Courts are an essential arm of any government. They are useful in the interpretation of the law. These laws include tax laws and treaties between countries. The research sought to address the question as to how much courts help to explain the terms of a tax treaty. Currently, the world is full of tax treaties of different forms. To enable a better understanding of the laws, these courts have been tasked further to offer an interpretation of the tax laws in case of ambiguity of terms of disagreements between the parties in question. There need to be specific bodies set up across the world with the sole purpose of improving the understanding of the tax treaties.
The major challenge that faces the court regards the involvement of foreign courts interpreting the tax treaties. The problem that arises at the moment concerns how much countries can take in the interpretation from a different jurisdiction. Such arguments could favour one country over the other, primarily where they are not conducted by an international court (Ash & Marian 2019). The research looks into explaining the need for a standard interpretation protocol for all the local courts to follow especially in the interpretation of the foreign treaties. The major challenge in international law takes place where unfavourable conditions are existing between parties. They tend to frustrate the whole justice system more so when the country is unsure about their fate. When two countries are facing challenges concerning a treaty, it is only a court or the International Court of Justice that can come to their rescue to offer the correct interpretation. However, how much the losing country takes in the argument raises the challenge because there is a likelihood of the local courts favouring their host country at the expense of the other.
What is the duty/role of the foreign court’s decisions in explaining and interpreting different tax treaties?
Judicial Interpretation in the United Kingdom
The concept of a beneficial owner remains among the essential concepts commonly used in tax treaties (Li 2012). The intention is to reduce the benefits of settlement reduced withholding taxes on the dividends and the royalties to be offered to specific recipients. They appear as the beneficial owners of such income. In the United Kingdom, very little has been done to try and explain the term beneficial owner. It is a common term in the EU tax treaties hence an essential element worth understanding before expanding practice into the EU tax laws. The decision in Indofood International Finance Ltd v. JP Morgan Chase Bank NA  EWCA Civ. 158, STL 1195 set the bar for explaining the interpretation of the term.
Another case that was meant to back up Indowood was Prévost Car Inc. v. Canada. The cases have made an earnest deal in the international tax society at the moment. The primary question has been whether they have advanced the people’s understanding of the tax laws and the EU demand on the explanation of who a demanding owner could be (Dagan 2016). Failure by the people to understand the actual value of the court’s interpretation raises the question of how much people appreciate the courts. The trust levels in the courts appear to be wanting from the scenario.
The difference in Legal Traditions
Having different legal traditions tends to introduce an array of approaches to the interpretation of various statutes and treaties. A case in question is that in civil law traditions, the doctrine involved in the abuse of rights tends to be related to combating tax avoidance plus treaty shopping (Marian 2016). Most countries move around looking for a favourable treaty that directly matches their legal jurisprudence (Harris 2020). Where there is a significant difference between the jurisprudence in place and the performance of the desired agreement, the country should opt for a different tax system to avoid any future implementation challenges of the same tax policies in the country (Marian 2016). Courts look at the tax legislation from a purposive angle and characterize the facts depending on the issues that form a part of the transaction. They are more willing to recognize the doctrine of treaty abuse if chances come out of such treaties being used to abuse the generosity of specific societies in question.
Challenges created by treaty shopping
Marian (2016) notes that there are more controversies over treaty shopping in recent years. Different countries have the undefined meaning of the specific terms in a treaty, and the differences tend to apply depending on the context changes. The contexts are, however, determined by the purpose of contracting. It can also stretch into the meaning of the legislation of the contracting states. In a treaty, there are two states involved as part of the contract, which means that there exist differences in terms of how the two countries look at the convention (Harris 2020). A favourable system needs to be neutral, but then the courts also operate in a society and in so long as they belong to one jurisdiction of either side of the treaty, there are higher chances that the interpretation could go in favour of the court’s country (Ash & Marian 2019). The notion of treaty shopping came from the United States where it was described to be a person out shopping for an unavailable treaty through very complicated structures in place. Treaty shopping comes out as a form of avoidance of the agreement as compared to mere tax evasion (Dagan 2016). There are even more likely controversies to be created, especially where there are increased chances of tax avoidance from either jurisdiction.
Under tax policies, the act of treaty shopping comes out as an abusive tax avoidance mechanism and improper use of the tax treaties. It is considered an essential instrument for the advancement of the intentions behind making a tax treaty with other countries. OECD believes the act of treaty shopping to be an outward problematic issue for some essential reasons (Petkova et al. 2019). First, it breaches the reciprocity principle, then it leads to a case of double taxation and likely destroys the incentive for the countries to negotiate the new treaties. Under the United Nations Treaty Shopping Report, it was suggested that there are numerous public benefits in honouring the act of treaty shopping. Countries that remain keen on bringing in investment tend to desire the dividends plus the interests paid to a specific recipient in the treaty country.
However, the act of treaty shopping is pushed majorly by the desire of countries to have partners who have similar beliefs and court structures. For leadership and development purposes, states prefer to go for partners who have the same jurisprudence hence can easily relate. A case in point has been the EU where complaints continue to rise over tendencies of foreign courts interpreting based on their interests rather than in the importance of protecting the whole treaty. Countries involved in such agreements are more concerned about benefiting from the existing tax policies, hence have to look at the possible interpretation that could come out from the respective courts. They entrust the courts in the understanding of the tax treaties. In some instances such arrangements do not end well for the two countries, thus making it harder for there to be a formidable relationship between two countries. Such treaties end up messy, and defiance becomes the new order with the protection of each country’s court.
