11 volume.pmd

Georgia’s Double Taxation Agreements
Viewpoint of the OECD
1. Introduction
B a k e r , i n t h e i n t r o d u c t i o n t o h i s b o o k , D o u b l e T a x a t i o n A g r e e m e n t s a n dInternational Tax Law, which was published in 1991,1 wrote: “This book is about atreaty which does not exist. No two states have ever concluded a treaty identicalto the OECD Model Double Taxation Convention on Income and Capital.” Sometwenty-five years later, the author points out that the vast majority of specificDTCs are now commonly patterned on the OECD model.2 The truth is that theOECD Model Convention (hereafter also MC) becomes broadly applicable notonly by OECD members but by non-member countries as well. Jones believes thatthere is little need for a separate model for developing countries. All that is neededis for OECD countries to accept the needs of developing countries for more sourcetax.3 Not to mislead the readers of this paper, it should be mentioned that theOECD Model Convention is not an international treaty as such which binds membercountries.4 It was adopted by a recommendation of the OECD Council and its mainpurpose is to provide a basis for the negotiations of bilateral conventions betweenthe states. Vogel, however, adheres to the opinion that member states of theOECD are in principle legally obliged to follow the Model Convention and itsCommentaries. He states that “the legal importance of recommendations is evengreater” in OECD practice. In fact, filed “reservations” or “observations” to theconvention regarding the particular interpretation of the member countries declarethe common consent on the application of the model and its commentaries. Vogelconcludes, therefore, that there is at least a “soft” obligation of applying both ofthese parts unless there is material reason, such as the “peculiarities of thedomestic law with regard with individual treaty provision,”5 to do otherwise. Relyingupon this reality, some of the commentators argue the existence of an international * Partner, Business Legal Bureau.
1 Baker, Double Taxation Agreements and International Tax Law, Sweet & Maxwell, London, 1991.
2 Baker, Double Taxation Conventions, Sweet & Maxwell, London, 2007.
3 Jones, The David R. Tillinghast Lecture, “Are Tax Treaties Necessary?”, Tax Law Review, 1, 1999-2000,1-38.
4 Op.cit. note 2, paragraph A-5.
5 Vogel, Klaus Vogel on Double Taxation Conventions, Kluwer Law International, 1997, 3 ed., paragraph80, 44.
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tax regime that is embodied in a remarkably similar treaty network.6 As far as inmost countries treaties override internal laws, it could be said that countries arebound by those treaties. The author of this idea argues that the network of morethan 2,000 bilateral tax treaties that are “largely similar in policy, and even inlanguage, constitutes an international tax regime.”7 Indeed, it is more likely thatthe states – especially non-industrial countries – could not be free to adopt anyof the international rules which they please. Instead, they have to operate in thecontext of the existing international tax regime that has already been establishedby the bigger players. It is hardly doubtable that there are clearly international taxpractices that are widely followed such as, for instance, non-discrimination andavoiding double taxation through either of two methods, the arm’s length standardand etc. That said, however, it does not mean that this regime is static and doesnot adopt changes. On the contrary, it poses permanent challenges such as taxarbitration which will be discussed later in this article.
My intention herein is not to go into more details in exploring the abovementionedalthough it should be stated that Baker’s idea in principle does not contradict Vogel’sposition. The OECD MC is not an international agreement under international public lawthat binds sovereign states by its obligations although there is an international consensusof the member states8 to bind themselves in their international fiscal practices bycommonly accepted rules. This common acceptance has moved beyond the memberstates and so the international tax regime is now a current contemporary reality.
This brief overview of the status of the OECD MC was necessary in order to turn fromthe general to the particular, let us say, which is the specific object of this article. Theresearch presented herein aims at exploring Georgian tax agreements which will beaccomplished by studying all the tax agreements of Georgia which have been currentlyconcluded.9 The measurement for assessments represents the OECD MC with Respectto Taxes on Income and on Capital10 together with its Commentaries. I will proceedfrom the idea that treaties based upon the MC should be given the same interpretationby the contracting states as far as possible whether or not one of the contractingstates represents the OECD Member State. A co-ordinated interpretation of theagreements is most likely available if the OECD Commentaries are used despite theparty’s being a member state. The article is structured around the OECD MC articlesbut will be selective and choose only those issues which appear to illustrate the mainproblems of the application of Georgian tax agreements. Further, it will also involvesome discussions about the peculiarities of Georgian tax law. As was mentioned in the 6 Based upon the OECD and the UN models. My point of view, however, is that the UN model of the DoubleTaxation Convention between the developed and developing countries is wholly based upon the OECD’sversion and consists of only slight variations of the former.
7 See Reuven, Tax Competition and International Tax Regime, Bulletin for International Taxation, April 2007,130-138.
8 Supported by recommendations of the Council of the OECD and its Fiscal Committee.
9 Data are confirmed by the Ministry of Foreign Affairs of Georgia of March 2008. Some have not yet beenratified and, consequently, have not acquired the legal effect. This article, however, covers themnonetheless.
10 Read on 15 July 2005.
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title, this research is intended to be analysed from the viewpoint of the OECD. I will behonoured, however, if this paper will also be of interest to Georgian practitioners,negotiators and tax authorities.
2. General Overview and Organisation of Treaties
After the collapse of the Soviet Union, in 1991, the Newly Independent States werelegally allowed to form their international legal relations. Double Taxation Agreements,however, were not vital agreements from the very beginning of their acquiring ofindependence but their time has now come. The latest trend of making these kinds ofagreements with more and more countries makes this reality clear. The very first DoubleTaxation Agreement of Georgia was concluded with Ukraine in 199511 but came intoeffect only after four years.12 The latest or newest one for Georgia has been concludedwith Turkey in November 2007.13 Within these 12 years, 28 international agreementswere concluded by Georgia amongst which are (in chronological order): Ukraine,Azerbaijan, Armenia, Turkmenistan, Uzbekistan, Kazakhstan, Russia, Romania,Bulgaria, Iran, the Hellenic Republic, Poland, the Czech Republic Latvia, Lithuania,Estonia, China, Belgium, the Netherlands, Italy, Germany, Austria, the UK, France,Denmark, Finland, Luxembourg and Turkey.
There is no draft model of a Double Taxation Agreement of Georgia that Georgianauthorities have been using in bilateral negotiations with countries or with groups ofcountries.14 All of the existing agreements are based upon the OECD Model Conventionincluding those with non-member countries. According to some features discovered inGeorgian tax treaties, these agreements could be divided into a) those made withWestern industrial nations, b) those made with developing countries and c) those enteredinto with countries of the former Soviet Union. Regardless of the fact that all the treatiesare based upon the OECD Model, the place of a particular treaty within theabovementioned groups could serve as some indication for the interpretation of aparticular treaty. This difference is also well illustrated in the definitions of the termsthat are involved in the treaties and are defined differently in different tax agreementssuch as, for instance, the “actual place of management” instead of the “effective placeof management,” amongst others.
11 The perfection of tax treaties can be measured by their number and history as well. The history ofnegotiating some issues of avoidance of double taxation upon bilateral agreements date to the secondhalf of the 19th century. See op.cit. note 5. The very first comprehensive tax treaty of the UK wasconcluded with the US in 1945 and the first 50 treaties were concluded between 1945 and 1951. Seeop.cit. note 3. Germany entered into its Double Tax Agreement with Italy in 1925. The US first comprehensivetreaty with Sweden and France is from 1939.
12 Was ratified by the Parliament of Georgia in 1999.
13 Ratified by the Parliament of Georgia in December 2007.
14 For instance, the US Treasury Department published its own model treaty in 1976 to serve as the basisfor US treaty negotiations. The model has been revised several times. On 15 November 2006, the USTreasury released a new model. For more details, see Reuven/Title, The New United States Model IncomeTax Convention, IBFD, June 2007, 224-235.
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The titles of previous versions (1963, 1977) of the OECD Model Convention includeda reference to the elimination of double taxation. In 2003, the following sentence wasadded to Paragraph 7 of the commentary of Article 1: “It is also a purpose of taxconventions to prevent tax avoidance and evasion.” The subsequent version still usesthe shorter title which does not include any of these references. In my opinion, ifcontracting states would be willing to add the additional purpose to tax agreements– and they are free to do so – they will still have to include the limitation of benefitsclauses in the treaties. In practice, many of countries’ agreements include all thereferences to the objectives in the titles; that is, they are larger than the OECD version’sformer title. In some instances, the title remains the same but with reference to theelimination of double taxation. Georgian DTAs share both practices and no specialpolicy considerations have been discovered herein. There is, however, no taxavoidance prevention measures involved in the agreements excluding thoseAgreements with the UK and Luxembourg where treaty shopping prohibition provisionsalready exist.15 The Georgian DTAs, likewise with the OECD model (and also the UN model), aretypically organised within seven chapters.16 The previous DTAs of Georgia includeArticle 14 of the OECD MC (Independent Personal Services) whilst some of new onesdo not.17 Some of the latest ones, however,18 still include the separate article forindependent personal services but exclude the definition of “business” instead.19Almost all the agreements include the article concerning the taxation of professors,teachers and researchers.20 Some of the agreements include innovations such as,for instance Article 27 which refers to taxation at the source that relates to withholdingtaxes21 and also the aid in recovery of taxes.22 There is some other novelty as wellwhich has still not been reflected in the OECD MC although the agreement with theNetherlands includes the provision regarding arbitration. Each of the particularfeatures will be discussed below.
