Tax Treaty Overrides- A Global Perspective

By Priya Desai, SVKM’s Pravin Gandhi College of Law, Mumbai and Devanshi Sethi, Rizvi Law College, Mumbai

Editor’s Note: A tax treaty is an agreement entered into between two countries whereby they decide to avoid double taxation of goods and services, in order to facilitate smooth international trade. In what is  regarded as the first tax treaty, it was concluded between  England and Switzerland for the prevention of double taxation in respect of death duties, dating back to the year 1872. However, today these treaties are more important than ever for commercial purposes. Treaty override is a related concept. It takes place when the domestic laws of a nation prevail over the provisions of the treaty. It does not happen in all nations, but when it does, it has far-reaching ramifications for tax treaties as well as the operation of international law. This paper attempts to provide a global perspective on treaty overrides by analysing the domestic laws of both- developed and developing nations. It further suggests how an override may be necessitated in case of public interest, but should not ordinarily be resorted to.”


 Tax Treaty

A “tax treaty” is defined as a ‘term generally used to denote an agreement between two (or more) countries for the avoidance of double taxation.’ In fact there are various types of tax treaty of which the most common are treaties for the avoidance of double taxation of income and capital (usually known as comprehensive income tax treaty).[i]

A tax treaty is also often referred to as a ‘double tax agreement’, a ‘double tax treaty’ or a ‘double tax convention’.[ii]

Double taxation agreements are an important element in the overall international economic policy of a nation, one of the fundamental objectives of which is to minimize impediments to the free international flow of capital and technology. This objective is fostered by the broadest possible network of income tax treaties, which seek to eliminate, or at least mitigate, the impact of these impediments.[iii]

Such treaties are also commonly aimed at the prevention of fiscal evasion and avoidance of double taxation; and, in order to achieve so, such treaties provide for the distribution, between the treaty partners, of the right to tax, which may either be exclusive, or shared between the treaty partners. [iv]

Treaty Override

In most countries, treaties (including tax treaties) have a status superior to that of ordinary domestic laws. However, in some countries there have been instances of treaties being changed unilaterally by subsequent domestic legislation.[v] In this context, the term “treaty override” refers to this situation where the domestic legislation of a State overrules provisions of either a single treaty or all treaties hitherto having had effect in that State. [vi]

Though well defined in theory, what constitutes a treaty override in practice has always been a matter of debate. The OECD Report[vii] attempted to bring some clarity to this issue, by listing certain situations, which either involve or are similar to treaty overrides but should be subject to analysis.

Firstly, a State may legislate to reverse the effect of a court decision, which deviates from the common interpretation of a provision in the text of the treaty. In this case, no injury is considered to have been caused as, in all probability, it is the Court’s decision in the first place, which may have been seen overriding the treaty.

In another situation, the State may change the definition of a term used in its domestic legislation, but which is also used in its treaty provision but which is not specifically defined for the purposes of the treaty. In such a case, it is said that there is no override as it cannot have been contemplated that, having once entered into a treaty, a State would be unable to change the definitions of terms used in its domestic law, provided such changes were compatible with the context of the treaty.

Finally, newly enacted domestic legislation may be in conflict with a treaty provision, without the concerned authorities intending, or even being aware of such an effect. This may not constitute a treaty override, as the intention of the legislators, to create a provision in the domestic law that would clearly be in conflict with that State’s treaty obligations, is a key element in the formation of the concept of ‘treaty override’.[viii]

Various commentators too, have strived to construe what a treaty override comprises of. The view taken by Professor McIntyre[ix] is that ‘to violate international law, a breach must be material; and to be material, the breach must take away from a treaty signatory a significant bargained-for benefit and must undermine the objectives of the breached treaty.’ In his opinion, such material breaches would constitute a treaty override. [x]

Position of International Law on Treaty Override

From the international law perspective, tax treaties are given supremacy over domestic law,[xi] and as is evidenced by the Vienna Convention on Law of Treaties (VCLT)- the relevant articles of which, clearly condemn treaty override.[xii]

Article 26 of the VCLT incorporates the principle of ‘Pacta sunt servanda’, stating “Every treaty in force is binding upon the parties to it and must be performed by them in good faith.”

In addition, Article 27, which talks about internal law and observance of treaties, explicitly states, “A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.”

Furthermore, Article 18 states the Obligation of a State not to defeat the object and purpose of a treaty prior to its entry into force, and reads as follows:

“A State is obliged to refrain from acts which would defeat the object and purpose of a treaty when:

  • it has signed the treaty or has exchanged instruments constituting the treaty subject to ratification, acceptance or approval, until it shall have made its intention clear not to become a party to the treaty; or
  • it has expressed its consent to be bound by the treaty, pending the entry into force of the treaty and provided that such entry into force is not unduly delayed.”

Thus, it is clear that treaty overrides constitute a violation of international law.[xiii]

Treaty Overrides in Nations

Over the last few decades, the number of bilateral tax treaties has increased dramatically. Developing countries are increasingly entering into tax treaties with developed and other developing countries in order to facilitate cross-border trade and investment.[xiv]

This part evaluates the global perspective concerning matters such as the status of tax treaties with respect to domestic law and the permissibility of tax treaty overrides in various nations, through the study of a chosen few developed and developing countries.

Developed Nations

United States

After exploring alternative means of mitigating the burdens of double taxation, the United States concluded its first bilateral tax treaty in 1932.[xv] In nearly seventy years since the conclusion of this treaty, the United States’ network of bilateral tax treaties has grown to embrace more than sixty countries, while the U.S. network of estate and gift tax treaties now embraces sixteen countries.[xvi]

The 1954 Internal Revenue Code (IRC) contained two provisions controlling the tax provisions and national laws i.e. §7852 and §894(a). These provisions were further modified by Technical and Miscellaneous Revenue Act 1988 (TAMRA) [xvii] and the impact of these modifications, on the relationship between tax treaty and subsequently enacted tax laws, has been a subject of debate.

