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2006 IBFD TAX DAY
INTERNATIONAL TAXATION COURT
AMSTERDAM
NETHERLANDS
IN THE CASE CONCERNING SECUROBITS
THE REPUBLIC OF PEARONIA
APPLICANT
v.
THE REPUBLIC OF APPALARIA
RESPONDENT
2006
MEMORIAL FOR THE APPLICANT
ii
TABLE OF CONTENTS
Table of Abbreviations iv
Index of Authorities v
Statement of Jurisdiction ix
Statement of Facts x
Questions Presented xiii
Pleadings
I. THE APPALARIAN TAX AUTHORITIES CIRCULAR GOES BEYOND MERE
INTERPRETATION OF THE TREATY AND AMOUNTS TO TREATY OVERRIDE 1
A. The Treaty is to be interpreted in the light of the OECD Commentaries 1
i) The role of the Commentaries in the interpretation of the Treaty 1
ii) The use of the Commentaries to interpret a treaty concluded with
a non-OECD member 4
B. Definition of know-how under the Circular is inconsistent with the treaty
meaning by not requiring know-how to be imparted 5
i) The definition of know-how under the Treaty 5
ii) The Circular contradicts the Treaty meaning of know-how 8
C. Considerations in the matter of Securobits 9
i) Payment for the training and troubleshooting services provided by Securobits to
CompuTV’s employees 9
ii) Payment for the customer list 11
iii) Payments to Securobits for marketing assistance 13
D. The Circular goes beyond mere interpretation of the Treaty, and amounts
to treaty override 14
II. BY APPLYING THE RATE APPLICABLE IN 2003 TO ITEMS OF INCOME PAID IN
2004 APPALARIA IMPOSED TAX IN CONTRAVENTION WITH THE TREATY 17
A. From 1 January 2004, the Treaty provides for 5% withholding tax on
royalties and for no tax on technical services fees 17
B. The right to withhold tax on royalties and technical service fees under
Treaty arises when payment is made 18
i) Term "paid" must be given a bilateral treaty meaning 18
ii) Interpretation based on ordinary meaning and requires income to be actually paid 19
iii
iii) OECD Commentaries require income to be actually paid 19
iv) Different wording than that used in the Treaty is required to cover accrued income 21
C. Timing issues in the matter of Securobits 22
Conclusion and prayer for relief 23
Annex 37
iv
TABLE OF ABBREVIATIONS
AITA Appalarian Income Tax Act of 1997
Art. article
ATO Australian Tax Office
BIFD Bulletin for International Fiscal Documentation
Circular Cicular Letter of 2002 issued by the Appalarian Tax
Authorities explaining the application of certain provisions of
AITA on withholding of taxes to certain types of income
Commentaries
OECD Commentaries on the Articles of the Model Tax
Convention
ET European Taxation
IBFD International Bureau of Fiscal Documentation
IFA International Fiscal Association
m. no. marginal number
MFN most favoured nation
OECD Organization for Economic Cooperation and Development
OECD Model OECD Model Tax Convention on Income and on Capital
para. paragraph
Sec. Section
TAG Taxation Advisory Group
US Model U.S.A. Model Income Tax Treaty (1996)
VCLT Vienna Convention on the Law of Treaties 1969
Treaty Convention between Pearonia and Appalaria with Respect to
Taxes on Income and on Capital of 1995
v
INDEX OF AUTHORITIES
Books, treatises
American Law Institute, "Federal Income Tax Project – International Aspects of United States
Income Taxation II: proposals of the American Law Institute", 1992
Engelen, F.A., “Interpretation of tax treaties under international law”, IBFD, 2004
Oxford University Press, Concise Oxford Dictionary, 1999
Philip Baker, "Double Taxation Conventions and International Tax Law", Looseleaf, 2006
Raad, C. van, "Materials on international and EC tax law", International Tax Center Leiden, 2005
Toit, C.P. du, "Beneficial ownership of royalties in bilateral tax treaties", IBFD Publications,
1999
Vogel, K., "On Double Taxation Conventions: a Commentary to the OECD, UN and US Model
Conventions for the Avoidance of Double Taxation of Income and Capital",1997
Ward, D.A.et al, “The interpretation of income tax treaties with particular reference to the
commentaries on the OECD Model”, IBFD, 2005
Articles
Ault, H.G., “The Role of the OECD Commentaries in the Interpretation of Tax Treaties”, in
Alpert, H.H. and K. van Raad (eds.), "Essays on International Taxation", 1993, pp. 61-68
Avery Jones, J.F., et al, “The origins of concepts and expressions used in the OECD Model and
their adoption by states”, BIFD 5/2006, pp. 220-254
Avery Jones, J.F., Bobbett, C., “The treaty definition of royalties”, BIFD 1/2006, pp. 23-28
Avery Jones, J.F., “The Effect of Changes in the OECD Commentaries after a Treaty is
Concluded” BIFD, 1/2002, pp. 102
Bruggen, E., "Good faith in the application and interpretation of double taxation conventions",
British Tax Review, 2003, 1, 25-68
Bruggen, E., "Source taxation of consideration for technical services and know-how with
particular reference to the treaty policy of China, India and Thailand", Asia-Pacific Bulletin,
3/2001, pp. 42- 60
Evans, K., “Treaty treatment of technical assistance, management and administrative fees in
Malaysia”, CCH Journal 1/1990, pp. 11-16, pp. 37-43
García Heredia,”Who knows the riddle of know-how? Spain becomes entangled in the web of
vi
intangibles”, ET, 3/2005, pp. 103-112
Hofbauer, I. "Most-favoured-nation clauses in double taxation conventions - a worldwide
overview", Intertax 10/2005, pp. 445-453
Hughes, D., "Withholding taxes and the most favoured nation clause", BIFD, 3/1997, pp. 126-
130
Mehta, N. "The effect of the MFN clause in the Indian treaties on royalties and fees for technical
services payments" Asia-Pacific tax bulletin, 3/2002, pp. 54-71
Oliver, J.D.B. et al., "Beneficial ownership", BIFD 7/2000, pp. 310-325
Sonntag, K., "The tax treatment of engineering in international large- project contracting",
Intertax, 1/1997, pp. 9-12
Tenore, M., "Timing issues related to changes in treaty residence or source", Intertax, 3/2006, pp.