15 See Article 10.6, 11.6, 12.6 and 24.2 of the Georgia-UK Agreement and paragraph 3 of the Minutes to theGeorgia-Luxembourg Agreement.
16 Those that are not drafted by the chapters are still designed in the consequence of the OECD MC.
17 For instance, the Georgia-UK Agreement of 2005.
18 Concluded with Germany in 2006 and France in 2007.
19 The term “business” was added to the OECD Model in 2000 at the same time as Article 14 (IndependentPersonal Services) was deleted from the Convention. It was considered that “business” includes theperformance of the activities defined previously by Article 14. See Commentaries, Article 4, paragraph10.2.
20 There is no special article devoted to this in the OECD Model.
21 The Agreement with Germany; these provisions have no analogues either in the OECD Model or in otheragreements of Georgia.
22 Article 27 of the agreement with the Netherlands; these provisions do not exist in other agreements ofGeorgia.
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3. The Relationship between Tax Agreements and the National Law
of Georgia

Like all of the other double taxation treaties of different countries, the DoubleTaxation Agreements (DTA) of Georgia are internationally binding obligations forGeorgia (not the taxpayers) under public international law. All the DTAs of Georgiaare subject to ratification and become binding according to the principles ofinternational public law once the instruments of ratification have been exchanged.
As soon as they become binding under international law, they gain internal domesticvalidity as well. Internal validity, however, has to be distinguished from the internalapplicability of the treaties.23 States vary in the procedure required for introducingtax treaties into domestic law wherein they can be either directly or indirectlyapplicable. It is essential, therefore, to know how the rules are involved and howthey are applied internally in the Georgian law system. The issue of the problem oftreaty override has become the subject of a short paper produced by the OECDFiscal Committee.24 The possibilities of treaty override are discussed herein froma different standpoint of whether or not Georgian legislation allows the treatyoverride de iure or de facto. Both situations are of major significance as, apartfrom legal status of tax treaties, it could undermine the actual efficiency ofmechanisms provided by them.
Treaty override from the legal viewpoint is mostly relevant for common lawcountries.25 It is worth reviewing the issue from the Georgian law perspective aswell. According to the Constitution of Georgia, its international agreements prevailover the internal laws of the country if it does not contradict the Constitution itself.26According to the Law on International Agreements of Georgia, internationalagreements are an inseparable part of Georgian legislation.27 Once it is incorporatedautomatically or through specific legislation, however, it still remains as aninternational agreement and which keeps primacy over other legislation. Becomingpart of the internal legislation does not transform the international agreement intogeneral domestic law but, rather, it works as domestic law but still with a high 23 See Knechtle, Basic Problems in International Fiscal Law, HFL Ltd., Weisflog (Transl.), 1973, 171.
24 See the OECD report on treaty override adopted by the Council on 2 October 1989. The term “treatyoverride” refers generally to the possibility of enactment of subsequent domestic legislation whichconflicts with obligations undertaken by a prior and binding treaty. The OECD distinguishes twosituations here a) “intentional” treaty override where the state enacts legislation knowing and intendingthat it will conflict with treaty obligations and b) “unintentional” treaty override where no such intentionexists.
25 Generally, the treaties of most Continental European countries have a superior status than the internallegislation.
26 Article 6 of the Constitution of Georgia.
27 Paragraph 1-2 of Article 6 of the law on International Agreements of Georgia of 1997.
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degree of supremacy whilst preserving the status of an international agreement. Inthe hierarchy of Georgian Legislative Acts, the international agreement (treaty) holdsthe position after the Constitution of Georgia although it prevails upon other statutesincluding tax legislation. The Tax Agreement of Georgia has precedence over nationallaws even when a subject matter is regulated by a subsequent national rule of law ina way which deviates from the obligation undertaken by the agreement. If a provisionof Georgian fiscal law contradicts a specific DTA of Georgia, the relevant provisionof fiscal law is not simply invalidated. It remains in force but must not be applied topersons or facts which fall within the scope of a specific treaty. The rules of theDTAs, therefore, do not replace the provisions of national tax law but are only validin so far as the application of the treaty is concerned.
The de facto application of the agreements, however, is another story. Georgianlegislation took a two-fold view concerning the introduction of the internationalagreements into domestic legislation. The direct effect of the agreements dependupon whether or not they need approval of some precise internal regulations. Inother words, in the case when they are self-executive, they have direct force oncethey are ratified. In reality, the mechanism of international agreements and, notably,double taxation agreements, could hardly be self-executive due to the lack of preciseprocedural rules and dramatic differences between the tax regulations ofcontracting states. The majority of double taxation agreements have to be read inconjunction with the internal regulations of contracting states and this type ofagreement, therefore, needs a high degree of involvement into the domesticlegislation with close consistency to the provisions of the treaties. The problem ofthe necessity of prescribing and elaborating norms has arisen in the Georgian caseof the Tax authority v. Aragvi Business Bank wherein the Supreme Court of Georgiaheld that Free Trade International Agreement between Georgia and Turkey requiresthe adoption of prescribing legislative norms and, thus, it has to be subject toratification.28 The Court interpreted that, in reality, the fact that no implementationnorms were adopted does not mean that the agreement can have direct force withoutthis. Finally, the Court held that the agreement is not a legally binding internationalobligation of Georgia unless it is ratified by the Parliament of Georgia given the factthat implementation legislation is needed for the application of the Agreement. Theidea of the judgment is that the fact of ratification itself does not mean that theagreement is directly applicable, in principle.29 Whether or not there are detailedrules of how the agreements should be executed, it has no direct effect in reality or 28 The agreement was given force without ratification solely upon the basis of presidential approval whichwas confirmed by the notification of the Ministry of Foreign Affairs of Georgia, Decision of the SupremeCourt of Georgia of 18 October 1999, Aragvi Business Bank v. Regional Customs Service, No 3g-ad-9-k.
29 There is quite an opposite approach in Dutch constitutional law according to which courts are notallowed to disregard treaties even if they have not been properly ratified, discussed or presented inParliament. See Maarten, The Judiciary and the OECD Model Tax Convention and its Commentaries,response to van Brunschot, IBFD, January 2005, 11-13.
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de facto. To my point of view, these types of situations could also be regarded astreaty override. It is understood that the override is not done by the courts in thiscase but, in fact, comes as a result of the gaps in the legislation. The only exceptionwhere Georgian Tax Code relies upon the international agreement is Article 122concerning the exchange of information. This article, however, gives very little tothe relevant application of information exchange provisions. This inapplicability isalso well illustrated in the examples of terminological inconsistencies that arediscovered in great numbers in the different language versions of the agreements.
This is not the result of inadequate legal translation alone but, rather, the relativelyundeveloped legal concepts in Georgian tax law.
4. Interpretation of Tax Agreements
The purpose of tax treaties is to allocate tax claims between the contracting states.
This goal can only be achieved if the treaty is applied consistently by the authoritiesand courts in both countries.30 This article deals with questions of interpretationwith regards to the application of the treaty which can arise before Georgianadministrative authorities and the courts. What must be taken into considerationin this process is that the domestic principles for the interpretation can differfrom the interpretation of tax treaties.31 In Georgia, courts are authorised tointerpret the treaties although judges are strictly bound by the wording of thestatute whilst at the same time the judiciary should have the task of protectingtaxpayers against the ambiguities found in the treaties. Regretfully, the judiciarypractice is very pure in Georgia in this regard and is of little help in giving ananalysis of its approaches.
A partial solution to the qualification problem is provided by Article 3.2 of the Modelthat is included without any changes in all tax agreements in Georgia. This articleoutlines the order of reference for interpreting terms used in DTCs. In the interpretationof treaty terms, one has to consider: a) the face value of the term, b) the definition (ifany) of the term in the treaty itself, c) the requirements of the context and d) themeaning of the term in the tax law of the applying state.32 According to Vogel,interpretation by recourse to domestic law in cases not covered by Article 3.2 ispermissible only if the context does not provide any basis for interpretation at all.33 Areference back to domestic law, however, will cause an unavoidable divergentinterpretation of Georgian tax agreements due to the inconsistent usage of terms 30 Op. cit. note 5, 39.
