To resolve such conflicts and promote smoother economic relations, countries enter into Double Taxation Avoidance Agreements (DTAAs). These treaties help allocate taxing rights between jurisdictions and offer relief to taxpayers who might otherwise suffer tax liabilities in two countries for the same income.
Under Section 90 of the Indian Income Tax Act, the Indian government is empowered to enter into such agreements with other nations. These agreements serve multiple objectives, including
- Provide clarity on allocating taxing rights and grant relief from double taxation
- Ensure non-discrimination in tax treatment of nationals and enterprises of treaty partner countries
- Resolve disputes arising from different interpretations of tax treaties
- Assist in the collection of fair and legitimate taxes
- Facilitate the exchange of information
- Promote mutual economic relations, trade, and investment
While the main objective remains the prevention of double taxation, modern tax treaties have evolved to also address tax avoidance, treaty abuse, and ensure fair and equitable taxation in a global context.
Understanding the evolution of tax treaties—from the era of bilateral agreements before 1969, to the global standardization introduced by the Vienna Convention on the Law of Treaties (VCLT), and finally to the modern Multilateral Instrument (MLI) is essential for anyone involved in international tax policy, law, or practice.
Timeline of Treaty Development in International Taxation
1.Traditional Bilateral Treaties (Pre-1969)
Before 1969, countries negotiated individual bilateral treaties. Each treaty was unique and negotiated separately, with no standardized global rules. This lack of consistency led to confusion, disputes, and abuse.
2. The Vienna Convention (1969): The Cornerstone of Treaty Law
The Vienna Convention on the Law of Treaties (VCLT) codified essential principles governing the lifecycle of treaties. Prior to VCLT, there was no international rulebook, resulting in inconsistent treaty interpretation. VCLT applies to all treaties, including bilateral and multilateral tax agreements, providing legal consistency worldwide. Key provisions include:
- Articles 31–33: Rules for interpreting treaties
- Article 26: “Pacta sunt servanda” — treaties must be performed in good faith
While the VCLT provides a universal legal framework for treaty creation, interpretation, modification, and termination, it is procedural, not substantive. It does not dictate how countries divide taxing rights or address tax avoidance — that where the role of tax models. OECD & UN Model Conventions comes into the picture
3. OECD & UN Model Conventions: Blueprints for Tax Treaties
To address the challenges arising under the Vienna Convention on the Law of Treaties (VCLT), the OECD and UN Model Conventions serve as templates for negotiating bilateral tax treaties. These models aim to:
- Provide guidance to avoid double taxation
- Prevent tax evasion and avoidance
- Establish clear rules on taxing rights between jurisdictions
The OECD Model Convention (finalized in 1977 and last revised in 2017) primarily reflects the interests of developed countries. It emphasizes the residence principle, which gives taxing rights to the country where the taxpayer resides. Although India is not an OECD member, its courts often refer to OECD Commentaries in judicial decisions—albeit with reservations on certain Articles.
In contrast, the UN Model Convention (first published in 1980) is designed with the interests of developing countries in mind. It leans toward source-based taxation, favoring the country where income originates. This approach reflects the economic reality of capital and technology flowing from developed to developing nations. Most of India’s tax treaties align more closely with the UN Model.
Why Are These Models Needed?
While the Vienna Convention on the Law of Treaties (VCLT) outlines the procedural framework for creating treaties, it does not dictate their substantive content—especially for tax treaties. The OECD Model was developed to encourage investment and economic cooperation among developed countries, whereas the UN Model seeks to preserve the taxing rights of developing nations. Since 1980, both models have coexisted, and countries often choose between them—or adopt a hybrid approach—based on their national interests.
4. The Multilateral Instrument (MLI): A Paradigm Shift
Until recently, over 3,000 bilateral tax treaties existed globally. Many of these were exploited by multinational corporations for tax avoidance strategies such as treaty shopping. Updating each treaty individually was a lengthy and complex administrative process, often taking years.
To address this challenge, the Multilateral Instrument (MLI) was developed to rapidly and efficiently amend existing treaties—especially to implement the OECD/G20 Base Erosion and Profit Shifting (BEPS) measures. The MLI:
- Introduces anti-abuse rules, such as the Principal Purpose Test (PPT)
- Enhances dispute resolution mechanisms
- Modifies the definition of Permanent Establishment (PE)
- Operates alongside existing treaties without replacing them
Rather than renegotiating thousands of bilateral or multilateral agreements, the MLI serves as a single instrument that allows countries to implement critical tax treaty-related BEPS measures. Companies and jurisdictions now sign onto this unified framework.
Currently, more than 100 jurisdictions participate in the MLI.
