ADIT - PIT - June 2024 Module 1 (Suggested Solutions)

THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION
June 2024
MODULE 1
SUGGESTED SOLUTIONS
Module 1 – Principles of International Taxation (June 2024)
PART A
Question 1
There is no one way to answer this question but it is expected that candidates’ answers include a brief consideration
of the nature of a DTA, a discussion of Arts. 31 and 32 OECD MTC 2017 (with more of a focus on Art.32 than Art.31)
the Vienna Convention on the Law of Treaties (VCLT) and any relevant case law and/or examples from DTA practice.
Answers would then be expected to conclude as to whether the statement can be supported or not. Here is one
possible schematic.
VCLT
As DTAs are international treaties, when considering the ‘life’ of a DTA, reference should be made to the VCLT.
Various provisions of the VCLT address when a treaty can be terminated or withdrawn from. These provisions apply
to DTAs:
• Consent of the parties. A treaty can be terminated where the treaty itself provides for termination or if all parties
to the treaty consent to its termination (Art.54 VCLT). Art.32 OECD MTC 2017 refers to the termination of a
DTA
• Denunciation of or withdrawal from a treaty providing no provision regarding termination, withdrawal or
denunciation (Art.56 VCLT)
• Suspension of the operation of a treaty under its provisions or by consent of the parties (Art.57 VCLT)
• Termination or suspension of the operation of a treaty implied by conclusion of a later treaty (Art.59)
• Where one CS has breached the treaty: a material breach of a treaty by one of the CS would appear to entitle
the other CS to invoke the material breach as a ground for terminating the treaty or suspending its operation
in whole or in part (Art.60 VCLT)
• A supervening impossibility of performance. Fulfilment has become impossible due to the permanent
disappearance or destruction of an object indispensable for the execution of the treaty (Art.61 VCLT)
• A fundamental change of circumstances. Where the original circumstances have fundamentally changed since
the treaty’s conclusion and those original circumstances were an essential basis of the CSs’ agreement to be
bound (Art.62 VCLT)
• Severance of diplomatic relations between CSs does not affect the legal relations between them by the treaty
except insofar as the existence of diplomatic or consular relations is indispensable for the application of the
treaty (Art.63 VCLT)
• Where a new peremptory norm of general international law emerges, any existing treaty which is in conflict
with that norm becomes void and terminates (Art.64 VCLT)
The procedure to be followed is contained within Art.65 VCLT (i.e. where a CS wishes to terminate, suspend or
withdraw a treaty it must notify the other CS). Art.67 VCLT provides details for the instruments for declaring invalid,
terminating, withdrawing from or suspending the operation of the treaty.
OECD MTC 2017
In the OECD MTC 2017, Arts. 31 & 32 specifically address the mechanisms for the entry into force and the termination
of DTAs. These articles set out the operational period of the DTAs and provide the conditions under which one of the
CSs can terminate the agreement by giving notice. Known as "final provisions," these sections have not seen
substantial changes in wording since they were first introduced, underscoring their stability and importance in the
framework of DTAs. These provisions fundamentally govern the "timing, effect, and application" of a DTA (Meinert,
2019).
It is necessary to differentiate Arts. 31 and 32 from other provisions within the MTC e.g. Arts. 1 & 2 discuss the
personal and substantive scope of DTAs, establishing who and what is covered under DTAs and Art. 26 (exchange
of information (EOI) applies as soon as a DTA enters into force, but may also allow for the exchange of information
pertaining to the period before the DTA’s enforcement, provided that the actual exchange occurs post-enforcement
(Dourado 2022 and Art.26(1) Commentary [10.3])). However, once a DTA is terminated, there is no legal framework
to support EOI.for periods when the DTA was active, reflecting the critical nature of these final provisions in regulating
the life cycle of a DTA. Furthermore, Art.30 OECD MTC 2017 is concerned with scope of territory and enables a CS
to extend the application of a DTA to additional territories and so may affect the geographical scope of the DTA
(Becker 2022) and is therefore considered separately from Arts. 31 & 32.
Whilst Arts. 31 & 32 are separate within the OECD MTC 2017 and would be expected to feature separately in DTAs,
there may be references to the termination of a prior DTA within the relevant entry into force provision in some DTAs.
Given this potential overlap, the following considers the entry into force provisions and then the termination
provisions. It could be noted that there are no reservations, observations nor positions on Arts. 31 & 32 OECD MTC
or the Commentary.
Entry into force/termination
The entry into force process typically involves several steps, which can differ slightly depending on each CS’s
domestic law and the relevant procedural requirements. Typically, one would expect CSs to adopt the following
procedure:
• Negotiation and signing, which indicates intent to be bound by the DTA provisions
• Ratification of the DTA, which may require approval from a legislative body or governmental authority,
confirming the DTA’s domestic legal status in the relevant CS
• Exchange of documents (instruments of ratification), which verify that each CS has completed the necessary
legal steps
• Entry into force will depend upon the relevant provisions within the DTA (the exchange of ratification
instruments may trigger it or a specific date may be set)
• DTA provisions may also specify the date from which they start to affect tax matters (e.g. some DTAs specify
that provisions relating to withholding taxes may have, for example, effect from the start of the calendar year
following its entry into force and provisions relating to other taxes may have effect from a later specified date).
Accordingly, there will always be a need to consider the specific DTA provisions at issue (e.g. US/UK DTA
2001, Art.29 Entry into force “in respect of taxes withheld at source, for amounts paid or credited on or after
the first day of the second month next following the date on which this Convention enters into force” then
providing different points in time for other taxes, which apply differently for each CS (given their different tax
years). These may be referred to as “individual threshold dates”
It is possible for CSs to agree for a DTA to have effect before the date of entry into force, which effectively involves
a retrospective application of the DTA provisions (see Art.28 VCLT). Whilst it is possible that the new DTA provides
for more favourable position for relevant persons, it is also possible that the prior DTA provides for a more favourable
outcome than the new DTA. Some DTAs may contain a provision where they permit persons to access the benefits
under the prior DTA (where it provides a more favourable position) until the new DTA enters into force, where the
new DTA would otherwise apply retrospectively (Nasdala 2015 & US/UK DTA 2001 where it is provided that the prior
DTA shall, at the election of such person, continue to have effect in its entirety with respect to that person for a 12-
month period from the date on which the provisions of the new DTA would otherwise would have effect).
DTAs will typically remain in force until terminated by one of the CSs (Zembala 2022). Whilst some DTAs may be
limited in time (e.g. United Arab Emirates-Germany DTA 2010 has a 10-year duration), they would typically be
expected to have a certain minimum duration (e.g. Art.32 OECD MTC 2017 refers to the need to give notice of
termination at least six months before the end of a specified calendar year) or to be left open-ended (Commentary
on Art.32 [5]). Termination of a DTA is to take place “through diplomatic channels or by giving notice of termination”
(Art.32 OECD MTC 2017). Some DTA provisions even refer to the fact that the DTA will remain in force “indefinitely”
whilst still providing a termination process (e.g. Art.30 Belgium/India DTA 1993).
Termination by notice involves a unilateral declaration of intent (Zembala 2022). However, other forms of termination
are contemplated by the VCLT (e.g. mutual agreement regarding the suspension of the DTA, agreement upon a new
DTA as its entry into force will result in the termination of the prior DTA). A new DTA entering into force is considered
to be the most common form of termination of a DTA (Tenore 2006). Severance of diplomatic relations has been
stated not to justify the termination of DTA (Nasdala 2015). The notice does not need to include the reasons for
terminating the DTA. Rather, it needs to comply with diplomatic custom and the relevant notice period (Zembala
2022). Notwithstanding that no reasons are required to be given, termination of a DTA is considered to be a last
resort and it is expected that a CS wishing to terminate a DTA would enter into negotiations with the other CS with a
view to amending the existing DTA (Vogel 1997).
It is not clear from the OECD MTC 2017 at what point in time the DTA provisions will cease to have effect (Art.32
Commentary [54]) and there is variance across DTAs. Some DTAs may specify when the DTA ceases to have effect
(e.g. US-UK DTA 2001, Art.30 – is to remain in force until terminated by a CS.: [e]ither CS may terminate this
Convention by giving notice of termination to the other CS through diplomatic channels. In such event, this
Convention shall cease to have effect approximately six months after the termination notice is given) and others may
specify that, for example, withholding taxes may cease to have effect at a different time to other taxes.
Some suspension/termination examples
The reasons for suspension/termination vary and include concerns regarding base erosion, incongruent tax policies
across the relevant CSs, the lapsing of time before the relevant domestic legal processes have been completed by
the other CS before a new DTA can come into force, as well as public policy concerns and retaliatory measures.
Reported examples include (note some of these terminated DTAs may have been renegotiated):
• US/Netherlands Antilles. Terminated by US in June 1987 as part of its fight against DTA shopping
• US-South Africa 1946. Terminated by the US on 1 July 1987, pursuant to the terms of that DTA and Section
313 of the Comprehensive Anti-Apartheid Act of 1986
• Finland-Portugal. Terminated in June 2018 as Portugal failed to approve a DTA signed by both CSs in 2016
(with a transition period of three years) by the end of November 2018 as required, with the result that as of 1
January 2019 there is no DTA in force between the CSs (PWC Portugal)
• Sweden-Portugal. Sweden initiated discussions with Portugal in 2017 with a view to amending the DTA. An
amended protocol was signed during 2019, but it appears Portugal has yet to ratify this
• Sweden-Greece. Sweden initiated a dialogue with Greece to initiate negotiations on a completely new DTA
• US-Hungary. US notified Hungary on 8 July 2022, that it would terminate its DTA with Hungary. In accordance
with the DTA’s provisions, termination was effective on 8 Jan 2023. However, with respect to taxes withheld
at source, the DTA ceased to have effect on 1 Jan 2024 and for other taxes: the DTA ceased to have effect
with respect to taxable periods beginning on or after 1 Jan 2024
• Ukraine-Iran. Ukraine terminated the Ukraine-Iran DTA in Aug 2023 over Iran’s alleged weapons supply to
Russia
• Burkina Faso-France. BF gave notice of termination in Aug 2023 due to France’s refusal to renegotiate their
DTA despite requests to do so in both 2020 & 2021
• Norway terminated DTAs signed with Barbados, Curacao, Jamaica, Sierra Leone and Trinidad & Tobago in
June 2023 (with the termination taking effect as of 1 Jan 2024). According to reports, Norway considered these
terminated DTAs to be outdated and seldom used in practice. It is possible that some of these may be
renegotiated
• Mongolia unilaterally terminated DTAs signed with Luxembourg, Kuwait, the Netherlands & UAE due to
concerns about DTA shopping and tax avoidance (Ulziisaikhan, IMF, 2013)
Russian DTAs
Russia recently suspended a significant number of material provisions within a significant number of its DTAs e.g.
UK-Russia DTA (the UK (and some other countries, 38 “unfriendly states”) in response to action taken by other CS.
The UK initially suspended exchange of information (EOI) with Russia & Belarus on 17 March 2022). Russa’s DTAs
with Latvia is reported to have been definitely and unilaterally suspended by Latvia in May 2022 and the Denmark-
Russia DTA was terminated by Denmark in June 2023 – it has been reported that the suspended provisions are the
distributive rules and the mutual agreement procedure with provisions from relief from double taxation being generally
retained.
When considering the Russia-UK DTA, it should be noted that it does not provide for suspension but does contain a
termination provision and therefore it is necessary to refer to Art. 60 VCLT when considering suspension. It has been
reported that (i) the UK released a statement in August 2023 noting that the UK-Russia DTA does not permit unilateral
suspension and asked Russia to reverse the suspension and (ii) the Russian Ministry of Finance issued a press
release noting non-compliance with its DTAs, including the suspension of the exchange of tax information (EOI) and
cited the VCLT as the legal basis for the suspension of the selected DTA provisions (Schwarz 2023). It is not clear
whether the suspension of EOI constitutes a material breach and so a valid justification for the suspension of the
relevant DTA(s) under Art.60 VCLT is as yet unclear. There is a view that the UK’s noncompliance with Art.26 of the
Russia-UK DTA does not necessarily imply a breach of the relevant provision because the obligation to EOI is not
absolute. Rather the obligation is subject to the exceptions specified in Art.26(2) Russia-UK DTA 1994, in particular,
there is no obligation imposed on the UK to EOI under Art.26(1) where to do so would be contrary to the public policy
exception (Art.26(2)(c) UK-Russia DTA 1994) (Goel & Goel, 2023). It has been reported that Switzerland has refused
to EOI based on the public policy exception under the Convention on Mutual Administrative Assistance on Tax
Matters (Art.26).
Furthermore, even where there is a relevant breach of a DTA provision, according to Art.60(3) VCLT this breach
must be “material”. The Commentary to the OECD MTC 2017, Introduction [15.6] notes that the administrative
