Templates for Double Tax Treaties by tyndale


									Tax Treaty Templates

Victor Thuronyi


I. Problems with the Current Tax Treaty Network

In a 2001 article in the Brooklyn Journal of International Law, I put forward several
proposals relating to a multilateral tax treaty. Here I develop further one of these, namely a
multilateral template for bilateral treaties. The template approach is designed to deal with the
following deficiencies of the existing bilateral treaty network.

1. Difficulty of amendment.-- Given the extensive network of treaties, it takes substantial
time for any updates made to the OECD model to be incorporated in treaties. As described
by John Avery Jones and Philip Baker: ―One of the most pressing problems in international
tax practice at the present time is how to devise a simple system – consistent with the
bilateral nature of existing DTCs and the constitutional traditions of the many countries
concerned – for amending the wording of large numbers of bilateral DTCs in a short period
of time.‖1

2. Role of Commentary.—As has been discussed at length in the literature, while there is
some legal authority for use of the OECD Commentary to interpret tax treaties, the ground is
a bit shaky2 and it would be better to have a clear position that the Commentary is applicable
to interpret treaties, including in cases where Commentary language is issued after a treaty
has been concluded.

3. Verbiage.—Even though in broad terms the existing treaty network can be said to be
based on the OECD Model, when one comes to read existing treaties more carefully, it
becomes apparent that each treaty is a separate legal instrument with its own language. The
text of existing treaties is not quite user friendly. Most treaties are close to the model, but to
ascertain the differences each must be read carefully word for word. One way this problem
can be described is that the presentation of the existing treaties is such that those working
with numerous treaties have quite a task to ascertain the differences between them.
Somewhat relatedly, one can question why it makes sense to have so many texts that are

 John Avery Jones and Philip Baker, The Multiple Amendment of Bilateral Double Taxation Convensitons,
BIFD 19 (2006).
 E.g., David Ward, The Role of the Commentaries on the OECD Model in the Tax Treaty Interpretation
Process, BIFD 97 (March 2006); Monica Erasmus-Koen and Sjoerd Douma, Legal Status of the OECD
Commentaries – In Search of the Holy Grail of International Tax Law, BIFD 339 (Aug. 2007).

broadly so similar, but yet differ in many details of wording. A more uniform wording for
the existing treaties surely would be a benefit for both governments and taxpayers. The
verbiage problem is not just one of ease in reading, but also has to do with interpretation.
Given that lawyers are sticklers for precision in language, the problem of using the Model’s
Commentary is compounded by the fact that existing treaties differ from the text of the

II. A possible solution

A. Restatement

1. In general.-- The proposed solution is simple in its basic outlines. The existing network of
some 3,000 bilateral income tax treaties would be re-formatted, explicitly using a template
that would serve as a point of reference for each individual treaty. The process of
reformulating each treaty in terms of deviations from the template would in some cases be
merely editorial. Even a purely editorial restatement would enable the features of each treaty
to be quickly grasped, given that in practice most treaties are negotiated by starting with the
OECD model and then making changes to suit the treaty partners.

The idea of expressing each treaty as deviations from the Model is a pretty obvious one, and
has been identified before. For example, in 1997, John Avery-Jones noted that ―Practitioners
would save a lot of time if treaties were presented as variations to the Model Treaty; we
would not need to read the rest to see whether it has been changed.‖3 While saving time to
the users of treaties would be of benefit, that is not the main motivation for the proposal
developed here. Rather, the main advantage of expressing each treaty as deviations from a
template is to facilitate the uniform interpretation of the template language and to make it
easier to update treaties.

The process of expressing each existing treaty in terms of deviations from a template should
go further than what one could obtain by using a compare documents feature of a word
processing program. If the treaty partners came to explicitly confront each instance in which
a treaty deviates from the template, they might be able to agree fairly easily to drop some of
these deviations.

