897) 2 QB 242, 290 (Rigby LJ), 299 (Chitty LJ), Powell v. Kempton Park Racecourse Co. Ltd. (1899) AC 143, 193 (Lord James); Ward v. Holman (1964) 2 QB 580, 587 (Lord Parker CJ).
19Ryall v. Rowles (1749) 1 Ves.Sen 348; 27 ER 1074, 1084 (Lord Parker CB). 20Powell v. Kempton Park Racecourse Co. Ltd. Supra (Lindcey LJ).
21
16
confined22, or limited23 by a narrow preamble. Likewise, the preamble may not broaden a clear substantive section.24
2.1.3.2 The Contextual Role of the Preamble
The contextual role of a preamble in statutory interpretation relates to the manner in which, as part of the context of a whole Act, a preamble may assist in confirming the ordinary meaning of enactments, or indeed, be suggestive of alternative meanings which are consistent with the intentions of the legislature.
Where the preamble forms part of the text of the statute by being expressly incorporated into the statute or expressly declared to be part of the statute, it must be read as part of the statute.25 Where the preamble is declared by the statute to be part of the enactment, it ought to be examined in case of ambiguity.
Preambles are not normally a part of the operative section of the statute. They, however, assume a different status if they are expressly incorporated. Where the preamble to a statute is incorporated into its main body, it must be read as part of the provisions of the Act.
Maxwell on interpretation of statutes26 commented that there was now little to be said about preamble in interpretation. However the House of Lords in A.G. v. Prince Ernest Augustus of Hanover27 made
references to the preamble’s role as part of the context in statutory interpretation. The court was of the view that the Act cannot be said to be unambiguous until it is read as a whole, including the preamble if there is one28 Viscount Simonds argued that words could not be read in isolation, but “their colour and content were derived from their context”.29 He said:
“No one should profess to understand any part of a statute before he had read the whole of it. Until he has done so he is not entitled to say that it or any part of it is clear and
unambiguous”.30
22
Mason v. Armitage, Supra (Lord Erskine LC).
23
Halton v. Cove (1830) IB & Ad 538; 109 ER 887, 895 (Lord Tenterden CJ)
24
Wilson v. Knubley (1806) 7 East 128; 103 ER 49, 51-2 (Lord Ellenborough CJ).
25
Adejumo v. Military Governor, Lagos State (1971) l ALL NLR 159.
26
P. St. J. Langan, Maxwell on the Interpretation of Statutes (12th ed., 1969) p.7.
27(1957) AC 436, 461
28
Cross on Statutory Interpretation (3rded., 1995) pp. 126-7
29A.G. v. Prince Ernest Augustus of Hanover Supra, at pp. 436, 461. 30
17
In the interpretation of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) should be preferred to a Construction that would not promote that purpose or object.31 In CIC Insurance Ltd. v. Bankstown
Football Club Ltd.32 the court said:
“The modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses “context” in its widest sense to include such things as the existing state of the law and the mischief which ---one may discern the statute was intended to remedy”33
Thus, in determining the ordinary meaning of a provision, it is necessary to have regard to the purpose of the legislation and the context of the provision as well as the literal meaning of the provision. The purpose of the legislation could sometimes be discovered by an examination of the legislation as a whole.
There is no doubt that a preamble is used like the rest of the context, to help establish the ordinary meaning of the substantive words and to be a guide to the intention of the legislature. A preamble assists in identifying ambiguities in the Act where an alternative construction could better enact the intention of the Parliament.
The preamble is a key to open the minds of the makers of the Act, and the mischief’s which they intended to redress. The preamble is a good mean to find out the meaning of the statute. This is how the Preamble plays its roles under the constitution or statute.
2.2 Comparative Study on Preamble under the Tax Treaty on Income and Capital
The provision of tax treaties was developed with the prime objective of preventing double-taxation. This was reflected in the title of the convention proposed in both the 1963 Draft Double Taxation Convention on Income and Capital and the 1977 Model Double Taxation Convention on Income and capital which was:-
“Convention between (State A) and (State B) for the avoidance of double taxation with respect to taxes on income and on capital”
31
Australian Interpretation Act (1901) (C th) Section 15AA (1)
32
(1997) 187 CLR 384, 408 (Brennan C.J., Dawson, Toohey and Gummow JJ) see also Saraswati v. The Queen (1991) 172 CLR 1, 20-1 (Mc Hugh J).
