TAXATION OF NON-RESIDENT TAXATION AND DOUBLE TAXATION AGREEMENT BETWEEN PAKISTAN AND AOTCA COUNTRIES

Just as the statutes have some purposes or object, agreements between the countries also have certain prupose. The purpose can be gathered from the agreement itself, from its preamble and the total tenor of the agreement. As tax treaties are meant to allocate tax claims equally between the contracting states, the tax authorities as well as the courts have to comply with the provisions of the treaty consistently. An interpretation which is most likely to be accepted by both contracting states, should always be preferred. In drafting the tax treaties several terms are defined in a manner which is acceptable to the two parties. Wherever, such definition is not given, a particular term may be interpreted having regard to the meaning given to it in the domestic laws. In such matters, therefore, both the international and domestic law have to be reconciled. The object and purpose of double taxation convention is:

1. To restrict the substantive tax law of contracting states reciprocally and;

2. To avoid cases of double taxation, while interpreting an agreement one has to keep in view the other related documents like protocols, notes and letters exchanged at the time the treaty is signed.

In January 1980 the United Nations Vienna Convention on the Tax Treaties of May 23, 1969, came into effect. To a great extent the convention codified income tax norms and customary international law. Such agreements are notified before their implementation. The Vienna convention contains general rules and they have resolved some uncertainties in international practice.

The tax agreements are in the nature of special provisions and they are not altered by subsequent law unless it expressly contradict their provisions. Bing special rules they override the domestic tax laws on the basis of the doctrine of generalia specialibus non derogant. This principle is attraction in case of conflict between a special and general statutes. It has been held by the supreme court of India in the case of Shahzada Nand and Sons : 60 ITR 392, that the eneral and special rules occupy the same filed. However in case of conflict the special provision must prevail as held by the Supreme Court in the case of Union of India vs. India Fisheries (P) Limited.: 57 ITR 33.

As the purpose of the agreements is to avoid any conflict, the approach for interpretation should always be harmonious interpretation of tax agreements. Where an interpretation is possible which promotes harmony and agreement it should be preferred to an interpretation which creates disharmony and disagreement. Even after such interpretation if a conflict remains, it has to be removed only by diplomatic means or by legislation. However, in all such interpretations the language has to go along with the intention and in case of conflict the language must be given its natural meaning. It is presumed that in the agreements the intention has been given in a clear manner and, therefore, there can not be an attempt at interpreting the provisions of the agreements in an official manner.

An important principle of interpretation of an agreement is to read the agreement as a whole. That would avoid any conflict in one part of the agreement with the other parts of the agreement. While interpreting the tax agreements, inconsistencies and collision have to be avoided and persuasive value should be attached to the decision of the foreign courts as well. However, the domestic courts continue to have their independent judgment even if it has to be against the decision of the foreign courts. The decision of the foreign court would be entitled to the same respect which the decision of any other domestic court would attract. The agreements between two states do not result in the application of tax laws of one state by the other. Rules of double taxation agreements are, therefore, "rules of limitation of law". A tax obligation exceeds in accordance with the domestic law of the state, but the same is defined and restricted by the tax agreements. In the domain of taxation, each state applies its own domestic laws subject to the limitation put by the agreements. Such limitation may be by giving credit to the tax paid in the other state or to waive the claim in its favour. They are called 'exemption' method or 'credit' method.

Where the expression is not defined in an agreement, controversy can arise in relation to the agreement if it is interpreted differently under the domestic laws of the contracting states. If the agreement uses the same which are used also in the substantive laws of the contracting states the controversy may become steeper. The conflict between the domestic laws of the two concerns can be resolved through various concepts. The concept of domestic law provides that each state qualifies the agreement terms according to the requirements of its own domestic laws. The argument against this concept is that it disregards the foreign law and may result in a conflict. The other concept is the concept of source country qualification according to which a term has to be interpreted in accordance with the laws in force in that state. These concepts are, however, not sufficient to resolve the conflict. Rules are only aids to construction and one must look to all the relevant circumstances and decide as to which rule should be applied in the circumstances of the case. The context is very important. The words cannot be read in isolation and their content is derived from their context. The reconciliation the conflicting legal system should be attempted under mutual agreement clause.

The courts in Pakistan have also been involved in interpreting the definition of royalty and determining its exemption.

One of the leading case decided on this issue has been decided by Honourable High Court of Sindh in the case of

In this case Mr.Justice Saleem Akhter discussed the definition of royalty as given in the agreement for avoidance of double taxation between U.K. and Pakistan and held that payment made to M/s. Glaxo Laborites Pakistan Limited fell within the definition of royalty and was thus exempt from tax.

The courts may be aided by the use of "travaux preparratoires" in the interpretation of international conventions in general. With regard to double taxation agreements, in Sun Life Assurance Co. of Canada Vs. Pearson (1986) S.T.C. 335) Vinelott J. stated that the commentaries to the O.E.C.D. Model "can and indeed must be referred to as a guide to the interpretation of the Treat" The commentaries have also been referred to as an aid to interpretation in the United States (US V.A.L. Burbank & Co. Ltd. 525 F 2d 9 (2d Cir 1975) Switzerland, Germany and Belgium.

In forthergil Vs. Monarch Airlines Ltd. (1981 A.C. 251) the House of Lords give some guidance as to when "travaux preparatoires" may be consulted. Lord Wilberforce thought that they should be admissible only on tow conditions. First, that the material involved was public and accessible, and second, that it 'clearly and indisputable' pointed to definite legislative intention. The majority view of the house of lords in this case was' travaux preparatoires' are admissible. This view has been affirmed in another case decided in 1985 - Gatoil International Inc. V. Arkwright Boston manufacturers Insurance Co. (1985 A.C. 255) .

