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

• Author: Nicolas M. Traut
• Position: LL.M. (Columbia)
• Pages: 119-171

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 generallyRICHARD E.ANDERSEN, ANALYSIS OF

UNITED STATES INCOME TAX TREATIES ¶ 1.01 at *2 (2010); Rebecca M. Kysar, Interpreting

Tax Treaties, 101 IOWA L.REV. 1387, 1393–94 (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 seeRebecca M. Kysar, Unraveling the Tax

Treaty, 104 MINN.L.REV. 1755passim(2020)(for a critical view on tax treaties).

2

See ANDERSEN,supranote 1, ¶1.01 at *2; JOSEPH ISENBERG,INTERNATIONAL TAXATION

221–22 (3d ed. 2010); Reuven S. Avi-Yonah, Tax Treaty Overrides: A Qualified Defence of

U.S. Practice, in TAX TREATIES AND DOMESTIC LAW65, 78(Guglielmo Maisto ed., 2006);

Oliver Fehrenbacher & Nicolas Traut, Völkerrechtliche Verträge und nationale „Treaty

Overrides,”in GRENZÜBERSCHREITENDES RECHT,CROSSING FRONTIERS:FESTSCHRIFT FÜR

KAY HAILBRONNER569, 570 (Georg Jochum et al. eds., 2013) (Ger.).

3

ANDERSEN,supranote 1, ¶1.01at *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, supranote 1, at 1394.

4

Avi-Yonah,supranote 2, at 78; Anthony C. Infanti, Curtailing Tax Treaty Overrides:

A Call to Action, 62U.PITT.L.REV. 677, 681 (2001); Kysar, Interpreting Tax Treaties, supra

note 1, at 1394.

5

SeeFehrenbacher & Traut, supranote 2, at 570; Hans H. Gattermann, U.S. Tax Tr eaty

Overrids Are Una cceptable, 2 TAX NOTES INT’L1238 passim(1990); Infanti, supranote 4,

at 681–88.

404CAPITAL 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 fiftyyears 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 havealsobeen made in the last decades to initiate a legal

discussion on tax treaty overrides.

10

Nevertheless, the Supreme Courtnever

really reconsidered the problem.This does not do justice to the relevance of

thisissue. The world has not stoodstill 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

CAPITALR(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. (11Wall.)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 INT’L L.&

MGMT.REV. 30, 49 (2011); Infanti, supranote 4, at 687–88.

10

E.g., Infanti, supranote 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.319passim(2005).

11

For the United States t ax treaties, seeJason R. Connery, Seth Green & Kimberly Tan

Majure, Current Status of U.S. Tax Treaties and International Tax Agreements, 48 TAX

MGMT.INT’L 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 OVERRIDES405

Modern-day America has to ask itself whether itshouldfollow Justice Hugo

Black’s advice that “[g]reatnations, 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. Thisarticle 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 law—not only in scholarship, but also in

jurisprudence. In 2012, the German Bundesfinanzhof [Federal Finance

Court],

13

in an attention-grabbingdecision 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 hundredcountries. SeeSchreiben des Bundesministeriums der

Finanzen [BMF-Schreiben] [Letter of the Federal Ministry of Finance], Jan. 15, 2020,

BUNDESSTEUERBLATT I [BSTBL. I] 162passim(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 Courtis 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 FINANCECOURT], 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-