provisions within a DTA, whilst important in furthering the goal of reducing tax avoidance/evasion, do not constitute
a policy basis for entering into a DTA where there is no actual risk of double taxation as the administrative objectives
could be achieved by alternative more targeted means (e.g. Mutual Administrative Assistance on Tax Matters, 2023).
Accordingly, there is an argument that it is unclear that a refusal to EOI (an administrative assistance provision)
would be sufficient to constitute a material breach (Goel & Goel 2023).
An alternative to Art.60 VCLT is provided by Art.57 VCLT, which provides that the operation of a treaty can only be
suspended (i) in conformity with the provisions of the relevant treaty or (ii) through mutual consent of all parties and
after consultation with the other contracting state. On this basis, it would appear that Russia’s suspension may be
unilateral as it has not been effected by way of “mutual consent” and would not appear to be consistent with Art.57
VCLT (Vanhassel & van Doremalen, 2023). Furthermore, as noted above, and at least in the case of the UK-Russia
DTA, suspension is not expressly provided for under its provisions.
Conclusion
Candidates may conclude by summarising their evaluation of the statement. It would be expected that candidates
would tend to agree with the statement and would support their answers by referring to the VCLT, OECD MTC 2017
(Arts. 31 & 32) and providing examples where CS have sought to terminate their DTAs (e.g. US-Hungary DTA 1979)
suspend certain DTA provisions. Candidates may also mention that there are no Reservations, Observations nor
Positions on Arts. 31 & 32 OECD MTC nor its Commentary and coupled with the fact that there have been no
significant amendments to these Arts. (other than the change in their numerical labelling following the inclusion of
Art.29 Entitlement to Benefits in the OECD MTC 2017), it could be concluded that there is general satisfaction with
the manner in which they operate.
A consideration of the entry into force and termination provisions of DTAs and the instances of DTA
suspension/termination highlight that DTAs are not just technical instruments, rather they can be described as
forming part of the international legal infrastructure that both reflects and provides the context for wider international
relations. (Schwarz 2023). Arguably, a study of DTA practice combined with the relevant provisions of the OECD
MTC, VCLT and DTAs not only supports the statement in the question but also reveals the types of tension that have
consistently underpinned DTAs and the conflicting interests (revenue concerns, economic efficiency and the
protection of nationals) that different government departments may have (respectively revenue authorities, treasury
and the foreign office) when considering terminating a DTA, with these tensions dating back to the first termination
of a DTA in 1872 (Jogarajan 2012).
Question 2
Whilst the statement in the question is based on a statement made by Picciotto (Indeterminacy, Complexity.
Technocracy and the Reform of International Corporate Taxation 2015) there is no requirement that candidates
reference this publication. However, answers would be expected to include supporting evidence for the
(dis)agreement with the statement up to and including December 2023 (more recent references are welcomed but
not required). Answers would be expected to briefly consider the general rules relating to the interpretation of treaties
and address the main issue in the statement: whether there have been increases in both soft and hard law and
whether these increases have added to the complexity of the interpretative process when interpreting DTA provisions.
Candidates may also consider whether the language of DTAs is or ever has been “plain and simple”. There is no one
way to answer this question and the below provides one possible schematic.
Interpretation of DTAs
Various terms are defined within the OECD MTC 2017 and UN MTC 2017 including in Articles 3, 4, 5, 10(3), 11(3)
and 12(2) . However, undefined terms are to be afforded their meaning under domestic tax law (with domestic tax
law meanings prevailing over non-tax law meanings) of the contracting state applying the DTA at the time unless
either (i) the context otherwise requires or (ii) the competent authorities agree to a different meaning pursuant to Art.
25 (Article 3(2) OECD MTC 2017). Article 3(2) has been described as a general rule of interpretation relative to the
special rules in the MTCs and DTAs but Art. 3(2) is a special rule relative to the general rules contained within the
VCLT (Dourado et al 2022). However, this special rule classification only extends to terms within the DTA and not to
general principles of domestic law. It would appear that due to the words “at that time” an ambulatory approach
applies in such a case. Where however, a DTA does not contain Art. 3(2) then it would appear that the general rules
of treaty interpretation would apply to undefined terms (e.g. Armenia-US 1973, which has a list of definitions but no
equivalent to Art. 3(2), (Dourado et al 2022).
The VCLT
Provides the legal framework for the creation, interpretation and application of treaties, including DTAs (which are a
form of international treaty, Art. 2 VCLT). Arts. 31 & 32 VCLT detail the general rule of interpretation and
supplementary means of interpretation respectively. Art.31(1) establishes that a treaty must be interpreted in good
faith in accordance with the ordinary meaning given to its terms in their context and in the light of its object and
purpose. Art.31(2) elaborates on the context for interpretation, which includes not only the text, including its preamble
and annexes, but also (a) any agreement relating to the treaty which was made between all the parties in connection
with the conclusion of the treaty, and (b) any instrument which was made by one or more parties in connection with
the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. Art.31(3) further
expands the context for interpretation by including any subsequent agreement between the parties regarding the
interpretation of the treaty or the application of its provisions, any subsequent practice in the application of the treaty
which establishes the agreement of the parties regarding its interpretation, and any relevant rules of international law
applicable in the relations between the parties. Art.31(4) states that a special meaning shall be given to a term if it is
established that the parties so intended. Art.32 provides that supplementary means may be referred to (and this
includes the preparatory work of the treaty and the circumstances of its conclusion), may be used to confirm the
meaning resulting from the application of Art.31, or to determine the meaning when the interpretation according to
Art.31 leaves the meaning ambiguous or obscure or leads to a result which is manifestly absurd or unreasonable.
Increases of soft law and hard law
Whilst there are a number of ways that candidates could explore this aspect of the question, it would be expected
that candidates would consider the impact of the BEPS Project in relation to both soft law (BEPS Final Reports and
the 2017 changes to the OECD MTC and its Commentary) and hard law (the impact of the MLI where countries have
determined that DTAs within their DTA networks are covered tax agreements (CTAs) or more recently negotiated
DTAs include terms that are consistent with the minimum standards within the MLI. It is also open to candidates to
consider more closely the dividing line between soft/hard law in the context of international tax e.g. when soft law
impacts the interpretation of hard law terms. It is also expected there be an acknowledgement that there has recently
been an increase in both soft and hard law in the area of international tax. It has also been stated that the OECD laid
out three tiers of norms in the form of “minimum standards”, “recommendations” and “best practices” to be
operationalised via various soft law (guidance, commentary and reports) and hard law (the MLI) (Christians 2021). It
is expected that answers acknowledge that there has been an increase in both soft and hard law in the area of
international tax.
Increased complexity in the interpretative process
It is anticipated that this section would include an analysis of the possible interpretative effect of the various
documents that together form the BEPS Project (taken here to mean the 15 Final Reports released in 2015 and its
relevant outputs including the MLI). When considering the interpretative process, there are a number of points that
could be made including: interpretative issues generally (e.g. the VCLT), the role of the OECD commentaries (static
v ambulatory approach, etc.), the fairly constant architecture of DTAs in terms of allocating of taxing rights, the impact
of the MLI and the relevance of its Explanatory Statement, and the interpretative role of different interest groups
(legislators, DTA negotiators, the judiciary, revenue authorities, taxpayers, advisors, etc). Also relevant are the nature
of the BEPS Project (noting that there may be different notions of what this includes) and the interpretative impact of
its outputs.
Nature and Influence of BEPS Project
In 2013, the OECD & G20 countries adopted a 15-point Action Plan to address BEPS. The final reports were
published as a BEPS Package (OECD, BEPS Project: Final Reports 2015). In 2016, the Inclusive Framework (with
over 100 members) was established to develop standards and reviewing, monitoring and implementing the BEPS
package. Candidates may note that BEPS 2.0 does not appear to form part of the BEPS Project and while it can be
referenced it is not expected that BEPS 2.0 would form a significant part of answers.
OECD MTC 2017 and its Commentary
The Final Reports of the BEPS Actions, to varying extents, have influenced the 2017 version of the OECD MTC and
its Commentary. The BEPS reports were not attached to the MTC but rather aspects of the reports were incorporated
into the provisions and/or included in the Commentary. The MTC included changes to the following text based on
different BEPS Actions: Preamble (Action 6); Art.1(2) & (3) (Action 2); Art.3(1)(e) (Action 2 & 2013 Discussion Draft);
Art.3(1)(f) (Action 6 & 2016 Discussion Draft); Art.3(2) interpretation by competent authorities (possibly Action 14 but
it has been stated that this was developed after the publication of the Final Reports in 2015); Art.5(4)(f), (5), (6) & (8)
(Action 7); Art.8 (BEPS Action 6); Art.10(2)(a) (Action 6); Art.13(3) (indirectly Action 2 & 2013 Discussion Draft);
Art.13(4) (Action 6); Art.23A (Action 6): Art.23B(1) (Action 6); Art.25(1) & (5) (Action 14); & Art.29 (Action 6). In
addition, there were a large number of amendments made to the Commentary that accompany the relevant
aforementioned changes to the text of the OECD MTC.
The MLI
Candidates are expected to provide examples of hard law, e.g. new DTAs entered into by countries and the MLI
(examples can also be provided of domestic law changes to support points being made but this is not required). As
a hard law BEPS output, it is necessary to consider the MLI’s impact on the interpretation of DTAs (and its .
Explanatory Statement (ES)). DTAs modified by the MLI are covered tax agreements (CTAs). The MLI is the product
of Action 15 where it was acknowledged that the implementation of the BEPS recommendations required changes
to the operation of the actual text of DTAs (in addition to domestic law changes). Where countries sign on to the MLI
and determine that a particular DTA may be modified by certain MLI provisions (in addition to the minimum standards)
a modification will generally take place where there is a MLI match in position. This process was thought preferable
to the alternative of separately negotiating changes to all DTAs that countries wished to amend. It is also open to
candidates to briefly refer to examples of hard law domestic changes brought about by BEPS Actions that may affect
the interpretation of DTA provisions (e.g. changes to CFC rules, rules restricting interest deductibility, anti-hybrid
rules etc.) but this is not required.
When considering the extent to which the MLI may affect the interpretation and implementation of DTAs, it is
necessary to be clear about the nature of the MLI. Whilst the MLI (i) is a treaty in that it is ‘a binding formal agreement,
contract, or other written instrument that establishes obligations between two or more subjects of international law
(primarily states and international organizations) (Henriksen 2019) and is a multilateral treaty in that it is concluded
among a number of countries, establishing rights and obligations between each party and every other party
Convention on Mutual Administrative Assistance in Tax Matters, there appears to be disagreement about the precise
nature of the MLI e.g. it may be viewed as an (i) autonomous treaty that must be read alongside the relevant CTA
provisions (Bravo, 2020 and Avery Jones 2019), which appears to be the more supported view (Manzi, 2020) but (ii)
it is also considered by some to operate as a protocol of sorts that applies so as to implement the relevant BEPS
measures (Bravo, 2020). This disagreement as to nature of MLI may be considered to have a knock-one effect for
the interpretation of DTAs e.g. where the MLI is not viewed as a self-sustaining DTA (as it based on the relevant
CTAs) and without these CTAs the MLI would have no reason to exist) as under this approach only the CTAs remain
the only agreements in force between the relevant contracting jurisdictions (CJs) (Bravo 2020).
The main interpretative guide for the MLI is the ES, which was drafted by an ad hoc group. Both the text of the MLI
and the ES were adopted by member countries in 2016. The ES, at [11], is stated to “provide clarification of the
approach to be taken in the MLI and how each provision is intended to affect tax agreements covered by the MLI
[and] reflects the agreed understanding of the negotiators with respect to the MLI.” There is a discussion around
whether only those countries that formed the ad hoc group are bound by the ES or whether all those signing on to
the MLI have implicitly accepted the ES as an interpretative aid (Manzi 2020). The legal status of the ES is
controversial as it does not form part of the MLI and the MLI does not expressly refer to the ES for interpretational
purposes. There are numerous views as to the ES’ status, which include that:
a) It is binding on members of the ad hoc group per section 31(2)(a) of the VCLT as it qualifies as an agreement
relating to a treaty that was made between the parties in connection with the conclusion of the treaty’ (Manzi
2020);
b) It can be viewed as a supplementary means of interpretation under Art.32 VCLT;