Prior to 1988, § 894(a) of the IRC provided that “income of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle”[xviii]. This was later replaced by §894 (a)(1) which provides that “The provisions of this title shall be applied to any tax payer with due regard to any treaty obligation of the United States which applies to such tax payer.”[xix]

At first, the inclusion of term “due regard” did not seem to have effected a radical change between tax treaty and internal revenue code, however, the true impact of its change can only be estimated when §894(a)(1) is read along with § 7852(d), which states “For purposes of determining the relationship between the provision of a treaty and any law of the United States affecting revenue, neither the treaty nor the law shall have preferential status by reason of its being a treaty or a law”[xx] The congress has hence attempted to codify its own peculiar interpretation of the judicially created “later-in-time rule” upon which its legislative overrides have been based.[xxi]

This can be further interpreted by inferring the legislative history of §7852[xxii]. Under §101212(aa)(2)(C) of the proposed House Bill “any other amendment made by the Reform Act should prevail over conflicting treaty provisions not identified by the mention list in the House Bill.[xxiii] Despite opposition, it was proposed again in the 1988 TAMRA[xxiv] House Bill.

Further the Finance Committee Report of 1988 explains in general:

“The bill modifies the 1954 ‘transition rule’ (embodied in sec. 7852(d)) governing the relationship between treaties and the Code to clarify that it does not prevent application of the general rule providing that the later in time of a statute or a treaty controls sec.7852 (d).[xxv]

Under the U.S. Constitution, “Laws of the United States which shall be made in pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land.”[xxvi] This “Supremacy Clause” was intended to ensure the supremacy of both U.S. federal laws and treaties to state laws, and was one of the major innovations in the Constitution.

As seen above, the congress has opted for its own peculiar interpretation of the principle of lex posterior (later law abrogates a prior contrary law), under which any conflict between a later statute and an earlier treaty would be resolved in favour of the statute without regard of any intention or consideration on the impact on the treaty.[xxvii]

On the other hand, the judiciary has limited and clarified the lex posterior principle by providing that “A treaty will not be deemed to have been abrogated or modified by a later statute unless such purpose on the part of congress has been clearly expressed.”[xxviii]

This was further affirmed in a case in 1888, Whitney v. Robertson[xxix], where the terms of a treaty between the United States and Dominican Republic were in conflict with a subsequent legislation passed by the U.S. government, and where the Court held that, “the duty of the courts is to construe and give effect to the latest expression of the sovereign will.” This was also was reaffirmed in a case in 1957, where the court stated “An Act of Congress, which must comply with the Constitution, is on a full parity with a treaty, and … when a statute which is subsequent in time is inconsistent with a treaty, the statute to the extent of conflict renders the treaty null.”[xxx]

In practice, certain legislations passed by theU.S. have been a topic of debate as they may be construed as cases of treaty override, but even if so, a few commentators believe they were justified.

An example of one such legislation was the Branch Profit Tax (BPT), which was enacted in 1986 to equalize the position of foreign investors who operate in the US through a subsidiary and a branch,[xxxi] and under which, withholding tax was levied along with tax on branch income, with limitations to prevent treaty shopping. Many U.S. tax treaties forbade taxing distributions from foreign corporation residents in a treaty country to their foreign shareholders even if distribution came out of earnings of a U.S. branch and arguably the branch profits violated the spirit of this rule. It was thus reasonably considered to be the commission of a treaty override.[xxxii]

Overriding a treaty is violation of doctrine of ‘Pact sunt servanda’ integrated in the Vienna Convention on Law of Treaties (VCLT). The United States has not ratified the Vienna Convention on the Law of Treaties; nevertheless, those provisions of this convention that constitute the codification of customary international law are binding on the United States.[xxxiii] However, a few commentators still believe, that an override may be justified if it is consistent with the underlying purpose of the treaty.


Under German law, an incorporated treaty is effectively domestic law, but special priority is granted to the incorporated treaty over truly domestic law. Tax treaties prevail over national laws.[xxxiv] Even though they have the same stature as the national tax laws. This longstanding principle of German tax law has been followed by the Imperial Tax Court[xxxv] and by the Federal Tax Court[xxxvi] since late 1930s.

Today, Article 59,¶2 of the German Fiscal Code states “Treaties with other states of the Basic Law take precedence over national tax laws if the treaties have been incorporated properly into applicable national laws. This explains that the German national legislature cannot override income tax treaties through subsequent legislation. The legislation is either inapplicable under the priority rule of ¶2 of German Fiscal Code or these treaties will be applied under ¶2 as leges speciales in relation to the subsequently enacted national tax laws.[xxxvii]

This can be further asserted in a decision published on 12 February 2014,[xxxviii]in a case between German Limited Partnership (GmBH & Co.KG – KG) and an Italian resident who owned an interest in KG itself. Here due to the 2009 amendment of the German Income Tax Act pursuant to Section 15(1) No. 2 ITA, interest paid to a partner of a German business partnership is re-characterized as business income and taxed accordingly in the hands of the partner, which consequently denied Italy the right to tax the interest under Article 11 (1) of the Treaty.[xxxix]

In its decision the German Federal Fiscal Court (BFH) stated that this unilateral reclassification of remunerations, which generally falls under a (specialty) article of a treaty, is an override of those provisions and hence commits an unconstitutional breach of international law.

United Kingdom

There is a certain ambiguity surrounding the position of the United Kingdom, with respect to treaty override, as is evidenced by its domestic legislations.

The provisions regarding relief by agreement with other countries that were formerly incorporated under S. 788(3) of the ICTA, 1988, are now embodied in S.6 of the Taxation (International and Other Provisions) Act, 2010, which reads as follows:

‘Subject to this Part and Part 18 of ICTA, double taxation arrangements have effect in accordance with subsections (2) to (4) despite anything in any enactment.’

These sub-sections deal with double taxation agreements that have effect in relation to income tax[xl], capital gains tax[xli] and petroleum revenue tax[xlii].

The question that arises is regarding the interpretation of these provisions, which imply that double tax treaty is to be given effect ‘notwithstanding anything in any other enactment’. Does this mean that any law extant at the date the treaty comes into effect, or does it mean that no domestic legislation past or future, can constrain the effectiveness of the tax treaty?[xliii]

A further attempt to clarify U.K.’s position, as regards treaty overrides, can be made by analyzing one of the few alleged instances of a treaty override in the U.K. – the enactment of a section in the Finance (No. 2) Act, 1987, purportedly done by the Government with the purpose of nullifying the effect of the judgment in Padmore’s[xliv] case.