31 For more details of the interpretation problem arising out of the basis of the Vienna Convention and Article3.2. of the OECD Model, see Qureshi, The Public International Law on Taxation, Texts, Cases and Materials,1994, 135-153.
32 See Brunschot, The Judiciary and the OECD Model Tax Convention and its Commentaries, IBFD, January2005, 5-10.
33 For more details, see op. cit. note 5, 207-217.
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which will be discussed further herein in greater detail. On the other hand, it is apparentthat tax officials and judges in possession of some experience in international tax lawwill tend to give priority to the context of the agreement whereas those without suchexperience will be more influenced by the meaning of domestic law with which theyare more familiar.
The place of the Commentary in treaty interpretation when parties to the agreementare not OECD members is still an issue. Member states, as mentioned above,have reached a consensus in relying upon the Commentaries whilst interpretingthe points of the treaties. The question remains whether or not non membercountries have to share the same practice in case they do apply the OECD MC intheir treaty practice. There is well-founded idea that if the OECD Model is used byeveryone, then it has to be interpreted in the same way by everyone involvedregardless of whether or not they are OECD member countries.34 It seems to bethat non-member countries have adopted the practice of making reservationsand observations to the OECD MC that in fact demonstrate their acceptance ofthe Model and its Commentary,35 whilst OECD members are legally obliged tofollow the Model and the Commentary in principle, these are documents whichVogel regards as less important for non-member states.36 According to him, anintention by the contracting parties to adopt a provision within the meaning of theOECD MC can be presumed only where a) the text of the provision coincides withthe OECD MC and b) its context suggests no other interpretation. The weight tobe given to the Commentary in such cases cannot be stated generally but must bedetermined according to the circumstances of the individual cases. He does notcases wherein a contract is made between a member and a non-member state.
Should member states apply the dual practice? To my mind, in the case when anon-member state negotiates with a member upon the basis of the OECD MC, theformer has to take into account that the member state will operate mostly uponth e ba s is of the Com me ntar y’s ex p l an a t ion s wi t h in t h e s c o p es o f it s o w nreservations (if they exist).
If the text of the OECD MC has been adopted by non-member states or between thenon-member and member states and if it is unchanged or only with a slight variationthat permits an interpretation consistent with the OECD Model, then there is thepresumption that the contracting states intended to conform to the OECD Model andits Commentary. In the case when the text of the OECD Model is not adopted literallyand the context suggests an interpretation diverging from the model, then the OECDMC and Commentary is presumed to have been disregarded. The justification to thisapproach is the goal of a common interpretation of the agreement. If Georgia intendsto imply an interpretation which is different from those of the OECD Model, then it has 34 Op.cit. note 3.
35 Georgia, however, has not undertaken any reservation or observation of the Commentary.
36 Op. cit. note 5, 44-46.
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to prescribe this in the agreement in advance otherwise it must be assumed that theOECD’s Commentary will be applicable.37 Agreements with Estonia, Latvia and Lithuania are illustrations to this idea. The protocolsto the agreements include the reservation that specific articles38 are not applicable untilthese states have introduced the term of “the place of effective management” in theirdomestic legislation as a criterion for the determination of residence.39 These agreementsinstead envisage the solution of double residence by mutual agreement procedure.
An interesting solution to the interpretation problem has been discovered in theagreement with Austria.40 According to the Introduction to the Commentary, it is notdesigned to be annexed to the Convention in any manner or to be signed by memberstates.41 The Georgian-Austrian and Georgian-Danish Agreements are supplementedby the Protocol regarding the application of the Commentary for interpretationpurposes. The protocols are integral parts of these Agreements and, thus, representbinding instruments under international public law. The interpretation rule is designedin the following way in the protocols: “It is understood that the provisions of theAgreement . shall generally be expected to have the same meaning as expressed inthe OECD Commentary thereon.” The derogation from the rule, however, is allowed ifcontracting states will agree upon any contrary interpretation. One point is unclear.
There is also a reference to commentaries which may be adopted in the future: “TheCommentary, as may be revised from time to time,42 constitutes a means tointerpretation…” This citation points out the increase of status of the Commentary inthis case. Although perhaps reasonable, however, it is doubtful whether or not anylegal weight should be given to the commentaries retrospectively.43 How will the Georgiancourt look at the issue that existing treaties be interpreted in the light of the newcommentaries? It is worth mentioning here that the Austrian court44 held that existingbut not later commentaries have to be applied for interpretation.45 The issue shouldhave created a constitutional problem in Georgia as well although, and somewhat 37 Especially in those cases when the agreement is concluded with a member state.
38 Articles 8(1), 13(3), 15(3), 23(3) use the term “place of effective management”.
39 The reservations are done from the side of Estonia, Latvia and Lithuania. This term is not the subject fornational law and has to be defined autonomously by the parties. This solution is better than an unpredictableinterpretation of the terms.
40 Protocol to Austria-Georgia Agreement of 2005. This is not the only exception with Georgian agreements.
Austria has engaged in similar types of protocols with some other states as well. For more details see op.
note 3.
41 See Introduction to the Commentary, paragraph 29.
42 This is also the wording of the OECD Council recommendation.
43 For more details see op. cit. note 3.
44 After Austria concluded the agreement with the US which included the same provision as the Protocolwith Georgia.
45 Decision 92/13/0172 by the Austrian Administrative Court on 31 July 1996 discussed in Lang, LaterCommentaries of the OECD Committee on Fiscal Affairs, Not to Affect the Interpretation of PreviouslyConcluded Tax Treaties, 25 Intertax, 7-9, 1997.
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surprisingly, the Georgian Parliament still ratified the Agreements.46 The other problemthat may rise in conjunction with this issue, however, is that if a country concludes a taxagreement with another country which is exactly the same as the previous one, shouldthese agreements be interpreted differently because of the problem of the legal weightof the later commentaries? Jones suggests drawing the boundary between“interpretation” and “change” but this will not be of great help in practice. The debateswill never come to a conclusion of producing a new interpretation or changing theprevious meaning but will remain, in the end, one-way path.
The idea of enclosing the protocol with interpretation rules seems to be the right pathto follow. At any rate, the solution of this problem is mainly in the hands of the courts inGeorgia as regards later commentaries. The courts will have to decide whether or notthese commentaries are applicable, if they change or if they only provide aninterpretation.
To sum up the issue, two topics have to be distinguished herein. Who is the subject ofthe application of the Commentary, the tax authorities (the government) or thejudiciary? The Commentary, as well as the MAP decisions, can only bind thegovernment and not the judiciary. Vogel points out that: “The courts have to observethe law exclusively which includes the international treaties …, but does not includeresolutions of international bodies.”47 In making this conclusion, however, he doesnot imply the cases where the interpretation rule is stated in the protocol which is aninseparable part of the agreement. To my point of view, this situation will differ fromthose where there are no such protocols annexed stating the obligation ofinterpretation according to the Commentary such as in the Austria-Georgia andLuxembourg-Georgia examples. In all other cases, the issue is clear-cut. TheCommentary should only be regarded as the government’s position or expert’sopinion in the judiciary.
5. Definition of Terms
Like the OECD Model, the Double Taxation Agreements of Georgia group together thegeneral provisions in Article 3 and explain some other provisions in other articles of theAgreements. According to the OECD approach, some terms are subject to treatyinterpretation whilst some have to be defined autonomously by the contracting statesand others are interpretable according to national law concepts. Interpretation shouldbe done in consequence as specified by Article 3.2 as was discussed above. In addition,contracting states may be free to bilaterally include some additional explanations of theterms that are not defined in the OECD Model such as, for instance, the Georgia-UK DTAwhich includes an additional explanation of term “the capital” and also adds some 46 The Georgia-Austria Agreement was ratified on 01.03.06 and the Georgia-Danish Agreement wasratified on 28.12.07.
47 Vogel, The Influence of the OECD Commentaries on Treaty Interpretation, IBFD, 12, 2002, 614.
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clarifications to the existing term of “business”.48 The Agreement with Russia additionallydefines the term as the “actual place of management”.49 a) Relationship Between the Terms “Business” and “Enterprise”
The terms “business” and “enterprise” are discussed here in conjunction with eachother as they have been recently replaced in the OECD Model.50 Previously, theCommentary adhered to the view that the terms were subject to entire domesticinterpretation. Regardless of giving definition of the “enterprise” in its existing text,the Commentary still clarifies that domestic law provisions are also applicable forinterpreting the term.51 The same applies to “business” as its definition is also notexhaustive. “Enterprise” is defined by making reference to the term “business”52 inwhich their meanings are not isolated but, rather, interconnected with one includingthe other and vice versa. Neither Georgia’s earlier agreements nor recent ones reflectthis definition with the exception of the Agreements with the UK, Austria andLuxembourg53 even though the concept of “enterprise” is unfamiliar for common lawand, on the contrary, the term “business” is unknown in Georgian law. It is not only thecommon law countries that will face the difficulty of interpreting “enterprise” in taxtreaties. The term “business” will also pose the same problem for Georgian taxauthorities.
