13/08/2025
INTERPRETATION OF TAX TREATIES:
The interpretation of tax treaties occupies a distinct space in tax jurisprudence. Unlike domestic tax statutes, tax treaties are international agreements intended to allocate taxing rights between states, avoid double taxation, and facilitate cross-border Trade. Accordingly, their interpretation is governed not by domestic rules of statutory construction, but by international principles foremost among them, those codified in 1969 (VCLT).
Article 31 of the VCLT sets out the general rule of interpretation and emahsizes that while Interpreting a treaty the focus is not merely on literal wording, but also on the treatyâs object to eliminate double taxation and to prevent fiscal evasion and facilitate international cooperation.
The first principle, in interpretation of a treaty is "contextual and purposive" reading. Tax treaties are not technical taxing statutes. They are negotiated instruments between sovereign states and reflect mutual concessions and understandings. As the Supreme Court of Pakistan noted in Snamprogetti Engineering B.V. v. CIR (2023 SCMR 1055), applying rigid domestic interpretive tools to treaties is âmisleading and unsuitable.â
Second, tax treaties require a common interpretation across contracting states. This arises from the bilateral or multilateral nature of treaties: the terms must be applied consistently in both jurisdictions, irrespective of domestic legislation. If one state applies the treaty differently from the other, the entire basis of mutual benefit and legal certainty collapses. In Commissioner v. A.P. Moller Maersk (C.P. 560-K/2019), the Court underscored the need for a âuniform and workableâ interpretation, noting that the role of the state is to implement, not unilaterally interpret, treaty provisions.
Third, treaty interpretation favours a âsubstance over formâ approach, particularly in identifying the nature of income, residence status, or the existence of a permanent establishment (PE). This aligns with the broader anti-avoidance objective embedded in many treaties. The Supreme Court in Snamprogetti acknowledged that treaties are drafted in more general and less rigid language, often necessitating a broader reading that captures economic substance over contractual form.
Fourth, supplementary means of interpretation including travaux prĂŠparatoires (preparatory work) and subsequent practice may be used under Article 32 of the VCLT to resolve ambiguity or confirm meaning. Judicial decisions from foreign courts, academic commentary (such as Klaus Vogel or Roy Rohatgi), and practical application by tax administrations are all part of the interpretive ecosystem. The Supreme Courtâs reference to Klaus Vogel in both Snamprogetti and Maersk confirms that Pakistani courts consider international consensus and scholarly sources relevant and persuasive.
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