Mr. Padmore was a partner in a Jersey partnership, which consisted of over 100 partners, who were mostly UK resident. Two managing partners who were resident in Jersey carried on the day-to-day business of the partnership. Mr. Padmore claimed that he was entitled to exemption from income tax, in respect of his share of profits, in the U.K. under the U.K.-Jersey Double Taxation Agreement, which provided, in Paragraph 3, for ‘the relief from UK tax of the industrial or commercial profits of a Jersey enterprise’[xlv].

In the present case, the court judged that since a partnership in Jersey didn’t carry on its business through a permanent establishment in the United Kingdom, the United Kingdom Government could not tax Mr. Padmore who is a partner of the partnership as a U.K. resident.[xlvi] The court’s decision prompted the Government of the day to promote legislation to remove the exemption exploited by Mr. Padmore.[xlvii]

To this end Section 62 was inserted into section 153 of the Finance (No. 2) Act, 1987, and it read as follows:

“In any case where — (a) a person resident in the United Kingdom (in this subsection and subsection (5) below referred as “the resident partner”) is a member of a partnership which resides or is deemed to reside outside the United Kingdom, and (b) by virtue of any arrangements falling within section 497 of this Act (double taxation relief) any of the income or capital gains of the partnership is relieved from tax in the United Kingdom, the arrangements referred to in paragraph (b) above shall not affect any liability to tax in respect of the resident partner’s share of any income or capital gains of the partnership.”

Lee, Jae Ho asserts that this section 62 of the Finance (No 2) Act, which was established solely in order to reverse the decision in the abovementioned case, comes under the ambit of treaty override legislation.[xlviii] However, a contrary view has been taken by Han, Sung-Soo[xlix], who claims that The U.K. Government had overridden the High Court’s decision by establishing a new statute in order to restore the general understanding of the law to what it was before a decision of the High Court and thus, one cannot say that there was a tax treaty override since the new law was made in order to override the High Court’s decision (or interpretation), but not a tax treaty.[l]

On 1st December 1986 the court allowed Mr. Padmore’s appeal. On 22nd January 2001, the Court of Appeal, affirming the High Court’s decision, found that the taxpayer was exempt from tax on his foreign income from a Jersey-based partnership.[li] As the Government had changed the law, even before the case was decided, this controversial provision was made retrospective; exempting only appeals already in train at the time the change was announced.[lii]

An analysis of the U.K. government’s enactment of section 62 in 1987, in response to the judgment delivered in the first Padmore case, demonstrates that this action was taken by the legislators with the clear intention of overriding, in all probability, both, the interpretation of the U.K.-Jersey tax treaty by the Courts and the terms of the treaty itself.

The action of creating a provision in domestic legislation with the intention, on behalf of the legislator, of having its effects being clearly conflicting with international obligations derived from previously executed treaties, constitutes a treaty override.[liii] Thus, it can be concluded that treaty override in the UK is only possible where it is the clear intention of the legislator to achieve it.[liv]


Singapore’s earliest tax treaties were concluded with the United Kingdom and Malaysia in 1966. There are now 38 comprehensive treaties in force.[lv]

Section 49 of the Income Tax Act of Singapore states:

 ‘If the Minister by order declares that arrangements specified in the order have been made with the government of any country outside Singapore with a view to affording relief from double taxation in relation to tax under this Act and any tax of a similar character imposed by the laws of that country, and that it is expedient that those arrangements should have effect, the arrangements shall have effect notwithstanding anything in any written law.’[lvi]

Thus a Singapore tax treaty acquires the force of statutory law.[lvii]

Though not a signatory to the Vienna Convention on Law of Treaties, Singapore, like other non-signatory states, is obligated to observe it as principles of customary international law and is bound by Article 26 of the VCLT. [lviii]

But the parliament cannot restrict the future law-making power of its legislators. In case of a further legislation, under Section 49 of Singapore’s Income Tax Act, domestic law passed subsequently can operate to restrict the scope of a tax treaty or revoke a part or the whole of the treaty. Presumably, the provisions that are enacted later would prevail; unless they are general and do not override an earlier provision that is special[lix]. This can be said in conformity with Section 9A of the Interpretation Acts, which says an interpretation that would promote the purpose or object underlying the written law (whether that purpose or object is expressly stated in the written law or not) shall be preferred to an interpretation that would not promote that purpose or object.[lx]

In case of IRC v. Colco Dealings Ltd.[lxi], it was implied that incase of an override the courts would have to give effect to the domestic provisions if their language is clear, even if they offend the rules of international law.

Developing Nations


In most common law jurisdictions, treaty law has the same status as domestic law and therefore, using the general principle that a later law overrides an earlier law; the treaty override is usually effective.[lxii] There may, of course, be protection for treaty law built into the domestic legal system – as is the case in India.

The correct legal position in India is that where a specific provision is made in the double taxation avoidance agreement, that provision will prevail over the general provisions contained in the Income Tax Act, 1961. In fact, due to the double taxation avoidance agreements which have been entered into by the Central Government of India, Section 90 of the Income Tax Act, 1961 provides that the laws in force in either country will continue to govern the assessment and taxation of income in the respective countries; except where provisions to the contrary have been made in the agreement.[lxiii]

The Indian judiciary has also played an appreciably large role in affirming this stand taken by India, of assigning tax treaties the power to override contradictory domestic legislation. This has been illustrated through a number of defining judgments of the various Indian High Courts, as well as of the Supreme Court.

In the case of Commissioner of Income Tax v. Vishakhapatnam Port Trust[lxiv], Jagannadha Rao, J. stated, “The question of law referred to us at the instance of the Commissioner of Income-tax, Andhra Pradesh, Hyderabad, is Whether, on the facts and in the circumstances of the case, the assesse is immune from liability either wholly or partly to tax on the basis of the Double Taxation Avoidance Agreement between Germany and India? We agree with the Tribunal and answer the question referred to us in the affirmative – in favour of the assesse, Port Trust, and against the Department – that the assesse is immune from liability either wholly or partly to income-tax in view of the provisions of the Double Taxation Avoidance Agreement between the Federal Republic of Germany and India.”