Some of these differences might on reflection seem obsolete or no longer needed, given the
interest in achieving as much international uniformity in treaty language as is realistically
possible. A clear reason to drop deviations from the Model will be cases where an existing
treaty is based on an earlier version of the Model, and where the parties agree that there is no
good reason not to adopt the most recent version.

    John Avery-Jones, Are Tax Treaties Necessary?, 53 Tax L. Rev. 1 (1999).

What I envision, in other words, is a process of negotiation where existing treaty partners
agree to restate their existing bilateral treaties as template plus deviations, with a view to
minimizing those deviations where agreement can be reached. As a formal matter, this
would mean a restatement of the entire existing treaty network. For the most part, the newly
restated treaties would not substantially differ from the existing ones. However, one would
expect that the extent of variation in treaty language that we see today would be narrowed.

Calling this process a ―restatement‖ evokes the Restatements of the Law which have been
prepared by the American Law Institute. These have been efforts to state the common law as
it is, but certainly with a view to unifying and rationalizing precedents that have not been
fully in harmony. The process of restatement, in other words, is a creative one that seeks to
provide greater order and unity. The civil law analogue might be codification (common law
lawyers tend to think of codification as more of a clerical process where a law is published
with all of its intervening amendments, while the production of a civil law code is a much
more flexible and creative process).

Despite involving some creativity, restatement of the existing treaties should for the most
part involve minor, technical changes as compared with current law. Each treaty would be
replaced by a new treaty that had slightly different wording in a few cases (or might have
exactly the same wording, if the parties do not wish to make any changes). Each of these
bilateral treaties would have to undergo the normal ratification process, since the legal
position would be that each existing treaty is being replaced. The exception, again, will be
for those treaties where the parties decide that they wish to make no change.

2. An example.-- The process of restating treaties in template format can be illustrated by
means of the following example. More or less picked at random, here is an extract
(paragraphs 1-4 and 6-7) from an article of the Australia-Mexico treaty. The question is how
one might go about restating it in terms of deviations from the Model.

Article 13
1 Income, profits or gains derived by a resident of a Contracting State from the alienation of
immovable (real) property situated in the other Contracting State may be taxed in that other
2 Income, profits or gains derived by a resident of a Contracting State from the alienation of
any shares or other interests in a company, or of an interest of any kind in a partnership, trust
or other entity, where the value of the assets of such entity, whether they are held directly or
indirectly (including through one or more interposed entities, such as, for example, through a
chain of companies), is principally attributable to real property situated in the other
Contracting State, may be taxed in that other State.

3 Income, profits or gains from the alienation of property, other than immovable (real)
property, that forms part of the business property of a permanent establishment which an
enterprise of a Contracting State has in the other Contracting State or pertains to a fixed base
available in that other State to a resident of the firstmentioned State for the purpose of
performing independent personal services, including income, profits or gains from the
alienation of that permanent establishment (alone or with the whole enterprise) or of that
fixed base, may be taxed in that other State.
4 Income, profits or gains from the alienation of ships or aircraft operated in international
traffic, or property other than immovable (real) property pertaining to the operation of such
ships or aircraft, shall be taxable only in the Contracting State in which the enterprise
alienating those ships, aircraft or property is a resident.

6 In this Article, the term "immovable (real) property" has the same meaning as it has in
paragraph 2 of Article 6.
7 The situation of immovable (real) property shall be determined for the purposes of this
Article in accordance with paragraph 3 of Article 6.

The title of the article is ―Alienation of Property‖, while the title of the OECD Model article
is ―Capital Gains‖. Capital Gains is of course not a great name, since the article is not really
about capital gains – it is about gains from the alienation of property. So one possibility
would be to revise the title of the OECD model to read ―Gains from the alienation of
property‖. Another possibility would be to keep the title of the OECD Model article as is,
but then to drop the deviation in the Australia-Mexico treaty on the basis that since the title
does not have legal significance the deviation should not be insisted on.

Paragraph 1 contains the expression ―income, profits, or gains‖ while the Model just refers to
―gains‖. The two terms appear to be synonymous. Therefore, it should be possible to restate
the Australia-Mexico treaty by dropping the deviation, and accepting the Model.

