Double Taxation Releief
Double Taxation Releief
Double taxation occurs when tax is paid more than once on the same taxable income or asset.
Double taxation may be economic or juridical. Double taxation is economic if more than one
taxpayer is taxed on the same income. For example, the profits of a company may be subject to
corporate tax in the hands of the company and to withholding tax in the hands of the
shareholders when the after-tax profits are distributed as dividends. Economically, the
corporate profits and the dividends are the same income, however taxed in the hands of two
different taxpayers – the company paying the corporate income tax and the shareholder –
subject to the taxation on the distributed profits. Double taxation is juridical when the same
taxpayer is taxed twice on the same income. For example, a resident of country A may earn
dividend income from country B and this dividend income may be taxed, first, in country B
(based on the source principle) by a way of withholding tax and then one more time in country
A (based on the residence principle) by a way of tax assessment.
Double taxation may occur in both domestic and international (cross-border) situations. We
will only be concerned with international juridical double taxation in this course.
(a) two States each subject the same person to tax on his worldwide income or capital; or
(b) a person is a resident of one State (R) and derives income from, or owns capital in, the
another State (S or E) and both States impose tax on that income or capital; or
(c) two States each subject the same person, not being a resident of either State to tax on
income derived from, or capital owned in, one of the States. This may result, for
instance, in the case where a non-resident person has a permanent establishment in one
State (E) through which he derives income from, or owns capital in, the other State (S).
In general, there are two principal methods for elimination of international double taxation:
(a) the exemption method, i.e. exempting foreign income from domestic taxation; and
(b) the credit method, i.e. granting a credit for foreign taxes.
These two methods are set out in Articles 23A (exemption method) and 23B (Credit method)
of the UN and OECD Model Conventions.
Exemption method
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Under the exemption method, the State of residence R does not tax the income which may be
taxed in State E or S. With the exemption method therefore, the country of residence leaves the
taxing right solely with the source country, giving that country the responsibility to tax the
source income according to its own tax rules and rates.
(a) the income which may be taxed in State E or S is not taken into account at all by State
R for the purposes of its tax; State R is not entitled to take the income so exempted into
consideration when determining the tax to be imposed on the rest of the income; this
method is called “full exemption”;
(b) the income which may be taxed in State E or S is not taxed by State R, but State R
retains the right to take that income into consideration when determining the tax to be
imposed on the rest of the income; this method is called “exemption with
progression”.
Credit method
Under the credit method, the State of residence R calculates its tax on the basis of the taxpayer's
total income including the income from the other State E or S which may be taxed in that other
State. It then allows a deduction from its own tax for the tax paid in the other State. With the
credit method therefore, the residence country gets a subsidiary tax right which will have its
effect when the source country levies a lower tax than the country of residence, because then
an additional amount of tax needs to be paid on the worldwide income.
(a) State R allows the deduction of the total amount of tax paid in the other State on income
which may be taxed in that State, this method is called “full credit”;
(b) the deduction given by State R for the tax paid in the other State is restricted to that part
of its own tax which is appropriate to the income which may be taxed in the other State;
this method is called “ordinary credit”.
Fundamentally, the difference between the exemption method and the credit method is that the
exemption methods look at income, while the credit methods look at tax.
Countries using the exemption method reserve this mainly for “active income” such as business
profits (through permanent establishments) and employment income, while they use the credit
method for “passive income” such as interest, dividends and royalties.
Example
An artiste earns $80,000 at home in State R (State of residence) and $20,000 abroad in State S
(State of source) = worldwide income of $100,000.
In State R the tax rates are progressive, namely 35% (average) on an income of $100,000 (=
$35,000) and 30% (average) on an income of $80,000 (= $24,000).
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(a) Initial tax liability
Without any relief for double taxation, the total initial tax liability of the artist would
be:
With the “full exemption”, the State R, State R, simply omits the foreign income from
its own taxation and only imposes tax on the domestic income of 80,000, at 30%:
With the “exemption with progression”, domestic income is taxed at the tax rate for
worldwide income, i.e. 35%:
With the “full credit”, the home country, State R, simply allows the deduction of the
foreign-source tax from the tax calculated on worldwide income:
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With the “ordinary credit”, the home country, State R, also allows a deduction of the
foreign-source tax from the tax calculated on the worldwide income, but not more than
the proportion of tax that would be attributable to the income from State S (maximum
deduction). This limitation to the average tax rate is a maximum of 35% x $20,000 =
$7,000:
In the above computation, the tax of $4,000 paid in State S is less than the $7,000
maximum deduction and therefore the entire $4,000 tax paid in State S will be allowed
as a deduction from the tax calculated on the worldwide income in State R.