In the case of Arabian Express Line Limited v. Union of India[lxv], the petitioner, M/s. Arabian Express Line Limited, United Kingdom, was a resident of the United Kingdom, who had pleaded that in accordance with Article 9(1) of the Agreement for the Avoidance of Double Taxation between the Government of India and the Government of the United Kingdom, the entire shipping income of the United Kingdom company be exempted from tax in India. The petitioner produced a certificate issued by the Assistant Commissioner of Income-tax, Company Circle, Calcutta, which affirmed that they were so exempted from the tax with effect from April 1, 1992. Despite this and other similar documentary evidence, the Income Tax Officer, Gandhidham, passed an order, which levied taxes and imposed penalties. The Supreme Court held that this order was illegal and contrary to the Circular[lxvi] issued by the Central Board of Direct Taxes and the convention between the Government of India and the United Kingdom.

Both, the Andhra Pradesh High Court and the Supreme Court, through their respective judgments, clearly spelt out that the tax treaty referred to in that particular judgment was conferred with the power to override the relevant domestic legislation or order.

It is thus, well settled that in the event of a conflict between a Double Taxation Agreement and a specific provision contained in the Income Tax Act, the provisions of the Double Taxation Agreement will prevail over the statutory provisions contained in the said Act. [lxvii] However, this unanimous, unflinching view of the Indian courts was in danger of losing its reliability, after the judgment passed by the Bombay High Court in the Vodafone[lxviii] case.

Through the $11.2 billion deal in May 2007, Vodafone International Holdings, a Dutch company, acquired a 67 per cent stake in the Hutchison-Essar Ltd (HEL) from the Hong Kong-based Hutchison Group through CGP (Holdings) Limited (CGP), a Cayman Island Company.[lxix]

The Income-tax Department took a view that Vodafone was liable to withhold taxes on payments made to the Dutch company since the transaction resulted in transfer of controlling interest of the Indian company. Vodafone filed a writ petition in the Bombay High Court, inter alia, challenging the jurisdiction of the tax authorities in the matter. By its order dated 3 December 2008, the Bombay High Court held that the tax authorities had made out a prima facie case that the transaction was one of transfer of a capital asset situate in India, and accordingly, the Indian income-tax authorities had jurisdiction over the matter. [lxx]

This decision of the Bombay High Court caused tremors, no matter how slight or for how short a time, in the unwavering stand taken by the Indian courts, as regards the question of whether a domestic legislation could have an overriding importance even if a double tax treaty, specifying the relevant provisions, was in place.

However, on appeal by Vodafone, The Supreme Court set aside the Bombay High Court judgment asking Vodafone International Holding to pay income tax of Rs 11,000 crore on the aforementioned transaction.[lxxi] It was held by the court vide its order dated January 20, 2012, that the transaction was not liable to tax in India as no direct transfer of the shares of Indian company had been made.[lxxii]

But in an alarming development, the Government of India, instead of accepting the Supreme Court verdict, made retrospective amendments in certain provisions of the Income Tax Act, through explanations to those sections provided in the Finance Bill, 2012, to nullify the effect of Vodafone’s case.[lxxiii]

Section 2(14) of The Income Tax Act was amended so as to clarify ‘that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.’[lxxiv]

Section 2(47) was amended to clarify ‘that “transfer” includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India’.[lxxv]

Section 9 was amended to clarify that ‘an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.’[lxxvi]

The net effect of the aforesaid amendments was that the decision of the Supreme Court in Vodafone’s case was no longer a good law. Now, any transaction entered into outside India between two foreign residents would also be subject to the provisions of the Indian Income Tax Act if the said transaction had any bearing on any asset situated in India. Though the Government then decided to settle Vodafone’s case amicably, this action of the Legislature to amend law retrospectively had a direct negative impact on the foreign investment in India.

Close on the heels of this controversial Vodafone case, were two equally important cases concerning similar matters – the Nokia[lxxvii] case and the Sanofi Aventis[lxxviii] case.

Nokia, a tax resident of Finland and a leading manufacturer of GSM equipment, had, during the relevant years, Nokia a Liaison Office (“LO”) and also a 100% subsidiary in India known as Nokia India Private Limited (“NIPL”). Nokia sold GSM equipment manufactured in Finland to Indian telecom operators outside India on a principal-to-principal basis. Installation activities were undertaken by NIPL under its independent contracts with Indian telecom operators. The LO carried out advertising activities for Nokia.[lxxix]

The main issue before the Delhi High Court was whether consideration for supply of software embedded in the GSM equipment supplied by Nokia can be taxed as royalty in view of the India-Finland tax treaty and the amended provisions of the Finance Act 2012, which expanded the scope of the definition of royalty under the Act to include the use of any right in a computer software. [lxxx]

Adjudicating on the question of whether the payments made for the embedded software were in the nature of royalty, the Court held that since Nokia was a Finnish resident in terms of the India-Finland double taxation avoidance agreement (the DTAA), it was eligible for the benefits accruing to it under the DTAA as provided for under Section 90(2) of the Income Tax Act, which reads as follows:

‘ Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.’

