3.2.1.1 An overview of the OECD IHTMTC provisions

Double taxation is undoubtedly the most significant problem to have triggered the interest of the international community, with attempts being made to address the situation as early as 1923. In that year, four acknowledged experts in fiscal matters – Professors Bruins, Einaudi, Seligman, and Sir Josiah Stamp – submitted their report entitled “Report on Double Taxation” to the Financial Committee of the Economic and Financial Commission of the League of Nations.1^, 2 In this report, the professors proposed a basis for reconciling the conflicting claims of the jurisdiction of personal nexus and that of the situs property. The report was followed by a second report prepared by the Committee of Technical Experts on Double Taxation and Tax Evasion in 1927. The 1927 report was submitted together with the “Draft Bilateral Convention for the Prevention of Double Taxation in the Special Matter of Succession Duties” to the League’s Financial Committee. In 1928, a general meeting of government experts on double taxation and tax evasion filed its report, with a revised Draft Convention, to the League of Nations. Further draft conventions were prepared at one conference in Mexico City and one in London in 1943 and 1946 respectively.3 All those endeavours preceded the Draft Double Taxation Convention on Estates and Inheritances (“the 1966 OECD IHTMTC”), which was adopted on 28 June 1966 by the Council of the OECD. Three years beforehand, namely on 30 July 1963, this same Council had adopted the 1963 Income Tax Draft for the avoidance of double taxation on income and capital (“the 1963 OECD ICTMTC”).4

The 1963 OECD ICTMTC was subsequently updated in the light of the experience that the OECD’s Council had gained in the meantime and was presented on 11 April 1977 by the successor of the committee, the Committee on Fiscal Affairs. Subsequently, the Committee initiated the revision of the 1966 OECD IHTMTC to consider the current trends on estates, inheritance, and gifts and “[t]o adapt the 1966 Draft, where necessary, to the substance and form of the 1977 Income Tax Model”.5 It follows that the update of the OECD ICTMTC in 1977 triggered the discussions for an update of the OECD IHTMTC. Consequently, one had to assume that each of the concepts expressed in the same words in both the Model Conventions had the same application, wherever appropriate, to the different forms of taxation in question.6 The committee presented the updated version of the OECD IHTMTC in 1982, accompanied by a recast of its Commentary.7

According to the introductory report of the model, the 1982 OECD IHTMTC takes into account the current trends in the OECD Member countries’ attitudes towards the avoidance of double taxation and covers gift taxes. Furthermore, the model deals – to a certain extent – with the double non-taxation issue arising from the application of an inheritance and gift tax treaty or due to differences in domestic law classifications.

The inheritance and gift tax model has arguably contributed to addressing the double taxation problem associated with death and gift taxes and, in particular, taxes levied on inheritances, estates, and gifts. Furthermore, the Commentary of the OECD IHTMTC provides useful guidelines to states wishing to conclude an inheritance and gift tax treaty drafted along the lines of the OECD IHTMTC (“the inheritance and gift tax treaty”). It also permits the states to deviate from the Articles in the model and often suggests alternative language in that regard.

More specifically, the 1982 OECD IHTMTC applies to estates, inheritances, and gifts where the deceased/donor was domiciled at the time of his death in one or both the Contracting States. It also applies to gifts where the donor was domiciled in one or both Contracting States at the time of the gift (Article 1). Under paragraph 13 of the Commentary on Article 1 of the OECD IHTMTC, “[a]lthough the Article contains what could be called the “personal scope” of the Convention, it should be stressed that it does not apply to “persons” but to estates of, or gifts made by, persons domiciled in one or both of the Contracting States.” On the contrary, I note that the OECD ICTMTC applies only to natural and legal persons (and thus not to estates). This is an important difference between the two models that differentiates their “personal scope”.

Article 2(1) of the model stipulates that “[t]his Convention shall apply to taxes on estates and inheritances and on gifts imposed on behalf of a Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied.” Paragraph 2 defines the taxes to which paragraph 1 refers. Furthermore, under Article 3(2) of the model, “[a]s regards the application of the Convention by a Contracting State, any term not defined there shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.”

Article 4(1) of the OECD IHTMTC clarifies the concept of “fiscal domicile” as used in several Articles of the model: “the term ‘person domiciled in a Contracting State’ means any person whose estate or whose gift, under the law of that State is liable to tax there by reason of the domicile, residence or place of management of that person or any other criterion of a similar nature.” It follows that the concept of “fiscal domicile” is broader than that of the common law domicile. Moreover, Article 4(2) of the OECD IHTMTC includes a tiebreaker rule that is very similar to that of the OECD ICTMTC to address cases where both Contracting States consider the deceased or the donor fiscally domiciled in their territory.

The model contains three distributive rules that are based on the economic allegiance theory.8 Under Article 5, the immovable property that is situated in the Contracting State that is not the state of the deceased’s or donor’s fiscal domicile (the “other Contracting State”), may be taxed by that state. The same applies to movable property of a PE or a fixed base that is situated in the other Contracting State (Article 6 of the model). The remainder of the deceased’s or donor’s property may only be taxed by the Contracting State of the deceased’s or donor’s fiscal domicile (“the Contracting State of the fiscal domicile”) at the time of the death/donation (Article 7 of the model). This applies, for example, to the immovable or movable property located in the Contracting State of the fiscal domicile or in a non-Contracting State. The same holds true for movable property located in the other Contracting State that does not pertain to a PE or a fixed base.

The deduction of debts under Article 8 of the OECD IHTMTC follows, in principle, the allocation of taxing rights between the Contracting States, in line with the economic alliance theory.

Articles 9A and 9B of the model refer to the elimination of double taxation by the Contracting State of the fiscal domicile with regard to property which “may be taxed” in the other Contracting State under Articles 5 and 6. Article 9A refers to the exemption method and Article 9B to the credit method.

Article 10 of the OECD IHTMTC contains a non-discrimination provision, which is identical to the nationality non-discrimination provision of the 1977 income and capital tax model.9 Interestingly, although the OECD IHTMTC applies to estates and not to persons, the non-discrimination provision refers to persons. Furthermore, Articles 11 and 12 of the OECD IHTMTC refer, respectively, to the mutual agreement procedure and the exchange of information, both reflecting the language of the corresponding Articles of the 1977 OECD ICTMTC. It is worthy of note that the OECD IHTMTC – like the 1977 OECD ICTMTC – does not contain an Article on the assistance in the recovery of tax claims.

Article 13 of the OECD IHTMTC refers to diplomatic agents and consular officers whose fiscal privileges, under the general rules of international law or other provisions of special agreements, prevail over the relevant inheritance and gift tax treaty.

Article 14 of the OECD IHTMTC refers to the territorial extension of the inheritance and gift tax treaty and Articles 15 and 16 of the OECD IHTMTC pertain to the entry into force and the termination of the tax treaty, respectively. These Articles, again, are similar to the corresponding Articles of the 1977 OECD ICTMTC.

Finally, Lang notes that “[i]n practice, a number of deviations from the [OECD IHTMTC] can be found. Many existing inheritance tax treaties – primarily those concluded before 1982 – are not applicable to gift taxes. Some treaties limit the scope to citizens of one of the two contracting states or tie it to tax liability. However, since a majority of OECD Member countries impose comprehensive tax liability if the deceased or the donor was domiciled in their countries, [Articles] 1 and 2 [of the OECD IHTMTC] were drafted accordingly.”10