Friday, August 24, 2012

Fleming on U.S. Tax Treaty Shopping

J. Clifton Fleming Jr. has posted a new article on treaty shopping that is of interest, entitled Searching for the Uncertain Rationale Underlying the US Treasury's Anti-Treaty Shopping Policy.  In it, he explores the questionable policy behind anti treaty-shopping measures and shows that the exceptions to the limitation on benefits provisions found in US tax treaties basically eviscerate the ability of these provisions to prevent treaty shopping.  It's a quick and straightforward read in Professor Fleming's usual approachable style.


  1. I think I have asked this question before but in the context of a tax treaty later amended by multiple protocols and in the context of the Natwest case should treaties by interpreted by only the commentaries in existence at the time of the original ratification or should the existence of later protocols allow the treaty to be interpreted by later commentaries or only the extent that the later commentaries are directly relevant to the later protocols.

  2. This is a good question and not one for which I have a pat answer. If a treaty is a contract, then standard legal construction ought to apply, that is, the intent of the signatories at the time of the signing or at least of ratification should control, so the ambulatory approach is invalid. But treaties are not strictly like other contracts, in major part because they are intentionally written to be vague and/or ambiguous. Tax treaties in particular are really meant to be frameworks, with much left to the interpretive exercise. That could be an argument for an ambulatory approach, i.e., the parties were simply agreeing to agree at some time in the future, with whatever interpretive resources are available at such time. Protocols are new contracts pasted on to old agreements, so if you do not use the ambulatory approach you quickly run into the problem you identify, namely, interpreting different parts of a single treaty according to interpretive resources available at the time of the signing or ratification of the various parts. I don't think OECD commentary is ever binding on anyone, but others differ on that score. But if it is to be used as an interpretive resource, the ambulatory-or-not questions is increasingly difficult. On legal grounds I would say the ambulatory approach is invalid. On pragmatic grounds, I'd say the ambulatory approach is probably necessary in many cases. There are some papers out there on this issue if you are interested I can hunt them up.