Interpreting Tax Treaties
| Author | Rebecca M. Kysar |
| Position | Professor of Law, Brooklyn Law School |
| Pages | 1387-1445 |
1387
Interpreting Tax Treaties
Rebecca M. Kysar*
ABSTRACT: The circumstances, if any, that permit non-uniform, or
differentiated, treaty interpretation are difficult to define. Generally, a
differentiated approach stands in tension with the Vienna Convention’s rules
of interpretation, which apply a methodology based on plain meaning to all
treaties. Yet courts, states, and scholars widely accept the notion that some
treaties warrant special interpretive rules. Thus far, however, efforts to justify
differentiated treaty interpretation on the grounds of subject matter or treaty
purpose have proven inadequate. A more promising avenue is the
examination of the objective characteristics shared within a treaty type. One
such characteristic, I argue, is the treaty’s degree of completeness. Specifically,
all else being equal, standalone instruments call for less reliance upon
extrinsic materials; interstitial instruments demand more.
This Article argues that such instruments should not be viewed as complete;
consequently, reference to plain meaning or even the treaty parties’ mutual
intent is often incoherent. Specifically, I contend that tax treaties are
jurisdictional overlays to the parties’ tax systems and substantially rely upon
domestic law. Tax treaties also are not heavily negotiated and instead borrow
from concepts that are embedded in model treaties, domestic law, and other
international instruments. The highly complex nature of tax law and the
factual situations to which it applies, the connection between revenue
collection and state sovereignty, and the necessity to combat tax abuse
retrospectively further explain the interstitial nature of treaties. Courts are
thus justified in relying upon extrinsic, and at times unilateral, materials in
the interpretation of tax treaties.
* Professor of Law, Brooklyn Law School. I am grateful to Hugh Ault, Anita Bernstein,
Dana Brakman-Reiser, Perry Dane, Steve Dean, Robin Effron, Katie Eyer, George Geis, Dan
Halperin, Edward Janger, Louis Kaplow, Anita Krishnakumar, Steve Landsmann, Michael
Livingston, Ruth Mason, Thomas McDonnell, Greg Mitchell, Saikrishna Prakash, Diane Ring,
Rand Rosenblatt, David Reiss, Fred Schauer, Rich Schragger, Kate Shaw, Steve Shay, Larry Solan,
Bob Williams, and workshop participants at Harvard Law School, Pace Law School, Rutgers School
of Law-Camden, and University of Virginia School of Law for valuable comments and discussion
on earlier drafts. I am also thankful to Andrew Granek, Jana Hymowitz, Bob Nelson-Sullivan, and
Grace Sur for excellent research assistance. Fina lly, I gratefully acknowledge the Dean’s Summer
Research Stipend Program at Brooklyn Law School for funding portions of my research.
1388 IOWA LAW REVIEW [Vol. 101:1387
I. INTRODUCTION ........................................................................... 1389
II. INTRODUCTION TO TAX TREATIES .............................................. 1393
A. THE ROLE OF TAX TREATIES ............................................. 1393
1. Avoidance of Double-Taxation .................................. 1393
2. Prevention of Fiscal Evasion ....................................... 1394
B. THE TAX TREATY PROCESS ............................................... 1395
C. THE INTERACTION OF TREATIES AND DOMESTIC LAW ............ 1396
III. BACKGROUND OF INTERPRETIVE PRINCIPLES .............................. 1397
A. TREATY INTERPRETATION IN THE UNITED STATES ................. 1397
B. THE VIENNA CONVENTION ................................................ 1402
C. U.S. PRAGMATISM IN TAX TREATY INTERPRETATION ............. 1404
IV. THE NECESSITY OF EXTRINSIC EVIDENCE IN TAX TREATY
INTERPRETATION ........................................................................ 1409
A. DIFFERENTIATED TREATY INTERPRETATION ......................... 1409
B. JURISDICTIONAL TAX TREATIES AND THE COMPLEXITY OF TAX
LAW .............................................................................. 1411
C. THE SIMILARITY OF TAX TREATIES ..................................... 1417
D. TAX ABUSE ..................................................................... 1418
1. Illustrations of Treaty Abuse ...................................... 1418
2. Measures to Combat Treaty Abuse ............................ 1419
E. TYPES OF EXTRINSIC SOURCES ............................................ 1423
1. Domestic Law .............................................................. 1423
2. Senate Materials .......................................................... 1427
3. Executive Materials ..................................................... 1428