The definition of royalty would therefore have to be considered as emanating from the DTAA, which under article 12 of the DTAA provided for a narrower and more restricted meaning of the term royalty.[lxxxi]

Further, retrospective amendments made to the definition of royalty under the IT Act had no bearing on transactions taxed under DTAAs.[lxxxii]

Sanofi Aventis, a French company had, in 2009, acquired the majority stake of another French company, Mérieux Alliance, in Hyderabad-based vaccine firm Shantha Biotechnics in a deal that valued the company at €550 million (about 3,783 crore). Mérieux Alliance owned 80% in Shantha through its subsidiary ShanH. Sanofi’s vaccine division, Sanofi Pasteur, acquired this stake.[lxxxiii]

In its ruling, the Authority for Advance Ruling (AAR) had held that this offshore share sale transaction between the two French companies, was taxable in India under Article 14(5) of India-France tax treaty.[lxxxiv]

However, the Andhra Pradesh High Court has ruled that France, not India, is entitled to Rs. 650 crore in capital gains tax arising from the this sale of Hyderabad-based Shantha Biotechnics to a Sanofi Aventis.[lxxxv] The court’s ruling, clarifies that tax treaties override the controversial retrospective amendments that India made to the income tax law.[lxxxvi]

Decisions in cases such as the Nokia case, the Sanofi Aventis case and the recently decided case of B4U International Holdings Ltd. vs. DCIT[lxxxvii], demonstrate the respect which the Indian judiciary accords to tax treaties with other countries and provide an anchor in otherwise choppy waters created post the Vodafone tax litigation and the frequent Explanations inserted to the relevant sections of the IT Act by the Indian government, which many argue are slowly eroding the principles of source based taxation.[lxxxviii]

Notwithstanding the Courts’ stance, recent legislative developments may give rise to concerns regarding India’s standpoint on these issues. The Direct Tax Code Bill, introduced in 2010, incorporates the General Anti-Avoidance Rule, which, in effect, implies that any arrangement entered into by a person may be declared as an impermissible avoidance arrangement[lxxxix] by the Commissioner of Income- Tax, if it is evident that the main purpose of the arrangement is to obtain a tax benefit.

It was proposed to provide, in the DTC, that between the domestic law and relevant DTAA, the one that is more beneficial to the taxpayer should apply, in keeping with the current provisions of the Income Tax Act. It was also proposed, however, that a DTAA will not have preferential status over the domestic law in the following circumstances:

  • When the General Anti Avoidance Rule is invoked, or
  • When Controlled Foreign Corporation provisions are invoked or
  • When Branch Profits Tax is levied.[xc]

Any apprehensions raised that the aforesaid proposals would lead to a treaty override, were countered by the reasoning that this ‘limited treaty override’ would be in accordance with the internationally accepted principles and would not be in conflict with the DTAA’s, as anti-avoidance rules are part of the domestic legislation and are not addressed in tax treaties.[xci]

The DTC Bill further provided that neither a DTAA nor the Code would have a preferential status by reason of its being a treaty or law; but, in the case of a conflict between the provisions of a treaty and the provisions of the Code, the one that is later in point of time would prevail.[xcii] As the DTC would be the ‘later provision’, as regards the bilateral DTAA’s that are already in existence, it is clear that the DTC would be vested with overriding authority, in case of the aforementioned conflict. The enactment of the DTC could thus, constitute a treaty override.

Currently, the government plans on coming up with a modified Direct Taxes Code (DTC) Bill after incorporating the suggestions of the Standing Committee on Finance, which has suggested a slew of changes to the legislation.[xciii]


The Mexican Constitution provides, in Article 133, as follows:‘This Constitution, the laws of the Congress of the Union that come from it, and all the treaties that are in accord with it, that have been concluded and that are to be concluded by the President of the Republic with the approval of the Senate will be the Supreme Law of all the Union. The judges of every State will follow this Constitution and these laws and treaties in considering dispositions to the contrary that are contained in the constitutions or the laws of the States.’

In 1999, the Mexican Supreme Court of Justice (Suprema Corte de Justicia de la Nación) determined that international treaties are below the Constitution and above national law (federal, state and municipal).[xciv]

In a recent resolution the Mexican Supreme Court of Justice has determined that the international treaties signed by Mexico are in accordance with the Vienna Convention of the Law of Treaties, based on principles of international law, as well as in the internationally customary principle of “pacta sunt servanda”, therefore Mexico binds itself to these obligations before the international community and cannot avoid its fulfillment calling on domestic provisions because this would make Mexico liable internationally.[xcv]

Therefore, in accordance with the Mexican Constitution, Mexico’s tax treaties take precedence over domestic law in terms of their application-the text of a treaty prevails in the event of any apparent dispute or inconsistency.[xcvi]

However, in the recent years, there has been an amendment in a domestic legislation, which could be treated as a possible treaty override.

Under Article 210 of the Mexican Income Tax Law (MITL), a non-resident is subject to tax in Mexico if it derives income from a Mexican source or if the non-resident is deemed to have a permanent establishment (PE) in Mexico.

The reform to the MITL, which became effective on January 1, 2005, introduced a modification to Article 210, which indicated that all income subject to taxation in accordance with Title V of the Mexican Income Tax Law (Of Residents Abroad with Income Proceeding from Sources of Wealth Located in National Territory) should not be considered as income for ‘entrepreneurial activities’.[xcvii]

The effect of these reforms is that they may cause the tax authorities to construe that certain income, which, prior to the enforcing of the amendment was not subject to the burden in Mexico, for being entrepreneurial benefits[xcviii], would now be subject to the Mexican Income Tax Law.[xcix] For instance, specific types of payments made by Mexican residents to non-residents without a permanent establishment (PE) in Mexico might be subject to full Mexican withholding tax at a rate of 25%, even if the recipient is resident in a country that has concluded a tax treaty with Mexico.[c]

In light of these developments, there exists a possibility of a conflict arising between the analysis of Mexico’s tax treaties and the current position of the tax authorities.


The African perspective on treaty override has been exemplified through an analysis of the provisions of tax treaties and domestic legislations of Ghana and Tanzania.[ci]


The position of the Ghanaian domestic law vis-a-vis Double Taxation Avoidance Agreements entered into by Ghana with other States, can be illustrated with a hypothetical example.

X, a company incorporated and tax resident in London, is listed on the London Stock Exchange; the majority of its shareholders being corporate investors, who may not necessarily be tax residents of the United Kingdom. Z is a company that is tax resident in Ghana. Z pays royalties to X for the use of certain intellectual properties.

Under Article 12(1) of the U.K.-Ghana Double Taxation Convention, royalties arising in Ghana and paid to the residents of U.K. may be taxed in the U.K.. Article 12(2) further provides that if the royalties are to be taxed in Ghana under the domestic laws, they would not be subject to the Ghanaian withholding tax rate of 25% (for residents) but rather at the rate of 12.5% under the tax treaty.

