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Tax Treaty Violation Could Lead to Tax Uncertainty

The Canadian Supreme Court’s recent decision in Her Majesty v. Alta Energy Luxembourg SARL has sparked concerns over the interpretation of Article 13 of the Canada-Luxembourg tax treaty, leaving taxpayers and authorities alike grappling with uncertainty.

Background

In a significant ruling, the court declined to read a requirement of sufficient substantive economic connection into Article 13, stating that “beneficial ownership is utterly foreign to Article 13”. This decision has implications for the interpretation of similar provisions in other tax treaties, including the India-Luxembourg treaty.

The Court’s Ruling

The court’s ruling was based on the fact that beneficial ownership is not explicitly mentioned in Article 13, and therefore cannot be inferred. The decision is likely to add fuel to ongoing disputes between taxpayers and authorities over the application of beneficial ownership principles in tax treaties.

Tax Authorities’ Challenges

Tax authorities have been known to challenge the availability of treaty benefits by questioning beneficial ownership, despite clarification provided by Circular No. 7899 that a Tax Residence Certificate (TRC) constitutes sufficient evidence for accepting the status of residence as well as beneficial ownership. The Supreme Court of India has upheld the validity of this circular in Azadi Bachao Andolan v. Union of India.

Recent Amendment

The recent amendment to the tax treaty in 2017, which granted India the right to tax future capital gains arising from Indian exits and provided protection to investments made prior to April 2017, has not alleviated concerns over the interpretation of beneficial ownership principles.

Uncertainty Remains

In a surprising move, the Tribunal remitted the matter back to the AO to make a finding on the issue of beneficial ownership, despite holding that it cannot be read into Article 13. This decision is likely to keep taxpayers in a state of uncertainty, as they await guidance on how the AO will determine whether Article 13 has to satisfy the beneficial owner test.

Importance of Clarity and Certainty

The ruling by the Tribunal highlights the importance of clarity and certainty in tax treaties, and underscores the need for authorities and taxpayers to work together to ensure that disputes are resolved in a fair and efficient manner. As the dispute continues to unfold, it remains to be seen how the AO will interpret the term “beneficial owner” and what implications this decision may have for taxpayers and authorities alike.

Article 13 of the Tax Treaty

Article 13 of the tax treaty states that every treaty in force is binding upon the parties to it and must be performed by them in good faith. The article emphasizes the importance of cooperation and mutual understanding between countries in the interpretation and application of tax treaties.

Conclusion

The recent decision by the Tribunal highlights the ongoing challenges in interpreting tax treaties, particularly with regards to the concept of beneficial ownership. As disputes continue to arise over the application of this principle, it is essential that authorities and taxpayers work together to ensure clarity and certainty in their dealings.

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