Issues surrounding interpretation of tax treaties

Most of the tax treaties are based on either OECD or the UN Model or a combination of both. Despite availability of several commentaries, judicial pronouncements or other supplementary means of interpretation of treaties, yet there exists conflicts of qualification, characterization and allocation of incomes.

  • Conflict of qualification – It arises due to the differences in characterization of same income in the source and the residence state. This often leads to the application of distributive rules which allows or restricts the taxing rights of the source state and residence state differently. This often leads to double taxation or double non-taxation. Some examples are –
    • Transfer of income may be treated as interest income in one state and dividend in the other state
    • Dividend payable on liquidation may be treated as dividend in one state and capital gain in another state
    • Interest payment in respect of loan secured by mortgage may be considered as income from immovable property in one state and interest in other state
  • Conflict of allocation – It arises due to the attribution of income to different taxpayer in source and residence state of the entity that has received the income.
    This often leads to double taxation or double non-taxation. It may occur between different taxpayers or between different units of the same taxpayer in cross border situations (like attribution of income between trust and beneficiaries or between partnership and partners). OECD has also attempted to resolve this conflict, especially in cases of partnership, still several aspects of economic double taxation persists and have not been resolved.


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