I am not alone in wondering whether or not “enterprise” means “business” in theModel. There are a great deal of debates in literature about the overlapping of themeaning of “enterprise” and “business”.54 Some authors argue that there is a partialdefinition of “enterprise” in the OECD Model.55 Georgian law defines “enterprise” asan entity that performs economic activity or is established to perform such an activity;namely, it refers to the creation or the organisational form of the activity and not tothe function or process as is done in the OECD Model. Besides, it is not a tax lawdefinition. Georgian tax law has to apply to company law. In the case of interpretingthe term according to Article 3.2, the applying state has to refer to the domestic tax 48 The term “business” is equalised with “economic activity”.
49 Articlre 3.1 (h) of the Georgia-Russia Tax Agreement of 1999.
50 Sub-paragraphs c) “enterprise” and h) “business” of Article 3 were replaced in the Model by the reportentitled “The 2000 Update to the Model Tax Convention”.
51 See Commentary, Article 3, paragraph 4.
52 See Article 3.1.c. “the term ‘enterprise’ applies to the carrying on of any business”.
53 See Article 3.1.f. and 3.1.k. of the Austria-Georgia Tax Agreement and Article 3.1.f. and 3.1.k. of theGeorgia-UK Tax Agreement and Article 3.1.f. of the Luxembourg-Georgia Agreement.
54 It is apparent that there is no agreement on the meaning of the concepts of “enterprise” and “business”even in the OECD Model. See Jones, Does “Enterprise” in the OECD Model Mean “Business”? IBFD,December 2006, 476-480.
55 Jones/De Broe/Ellis/Van Raad/Le Gall/Goldberg/Killius/Maisto/Miyatake/Torrione/Vann/Ward/Wiman,The Origins of Concepts and Expressions Used in the OECD Model and their Adoption by States, IBFD, June2006, 220-254.
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law that has no concept of “enterprise”.56 The OECD definition of “enterprise” issomewhat blurred for Georgian legal thinking. In reality, the Model’s term,“company,” equals the concept of “enterprise” according to the understandingsof Georgian law. Consequently, the contingency of applying this term in Georgiantax practice is completely clear. The practice will ignore the OECD meaning of theterm.
Georgian negotiators on the Agreement with the UK apparently understood thisconceptual inconsistency and included the term “economic activity” withi as an equalterm for “business”. Treaty equalisation alone, however, does not mean that theywould have the same or similar meanings for both legal systems. The concept of“economic activity” does not equal the term “business”. The Tax Code of Georgiadefines economic activity as any activity undertaken with the intent to gain profit,income or compensation regardless of the results of such activity.57 In other words,all the activities, the entrepreneur and the non-entrepreneur are regarded as economicactivity. In common law, the company may or may not carry on business; in otherwords, it can merely receive an income but not carry on a business58 whereas economicactivity encompasses the activity of the entrepreneur and the non-entrepreneuraccording to Georgian tax law. Consequently, UK tax law makes the determination ofbusiness profit upon the type of income59 and not upon the type of person as isregarded in Georgian tax law. This difference will play a major role whilst applying theagreement in practice and, particularly, with regards to the taxation of permanentestablishments.
Taking into consideration the abovementioned divergences of legal thinking, thet e r m s “ e n t e r p r i s e ” a n d “ b u s i n e s s ” s h o u l d b e o m i t t e d f r o m G e o r g i a n t a xagreements since they add nothing for the common understanding of theagreements but, rather, blur the distinction between treaty concepts and nationallaw understandings.
b) “Enterprise of a Contracting State”
Article 3.1.d. of the OECD Convention and the relevant articles of the Georgianagreements apply the term of the “enterprise of a contracting state” and give itsdefinition as an enterprise carried on by a resident of a contracting state.60 Thedefinition given by the internal tax law of Georgia differs from it dramatically and 56 The concept of enterprise is unknown in both general and tax law in common law countries. See Jones,“Does “enterprise” is the OECD Model Mean “Business”? IBFD December 2006, 477-479.
57 Article 13 of the Georgian Tax Code.
58 Op. cit. note 56.
59 Jones/De Broe/Ellis/Van Raad/Le Gall/Torrione/Miyatake/Roberts/Goldberg/Killius/Maisto/Giulian/Vann/Ward/Wiman, Treaty Conflict in Understanding Income as Business Profits Caused by Differencesin Approach Between Common Law and Civil Law, B.T.R , 2003, 224-246.
60 See Article 3.1.d of the OECD MC.
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attaches the enterprise to the country according to the place of business and ormanagement. The place of business is defined as the place of registration of thecompany61 and the place of management refers to the actual place of managementwhich refers to the place where the management (other similar managerial agency)of the enterprise fulfils its managerial function in accordance with the company’sstatute (or other founding documents) irrespective of the place of activity of thecompany’s supreme controlling body and the income generated from the activitythereof.62 The most blurred definition is given in Section 3 of Article 28 of the TaxCode of Georgia according to which it states that if the company is run by a manager(the company or a physical person), the place of the management of the company,or the residence of the physical person, will be considered as the place of theactivity of the managing enterprise. This last phrase seems to be included in theCode as a result of giving regards to the provisions of the OECD Model. Thisdefinition, however, is in full incompliance with other sections of the same Articleand the Companies Act.63 According to the “Law on Entrepreneurs,” the company isrun by a one or two-tiered board (a board of directors and a supervisory board)and there are no other managers, governors or other companies who could beeligible by law to manage the company. This definition of Article 28.3 of the TaxCode of Georgia seems to be an incorrect transplant from the OECD proposals. Bethat as it may, the term “enterprise of the contracting state” is linked to the place ofregistration or to the place where managerial functions are fulfilled in Georgian lawwhereas the OECD MC links the term to the residence of a person who run a businessof a company. According to the OECD Model, the treaty protection of an enterprisedepends upon the residence of the person that run the enterprise rather than on theplace where the enterprise is carried on.64 Georgian tax agreements do not includeany other clarifications or reservations concerning the definitions of the agreementsas concerns this term. Accordingly, the OECD term of “enterprise of a contractingstate” will be applicable. A twofold practice, however, will be inevitable given thatthe enterprises will in some cases have treaty protection if they are attached to thestate according to the treaty definition and, in other cases, the enterprises may nothave the treaty protection65 where their attachment is resolved according to Georgiantax law provisions.
c) “Residence” of a Physical Person
Neither the OECD Model nor the tax agreements of Georgia lay down the standardsaccording to which a person is to be treated fiscally as “resident.”66 This is leftentirely to domestic law. The resident of a contracting state within the meaning of 61 Article 27 of the Tax Code of Georgia.
62 Article 28 of the Tax Code of Georgia.
63 The Law on Entrepreneurs of Georgia of 1994.
64 See Commentary to Article 3.1.d.
65 Interpreting the attachment according to treaty term, however, they could have been fallen under theagreements provisions.
66 Article 34.1 of the Tax Code of Georgia.
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the OECD MC is a person who meets the locality related criteria that must beinterpreted by the domestic law. These criteria for individuals are: domicile,residence and other criterion of a similar nature which could be regarded to bothindividuals and companies. The term of “other criterion of similar nature,” however,makes clear that the enumerated criteria could be expanded only by locality-relatedattachments. The law related attachments do not fit within these criteria accordingto the OECD view.
“Domicile” as a concept is unfamiliar both to Georgian tax and civil law.67 The TaxCode of Georgia stipulates the rule for determining the “residence” that is linked tofactual stay within the territory for more than 183 days during the entire year.68Consequently, for the purposes of Article 4.1, the concept of “residence” or durationof stay for 183 days is applicable since there is no other criterion in Georgian taxlaw. Some misunderstandings in applying the agreement could have arisen, however,such as the case with Poland. Article 4.2.b, instead of “habitual abode,” involves aduration of stay of more than 182 days within a 12-month period as a tie-breaker69;As a duration of stay is the main idea of the concept of “residence” according toGeorgian law, it could not be applicable as a tie-breaker in the case of doubleresidence. These two concepts coincide in this case. The Agreement with Belgiuminvolves the “duration of stay” as a main criterion and not a tie-breaker but stillcoincides with the Georgian tax law concept of “residence” that is linked only withthe duration of stay.