132-142
Vogel, K., "The influence of the OECD Commentaries on treaty interpretation", BIFD 12/2000,
pp. 612-616
Ward, D.A., “The interpretation of income tax treaties with particular reference to the
commentaries on the OECD Model”, BIFD 3/2006, pp. 97-102
Waters, M., "The relevance of the OECD Commentaries in the interpretation of tax treaties", in
"Praxis des Internationalen Steuerrechts: Festschrift für Helmut Loukota zum 65. Geburtstag", pp.
671-689
Wattel, P.J., Marres, O. "Characterization of fictitious income under OECD-patterned tax
treaties", ET 3/2003, pp. 66-79
Model Treaties and Treaties
OECD Model Tax Convention on Income and on Capital and Commentaries, 6th Version, July
2005, IBFD Tax Treaties Database
Vienna Convention on the Law of Treaties, 1969, United Nations, Treaty Series, vol. 1155, p.
331-512.
United States Model Income Tax Convention, September 20, 1996, with technical explanation,
IBFD Tax Treaties Database
Australia-UK Income Tax Treaty of 21 August 2003, IBFD Tax Treaty Database.
Austria – Mexico Income And Capital Tax Treaty of 13 April 2004, IBFD Tax Treaty Database.
France-Ukraine Income And Capital Tax Treaty of 31 January 1997, IBFD Tax Treaty Database.
vii
India-Ireland Income Tax Treaty of 6 November 2000, IBFD Tax Treaty Database.
Luxembourg - U.S.A. Income And Capital Tax Treaty of 3 April 1996, and US Technical
Explanations of 19 September 1996, IBFD Tax Treaty Database.
Taiwan-UK Income Tax Treaty of 8 April 2002, IBFD Tax Treaty Database.
OECD and U.N. Documents
"Draft Articles on most-favoured-nation clauses with commentaries" Yearbook of the
International Law Commission, 1978, vol. II, Part Two
Recommendation of the OECD Council concerning Tax Treaty Override adopted by the Council
on 2 October 1989
Recommendation of the OECD Council concerning the Model Tax Convention on Income and on
Capital, adopted by the Council on 23 October 1997
OECD TAG on Treaty Characterization Issues Arising from E-Commerce, adopted by the OECD
on 7 November 2002
The tax treatment of software OECD report , adopted by the OECD on 23 July 1992
Treaty Characterisation Issues Arising from E-Commerce, adopted by the OECD on 7 November
2002
The elimination of double taxation: fourth report of the Fiscal Committee, Organisation for
European Economic Co-operation, 1961
Third report on reservations to treaties, Draft Guideline 1.2, International Law Commission, UN,
1998.
Taxation of New Financial Instruments, Paris, OECD, 1994.
National Case Law and Rulings
Australia
High Court of Australia, FCT vs Sherrit Gordon Mines Ltd, 137 CLR 612, 1977
Canada
The Queen v Farmparts Distributing Ltd, 80 DTC 6157 (FCA)
Tax Court of Canada, Hasbro Canada Inc v the Queen, 96-19,1998
viii
France
Reply Bockel, 4 June 1984 (France-Switzerland tax treaty)
India
Graphite Vicarb, 12 September 1992 (India-France tax treaty)
High Court of Calcutta, CIT vs Hindusthan Paper Corpn Ltd, ITA Nos 257/1986, 1994
Indian Authority for Advance Rulings, India Re Y’s Application, New Delhi, P 30/1999
Indian Central Board of Direct Taxes, Notification No. 11050 [F.No.501/2/83-FTD] dated 30
August 1999
Indian Central Board of Direct Taxes, Notification No. S.O. 54(E) dated 19 January 2001
Income Tax Appellate Tribunal (Mumbai ‘A’ Bench), Hindalco Industries Ltd v Assistant
Commissioner of Income Tax, ITA Nos 3772 and 3774/Mum/1996, 2005
Malaysia
Malaysian Court of Appeals, El Limited v The Director General of Inland Revenue
(Euromedical), (1981) 2 MLJ 208 (at trail); (1983) 2 MLJ 57 (Fed CA)
Netherlands
Hoge Raad, 21 February 2003, case 37.011, IBFD Tax Treaty Case Law Database summary
Portugal
Portuguese Administrative Court, Borealis Polímetros, 2003
ix
STATEMENT OF JURISDICTION
The Republic of Pearonia and the Republic of Appalaria have agreed to submit the present
controversy for final resolution by the International Taxation Court. In accordance with statute of
the Court, the jurisdiction of the International Taxation Court comprises all cases that the parties
refer to it.
x
STATEMENT OF FACTS
This dispute arises out of Appalaria responsibilities over the material breach of the 1995 double
taxation agreement between the Appalaria and Pearonia (Treaty).
The Appalaria and Pearonia Treaty, which entered into force in 1997, generally follows the
OECD Model Tax Convention (OECD Model). The following official statement accompanied
the publishing of the Treaty in Pearonia:
“The treaty contains separate articles applying to royalties and technical service
fees (Arts. 12 and 13, respectively), which allow taxation in the source state of up
to 15% on royalties and 10% on technical service fees. After some discussion it
was agreed to follow the definition of royalties suggested in the OECD Model
Convention and to follow the definition of technical service fees that has been
used in some earlier conventions signed by both countries.”
In 2002, Appalaria issued an administrative guidance, under the form of a circular letter,
interpreting, inter alia, the concept of royalties. According to the preamble of the Circular, such
guidance was aimed at clarifying uncertainties arising from several tax disputes in Appalaria,
concerning the interpretation of the certain types of income subject to the withholding of tax,
namely royalties.
The application of the Circular resulted in additional source taxation in Appalaria and
consequently increased requests for foreign tax credits in Pearonia.
xi
The Treaty includes a most-favoured nation (MFN) clause covering amongst others royalties and
fees for technical services. Accordingly, if Pearonia concludes a more beneficial treaty with
another OECD member the same rate or scope as provided for in that more beneficial treaty shall
also apply under the Treaty. The MFN clause is automatically activated as from the date on
which the relevant Pearonia Convention or Agreement enters into force.
In 2002 Pearonia concluded a treaty with the Tangerine Republic (an OECD member), which
disallows source state taxation of technical service fees, and limits source taxation of royalties to
5 %. This treaty was ratified in 2003 and entered into force on 1 January 2004.
The matter of Securobits, in which the two countries were unable to reach a mutual agreement,
was selected as the test case of this dispute.