The research involved literary analysis; case study analysis. Two case studies were chosen for the research process. The two case studies were: in Indofood International Finance Ltd v. JP Morgan Chase Bank and Prévost Car Inc. v. Canada. The two cases were used to present challenges faced in the interpretation of tax treaties in different countries. The two involve very various agreements and appears that the challenges remain the same. The case studies look into:
- The effect of ambiguity
- Disagreements with court decisions on the interpretation of tax treaties
The two cases are vital because they both set the antecedent standard that most countries are now following concerning the understanding of the agreements. There are several challenges that they come up from the conventions involved. The problems present the issues of implementation of tax treaties from different fronts.
Prevost presents itself as the first case from Canada about the interpretation of the ‘beneficial owner’ concept in the tax treaties. The facts were straightforward, as well. Prevost was a company located in Quebec province, a civil law region and was also a resident of Canada (Li 2012). In 1995, a company from Sweden, Volvo got all the shares of Prevost. After some time the acquisition transferred the shares to a Dutch Holding company and then later to Henlys, a United Kingdom-based company a total of 49% shares. According to a shareholders agreement made at the time, both Volvo and Henlys made an agreement that Prevost and the Holdco were to distribute approximately 80% of the profits to their existing shareholders (Li 2012). The Prevost paid up their dividends to Holdco as per the dividend policies. They also withheld and remitted tax at a 5% rate under the Canada-Netherlands treaty. Holdco made a pact to distribute then the dividends that were received from Prevost to Volvo and the Helys. Later, the Canada Revenue Agency did assess the Canadian withholding tax based on the fact that Holdo had not been the beneficial owner of the said dividends. Under the Canadian courts, Rip. J held that the ordinary meaning of the private law was to be the governing piece. By considering the meaning of the term under the Canadian legislation, the Civil Code of Quebec and Dutch law, the learned judge concluded that the in both conventional and civil law, the persons who should get the income are to be the owners of the said income analysis (Li 2012). In the case, the court preferred a domestic solution, which meant that Canada acted using a selfish perception in the situation rather than a profound international standard.
On the other hand, the in Indofood International Finance Ltd v. JP Morgan Chase Bank, the court opted for an international standard. The court considered a solution that matched both countries and set up a likeable standard at the time (Li 2012). They considered both interpretations and opted for the international customary law standard of interpreting the practice between the countries involved in the treaty at the time.
The question of whether international treaties can be interpreted through domestic law meaning or international law standard remains a very controversial one. Most of the commentators tend to argue that the term should remain autonomous to the global purpose as compared to the domestic law meaning because:
- It was brought into the international law environment through the work of the United Nations and OECD
- It was widely part of the tax treaties or just a preserve of domestic operation
- Whether it was used to prevent any possibility of treaty shopping
Countries tend to be more concerned about reducing the opportunities for treaty shopping that can best be achieved through appreciating different interpretations across the states. However, others argue that adopting a domestic law interpretation is relevant for the progress of tax treaties (Petkova et al. 2019). Such an interpretation is more likely in the universal law jurisdiction which employs the international concepts through a domestic angle in so long as the
local law meaning matches the international standards.
Application of international law of any form tends to be one of the significant challenges facing the globe. Countries come together to make treaties with common interests at heart. It is worse to for the same countries finding themselves at cross paths when the treaties do not go through. As a result, to ensure continuity, the treaties need to specify the forum for any battle. It can be counted as a major challenge that the countries need to consider at such a stage, and by having a designated place for solving the issues, it can make things better. The states need to have a specific forum to resolve their problems, and the treaties should specify where it works.
International tax treaties face a change when it comes to the interpretation of conflicting clauses. However, countries have been at the cross path as to how they can solve the issues. The two cases, Indofood and Prevost, present conflicting decisions with one court opting to use a domestic interpretation while the other one using an international standard. Such differences have made the ground on international tax treaties very hostile even as the law does not have an exact manner of working on the case. The best way to go around the cases can be through the treaties expressly specifying the forum for disputes. Such a condition could solve any form of ambiguity that might come from the cases and would reduce the possibility of any more challenges coming up in the future about the same treaty because the parties from the onset agreed on how their issues should be solved and set the preconditions to be followed in the forum.
Ash, E., & Marian, O. Y. (2019). The making of international tax law: empirical evidence from natural language processing. UC Irvine School of Law Research Paper (2019-02).
Dagan, T. (2016). Tax Treaties as a Network Product. Brooklyn Journal of International Law.
Harris, P. (2020). International commercial tax. Cambridge University Press.
Li, J. (2012). Beneficial ownership in tax treaties: judicial interpretation and the case for clarity. Osgoode CLPE Research Paper, (4).
Marian, O. Y. (2016). Unilateral responses to tax treaty abuse: a functional approach. Brooklyn Journal of International Law, 41, 2017-09.
Petkova, K., Stasio, A., & Zagler, M. (2019). On the relevance of double tax treaties. International Tax and Public Finance, 1-31.