If an individual is a resident of both states, then the tie-breaker attachments ofArticle 4.2 become applicable. These locality-related attachments must bedetermined independently of domestic law and autonomously, except for that of“nationality.”70 Article 4.2 supplements the residence criteria of domestic law byadding autonomous terms. A person is deemed to be a resident of that state whichis determined in order of precedence given in Article 4.2 from a) until b). The criteriaof permanent home, habitual abode and nationality can be met in one or both statesor in neither of them. A centre of vital interests can exist only in one of the contractingstates or in a third state.71 67 In British law, “domicile” has a particular significance which has no exact parallel in other legislations. Itis initially acquired by the birth place or “domicile of origin” and is capable of being altered into a “domicileof choice” in very exceptional cases. See Clarkson/Hill, The Conflict of Laws, 3 ed., Oxford UniversityPress, 2006, 18-52.
68 Article 34.1 of the Tax Code of Georgia.
69 The Commentary does not support the use of a fixed period as a tie-breaker. It has to be a sufficientlength of time for determining whether or not the residence in each state is habitual and also to determinethe intervals at which the stays take place. See Commentary, Article 4, paragraph 19.
70 “Nationality” is a national law concept and could not be interpreted otherwise.
71 Op. cit. note 5, 246.
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The Georgian language version of earlier Double Taxation Agreements with theformer Soviet states include the term of “place of permanent residence” as a tie-breaker instead of “permanent home” whilst other Agreements with developedcountries reflect the term of “permanent home.” Their Georgian translations,however, still apply the term of “place of permanent residence.” These variations ofthe same term will be disruptive in achieving an autonomous interpretation. TheOECD tie-breaker of “permanent home available to him” contains a subjectiveelement72 whilst “residence” is an objectively determinable concept. “Home” in theGeorgian language means a house or an apartment belonging to or rented by anindividual; in other words, it lacks some sort of attachment to the subject andfocuses only upon belonging as such. In its conventional meaning, however,“permanent home” has to be understood as a concept containing the personal linkwith the accommodation. Being the “seat of domestic life and interests,” the “home”concept is somewhat similar to the “centre of vital interests” used in article 4.2.a. 73From the second sentence of the Article 4.2.a, it is apparent that the “centre of vitalinterests” is one of the attributive factors for the qualification of a “permanent home.”According to Georgian tax law, the “permanent home” or “place of residence”74 isequal to the “habitual abode” wherein the former includes the latter as one of thesituations of a “permanent home.” Georgian law envisages the possibility of havingmore than one “permanent home” or “habitual abode.” In case of a dual “place ofresidence,” the matter is solved through the agreement between the tax authorityand the taxpayer.75 Finally, according to Georgian tax law, the precedence is givento the 183 days rule, then comes into play “the permanent residence rule” whichoverlaps the “permanent home” and the “habitual abode” concepts; a sort of lastresort is an agreement between the taxpayer and the tax authority. No criteria arelaid down for this agreement which means that tax authorities could claim the“residence” of a person in a wide range of situations.
d) “Residence” of a Person Other than an Individual
The “residence” principle for a person other than an individual is linked to the place ofmanagement according to the OECD Model. Article 4.3 becomes applicable only if thesame non-individual by virtue of Art. 4.1 is a resident of both contracting states. Thedecisive criterion in this case is a “place of effective management”. Tax agreements ofGeorgia, in addition to the OECD criterion, apply the following criteria: the place ofregistration,76 the place of location of the actual management,77 the place of incorporation,78 72 Op. cit. note 5, 247.
73 Jones, Dual Residence of Individuals: The Meaning of the Excretions in the OECD Model Convention, BTR15, 104, 1981.
74 The term of “place of residence” is used in the Tax Code of Georgia in Article 35 which is conceptuallycloser to the term “permanent home”.
75 Article 35.5 of the Tax Code of Georgia.
76 Agreements with Ukraine, Azerbaijan and Armenia.
77 Agreements with Armenia, Kazakhstan, Ukraine and Poland.
78 Agreements with Latvia, Estonia, Lithuania and the UK.
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the place of economic activity79 and the place of actual management.80 It must be mentionedthat giving importance to many attachments will just increase the possibility of doubletaxation situations for the companies. If one state attaches importance to the registrationand another to the place of management, for example, the risk of arising double taxationsituation is higher.
According to the OECD Commentary, residence criteria are also subject to entiredomestic law interpretation in the case of companies.81 The specification of Georgian taxlaw is that it is not familiar with the term of “residence of legal persons.”82 The Codestipulates the term of “enterprise of Georgia” instead.83 The latter is determined accordingto the place of activity which is equal to the place of incorporation84 and the place ofmanagement.85 The Code applies the “residence of enterprise” in other articles, however,such as when determining the provisions of source-based taxation. According to thewhole structure of the Code, it seems that it implies the nationality of the company underthe “residence” concept. The latter is determined according to the law related and localityrelated criteria together as has been previously mentioned. Locality related criterion,however, differs from the OECD understanding of the management principle. To sum up,Georgian tax law refers to the incorporation and management principle whilst all othercriteria as stipulated above are of no relevance for the application of the agreements inGeorgia.
The majority of the Georgian Tax Agreements relies upon the term of “place of effectivemanagement” as tie-breaker for double residence situations. The term is definedneither in the OECD MC nor in Georgian Tax Agreements. As previously stated, thetie-breaker concept has to be defined autonomously or it will not be helpful for a co-ordinated approach for avoiding double residence situations.86 Here, the problem isnot just in the interpretation. Uncertainties will cause also differences in the corporatelaws of contracting states, notably between the common law and civil law countries.87Due to these structural and conceptual differences, it will be difficult to describe theappropriate level of management that is sufficient for qualifying it as effective.88 79 Agreements with Bulgaria and Russia.
80 Agreement with Germany.
81 See Commentary, Article 4.1, paragraph 4.
82 Georgian company law is built upon the notion of a legal person which is equal to a company orenterprise.
83 Article 26 of the Tax Code of Georgia.
84 Article 27 of the Tax Code of Georgia.
85 Article 28 of the Tax Code of Georgia.
86 See Commentary, Article 4.3. See also Jones, Place of Effective Management as a Residence Tie-breaker, IBFD January 2005, 20-24 and Hinnekens, Revised OECD-TAG Definition of Place of EffectiveManagement in Treaty Tie-Breaker Rule, Intertax, Volume 31, Issue 10, 314-319.
87 Georgia, as with other civil law countries, has taken the two-tiered approach whilst civil law countrieshistorically adhere to the single board principle.
88 Op. cit. note 56.
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Other decisive criteria for resolving double residence situations in Georgian TaxAgreements have been discovered as well. The Georgia-Russia Double TaxationAgreement attaches importance to the “factual place of management” as a tie-breakerinstead of “effective place of management” and gives the definition in Article 3 of theAgreement. According to the definition, the “factual place of management” is linkedto the physical location of the enterprise whereas the Commentary attaches importanceto the place where the company is actually managed.89 According to the OECDapproach, it is not the place where the management directives take effect but, rather,the place where they are made in substance. The Georgia-Germany Agreement alsoincludes the same term of “actual place of management” as the tie-breaker choice inArticle 4.3 although this Agreement does not give any definition of the term. Accordingto Vogel, German case law regards the “place of management” as the centre of thetop level management of the company90 which is very similar to the treaty term of“effective place of management”. Thus, the wording of the Agreements with Russiaand Germany coincide although they differ in concepts and, consequently, theinterpretation of literally the same terms will cause different results. There is someother criterion for resolving the double residence situations. The Agreement withBulgaria includes “the place of head office”. In fact, there is no set definition of theterm since it is easily determinable in practise without the necessity of a statutorydefinition.
The most desirable solution for achieving a common understanding of the term of“effective place of management”91 is giving it an autonomous definition in the Agreements.
The definition stipulated in the Agreement with Russia, however, is different from theOECD understanding. It is nonetheless still helpful for the solution of double residencecases rather than other more unpredictable and unknown interpretations which will notserve as a solution in double residence cases.
e) “Permanent Establishment”
The OECD concept of permanent establishment appears to have the most influence uponthe internal laws of countries. It has been adopted by the majority of countries in theirinternal laws.92 The Georgian Tax Code also includes a special article devoted to the“permanent establishment”93 although domestic tax law interpretation is not relevant forthe purposes of double taxation agreements even if the wording of the national law conceptis literally the same.94 National tax law interpretation has to be applied in unilateraloccasions with regards to those enterprises that are not the subject to treaty protection;that is, for a third party’s permanent establishments.