If, however, State S had a tax rate of 40% this would lead to $8,000 source tax, and
total taxes in State R and State S would be $43,000 (i.e. $35,000 + $8,000). In such
case, State R would only allow a deduction of up to $7,000 foreign-source tax from the
tax calculated on the artist’s worldwide income. The computation of tax due in State R
would be as follows:
Of the two exemption methods, the “full exemption” is usually the most advantageous method
for eliminating double taxation for the artiste in this example. The “full exemption” will be
given against the marginal, highest applicable tax rate, while the “exemption with progression”
allows the exemption against the average tax rate on the income in the country of residence.
This makes a big difference in a country with steep progressive tax rates.
In any case, in both situations the tax relief can be more than the foreign-source tax, but can
also be lower. This will happen sooner with the “exemption with progression” method than
with the “full exemption” method, as the examples in (b) and (c) above show.
The “full exemption” method is regularly used for exemption in source States, but almost never
for elimination of double taxation in the country of residence. Article 23A of the OECD Model
Tax Treaty recommends the use of the “exemption with progression” method for countries that
want to apply this to active foreign income.
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An important difference in favour of the “exemption with progression” method is the treatment
of foreign losses. They can be offset against other, domestic, positive income items and
therefore bring down the taxable income in the country of residence. This is more profitable
than under the “full exemption” method, where these foreign losses are included in the
exemption.
From the two tax credit methods, the “full credit” gives the best result for the taxpayer. The tax
relief from this method seems to be closest to the theory of “capital export neutrality”, because
the total tax burden after the full tax credit is equal to the tax that would be due if the income
were earned in the home country only. At first sight, it is a nicely balanced credit system, with
the same overall tax burden regardless of whether the income had a domestic or foreign source.
But problems can arise for state budgeters when the foreign-source tax rate is higher than the
tax rate in the country of residence. This was already recognized in 1921 in the United States,
a mere 3 years after the foreign tax credit was introduced in the Revenue Act. The limitation to
“ordinary credit” was enacted to prevent taxes from countries with income tax higher than that
in the United States from reducing US tax liability on US-source income. The reason was that
the income tax rates in the United Kingdom in those post-war years were so high that the United
States was afraid that all domestic tax revenue would be wiped out by a full foreign tax credit.
The United States stated the opinion that at least it wanted to collect the taxes that fairly
belonged it. This provision still constitutes a fundamental basis of US law for taxing income
earned abroad by US residents.
The United Kingdom also limits the tax credit to a maximum, which is the amount of UK tax
attributable to the income which has been subject to foreign tax. This is the same for other
countries using the tax credit system.
Article 23B of the OECD Model Tax Treaty follows the views of the United States and the
United Kingdom and recommends in general the use of the “ordinary credit” method for
countries wanting to apply the credit system to all types of foreign income, both active and
passive. But the conclusion from the example is that this might lead to insufficient
compensation for the foreign artiste tax, as shown in the example (e) above when the artist’s
foreign-source tax was $8,000.
Deduction method
The deduction method allows residents/citizens to deduct foreign taxes paid treating them as a
current expense so it becomes the effective means of providing relief when there is no DTA.
Anyone in the United States with unlimited tax liability on his full worldwide income can
choose not to take a tax credit for foreign tax, but to deduct the foreign tax as a business expense,
so that the tax base will become considerably lower.
Germany also gives its residents with unlimited tax liability the option of choosing the
deduction of the foreign tax from worldwide income as a business expense.
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When the foreign-source tax is high or domestic income is low or negative, the choice of a
deduction as an expense might become advantageous.
Relief from double taxation can be provided in mainly two ways: (i) bilateral relief; and (ii)
unilateral relief.
Bilateral Relief
Under this method, the Governments of two countries can enter into an agreement (known as a
double taxation agreement (DTA) or double taxation treaty (DTT)) to provide relief against
double taxation by mutually working out the basis on which the relief is to be granted. Zambia,
for example, has entered into agreements for relief against or avoidance of double taxation with
more than 10 countries which include the United Kingdom, Ireland, Switzerland, Sweden,
Mauritius, South Africa etc.
Bilateral Relief may be granted by either the exemption method or credit method. In Zambia,
double taxation relief is provided by a combination of the two methods.
