6.3.8.5 More fundamental solution: making the treaty rule the domestic rule

In some countries, the treaty rule becomes the domestic rule: if a treaty permits taxation which does not occur under domestic law, the treaty rule can become the domestic rule for this case. In this view a tax treaty can create taxing rights. Such an approach provides a structural solution for double non-taxation.1 Even though this approach seems in conflict with the basic principles of the relationship between national law and treaty law, the approach applies in certain cases in France and in Australia.2 In the Netherlands, a similar method is followed specifically in respect of the permanent establishment definition. In treaty situations, the permanent establishment definition as included in the relevant tax treaty becomes the definition for national tax law purposes.3

An important objection to this view is that it could be seen as an excessive intrusion into fiscal sovereignty. However, it may be objected that a country is involved in concluding a convention and thus agrees with the rules that are decided upon. Another concern may be that non-residents would be taxed at a higher rate than residents, which could lead to a conflict with EU law.4 Moreover, making the treaty rule the domestic rule would go a step further than the objectives of the OECD MTC require: in non-abusive situations double non-taxation would also be eliminated. Therefore, this approach does not seem desirable viewed from the objectives of the OECD MTC.