18
There were no Preamble inserted to the Convention by the OECD on that period. The first preamble inserted in the Tax Treaty on Income and Capital were The Convention between The United States of America and The French Republic which was signed on 28th July 1967 which stated that:-
“The President of the French Republic and the President of the United States of America, desiring to conclude a Convention for the avoidance of double taxation of income and capital”
This is the first Preamble put under the Tax Treaty, which was later terminated by both parties on 1st January 1996. The second Preamble put under the Tax Treaty were The Convention between Malta and The Great Socialist People’s Libyan Arab Jamahiriya which were signed on 5th
October 1972 which stated that:-
“Malta and The Great Socialist People's Libyan Arab Jamahiriya, desiring to enter into a Convention with each other for the avoidance of double taxation with respect to taxes on income”
This convention was also terminated later on 1st January 2011. From both preamble, we can see that the wording was meant to suggest that this convention were signed for the avoidance of double taxation on income. From 1930 until 2016, there are 14 tax treaties signed with preamble been part of the convention.34 These lists of convention does not signify any bearing on the importance of the preamble to the convention. But, the recent trend of treaty shopping, base erosion and profit shifting activity had suggested people to put more weight to the preamble as suggested by BEPS Project by the OECD and United States of America Tax Treaty Model 2016.
The most recent example of Tax Treaty, which was signed on 12th November 2015 between Australia and Germany were very highly BEPS compliant where they adopted most of the OECD recommended treaty changes and was signed shortly after the final reports on the OECD Base Erosion and Profit Shifting (BEPS) Project were released on October 5, 2015. The preamble of the Convention between Australia and Germany stated that:-
34
France – United States Income and Capital Tax Treaty (1967), Libya - Malta Income Tax Treaty (1972), Malta – Netherland Income and Capital Tax Treaty (1977) , France – Malta Income Tax Treaty (1977), Canada – Indonesia Income Tax Treaty (1979), France – Quebec Income and Capital Tax Treaty (1987), Netherland – Norway Income Tax Treaty (1990), Germany – Norway Income Tax Treaty (1991), Korea Republic – Uzbekistan Income and Capital Tax Treaty (1998), United Arab Emirates - Uzbekistan Income and Capital Tax Treaty (2007), Switzerland – United Kingdom Tax Agreement (2011), Germany – Netherland Income Tax Treaty (2012), Hungary – Iran Income and Capital Tax Treaty (2015) and Australia – GermanyIncome Tax Treaty (2015).
19
“Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefits of residents of third states)”35
These recent tax treaty of the 21st century will marks the new chapter of the roles of the preamble to the tax treaty interpretation. This preamble will be given more weight to the interpretation and application of the provision in the tax treaty.36
2.3 Whether Preamble is part of the Tax Treaties?
There are no denials of the facts that tax treaties are part of the Public International Law.37 Treaties are governed by the Public International Law where, the applicability and their interpretation have been codified in the 1980 Vienna Convention on the Law of Treaties. According to the basic rule of interpretation of treaties in Article 31(1) of the Vienna Convention on the Law of Treaties, “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 lights of its objects and purpose”. Article 31(2), confirms that, for the purpose of this basic rule, the context of the treaty includes its preamble.38
There are many cases which had used this principle. For example, in the Bayfine UK v.
Commissioners for H M Revenue and Custom39 case, Arden LJ observed that the fact that the treaty was an international instrument made by the two Contracting State had to be borne in mind in interpreting its provisions and in particular it had to be given a purposive interpretation. The words of the preamble to the treaty made it clear that the primary purposes of the treaty were, on the one hand, to eliminate double taxation and, on the other hand, to prevent the avoidance of taxation. In seeking a purposive interpretation, both those principles had to be borne in mind. Moreover, the latter principle,
35David Watkins, Claudio Cimetta and Vik Khanna, Australia’s New Tax Treaty with Germany contains BEPS
Measures, International Tax News, April (2016).
36
OECD Base Erosion and Profit Shifting (BEPS) Project, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 Final Report (2015).
37
Micheal Edwardes-Ker, Tax Treaty Interpretation, July 1994
38The Commentary on the 1966 Draft of the Vienna Convention on the Law of Treaties notes that the
International Court of Justice “has more than once had recourse to the statement of the object and purpose of the treaty in the preamble in order to interpret a particular provision” (Draft articles on the Law of Treaties with commenteries, Report of the International Law Commission to the General Essembly, Yearbook of the International Law Commission, 1966, vol.IIp.221).