For the efficient and fair application of tax agreements, attempt of the courts world over should be to interpret its provisions consistently avoiding collision. Lord Scarman said in Fothergill Vs. Monarch Airlines "The decisions of the superior court, or the opinion of a court of cassation, will carry great weight "In Canada, decision, of the United States Tax Courts have been applied (see No. 630 V.M.N.R. 59 D.T.C. 300) as has an interpretation issued by the Dutch Ministry of Finance (Hunter Douglas Ltd. V.M.N.R. 79 D.T.C 5340). One rare example of the citation of a civil law country's decision in a common law country was a reference to a decision of the Bundesfinanzhof in a New Zealand case. (Commissioner of Inland revenue Vs. Unived Dominions Trust Ltd. (1973) 1, N.Z.T.C. 61, 028).

The issue remains what approach should courts take to the interpretation of double taxation agreements ?

In Canada, the Courts have at times suggested a different approach to the interpretation of taxation treaties from the interpretation of domestic tax legislation.

"The accepted principle appears to be that a taxing Act must be construed against either the crown or the person sought to be charged, with prefect strictness-so far as the intention of Parliament is discoverable. Where a tax convention is involved, however, the situation is different and a liberal interpretation is usual, in the interests of the comity of nations. Tax conventions are negotiated primarily to remedy a subject's tax poison by the avoidance of double tax taxation rather than to make it more burdensome.

Similarly, in New Zealand the Courts have held that they should take a broad approach to the interpretation of double taxation agreements:

"We are not to adopt a narrow interpretation but interpret having regard to the broad intention of the framers as they emerge from tax text.

The Australian Courts appear to have adopted a literal approach to the interpretation of double taxation agreements, consistent with the approach of interpreting the agreement as part od domestic law without regard to its character as a bilateral treaty.

The situation of France is somewhat different from common law countries since courts may only interpret a treaty if its meaning is clear. In all other cases Ministry of Foreign Affairs is the competent authority for issuing interpretations which are binding upon the courts. Thus much of the discussion on treat interpretation by the courts cannot apply in France.

In the United Sates the "rules of construction used by United States Courts in interpreting treaties as domestic law are essentially the same as those used by the courts in interpreting statutory law" Particular features of the United States approach to interpreting tax treaties is the reliance placed upon committee treaties of the congressional committee (before whom the treaty has been discussed) and upon the technical Memorandum prepared by the United States Treasury. This Memorandum is prepared after the treaty is concluded on the basis of noted during the negotiations and the preparatory material.

In U.S.A. Vs. A.L. Burkbank the Second Circuit court of Appeal sanctioned a broad approach to he interpretation of tax treaties:

"Moreover it is well understood that treaties are to be broadly construed to enable the intent of the treaty to be enforced"

The case referred to the Commentaries to the OECD Model as an aid to interpretation, and looked at the purpose of the treaty to prevent fiscal evasion as a guide to interpreting the exchange of information provision.

It is worth pointing out briefly, however, that the regular recourse to committee reports and the Technical Memorandum had been doubted recently in the Supreme Court by Scalia and Kennedy JJ. In US Vs. Stuart.

While the issue whether that Technical Memorandum should prevail if it contradicted the clear words of the treaty did not have to be decided in that case, nevertheless Scalia J. had the following comments:

" Of course, no one can be opposed to giving effect to the intent of the Treaty parties'. The critical question, however, is whether that is more reliably and predictably achieved by a rule of construction which credits, when it is clear, the contracting sovereigns carefully framed and solemnly ratified expression of those intentions and expectations, or rather one which sets judges in various jurisdictions at large to ignore that clear expression and discern a ''genuine'' contrary intent elsewhere. To ask that question is to answer it."

An he added further :

" Using pre-ratification Senate materials, it may be said, is rather like determining the meaning of a bilateral contract between two corporations on the basis of what the Board of directors of one of them thought it meant when authorizing the Chief Executive Officer to conclude it. The question before us in a treaty case in what the two or more sovereigns agreed to, rather than what a single one of them, or the legislature of a single one of them, thought it agreed to. And to answer that question accurately, it can reasonably be said, whatever extra-rextual materials are consulted must be materials that reflect the mutual agreement (for example the negotiating history) rather than a unilateral understanding."

There are a large number of cases in India in respect of double taxation cases arising from the Double Taxation Avoidance Agreements with Pakistan. A few of those cases are as under :-

(1) CIT Vs . Carew & Co. Ltd. (120 ITR 540 SC)
(2) CIT Vs . Mahalaxmi Sugar Mills Ltd. (160 ITR 920 SC).
(3) State Bank of India Vs . ITI (57 ITR 235 Cal).
(4) Cement Agencies Ltd. Vs . CIT (146 ITR 136 Bom).
(5) CIT Vs . Soorajmull Nagramull (130 ITR 136 Cal).

The subject of " Taxation of Non-Resident and Double Taxation Agreement" is a very vast & wide subject and if I had tried to cover every aspect of this subject in this paper, a treaties running into hundreds of pages would have resulted and it was not possible for me to conduct such painstaking research. I have however tried to briefly highlight the salient and important element of this subject.

I hope this paper with all its inadequacies may prove to be of some benefit to you.

Thank you very much all of you, it had been a great experience to be able to communicate with you.