However, Section 111(4) of Ghana’s Internal Revenue Act, 2000 (Act 592), states:

‘Where an international arrangement provides that income accruing in or derived from Ghana or some other amount is exempt from Ghanaian tax or is subject to a reduction in the rate of Ghanaian tax, the benefit of that exemption or reduction is not available to a person who, for the purposes of the arrangement, is a resident of the other contracting state where fifty per cent or more of the underlying ownership of that person is held by an individual or individuals who are not residents of that other contracting state for the purposes of the arrangement.’

Section 166 of the same law[cii] defines “underlying ownership”

(a) in relation to an entity, means an interest held in or over the entity directly or indirectly through one or more interposed entities by an individual or by an entity not ultimately owned by individuals; or

(b) in relation to an asset owned by an entity, is determined as though the asset is owned by the persons having underlying ownership of the entity in proportion to that ownership of the entity.

Applying the facts of the given situation, it can be interpreted that the payment of royalties may be regarded as an amount exempt from or subject to a reduction in the rate of Ghanaian tax under an international arrangement (which in this context, would refer to the U.K.-Ghana Double Taxation Convention), as provided under Section 111. Further, the definition of underlying ownership under Section 166 suggests that the tax residency of non-individuals (such as the corporate investors referred to in the given example) should also be considered, with the effect that tax treaty relief would be unavailable if more than 50% of the shareholders (whether individuals or not) of X are not tax residents in the U.K.

The fact that X is a listed company, makes it very difficult to prove that more than 50% of its shareholders are U.K. tax residents, since shareholders of London listed companies constantly change, and some shares may be held by nominee shareholders.

The enforcement of Section 111(4) of the Ghana Internal Revenue Act, 2000, consequently makes it very difficult for London listed companies to avail themselves of the benefits conferred by the U.K.-Ghana tax treaty.


Section 128 of the Tanzanian Income Tax Act, 2004 explicitly provides:

‘To the extent that the terms of an international agreement, to which the United Republic Of Tanzania is a party, are inconsistent with the provisions of this Act, apart from subsection (5) and Subdivision B of Division II of Part III[ciii], the terms of the agreement prevail over the provisions of this Act.’

Sub-section (5) of Section 128 is to be read with sub-section (4), which applies when an international agreement provides that the United Republic of Tanzania shall exempt income or a payment or subject income or a payment to reduced tax.

Sub-section (5) states that this exemption or reduction would not be available to any entity which either is, for the purposes of the agreement, a resident of the other contracting state; and 50 percent or more of whose underlying ownership is held by persons, being individuals or entities who are not, for the purposes of the agreement, residents of the other contracting state or the United Republic of Tanzania.

Impact of Treaty Overrides

A material breach of a bilateral treaty by one of the parties and the subsequent violation of international law embodied in the Vienna Convention on the Law of Treaties (VCLT) grants the other party the right to terminate the treaty.[civ]

This frustration of a treaty is often detrimental to a State in a number of ways.

First, each time it enacts a legislative override, it amounts to violation of international law, which damages the reputation of the State as a member of the international community as well as the international legal order itself.[cv]

Second, because treaties are really no more than contracts between sovereign nations, legislative overrides erode the trust of treaty partners undermining that the state will remain faithful to its obligations.[cvi]

Third, these overrides might itself harm the citizens and residents of the overriding State, who may wish to avail themselves of the benefits of tax treaties, as violation as led an increasing number of treaty partners to insist upon a right to renegotiate or retaliate.[cvii] This was seen in case of successive U.S. treaty overrides, where the European countries have been joined in their criticism by prominent United States professional organizations.[cviii]

Treaty overrides, thus, create friction between a State and its treaty partners and may even undermine, to some extent, the comity upon which the network of international tax agreements ultimately rests. The negative consequences of treaty overrides may appear so far to be small, but there is a significant downside risk for the long term.[cix]


On evaluation of the various case laws, situations, and perspectives of legislators and other experts presented in this paper, it can be established that treaty overrides may be justified in certain instances; such as, for example, where such override was mandated by a significant issue of national interest, and no other less infringing measure was available.[cx]

We, however, are of the opinion that whenever such need arises, instead of resorting to the commission of a treaty override, States should consider the other alternatives available to them in such situations – namely termination, revision or amendment of a treaty.

The termination or suspension of operation of the treaty may take place in conformity with the provisions of that treaty[cxi], by the express agreement or consent[cxii] of the parties to the treaty, by the implication of termination by conclusion of another treaty[cxiii], or, if no relevant termination provisions are contained in the treaty, by the establishment that the possibility of denunciation or withdrawal of the treaty is intended by the parties or is implied by the nature of the treaty[cxiv].

However, as the 1989 OECD report[cxv] states, termination could do even more harm economically and endanger the possibility of finding an acceptable solution in the future.

In cases where the legislators of any State feel that they have no option but to enact a domestic legislation that could conflict with any provision of a particular tax treaty, an easier way out would be amending that provision of the treaty, of course, with the consent of the treaty partner.

The term “amendment” refers to the formal alteration of treaty provisions affecting all the parties to the particular agreement.[cxvi].

‘Revision’ essentially has the same meaning as ‘amendment’, though in some cases, this term refers to an overriding adoption of the treaty to changed circumstances, whereas the term ‘amendment’ refers only to a change of singular provisions.[cxvii]

Though these solutions may seem principally theoretical, there are countries that have displayed their willingness to renegotiate or alter, rather than override, their double tax treaties.

Finance Ministry officials of India and Finland were poised to meet, in December 2013, and review the India- Finland Double Taxation Avoidance Treaty, in light of Nokia’s Rs.6,500-crore tax dispute case[cxviii]

In another instance, India was seeking to rework the ‘Limitation of Benefit’ clause in the India-Mauritius Double Taxation Avoidance Agreement to ensure that shell companies are not used to route investments into the country from Mauritius in order to escape tax; and Mauritius too, had expressed its readiness to expeditiously revise the tax treaty with India to check tax evasion.[cxix]

In conclusion, we may opine that it cannot be disregarded that honoring treaty obligations goes a long way towards the maintenance of international relations. In the elegantly quoted words of Professor Verzul:

“The firm and obviously sound canon of construction against finding implicit repeal of a treaty in ambiguous congressional action has been reiterated in a number of cases. Without its operation and general acceptance as an axiom of inter-state intercourse no true and effective international law is indeed conceivable: when and where, and to the extent to which, that foundation-stone of international system crumbles, the entire legal order is doomed to collapse, as experience has only too often demonstrated. This self- evident truth is the incontrovertible corollary of the fact that, whereas a municipal legal order is erected on the command ‘You shall’, the international legal system rests on thee undertaking ‘We shall’. Whenever those ‘We’ break the faith, their legal order also necessarily breaks down.”[cxx]

Edited by Kudrat Agrawal 

[i] Larking, B. International Tax Glossary, Amsterdam: Bureau of Fiscal Documentation, 354 (4th ed 2001).