39
20
in her Ladyship’s judgment, meant that the treaty should be interpreted to avoid the grant of double relief as well as to confer relief against double taxation.
Moreover, in the case of Anson v. Commissioners for Her Majesty’s Revenue and Custom40, it was
held that The purposes of the 1975 Convention, as stated in its preamble, are “the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains”. The preamble does not indicate more precisely what is meant by double taxation: in particular, whether the Convention is restricted to “juridical double taxation”, or can also extend to “economic double taxation”. The former is usually considered to arise where two jurisdictions impose income taxes on the same person in respect of the same income. The latter is usually considered to arise where there is taxation of the same or derivative income in separate hands. It can be construed that the object and purpose of the convention enshrined under the preamble are part and parcel of the convention.
40
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PART III
INTERPRETATION OF TAX TREATY AND
22 Chapter 3
3.1 Interpretation of Tax treaty
3.1.1 General
Tax Treaties are international agreement under the Public International Law where there is no international judicial authority to interpret tax treaties. Treaty interpretation under the international law follows one or more of the following approaches41:
a) “Objective Approach” – interpretation according to the ordinary use of words of the treaty.
b) “Subjective Approach” – interpretation according to the intentions of the parties. c) “Teleological Approach” – interpretation according to the treaty’s aims and objective.
Treaty interpretation rules differ from domestic tax rules for several reasons. For example:-
a) As international treaties, tax agreement are governed by customary international law. Therefore, their interpretation is based on the rules of interpretation under Public International Law. These principles are different and interpretation under the domestic law may be misleading and unsuitable; and
b) Tax treaties specify general taxing principle to avoid double taxation, while the domestic law, which contain highly technical, legislative language relevant to the a specific jurisdiction, tax treaties are based on the mutual understanding among two or more contracting state. They must be applied by the tax authorities and the courts in each Contracting state in a uniform way that may differ from the domestic laws and practices in each state.
Thus, the treaty interpretation should be kept as free as possible from the interpretation rules under domestic law, unless specified in the treaty itself. Most countries accept the common interpretative principle under the Vienna Convention on the Law of Treaties42. This convention, and not the
41
P. Arginelli, Multilingual Tax Treaties Interpretation, Semantic Analysis and Legal Theory (IBFD 2015), Online Books IBFD
42
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domestic law of the contracting state, normally governs the interpretation of treaties under international law.43
But, there are also some discussion and opinion that the context for the purpose of the interpretation of a treaty comprises first and foremost the text of the treaty, including its preamble and annexes.
Frank Engelen is of the opinion that no further comment should be put on this issue. However, in the
course of the debate of the 769th meeting of the ILC, held on 17 July 1964, Rosenne pointed out that there is no reason to include an express reference to the instrument which is part of the treaty in the definition of “the context of the treaty”.44
Sir Humphrey Waldock was also of the opinion that there will be an element of redundancy in expressly referring to the preamble and annexes of the treaty which later resulting him to omit it from his reformulation of Article 69 of the 1964 Draft Convention of the OECD Model Tax Convention in the lights of written comments and observation received from governments.45 However, during the 870th meeting of the ILC, held on 15 June 1966, most members express their opinion favoring the restoration of the reference to the preamble and annexes of a treaty.
Rosenne also changed his position since both he46 and Castren47 pointed out that the preamble and annexes was not always an evident to actually formed part of the treaty and, therefore, considered that it was desirable to stress their importance. The consensus view was that the information contained in the preamble and annexes of a treaty has been often beneficial and useful to an interpreter, in particular when determining the treaty’s objects and purposes.
During the discussion at the 871st meeting, held on 16 June 1966, several members stressed again on the same issues. The context for the purpose of interpreting a treaty should include an express reference to the preamble and annexes of the treaty. El Erian, definitely did not agree with Sir
Humphrey Waldock that the preamble should be left out of the definition. He pointed out that
preamble frequently formed an integral part of the text, particularly on the objects and purposes of the treaty.48 In response to the question posted by Amado at the 872th meeting, held on 17 June 1966, on the use of the preamble and annexes for the purpose of treaty interpretation,49 Sir Humphrey Waldock made it clear that he had no intention to exclude preamble and annexes from the definition of the context. He explained that in the new formulation the reference to the preamble and annexes had been
43Kees van Raad, Tax Treaty Issues- Current and Future Development (IBFD European Taxation, January 1996)
– “many national courts look(ed) upon tax treaty provision as somewhat exotically clothed rules which nevertheless could be interpreted like domestic law… Interpretation follow(ed) customary international law and courts are often not well versed in this area of the law”.
