Tax Treaty Overrides and Friendliness Towards International Law: A Comparative Approach to Put the Later-in-Time Rule to the Test

AuthorNicolas M. Traut
PositionLL.M. (Columbia)
Pages119-171
TAX TREATY OVERRIDES AND FRIENDLINESS
TOWARDS INTERNATIONAL LAW:
A COMPARATIVE APPROACH TO PUT THE LATER-IN-
TIME-RULE TO THE TEST
NICOLAS M. TRAUT*
I. INTRODUCTION
Tax treaties are the most important instrument to align cross-border
taxation and to prevent international double taxation.
1
International tax
treaties limit the taxing rights of contracting states and allocate tax revenue
between the countries.
2
They foster international trade by reducing taxation
at the source and by avoiding discrimination;
3
and today they also help in
the prevention of fiscal evasion.
4
Nevertheless, the United States (and other
countries following this example) have developed a practice of national
legislative counteraction of tax treaties.
5
The Organisation for Economic
* Dr. Nic olas M. Traut, LL.M. (Columbia). The author te aches and researches at the
University of Konstanz (Germany).
1
For the purpose of tax treat ies, see generally RICHARD E. ANDERSEN, ANALYSIS OF
UNITED STATES INCOME TAX TREATIES1.01 at *2 (2010); Rebecca M. Kysar, Interpreting
Tax Treaties, 101 IOWA L. REV. 1387, 139394 (2016) [hereinafter Kysar, Interpreting Tax
Treaties]; Klaus Vogel, The Domestic Law Perspective Tax, in TAX TREATIES AND DOMESTIC
LAW 3, 3 (Guglielmo Maisto ed., 2006). But see Rebecca M. Kysar, Unra veling the Tax
Treaty, 104 MINN. L. REV. 1755 passim (2020) (for a critical view on tax treaties).
2
See ANDERSEN, supra note 1, ¶ 1.01 at *2; JOSEPH ISENBERG, INTERNATIONAL TAXATION
22122 (3d ed. 2010); Reuven S. Avi-Yonah, Tax Treaty Overrides: A Qualified Defence of
U.S. Practice, in TAX TREATIES AND DOMESTIC LAW 65, 78 (Guglielmo Maisto ed., 2006);
Oliver Fehrenbacher & Nicolas Traut, Völkerrechtliche Verträge und nationale Treaty
Overrides, in GRENZÜBERSCHREITENDES RECHT, CROSSING FRONTIERS: FESTSCHRIFT FÜR
KAY HAILBRONNER 569, 570 (Georg Jochum et al. eds., 2013) (Ger.).
3
ANDERSEN, supra note 1, 1.01 at *3. Domestic laws usually entail unilateral measures
to accord for double taxation, but tax treaties still may produce beneficial results for
taxpayers. See, e.g., Kysar, Interpreting Tax Treaties, supra note 1, at 1394.
4
Avi-Yonah, supra note 2, at 78; Anthony C. Infanti, Curtailing Tax Treaty Overrides:
A Call to Action, 62 U. PITT. L. REV. 677, 681 (2001); Kysar, Interpreting Tax Treaties, supra
note 1, at 1394.
5
See Fehrenbacher & Traut, supra note 2, at 570; Hans H. Gattermann, U.S. Tax Tr eaty
Overrids Are Una cceptable, 2 TAX NOTES INTL 1238 passim (1990); Infanti, supra note 4,
at 68188.
404 CAPITAL UNIVERSITY LAW REVIEW [48:403
Co-operation and Development [OECD] describes this tax treaty overriding
as “a situation where the domestic legislation of a State overrules provisions
of either a single treaty or all treaties hitherto having had effect in that
State.”
6
The disregard for international treaties through tax treaty overriding is
one of the most pressing issues of international taxation, and it is
internationally recognized as such.
7
It is, therefore, all the more remarkable
that this is not reflected in the current jurisprudence of the United States
Supreme Court. One hundred fifty years ago, the Supreme Court established
that domestic legal provisions and international treaties are on the same
footing, and developed the so-called later-in-time-rule, which makes (tax)
treaty overriding through later legislation possible.
8
Tax treaty overrides in
the United States have been criticized on policy grounds from all sides.
9
A
few attempts have also been made in the last decades to initiate a legal
discussion on tax treaty overrides.
10
Nevertheless, the Supreme Court never
really reconsidered the problem. This does not do justice to the relevance of
this issue. The world has not stood still since the nineteenth century. The
United States today is party to nearly seventy tax treaties and the treaty
override question affects a great number of taxpayers all over the world.