CompuTV (company resident in Appalaria) concluded a five-year agreement with Securobits
(company resident in Pearonia) concerning security systems to be incorporated into the sound
systems and televisions manufactured by CompuTV. According to the agreement, Securobits
was required to supply various types of hardware, including hardware and software for a central
control unit designed to collect and analyse customer information. In addition, Securobits was
required to train CompuTV staff in several areas, namely in the installation of the control unit,
security systems and proper use by customers of the systems. Securobits was also required to
assist CompuTV on a five-year marketing campaign in Appalaria and supply CompuTV with
lists of potential customers. Finally, the agreement includes a license of Securobits logo, to be
used in CompuTV products incorporating Securobits technology. The contract provides that
xii
payment for all goods and services supplied to CompuTV in a calendar year is to be paid within
three months of the end of the year.
In March 2004, when CompuTV paid Securobits, tax was withheld at 5% from the payments for
use of the Securobits brand name and logo. Appalarian tax authorities later reassessed CompuTV
and required tax to be at 15% on all the payments except for the payments for the chips, sensors
software and other security apparatus.
Securobits requested Pearonia to initiate a mutual agreement procedure with Appalaria to resolve
the issue of double taxation, but the two tax authorities failed to reach an agreement. Pearonia
submitted a claim against Appalaria in the International Taxation Court to resolve the dispute.
xiii
QUESTIONS PRESENTED
Pearonia requests that the Court to decide:
i) Whether the Circular issued and applied by the tax authorities of Appalaria goes beyond
mere interpretation of the Treaty and amounts to treaty override;
ii) Whether in the matter of Securobits, the correct interpretation of the treaty should determine
that:
- the payments for the lists of potential customers qualify as business profits under the
Treaty;
- the payments for the training (including the troubleshooting support services) qualify
as technical services under the Treaty;
- the payments for assistance with the marketing campaign qualify as technical services
under the Treaty.
ii) Whether Appalaria is acting manifestly in breach of the Treaty by requiring that tax be
withheld from the amounts paid to Securobits at the rate applicable in 2003 and not at the
rate applicable in 2004, under the Treaty as modified from 1 January 2004.
1
PLEADINGS
I. THE APPALARIAN TAX AUTHORITIES CIRCULAR GOES BEYOND MERE
INTERPRETATION OF THE TREATY AND AMOUNTS TO TREATY
OVERRIDE
1. The unjustified broadening of the concept of know-how in the Circular represents tax treaty
override. The concept of know-how has a particular treaty meaning. That meaning includes
“imparting” of knowledge. The Circular extends the concept to include any payment for
information, without mentioning that such information must be imparted. As a result of such
erroneous interpretation, in the matter of Securobits, payments for services arising in
Appalaria were wrongly qualified as royalties, leading to unjustified taxation in Appalaria.
A. The Treaty is to be interpreted in the light of the OECD Commentaries
i) The role of the Commentaries in the interpretation of the Treaty
2. Tax treaties are international agreements entered into between states. The conclusion and
interpretation of such treaties is governed by public international law, particularly by the
Vienna Convention on the Law of Treaties (VCLT).
3. Article 31(1) of the VCLT states that a treaty shall be interpreted in good faith in accordance
with the ordinary meaning given to the terms of the treaty in their context and in the light of
its object and purpose.
2
4. The starting point for the interpretation of a substantive treaty provision should be the
definitions provided in the treaty itself. The term royalty has been explicitly defined in Art.
12 of the Treaty and in a cross-border scenario that definition should prevail over the
definition of ‘royalty’ as appearing in the Appalaria Income Tax Act.
5. The definition of royalties1 includes, within its scope, the term “information concerning
industrial, commercial or scientific experience”. In classifying as royalties payments received
as consideration for “information concerning industrial, commercial or scientific,
experience”, the treaty refers to the commonly known concept of know-how. The Circular
issued by Appalaria reiterates this statement.
6. According to para. 2 of Art. 3 of the Treaty, when applying or interpreting the treaty, any
term not defined2 shall, unless the context otherwise requires, have the meaning that it has
under the law of Appalaria. When a tax treaty does not define a term employed, and the
context of the treaty so requires, it can be given a meaning different from domestic law
meaning thereof.
7. The context in broad sense includes all of the items (interpretative elements) that may be
taken into account in interpreting treaties under Arts. 31 and 32 of the VCLT. Accordingly,
the text of the treaty, the OECD Model and Commentaries, unilaterally published material
(such as the press release issued by Pearonia), jurisprudence dealing with similar issues and
1 Definition originates from the 1961 OEEC Fourth Report.
2 Even a term used in a particular treaty definition.
3
scholars writings should first be used to adequately resolve an interpretative question.3 The
domestic meaning should be placed at the bottom of the interpretation hierarchy.4
8. By interpreting the Treaty according to the said rules, the term “information concerning
industrial, commercial or scientific, experience”, as demonstrated below, has a particular
treaty meaning. Even though such term may have a particular meaning in the internal law of
Appalaria, if that meaning contradicts the one assigned to the term by the context, the
internal law definition should be set aside.5
9. The parts of the Commentaries6 that explain and interpret the term “information concerning
industrial, commercial or scientific, experience” are to be referred in order to establish the
ordinary meaning of treaty term, under Art. 31(1) of the VCLT.7
10. Alternatively it may be considered that the meaning of the term set out in the Commentaries
provides a special meaning, under Art. 31(4) of the VCLT.8 The Commentaries should
therefore be taken into account as evidence that a special meaning exists.9
3 Applying the Vienna context definition to the expression “unless the context otherwise requires” would make no
sense because the Vienna context was not meant to be used in isolation from other factors, see John F. Avery Jones,
et al., The Interpretation of tax treaties with particular reference to Art. 3(2) of the OECD Model, British Tax
Review, p.104. 4 "Federal Income Tax Project – International Aspects of United States Income Taxation II: the Proposals of
American Institute" Philadelphia: The American Law Institute, 1992, pp. 43-46. 5 Prof. Ward et al., refer that if the relevant commentary is unambiguous in the meaning it ascribes to the term, the
authors are of the view that the internal law definition could be ignored and the commentary then would govern the
interpretation of the undefined term. See Ward et al., "The interpretation of income tax treaties with particular
reference to the commentaries on the OECD Model", 2005, p. 121. 6 Paragraphs 11 to 11.6, as updated from time to time. See Annex for the position of the applicant as to the relevance
of later commentaries in the interpretative process. 7 Prof. Vogel in a seminal article on the influence of the OECD Commentaries on treaty interpretation proposes a
step-by-step approach for the use of the Commentaries on tax treaty interpretation. According to Vogel, a term
already used by the Draft Convention of 1963 and explained by its Commentaries, should be considered to have
become in the course of time part of the “international tax language”. In other words, it should be assumed that the
meaning attributed to that term by the Commentaries is its “ordinary meaning” within the meaning of Art. 31(1) of
4
11. It should be recalled that OECD member countries “should follow the Commentaries on the
Articles of the Model Tax Convention, as modified from time to time, when applying and
interpreting the provisions of their bilateral tax conventions that are based on these
Articles”.10
12. In addition to the Commentary, there is clear authority in the form of legislation of several
countries,11
rulings12
and case-law13
demonstrating that the term know-how should be
interpreted within its treaty context and not by recourse to domestic law.