Unilateral Relief
This method provides for relief of some kind by the country of residence where no DTA has
been entered into with the country of source. Unilateral relief is normally allowed as a credit of
the foreign tax against the income tax chargeable in the country of residence.
7.4 DOUBLE TAXATION RELIEF PROVISIONS UNDER THE INCOME TAX ACT
Sections 74, 75 and 76 of the Income Tax Act provide for international double taxation relief
in Zambia.
Section 74(1) of the Income Tax Act provides that the President may enter into a double
taxation agreement with the Government of any other country:
(a) for the granting of relief of tax or the prevention of double taxation in respect of income
on which income-tax is payable in both Zambia and the foreign country has been paid
both in Zambia and in that country or specified territory; or
(b) for the rendering of reciprocal assistance in the administration of and collection of taxes
under the income tax laws o Zamia and of such foreign country.
Following the President’s entry into such an agreement with a Government of a foreign country,
the agreement must be presented before Cabinet by the Minister of Finance for ratification and
soon after ratification, the President is required, by statutory instrument, to notify the public of
terms of the agreement. The agreement will have effect until such statutory instrument is
revoked and for so long as the agreement has the effect of law in the other contracting country.
Double taxation agreements permitted under section 74(1) are intended to provide relief to the
taxpayer, who is a resident of either Zambia or of the other contracting country to the
agreement. Such taxpayer can claim relief by applying the beneficial provisions of either the
agreement or the domestic law.
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Section 75(1) provides that where a double taxation agreement applies to a Zambian-resident
in respect of income earned in a foreign country and such agreement entitles the taxpayer to a
credit of foreign taxes against Zambian taxes, the taxpayer will be allowed a credit of the
foreign tax paid in respect of the foreign income against Zambian tax payable in respect of the
foreign income. The amount of foreign tax allowed as a credit is, however, limited to the
amount of Zambian tax that would be payable in respect of the foreign income (essentially
relief is by way of an ordinary credit).
In the case of income arising to a Zambian-resident taxpayer in countries with which Zambia
does not have any double taxation agreement, relief would be granted under section 76 provided
all the following conditions are fulfilled:
(c) the income in question has been subjected to income-tax in the foreign country in the
hands of the taxpayer;
(d) the taxpayer has paid tax on the income in the foreign country.; and
(e) there is no double taxation agreement between Zambia and the foreign country.
In such a case, the taxpayer shall be entitled to a deduction of the foreign taxes paid from the
Zambian income-tax payable by him. The deduction allowed, however, is limited to the amount
of Zambian tax that would be payable in respect of the foreign income (essentially relief is by
way of an ordinary credit).
A double taxation agreement (DTA), also known as a ‘tax treaty’ or ‘tax convention’ is an
agreement entered into by the Governments of two countries with the broad objective of
facilitating cross-border trade and investment by eliminating the tax impediments to these
cross-border flows. This broad objective is supplemented by several more specific, operational
objectives; the most important operational objective being the elimination of international
double taxation. If income from cross-border trade and investment is taxed by two or more
countries without any relief, such double taxation would obviously discourage such trade and
investment. Many of the substantive provisions of the typical DTAs are directed at the
achievement of this goal.
DTAs are generally based on certain models. The most common ones are:
(b) the United Nations (UN) Model Double Taxation Convention between Developed and
Developing Countries (the “UN Model Convention”).
In addition, many countries have their own model tax treaties, which are often not published
but are provided to other countries for the purpose of negotiating tax treaties. The UN Model
Convention draws heavily on the OECD Model Convention.
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The OECD Model Convention
The OECD Model Tax Treaty is an accord reached between member states of the Organization
for Economic Cooperation and Development (OECD) that serves as a guideline for establishing
tax agreements. The convention consists of articles, commentaries, position statements and
special reports on evolving tax issues. Its primary application is in guiding the negotiation of
bilateral treaties between two or more countries.
Currently, the OECD has 34 members, consisting of many of the major industrialized countries.
The OECD Model Convention was first published, in draft form, in 1963. It was revised in
1977 and again in 1992, at which time it was converted to a loose-leaf format in order to
facilitate more frequent revisions. Since then, revisions have been made every few years, on
nine occasions, most recently in 2014. The Committee on Fiscal Affairs (CFA), which consists
of senior tax officials from the member countries, has responsibility for the OECD Model
Convention as well as other aspects of international tax cooperation. CFA operates through
several working parties and the Centre for Tax Policy and Administration, which contains the
permanent secretariat for CFA. The working parties consist of delegates from the member
countries. Working Party No. 1 on Tax Conventions and Related Questions is responsible for
the Model Convention, and it examines issues related to it on an ongoing basis.