Important Key Tax Treaty Terms and Tools for Treaty interpretation
1.What is a Protocol?
A protocol is an official addendum or annex to a tax treaty. It has the same legal authority as the main treaty and serves several key purposes:
- Clarifies ambiguous terms
- Prevents misuse or unintended interpretation of the treaty
- Adds specific provisions without rewriting the entire treaty
Example:
- The India–US treaty protocol clarifies the meaning of “make available” in relation to services.
- The India–France treaty protocol includes a Most Favoured Nation (MFN) clause.
Key Point: Always review the protocol when interpreting a tax treaty it can significantly impact the application of specific provisions.
2. What is a Preamble?
The preamble is the introductory statement of a tax treaty. It outlines the treaty’s main objectives, such as promoting trade and investment, and preventing tax evasion or avoidance.
Example:
- In the India–Mauritius treaty case, the Indian Supreme Court highlighted that the preamble indicated the goal was to promote economic cooperation.
- Under the Multilateral Instrument (MLI), updated preambles now explicitly state that treaties should not be used for tax evasion or treaty shopping.
3. OECD and UN Model Commentaries
These are official guides to help interpret tax treaties. They explain what each clause in a model treaty is meant to do.
- OECD Model Commentary is widely respected and often used by courts.
- UN Model Commentary is also useful, especially for treaties with developing countries, and sometimes takes a different view than OECD.
Example:
Courts in India and abroad have quoted OECD commentaries when interpreting terms like “royalties” and “permanent establishment.”
4.Memorandum of Understanding (MoU)
An MoU can be used to interpret specific treaty provisions, especially when similar wording appears in more than one treaty
Example:
In Raymond Ltd., the Indian Tribunal used the India–US MoU to interpret the term “make available” in the India–UK treaty due to similar language
5. “May be taxed” vs. “Shall be taxed”
May be taxed
- The source country (where the income is earned) is allowed to tax the income if it wants to, but it is not mandatory.
- At the same time, the resident country (where the person receiving the income lives) can also tax the same income.
- So, both countries may tax the same income, but the resident country must give relief to avoid double taxation (typically through credit or exemption).
Key point: “May be taxed” permits taxation by the source country but does not make it exclusive.
Example:
Let’s say an Indian resident earns interest income from Malaysia.
If the India-Malaysia treaty says:
“Interest may be taxed in the source country (Malaysia)”
then:
- Malaysia can tax it (at a limited rate set by the treaty).
- India (being the resident country) will also tax the income.
- But India must give credit for Malaysian tax paid to avoid double taxation.
Supreme Court Ruling – Chettiar’s Case [(2004) 267 ITR 654]
In this case:
- The treaty between India and Malaysia used the phrase “may be taxed.”
- The Court held that this language does not prevent India from taxing the income.
- The income earned abroad is still included in Indian total income, and India gives credit for the tax paid in Malaysia.
“Shall be taxed”
- This gives exclusive taxing rights to one country only.
- It means the income must be taxed only in the country mentioned—the other country is not allowed to tax it.
- Key point: “Shall be taxed only in” = Exclusive right to tax.
Example:
Let’s say a person living in the UK earns a government pension from India, and the treaty says:
“The pension shall be taxable only in the country of residence.”
Then:
- Only the UK (resident country) can tax the pension.
- India (source country) must not tax it.
This kind of language is often used in treaty provisions relating to pensions, government salaries, or employment income, depending on the treaty.
Conclusion
The main tools for the interpretation and application of tax treaties are the Vienna Convention on the Law of Treaties (VCLT), the synthetic texts of the OECD and UN Model Tax Conventions, and the Multilateral Instrument (MLI).
- The VCLT provides a universal legal framework that guides countries on how to draft, interpret, and apply treaties.
- The OECD and UN Model Tax Conventions serve as templates for negotiating tax treaties and help determine how taxing rights are fairly allocated between countries.
- The MLI enables the swift implementation of BEPS measures, such as anti-abuse rules and modifications to the definition of Permanent Establishment (PE), across numerous treaties without renegotiating each one individually.
In addition to these core instruments, other essential components include commentaries, protocols, preambles, mutual agreement procedures (MAPs), and memoranda of understanding (MoUs). These supplementary tools help clarify complex provisions and resolve disputes, and are frequently referenced by courts and tax authorities to ensure the proper application of treaty rules
To access comprehensive resource including commentaries, protocols, and synthetic texts—on various UN model conventions and treaties, you can refer to the following authoritative sources
https://incometaxindia.gov.in/Pages/international-taxation/dtaa.aspx
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Disclaimer: The views expressed in this article are the personal views of the author. Neither the views nor the analysis constitute a legal opinion and are not intended to be advice.
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