ii) The use of the Commentaries to interpret a treaty concluded with a non-OECD member
the Vienna Convention. See Vogel, “The influence of the OECD Commentaries on treaty interpretation”, 12 BIFD
12/2000, p. 614. 8 Prof. Ault suggested that the parties negotiating a tax treaty, if they adopt a provision that is identical to the OECD
Model, tacitly refer to the views expressed by the Commentaries regarding the meaning of the provision adopted.
Those views could then be considered as a “special meaning” intended by the parties which would be decisive under
Art. 31(4). See Ault, “The Role of the OECD Commentaries in the Interpretation of Tax Treaties”, in Alpert, H.H.
and K. van Raad (eds.), "Essays on International Taxation", 1993, pp. 61, 65. 9 In a recent article, Watters suggested other examples of terms having a “special meaning” used but not defined
under the model, such as “permanent home”, “centre of vital interests”, “beneficial ownership”, “special
relationship”. See Waters, "The relevance of the OECD Commentaries in the interpretation of tax treaties", in
"Praxis des Internationalen Steuerrechts: Festschrift für Helmut Loukota zum 65. Geburtstag", pp. 671-689. 10
Recommendation of the OECD Council concerning the Model Tax Convention on Income and on Capital,
adopted by the Council on 23 October 1997. 11
See, e.g., the reference in Hasbro Canada Inc v the Queen (1998) to the case of Canada where “the Income Tax
Act will be amended to provide that the present non-resident withholding tax on royalties paid by a resident of
Canada to a non-resident shall apply to a somewhat wider range of payments. The proposed amendment will be
based on the definition of royalties suggested by the OECD fiscal committee and used as a model by Canada in
several of its international tax agreements.”(Canada, House of Commons Debates 1968). The definition of royalties
similar to the Model’s definition was adopted in internal law by Australia (1967), the Netherlands (1970) and Italy
(1973). See Avery Jones “The origins of concepts and expressions used in the OECD Model and their adoption by
states”, BIFD 6/2006, pp. 220-254. 12
E.g., ATO Ruling 2660, Income Tax: Definition Of Royalties (Australia). 13
Amongst others: High Court of Australia (1977) 137 CLR 612, Federal Commissioner of Taxation vs Sherrit
Gordon Mines Ltd.
5
13. Paragraph 12 of the Commentaries to Art. 3 refers that “the context is determined in
particular by the intention of the Contracting States when signing the Convention(…)”.
14. The arguments set out above (i.e. relevance of the Commentaries) are applicable in a
situation where one of the parties to the treaty is not a member of the OECD. In the absence
of evidence to the contrary, it is to be presumed that by adopting a provision of the Model the
parties intended that that provision of the treaty negotiated by them should be interpreted on
the same basis as set out in the OECD Commentaries. A statement, issued by Pearonia,
confirming that the parties agreed to follow the definition suggested in the OECD Model,
supports this presumption. 14
In addition, there is authority case law demonstrating the use of
Commentaries to interpret treaty provisions following the OECD Model entered into with
non-OECD members.15
B. Definition of know-how under the Circular is inconsistent with the treaty meaning by
not requiring know-how to be imparted
i) The definition of know-how under the Treaty
15. Having determined the role of the Commentaries in the interpretation of the Treaty, the next
step is to ascertain the treaty meaning of the payment for “information concerning industrial,
commercial or scientific experience”, with the assistance of the Commentaries.
14
In a recent ruling of the Indian Authority for Advance Rulings, in the case of Abdul Razak Menon (276 ITR 306),
reliance was placed on Press Notes accompanying a signing of a tax treaty for the purposes of interpreting a treaty
provision. Such use was apparently supported on the basis of Art. 32 of the VCTL (see point 16).
6
16. The Commentaries include a third-party definition of “know-how” given by Association des
Bureaux pour la Protection de la Propriété Industrielle, according to which know-how is
“undivulged technical information that is necessary for the industrial reproduction of a
product or process, directly and under the same conditions; inasmuch as it is derived from
experience, know-how represents what a manufacturer cannot know from mere examination
of the product and mere knowledge of the progress of technique”.16
17. The Commentaries highlight the essential characteristic of a know-how contract, under which
“one of the parties agrees to impart to the other, so that he can use them for his own account,
his special knowledge and experience which remain unrevealed to the public”.17
The term
“impart” has particular importance as it conveys a meaning equivalent to that of “use of, or
right to use” employed in the first part of the royalty definition of Art. 12(3) of the Treaty.
18. Although interpreting literally, the “use of, or right to use” refers only to the first part of the
definition, the Applicant submits that the term “use of, or right to use” has to be understood
to pertain to the second part of the definition as well, i.e. to “information concerning
industrial, commercial or scientific experience”. This is supported by contextual and dynamic
interpretation of the concept of royalties.
15
In a recent Netherlands Supreme Court decision (Hoge Raad, 21 February 2003, case 37.011, V-N 2003/13.9),
which involved non-OECD countries, the court supported its view by referring to para. 5 of the Commentary to Art.
15 of the OECD Model, which since 1992 explicitly states that the term 183 days refers to physical presence. 16
Para. 11 of the Commentaries to Art. 12. 17
Para. 11.1. of the Commentaries to Art. 12.
7
19. On one hand, the Commentaries, through the “imparting principle”, incorporate the element
of transferability (of the proprietary rights as a whole) or licensing (certain rights to use the
property), which is essential to all intellectual property rights.
20. On the other hand, from the historical point of view, the possible reason for originally not
including “use of, or right to use” in relation to know-how payments could have been the
embryonic stage, at that time, of many intellectual property laws. Since the character of
know-how is also of a less manifest, less exact nature than the other types of intellectual
property, it could have been difficult, at that time, to envisage a right on know-how which
could be transferred or licensed to third parties.18
21. In the Applicant’s view, presently there is no ground to treat payments for know-how
differently from payments for other types of intellectual property rights mentioned in Art.