4. International Materials ............................................... 1430
V. IMPLEMENTATION ISSUES ............................................................ 1432
A. OBJECTIONS .................................................................... 1432
1. Interaction with International Law ............................ 1432
2. Double Taxation ......................................................... 1433
3. Planning Difficulties ................................................... 1434
B. HARMONIZATION DEVICES................................................. 1435
1. A Loose Ordering of Sources ..................................... 1435
2. Interpretive Presumptions .......................................... 1439
i. Presumption Against Double Taxation ................... 1439
ii. Interpreting Tax Treaties Liberally ......................... 1440
iii. Presumption in Favor of Source/Residence Country .. 1442
iv. The Last in Time Rule and the Charming Betsy
Canon ..................................................................... 1443
VI. CONCLUSION .............................................................................. 1444
2016] INTERPRETING TAX TREATIES 1389
I. INTRODUCTION
The international law of treaty interpretation, as codified in the Vienna
Convention on the Law of Treaties (“Vienna Convention”), prescribes
general rules of interpretation, based on a plain meaning approach, that
apply uniformly to all treaties.1 Yet courts, states, and scholars seem to agree
that some treaties warrant special interpretive rules.2 Theorizing this
differentiated approach to treaty interpretation, however, remains elusive.
Explanations based on treaty subject matter or purpose fail to satisfy.3 Instead,
examination of the objective features shared within a treaty category provides
a more promising avenue for justifying specialized interpretive methods. One
such characteristic is the treaty’s degree of completeness, or its degree of
specificity and operationality. Specifically, all else being equal, standalone
instruments call for less reliance upon extrinsic materials; interstitial
instruments demand more.
Applying this insight to the income tax treaty context,4 such instruments
should not be viewed as complete; accordingly, reference to plain meaning or
even the treaty makers’ mutual intent is often incoherent. Specifically,
because tax treaties function to limit the taxing reach of treaty countries
rather than prescribe substantive rules, they are closely intertwined with
domestic law. Indeed, tax treaties explicitly state that domestic law provides
the meaning of any undefined term. Gaps are intentionally left open by treaty
drafters due to the complexity of the tax system and the close connection
between fiscal policy and sovereignty.5
(entered into force Jan. 27, 1980) [hereinafter Vienna Convention].
2. See Julian Arato, Accounting for Difference in Treaty Interpretation over Time, in
INTERPRETATION IN INTERNATIONAL LAW 205, 205–12 (Andrea Bianchi et al. eds., 2015).
3. Id.
4. Note that my analysis is limited to double income tax treaties rather than other types of
tax treaties and agreements, such as estate and gift tax treaties or tax information exchange
agreements. My analysis also does not apply to treaties that have ancillary tax effects or contain
isolated tax provisions. I limit my thesis to the jurisdictional elements of double tax treaties
relating to income, which comprise the backbone of the treaty, rather than those aspects that
have substantive, operative effects—specifically, nondiscrimination, exchange of information,
and mutual agreement provisions. Although I focus on American sources and case law, my
general conclusion—that liberal use of extrinsic sources is appropriate in the interpret ation of
tax treaties—is applicable to other legal cultures.
5. Treaty-based gap-filling mechanisms exist; however, these are incomplete. For instance,
article 3(2) of the Model Treaty prescribes that domestic law steps in to provides definitions for
undefined terms “unless the context otherwise requires.” U.S. MODEL INCOME TAX CONVENTION
OF NOVEMBER 15, 2006 art. 3(2) (U.S. DEP’T OF TREASURY 2006), https://www.irs.gov/pub/irs-
trty/model006.pdf. Gap-filling may nonetheless be necessary when the domestic definitions
themselves contain vague terms, as is often the case, or to determine if “the context otherwise
requires.” Id. Article 21 attempts to close jurisdictional gaps by providing that types of income
not dealt with by specific treaty provisions be taxed only by the country of the taxpayer’s
residence. Id. art. 21(1). Nonetheless, extrinsic resources may still need to be consulted to
determine how to categorize the income at issue.
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