Judicial Interpretation of Tax Treaties

Judicial Interpretation of Tax Treaties

The Use of the OECD Commentary

Elgar Tax Law and Practice series

Carlo Garbarino

Judicial Interpretation of Tax Treaties is a detailed analytical guide to the interpretation of tax treaties at the national level. The book focuses on how domestic courts interpret and apply the OECD Commentary to OECD Model Tax Convention on Income and on Capital. Adopting a global perspective, the book gives a systematic presentation of the main interpretive proposals put forward by the OECD Commentary, and analyses selected cases decided in domestic tax systems in order to assess whether and how such solutions are adopted through national judicial process, and indeed which of these are of most practical value. The book operates on two levels: firstly it sets out a clear and comprehensive framework of tax treaty law, which will be an important tool for any tax practitioner. Secondly, the book provides crucial guidance on issues of tax treaty law as applied at domestic level, such as investment or business income, dispute resolution and administrative cooperation.

Chapter 7: ROYALTIES (ART. 12)

Carlo Garbarino

Subjects: law - academic, tax law and fiscal policy

Extract

Art. 12 § 1 provides that the royalties arising in the SC and beneficially owned by a resident of the RC shall be taxable only in the RC. The Model adopts the principle of exclusive taxation of royalties in the State of the beneficial owner’s residence and admits only one exception at Art. 12 § 3 with respect to the force of attraction on outbound royalties effectively connected to a PE (see supra at paras 4.79–4.71 and infra at para 7.78). This is one of the few situations in which the Model prevents double taxation by attributing an exclusive right to tax to only one of the CSs, by using the expression royalties ‘shall be taxable only’ in the RC, thereby precluding other CSs from taxing. In spite of the principle of exclusive taxation of royalties in the RC adopted in the Model, many countries adopt a treaty clause (similar to that adopted for dividends and interest by the Model) that also attributes taxing rights to the SC, so that an intermediate approach has been adopted, according to which royalties may be taxed in the RC, but the SC maintains the right to impose a tax. The SC is, however, free to give up all taxation on royalties paid to non-residents, but if the SC decides to tax outbound royalties its exercise of this right is limited by a capped relief to be attributed by the RC for the tax charged in the SC (see Artt. 23A or 23B).

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