11
6
ORG. FOR ECON. CO-OPERATION & DEV., MODEL TAX CONVENTION ON INCOME AND ON
CAPITAL R(8)-2 (2017), https://read.oecd-ilibrary.org/taxation/model-tax-convention-on-
income-and-on-capital-2017-full-version_g2g972ee-en#page1 [https://perma.cc/J68H-
GL73] [hereinafter OECD MODEL TAX CONVENTION].
7
See id.
8
The Cherokee Tobacco, 78 U.S. (11 Wall.) 616 passim (1870).
9
For portrayals of the critique from the executive branch, treaty partners and other actors,
see Sung-Soo Han, The Harmonization of Tax Treaties and Domestic Law, 7 INTL L. &
MGMT. REV. 30, 49 (2011); Infanti, supra note 4, at 68788.
10
E.g., Infanti, supra note 4, passim; David Sachs, Is the 19th Century Doctrine of Treaty
Override Good Law for Modern Day Tax Treaties?, 47 TAX LAW. 867 passim (1994); Mark
J. Wolff, Congressional Unilateral Tax Treaty Overrides: The Latter in Time Doctrine” is
Out of Time!, 9 FLA. TAX REV. 699 passim (2009). For an overvi ew of the general criticism
of the later-in-time-rule (beyond the tax context) and a defence of this rule, see Julian G. Ku,
Treaties as Laws: A Defense of the Last-in-Time Rule for Treaties and Federal Statutes, 80
IND. L.J. 319 passim (2005).
11
For the United States t ax treaties, see Jason R. Connery, Seth Green & Kimberly Tan
Majure, Current Status of U.S. Tax Treaties and International Tax Agreements, 48 TAX
MGMT. INTL J. 142 passim (2019), https://tax.kpmg.us/content/dam/tax/en/pdfs/2019/
update-us-treaties-status-tmij.pdf [https://perma.cc/G9ZB-99X5]. The wide net of tax
2020] TAX TREATY OVERRIDES 405
Modern-day America has to ask itself whether it should follow Justice Hugo
Black’s advice that “[g]reat nations, like great men, should keep their
word,”
12
or instead should maintain a practice of frequently violating
international law in the tax context.
This article presents a new basis for the overdue discussion on tax treaty
overrides based on a comparative approach. This article looks at Germany,
which has conditions and practices regarding tax treaties similar to the
United States; but in Germany, treaty overrides are probably the most
discussed issue of international tax lawnot only in scholarship, but also in
jurisprudence. In 2012, the German Bundesfinanzhof [Federal Finance
Court],
13
in an attention-grabbing decision deemed a domestic tax provision
impermissible because it contradicted a tax treaty.
14
The court thereby
responded to a growing trend in the constitutional jurisprudence and to the
vigorous scholarly debate regarding treaty overrides. It renounced the
traditional view of the domestic irrelevance of a breach of international
obligations and emphasized the principle of Völkerrechtsfreundlichkeit
[friendliness towards international law].
15
Even though the German
Bundesverfassungsgericht [Federal Constitutional Court]
16
did not uphold
treaties is not a peculiarity of the United States; Germany for example concluded tax treaties
with approximately one hundred countries. See Schreiben des Bundesministeriums der
Finanzen [BMF-Schreiben] [Letter of the Federal Ministry of Finance], Jan. 15, 2020,
BUNDESSTEUERBLATT I [BSTBL. I] 162 passim (Ger.), https://www.bundes
finanzministerium.de/Content/DE/Downloads/BMF_Schreiben/Internationales_Steuerrecht/
Allgemeine_Informationen/2020-01-15-stand-DBA-1-januar-
2020.pdf?__blob=publicationFile&v=3 [https://perma.cc/WX8D-G388].
12
Fed. Power Comm’n v. Tuscarora Indian Nation, 362 U.S. 99, 142 (1960) (Black, J.,
dissenting).
13
The Federal Finance Court is the highest German tax court and one of the five supreme
federal courts in Germany. For the self-perception of the court, see BUNDESFINANZHOF [BFH]
[FEDERAL FINANCE COURT], DER BUNDESFINANZHOF—THE FEDERAL SUPREME FINANCE
COURT, https://www.bundesfinanzhof.de/fileadmin/media/pdf/marketing-
publikationen/booklet_the_federal_supreme_finance_court.pdf [https://perma.cc/9TGB-
Z72K].
14
BFH Jan. 10, 2012, 236 SAMMLUNG DER ENTSCHEIDUNGEN UND GUTACHTEN DES
BUNDESFINANZHOFS [BFHE] 304 passim (Ger.).
15
Id.
16
The Federal Constitutional Court is the highest German court, hearing only
constitutional cases, and is not a court of last appeal. See Federal Constitutional Court,
ENCYCLOPAEDIA BRITANNICA (Sept. 23, 2013), https://www.britannica.com/topic/Federal-

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