Law: Income Tax Ordinance, 2001

Section: 107,107(2)(c)

(a) Income Tax Ordinance (XLIX of 2001)--- ----S. 107---International tax conventions, agreements or treaties---Interpretation---Reasons as to why treaty interpretation rules differ from domestic tax rules stated. International tax conventions or agreements or treaties are of a special nature and the role of a state (being party to such a bilateral agreement) is more of implementing the terms of such agreement rather than that of interpreting the same and that too in a unilateral manner. Treaty interpretation rules differ from domestic tax rules for the following among other reasons: (a) As international treaties, the Vienna Convention on the Law of Treaties of 23rd May 1969 ("VCLT") governs double tax agreements. Therefore, their interpretation is based on the rules of interpretation under customary international law. As these principles and procedures of interpretation of agreements differ from rules applied to domestic legislation, an interpretation under the domestic law as a taxing statute may be misleading and unsuitable; (b) Unlike the domestic law which contains highly technical legislative language relevant to a specific jurisdiction, tax treaties are based on the mutual understanding among two or more contracting states. Moreover, more than one language may be involved. They must be applied by the tax authorities and the courts in each contracting state in auniform way (common interpretation) that may differ from the domestic laws and practices in each state; (c) Tax treaties are primarily relieving in nature and do not impose tax, while the domestic tax law seeks to impose tax in specific circumstances. A treaty specifies general taxing principles to avoid double taxation. Moreover, as the life of a treaty can be long it must be flexible enough to adapt to changes in the domestic law while continuing to reflect the original negotiated balance of obligations and concessions; (d) Tax treaties tend to be less precise and require a broad purposive "substance over form" interpretation. Therefore, they are often interpreted more liberally than domestic law in the context of their object and purpose. On the other hand, in states that prefer a liberal,…

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