Question

Explain with example the role of protocol and preamble in interpretation of tax treaty.

Answer 1

Role of protocol and preamble in the interpretation of the tax treaty.

The Protocol amending the United States-Spain income tax treaty (1990) was signed in early 2013 and provides for: Exemption from withholding taxes for interest (subject to certain exceptions), royalties, and capital gains. ... Broad exchange of information between competent authorities for tax purposes.

The protocol is an integral part of the tax treaty –need not be separately notified; Restrictive definition of India-UK tax treaty can be read into India-France tax treaty

The primary object and purpose of a tax treaty as enshrined in the Preamble is the avoidance of international juridical double taxation to facilitate international commerce and allocation of taxing rights between the Contracting States.

1. Tax treaties represent an important aspect of the international tax rules of many countries. Over 3,000 bilateral income tax treaties are currently in effect, and the number is growing. The overwhelming majority of these treaties are based in large part on the United Nations Model Double Taxation Convention between Developed and Developing Countries1 (United Nations Model Convention) and the Organisation for Economic Co-operation and Development Model Tax Convention on Income and on Capital2 (OECD Model). These model treaties are available on the OECD and United Nations websites and are discussed below. 2. The following provides a brief introduction to the basic aspects of tax treaties. Its focus is on issues such as the types of treaties dealing with tax matters, as well as the legal nature, purposes, and interpretation of treaties, rather than on their substantive provisions.

Legal nature and effect of tax treaties

3. Treaties are agreements between sovereign nations. Article 2 of the Vienna Convention on the Law of Treaties,3 which applies to all treaties, provides: A treaty is an international agreement (in one or more instruments, whatever called) concluded between States and governed by international law.

4. Tax treaties are often called either “agreements” or “conventions.” As Article 2 of the Vienna Convention indicates, the name used is not important.

5. Bilateral tax treaties confer rights and impose obligations on the two contracting States, but not on third parties such as taxpayers. However, tax treaties are obviously intended to benefit taxpayers of the contracting States. Whether treaties do so or not depends on the domestic law of each State. In some States, treaties are self-executing: that is, once the treaty is concluded, it confers rights on the residents of the contracting States. In other States, some additional action is necessary (for example, the provisions of the treaty must be enacted into domestic law) before benefits under a treaty can be given to residents of the contracting States

The preamble in Tax Treaties

• Tax treaties can be defined as an “international agreement between two sovereign states reaching an understanding as to how their residents will be taxed in respect of cross border transactions in order to avoid double taxation on the same income.

• Besides double taxation and sharing of revenue between states through negotiations and compromise, the following additional objectives are spelled out in the UN model on tax treaties: - To protect taxpayers against double taxation - To encourage the free flow of international trade and capital - To encourage the transfer of technology - To prevent discrimination between taxpayers - To provide a reasonable element of legal and fiscal certainty to the investors and businessmen - To arrive at an acceptable basis to share tax revenues between the two states.