c) Art.31(4) VCLT special meaning applies;
d) It may also influence those countries who had the option to join the ad hoc group but chose not to do so as
these countries may be seen to have freely adopted the terms of the MLI as drafted by the ad hoc group and
as a consequence indirectly agreed to be bound by the ES per Art.31(2)(b) VCLT (Manzi 2020): and
e) It should be distinguished from the OECD MTC / UN MTC and relevant Commentary as it is not possible for
countries signing on to the MLI to change the terms within the MLI (Manzi 2020).
Other points that could be made include:
• That the MLI specifically provides for a mechanism by which parties can determine questions of interpretation
and implementation for provisions of CTAs as modified by the MLI (Art.32(1) MLI), which are to make use of
the mutual agreement procedure to determine how the MLI has modified a specific agreement where such an
agreement is consistent with the MLI provisions and provisions of the MLI itself. (Art.32(2)) (Opinion of the
Conference of the Parties of the MLI, MLI Interpretation and Implementation Questions, May 2021). Implicit is
that increased issues relating to interpretation are anticipated. The impact of the MLI may impact different
provisions in different DTAs differently e.g. the MLI may significantly affect the interpretation of CTAs that have
had their provisions modified in line with specific MLI provisions as it is clear that there CJs are legally bound
to comply with the relevant modifications. There is also scope for countries who have reservations on certain
MLI provisions to remove those reservations in the future such that the MLI may further influence the
interpretation of CTAs moving forward where, for example, the other CJ was (and has remained) open to
modifying the relevant CTA in line with the relevant MLI provision. As noted above, the role of the ES is less
clear. Whilst it does not appear to constitute hard law, it can be expected to influence the interpretation of
provisions within CTAs that have been MLI modified.
• There is also the question of whether the MLI may affect the interpretation of DTAs that are not CTAs. Whilst
the MLI provisions are clearly not binding in such a case, it is possible that MLI provisions (and interpretative
material associated with the MLI such as the ES) may influence the interpretation of provisions within DTAs
that are not CTAs where these provisions are identical or very similar to the relevant MLI provisions (e.g. DTAs
that have been entered into between countries that have chosen not to include their DTA as a CTA but have
included provisions that implement the minimum standard with the same or similar wording to the relevant MLI
provisions. Revenue authority guidance on MLI provisions, may also affect the interpretation of provisions
contained within DTAs that are identical or substantially similar to those contained within the MLI. A further
point in relation to DTAs that are not CTAs, is that it has been stated that Reservations on the MLI in relation
to optional MLI provisions should not be relied as an indication of the intended meaning to give to DTAs that
are not CTAs as the reservations to the optional MLI provisions are made for a variety of reasons (including
disagreement with a DTA related BEPS measure to the desire to implement the relevant measure only in
certain specified DTAs and not others) (De Bravo 2020).
Soft law
OECD & UN MTC 2017 (and their Commentaries). Candidates may briefly refer to the fact that the OECD and
UNMTC 2017 (and their Commentaries) are not hard law and so can be considered under this heading where they
are accepted as soft law. This section considers the changes made in the OECD MTC 2017 Commentary at a high
level – it is open to candidates to provide examples in this section. Whilst the focus here is on the work of the OECD
more generally, it is also open to candidates to mention the UNMTC 2021 (e.g. the introduction Art.12B, which
introduced a source state taxing right for income derived from automated digital services into the UNMTC). To avoid
duplication there is no discussion of the ES to the MLI in this section. It has been stated that the Commentary on the
OECD MTC 2017 contains 150 pages of new Commentary introduced into the 2017 version (Hattingh, 2018).
In relation to the influence of the OECD MTC Commentary, it is possible to consider this in a number of different
ways, including:
• CTAs. There is an argument that the Commentary to the OECD MTC 2017 may be relevant to the interpretation
of the MLI modified provisions within a CTA where relevant OECD MTC provisions are the same as the relevant
CTA modified provisions. Where this is the case, there is an argument that the boundary between soft law
(Commentary) and hard law (CTA provisions) may be less than clear. When considering the extent to which
the Commentary to the OECD MTC 2017 may influence the interpretation of provisions that have not been
modified but sit within a CTA (because, for there is no match in the CJs’ MLI position), then arguably the
argument that the 2017 Commentary is relevant is weakened by the fact that the original DTA wording remains
“unmodified” and for those DTAs that were entered into pre-BEPS there appears to be evidence of an “opt-
out” by either one or both CJs in relation to a specific MLI provision in relation to a provision that has been
incorporated into the MTC / its Commentary.
• Non-CTAs. DTAs that are not CTAs may be broadly categorised as BEPS compliant or not e.g. some DTAs
entered into in the post-BEPS era, like the Australia-Germany DTA 2015, incorporate key aspects of the BEPS
project, meeting the minimum standard even though they are not CTAs. Other pre-BEPS DTAs, such as those
with the USA that include limitation of benefit provisions, may also be considered “BEPS compliant”. If such
DTAs contain provisions that align with the terms of the OECD MTC 2017, there is an argument that the MTC
Commentary could influence their interpretation. However, for non-CTAs with terms not aligned with BEPS
standards, the 2017 updates to the OECD MTC and its Commentary arguably have limited relevance in
interpreting these provisions.
Conclusion
BEPS has been characterised as ushering in a new era where individuals and organizations outside the usual tax
policy circles have recognised the societal importance of tax, cross-border tax regimes and their associated
institutions. This recognition has led numerous organizations to express opinions on the meaning and significance
of DTAs, extending well beyond the traditional scope of government officials, tax practitioners, academics or judicial
officers (Hattingh 2020). Thus, it can be said that the landscape for DTA interpretation in the post-BEPS era is more
plural than before (Schon 2020). When considering the impact of hard and soft law changes to DTA interpretation,
the interpretation of the MLI is clearly relevant and it could be noted that the MLI can be viewed differently to the
other BEPS outputs (which as soft law may not constitute “context” per Art.31(2) VCLT) as they were not adopted in
connection with the conclusion of the MLI and were agreed by a group smaller than the ad hoc group (Hattingh
2020)).
The relevance of the BEPS Project has been described as “controversial” (Manzi 2020) as these are “not binding
tools per se but at the same time represent the substance of the MLI”. Where the ES to the MLI is viewed as a binding
interpretation tool then to the extent that the ES refers to paragraphs within the BEPS Project (e.g. ES [39]-[40] refers
to BEPS Action 2: Manzi 2020) the BEPS Project could be considered to play a role in the interpretational process
of MLI provisions under Article 31(2) VCLT and potentially relevant provisions in DTAs. However, it could also be
noted that (i) the MLI’s impact on DTAs generally may be viewed as still being rather limited in that it has been stated
that as at 2018 it has only affected directly approximately 1,246 DTAs (Hattingh, 2018) and (ii) concerns have been
raised that if BEPS outputs are seen as influencing the interpretation of DTAs, this approach could be perceived as
introducing BEPS measures "through the backdoor" (Brauner 2018), a priori given that there are significant questions
as to whether non-OECD member countries and even some OECD member countries regard the BEPS project as
legitimate (Elliffe 2019).
Candidates might also note that MLI provisions, a key BEPS output, are now part of the OECD MTC 2017 and may
impact certain DTAs, particularly CTAs, in various ways. This can be said to contrast with pre-BEPS strategies, where
approaches to address profit shifting and DTA shopping were added to the MTC Commentary, influencing the
interpretation of existing DTA terms (Hattingh 2020) and this has been said to have elevated the status of certain key
aspects of the BEPS project to OECD MTC provisions or as part of the Commentary (Hattingh 2020). Accordingly, it
can be argued that the BEPS Project has impacted the interpretation of DTAs more generally than just impacting
those DTAs that are CTAs and it is arguable that whilst DTA provisions may not typically ever have been described
as “plain and simple”, arguably they may now be considered to be relatively less simple to apply than previously
(Bossuyt, 2020 referencing the MLI’s spillover effect on the bilateral DTA network which has strongly increased
complexity in the interpretation of DTA rules).
Question 3
This question asks candidates to evaluate whether adopting a multilateral tax agreement (MTA) by some or all
countries would be preferable to maintaining the existing bilateral network of over 3,000 DTAs. Candidates should
address several key aspects in their responses, which may include:
1) Current Situation. Provide a brief overview of the existing landscape, which includes numerous bilateral DTAs,
many of which have been modified by the Multilateral Instrument (MLI).
2) Challenges with the Current System. Discuss the perceived issues and challenges associated with the current
predominance of bilateral DTAs.
3) Nature of Multilateral Treaties. Outline what constitutes a multilateral treaty and how it differs from bilateral
agreements in structure and scope.
4) Pros and Cons of MTAs. Analyse the potential benefits and drawbacks of shifting towards a single or a greater
number of MTAs over the existing system of bilateral DTAs.
Candidates are expected to incorporate at least some of these points into their answers, providing a well-rounded
argument for or against the move towards more generalised multilateral agreements in tax policy. There is no one
way to answer this question and the following provides one possible schematic.
Current situation and concerns
Bilateral DTAs: the current situation involves over 3,000 individually negotiated bilateral DTAs that are to varying
extents like the relevant OECD MTC in existence at the time the DTA was entered.
MTAs: existing MTAs can be categorised based on their focus: some address substantive international tax law
issues, such as the relief of international double taxation, while others are dedicated to administrative cooperation
(Baker 2021). Further, these MTAs can be classified into regional instruments, designed for members of specific
regional groups, and global instruments, which are open to all countries. Unique among these is the MLI, which may
prove transformative for the future development of MTAs. There is a long list of regional instruments, although it has
been stated that relatively few of them are particularly significant in practice (e.g. there is a view that the Nordic
Convention is a hybrid international arrangement that consists of a series of bilateral DTAs held together by common
principles and provisions: Orow 2005)).
In terms of administrative cooperation between revenue authorities, there are both regional instruments and a global,
multilateral instrument of significance Multilateral Convention on Administrative Assistance (MCAA)). The growth in
acceptance of the MCAA has undoubtedly been assisted by developments arising out of the OECD’s Harmful Tax
Competition project in the late 1990s, with its emphasis on exchange of information and administrative cooperation
to identify cooperative and non-cooperative jurisdictions (Baker 2021).
Concerns: it has been said that pre-BEPS international tax involved a series of unrelieved collective action problems
related to the issues of tax competition and tax arbitrage, particular in respect of the taxation of multinational
enterprises (Christians 2007). The large number of bilateral DTAs can be described as exacerbating these problems
and whilst the MLI seeks to reduce these concerns there is an argument that it may not (fully) meet its objectives
(Parts I-V) and adds complexity to an already somewhat fractured regime.
Examples of concerns include:
• Complexity. The Full Version of the OECD MTC 2017 on which many DTAs are based is over 2,500 pages in
length (including a Commentary that is approximately 550 pages) (Hynes 2022); whilst the MLI may provide a
mechanism for the swift implementation of certain of the BEPS recommendations, there is a view that it creates
considerable complexity by providing a multitude of options for jurisdictions to opt in or out of various provisions
(Hynes 2022).
• Ineffective. There is no definitive evidence that the BEPS project has effectively curtailed tax avoidance.
However, some reports indicate that compliance and administrative costs have generally increased, partly due
to BEPS initiatives. For instance, the cost of complying with tax laws in Australia reportedly rose from $40
billion in 2010 to $50 billion per year by 2021. This figure has been reported to be approximately 14 times
higher than the cost of running the relevant country's revenue authority (Mills 2021). Additionally, factors such
as accelerating globalisation, digitalisation and the rise of borderless entities highlight the growing challenges
faced by a bilateral tax regime in maintaining control. Furthermore, the MLI might introduce uncertainty and
confusion, potentially creating new gaps or frictions in DTAs, which could inadvertently open up new avenues
for BEPS.
• Uncertainty. There is a concern that the past decade has witnessed constant changes in the international tax
space, which has had a knock-on effect on certainty due to increased complexity, compliance and
administrative costs. Furthermore, it appears that further changes are now being implemented or an on the
horizon (e.g. BEPS 2.0).
• Unprincipled. The MLI does not address the underlying cause of BEPS (i.e. the bilateral DTA regime per se
and the variously framed domestic tax laws that have developed as a result). There is a view that the MLI may
not meet the objectives of neutrality, complexity nor efficiency (Hynes 2022). Plus, there are those who