44
YBILC 1964-I,p. 310, par.16.
45YBILC 1966-II, p. 101, par.25. 46
YBILC 1966-I(II), p. 186, par.22.
47YBILC 1966-I(II), p. 189, par.53. 48YBILC 1966-I(II), p. 196, par.32. 49
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dropped only because it embodied a self-evident statement, included in the 1964 text ex abundanti
cautela.50 Nevertheless, the ILC decided to make the point explicit in Article 27(2) of the 1966 Draft
Convention by restoring the reference to the preamble and annexes in the definition of the context for the purpose of interpreting the treaty.
3.2 Vienna Convention on Law of Treaties
3.2.1 Preamble of Vienna Convention on Law of Treaties
The Preamble of Vienna Convention on Law of Treaties are generally regarded as the most authoritative statement on the function of this international conventions.51 This provision provides that:-
‘The States Parties to the present Convention,
Considering the fundamental role of treaties in the history of international relations,
Recognizing the ever-increasing importance of treaties, as a source of international law and as a means of developing peaceful co-operation among nations, whatever their constitutional and social systems,
Noting that the principles of free consent and of good faith and the pacta sunt servanda rule are universally recognized,
Affirming that disputes concerning treaties, like other international disputes, should be settled by peaceful means and in conformity with the principles of justice and international law,
Recalling the determination of the peoples of the United Nations to establish conditions under which justice and respect for the obligations arising from treaties can be maintained,
Having in mind the principles of international law embodied in the Charter of the United Nations, such as the principles of the equal rights and self-determination of peoples, of the sovereign equality and independence of all States, of non-interference in the domestic affairs of States, of the prohibition of the threat or use of force and of universal respect for, and observance of, human rights and fundamental freedoms for all,
50
YBILC 1966-I(II), p. 199, par.15.
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Believing that the codification and progressive development of the law of treaties achieved in the present Convention will promote the purposes of the United Nations set forth in the Charter, namely, the maintenance of international peace and security, the development of friendly relations and the achievement of co-operation among nations,
Affirming that the rules of customary international law will continue to govern questions not regulated by the provisions of the present Convention’
This preamble provides the general guidelines on treaty interpretation and the roles of international law on treaties.
3.2.2 Article 31 of Vienna Convention on Law of Treaties
3.2.2.1 Article 31 (1) of Vienna Convention on Law of Treaties
Article 31 (1) states:”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”52
. This will be regarded as the “basic rule” for interpretation under the Vienna Convention on Law of Treaties.
This basic rule of interpretation refers to:-
a) The “ordinary” meaning of the words based on the actual words in the text.
“The interpretation should start with the natural meaning of the words in the text, as expressed in the context in which they occur. In other words, the written text is of primary importance.
The interpretation should follow the “ordinary meaning” of the words.53 Where there is a difference, the ordinary meaning that defines the terms in the lights of the object and purpose of the treaty should prevail.54
The “ordinary” meaning of terms used in the agreement is not just the everyday usage. It is the uniform legal usage or the specific legal usage employed by the Contracting State.
52
Article 31(1) of the Vienna Convention of the Law of Treaties (1969)
53K.Vogel:” …the wording of a provision defines not only the starting point for interpretation but also its limit.
Should the wording be unclear…national courts may not replace the wording of the text with supposed intentions of the Contracting parties.”(IFA Cashers Vol 78A, General Report, 1993)
54
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The meaning should relate to the entire agreement in its context, and not be based on individual provision.
The treaty terms should be given their true meaning when the treaty was concluded and not what the parties subsequently believe it to be. Identical terms should be given the same meaning”.55
b) The express intention of the parties from “the terms of the treaty in their context”
“The express intention of the parties must be ascertained from the actual treaty text. The treaty interpretation must be literal (and not purposive) language of the treaty, unless the overriding intentions of the Contracting parties are beyond doubt.”56
c) The object and purpose of the treaty
The purpose is not the same as the subjective intention of the contracting state. It refers to the goals of the treaty as reflected objectively by the treaty as a whole.57
“The object and purpose do not provide an independent method of interpretation of the individual treaty provision. The treaty’s objectives may be used only in the general interpretation of the treaty”.58
This rule does not prevent the rejection of a literal interpretation when other factors so required. The common sense or purposive meaning must be relevant to the object and purpose59.