12(3). Nowadays the concept of know-how acquired a common meaning, it became
recognised and protected under intellectual property laws, in a trend similar to that
concerning software.
22. Know-how can be owned, just as any traditional types of intellectual property and, using the
words of the Circular, the owner nowadays “has a right to legal protection in most of the
countries of the world, including Appalaria”. Although the rights relating to know-how
cannot generally be registered in a public register, this does not affect the status of know-how
as intellectual property. 19
18
The Circular refers to the same when stating “…….[know-how] is often not capable of being encapsulated in such
a way as to make it capable of registration”. 19
As set out in the Commentaries to Art. 12, para. 8.
8
23. This interpretation is confirmed by the language of some recently concluded tax treaties, such
as the Austria-Mexico treaty, which includes the term “use, or right to use” with respect to
payments relating know-how.20
In addition, recent US Technical Explanations also include
the same interpretation.21
ii) The Circular contradicts the Treaty meaning of know-how
24. The Circular deviates from the treaty meaning of “know-how” since it ignores the “imparting
principle”. According to the Circular, a payment for know-how “does not require the
payment to be for ‘the use of, or the right to use’ the intangible property, but only that the
payment is ‘for’ the information”. The Circular does not mention the concept of “imparting”
knowledge. By abandoning an essential element of the know-how concept, the Circular
brings within the scope of Art. 12 of the Treaty items of income, which clearly fall outside of
that article.
25. The effect of the Circular is that the borderline between royalties and other types of income,
inter alia, technical service fees, is blurred. The Circular fails to proper distinguish between
know-how and technical service fees with negative consequences for taxpayers, as the matter
of Securobits demonstrates.
20
Austria – Mexico Income And Capital Tax Treaty (2004). 21
Luxembourg - U.S.A. Income And Capital Tax Treaty (1996), the US Technical Explanations state: “Paragraph 3
defines the term "royalties" as used in the Convention as payments of any kind received as a consideration for the
use of, or the right to use, any copyright (...); or for the use of, or the right to use, information concerning industrial,
commercial, or scientific experience”.
9
26. Know-how agreements envisage the transmission of pre-existing technological information,
which is not part of the public knowledge.22
The provider of know-how imparts such
information to the recipient, so that he can use them for his own account. Independent use by
the recipient inevitably involves that the provider has to disclose or explain the processes,
formulas and context on which the technology is based. In contrast, contracts for technical
services envisage the rendering of services that suppose the application, not the assignment,
of technology in the rendering of a service. Rather than imparting his experience, the service
provider uses it himself in the rendering of the technical services. All that he conveys is a
result of the application of his special knowledge and experience.23
27. In conclusion, the Applicant submits that because the Circular does not reflect that know-
how implies imparting of knowledge while technical services simply imply the application of
such knowledge, the Appalarian tax authorities wrongly re-assessed the tax on payments
made by CompuTV to Securobits.
C. Considerations in the matter of Securobits
28. The appropriate qualification of the payments under the contract between Securobits and
CompuTV should be determined by using a “break down” method.24
22
Para. 11.1 of the Commentaries to Art. 12 states that “It is recognised that the grantor is not required to play any
part himself in the application of the formulas granted to the licensee and that he does not guarantee the result
thereof”. 23
Para. 11.2 of the Commentaries to Art. 12 states that a know-how contract “differs from contracts for the
provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute
work himself for the other party. Payments made under the latter contracts generally fall under Art. 7”. 24
Para. 11.6 of the Commentaries to Art. 12 of the OECD Model. Although the contract at issue maybe categorised
as a mixed contract, it is possible to identify and separate each supply and service and the consideration relating
thereto due to the different methods of calculation agreed upon by the parties for each supply and service under the
10
i) Payment for the training and troubleshooting services provided by Securobits to CompuTV’s
employees
29. The training provided by Securobits to the CompuTV’s staff does not involve any
transmission or imparting of special knowledge relating to the technology on which the
security systems developed by Securobits are based, with the purpose of enabling CompuTV
to reproduce either the central system or the chips and sensors supplied by Securobits.
30. The training merely guides CompuTV employees as to the standard procedures on how to
build up/operate the central system and install the chips in televisions with the use of the
components (hardware, software, chips, sensors) purchased by CompuTV. Such training
provides only guidance as to the application of Securobits’ pre-existing know-how and not
by any way a transmission of that know-how. The contract does not provide for any transfer
of technical documentation, designs or blueprints that substantiate the transmission of know-
how.
31. The fact that more complex technical problems, which cannot be resolved by CompuTV
employees by using standard procedures, are handled by Securobits’ technical staff through
troubleshooting support services, demonstrates that know-how as regards Securobits’
technology is not transferred to CompuTV.
contract. In addition the royalty element (use of the logo) is only of an ancillary and largely unimportant character
(taking into account the whole transaction) and should not, in any way, be viewed as the predominant element.
11
32. It is sometimes recognized as indication that a certain payment falls within royalties if the
amount payable as consideration is dependent on (i) the use to be made of, or the benefit to
be derived from such knowledge or service; or (ii) the sales or profits of a particular good or
service.25
In this case, the training programme is remunerated on the basis of the number of
days and employees present in the training, without any link to the benefits derived or profits
generated by CompuTV from the sales of security systems.
33. Contracts under which no imparting/assignment/transfer of technical information is made to
the recipient cannot be qualified as know-how contracts within the context of the Treaty.
The training provided under the contract between Securobits and CompuTV should therefore
be qualified as technical services under Art. 13 of the Treaty and cannot be taxed by
Appalaria as royalties.
34. The analysis relating to the training services of Securobits also applies to troubleshooting
services. Accordingly, payments for these services have to be taxed as technical service fees
under Art. 13 of the Treaty.
ii) Payment for the customer list
35. The payment by CompuTV to Securobits for the customer list cannot be qualified as
royalties, since Securobits does not impart any knowledge to CompuTV by handing over
such list.
25
This element is sometimes found in domestic laws of OECD member countries, e.g. Canadian law.
12
36. It is commonly accepted that Securobits does not divulge to CompuTV the basis on which
the selection of the customers’ names included in the list are made. The composition of the
customer list by Securobits amounts to applying its own know-how in the course of
providing services to CompuTV. Thereafter, Securobits presents the result of application of
its own know-how to CompuTV.
37. Securobits used for drawing up the customer list its own information and information
supplied by CompuTV about its own customers. The fact that information was assembled
from different databases and later perfected means that Securobits did not transfer any
exclusive information, but simply carried out a selection service.