89 See Commentary, Article 4.3, paragraphs 22 and 24.
90 Op. cit. note 5, 262, paragraph 104.
91 Taking into account that the status of the Commentary for countries like Georgia is still an issue.
92 With the exception of the US, see op. cit. note 56.
93 Article 29 of the Tax Code of Georgia.
94 Op. cit. note 5, 282, paragraph 9.
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Article 5.1 of the OECD Model defines the “permanent establishment” as a fixedplace of business. The place of business must be a “fixed” one which means that thepermanent establishment must be established at a distinct place with a link betweenthe place of business and a specific geographical point.95 The term of “permanentestablishment” is transferred into English language versions of Georgian DTAsunchanged. Some confusion within has resulted in the Georgian language versionsof various agreements and also those which are written in Russian and in thelanguages of other former USSR states. These Agreements define permanentestablishment as a “permanent place of business” instead of a “fixed” place. Theonly exception is the Agreement with France where the Georgian language text refersto the exact translation of the “fixed” place. All these divergences are not the issuein cases where the English text prevails although not all the agreements, however,state this rule. The Russian text prevails in some cases96 or both texts are equallyauthoritative.97 The concept of “permanent place of business” differs from the “fixed place” asthe former is associated with continuity of activities rather than with specificg e o g r a p h i c a l p o i n t o r s o m e d i s t i n c t a r e a . A p p a r e n t l y , t h o s e c a s e s o f t h eAgreements with different wording will be the issue whilst interpreting the relevantarticles of the agreements. In the cases where Georgian competent authoritiesare guided by the Georgian text, the views will be divergent from those that areproposed by the OECD. The crucial requirement for tax treaties is that theirp r o v i s i o n s h a v e t o b e i n t e r p r e t e d c o n s i s t e n t l y . A s r e g a r d s p e r m a n e n testablishment, if they are interpreted inconsistently between jurisdictions,international enterprises (companies) will always use planning techniques toexploit the different interpretations.98 6. Tax Sharing Rules
There is well-supported doctrine in tax law that the source state has the primaryright to tax. Advocates of this idea argue that source principle is one of the basicprinciples upon which the taxation on the production of income and the possessionof the wealth should be allocated to states.99 The residence states, however, havetraditionally claimed that they have the better rights. This is the position supportedby the OECD Model and the majority of double tax treaties as well. “The primary 95 See Commentary, Article 5, paragraphs 2 and 5.
96 For instance, the Agreement with Germany.
97 The Agreement with the UK.
98 See Kobetsky, Article 7 of the OECD Model: Defining the Personality of Permanent Establishments, IBFDOctober 2006, 411-425.
99 See Kemmeren, Source of Income in Globalising Economies: Overview of the Issues and a Plea for anOrigin-Based Approach, IBFD November 2006, 430-453. See also Pinto, Exclusive Source or Residence-Based Taxation: Is a New and Simpler World Tax Order Possible? IBFD, July 2007, 277-293.
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aim of the DTA is to demarcate the national tax systems from each other.”100 Iwould say that the final objective of the DTA is the prevention of double taxationthat could be achieved through several methods wherein the main device is theallocation of a tax base. Some of the commentators consider that the main obstacleto the economic growth and the reason for double taxation is worldwide taxationwhich results in endless conflicting tax claims between the states.”101 On thecontrary, others argue that worldwide taxation is justifiable by capital-exportneutrality (CEN) which would promote worldwide efficiency and not capital-importneutrality (CIN) because it provides taxation wherein there is no difference intaxation if capital is invested abroad or in the residence country.”102 It is doubtful,however, that this system could provide any efficiency for developing countriessince it does not favour investment promoting activities but adheres to a neutralapproach for making investments abroad and clearly favours the tax interests ofindustrial countries.
Tax treaties operate by means of a system of conflict rules103 as the allocation offiscal jurisdiction is the main way for avoiding double taxation. That said, however, itdoes not mean that tax treaties contain conflicts of law rules in its original sense. Theydo not provide whether or not a state must apply domestic or foreign law but, rather,impose their own distributive rules which are fundamentally different from the conflictsrules of private international law.104 Tax authorities do not apply the foreign law as it isin conflicts of law situations but rely upon allocated taxing power and tax upon thebasis of national laws using the concepts of national law or treaty definitions accordingto Article 3.2.
According to Knechtle’s formulation, the allocating rules could figuratively beregarded as demarcating rules.105 Rohatgi refers to allocating rules as distributiverules that initially classify and then assign the taxing rights to one or both contractingstates.”106 I would add that in short, assignment rules could be regarded as tax sharingrules between the states involved. The main parts of the Agreements consist of thesetypes of rules and for their correct interpretation, the wording of the specificprovisions are precisely important. “Assignment rules” in the OECD Model operateby using the following phrases: “shall be taxable only”, “shall be taxable only in thecontracting state… unless”, “may be taxed in that other state”, “…but may be alsotaxed in the first state”, and “shall not be taxed”. The phrases “shall be taxable” or 100 Op. cit. note 24, 162.
101 Andersson, An Economists View on Source versus Residence Taxation – The Lisbon Objectives andTaxation in the European Union, IBFD, October 2006, 395-401.
102 Mossner, Source versus Residence: A EU Perspective, IBFD, December 2006, 501-503. The author ofthis article is not himself of the above mentioned idea but cites other commentators.
103 Op. cit. note 24, 167-168.
104 See op. cit. note 5, 52.
105 See op. cit. note 24.
106 Rohatgi, Basic International Taxation, Kluwer Law International 2002, 56.
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“may be taxed” should be interpreted by the ordinary meaning of the words as“exclusive” or “non-exclusive” taxing rights, respectively.107 Since the right of the otherstate is not denied by the construction of the non-exclusive assignment articles, itwould invariably lead to tax relief in accordance with the Agreement. Regretfully, someGeorgian language versions of tax agreements do not strictly adhere to thisconstruction of “assignment rules” but in a way represent a literary translation oflegal constructions that mislead whilst applying Georgian language versions of theagreements. In the Georgian language version of the Agreement with Ukraine, forexample, the wording of Article 11 I is “.shall be taxable” instead of “may be taxed”and which changes the whole idea of the rule.
Georgian double taxation agreements include some divergences from assignmentrules of the OECD Model. It is not surprising as the OECD Model represents thep r e s e n t s t a t e o f o p i n i o n o f m o s t i n d u s t r i a l c o u n t r i e s . S o m e o f G e o r g i a ’ sagreements slightly extend the source state’s taxing right rather than the OECDModel whilst others make it narrower. Agreements with the former Soviet states,including the Baltic states, for example, involve the provision of allocating a taxingright upon royalties to the source state as well.108 The Agreement with Belgiumshares the same provision. All other items of income109 that are not dealt with inspecific articles (Article 21) of the agreement and are generated from the sourcesof that state may be taxable in the source state according to the Agreement withAzerbaijan, Bulgaria and Russia.110 According to the Agreement with Belgium, otheritems of income are capable of being taxed in the source state whether they arenot taxed in the residence state.111 In this regard, Professor Ellis points out thatArticle 21 is the basic rule of the OECD Model as the other articles are exceptionsto this fundamental rule. Only the residence state should be allowed to tax thistype of income.112 This is, however, dealt with differently in the above mentionedAgreements.
Almost all the Agreements with developed countries make the taxing capabilities of thesource state narrower exempting the taxation of interest from the source state allowance.
Agreements with the UK, France, the Netherlands, Austria and Germany, for example,exempt Article 11.2 of the OECD Model from the agreements and, thus, do not permit thetaxation of interest in a source state. The wording of this Article has been changed asfollows: “…shall be taxable only” which means that the exclusive right to tax is on theresidence state with regards to these agreements.
107 See op. cit. note 5, Preface to Articles 6-22, 3-5. See also Commentary, Article 23, paragraphs 6 and 7and op. cit. note 108.
108 The OECD Model does not share the same approach although the same provision is included in the UNModel.
109 Article 21 of the OECD Model.
110 Article 21 of the Agreements with Azerbaijan and Russia and Article 22.1 of the Agreement withBulgaria.
111 Article 22.2 of the Agreement with Belgium.
112 Op. cit. note 30.
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Dividend allocating articles are of special importance in tax agreements of Georgia.
According to the OECD Model, this rule is regarded as allocating the limited taxingr i g h t t o t h e s o u r c e s t a t e . G e o r g i a ’ s D T A s d i f f e r f r o m t h e O E C D M C a n d ,accordingly, they could be distinguished as a) dividend allocating rules withprovisions for tax incentives for investments and b) mere dividend allocating rulesthat are done mostly upon the pattern of the OECD Model. Agreements with thecountries of the former USSR (excluding the Baltic states) and some other non-industrial states do not include the investment promoting provisions although theamount of tax upon dividend in the source state is determined at a lesser rate thanis proposed by the OECD Model. Agreements with developed states together withdividend distributive rules apply the investment promoting provisions. Dividendsare exempted from tax in the residence state of the company paying the dividends,for example, if the investment allocated in that company reaches a specificallydetermined amount. The special amount of investment is a condition for incentivesand differs from agreement to agreement. These types of provisions have to begrounded upon economic rationalism and so it is desirable to have differentpractices with different countries. The construction of dividend allocating rulessomewhat changes the purpose of double taxation agreements, aiming atadditional results through investment promotion. These provisions, however, fitnicely within tax agreements.