3.2.2.2 Article 31 (2) of Vienna Convention on Law of Treaties
Article 31 (2) states:”The context for the purpose of the interpretation of a treaty shall comprise, in
addition to the text, including its preamble and annexes:
55Roy Rohatgi, Basic International Taxation, Kluver Law International (2002), Books IBFD 56
Supra
57K.Vogel, Double Taxation Convention, Introduction, m.mo.69. 58Supra
59
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a) Any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;
b) Any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.”60
“The “context” includes the entire text, preamble and annexes. It also covers additional material included in any related agreement or instrument, such as protocols, notes, letters, explanations or memorandum of understanding, which were mutually agreed upon by all treaty partners at the time treaty was concluded. However, it excludes any unilateral material such as US technical explanations and senate reports, oral statements during negotiations and explanatory notes.”61
3.2.2.3 Article 31 (3) of Vienna Convention on Law of Treaties
Article 31 (3) states:”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 establish the agreement of the parties regarding its interpretation;
c) Any relevant rules of international law applicable in the relations between the parties.”62
Other imperative elements are considered similar to the context.
3.2.2.4 Article 31 (4) of Vienna Convention on Law of Treaties
Article 31 (4) states:”A special meaning shall be given to a term if it established that the parties so
intended”
A special meaning should be used only if it is established that the parties so intended.
3.2.3 Article 32 of Vienna Convention on Law of Treaties
60
Article 31(2) of the Vienna Convention of the Law of Treaties (1969)
61
Supra
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Article 32 states:”Recourse may be had to supplementary means of interpretation, including the
preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:
a) Leaves the meaning ambiguous or obscure; or
b) Leads to a result which is manifestly absurb or unreasonable.”63
“Article 32 permits the use of other relevant materials as supplementary data for interpretation under Article 31. However, extra-textual materials are not a substitute for the study of the tax treaty itself. The material does not constitute context and may only be used to confirm, but not to contradict, or as independent support. It is not binding and can only be used as a secondary source if the plain meaning is unclear. This article also permits their use to avoid an ambiguous, obscure, absurb or unreasonable meaning under the basic rule.”64
“The OECD commentary and reports are considered as supplementary means of interpretation. Foreign case laws can be used to provide additional non-binding support on treaty interpretation. Supplementary data also include the circumstances of a treaty’s conclusion (the historical international and domestic fiscal background) and the preparatory work of the treaty or “travaux
preparatoires” (negotiating history). Moreover, they include extra-textual material, such as
international legal practise and other tax conventions, judicial decisions and legal writings. The material that only represents the reasons and goals of one Contracting party is not regarded as a supplementary means of interpretation.”65
3.3 Reference to the Domestic Law for purpose of Interpretation
3.3.1 Introduction to Article 3 (2) of the OECD Model Tax Convention
It is undeniable facts that tax treaty cannot be seen in isolation from the domestic tax law of the contracting state within its scope of application as such laws constitute the legal frameworks in which its provision must be applied and implemented. This special relationship between tax treaty and
63Article 32 of the Vienna Convention of the Law of Treaties (1969) 64Supra
65
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domestic tax laws of the contracting state is upheld by the OECD Model Tax Convention under the Article 3(2) where it clearly mentions 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 given to the term under other laws of that State.”66
Even though it is perfectly normal to refer to the domestic tax laws for the purpose of interpretation of undefined terms with a specific legal meaning under those laws, Article 3(2) is a matter of facts creating a lot of controversial and debatable outcome from the perspective of international tax literature. There are many views given by scholars with regards to the approach to this article. Some scholars emphasise the primacy of the text as the basis for an interpretation of Article 3(2), while others argue that the terms of Article 3(2) should be interpreted in such a way that any reference to the domestic laws of the contracting state for purpose of interpretation is avoided as much as possible in order to prevent that due to the inherent differences between those laws the provision of a tax treaty have a different meaning within the contracting state, with double non taxation as a result of its implementation.67
Those controversial and undecided questions are partly solved in the Commentary on Article 3(2) of the OECD Model Tax Convention, which makes the following observation regarding its implementation and application.68
“11. This paragraph provides a general rule of interpretation for terms used in the Convention but not defined therein. However the question arises which legislation must be referred to in order to determine the meaning of terms not defined in the convention, the choice being between the legislation in force when the convention was signed or that in force when the convention is being applied, i.e, when the tax is imposed. The Committee on Fiscal Affairs concluded that the latter interpretation should prevail, and in 1995 amended the Model to make this point explicit.