38. Moreover, the payment for the customer list not only falls short of the treaty meaning of
payment for know-how but also does not meet the “minimalist requirement” of the Circular,
as it cannot even be considered to have been made “for” information.
39. CompuTV does not pay for the information contained in the list in the abstract sense. It only
pays a commission to Securobits on the basis of materialised sales, i.e. after each sale to a
customer whose name appeared on the list, regardless of whether or not CompuTV actually
used the list to make such sale. In a Canadian case, which was decided by reference to the
OECD Model and Commentaries, buying commissions were held to clearly fall outside the
scope of payments for know-how. 26 The same conclusion should apply to selling
commission, such as the one paid by CompuTV to Securobits.
26
Hasbro Canada Inc v the Queen (1998) 1 ITLR 341 (Tax Court of Canada, Montreal). This case deals with the
buying commission paid by a Canadian company to certain related companies in Hong Kong and whether these fall
under the 'information concerning industrial, commercial or scientific experience' in s212(1)(d) of the Canadian
13
40. The payment for the customer list has to be qualified as payment for a service provided by
Securobits to CompuTV and cannot be taxed by Appalaria as royalties. 27 Such payment
does not either fall under Art. 13 of the Treaty, as the supply of a customer list is not a
service of a technical or consultancy nature. The fact that technology may be used in
providing a service is not indicative of whether the service is of a technical nature.28 The
service is also not of an advisory nature. The payment for the customer list should therefore
qualify as business profits of Securobits.
iii) Payments to Securobits for marketing assistance
41. The assistance with the marketing campaign given by Securobits to CompuTV cannot be
qualified as provision of know-how, as the type of information supplied by Securobits falls
out of the scope of the treaty meaning of know-how.
42. Expertise in finding the customers for a product or service, advertising a product or service,
approaching customers, presenting products in an appealing way does not involve any special
knowledge which any market player could not possess on the basis of analysing a certain
market.
Income Tax Act 1988. It was held that they did not. The court used the Commentaries in interpreting the royalties
concept. 27
On payments for customer lists as not royalties see Discussion at 2005 IFA Congress and J. Avery Jones “The
treaty definition of royalties” BIFD 1/2006, pp. 23-28. 28
Specific software might have been used to perfect the customer list. According to the OECD TAG report, “In that
respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge
may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be
14
43. Designing a marketing campaign, even if it is adjusted to the characteristics of a market, can
be done by examining and perceiving the market concerned. Know-how would require a sort
of knowledge that goes beyond the “state of arts”29
and that the receiver cannot know from
mere examination of a process or product.30
44. The assistance with the marketing campaign should therefore be qualified as a service and
cannot be taxed by Appalaria as royalty.
D. The Circular goes beyond mere interpretation of the Treaty, and amounts to treaty
override
45. As outlined above, Appalaria thereby abuses its discretion of developing domestic
terminology for tax purposes by artificially construing a term of a tax treaty with the aim or
the effect of altering the equitable distribution of tax revenue in cross-border scenarios. By
this action, Appalaria fails to perform the tax treaty in good faith.
46. The violation of the Treaty by a unilateral action of Appalaria eroded certainty and security
for taxpayers (as demonstrated in the matter of Securobits) and ultimately poses a question as
to whether the Treaty serves any purpose, if it can be altered at any time and at will by
Appalaria.
a technical fee, however, unless that special skill or knowledge is required when the service is provided to the
customer.” See OECD report on Treaty Characterisation of Electronic Commerce Payments (2002), paras. 39 to 42. 29
See Vogel, K. "On Double Taxation Conventions", 3rd edition, 1996 (Vogel) pp. 794 m.mo. 60. 30
Para. 11 of the Commentaries to Art. 12.
15
47. By signing the Treaty with Pearonia, Appalaria undertook the obligation to respect and apply
the said Treaty provisions. The principle “pacta sunt servanda” codified in Art. 26 of the
VCLT states that “every treaty in force is binding upon the parties to it and must be
performed by them in good faith”. 31
48. The extension of the scope of a term, as demonstrated above, through the use of a Circular is
inconsistent with the Treaty as it brings within the concept of “royalties” items of income
that clearly do not qualify as royalties within the context of the Treaty. According to the
preamble of the circular, the guidance was aimed at “clarifying uncertainties” arising from
royalties. Contrary to this, the Applicant maintains that the circular constitutes treaty override
and not in any way a clarification.32
49. A statement, issued by Pearonia, refers that the parties agreed to follow the definition
suggested in the OECD Model. The press release of Pearonia qualifies under international
law as a unilateral interpretative declaration33
and is a useful tool in interpreting the “context”
of the Treaty34
. Appalaria, having acquiescenced Pearonia position and in the absence of an
objection, is precluded of afterwards contesting a statement to which it apparently consented.
31
The principle of good faith not only puts a limit on the reference to domestic law (for the purpose of the
interpretation and application of a tax treaty) but also prevents Appalaria from eroding or evading its obligations
under the treaty by subsequently amending in its domestic law the scope of terms not defined on the treaty, either by
means of legal definition or otherwise. The principle of permanency of commitments also requires that Appalaria
should not be allowed to make a convention partially inoperative by amending afterwards in its domestic law the
scope of terms not defined in the Convention. See Bruggen, E., "Good faith in the application and interpretation of
double taxation conventions", British Tax Review, 2003, 1, 25-68 citing amongst others O'Connor, "Good Faith in
International Law", Darmouth, 1991. 32
The term “treaty override” refers to a situation of enactment of domestic legislation (including administrative
guidance) intended to have effects in clear contradiction to international treaty obligations. 33
Draft Guideline 1.2, International Law Commission. 34
See supra note 14.
16
50. In addition, in the same year (2002) when the Circular was published, Pearonia signed a
treaty with the Tangerine Republic where it relinquished source taxation on technical
services. The coincidence of dates reinforces the apparent intention of minimising the effects
of the MFN clause by extending the domestic scope of know-how.
51. The Recommendation of the OECD Council concerning Tax Treaty Override35
refers that its
member countries should avoid any legislation, which constitutes a treaty override.
Appalaria, as a member of the OECD, is required to follow such recommendation.36
52. For these reasons, the Circular issued and applied by the tax authorities of Appalaria, going
beyond mere interpretation of the Treaty, amounts to a manifest tax treaty override.
