Tax treaties and the interpretive effect of protocols
Can protocols have influence on the interpretation of tax treaties, particularly in the situations where the interpreter is faced with interpretive (soft law) material adopted after the conclusion of a tax treaty?
To be able to adapt treaties to include new ideas and developments, existing bilateral tax treaties are ‘updated’ by the OECD through the periodical release of new interpretive material. In particular through the release of OECD commentary on the OECD Model Tax Treaty (for more on this, see the other tax related blog posts). The use of this ‘ambulatory’ OECD commentary is controversial.
What exactly is the interpretive effect of these materials if a protocol is concluded? In other words: does a protocol ‘refresh’ a treaty for interpretive purposes so that new ideas and developments, as set out in this ‘ambulatory’ OECD commentary, are implicitly integrated into the treaty by this protocol?
The issue has come up in a number of cases I have encountered.
For instance, in a Canadian case, a 1995 protocol changed the wording of a provision of the 1975 France-Canada tax treaty. The court, when it was faced with the interpretation of this ‘new’ provision, used OECD interpretive material published in 1977 – material that was published after the conclusion of the treaty but before the date the protocol was approved.
There are also cases in which the protocol has not changed the wording of the treaty. In another case, a 2007 protocol was added to the 1980 US-Canada tax treaty. The interpretive material that was used, adopted in 2000, was in conformity with the 2007 protocol. It might be concluded that the protocol had influence on the way OECD Commentary was applied to the interpretation of the 1980 tax treaty. The Court held:
‘What is even more telling with (…) the Fifth Protocol Amendments is that, as the two countries are turning their minds to the wording of new provisions being drafted (…) they are content relying upon a sensible approach to the application and interpretation of the words.’
To construct this ‘sensible approach’ to interpret the treaty’s words, the court felt free to refer to the OECD materials adopted in 2000, after the conclusion of the 1980 treaty!
There are more examples from which it can be concluded that protocols can have interpretive effects. Although it cannot be said that any protocol completely ‘refreshes’ a treaty for interpretive purposes, it follows from some case law that a protocol can ‘refresh’ a treaty provision for interpretive purposes when it changes the wording of that treaty provision. Also, when a protocol is in conformity with ambulatory interpretive material adopted after the conclusion of a treaty, this interpretive material can be used to interpret the treaty.
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