7. Double Taxation Relief Methods
Article 23 of the OECD and Georgian DTAs deal with the so-called judicial doubletaxation. This case has to be distinguished from economic double taxation which isnot discussed in this article.113 International judicial double taxation is not defined inthe OECD Model or in Georgian tax law. The Commentary, however, does shed somelight upon this issue114 and clarifies that judicial double taxation occurs where thesame income or capital is taxable in the hands of the same persons by more than onestate. Georgian tax law does not give any definition of judicial double taxation althoughthe judiciary interpretation has to be regarded as guidance in this case. The SupremeCourt of Georgia held that it is against the law “to tax the same person with regards tothe same taxable basis more than once”.115 In fact, the interpretation is similar to theone given by the Commentary.
113 If states wish to solve the problem of economic double taxation, they can do so by bilateral negotiations.
114 See Commentary, Article 23a and 23b, Preliminary Remarks, paragraph 2.
115 “Didubis Rdze” LTD v. Customs Department of Georgia of 20 July 2000.
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Three methods are in common use today for giving relief in the case of double taxation:deduction, exemption and credit methods.116 The OECD has sanctioned only theexemption and credit methods117 both of which are permissible for Agreements basedupon the Model with each state being left free to make its own choice.118 The exemptionand credit methods are distinguished further: full exemption and exemption withprogression and full credit and ordinary credit methods. The OECD Model limits thechoice between the exemption method with progression (Article 23a) and the ordinarycredit method (Article 23b). Most of the Georgian tax agreements use the exemptionmethod for eliminating double taxation from the Georgian side.119 In several of them, acombination of the two methods or a mixed version of Articles 23a and 23b areapplicable.120 As a rule, developed countries use a combination of the two methodswith Georgia wherein they apply exemption plus credit or exemption plus deductionmethod (for dividends).
The reason for OECD Member States being unable to agree upon one universalmethod of revealing double taxation is that the philosophies underlying these twomethods are far different. The exemption method favours capital import neutralityand puts the investors in equally competitive conditions in the source state whereasthe credit method favours capital export neutrality and treats the capital investmentsequally in a residence state. Vogel advocates the exemption method as it avoids notonly actual double taxation but also potential double taxation.121 This idea issupported by other scholars as well.122 On the other hand, some commentatorsbelieve that the credit method is recognised to be the best method for eliminatinginternational double taxation.123 By taxing income upon a worldwide basis andrelieving double taxation by means of credit, however, European countries areeffectively exporting their high tax levels to foreign markets.124 The truth is that veryfew counties have either a pure exemption or a pure credit method. In most cases,countries apply both approaches for different income and activities such as in theGeorgian case. In case both methods are designed properly, they can be reasonablycomparable.125 116 See Arnold/McIntyre, International Tax Primer, Kluwer Law International, 2 ed. 2002, 30-47.
117 See op. cit. note 107, 32. The credit and exemption methods are also sanctioned by the UN and USmodels. The deduction method is also used by some states as an optional form of relief in case foreigntaxes are not creditable.
118 Theoretically, a single principle could be held to be more desirable. See Commentary, Article 23, paragraph28.
119 Agreements with Armenia, Azerbaijan, Kazakhstan and France, etc.
120 Austria-Georgia Agreement.
121 Vogel, Tax Treaty News, IBFD, December 2006, 474-475.
122 Rohatgi argues that the exemption method avoids or totally eliminates double taxation whilst the creditmethod prevents or partly eliminates it. See op. cit. note 107, chapter 2, paragraph 5.5.
123 Op. cit. note 117, 37.
124 Op. cit. note 102.
125 Op. cit. note 117.
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Both methods in the OECD Model are drafted in a general way and do not givedetailed rules on the computation of the methods and operation of the credit. Thisis left to domestic tax laws. Domestic law provisions are not just additional normsto the DTAs, the double taxation relieving provisions can also be given the effectunilaterally without tax agreements. However, Treaty relief is still important as itmay be more generous than the unilateral relief. The Georgian Tax Code (the recentupdates to the Code) provides for a tax relieving rule which is very close to theordinary credit method. Generally, the countries using the deduction methods taxtheir residents on their worldwide income.126 In effect, foreign taxes are treated ascurrent expenses of doing business or earning income in the foreign jurisdiction.
Georgian law, however, is far from being perfect in this respect. As alreadymentioned, the method chosen by the Code is not favoured by the OECD. Thecorresponding article of the Georgian Tax Code specified that the deduction isallowed just with respect to foreign source based profit taxes. It is apparent, thatthe problem will rise with regards to the application of the exemption and creditmethods127 as these rules are not stipulated in Georgian tax law at all. Finally, theprovisions of the national tax law concerning the relief of double taxation are verypoor and seem to be of no real help in completing the whole picture of any chosen(treaty or unilateral) methods.
The Agreements with Ukraine and the UK include some different approaches in thisregard. Relief will be granted if taxation is done upon the basis of source rule inanother state. The OECD MC wording is rather simple for application because it onlyrequires that taxation is done in another contracting state as a condition for relief.
Additional involvement of the source rule here could through the contracting statesinto excess trouble to determine whether or not the source of income is in anotherstate. These situations can cause a conflict between the understandings of sourcerule in that it has no universal definition. The potential consequences of this conflictwill be frightening because no relief would be granted to the taxpayer. Luckily, theAgreement with the UK copes better with this situation. Article 23.2.a. points out theAgreement as a basis for determining the source state. Accordingly, no internaldefinitions of the source will be needed for applying the Agreement. The Agreementwith Ukraine lacks this clarification, however, which means that the national law conceptof the source will be applicable. In this case, there will be inevitable conflicts indetermining whether or not the taxation had been done in another state according tothe source principle. It is apparent that this practice has to be changed by the OECDconstruction of the relevant article.
126 Op. cit. note 116, 32.
127 Agreement with Belgium.
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8. Mutual Agreement Procedure (MAP) and Arbitration
The existing version of Article 25 of the OECD Model is placed unchanged in almostevery tax agreement of Georgia. This research is not intended to explore thisArticle (its existing version) in all details but is more focused upon the novelty thathas been decided for inclusion in this article. Several comments thereto, however,are necessary since some questions will arise with regards to Article 25 such as:What is the place that should be regarded to the agreements reached by MAPprocess within the legal system of the contracting state which, in this instance, isGeorgia? What is the binding effect of these agreements or is the MAP initiatedmerely for communication between the authorities? The wording of Article 25 alsoseems quite ambitious to some extent. It indicates that “any agreement reachedshall be implemented notwithstanding any time limits in the domestic law of thecontracting states.” What if the court has held the ruling before or afterwards?How could the MAP agreement override the court decision? Will the court have totake into consideration this agreement in reaching its judgment when the MAP hasalready reached an agreement? This seems to be the case not just for Georgianlaw but for other jurisdictions as well. In 1999, the Supreme Court of Georgia heldthat “it is not acceptable for courts to base their judgments upon the interpretationsgiven by the executing bodies on the matters of law.”128 The judiciary of the UKalso holds that the Map decisions are not binding in internal law. In IRC v.
Commerzbank, it was held that competent authorities may communicate with eachother for reaching the common interpretation of the treaty, however “… this jointstatement has no authority in English courts. It expresses the official view ofrevenue authorities of the two countries. That view may be right or wrong…”129 Insubstance, the judiciary decisions of both countries reflect the same position. Itis clear that the courts will be reluctant to adhere to the MAP’s interpretation ofthe case. This, however, will be the issue until the solution is found. The MAPprocedure and its decisions need some allocation within the legal framework ofcontracting states.
Recently the amendment was made to Article 25 of the OECD Model which refer to thearbitration procedure.130 It is worth mentioning here that the OECD has not always favouredthis innovation and the Committee on Fiscal Affairs did not recommend the adoption ofarbitration for some time. The Committee later reported that the adoption of the latter“would represent an unacceptable surrender of fiscal sovereignty.”131 Since then, therealities have been changed and the views also. The novelty has been discussed for a 128 Decision of the Supreme Court of Georgia on 18 October 1999, Aragvi Business Bank v. RegionalCustoms Service.