[ii] Kevin Holmes, International Tax Policy and Double Taxation Treaties: An Introduction to Principles and Application,IBFD Publications, 2007.

[iii] Anthony C Infanti, Curtailing Tax Treaty Overrides: A Call To Action, University of Pittsburg Law Review (2000-2001).

[iv] Supra note i.

[v]Avi-Yonah, Reuven S., Tax Treaty Override: A Qualified Defence of U.S. Practice, (2005), 65-80 in Tax Treaties and Domestic Law, (G. Maisto, 2006).

[vi] OECD 2012, “R(8): Tax Treaty Override” in Model Tax Convention on Income and on Capital 2010 (Full Version), OECD Publishing.

[vii] OECD Report on ‘Tax Treaty Override’ (adopted by the OECD Council 2nd October 1989).

[viii] Committee of Fiscal Affairs: Tax Treaty Overrides (1989).

[ix] Professor McIntyre, Int’l Tax Treaties, Wayne State University Law School.

[x] Mike McIntyre, A Defense of Treaty Overrides, Editor’s Notebook, Vol. 1, Issue 6, 1/6 Tax Notes Int’l 611-614 (1989).

[xi] Alexander Trepelkov, Harry Tonino and Dominika Halka, United Nations Handbook on Selected Issues in Administration of Double Tax Treaties for Developing Countries, (2013).

[xii] G. Maisto, Tax Treaties and Domestic Law: EC and International Tax Law Series, Vol 2, 2006.

[xiii] Supra note xii.

[xiv] Brian J. Arnold, Overview of Major Issues in the Application Of Tax Treaties, Paper No.1-A, UN Handbook for Administration of Double Tax Treaties, 2013.

[xv] Convention Concerning Double Taxation, Apr 27, 1932, US-Fr.,49 Stat. 3145.

[xvi] Supra note iii.

[xvii] Technical And Miscellaneous Revenue Act, 1988, P.L. 100-647, 102 Stat. 3342.

[xviii]United States, Internal Revenue Code, §894(a)(1985) (emphasis added).

[xix] United States, Technical and Miscellaneous Revenue Act, §894(a)(1) (1988).

[xx] United States, Internal Revenue Code ,§7852 (d) (2001).

[xxi] Supra note iii.

[xxii] United States, Senate Committee Report, No. 445,1

[xxiii] Eilers Stephan, Override of Tax Treaties Under the Domestic Legislation of the U.S. and Germany, Tax Management International Journal, 298, (1990).

[xxiv] United States, Technical And Miscellaneous Act, 1988.

[xxv] United States, Senate Finance Committee Report, note 7, at 604.

[xxvi] U.S. Constitution, Article IV, Cl, 2.

[xxvii] Supra note iii at 685.

[xxviii] Cook v. United States, 288 U.S. 102,120 (1933).

[xxix] Whitney v. Robertson, 24 U.S. 190, 194(1888).

[xxx] Reid v. Covert, 354 U.S. 1,18 (1957).

[xxxi] United States, Internal Revenue Code §884.

[xxxii] Supra note v.

[xxxiii] Supra note iii.

[xxxiv] Supra  note xxiii.

[xxxv] Germany, Federal Tax Court (BFH), of October 22,1986-I R 261/82.

[xxxvi] Abgabenordung (AO) 1977, text in Bundegesetzblatt (BGBI) 1976 1 613.

[xxxvii] Supra  note xxiii.

[xxxviii] BFH, 11 December 2013, I R 4/13.

[xxxix] Convention Concerning Double Taxation Agreement, 1993, Germany-Italy.

[xl] S.6(2) of the Taxation (International and Other Provisions) Act, 2010 (United Kingdom).

[xli] S.6(3) of the Taxation (International and Other Provisions) Act, 2010 (United Kingdom).

[xlii] S.6(4) of the Taxation (International and Other Provisions) Act, 2010 (United Kingdom).

[xliii] A. Miller and L. Oats, Principles of International Taxation, (3rd ed.,2012).

[xliv] Padmore v Inland Revenue Commissioners [1989] STC 493.

[xlv] INTM355225 – Double Taxation Agreements: Jersey: Income from a UK source paid to a resident of Jersey – Industrial or commercial profits paragraph.

[xlvi] Supra note xliv.

[xlvii] Han, Sung Soo, Establishment of Principle for Prevention of Treaty Override (excerpted from Han, Sung-Soo’s doctoral thesis “Strategic Approach toward the Amendment of the Korea-U.S. Tax Treaty”, University of Seoul, 2008).

[xlviii] Lee, Jae Ho, A Study On The Tax Treaty Override, (Doctoral Thesis of Seoul National University 2007).

[xlix] Han, Sung-Soo – Ph.D. in International Tax, University of Seoul, 2008.

[l] Supra note xlviii.

[li] Padmore v Inland Revenue Commissioners (No. 2) [2001] All ER (D) 119 (Jan).

[lii] James Hannam, Double Tax Relief—Sections 57–59, British Tax Review.

[liii] OECD Committee on Fiscal Affairs. Tax Treaty Override (1989). Quoted in: Vogel, Klaus, Double Taxation Convention, Volume I, 3rd Edition, Kluwer International Publishing House, Netherlands, 1996. Pg. 67-71.

[liv] Supra note xliv.

[lv] Tan How Teck, Do Singapore’s domestic tax laws constitute a tax treaty override?, Vol 26, The International Tax Journal 49, 56 (2000).

