Allocation of jurisdiction in tax treaties. It is clear from the outset that the application of these previously discussed rules of customary international law with regard to fiscal jurisdiction may lead to international juridical double taxation. International juridical double taxation can be generally defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods.34 According to the Commentary to the OECD Model Tax Convention, the harmful effects on the exchange of goods and services and movements of capital and persons are so well known that it is unnecessary to stress the importance of removing the obstacles that double taxation presents for the development of economic relations between countries. The primary purpose of the OECD Model is to provide a way of settling, on a uniform basis, the most common problems in respect of international juridical double taxation. Most bilateral tax treaties are, to a large extent, based on the OECD Model. The OECD Model allocates the jurisdiction to tax and prescribes the method by which double taxation is eliminated. Self-imposed unilateral limitations on jurisdiction Many States have imposed unilateral limitations on the exercise of jurisdiction. For example, most States do not fully apply their worldwide jurisdiction on the basis of nationality.35 With regard to the taxation of income, the Netherlands, for instance, only applies the personal basis for jurisdiction (the nationality of the taxpayer) to companies.36 France operates a territorial system for corporate income tax purposes. In principle, account is only taken of profits realized in undertakings operating in France or in those liable to taxation in France by virtue of a tax treaty.37 Consequently, France does not make use of its unlimited fiscal jurisdiction with regard to companies incorporated under French law 32 Restatement of the Law, Third, 1987, § 412(a). 33 Restatement of the Law, Third, 1987, § 412(e). 34 Commentary to the OECD Model, Introduction, § 1. 35 An exception is the United States, which, in principle, taxes its nationals on their worldwide income. 36 Although the principle of nationality also plays a minor role with regard to individuals, and in particular, in respect of diplomatic staff (Art. 2.2 of the Individual Income Tax Law (Wet inkomstenbelasting 2001)). For the worldwide jurisdiction with regard to companies incorporated under Netherlands law, see Art. 2(4) of the Corporate Income T...
Allocation of jurisdiction in tax treaties. It is clear from the outset that the application of the rules of customary international law with regard to fiscal jurisdiction may lead to international juridical double taxation. International juridical double taxation can be generally defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods.308 According to the Commentary to the OECD Model Tax Convention, the harmful effects on the exchange of goods and services and movements of capital and persons are so well known that it is unnecessary to stress the importance of removing the obstacles that double taxation presents for the development of economic relations between countries. The primary purpose of the OECD Model is to provide a way of settling on a uniform basis the most common problems in respect of international juridical double taxation. Most tax treaties are, to a large extent, based on the OECD Model. The Introduction to the OECD Model explains that it establishes two categories of rules for the purpose of eliminating double taxation. “First, Articles 6 to 21 determine, with regard to different classes of income, the respective rights to tax of the State of source or situs and of the State of residence, and Article 22 does the same with regard to capital. In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the Contracting States. The other Contracting State is thereby prevented from taxing those items and double taxation is avoided. As a rule, this exclusive right to tax is conferred on the State of residence. In the case of other items of income and capital, the right to tax is not an exclusive one. As regards two classes of income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief so as to avoid double taxation; this is the purpose of Article 23 A and 23 B. The 306 Restatement of the Law, Third, 1987, § 412(a). 307 Restatement of the Law, Third, 1987, § 412(e). 308 Commentary to the OECD Model, Introduction, § 1. Convention leaves it to the Contracting States to choose between two methods of relief, i.e. the exemption method and the credit method.”309 Consequently, the first category of rules allocates th...
