Introduction: International Taxation, a complex domain, is governed by Double Taxation Avoidance Agreements (DTAAs), customary international law, and the Vienna Convention on the Law of Treaties (VCLT). This article provides insights into the Vienna Convention’s principles and their implications on interpreting and implementing DTAAs in the realm of international taxation.
A brief intro of VCLT will set the context. VCLT was signed by 116 countries and was enforced from 27th January, 1980. It defines the treaty as agreements between two or more States (countries) in written form and governed by international law. VCLT establishes comprehensive rules, procedures, principles, and guidelines for interpretation of treaty provisions. It gives directions how treaties are governed, drafted, amended, interpreted, and generally operated.
We will explore the fundamental principles of interpretation as set out in VCLT, which help in interpretation of DTAAs:
1) Pacta Sund Servanda (“agreements must be kept”): It means that both parties to the international treaty shall enter the treaty in good faith. The provisions of the treaty will be binding on them. (Article 26)
Indian Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA Vs Department of Revenue (GOI) 2013 (354 ITR 316) also emphasised that the treaties must be performed and interpreted in good faith by both the countries of the treaty.
2) Treaty is prospective and not retrospective: Treaty provisions and any act/ fact/situation will be applicable from the date of entry into force of the treaty unless the intention of the parties is otherwise. (Article 27)
3) Territorial Scope of treaties: Treaty provisions are applicable to the parties in their entire territorial jurisdiction. So, the provisions cannot be partly applied to some areas/territories and not in entirety. But it may happen that the treaty provisions may specifically exclude some areas from the application. (Article 29)
4) General Rule of Interpretation: Treaty provisions are to be interpreted in good faith, with ordinary meaning of terms of treaty and in the context of the treaty and its object and purpose. The context may be understood, besides the express term, preamble and annexures, as any earlier agreement/instrument while concluding the treaty or any subsequent agreement or practice between the parties or any new rules of international law. So, general meaning of the terms used in treaty in the context will be used. However, if intention of the parties are specific, then special meaning will be assigned to the terms. (Article 31)
5) Supplementary Rule of Interpretation: It may happen that the ordinary meaning of the terms used in the treaty gives rise to unreasonable meaning or absurd conclusion or ambiguous meaning. In that case, the preparatory work of the treaty or circumstances in which the treaty was concluded can be used as supplementary rule of interpretation of the treaty provisions. (Article 32)
6) Authentic text of treaty: A text of treaty will be interpreted in the language of the treaty originally signed. In case of two or more languages of treaty, each will be treated as authentic. Terms of the treaty are presumed to have same meaning in each authentic text. In case of divergence, each party must agree. (Article 33)
7) Third State: Treaty provisions do not bind or create any rights to the third State. The third State cannot claim any right in a treaty signed by the parties to the treaty. Also, no obligations can be forced upon the third State. (Article 34)
8) Validity and Continuance of the treaty: Treaty is valid and continue unless any party withdraws or suspends as per the provisions of the treaty or VCLT. It is not free-will of the parties to terminate, suspend or withdraw from the treaty. (Article 42)
9) Material Breach and its consequences: A material breach in a bilateral treaty gives right to suspend or terminate the treaty. It may arise from the repudiation of the treaty by one party or doing acts or omission detrimental to the objects or purpose of the treaty. (Article 60)
10) Supervening impossibility of the performance: There may be a situation where the object which is core ingredient for the execution of the treaty, permanently disappears or gets destroyed. In that case, a party can withdraw or terminate the treaty. But there cannot be such a ground in case temporary situation. (Article 61)
11) Fundamental Change in circumstance: There may occur certain changes in circumstances which were not there at the time of conclusion of the treaty. It may also happen those circumstances were not envisaged at the time of treaty conclusion. These circumstances were the fundamental basis on which the parties concluded the treaty. In that situation, the parties may terminate or withdraw from the treaty. But such party should not be reason for the termination. (Article 62)
12) Jus cogens: Emergence of new peremptory norm of general international law- In case of any abrupt change in general international law, any existing treaty conflicting with that norm become void and the treaty gets terminated. (Article 64)
Conclusion: Understanding the Vienna Convention’s principles is essential for navigating the complexities of international taxation, especially in interpreting and implementing DTAAs. These principles provide a framework for fair, transparent, and mutually beneficial international agreements, ensuring that treaties are upheld in good faith and adapt to changing circumstances.
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In case you have any concern or need any clarity or support regarding the Transfer Pricing/ International Taxation/DTAA, you may like to contact us.
Abhinarayan Mishra, FCA, FCS, LL.B, IP, RV ; Managing Partner, KPAM & Associates, Chartered Accountants; 9910744992, ca.abhimishra@gmail.com
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