consider that in the main the changes being made by the MLI are trivial, often to the point of total irrelevance
(Cooper 2019).
Benefits
Some possible benefits of an MTA include (note: some are inter-related):
• Reducing overall complexity by decreasing the total number of DTAs) from approximately 3,500 to one MTA
(or to a subject specific set of MTAs)
• Removal of opportunities for tax competition through the terms of bilateral DTAs (Baker 2021)
• Provides an opportunity to address international tax issues that concern more than two countries e.g. triangular
cases (Baker 2021)
• Standardising regulations — companies can more easily navigate tax laws between CSs to an MTA rather
than via a multitude of bilateral DTAs, thousands of pages of commentaries, the MLI, and the need to
investigate the current MLI elections of each trading partner
• Reducing competition for mobile capital and maintaining tax rates
• Reducing compliance costs for taxpayers and administrative costs for tax collectors
• Encouraging tax havens to become signatories of the MTA
• Leveling the playing field for all tax jurisdictions with an MTA – as there may be an imbalance in power when
a bilateral DTA is negotiated (Baker 2021)
• Encouraging and producing cooperation among all tax jurisdictions
• A more effective instrument for the development of a global approach to the taxation of cryptocurrency-related
activities and the future manifestations of both digitalization and globalization (Hynes 2022)
• Amended more easily once the decision to amend has been reached (Baker 2021)
• A need for a world tax organization/court to address MTA issues (this could be viewed as a disadvantage
depending on one’s perspective) (Tanzi 1999)
• It may be easier for some countries, a priori smaller countries that either have not entered DTAs with other
countries or have only entered into a small number of DTAs to enter into fiscal relations with a larger number
of countries rather than separately negotiating individual DTAs (Baker 2021)
• Possibility of a common interpretation of the MTA’s provisions and ultimately develop new international tax
principles (Baker 2021)
• Practical benefit that there would be a need only to access a single document rather than potentially thousands
of bilateral DTAs (Baker 2021)
Disadvantages
Many of the possible arguments that may be raised against a MTA relate to multilateral treaties generally and include:
• Ceding of Sovereign Rights: adopting an MTA may require countries to relinquish a certain degree of
sovereignty, especially concerning their tax imposition and collection practices. This could pose a challenging
political stance for jurisdictions participating in an MTA, as it directly impacts their autonomy over tax policies.
• Difficulty in reaching a consensus (Baker 2021)
• Likelihood that in order to achieve consensus multiple options would need to be included, which would add to
the complexity of the document (Baker 2021)
• There is no or minimal opportunity for tailored bespoke solutions (Baker 2021)
• It is possible that the structure of an MTA may give undue influence to a small number of countries or only one
country (Baker 2021)
• Reduced Competitive Advantage: an MTA might limit individual countries' ability to use tax incentives to attract
capital and corporations, impacting their competitive edge in the global market
• Lengthy Negotiation Process: Establishing the terms of an MTA could involve prolonged and complex
negotiations, given the need to accommodate the diverse interests and tax policies of all participating countries
• Increased Mistrust: confidential negotiations for an MTA could lead to heightened mistrust between
governments and taxpayers, potentially eroding confidence in the tax system
• Complexity in Drafting Provisions: creating an MTA that fairly represents the interests of all or most
participating countries can be extremely complex, given the vast differences in national tax systems and
policies
• Challenges in Gaining support from Larger Economies: securing the buy-in of larger economies for an MTA
can be particularly difficult, as these countries might have more to lose from ceding tax policy sovereignty and
may prefer to maintain their bilateral agreements
Conclusion
In concluding, candidates might determine that either expanding the use of MTAs, whether regional or topic-specific,
or continuing to rely on a vast network of bilateral DTAs is preferable. Their conclusions could involve a critical
analysis of the arguments for and against adopting a more extensive MTA framework. It is also notable that increased
multilateralism in tax is likely, and this trend may be more pervasive than initially recognised. For instance, there is a
perspective that Part VI of the MLI might apply to all DTAs—not only to those modified by Parts I-V of the MLI—and
could function as an effective standalone MTA focused on mandatory arbitration of tax disputes (Baker 2021).
A recent initiative, the ‘Fast-Track Instrument’ (FTI), mirrors the MLI's approach and aims to facilitate the integration
of key provisions from the UN MTC into existing DTAs. This would strengthen countries' rights to tax profits generated
within their borders from natural resources, offshore indirect transfers, technical services, automated digital services,
and other areas, along with incorporating a broader application of the Subject to Tax Rule and provisions on capital
gains from immovable property, pension funds, and arbitration (Picciotto 2023).
The discussion could also explore which organisations might lead such initiatives, with the OECD and the UN being
the primary candidates, other possibilities might briefly be considered. Candidates may also acknowledge that the
drive for a singular MTA is not new, tracing back to efforts from 1920 to 1960, especially between 1920 and 1939
(Broekhuijsen 2017). Despite these historical efforts, tax sovereignty remains a significant barrier to a unified MTA
solution. However, some views suggest that significant inroads into tax sovereignty have already been made, positing
that the OECD's role as a global tax authority could potentially evolve to include the development of an MTA (Hynes
2022).
Question 4
This question provides candidates with an opportunity to demonstrate their understating of exchange of information
and in particular the boundary between requests made by revenue authorities for information to be exchanged that
are likely to be classified as being ‘foreseeably relevant’ and those that are likely to be perceived as ‘fishing
expeditions’. Candidates may refer to the recent amendment (19 February 2024) to the Commentary on Article 26
OECD MTC 2017 but this is not required. Whilst there is no one way to answer the question the provides one possible
schematic.
EOI is founded on mutual assistance provisions in DTAs, Tax Information Exchange Agreements (TIEAs) and
regional or multilateral conventions, notably the Convention on Mutual Administrative Assistance in Tax Matters
(MAAC) developed by the OECD and the Council of Europe, and the Agreement on Mutual Assistance in Tax Matters
(AMATM) by the African Tax Administration Forum (ATAF). EOI primarily takes place in three main forms (whether
alone or in combination): on request, automatic and spontaneous but other techniques may also be used (e.g.
simultaneous examination and industry wide examinations (Dourado 2022)).
• EOI on request (EOIR) involves one country's Competent Authority (CA) requesting specific information from
another country’s CA under an international agreement.
• Automatic exchange of information (AEOI) occurs when CAs of two or more countries periodically exchange
predetermined types of information, such as income details (e.g. interest, dividends, royalties, pensions)
without prior request, based on an international agreement. Countries agree in advance on the types of
information to be exchanged and the timing of these exchanges (Global Forum on Transparency and
Exchange of Information for Tax Purposes, Establishing and Running an Effective Exchange of Information
Function, a joint Global Forum and ATAF Toolkit 2020).
• Spontaneous exchange of information (SEOI) happens when a CA, during its tax law enforcement, discovers
information that may interest a treaty partner and shares it without a prior request. This form's effectiveness
relies on tax inspectors recognising pertinent information during investigations. If the information leads to tax
adjustments, the providing CA should seek feedback from the recipient administration (Global Forum on
Transparency and Exchange of Information for Tax Purposes, Establishing and Running an Effective
Exchange of Information Function, a joint Global Forum and ATAF Toolkit 2020).
Art. 26(1) OECD MTC 2017 sets the legal basis for EOI and accommodates any method that may be developed and
agreed upon by the contracting states (CSs) (Dourado, 2022). Where the conditions are fulfilled, EOI is mandatory
due to use of the word “shall”. The requirement that CSs exchange information under Art.26 OECD MTC can be said
to support national revenue interests, facilitate the allocation of taxing rights and aid in resolving disputes over income
sources and taxpayer (TP) residence. More specifically, it aids the enforcement of domestic tax laws in CSs, ensuring
compliance with the respective DTA provisions and establishes a framework for information exchanges – EOIR,
AEOI & SEOI – extending beyond the residents or taxes covered by the relevant DTA (prior to 2000, Art 26 was
limited by Article 2 (Dourado 2022) but some countries have a reservation on this aspect of Art. 26 e.g. Thailand and
Morocco (Positions on Art. 26, [2.1])). A central aspect of Art. 26(1) is that information exchanged is ”foreseeably
relevant” (FR), which is discussed below. Art.26 also sets limitations to prevent abuses like bank secrecy and
specifies conditions under which exceptions to EOI are allowed, such as when compliance would breach either CS's
laws or administrative practices, or when disclosure could reveal trade secrets or contravene public policy (Art. 26(3)).
Foreseeable relevance (FR)
Has been described as a “precondition” for information to be exchanged (Urinov, 2016) and guides EOI allowing for
broad information sharing while preventing indiscriminate ‘fishing expeditions’ (Commentary on Article 26 OECD
MTC 2017, [4.4]). Prior to the inclusion of the FR criterion, the information requested had to be “necessary” and some
countries replaced the necessary condition with “relevant” (Commentary on Article 26 OECD MTC 2000, 2003, [5]).
Whilst the OECD has stated that FR is synonymous with “necessary” (Commentary on Art.26 [4.1]), there is a view
that FR is broader (Teck 2009 and Dourado, 2022).
The FR condition is not defined in the OECD MTC 2017 and so there is an argument that per Article 3(2) reference
should be made to domestic law to determine its meaning. However, the context may require an alternative
interpretation - i.e. an autonomous interpretation; as tehre is a view that Art. 26 operates in “an international tax
situation” (e.g. condition of information exchange and the requested state is required to provide information even if it
does not require it for its own purposes ) and so warrants an autonomous interpretation of an undefined DTA term
(Dourado, 2022). Where an autonomous interpretation of FR is adopted, other conditions arising under domestic law
may still be relevant e.g. in the US, the Powell standards have to be satisfied (United States v Powell, 379 US 48,
57-58, 14 AFTR2d 5942 (1964).
As noted above, the Commentary on Art. 26(1), [5} provides that FR is intended to provide for EOI in tax matters to
the widest possible extent and, at the same time, to clarify that jurisdictions are not at liberty to engage in ‘fishing
expeditions’ or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer (TP).The RF
criterion requires information to be reasonably expected to be relevant at the request time; its actual relevance after
being provided is secondary (Commentary on Art. 26(1), [5]). The Commentary on Art.26 and various protocols to
DTAs provide further details on what constitutes foreseeable relevance and a fishing expedition, ensuring that EOI
promotes tax compliance and enforcement while protecting TP rights and confidentiality.
A common requirement of EOI is the exchange of foreseeably relevant information for the application of the provisions
of the related EOI agreement or for administering or enforcing the requesting jurisdiction’s tax law. The competent
authorities (Cas) of the requested and requesting country exchange information that is FR to secure the correct
application of the provisions of the international agreement between them or of their domestic laws. Jurisdictions
seeking information must identify the correct jurisdiction to ask, provide enough details to identify the TP(s), and
establish the information's relevance to a specific tax investigation. Typically, knowing the financial institution holding
the information is necessary (OECD, Tax Policy Studies - Taxation of Household Savings 2018). The assessment of
foreseeable relevance primarily rests with the requesting jurisdiction, though CAs should consult if the relevance is
unclear to the requested jurisdiction (Commentary on Art.26, [5]). Whilst the requested state may consult with the
requesting state and ask it to clarify the FR nature of the information request where it becomes aware that the
information requested may not be FR, the requested state is not required to provide information in response to a
request that is a fishing expedition.
Whilst Article 26 OECD MTC 2017 does not specify what may constitute FR, Articles 5(5) of the OECD’s Model
Agreement on Tax Information Exchange Agreements refers to types of information that a requesting party should
provide to support the FR nature of the request (a checklist, which broadly corresponds with Module 1, [24]-[25] on
the Manual on Implementation of Exchange of Information) and it may be open to the requested state to conclude
that the request involves a fishing expedition where the requesting country fails to provide items on the relevant
checklist (Manual on Implementation of EOI”.
The 2012 revision of Art.26 OECD MTC elaborated on ‘group requests’, specifying when they meet the standard of
foreseeable relevance (Commentary on Art.26, [5]-[5.3]). The EU's adoption of Art.5(a) in Directive 2011/16/EU
largely codifies the Berlioz judgment, setting limits on unspecified bulk requests and irrelevant information requests.
Various examples are provided for in the Commentary on Art.26 [7] – application of the DTA provision - and [8] and
in particular the example in the Commentary on Art.26 [8(f)]. Examples also include where:
• Country X is aware that clients of a specific tax agent have participated in a tax avoidance scheme involving
investments in a company based in Country Y. Several of these individuals are under investigation, facing
substantial potential tax liabilities. Despite exhausting all local information-gathering powers, Country X's tax
authorities have been unable to secure a client list from the tax agent. Consequently, Country X has requested
Country Y to identify all investors in the company who have an address in Country X. This request has been
stated to meet the standard of FR as it targets a specific group—investors in the foreign company—and
addresses a specific tax risk associated with the avoidance scheme (IEMI101350 HMRC 2024).
• An information request has been held by a Swiss Tribunal not to fulfil the FR criterion because the underlying
investigation related to taxable periods prior to those in relation to which information could be exchanged. The
Federal Supreme Court decided that it was FR and did not involve a fishing expedition (Michel 2017 & Case
No. 2C_1162/2016)).
• The Swiss Federal Supreme Court has ruled that (i) the criterion of FR is satisfied—typically in cases involving
lump sum payments—if there is a reasonable possibility that the requested information will prove significant at
the time of the request, and (ii) the role of the country from which information is requested in making this
determination is likely to be limited. Therefore, the assessment of FR primarily falls on the requesting country
(Suter and Poletti 2021 referring to inter alia FC 16 April 2018 2C_28/2017).
• A request should not be deemed a fishing expedition solely because it (i) lacks the name and/or address of
the TP under investigation, provided it contains sufficient alternative information to identify the TP, or (ii)
features a different spelling of the name or presents the name/address in a different format, as long as there
is enough additional information included to identify the TP (Commentary on Art.26 [5.1]).
• A group request that does not individually identify the TPs, but instead provides a detailed description of the
group, the specific facts and circumstances leading to the request, an explanation of the applicable law, and
the reasons for suspecting non-compliance within the group, supported by clear factual evidence, may not be
considered speculative or akin to a fishing expedition (Commentary on Art.26 [5.2). This would also include
information relating to any third party’s actions that have actively contributed to the alleged non-compliance.
Fishing expeditions
As noted above, the requested state is not obliged to provide information in response to ‘fishing expeditions’ (FE).
This is justified on the basis that the requested state is granted some control of the allocation of resources, the right
to a defence of a TP and the right to confidentiality (Dourado, 2022). FE is not defined in the OECD MTC 2017 but
is referenced in the Commentary on Article 26 and has been separately defined as being speculative requests lacking
a clear connection to an ongoing inquiry or investigation (Manual on Exchange of Information, number 2023, poin8
(Dourado, 2022)). However, the requested state is expected to provide such information when the requesting state
has provided a rationale explaining the foreseeable relevance of the information requested (Commentary on Art.26
[5]). A request will not constitute a FE simply because it does not contain the name and/or address of the TP under
investigation ((Commentary on Art.26 [5.1]] however, other information would be needed in order to identify the TP.
Other examples where a request may be considered not to be foreseeably relevant and may constitute a fishing
expedition include:
• A request concerning a group of TPs, where the individuals are not specifically identified, may be considered
a FE. This is because a group request can make it challenging to prove that it is not speculative, especially if
the requesting state cannot link it to an ongoing investigation into the affairs of any specific TP (Commentary
on Art.26, [5.2). However, the Commentary does detail how the requesting state may be able to ensure the
information is provided notwithstanding the lack of detail regarding the identities of the group members i.e. a
detailed description of the group and the facts and circumstances that have led to the request, an explanation
of the relevant law and why the TPs in the group have been non-compliant (Commentary on Art.26, [5.2).
• Various examples are provided in the Commentary on Art.26, [8.1].
• Revenue authorities may also provide examples, e.g. (i) where Country X asks Country Y for details of all
properties owned by Country X residents in Country Y. Aside from difficulties in obtaining such information,
this has been stated to be a FE because there is no specific customer and liability for whom the information is
sought. The request is considered to be speculative because it is made in the hope that some useful
information can be obtained rather than being linked to a risk with an identifiable customer or group of
customers. The standard of FR is not met in this example (HMRC IEMI101350 2024) and (ii) a request for
information about a group or group of persons income and/or transactions abroad for the purpose of analysing
risks, conducting surveys or keeping statistics has been stated not to be permitted and would thus appear not
to involve a request for information that is FR (Swedish Tax Agency No. 202 279494-18/111; Karlqvist 2018).
• Some DTAs may provide examples of FEs e.g. Additional Protocol to the Austria-Slovenia (where a CS
randomly requests information about bank accounts held by residents located in the other CS).
Issues: the FR criterion is designed to enhance tax information exchange but faces challenges in interpretation and
application, balancing effective EOI with TP rights protection, and avoiding invasive practices. Issues include:
1) Interpretation variability: as noted above FR is not defined in the OECD MTC 2017 and whilst there is support
for an autonomous interpretation, variability in interpretation remains. Such variability can lead to discrepancies
in how countries interpret data collection and sharing extents, impacting international cooperation and creating
TP uncertainties. Differences in the application of reciprocity principles can lead to inconsistent EOI outcomes.
Additionally, some courts apply the proportionality principle, requiring that data exchange should not
overburden tax administrations lacking in resources or technical capabilities for secure data handling
(Valderrama 2020 and Michel 2017). There is also the point that some contracting states may include Protocols
in their DTAs that seek to define FR using some or all of the elements in the aforementioned checklist (e.g.
Portugese Republic – Republic of Panama, Protocol, [8]) – however, it has been stated that it is not clear that
the requirement for a name and address may not be compatible with the EOI standard (Dourado, 2022).
2) Risk of overreach and privacy concerns: the broad application of foreseeably relevant might lead to excessive
data requests, infringing on TP privacy. While designed to prevent fishing expeditions, distinguishing between
legitimate and excessive requests remains contentious. The OECD Commentary suggests that not all TP
details are necessary for a valid request, but clarity is needed when a request potentially involves multiple TPs,
to avoid breaching uninvolved parties' privacy (Huiskers-Stoop, Breuer and Nieuweboer 2022).
3) Compliance and administrative burden: Assessing the relevance of requested data can significantly burden
jurisdictions, especially those with limited resources, encompassing data collection efforts and compliance with
legal standards. Legal and procedural uncertainties: The subjective nature of the "foreseeably relevant"
standard can lead to legal ambiguities, requiring revenue authorities to balance domestic and international
laws against the necessity to protect sensitive information.
4) Protection of TP rights: It is vital to balance EOI effectiveness with safeguarding TP rights, ensuring that data
security and usage are transparent to maintain TP trust.
5) Evolving standards and practices: As the international tax landscape evolves with new economic activities,
adapting the "foreseeably relevant" criterion to remain effective and relevant is a continuous challenge,
necessitating ongoing international dialogue and cooperation.
Conclusion
While the "foreseeably relevant" criterion under Art.26 plays a vital role in international tax cooperation, addressing
its associated challenges is crucial for ensuring that EOI is both effective and respectful of TP rights and privacy.
Balancing these concerns requires careful interpretation, clear guidelines and ongoing international collaboration.
Candidates may include a reference to the recent amendment to the Commentary on Article 26 OECD MTC 2017,
[11] and [12] as an example of the ongoing work in this area (however, such reference is not required): on 19 February
2024, the OECD Council approved an update to the Commentary on Article 26 OECD MTC 2017, [11] and [12] which
clarifies that information received through administrative assistance can be used for tax matters concerning persons
other than those in respect of which the information was initially received. It also provides interpretative guidance on
confidentiality, in particular regarding the access of taxpayers to information exchanged when such information has
a bearing on their tax situation and regarding reflective non-taxpayer specific information, including statistical data,
about or generated on the basis of exchanged information.
Question 5
The question provides candidates with an opportunity to demonstrate their understanding of the operation of
withholding taxes (WHTs) at a general level, as well as considering the reasons why a country may (or may not)
determine to levy a withholding tax on dividends, interest and royalties (and capital gains where relevant) derived by
non-residents. It also provides an opportunity for candidates to demonstrate their knowledge of the operation of Arts.
10-12 OECD MTC 2017 at a high level, as well as at a more specific level in order to substantiate the points made.
The inclusion of relevant examples from DTA practice, including relevant case law references are welcomed. Whilst
there is no one way to answer the question, it is expected that answers would include a consideration of the nature
of WHTs; reasons for relying on WHTs in an international context (which would include a consideration of the possible
issues for not relying on withholding taxes) and a consideration of how the domestic law position may be modified in
a DTA context. As noted in Art.10(2) Commentary [18]-[19], it is open to CSs to tax these amounts on an assessment
basis but, given the wording, it is anticipated that answers will focus on deduction at source. WHTs on such payments
are levied on the gross amount of the relevant payment, with the result that the rates seen in DTAs provide for a
maximum amount of tax that can be levied on the relevant payment where the relevant conditions are satisfied
(Haslehner 2022).
Nature of WHT
WHT on passive income refers to the tax automatically deducted from payments of interest, dividends, rent and
royalties before these earnings are paid out to the relevant investor or property owner (these amounts are typically
received net of any WHT). Typically, domestic rules regulate the circumstances in which WHT apply and also specify
the relevant rate to be applied. The rate of WHT can vary across countries and may depend on the tax residency of
the recipient, domestic laws of the paying entity and the provisions of any relevant DTA, with non-residents often
subject to a different WHT rate than residents.
Reasons for relying on WHT
Numerous arguments for levying WHT on non-residents can be considered. It is acknowledged some considerations
apply equally to a country’s decision to levy WHT on residents. However, some of the below are more relevant to
WHT levied on payments to non-residents and to WHT in a DTA context:
• Tax jurisdiction and revenue collection. WHT can be viewed as a mechanism for a country to exercise its tax
jurisdiction over income generated within its borders by non-residents. This ensures that income earned in
Country A by foreign entities or individuals is subject to taxation in Country A. This helps secure revenue from
cross-border economic activities.
• Simplicity and efficiency. WHT applies when payments such as dividends, interest and royalties are made by
a resident entity of Country A to a resident of Country B (who is a non-resident of Country A). This mechanism
streamlines the tax collection process, enhances efficiency and lowers the risk of tax evasion. The resident
payer in Country A is tasked with deducting the tax and remitting it directly to the Country A revenue authority.
This often exempts non-residents from the need to file tax returns in Country A, especially when the WHT in
Country A is considered a final tax.
• Tax compliance and enforcement. WHT acts as a tool for ensuring tax compliance and enforcement. By
requiring the payer to withhold and remit the tax, reliance on non-residents voluntarily complying with the local
tax obligations is reduced (again where the WHT operates as a final tax). It also helps revenue authorities to
track cross-border transactions and enforce tax laws more effectively.
• Equity and fairness. WHT on non-residents may level the playing field between residents and non-residents
earning income within a country. This ensures that foreign entities and individuals contribute to the public
finances of the country where they are economically active, which could be described as being similar to how
residents are taxed on their income.
• Policy objectives . Despite the generally uniform application of withholding taxes (WHTs), governments retain
the flexibility to adjust WHT rates, and define relevant payments differently to align with specific policy goals.
For example, a government might:
1) Set lower WHT rates on interest payments to stimulate foreign investment in domestic bonds or to
enhance business financing by making it more appealing for foreign entities to lend to domestic
businesses. For instance, under their domestic laws, some Contracting States (CSs) may exempt
interest paid to financial institutions from tax at the source, as WHT could hinder such transactions
unless the debtor covers the relevant tax (Art.10 Commentary [7.7]).
2) Apply different definitions to various types of payments to tailor tax outcomes to different economic or
sectoral needs.
Issues with WHT
Various issues could be mentioned, including:

• Cash flow impact. The immediate deduction of taxes at source can strain the cash flows of individuals and
businesses. This effect is especially pronounced for those with tight budgets, as taxes are deducted as income
is earned rather than at the time of filing annual tax returns, potentially limiting available funds for operational
or personal expenses.
• Over-withholding. In the context of a DTA, the standard rate at which WHT is applied might not always align
with the Taxpayer’s entitlement to relief as specified under the DTA. Such misalignment may result in excess
tax being collected. e.g. if a country imposes WHT on royalties based on its domestic laws but the DTA grants
exclusive taxing rights to the state of residence, the initial application of WHT may be followed by a refund
once the TP’s entitlement under the DTA is confirmed (Wassermeyer 2010). It is also possible for a default
rate of tax to be withheld when for example a minimum holding period in Article 10 has not been satisfied as
at the date of payment of the dividend and then once the holding period is subsequently satisfied a refund may
be available to the extent the relevant condition(s) has/have been satisfied. Notwithstanding this possibility,
the process of obtaining a refund can be complex and may temporarily tie up the TP’s funds.
• Administrative burden. WHT is typically deducted by the payer and transferred to the local revenue authority.
The process of calculating, deducting and remitting taxes to the revenue authority for various payments may
add a significant compliance burden for businesses. This burden is particularly acute for small businesses that
may lack the resources to efficiently manage these tasks, thereby increasing their operational costs. Subjecting
a private person to the legal obligation of properly administering tax law has been referred to as an inherent
flaw of WHT , a priori in situations where identifying the relevant recipient may be a complex process e.g.
where collective investment vehicles with multiple tiers of entities are involved (Lee and Yoon, 2018).
Furthermore, withholders may be subject to penalties or may not be permitted to claim the relevant payment
as a deduction where they have not withheld as required. Whilst typically the withholder may be a resident,
and where payment is a cross border payment from the source state to the resident state, there may be
instances where , for example, a non-resident is required to withhold (Lee and Yoon, 2018).
• Disincentive to work or invest. High WHT rates can deter savings and investment by reducing the
attractiveness of earning, for example, interest or dividends.
• Gross basis. WHT is often levied at a flat rate on the gross amount of the relevant income, and where
withholding agents are responsible for withholding then gross income becomes a more straightforward
exercise (than net income calculations) for the withholder. However, gross income as a basis may be viewed
as unfair on the recipient (Lee and Yoon, 2018).
• Complexity and lack of understanding. The mechanisms and regulations surrounding WHT can be complex,
leading to misunderstandings among TPs about their obligations, the amount of tax being withheld and what
do to when they have overpaid tax. This complexity can result in unintentional non-compliance and
dissatisfaction with the tax system.
• Definitional issues. While not strictly part of the WHT concept, the application of rules concerning general WHT
rates and specific exemptions or reductions is intricately linked to other aspects within a DTA. E.g. whether a
payment qualifies as royalties can impact the applicability of WHT, as seen in the case of Tech Mahindra
Limited v FCT [2015] FCA 1082, where fees for technical services were classified as royalties under the India-
Australia DTA. Additionally, determining whether the recipient of a dividend is the beneficial owner may affect
WHT rates, illustrated by Velcro Canada Inc. v The Queen (2012), which addressed beneficial ownership
under the Canada-Netherlands DTA. Issues of definition can further complicate the WHT process.
• Challenges of, inter alia, the digital economy. Both PEs and WHT have been described as being “under
considerable pressure” from a BEPS perspective and at least some have noted that an appropriately expanded
use of WHT may contribute to overcoming issues raised by BEPS provided that it does not undermine taxpayer
rights etc. (Lee and Yoon, 2018).
Different rates and conditions under DTA provisions
The bilateral nature of DTAs means that the provisions within each DTA can vary significantly, especially concerning
the allocation of taxing rights, definitions of relevant amounts, and WHT rates, including any conditions attached to
concessional rates or exemptions in the source state. Candidates have several points they could discuss, as outlined
below. While the focus here is primarily on Art.10, candidates may explore Arts. 11 & 12 in more detail if they choose.
The capacity of the source state to levy WHT varies by payment type. For example, the right to tax royalties is solely
allocated to the resident CS under Art.12(1) OECD MTC 2017, whereas both CSs may tax dividends under Art.10,
albeit to varying degrees. Additionally, different DTAs may adopt varied approaches to source taxation of the same
payment. For instance, Art.12(1) OECD MTC 2017 grants exclusive taxing rights to the state of residence of the
beneficial owner, while Art.12 UNMTC provides the residence state of the beneficial owners a non-exclusive right,
allowing the source state to tax up to a certain limit. In practice, DTAs may implement either the OECD approach
(e.g. Art.12(1) US MTC) or the UN approach, as seen in various Reservations and Positions on Art.12(1), where
countries like Australia, Chile, Korea, Mexico and Poland reserve their right to tax at source.
When assessing DTA WHT rates on dividends, different rates may apply based on factors including the foreign
ownership interest held by the non-resident e.g., Art.10(2)(a) specifies a maximum 5% rate on dividends where a
resident (who is the beneficial owner) of the other CS holds at least 25% of the capital of the company paying the
dividends. This contrasts with the default maximum rate of 15% under Art.10(2)(b), applied when dividends are paid
to the beneficial owner without significant ownership interest. This 15% rate is considered reasonable as the source
state can already tax the profits of the paying company (Art.10(2) Commentary [9]). A study from 2012 highlighted a
downward trend in rates on participation dividends since 1990 (Petkova 2020).
Similar provisions are found in DTAs, with some reducing the WHT rate to 0% when the foreign ownership percentage
exceeds a certain threshold. For instance, if the beneficial owner, a resident of the other CS, directly holds at least
80% of the voting power of the company paying the dividend, then there is no taxation in the state where the dividend-
paying company is located (e.g. Art.10(3) Germany-Australia DTA). This variation in rates depending on foreign
ownership levels is typically described by distinguishing between "portfolio" and "participation" interests held by the
non-resident in the paying company.
It has been observed that DTAs generally adopt an asymmetrical approach to rates for portfolio vs. participation
interests more often than a symmetrical one. A 2012 study found that about 41% of DTAs featured symmetric (single-
rated) WHT rates, while 59% had asymmetric (multi-rated) structures (Petkova 2020). Notable examples of DTAs
lacking special rules for intercompany dividends include Art.10(2) Brazil-China and Art.10(2) Hungary-India. Recent
trends indicate a shift towards asymmetrical rate structures even in countries like New Zealand and China that
previously favoured a symmetric approach (Haslehner 2022).
Addressing avoidance and evasion
Key points include:
• A beneficial ownership (BO) condition that must be satisfied to access the relevant concessional rate of WHT.
For example, Velcro Canada v The Queen (2012), where the TP was found to be the BO of the royalty for the
purposes of the Canada-Netherlands DTA and so was able to access the reduced rate (10% - the rate at the
relevant time) instead of the rate under domestic law (25%).
• The relevant reduced WHT rates will not be automatically granted where, for example, a BO is paid the relevant
dividend and holds the relevant ownership interest but does not satisfy other conditions such minimum holding
periods. For example, Art.10(2)(a) OECD MTC 2017 refers to a minimum holding 365-day period, including
the date of payment. Whilst this language is found in CTAs that have adopted the dividend transfer transaction
rule in the MLI, some CSs have reserved their right not to include a minimum holding period as provided for in
Art.10(2)(a) (e.g. Luxembourg Reservations on Art.10(2) [77.1]).
• When considering reduced rates of WHT under Art.10, other provisions may restrict the availability of the
reduced rate/exemption. For example, Art.29(9) may apply in certain circumstances, including in cases of
certain types of DTA shopping (Haslehner 2022).
• DTA provisions may include a main purpose test, serving as a special anti-abuse provision, such as Art.10(6)
of the Germany-UK DTA. The Commentary on Art.1 [61] further explains that the benefits of a DTA should not
be available if a principal purpose of the transaction(s) was to secure a more favorable tax position that
contradicts the object and purpose of the relevant provisions.
• A fairly recent study on DTAs in existence in 2012 found that higher rates of WHT on portfolio dividends was
linked to increased concerns over tax avoidance/evasion and that more specifically an upward trend for
portfolio dividends was evidenced until the mid-1990s, but this has since stabilised (Petkova 2020).
• CSs may implement specific domestic measures such as controlled foreign company rules or thin capitalization
and other interest limitation rules related to relevant amounts. These measures are generally not seen as
incompatible with DTAs, as discussed in the Commentary on Art.1 [23] and Art.10 [37].
Conclusion
Candidates might conclude by noting that at a very high level, WHT is one of the two major ways in which the limits
of enforceable tax jurisdiction between the resident and source state are reflected in the distributive rules of DTAs
(the pther beign the permanent establishment concept) (Lee and Yoon, 2018). Candidates may also summarise why
countries impose WHTs and how closely they align with OECD MTC provisions. They might conclude that the taxation
of payments in the source state varies among DTAs, requiring analysis of specific circumstances such as definitions,
rates, ownership percentages, nature of ownership, holding periods, and purposes, especially in the context of
dividends. This variation reflects differing policy objectives, such as incentivising investment while ensuring that
reductions or exemptions are granted only to the intended beneficiaries under the DTA, particularly in cases involving
non-residents. Ultimately, provided that WHT is able to protect TP rights, WHT may well continue to function as an
intuitively appealing and practically effective means to protect the national tax base of countries (Lee and Yoon,
2018).
PART B
Question 6
Salaries
There is little detail about the type of employment but the combination of the reference to a marketing function and
the fact there appears to be a private sector employer means it is likely that Art.15 would apply. It appears that
salaries derived by Denis and Emma (as residents of Iveria) would be taxed in Iveria because the vast majority of
their time in employment appears to be spent in Iveria (they only attend an annual retreat one weekend a year in
Harmonia). Employment is considered to be exercised in the state in which the relevant employee is present, and it
is clear Dennis and Emma are physically present in Iveria for the year (bar one weekend - candidates could mention
that where this is considered to constitute employment being exercised in Harmonia it is possible that Harmonia may
have taxing rights over a small proportion of their salaries). Therefore, it is likely that Iveria has the right to tax the
salaries of both Denis and Emma. Candidates may note that no information is provided about the domestic law in
either state.
Stock options
Employee stock options are often linked to future services and are a way to share profits with employees, encouraging
investment in company growth (Kincha 2002 and De Broe 2022). However, they may be granted as a reward for past
performance. Stock options may create tax issues because they may be taxed at a time that is different from the time
when the employment services are rendered (Commentary on Art.15 [12]) and different countries may apply different
taxing points including grant, vesting, exercise, and sale of the option or shares. The variation in country practices
may be at least partly fuelled by countries’ desire to tax any benefits at the earliest point in time (Kincha 2002). Whilst
the OECD MTC 2017, Art. 15 does not refer to stock options, it does refer to “salaries, wages and other similar
remuneration” in Article 15(1) and the Commentary on Art. 15, [2.1] and [12]-[12.15] and the OECD CFA’s 2004
Report on “Cross-Border Income Tax Issues Arising from Employee Stock-Option Plans” both refer to the fact that
amounts derived from stock options may fall within Art. 15 as “other remuneration” and / or Art. 13 depending on the