The other difference between Paragraph 1 of the Australia-Mexico treaty and the Model is in
the form of the cross-reference to Article 6. In this respect, the Australia-Mexico treaty
seems to be technically superior to the Model, in that it contains a separate paragraph 6
defining the term ―immovable property‖ for purposes of this article by reference to its
meaning in paragraph 2 of article 6. In this case, one hopes that in the process of restatement
the OECD Model would be revised to conform to the Australia-Mexico treaty. Similarly, a
decision can be made as to whether paragraph 7 is needed and should be included in the
OECD Model.

Moving on to article 2, there is again the issue of the expression ―income, profits, or gains‖
which should be resolved in the same way as for paragraph 1.

Otherwise, paragraph 2 is not found in the OECD Model. However, provisions of this kind
are found in numerous articles. Therefore, in the process of restatement, it would make sense
to draft a template paragraph and either conform paragraph 2 to this paragraph or specify the

Paragraph 3 corresponds to paragraph 2 of the Model. Again the expression ―income,
profits, or gains‖ should be handled consistently with the decision for paragraph 1.

Paragraph 3 also deviates from the Model by using the expression ―property, other than
immovable (real) property‖ in place of the Model’s ―movable property.‖ The two terms are
synonymous, and one would expect the negotiators to be able to agree to drop the deviation.

Next, ―that forms part of‖ is used instead of ―forming‖. Assuming that the Australia-Mexico
treaty is restated to use ―movable property‖, it should also be possible to conform to the
Model by using ―forming‖ (―that forms part of‖ reduces awkwardness as the treaty is
currently written, but is no longer needed if the shorter term ―movable property‖ is used).

Similarly, the parties should be able to agree to change ―or pertains‖ to conform to the Model
(―or of movable property pertaining‖), since no substantive difference is involved.

Likewise with the rest of the language of the paragraph.

The bottom line is that, since paragraph 3 of the Australia-Mexico treaty involves no
substantive difference, and no clearly superior wording, as compared with the text of the
Model, the restatement should be able to eliminate the deviations between this paragraph and
paragraph 2 of the Model.

Paragraph 4 of the treaty corresponds to paragraph 3 of the Model. This paragraph contains
two specific, substantive differences from the Model. First, the treaty excludes the reference
to boats engaged in inland waterways. Second, the treaty confers taxation rights on the state
of residence of the enterprise, while the Model confers taxing rights on the Contracting State
in which the place of effective management of the enterprise is situated. Suppose that the
parties wish to keep these deviations. In this case, the paragraph could be restated as follows
(assuming that ―income, profits, or gains is changed throughout to conform to the Model):

Gains from the alienation of ships or aircraft operated in international traffic, boats engaged
in inland waterways transport or movable property pertaining to the operation of such ships
or aircraft or boats, shall be taxable only in the Contracting State in which the place of
effective management of the enterprise alienating those ships, aircraft or property is a
resident situated.

This example suggests the following. First, there are a lot of deviations between the Model
and existing treaties which are not of much substance. A restatement exercise should be able
to eliminate many of them in an effort to achieve as much uniformity as possible. Second, in
some cases, the restatement should involve changes to the Model. That is, where practical
experience of treaty negotiation has resulted in language that is better drafted than the OECD
Model, then the drafting of the Model should be revised accordingly. The restatement
process should therefore to some extent become a process of revision of the Model. It would
not necessarily be a revision from scratch, but would rather be oriented to take into account
the actual provisions of treaties that have been negotiated. Third, there are going to be cases
where a number of existing treaties include similar provisions that are not in the Model. To
reflect these, either the Model can be revised to incorporate them (if the consensus is that
they reflect best practice), or they can be cast in terms of alternative wording. While some
might be disturbed by the possibility of alternatives, remember that the idea is just to reflect
the reality of the existing network. If this network already includes alternative provisions,
then nothing is lost by standardising them. Finally, there will be cases of substantive
differences between existing treaties and the Model. In these cases, the parties to each
bilateral treaty will have to make a decision either to conform to the Model or to keep the
provisions that they currently have (or possibly vary them).