[lvi] Republic of Singapore, Income Tax Act, §49.

[lvii] Supra note lxv.

[lviii] Theil v. FCT (1990)171 CLR 338.

[lix] Hangchi, Principles and Rules in the Interpretation of Taxing Acts and Tax Treaties, 179 in Inland Revenue Department: Concise Tax Programme (Singapore: Longman, 1984).

[lx] Republic of Singapore, Interpretation Act, § 9A.

[lxi] [1962]AC 1; see also Woodend Rubber & Tea Co Ltd v CIR [1971] AC 321.

[lxii] Supra note xliv at Chapter 7.

[lxiii] Circular No. 333, F. No. 506/42/81-FTD, Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India.

[lxiv] [1983] 144 ITR 146 (AP).

[lxv] 1995 212 ITR 31.

[lxvi] Supra note lxiv.

[lxvii] CIT v. Hindustan Motor Corporation 2005 142 TAXMAN 177.

[lxviii] Vodafone International Holdings B.V. v. Union of India & Anr., 341 ITR 1/ 6 SCC 613

[lxix] Vodafone wins Rs 11,000 crore tax case, to get Rs 2,500 cr with interest,, The Economic Times, (20/01/2012) available at

[lxx] Vodafone International Holdings B.V. v Union of India, W.P. 2550/2007, (Bombay High Court, 03/12/2008).

[lxxi] Supra note lxix.

[lxxii] Ibid.

[lxxiii] H P Agrawal , Tax treaties override Vodafone amendments: AP High Court, in the case of Sanofi Pasteur Holding SA, said amendments made in the I-T Act do not nullify India’s tax treaties, Business Standard, (14/07/2013).

[lxxiv] S. 3(1), Finance Act, 2012.

[lxxv] S. 3(v), Finance Act, 2012.

[lxxvi] S. 4(1)(a), Explanation 5, Finance Act, 2012.

[lxxvii] DIT v Nokia Networks OY and Ors. (2012) 78 DTR 41

[lxxviii] Director of Income Tax (International Taxation) and Anr.
v. Authority for Advance Rulings and Anr., [2013] 352 ITR 185(AP).

[lxxix] Anita Nair , A Question Of Royalty: In the case of software embedded in Nokia’s GSM equipment, have the tax authorities dialed a wrong number? Businessworld, (01/10/2012) available at

[lxxx] Ibid.

[lxxxi] Anonymous, Nokia: Treaty provisions override retrospective amendments, International Tax Review, (2012) Euromoney Trading Limited, UK.

[lxxxii] Supra note lxxviii.

[lxxxiii] Sanofi buyout of Shantha ruled taxable, Mumbai, DNA, (29/11/2011) available at

[lxxxiv] K.V. Ramana, Sanofi gets Rs700 crore relief in double tax case, DNA, (19/02/2013) available at

[lxxxv] Supra note lxxix.

[lxxxvi] CR Sukumar, France, not India, is entitled to Rs 650 crore in capital gains tax from Shantha deal: Andhra High Court, The Economic Times , (16/02/2013), available at

[lxxxvii] (2012) 137 ITD 346.

[lxxxviii] Supra note lxxx.

[lxxxix] Cl. 123, Direct Tax Code Bill, 2010 (pending)

[xc] Ministry of Finance, Government of India, Revised Discussion Paper on the Direct Tax Code, 2010.

[xci] Supra note lxxxviii.

[xcii] Supra note lxxxvii.

[xciii] Revised DTC Bill in the offing, The Economic Times, (01/02/2013), available at

[xciv] The precedence of treaties over domestic law was acknowledged in a decision of the Mexican Supreme Court (P.LXXVII/99, published in the Federal Judicial Weekly and its Gazette, Volume X, under the heading “International Treaties Take Precedence Over Federal Laws and, on a secondary Level, the Federal Constitution”).

[xcv] Ramírez Martínez, Álvaro, The Mexican Constitution and its Safeguards against Foreign Investments (2009), Cornell Law School Inter-University Graduate Student Conference Papers, Paper 39.

[xcvi] Ricardo Gonzalez Orta & Others, Fees for Services and Technical Assistance – Can Mexico’s 2005 Tax Reform Actually Override Tax Treaties?, Vol. 34, Tax Management International Journal, 282, 285 2005).

[xcvii] Amanda Johnson, Mexico Tax, Law and Business Briefing: 2005, World Trade Executive.

[xcviii] Mexican Tax Treaties, §7 (United Mexican States).

[xcix] Supra note xciv.

[c] Supra note xciii.

[ci] See Anonymous, Do tax treaties override domestic law in Africa? International Tax Review, (2013), Euromoney Trading Limited.

[cii]Internal Revenue Act, (2000) §592 (Republic of Ghana).

[ciii] Part III, Division II, Subdivision B: Quantification, Allocation and Characterization of Amounts.

[civ] Article 60 (1) of Vienna Convention on Law of Treaties.

[cv] Anthony C Infanti, Curtailing Tax Treaty Overrides: A Call To Action, University of Pittsburg Law Review (2000-2001). P. 688. (In reference to impact of override on United States.)

[cvi] Ibid.

[cvii] Ibid.

[cviii] Supra note xxiii.

[cix] Michael J. McIntyre, Legal Structure of Tax Treaties, (2003; revised 2010)

[cx] Ibid at 38.

[cxi] Article 54 (a) of VCLT.

[cxii] Article 54 (b) of VCLT.

[cxiii] Article 59 of VCLT.

[cxiv] Article 56 of VCLT.

[cxv] ‘‘OECD Committee on Fiscal Affairs Report on Tax Treaty Overrides,’’ Tax Notes Int’l, Jan. 1, 1990, p. 25, 90 TNI 7-13

[cxvi] Glossary of terms relating to Treaty actions, United Nations Treaty Collection. See also Art. 40 of VCLT

[cxvii] Ibid.

[cxviii] India, Finland to discuss Nokia tax case next week, The Hindu,,(6/12/2013) available at

[cxix] Mauritius wants revised tax treaty to override domestic laws, DNA, (6/7/2012) available at

[cxx] J.H.W. Verzul, International Law in Historical Perspective, 244 (1968).

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