circumstances.
Candidates may note that typically an option must vest (broadly the process by which a person gains the right to
exercise stock options (e.g. satisfying any relevant conditions) as part of an employee compensation) before the
option can be exercised. In this case, it is a condition that Denis and Emma are employed by Gallant Inc and as such
the following proceeds on the basis that they either (i) do not exercise their options or (ii) exercise their options prior
to their employment ending. It also appears that Denis and Emma may have received their stock options in respect
of past services (as a reward for their role in Gallant Inc’s advertising campaigns) as opposed to an incentive for
future performance (note that the Commentary on Article 15, [12.11] refers to stock options needing to be
demonstrably based on a person’s previous performance in order to be viewed as not being an incentive for future
performance) here the facts do not appear to suggest that the stock options have been granted as an incentive in
return for future services. Whilst the facts do not state that the options have been exercised, it is possible that both
Denis and Emma may seek to exercise their options before terminating their employment with Gallant Inc.
(candidates may note that Denis may soon retire and Emma may soon resign). Candidates (i) can therefore consider
which country is likely to have taxing rights where they do and do not exercise the relevant options and (ii) would be
expected to note that no information is provided about the domestic tax law position in any countries and so it is not
possible to determine the precise tax outcome in different scenarios, rather the focus is on the respective taxing.
Rights of the various countries. It can also be noted that the options are non-transferable such that there is no
requirement to discuss the sale of the options.
Granting of options
As the stock options must be exercised before employment ceases, Denis and Emma should be advised that until
such time as they exercise the options, the stock-options are likely to be dealt with by Art.15 and its Commentary as
“other remuneration” Commentary on (Art.15(1) [2.1], some DTAs explicitly include stock options e.g. Protocol to the
Japan-USA DTA 2003 [10]) - the state of source – where the employment is exercised – may tax the part of the stock
option that constitutes remuneration derived from employment exercised in that state, even if the tax is levied at a
later time when the employee is no longer employed in that state (Art.15(1) Commentary [2.2]). It is clear that both
Denis and Emma have exercised their employment in Iveria and are also Iverian resident. As such, Iveria is likely to
be the state in which the employment is exercised for the purposes of the options under Art.15 (Commentary on
Art.15(1) [12.2]). This means that Iveria is likely to be able to tax any value attributable to the option itself that arises
after the granting of the option (Commentary on Art.15(1) [12.23]). No information is provided about domestic tax law
and thus it is sufficient to note which state has the right to tax and which state must provide relief from any resulting
double taxation. However, it could be noted that where Emma ceases to be a resident of Iveria (because for example
she moves to Konia), there would be a need to confirm how Iveria’s domestic law treats such a scenario (e.g. where
Iveria imposes a capital gains tax when Emma ceases to be an Iverian resident then Art. 15 may still apply - the
Commentary on Art.15 , [12.4] notes that Art. 15 does not restrict Iveria’s right to levy such a tax. This information is
not provided in the facts but can be noted to be of potential relevance to Emma.
Options are exercised
It is possible that Denis and Emma will seek to exercise the options before they cease employment with Gallant Inc.
and as such they should also be advised that neither Art.21 (other income) nor Art.18 (pensions and similar
remuneration) are likely to apply to any increase in value. Where the options are exercised or alienated, Art.13 may
apply to any relevant increase in value. Art.13(5) is considered to apply in such situations as upon exercise of the
option, Denis and Emma are considered to have transitioned from employees to shareholders. Art. 13(5) provides
that the state of residence of the alienator has the exclusive right to tax the relevant gain (i.e. Iveria). Furthermore, if
Denis and Emma decide to sell the shares, any gains from such sales would also fall under Art.13, with the taxing
right being afforded to the resident state of the alienator (i.e. likely to be Iveria where they both continue to be Iverian
resident but were Emma to move to Konia and become tax resident there then Konia may have the right to tax any
gain). Whilst there is no information about any of the countries’ domestic tax laws, it could also be noted that the
exemption from taxation in the source state may apply notwithstanding that there is no taxation in the state of
residence i.e. there is a view that it is only where a DTA contains a general “subject-to-tax” rule that non-taxation of
the capital gain by the residence state results in a right to taxation by the source state (Reimer, 2022). As there is
nothing in the facts to suggest that there has been an improper use of a DTA and as such it is not anticipated that
candidates would spend time considering such a possibility.
Non-compete payment
Can be described as a contractual agreement that prevents someone entering into an employment agreement with
a competing business once employment has ended. Non-compete agreements have been the subject of
considerable scrutiny in recent times (e.g. there have been US and UK proposals to restrict their duration as they are
seen by some as stifling competition (Halls and Judra 2024).
Although Emma has not yet signed a non-compete agreement nor received any payment, there is a possibility that
she might do so in the future. Consequently, it is feasible to offer her some preliminary advice on the potential tax
implications should she enter into such an agreement and receive a payment. Some initial points include:
• The conditions appear to be temporal (6 months) and geographical (rival companies in Harmonia and Iveria);
• The agreement does not appear to restrict her working for a rival company in Konia and so it may be possible
for her to take a new job in Konia immediately upon terminating her employment with Gallant Inc.; and
• She may not remain resident of Iveria during the relevant 6-month period. It would therefore be necessary to
consider her residence status, specifically whether she becomes a tax resident in Konia.
Likely position under the DTA – it would appear that a payment under the agreement would fall within Art.15 (OECD,
Tax Treaty Treatment of Termination Payments, Discussion Draft 2013, [20]-[23]), which is consistent with practice
across various countries (e.g. Germany and Belgium: De Broe 2022). However, some countries consider the payment
may fall within Art.21 (e.g. the USA considers Art.21 US MTC and not Art.14 US MTC applies: Korfund Company Inc
v CIR 1 TC 1180). Furthermore, payments under non-compete agreements in connection with past employment are
likely to be considered to reward current non-activity rather than past employment and so would not be expected to
fall within Art.18 (Ismer 2022). It would appear, therefore, that a payment under a non-compete agreement that
applies following the termination of Emma’s employment may fall within Art.15. Candidates may note that there would
be a need to refer to the relevant country’s domestic tax law also and that this information is not available in the facts.
On the basis that Art. 15 applies, several approaches can be considered when determining which country is likely to
have the right to tax any payment under the nom-compete agreements, including:
• State of residence when payment received. As it is unlikely that the payment is for employment activities
performed before termination, it would be expected that Emma’s state of residence when she receives the
payment would have taxing rights. This may be Iveria or Konia, depending where she is resident at the relevant
time (Art.15(2) Commentary [2.9]). “Replacement approach”. The taxing right is allocated to the place where
Emma would have performed the employment had she continued to be employed – e.g. Iveria (German BFH
9 September BStBl, II 867(1970); note the Court made an exception to this approach where the failure to
honour the agreement could take place in any country, i.e. where the agreement did not restrict the
geographical scope, in which case the taxing right may fall to the country of physical presence. In this case, it
appears that the failure to honour the agreement may only apply in Harmonia and Iveria and as such, the
exception may not appear to apply. Under the replacement approach, it would appear that Iveria has the right
to tax the non-compete payment.
• Location during the 6-month period when the non-compete agreement is honoured. This location would be
Emma’s state of residence in a situation where she is respecting the non-compete agreement. In a case of
dual residence, there would be a need to refer to, for example, the Iveria-Konia DTA to determine in which
state she is a resident (Du Broe 2022).
• State of presence when payment received. This information is not provided but one might consider the position
where Emma is present in Konia or Iveria when she receives the payment (Belgian Court of Appeals, Brussels,
29 June 2017 case 2015/FR/61).
Where Emma becomes a resident of Konia under its domestic laws, is resident under the Iveria-Konia DTA and is
also physically present in Konia when she receives the non-compete payment, then Konia may have the right to tax
the relevant amount under Art. 15(2) (Commentary on Art.15(2) Commentary [2.9]). A different outcome may arise
where Emma, for example, does not take up the job in Konia and remains living in Iveria or where she moves to a
different country, etc.
Question 7
The question requires candidates to consider the taxation of business profits under Arts. 5 & 7 of the OECD MTC
2017, the extent to which the current MTC allocates taxing rights to the source state where business profits are
derived from exploration/exploitation of natural resources, and the implications of introducing a specific shorter
duration. Candidates may reference DTA practice, including that numerous DTAs are reported to already include a
30-day threshold, the Commentary on Arts. 5 and 7, and any relevant Reservations, Observations and Positions.
Candidates may also refer to the recent OECD’s Public Consultation on Activities in Connection with the Exploration
and Exploitation of Extractible Natural Resources in November 2023 (Consultation 2023), which considered this
issue. Candidates’ answers should conclude by advising Magnolia whether it should or should not consider the
possibility of reducing the period of time before a PE arises when considering these specific activities and at the very
least summarise the major benefits / disadvantages of amending the relevant threshold.
Art.5 OECD MTC 2017. The concept of Permanent Establishment (PE) is crucial for the allocation of taxing rights on
income from natural resources. An enterprise can be taxed in a country if it has a PE there, i.e. a fixed place of
business through which the business of the enterprise is carried (note there is no discussion of dependent agency
PEs here). Business profits derived from the extraction of natural resources in a Contracting State (CS) may be taxed
by that CS where the conditions of Art.5(1) are satisfied. Art.5(1) requires (a) a POB; (b) a POB that is fixed (in both
a geographical and temporal sense) and (c) that the business of the enterprise is to be carried out through that POB.
POB
POB covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not
they are used exclusively for that purpose. A POB may also exist where no premises are available or required for
carrying on the business of the enterprise and it simply has a certain amount of space at its disposal (Commentary
Art.5(1) [10]). Broadly, having the space at the disposal of the enterprise will involve the enterprise having the effective
power to use that location and the activities it performs there (Commentary Art.5(1) [12]). There is no profitability
requirement (Commentary Art.5(1) [7]). Art.5(2) provides a non-exhaustive list of examples of places of business,
each of which can be prima facie regarded as constituting a PE under Art.5(1), provided it meets the Art.5(1)
requirements and does not violate the Art.5(4) exceptions (Commentary Art.5(2) [45]).
Art.5(2)(f) specifically refers to mines, oil or gas wells, quarries and any other place of extraction of natural resources
are included as examples of possible places of businesses. The term “any other place of extraction of natural
resources” should be interpreted broadly and includes, for example, all places of extraction of hydrocarbons whether
on or off-shore (Commentary Art.5(2) [47]). Furthermore, Art.5(2)(f) refers to the extraction of natural resources but
does not mention the exploration of such resources, whether on or offshore (Commentary Art.5(2) [48]). Candidates
may note that Art. 5(2)(f) does not refer to exploitation, but certain countries have a reservation on that provision e.g.
Canada, Chile and Israel reserve the right in subparagraph (2)(f) to replace “of extraction” with “relating to exploration