The UN Model Convention forms part of the continuing international efforts aimed at
eliminating double taxation. These efforts were begun by the League of Nations and pursued
in the Organisation for European Economic Co-operation (OEEC) (now known as the OECD)
and in regional forums, as well as in the United Nations, and have in general found concrete
expression in a series of model or draft model bilateral tax conventions.
The work of the United Nations on a model treaty commenced in 1968 with the establishment
by the United Nations Economic and Social Council (ECOSOC) of the United Nations Ad Hoc
Group of Experts on Tax Treaties between Developed and Developing Countries pursuant to
its resolution 1273 (XLIII).1 The Group of Experts produced a Manual for the Negotiation of
Bilateral Tax treaties between Developed and Developing Countries which led to the
publication of the UN Model Convention in 1980.2 The Model Convention was revised in 2001
and again in 2011. In 2004, the Group of Experts became the Committee of Experts on
1
Economic and Social Council resolution 1273 (XLIII) of 4 August 1967.
2
UN Model Taxation Convention between Developed and Developing Countries (New York: 1980).
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International Cooperation in Tax Matters.3 The Committee maintains detailed Commentaries
on the UN Model Convention; it is also responsible for the publication of several useful
manuals on tax issues important for developing countries, such as transfer pricing and the
administration of tax treaties. The members of the Committee are tax officials nominated by
their governments and appointed by the Secretary-General of the United Nations, who serve in
their individual capacity. A small majority of the members of the Committee are from
developing countries and countries with economies in transition. The UN Model Convention
follows the pattern set by the OECD Model Convention and many of its provisions are identical,
or nearly so, to those in that Model Convention. In general, therefore, it makes sense not to
view the UN Model Convention as an entirely separate one but rather as making important, but
limited, modifications to the OECD Model Convention.
The main difference between the two model Conventions is that the UN Model Convention
imposes fewer restrictions on the taxing rights of the source country; source countries,
therefore, have greater taxing rights under it compared to the OECD Model Convention. For
example, unlike Article 12 (Royalties) of the OECD Model Convention, Article 12 of the UN
Model Convention does not prevent the source country from imposing tax on royalties paid by
a resident of the source country to a resident of the other country. The UN Model Convention
also gives the source country increased taxing rights over the business income of non-residents
compared to the OECD Model Convention. For example, the time threshold for a construction
site permanent establishment under the UN Model Convention is only 6 months, compared to
12 months under the OECD Model Convention. In addition, furnishing services in a country
for 183 days or more constitutes a permanent establishment under the UN Model Convention,
whereas under the OECD Model Convention furnishing services is a permanent establishment
only if the services are provided through a fixed place of business which, according to the
OECD Commentary thereon, must generally exist for more than 6 months.
The success of the UN and OECD Model Conventions has been astounding. Virtually all
existing bilateral tax treaties are based on them. Their wide acceptance and the resulting
standardization of many international tax rules have been important factors in reducing
international double taxation.
Changing the UN and OECD Model Conventions to correct flaws and respond to new
developments is extremely difficult. One source of difficulty is that countries can bring their
existing tax treaty networks into line with a revision to the UN or OECD Model Conventions
only by renegotiating virtually all of their existing treaties. In contrast, the Commentaries to the
UN or OECD Model Conventions are much easier to change than the Model Convention itself.
Therefore, if a Commentary is revised, it may be possible for the tax authorities of countries to
interpret existing treaties in accordance with it without the need to renegotiate existing treaties.4
Unlike the UN Model Convention, the OECD Model Convention reflects the positions of the
member countries of the OECD. Member countries that disagree with any aspect of the OECD
Model Convention can register a reservation on the particular provision. These reservations are
found in the Commentaries to the Model Convention. A reservation indicates that the country
does not intend to adopt the particular provision of the OECD Model Convention in its tax
treaties. Most countries have entered reservations on some aspects of the Model Convention.
3
Economic and Social Council resolution 2004/69 of 11 November 2004.
4
The country’s courts may take a different position and refuse to interpret the treaty in accordance with the revised
Commentary.
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For example, several countries have entered reservations on Article 12, dealing with royalties,
by asserting their intention to levy withholding taxes on them.