66
Ireland is the only OECD Member country that has entered a reservation on article 3(2). Ireland reserved the rights, when concluding new tax treaties or revising existing treaties with other OECD Member countries, to omit the words “any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State”, added to Article 3(2) by the reports entitled “The 1995 Update to the Model Tax Convention ”, which was adopted by the OECD Council on 21 September 1995.
67
F.A. Engelen, Interpretation of Tax Treaties under International Law, Online Books IBFD (2004), p.475.
68None of the OECD Member countries have made observation on the interpretation of article 3(2) as set out in
the Commentary thereon and neither has any of the non-member States that have determined their position on the OECD Model tax Convention, nor has any of those states entered reservation on Article 3(2) itself.
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12. However, paragraph 2 specifies that this applies only if the context does not require an alternative interpretation. The context is determined in particular by the intention of the contracting state 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 articles therefore allows the competent authorities some leeway.
13. Consequently, the wording of paragraph 2 provides a satisfactory balance between, on the one hand, the need to ensure the permanency of commitment entered into by states when signing a convention (since a state should not be allowed to make a convention partially inoperative by amending afterwards in its domestic law the scope of terms not defined in the convention) and, on the other hand, the need to be able to apply the convention in a convenient and practical way over time (the need to refer to outdated concepts should be avoided).
13.1 Paragraph 2 was amended in 1995 to conform its text more closely to the general and consistent understanding of member states. For purpose of paragraph 2, the meaning of any term not defined in the convention may be ascertained by reference to the meaning it has for the purpose of any relevant provision of the domestic law of a contracting state, the meaning given to that terms for purpose of the laws imposing the taxes to which the convention applies shall prevail over all others, including those given for the purpose of other tax laws. States that are able to enter into mutual agreements (under the provision of article 25 and, in particular paragraph 3 thereof) that establish the meaning of terms not defined in the convention should take those agreements into account in interpreting those terms.”69
3.3.2 The link between Article 3(2) of the OECD Model tax Convention and the Vienna Convention on Law of Treaties
Today, the unanimous view among scholars is that Article 3(2) is a lex specialis in relation to Articles 31 and 32 of Vienna Convention on Law of Treaties. This means that the interpretation of any terms not defined in a tax treaty is, in principle, govern exclusively by Article 3(2). However, the rules of interpretation under the Vienna Convention are still very much applicable in the context of tax treaties.70
69
Commentary to Article 3 of the OECD Model tax Convention
70
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Firstly, it is very much agreed that the general principle of Article 31 and 32 of Vienna Convention are an integral part of the rule of Article 3(2), where the words “unless the context otherwise requires”, reads as “unless the Vienna Convention otherwise requires”. This is supported by the literature from Mónica Sada Garibay on the topic of An Analysis of the Case Law on Article 3(2) of the OECD Model (2010) on Bulletin for International Taxation, 2011 (Volume 65), No. 8 published online on 07 July 2011.
“Article 3(2) of the OECD Model (2010) reads as follows:
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 applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.
Avery Jones et al. (1984) noted that the purpose of the tax treaties is "to provide links between two tax systems from which they necessarily take their technical vocabulary. This highlights
the significant connection of this type of international instrument with the domestic laws of the contracting parties and, consequently, justifies the reference in article 3(2) of the OECD Model (2010) to domestic law.
This provision integrates the following four elements:
(1)
"[a]s regard the application of the Convention at any time by a Contracting State...": Vogel (1997) affirms that the term refers to every decision issued by a tax authority or by a court regarding a tax question in which the tax treaty is or should be considered;
(2)
"... any term not defined therein shall... have the meaning it has at that time under the law of that State for purposes of the taxes to which the Convention applies...: this refers to the domestic law of the state that is applying the tax treaty as amended from time to time;
(3)
"... any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State": preference is given to the domestic tax law meaning over any other domestic law meaning that the undefined term might have; and
(4) "... unless the context otherwise requires...": Vogel (1997) argues that the "context" requires "otherwise" than the domestic meaning "if such reference fails to provide a clear cut solution
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to the particular tax issue... or when the particular context in which a term is used in domestic law leads to a different interpretation of the identical DTC term", but the question remains as to when the "context" requires otherwise.