35
Recommendation of the OECD Council concerning Tax Treaty Override adopted by the Council on 2 October
1989. 36
Recommendation of the OECD Council concerning the Model Tax Convention on Income and on Capital,
adopted by the Council on 23 October 1997.
17
II. BY APPLYING THE RATE APPLICABLE IN 2003 TO ITEMS OF INCOME
PAID IN 2004 APPALARIA IMPOSED TAX IN CONTRAVENTION WITH THE
TREATY
53. Appalaria is acting manifestly in breach of the Treaty by applying the 15% withholding tax
rate for payments on royalty and technical services fees made by CompuTV to Securobits in
March 2004. From 1 January 2004, 5% withholding tax applies to royalties and no source
taxation is due on technical services fees under the Treaty. As Arts. 12 and 13 of the Treaty
refer to income "paid", all payments made after 1 January 2004, fall within the scope of
royalties and technical service fees applicable at that date.
A. From 1 January 2004, the Treaty provides for 5% withholding tax on royalties and
for no tax on technical services fees
54. The Treaty initially provided for 15% withholding tax on royalties and 10% withholding tax
on technical service fees.
55. The entry into force of the treaty between Pearonia and an OECD member Tangerine
Republic, providing for a more favourable treatment of royalties and technical service fees,
has activated the MFN clause in Art. 29 of the Treaty.
18
56. The 5% tax on royalties and no source taxation on technical service fees under the Pearonia-
Tangerine Republic treaty apply automatically from the date of entry into force of this treaty,
that is, 1 January 2004.37
B. The right to withhold tax on royalties and technical service fees under Treaty arises
when payment is made
57. Both articles of the Treaty refer to the term "paid" thereby authorising a state to levy tax only
when income is actually paid. The wording and the context of the Treaty exclude income
accrued but not paid from the scope of these articles. This interpretation is supported by the
Commentaries and country practices in framing the wording of tax treaty provisions.
i) Term "paid" must be given a bilateral treaty meaning
58. Under Art. 3(2) of the Treaty, any term not defined in the treaty shall, unless the context
otherwise requires, have a domestic law meaning. The purpose and the context of the Treaty
require the term "paid" to be given a contextual interpretation.
59. First, divergent interpretation of the term by reference to domestic law leads to timing
mismatches, which may eventually lead to double taxation, hence conflicting with the
purpose of a tax treaty to eliminate double taxation. Secondly, significant disparities in an
37
When concluding the Treaty, the intention of the parties was that the MFN clause becomes effective on the entry
into force date of the Pearonia-Tangerine Republic treaty. If the intention would have been different, another
wording would have been included. Under, e.g., the India-Switzerland treaty of 2 November 1994, the MFN clause
does not enter into force until the contracting states enter into further negotiations with regard to the favourable
treatment.
19
interpretation given by Appalaria constitute a breach of principle of reciprocity, on which tax
treaties are based.38
60. Thus, in the context of Treaty the term "paid" has a bilateral treaty meaning and must be
interpreted uniformly by Pearonia and Appalaria.
ii) Interpretation based on ordinary meaning and requires income to be actually paid
61. Following the rules of the VCTL, the term "paid" first of all should be interpreted "in good
faith in accordance with the ordinary meaning to be given to the term[s] of the treaty in
[their] context and in the light of its object and purpose".39
The ordinary meaning of the word
"to pay" in the context of provisions of Arts. 12 and 13 is to "give (someone) money due for
work, goods, or an outstanding debt".40
It is evident that the ordinary meaning does not
comprise income not yet paid.
iii) OECD Commentaries require income to be actually paid
62. The Treaty is based on the OECD Model and hence any interpretation of terms under the
OECD Model and Commentaries can be used to ascertain the meaning of the term.41
38
The principle of reciprocity requires to take into account the meaning given to the term by other Contracting State
and also determines the context of a treaty. This principle is explicitly recognised, e.g., in the OECD Commentary to
Art. 3, see para. 12. 39
Art. 31(1) of the VCLT. 40
Concise Oxford Dictionary, Oxford University Press, New York, 1999, p. 1048. 41
For the use of the Commentaries, see above explanation given on this issue in the first submission, under sub-
heading "A. The Treaty is to be interpreted in the light of the OECD Commentaries".
20
63. The Commentaries explain the term "paid" or "payment", uniformly used in articles 10, 11
and 12 of the OECD Model, as "the fulfilment of the obligation to put funds at the disposal of
the creditor in the manner required by contract or custom".42
According to the Commentaries,
the term "has a very wide meaning".43
However, the wide meaning comprises only the wide
range of methods in which payment may be settled, e.g., by performance in kind or set-off of
mutual obligations.44
The substantive requirement that there must be a fulfilment of
obligation or a shift of a material benefit to the creditor remains inherent to the term “paid”.45
Therefore, income treated as "accrued" under the laws of a state, when a creditor has not yet
received any benefit, is not regarded as income "paid" under Arts. 10, 11 and 12 of the
OECD Model.46
64. It means that Arts. 12 and 13 of the Treaty, incorporating the identical concept of "paid",
require the shift of material benefit to the creditor to trigger the application of withholding
tax on royalties and technical services fees. The Treaty does not allow Appalaria to impose
withholding tax on income when there was not shift of benefit to a creditor resident in
Pearonia.
42
Para. 7 to the OECD Commentary on Art. 10, para. 5 to the OECD Commentary on Art. 11 and para. 8 to the
OECD Commentary on Art. 12. 43
Ibid. 44
Supported by Vogel, "On Double Taxation Conventions: a Commentary to the OECD, UN and US Model
Conventions for the Avoidance of Double Taxation of Income and Capital" (1997), p. 714, m.no. 15. 45
Supported by Wattel, and Marres "Characterization of fictitious income under OECD-patterned tax treaties" 3 ET
(2003), pp. 66-79. 46
Explicitly recognised with respect to interest payments in "Taxation of New Financial Instruments", Paris, OECD,
1994, p. 26: "Article 11 of the [OECD Model] considers only interest paid and to impose a withholding tax yearly
21
iv) Different wording than that used in the Treaty is required to cover accrued income
65. It was the intention of Pearonia and Appalaria to include the term "paid" in Arts. 12 and 13
of the Treaty so that amounts that are accrued but not paid are excluded from the scope of
application of these articles. A state wishing otherwise drafts its treaty provisions in a way
that the term “paid” is not mentioned.