The Commentaries on the OECD Model Convention also contain observations by particular
countries on specific aspects of them. Countries register observations to indicate that they
disagree with the interpretation of the treaty provided in the Commentary. A country making
an observation does not reject the particular provision of the OECD Model Convention (in other
words, it has not registered a reservation on the provision). The purpose of an observation is to
indicate that the country may include the provision in its treaties but it will interpret and apply
it in a manner different from the interpretation espoused in the Commentary.
A typical DTA based on the UN or OECD Model Conventions will have the following basic
structure and major provisions:
• Chapter III – Taxation of Income: Chapter III contains what are often referred to as
the distributive rules of the treaty. Articles 6-21 deal with various types of income
derived by a resident of one or both of the States. In general, these provisions determine
whether only one or both of the contracting States — the State in which the taxpayer is
resident (the residence country) and the State in which the income arises or has its
source (the source country) — or whether both of them can tax the income and whether
the rate of tax imposed is limited. The Articles and the types of income are as follows:
Article 8 — Income from the operation of ships or aircraft in international traffic and
boats in inland waterways transport;
Article 10 — Dividends;
Article 11 — Interest;
Article 12 — Royalties;
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Article 15 — Income from employment;
Article 21 — Other income; in other words, income not dealt with in Articles 6-20.
• Chapter IV – Taxation of Capital: Chapter IV deals with the taxation of capital (not
income from capital).
• Chapter VII – Final Provisions: Chapter VII provides rules to govern the entry into
force and termination of the treaty.
Where two countries have entered into a DTA that provides for the avoidance of double
taxation, usually the business activities of an enterprise that is resident in one of the countries
(State R) are protected from taxation in the other country (State S) as long as those activities do
not create what is known as a ‘permanent establishment’ (PE) in State S. Typically, a DTA
defines a PE using the following two general tests:
(a) whether the enterprise has a fixed place of business within the other country, as defined
under the language of a specific treat; and
(b) whether the enterprise operates in the State S through a dependent agent that habitually
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exercises the authority to conclude contracts on behalf of the establishment in the State
S.
The definition of a PE is typically similar under both the OECD Model Convention and the UN
Model Convention. However, a specific treaty should always be examined for exceptions or
differences from standard language. In general, the UN Model Convention preserves greater
source country taxation rights in Article 5, which addresses the economic nexus required before
source country taxing rights may be exercised under the DTA.
Under the first prong of the PE test outlined above, an establishment must operate in State S
through a fixed place of business to create a PE. A fixed place of business is typically defined
to include the following types of physical locations:
(c) a factory;
(e) a mine, oil, or gas well, quarry, or any other place where natural resources are extracted.
However, there are exceptions to these general types of locations that do not constitute a PE for
treaty purposes. The exceptions usually include:
(a) the use of a facility solely for the purpose of storage, display, or delivery of goods or
merchandise owned by the establishment;
(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purposes of storage, display, or delivery;
(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of processing by another enterprise;
(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods
or merchandise (or collecting information) for the enterprise;
(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for
the enterprise, any other preparatory or auxiliary activity;
(f) the maintenance of a fixed place of business solely for any combination of the activities
listed above.
Based upon the foregoing, an establishment has many options for doing business in State S
without triggering a PE for treaty purposes. The analysis is highly fact-specific for each case,
and the treaty language may vary depending upon the two countries involved in the analysis.
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An enterprise of a contracting state shall not be deemed to have a permanent
establishment in the other contracting state merely because it carries on business in that
other contracting state through a broker, general commission agent, or any other agent
of an independent status, provided that such persons are acting in the ordinary course
of their business. However, when the activities of such an agent are devoted wholly or
almost wholly on behalf of that enterprise, he/she will not be considered an agent of an
independent status within the meaning of this paragraph if it is shown that the
transactions between the agent and the enterprise were not made under arm’s-length
conditions.
Typically, the analysis to determine whether an agent is working as an independent agent can
be determined by examining whether the agent is:
(b) economically independent from the State R establishment that has contracted for their
services; or
(c) legally independent from the State R establishment that has contracted for their
services.
Further, when examining the agency relationship, it is helpful to also identify the category of
the agent that has been hired by the State R establishment. For example, agents can be
considered any one of the following:
Each type of agent must always be operating in the ordinary course of their business – and must
meet the economic and legal independence tests to protect the State R establishment from being
considered as operating a business through a permanent establishment in the State S. In all
cases, consideration of the issues discussed above must be made when any enterprise is
expanding their operations into a foreign country.