for or the exploration” (Reservations on Article 5(2), [198].
The Art.5(2) Commentary at [48] states that whenever income from exploration activities is considered business
profits, the question whether these activities are carried on through a PE is governed by Art.5(1). Noting that it has
not been possible to arrive at a common view on the basic questions relating to income from exploration activities,
the Commentary states that CSs may agree upon the insertion of specific provisions, such as a non-resident
enterprise being deemed: (i) not to have a PE in that other CS; (ii) to carry on such activities through a PE; or (iii)
carry on such activities through a PE in that other CS if such activities last longer than a specified period of time’ or
(iv) to another rule.
POB that is fixed
Commentary Art.5(1) [21] – there must be a “link between the place of business and a specific geographical point”.
In connection with this, equipment used does not have to be fixed to the ground rather it is enough if that equipment
remains on site. Since the place of business must be fixed it must have a “certain degree of permanency”
(Commentary Art.5(1) [28]). However, a place of business may be fixed in a temporal sense even when the place of
business exists for a short time where the nature of the business is such that it is only carried on for a short time
(Commentary Art.5(1) [28]). This is particularly relevant in the case of recurrent activities (where one would consider
the number of times the place was used, which may be over a number of years) or where the business activity is only
carried on in that country but may also apply in special circumstances (such as the death of the relevant taxpayer,
failed investment, or premature liquidation etc.).
The business of the enterprise is to be carried out through that POB
“Through which” the business must be carried on partly or wholly through the place of business, is said to be given
a “wide meaning” so as to apply to any situation where business activities are carried on at a particular location that
is at the disposal of the enterprise for that purpose, e.g. paving a road will be considered to be carrying on its business
“through” the location where this activity takes place (Commentary Art.5(1) [20]). The business may be carried out
by employees, automatic equipment, etc. (Commentary Art.5(1) [39]-[41]), e.g. automatic pumping equipment used
in the exploitation of natural resources (Commentary Art.5(2) [127]).
Issues that Magnolia may wish to consider include:
• Industry disparities. PE thresholds vary across DTAs and countries, with a notable distinction between the
standard 12-month duration for construction or installation projects under Art.5(3) and the proposed shorter
duration for the extractives sector that Magnolia is considering. It could be noted that countries such as
Australia, Chile, Greece, Korea, New Zealand and Turkey have reserved their right for a six-month threshold
for activities related to natural resource exploitation (Reservation on Art.5(3) [201]; Reservations on Art.5(1)
[188]-[195]), which may indicate a trend towards shorter durations for the extractives sector. A 30-day period
is considered by some to be too short (ICAEW 2023, Deloitte (2023 & Michel 2024).. However, there are
approximately 200 (out of over 3,000 DTAs) that include similar provisions e.g. a 30-day PE threshold is found
in Australia-Norway DTA (Art.20), US-UK DTA (Art.21), and UK-Netherlands DTA (Art.23)). Magnolia may be
advised to consider how these provisions have operated for those countries.
• Interpretation. Interpretative issues in relation to the application of the proposed provision may arise. Magnolia
may need to consider how this provision will interact with other DTA provisions, e.g. will it sit within Art.5 or a
standalone provision? It may be advisable to clarify that the proposed provision is based on the need to protect
the situs principle in Art.6 (immovable property) over functions that are disaggregated between different
specialised subcontractors that collectively and in substance amount to the offshore winning of petroleum, gas
and minerals as opposed to viewing the proposed provision as a concession by the residence to “resource
source state “countries over general mobile business income (Hattingh et. al 2024). Other interpretative issues
may also include the meaning to be afforded to key terms in any such provision. As terms included within the
proposed provision may not be defined therein, it would be expected that the domestic classification by the
host state (resource source state) of income derived by non-resident enterprises may be required.
A further justification is that the domestic law of the resource host state will tend to be informed by complex
policy considerations and possibly also case law considerations. It is not clear whether the proposed provision
would make reference to the need to refer to the domestic law of Magnolia as the resource source state.
Notwithstanding the need to clarify which CS’s law would apply, it is unclear whether Magnolia’s domestic law
includes such classifications. It is at least possible that Magnolia’s domestic income tax regimes may refer to
income from “immovable property”; “income from mining” or income from “offshore activities” as opposed to
the terms in the proposed provision (Hattingh et al. 2024). Issues with day count tests more generally may
include the fact that there is a need to be clear about when such periods start and end (Reimer 2022). Whilst
there is minimal guidance in relation to the calculation of the 12-month period in the Art.5(3) Commentary, a
site is considered to exist from the date the relevant contractor starts work (including preparatory work –
although the preparatory work should have economic substance and actually serve the operation of the site or
project (Reimer 2022)), will continue until the work is complete or permanently abandoned and temporary
cessation should be ignored (Commentary Art.5(3) [54]-[55]). The OECD notes that activities at every stage
of the extracting process are to be included such as exploration; development; production; and
decommissioning (Consultation 2023 [188]).
• Magnolia would also need to consider whether the proposed provision should be restricted by a provision
equivalent to Art.5(4) (i.e. preparatory and auxiliary activities) or whether there is no need given the shorter
duration requirements under the proposed provision. The OECD notes that the proposed provision is not
subject to Art.5(4) but acknowledges that some DTAs that already contain a provision similar to the proposed
provision do subject it to Art.5(4) (Consultation 2023 [188]). As such it may be worthwhile for Magnolia to
consider whether the proposed provision should operate subject to the Art.5(4) exception and the anti-contract
splitting rule in Art.5(4.1).
• Higher compliance costs. The proposed shorter deemed PE duration may increase compliance costs and
administrative challenges due to the variable presence of deemed PEs (Deloitte 2023). Magnolia may find the
30-day threshold too low, potentially incurring higher costs (e.g., registration costs and filings) than revenue
gains (Intl Assn Oil and Gas Producers 2023). The impact on different types of enterprises is unclear,
suggesting that compliance concerns might be more significant for smaller businesses exempt from certain
reporting regimes, but less so for large Multinational Enterprises equipped with the necessary technology and
processes for GloBE and ESG reporting requirements (ICAEW 2023). The OECD notes that about 200 DTAs
include a similar provision, with 30 days being a common duration (Consultation, November 2023, [191]),
suggesting it could be beneficial for Magnolia to explore if such provisions have led to increased compliance
costs.
• Profit attribution. It may not be clear whether the proposed provision would result in profit attribution effected
by Art.7 and Magnolia may wish to consider whether the implementation of a 30-day period is likely to create
additional profit attribution difficulties. In connection with this: (i) it has been reported that attributing profits to
“lower threshold” PEs (in connection with oil and gas operations with an existing lower PE threshold) has not
created any particular challenges (Norwegian Shipowners Association 2024) but (ii) there is a more general
concern with the attribution of profit in accordance with a simple days-presence allocation of profits is
problematic as not all activities (and pricing of such activities) can be ascribed to physical presence in the
source country (Hattingh 2024). Whilst the OECD notes that profit attribution would be effected as per Art.7
(OECD, Public Consultation, November 2023, [191]) it has sought feedback on the specific issue of profit
allocation and short duration PEs as part of its recent (Consultation 2023). Accordingly, it is unclear that the
attribution of profits would be certain to create additional difficulties, but Magnolia may be advised to investigate
further to see what issues have arisen in practice before determining to introduce such a provision into its
DTAs, or a selection thereof.
• Fair treatment concerns. There is a possibility that tax burdens for non-residents operating through PEs and
resident entities may diverge, which may not be consistent with existing DTA provisions (Deloitte 2023).
Art.24(3) provides that: “The taxation on a permanent establishment which an enterprise of a CS has in the
other CS shall not be less favourably levied in that other CS than the taxation levied on enterprises of that
other CS carrying on the same activities.” Art.24(3) does not operate to restrict the taxation of residents and
non-residents on differing bases, rather it focusses upon the result (Commentary Art.24(3) [34]) and notes that
the purpose of the provision is to ensure that the PEs of non-residents are not discriminated against vis-à-vis
resident enterprises in the same sector (Commentary Art.24(3) [35]). Should Magnolia choose to adopt the
proposed provision, it may need to review and potentially revise the wording of its non-discrimination articles.
This could involve either expanding their scope (for example, by explicitly including conditions related to
taxation) or narrowing it (for instance, by exempting specific types of income such as earnings from the
exploration or exploitation of natural resources. An illustrative case is Vietnam, which omits activities like oil
exploration and production, as well as agricultural production, from the PE non-discrimination provisions in
some of its DTAs, such as Art.23(2) of the UK-Vietnam agreement (Reimer 2022)).
• Unnecessary. Magnolia should evaluate whether the proposed provision will achieve its desired effect or if
existing provisions, which reflect the OECD MTC 2017, already provide adequate coverage. It is generally
considered that the relevant extractive activities would constitute a fixed place POB PE under existing
regulations such as Art.5(2)(f). There is also the point that Art. 6 may apply in any event. Additionally, the anti-
fragmentation rule in Art.5(4.1) helps prevent MNEs from splitting activities among affiliated entities to
circumvent the creation of a PE (ICAEW 2023). In connection with this is that it has been stated that the
purpose of such reduced thresholds in the case of the exploitation of oil and gas exploitation and exploration
seek to address issues pertaining to stability and more specifically relocated or roaming places of business
(Reimer 2022).
Conclusion
Candidates might conclude by summarising the key considerations Magnolia should take into account regarding the
introduction of such a provision. It should also be noted that, generally, modifications some CSs make in their DTAs
might not significantly affect the actual allocation of taxing rights, as income from these activities would typically be
assigned to the state of situs regardless (noting that a number of CSs add further elements to the positive limbs in
Art. 5(2) including use and exploitation of natural resources; exploration and exploitation of the sea bed and subsoil
areas and their natural resources where these are performed for 30 days in a calendar / tax year (in the case of the
Netherlands) and this is not considered to alter the general balance between the residence and source state in
substance as the income from these activities would have been assigned to the source state under Art. 6, (Reimer
2022).

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THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION

OECD MTC 2017

Entry into force/termination

Some suspension/termination examples

Increases of soft law and hard law

Increased complexity in the interpretative process

Nature and Influence of BEPS Project

OECD MTC 2017 and its Commentary

Other points that could be made include:

Current situation and concerns

Examples of concerns include:

Some possible benefits of an MTA include (note: some are inter-related):

Foreseeable relevance (FR)

Reasons for relying on WHT

Issues with WHT

Various issues could be mentioned, including:

Different rates and conditions under DTA provisions

Addressing avoidance and evasion

Key points include:

Options are exercised

POB that is fixed

The business of the enterprise is to be carried out through that POB

Issues that Magnolia may wish to consider include:

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