The example also shows that the restatement exercise will involve a fair amount of work.
But the end product should be worthwhile. It will be an updated and substantially
harmonised set of bilateral treaties.

3. Participation.—It would of course be possible for the OECD countries to proceed with a
restatement exercise only in respect of the treaties that they have signed with each other.
This would make little sense, however, since it would be logical for each OECD country to
include in its restatement exercise all its treaties – including those signed with non-OECD
members. And in turn each of those non-OECD countries would probably want to restate all
its treaties, which quickly turns into including all countries with double tax treaties (there is
probably no country that has treaties only with treaty partners that do not in turn have at least
one treaty with an OECD member). Of course, participation should be voluntary, but it is
likely that most countries would sign up if the OECD members themselves agreed to
commence a restatement exercise. This would not mean that treaties currently based on the
UN Model would be pushed to the OECD Model. The restatement has room for more than
one template providing alternative language, to the extent that this is needed to reflect the
diversity of the existing treaty network. To the extent that the UN Model differs from the
OECD Model, and provides a basis for existing treaties, its language would become a
template for those treaties.

4. Language.-- Many current treaties are either in English or have an English text in addition
to a text in another or other languages. It would of course be simplest if all the bilateral
treaties could be restated in English. If the network of bilateral treaties is analogised to a de

facto multilateral instrument,4 then it would not be unusual to have just one text – in English.
This is the normal approach to multilateral treaties today, and it makes life much easier for
all concerned. Of course, there is no reason that the text cannot be translated into various
languages. A fallback position would be for each treaty to be restated in English, but that
there would be one or more alternative texts in other languages with equal legal validity.
This would be a bit more work for the negotiators, but would not pose a substantial problem
for the uniformity of the system, since the basic principle is that each bilateral treaty would
have an official version in English. This is all that is required in order for uniformity of
interpretation of the template language to be possible. The language position would be
negotiated by the partners for each bilateral treaty in question, as it is today.

B. Future amendments

Step two would be to set up a process for making changes in the future. Because each
existing treaty would be expressed as template plus deviations, future changes can be made
to the template itself which will automatically change each of the existing bilateral treaties.
The trick to doing this is that whenever the participating countries want to change the
template, they will do so by means of a multilateral treaty, the effect of which will be to
amend simultaneously each of the bilateral treaties affected by the template. This
multilateral treaty would include a schedule containing conforming amendments to particular
bilateral treaties where required. Depending on the particular change made, such conforming
changes may or may not be needed, or may not be needed in many instances.

The multilateral amendment treaty will go into effect as a separate legal instrument when it is
signed and ratified, as between those parties that have approved it. If particular countries
disagree with the amendment, they would not sign the multilateral treaty for introducing that
amendment and therefore their bilateral treaties would contain the old text. While it would
obviously be desirable to achieve unanimity on amendments to the template, countries could
go ahead without doing so.

C. Interpretation

Step three would be to deal with questions of how the template should be interpreted. Given
that all the treaties are being restated and re-signed, it should be fairly straightforward for
contracting parties to agree that the commentary as it exists at the time of restatement would
be used as a basis for interpretation of the text. (The Commentary would of course have to
be revised to conform to the template.)

    See Avery Jones, supra (

The main issue would be how to deal with questions of treaty interpretation for the future.
Under the existing regime, the OECD has tended to deal with many problems in the
commentary, rather than amending the text of the Model. One of the main purposes of
restating the treaties in terms of deviations from the Model will be to facilitate a process
whereby future problems that are best dealt with as amendments to the text of the Model will
be handled in that way. This should remove one of the problems with adopting an
ambulatory use of the commentary. Use of the commentary to fix problems with the text of
the Model by adopting language that is possibly inconsistent with the text of the Model or
that does not have much support in the text makes it problematic to apply the commentary to
treaties concluded earlier.5 If this practice is abandoned, in other words if in the future
changes to the commentary are restricted to interpretation of the existing text, then it should
be much easier to secure agreement to apply the commentary also to previously signed

D. Participation in Interpretation and Amendment

As discussed above, it would be desirable to include non-OECD members in a restatement
exercise. From an institutional point of view, this is not problematic, because the restatement
would take the legal form of renegotiation of bilateral treaties. Thus, each replacement of an
existing treaty by a restated treaty would be done by agreement of the two treaty partners.