The relationship between tax treaties and domestic tax legislation is a complex one in many
countries. The basic principle is that the treaty should prevail in the event of a conflict between
the provisions of domestic law and a treaty. In some countries — France is an example — this
principle has constitutional status. In many other countries, the government clearly has the
authority under domestic law to override the provisions of a DTA. For example, legislative
supremacy is a fundamental rule of law in many parliamentary democracies. As a result, it is
clear in these countries that domestic tax legislation may override their tax treaties. However,
the courts in these countries may require that the legislature explicitly indicate its intention to
override a treaty before giving effect to a conflicting domestic law. Courts may also strain to
find some ground for reconciling an apparent conflict between a treaty and domestic legislation.
In general, tax treaties apply to all income and capital taxes imposed by the contracting States,
including taxes imposed by provincial (state), local, and other subnational governments. In
some federal States, however, the central government is constrained by constitutional mandate
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or established tradition from entering into tax treaties that limit the taxing powers of their
subnational governments. Accordingly, the tax treaties of such federal States apply only to
national taxes. This is the situation for both Canada and the United States of America. In such
circumstances, a subnational government may impose taxes in a manner that would not be
permitted for its central government.
In general, tax treaties do not impose tax. Tax is imposed by domestic law; therefore, tax treaties
limit the taxes otherwise imposed by a State. In effect, tax treaties are primarily relieving in
nature. Similarly, tax treaties do not allocate taxing rights, although it is often claimed that they
do. In light of this fundamental principle, it is usually appropriate before applying the
provisions of a DTA to determine whether the amount in question is subject to domestic tax. If
the amount is not subject to tax under domestic law, it is unnecessary to consider the treaty. For
example, assume that under the provisions of a treaty between country A and country B, interest
paid by a resident of one State to a resident of the other State is subject to a maximum rate of
withholding tax of 15 per cent. If, under the law of country A, interest paid by a corporation
resident in that country to an arm’s-length lender resident in country B is exempt from tax by
country A, the treaty does not give country A the right to impose a 15 per cent withholding tax
on the interest.
However, whether tax treaties give a right to tax independent of domestic law is a question of
domestic law. The internal law of a few countries — France is an example —provides that they
have the right to tax under domestic law any amount that they are not prevented from taxing
under the terms of the treaty.
The provisions of tax treaties do not displace the provisions of domestic law entirely. Consider,
for example, a situation in which a person is considered to be a resident of country A under its
domestic law and is also considered to be a resident of country B under its domestic law. If the
person is deemed to be a resident of country A pursuant to the tie-breaker rule in the treaty
between country A and country B (Article 4 (2) (Resident) of both the UN and OECD Model
Conventions provides a series of rules to make a person who is resident in both countries a
resident of only one country for purposes of the treaty), the person is a resident of country A
for purposes of the treaty but remains a resident of country B for purposes of its domestic law
for all purposes not affected by the treaty. Thus, for example, if the person makes payments of
dividends, interest or royalties to non-residents of country B, the person will be subject to any
withholding obligations imposed by country B on such payments because the person remains a
resident of country B.
Occasionally, some countries have passed legislation to modify or overturn the interpretation
of a DTA given by a domestic court. Such legislation, adopted in good faith, may not violate a
country’s obligations under its tax treaties. Often the country overriding its tax treaties in this
way will consult with its treaty partners to demonstrate good faith and to prevent
misunderstandings.
Some countries may seek to prevent court challenges to certain domestic tax legislation on the
basis of the country’s tax treaties by providing that the new legislation prevails over any
conflicting provisions of a DTA. The most well-known and controversial treaty overrides are
probably those adopted by the United States; however, other countries have also done so on
occasion. Treaties are solemn obligations that should not be disregarded except in extraordinary
circumstances. At the same time, countries must have the ability to amend the provisions of
their domestic tax legislation to keep it current and to clarify interpretative difficulties.
Many of the provisions of tax treaties do not operate independently of domestic law because
they include explicit references to the meaning of terms under domestic law. For example,
under Article 6 (Income from immovable property), income from immovable property located
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in a country is taxable by that country. For this purpose, the term “immovable property” has
the meaning that it has under the domestic law of the country in which the property is located.
In addition, Article 3 (2) (General definitions), which is discussed below, provides that any
undefined terms in the treaty should be interpreted to mean what they mean under the law of
the country applying the treaty. Conversely, in some countries where domestic law uses terms
that are also used in the treaty, the meaning of those terms for purposes of domestic law may
be interpreted in accordance with the meaning of the terms for purposes of the treaty.
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