66. For example, the US Model Technical Explanations explicitly recognise that the absence of
term “paid” in the royalty article of the said Model is intended to bring amounts accrued but
not paid within its scope.47
Treaty practice amongst OECD Members illustrates that states
either include or eliminate such terms any in order to achieve taxation at a specific point in
time.48
67. Therefore, by an explicit reference to the term “paid” in Arts. 12 and 13, the parties agreed to
grant taxing rights at the moment when income is actually paid.
on an accruing discount would not seem to be in accordance with the provisions of Article 11 because such discount
is not paid until redemption". 47
Para. 174 of US Model Technical Explanations states: “Unlike the OECD Model, paragraph 1 does not refer to an
amount ‘paid’ to a resident of the other Contracting State. The deletion of this term is intended to eliminate any
inference that an amount must actually be paid to the resident before it is subject to the provisions of Article 12.
Under paragraph 1, an amount that is accrued but not paid also would fall within Article 12”. It must be noted that
the Technical Explanations refer to the 1996 version of the OECD Model when the term was present in Art. 12(1) of
the OECD Model. It was deleted in 1997 to make the beneficial ownership test in Arts. 10-12 of the Model
consistent, but the reference to the term “payment” (instead of “consideration” in the US Model) in Art.12(2)
maintains the requirement of royalty income to be paid. 48
With regard to the term “paid” see, e.g., India-Ireland tax treaty (2000) or Taiwan-UK tax treaty (2002) or France-
Ukraine tax treaty (1997) (all use term "paid" and "payment" in articles of royalties). With regard to the treaties
excluding terms "paid" and "payment" see, e.g., Arts. 11, 12 of Australia-UK tax treaty (2003) (uses terms
"beneficially owned" and "payments or credits").
22
C. Timing issues in the matter of Securobits
68. The contract between Securobits and CompuTV explicitly states that payment for services
provided during a calendar year is to be paid within three months of the end of the year.
69. Securobits rendered the relevant services to CompuTV throughout 2003 and CompuTV paid
on 20 March 2004 accordingly. Under Arts. 12 and 13 of the Treaty, this income is
considered to be paid in 2004. Technical services fees paid in 2004 fall under the business
profits article of the Treaty, as modified as of 1 January 2004.
70. For these reasons, the tax treatment in force in 2004 under the Treaty must be applied to the
amounts remitted to Securobits, hence royalties paid to Securobits must be subject to 5% tax,
and services fees must be taxed only in Pearonia, the residence state of the company.
23
CONCLUSION AND PRAYER FOR RELIEF
For the foregoing reasons in this Memorial, the Applicant respectfully requests that this
honourable Court:
i) DECLARES that Appalaria materially breached the Treaty by issuing administrative
guidance, under the form of a Circular, departing from the definition of royalties agreed
upon between the parties;
ii) DECLARES that in the matter of Securobits:
− the payments for the training (including the troubleshooting support services) qualify
as technical services under the Treaty;
− the payments for the lists of potential customers qualify as business profits under the
Treaty;
− the payments for assistance with the marketing campaign qualify as technical services
under the Treaty.
iii) DECLARES that tax on the amounts paid to Securobits in 2004 is to be withheld at the
rates applicable in 2004.
PEARONIA LEGAL TEAM
Tiago Cassiano Neves, Julija Petkevica
Rita Szudoczky, Anna Berglund and Carlos Perez
1
ANNEX: THE RELEVANCE OF LATER COMMENTARIES IN THE
INTERPRETATIVE PROCESS
A1. The above submissions take into account later commentaries as they provide valuable
guidance in the interpretative of the present dispute. The following corresponds to the
understanding of the Applicant as regards the use of later commentaries in the present
interpretative process.
A2. OECD member countries should follow the Commentaries on the Articles of the Model Tax
Convention, as modified from time to time [emphasis added], when applying and interpreting
the provisions of their bilateral tax conventions that are based on these Articles.1
A3. Since the treaty was concluded in 1995 and up to the current 2005 version of the OECD
Model Convention and Commentary, various new paragraphs to the commentary to Art. 12
were added or replaced. New paragraphs mainly include useful examples designed to
distinguish payments for the supply of know-how and payments for the provision of
services.2
A4. Commentaries made after a treaty is concluded may be considered not be in the same
category as Commentaries in place at the time the treaty was concluded. But that is not to say
that later Commentaries are to be excluded altogether from the interpretation process.
1 Recommendation of the OECD Council concerning the Model Tax Convention on Income and on Capital, adopted
by the Council on 23 October 1997. 2 Such paragraphs were based on the report of the OECD TAG on Treaty Characterization Issues Arising from E-
Commerce, adopted by the OECD on 7 November 2002 and included in the 2003 OECD Model and Commentary.
2
A5. The following are arguments in favour of using later Commentaries when interpreting a
treaty concluded. First, there is no rule that anything that happens after the treaty is
concluded is irrelevant. Secondly, refusing to take later Commentaries into account can result
in such Commentaries being frozen in time and therefore failing to adapt to changes in
business or technology. Thirdly, it is common for national legislation to be interpreted to take
account of later developments3. There is no rule that the same should not apply in
interpreting treaties. Finally, if later Commentaries are not used, the result could be a
different interpretation of identical wording in treaties entered into at different times.
A6. In determining the use of later Commentaries in any particular circumstances, it is important
to differentiate between (substantial) changes that fill gaps in the existing Commentaries or
amplify the existing Commentaries and changes that simply record a treaty practice or clarify
an already existent element.
A7. In the case of Art. 12, the new Commentary simply adds new examples designed to assist
practitioners and judges in how to interpret arguments, which were already there when the
treaty was concluded.4
A8. The new paragraphs inserted in Art. 12 record what some of the OECD Member countries
have been doing in practice in respect of the interpretation and application of the term Know-
3 Both under domestic interpretation rules or through interpretation by reference of Art. 3(2).
4 The OECD TAG (which included representatives business community) considered that that it was useful to
provide greater guidance in the Commentary, on the basis of the above criteria and factors, on the distinction to be
3
how. Several rulings and case-law mentioned in this pleading of OECD member Countries
support this understanding.
A9. In conclusion, later Commentaries (i.e. after 1995) to Art. 12, namely dealing with the
concept of know-how, do not include any significant changes and therefore cannot be said in
any way to amplify the existing Commentaries, fill a gap or reverse prior Commentaries. The
Later Commentaries simply provide useful guidance on how to distinguish in practice
payments of know-how and services and should therefore have a legitimate role in the
interpretative process of the present dispute.
made between payments for the provision of know-how and payments for the provisions of services. Such guidance
was inserted in the treaty without altering the fundamental elements of the meaning of know-how.