From a practical point of view, however, the restatment would have to be a coordinated
exercise, requiring all members of the group of countries involved to work with each other.
This is because the restatement involves development of a template, and this exercise must
be done by consensus. Out of this exercise would emerge a de facto group of countries that
are signatories to a restated newwork of treaties.

The question is how this group can continue its collaboration in the future, when questions
arise about amendments to the template or interpretation of the template.

A possible approach would be for two bodies to have responsibility for approving both
amendments to the template (to be incorporated into a multilateral treaty) and to the
commentary, namely the OECD Committee on Fiscal Affairs and the Group of Experts on
International Cooperation in Tax Matters. The reason for using the Group of Experts is that
they are an existing body with widely representative membership, and which consists of
experts on tax treaties. If the CFA and the Group of Experts were made jointly responsible,
they could set up working groups and procedures to facilitate the work. Meetings of the
Group of Experts are open to all countries, which may send observers to participate in the

 E.g., Avery-Jones, supra, at 21-22, arguing that where fundamental changes are made via the commentary,
probably only those changes that are in favor of the taxpayer will prevail in court.

meetings. In that sense it is a universal group, while the Group of Experts itself is a
relatively small body that can take decisions relatively efficiently. Currently the Group of
Experts meets once a year only, but there is no reason why they could not meet more
frequently or make use of working groups to carry on the work so as to be able to decide
matters without undue delay.

To provide a solid legal basis for the Commentary, one option would be to adopt a
multilateral treaty stating that in interpreting material found in the template, regard should be
had to commentaries approved by both the OECD’s Committee on Fiscal Affairs and the
UN’s Group of Experts. Provision could be made for countries to register reservations with
the commentary, as currently practised by the CFA.

An alternative to using the UN’s Group of Experts would be to somehow expand the circle of
countries participating in the OECD.6 Whiel this might be a more efficient approach, it
would be less inclusive as far as non-OECD member countries are concerned.

It might also be wise to leave open the question of institutions for future amendments and
interpretation and simply commence the restatement exercise. This process – which would
presumably take several years – would by itself bring together representatives of countries
participating in the worldwide treaty network. New institutional arrangements might emerge
out of this collaboration.


The proposal made here is similar to that made by Avery Jones and Baker in 2006. They
propose an amendment by multilateral instrument, coupled with a bilateral declaration by
each of the states for which the amendment will enter into effect. The main difference
between the two proposals is in the template approach. Avery Jones and Baker would not
require a template as a prerequisite. However, each amendment of the Model would then
require each pair of contracting states to prepare and agree on a declaration as to how to
incorporate the amendment into each treaty. By contrast, my approach would require more
up front work by way of preparation of the template, and would involve a much more
streamlined process for future amendments. In most cases, amendments to the template can
be made with the multilateral instrument alone. It is only where conforming amendments
must be made to individual treaties that bilateral instruments or schedules containing the text
of those conforming amendments would be needed.

 See Arthur Cockfield, The Rise of the OECD as Informal ―World Tax Organization‖ Through National
Responses to E-Commerce Tax Challenges, 9 Yale J. L. & Tech. 59 (2006).

While the restatement of existing treaties would be a fair amount of work, it would have the
benefit of making more transparent the existing treaty structure and of rationalising and
bringing up to date those treaties. Restatement would facilitate the task of consistent
interpretation of treaties. Restatement of the existing treaties using the template approach is
also needed for future amendments to work smoothly.

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