In order to answer the question in (4), it is necessary to decipher the meaning of the word "context". In this regard, scholars have developed different theories, though there are broadly two main lines of reasoning.
The first identifies the "context" referred to in article 3(2) of the OECD Model (2010) with the "context" referred in article 31 of the Vienna Convention (1969). This interpretation restricts the "context" to the text and other agreements and documents made in connection with the conclusion of the tax treaty, though it is possible to expand this by considering the subsequent agreements and practice noted in article 31(3) of the Vienna Convention (1969). Such means of interpretation are referred as the internal "context".
The second considers that the "context" should have a broader meaning, including the internal "context" and the external "context". As part of this external "context", some authors include the use of other tax treaties by analogy, the decisions of courts in other countries and even the opinions of writers from different jurisdictions.Vogel (1997) considers the text of a tax treaty and any supplementary instrument, the relevant provisions of the two national legal systems, and the OECD Model and the related Commentaries to be part of the "context". In summary, the authors that support this point of view consider that elements which may be taken into account in interpreting tax treaties, or to which is possible to have recourse, should be considered to be "context". In this respect, the US Treasury in the Technical Explanation to the Canada-United States Income and Capital Tax Treaty (1980) took the view that the "context" "refers to the purpose and background of the provision in which the term appears".
A different issue relates the procedure that must be followed to apply the "contextual" meaning. Some authors consider that the "contextual" meaning must be used whenever possible, whilst others argue that the domestic law meaning must be applied as a rule and only as an exception, as the "context" may require a different interpretation.
3.3. The Commentaries on the OECD Model and the "context"
Various scholars have argued that Commentaries on the OECD Model are strong evidence that the parties to a tax treaty, particularly if both are OECD Member countries (but also
33
non-member countries if they followed the OECD Model), intend that the meaning established in the Commentaries should apply. Without a doubt, the Commentaries on the OECD Model fall within the external "context" and there are even those that argue that they fall within the "context" of the Vienna Convention (1969). In this regard, whenever the Commentaries propose a definition of an undefined term in the OECD Model, it is reasonable to consider such a meaning as the international accepted meaning, which should be taken into consideration for the purpose of interpreting the term in a tax treaty that follows the OECD Model.”71
Secondly, if the term is not defined under the tax treaty and at the same time not having a similar interpretation under the domestic tax law of the contracting state, in which the result of interpretation will be unclear and ambiguous, the term in question must be interpreted in accordance to the Article 31 and 32 of Vienna Convention. This is also true if the term is not a legal term under the domestic law. For example, in the decision dated 1 November 2000, the Hoge Raad said that the expression “any taxation” in article 24(3) of the 1986 DTC between Netherlands and Canada should be given its ordinary meaning in the context of the treaty as a whole, including its object and purpose, in accordance with Article 31(1) of Vienna Convention.72 Since the Convention does not apply to capital taxes, the Hoge Raad decided that the said expression does not comprise such taxes either.
Finally, most scholars agree that the rules of interpretation enshrined in the Vienna Convention also applied to Article 3(2) itself, which must be interpreted in good faith in accordance with the ordinary meaning to be given to its terms in their context and in the lights of the object and purpose of the treaty concerned.
Whether the preamble is “context” within the meaning of Article 3(2) of the OECD Model Tax Convention?. This question is very much relevant to this study. When we refer back to the literature by Mónica Sada Garibay on the topic of An Analysis of the Case Law on Article 3(2) of the OECD Model (2010) on Bulletin for International Taxation, 2011 (Volume 65), No. 8 published online on 07 July 2011, there are two lines of reasoning provided by various scholars on this issue:-
“The first identifies the "context" referred to in article 3(2) of the OECD Model (2010) with
the "context" referred in article 31 of the Vienna Convention (1969). This interpretation restricts the "context" to the text and other agreements and documents made in connection with the conclusion of the tax treaty, though it is possible to expand this by considering the
71 M. Sada Garibay, An Analysis of the Case Law on Article 3(2) of the OECD Model (2010), 65 Bull. Intl.
Taxn. 8 (2011), Journals IBFD.
72