129 IRC v. Commerzbank [1990] STC 285 at 302b.
130 The amendments were made according to the Report, adopted by the Fiscal Committee on 30 January2007.
131 See the 1984 Report of the OECD Committee on Fiscal Affairs, Transfer Pricing and MultinationalEnterprises, Taxation Issue, 39.
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long period and a decision was recently made for inclusion of arbitration procedure inthe MC.
In its latest report, the Fiscal Committee132 confessed that the MAP procedure is notas effective as it appears to be. There is no direct confession but the facts speak forthemselves. After the draft was submitted for public discussion, private sectorrepresentatives and tax officials also pointed out that the MAP does not alwaysfacilitate the solution of a case.133 In reality, the MAP procedure is not created toarrive at a common understanding of the debatable issues. The procedure issupposed to provide adequate efforts for the parties to come to a commonunderstanding of the issues arising out of treaties. The concept of the MAP itselfimplies that it is not the final dispute resolving procedure which means that the casecould still be open after years of consultations between the competent authorities.
The OECD draft looks at the arbitration as an additional tool together with the MAPprocedure and does not attempt to supersede the latter. The innovation has meritsand demerits as well.134 The OECD MC understands that constitutional difficulties willnot allow states to adopt the procedure in some cases and so the article is with areference footnote that indicates that it is a selective provision for those countrieswhose legislation allows such a legal luxury. It is clear that arbitration will forcecompetent authorities to come to the agreement in a reasonable time and theyendeavour to work harder at finding a solution if they are not willing to enter intoarbitration. It seems that the result of the inclusion of arbitration will be profitable forboth parties. The taxpayer will benefit as he gets an additional step towards claiminghis rights and the tax authorities will get benefits as they will save time and useresources effectively.
The Tax Agreement of Georgia with the Netherlands includes similar provisions. ThisAgreement was signed in 2002 far before the OECD published its first draft for publicdiscussion.135 No other tax agreements of Georgia include such a provision. Article 26.5of this Agreement states that in case the issue is not resolved after two years, the partiesto the agreement are allowed to submit the case to arbitration. The advance permissionof taxpayers is required for rendering the decision binding. Despite how innovative andadvantageous this provision can be, it is still wholly confusing. The wording of theAgreement alone means that the procedure will not fit within the legal structure of Georgia.
At the same time, the agreement does not give any indication of the type of arbitration 132 February 2007, Improving The Resolution of Tax Treaty Disputes.
133 See OECD Report of February 2007, Improving the Resolution of Tax Treaty Disputes, Introduction,paragraph 11.
134 For more details about the advantages and disadvantages of arbitration, see Fogarasi/Gordon/Venuti/Andersen, Use of International Arbitration to Resolve Double Taxation Cases, Tax Management InternationalJournal, 11 August 1989, 319-327.
135 The Government of the Netherlands published a paper in 1987 on tax treaty policy together with theNetherlands Standard Convention. See Brunschot, The Judiciary and the OECD Model Tax Convention andits Commentaries, IBFD, January 2005, 5-10.
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that is implied, who has to take the case to arbitration (the tax authorities or the taxpayer),how arbitration will deal with the case, what the procedures will be, how the decisions willbe enforceable and, finally, what place should be regarded to the decision of thisarbitration within the national legal system. These are the issues that have to be elaboratedconsistently in the agreement and in national law. Since this has not yet been done, thereis only little hope that these provisions of the Georgia-Netherlands Tax Agreementconcerning the arbitration will ever work.
After amending the OECD Model, however, the question will still be posed of whetheror not the arbitration procedure will be desirable for Georgian tax practice. TheOECD contemporary concept of arbitration clearly does not represent a threat tofiscal sovereignty or its unacceptable surrender although it all must be analysed indetail, particularly the composition of the arbitration and decision-makingprocedure of arbitration within an “independent opinion” approach or the “last bestoffer”.
9. Assistance in the Collection of Taxes
In addition to the component of arbitration, some other provisions of the Agreementwith the Netherlands look like a white elephant for the Georgian tax system; namely,the provisions of giving assistance in tax recovery matters which is not followed inother agreements. Georgian negotiators, however, will be facing this challenge inmaking further agreements as the Georgian authorities do not adhere to a consistentstand with regards to some practices. Unfortunately, the variety of approaches indifferent agreements leads to the idea that there is no established practice of makingtax agreements even whilst negotiating special provisions. Consequently, the questionwill arise every time: If this practice is suitable with one state, then why is it not with thesame in another? Sometimes the views of the negotiators involved change with thetreaty practice being changed as well. This is a better situation than blind adherenceto the proposed drafts.
Article 28 of the Agreement with the Netherlands states the obligation of givingassistance in the recovery of taxes. My personal opinion is quite the opposite ofthat approach because Georgian tax law and the tax system in whole remainscompletely unprepared for these types of advances in its tax practices. Theprovisions were included without caring for the inclusion of further specific normsinto Georgian tax law. The concept of the idea is the same as it is drawn in the OECDModel although this Model raises this mechanism to the international level whichrequires setting down the mode of application of the relevant article between thecontracting states. On the contrary, the discussed Agreement pulled down theprocedure to the level of national laws. Article 28.1 of the Agreement states thatassistance and support in recovery of taxes will be granted in accordance of therelative norms and administrative practices of the contracting states. This type oftactic in designing a treaty is sometimes needed for creating safeguards upon thebasis of national law. Again on the contrary, this wording of relying upon the national G E O R G I A N L A W R E V I E W 11`2008-1
law and practice in this case turned the provisions of the Agreement into completefiction. The Tax Code of Georgia is the only basis for the enforcement of tax claims.
In that there is no support of these provisions in this Code, the prospects of recoveryof tax claims of foreign countries seems to be very vague, not to say unlawful,according to the Georgian Tax Code.
Georgian courts do not yet recognise and enforce the foreign judgments on taxcases as, for example, is done in English courts.136 It goes without saying thatthe judgments are of more legal weight than the decisions of tax authorities. Taxrecovery aid provisions, whether direct or indirect, contradict the main principlesof Georgian law at this stage. Whether or not the legislative views and judiciarypractice change, the recovery provisions of tax claims could be discussable butthere is still a great deal to be done in this regard. Yet it is to go too far and tooquickly.”137 I do not mean to imply that there is anything wrong in the assistance in thecollection of taxes. It is fine to do so when there is some degree of similaritybetween the tax systems of contracting states. When there has been no realharmonisation, however, this emerges as quite a large step.
10. Conclusion
I would sum up with the same idea with which I started. Georgian Tax Agreementsare made upon the pattern of the OECD Model. Nevertheless, the whole analysistakes me to the idea that the Model has had less influence upon the internal taxlaw of Georgia than might have been expected. Is there any hope for improvement?T o m y m i n d , s e v e r a l s u g g e s t i o n s c o u l d b e m a d e i n c o n c l u s i o n . F i r s t , t h eGovernment has to adopt some general guidelines or strategies for tax treatynegotiating policies. It has to define the main purposes of negotiations: to securethe most beneficial attribution of taxing rights to Georgia or to protect taxpayersa g a i n s t d o u b l e t a x a t i o n ? S e c o n d , i t i s n e c e s s a r y t o d r a f t s o m e s t a n d a r dimplementing norms for giving real effect to tax agreements. Third, MAP decisionsneed to be allocated within the internal legal system. Fourth, arbitration proceduresneed to be elaborated whether is has to be persuaded. Fifth, the legal status ofthe Commentary should be clarified by referring to it in treaties as in effect we donot know to what extent the Commentary has relevance for the interpretation in theeyes of the Government. Sixth, steps need to be taken towards consolidating the 136 It is well established principle that English court will not enforce a foreign revenue laws. The reasonwhy the English courts do so is simply that they don’t sit to collect taxes for another country; nor will bea foreign revenue law enforced by allowing the Foreign Government to recover property in England; seeGovernment of India v Taylor [1955} 2 QB 490 at 515; Regazzoni v. K C Sethia (1994) LTD [1956} 2QB 490,515.
137 This hypothetical assessment was given by Jones to the attempt of involving same rules in theagreements between EU countries; see op. cit. note 3.
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wording of treaties and especially giving the terms the same definitions in eachtreaty. Seventh, it is needed to correct Georgian language versions of existingtreaties in terms of relevant translations of the terms and definitions. Eighth, thedouble taxation relief article in relevance with the OECD Model needs elaborationin clear terms. All of these suggestions and others that are pointed out above areeasily to achieve but the main thing is to hold the balance between Georgianresident taxpayers, on the one hand, and the interests of Treasury, on the other. Itis understood that given interests as a rule are not exactly identical although theclarity of the tax agreements is a far more desirable issue for both parties involved.
The great regret left after reviewing the topic is that tax agreements of Georgiahave not yet become the subject of extensive judiciary control and review. Hopefully,they will have a long way forward.
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