Judicial influence on tax treaties

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Judicial influence on tax treaties
The beneficial owner is an essential concept applied in tax treaties. It restricts the benefit of treaty-reduced holding back taxes on royalties, interests, dividends, and interests to the recipients who are the beneficial owners of this kind of income. The beneficial owner as a term has been embraced mostly in the bilateral tax treaties, even though it lacks its definition in any of them. Therefore, the definition of the phrase is interpreted under the Article 3(2) of the OECD Model Tax Agreement on Capital Model and Income. Since the term lacks an exact definition in the domestic tax statutes of many nations, the means through which the local courts need to develop the meaning of this treaty-initiated concept has deferred within the scholars. Understanding of this in the judicial system would be the key to evaluating the influence of the law courts on the tax treaties. Therefore, understanding this term determines the ability of the judiciary in the provision of more certainty as well as the delivery of practical solutions towards tax treaties stalemates.
In the pursuit of understanding the meaning of the beneficial owner in the tax treaties, the judicial system has encountered various incidences that portray its necessity in understanding this matter which depicts its influence on the international tax treaties. This paper illustrates the significance of developing the meaning of the beneficial owner as an influence on the tax treaties where the identifiable reasons for providing certainty and provision of practical solutions are detailed respectively.

It also demonstrates an example of the differences in understanding the beneficial owner in court cases as an illustrative example. The major conclusion to this paper is that the judicial system has a substantial impact on the existence of the international tax treaties through its understanding of the beneficial owner. The paper ends with a reconsideration of the major ideas discussed in the whole paper.
First, understanding the beneficial owner is essential in the provision of certainty in court’s decisions. The taxpayers encounter a momentous uncertainty in regards to the procedures applied in the elucidation of the beneficial owner. Encountering many incidences involving the tax treaties the domestic courts and the international judicial systems have at times differed in their decisions. For instance in a case involving Real Madrid a football club in Spain which paid a Hungarian firm for the right to utilize the image rights of one of their players. The Hungarian firm without hesitation conveyed 99 percent of the paid amount to a Holland firm (Kotlyarov 1-4). As a response the tax authorities in Spain declined the zero by retaining the tax on royalties under the Hungary-Spanish treaty on the basis that the Hungarian organization was interpolated for the sole aim of profiting from the Hungarian-Spain treaty; hence not a beneficial owner. Additionally, the court supported the Spanish tax authorities’ stand. According to the court’s understanding, this was a case where the setting otherwise needs (Kotlyarov 4). Hence, there is the exclusion of the internal law references in favor for the application of the universal meaning. The court depended on the OECD materials as it concluded that the explicit goal of the beneficial owner concept is its applicability as a tool for any treaty shopping. At the same time, an economic understanding could be used to determine the actual owner of the income by disregarding the legal ownership of the income (Yoshimura 761-781). In this cases, the decision made by the court about this matter ignores a given law for another assumed legal implication. The court solving this case would have regarded the decent part of this instance then it would have considered the legal bit of the case. Therefore, the decision failed to avail certainty as the court depended on the OECD regulations without bringing into context the relations between Hungary and the Netherlands firms (Yoshimura 761-781). Considering this incidence, the courts are influential towards the tax treaties, as the value the fulfillment of these agreements for the economic function rather than the legal part of the international tax relations. Through this, the judicial system can be considered a system that integrates sanity into the international tax treaties as it upholds the agreements between the country parties to ensure equal profitability.
Additionally, determining the implication of beneficial owner is essential for providing practical solutions towards the tax treaties deadlocks. So as to understand the meaning of the beneficial owner, there is a need for changing the soft or hard law. The latter can be attained by introducing a definition of the beneficial owner or establishing general restrictions on the benefits section. The bilateral being of the tax treaties entails the transformations to the hard law should be done on all the treaties. However, this kind of treaty-by-treaty mitigation is extremely impractical as there is a need for a lot of time to allow negotiations necessary for changing the treaties. Nonetheless, the disparities amongst tax treaties will remain the leading cause for the treaty shopping. For instance, in the Real Madrid case, the parties involved seeks their inherent benefits from the amount paid, but due to differing tax treaties, the Hungarian firm would end up as a beneficiary during the Spanish tax authorities as losers (Kotlyarov 4). Therefore, the intervention by the court of law was essential to mitigate the situation and limit the cases of treaty shopping while ensuring equal benefits. The court only managed this through adhering to the OECD stipulations about the international association between its member states. Hence, as there is a need for an amicable solution to end the misunderstandings of the beneficial owner, it would be worth to adhere to the OECD regulations so as to determine the income profitability rather than the legal measure (Yoshimura 761-781)s. The court, in this case, serves as an implication towards the necessity for the preference of the OECD regulations over the hard laws.
The beneficial owner limits the cases of tax treaties holding back the interests, dividends, and royalties to the actual recipients who are the beneficiaries of this income. The beneficial owner is a term with a limited meaning that does not vividly portray its applicability in the hard and the soft laws. Hence, the determination of its meaning would reveal the impact of the judicial system of the tax treaties in matters of certainty and practical solutions towards some dilemmas. An instance of the Real Madrid football club tax payments that required the court intervention to establish a beneficiary owner implies the importance of understanding this term. The judicial system has a substantial impact on the existence of the international tax treaties through its understanding of the beneficial owner. As courts get involved in the ruling of cases entailing the tax treaties misunderstanding, they also brand a meaning to the beneficial owner; hence dictating the best direction to be taken in order to reduce the cases of treaty shopping amongst countries.
Works Cited
Kotlyarov, Dr Maxim. “The Concept Of Benefi Cial Ownership In The OECD Model Tax Convention 2014: A Critical Analysis – Part II”. International Tax Report, 2015, pp. 1-8.
Yoshimura, Koichiro. “Clarifying The Meaning Of ‘Beneficial Owner’ In Tax Treaties”. Tax Analysts: Special Reports, 2013, pp. 761-781.