IFA Research Paper On TheApplicationOfInternationalTaxTreatiesToSubnationalTaxes

IFA Research Paper: The application of international tax treaties to
subnational taxes
Abstract:
Half of the worlds population live in federal countries or in countries which use similar
divisions of power but are not officially considered to be federal 1. Moreover, local, municipal,
cantonal and other subnational taxes are widely applied by non-federal countries for reasons
to be discussed later in this paper. Thus, this essay researches the questions, whether
subnational taxes are covered by the scope of certain international conventions and what are
the potential problems of applying international treaties to subnational taxes, which deserve
the attention of the IFA and not just for the sake of federal countries, but for the interest of a
wider international tax audience. Although, this paper does not have the objective to discover
what makes a tax subnational, it tries to determine whether international agreements define
subnational taxes or at least provide for guidelines to categorize taxes as such.
After a brief summary of the general aspects of subnational taxation and the constitutional
background of the topic (Chapter 1), Chapter 2 will be dedicated to the OECD MTC on
Income and on Capital to unveil whether it covers subnational taxes, what definition of
subnational taxes it uses and whether it provides relief from double taxation caused by
subnational taxation. In this Chapter, the approach of the OECD MTC to subnational taxes is
compared with the approach applied by the UN and the US MTC and the EU. Additionally,
reference is made to examples of different tax treaties, tax treaty case law and selected
1
Sacchetto, Analysis of Fiscal Federalism from a Comparative Tax Law Perspective in Bizioli/Sacchetto,
Tax Aspects of Fiscal Federalism, A Comparative Analysis, 2011, 9., IBFD.
1
domestic (non-treaty) regulations. In Chapter 3, the imposition and application of subnational
taxes under the OECD Model Double Taxation Convention on Estates and Inheritances and
on Gifts, the Council of Europe/OECD Convention on Mutual Administrative Assistance in
Tax Matters, the OECD (Model) Agreement on Exchange of Information on Tax Matters,
Transport Tax Treaties, and the GATT/WTO trade rules are examined.
Subnational taxation could raise several other questions with respect to sales taxes and VAT,
tax competition and the practical administration of subnational taxes. These considerations,
due to the deliberate focus on the direct tax and legal aspects of the application of
international tax treaties to subnational taxes, are out of the scope of this research paper but
could also be discussed at the 2013 Copenhagen IFA Conference.
Tamas Kulcsar
IFA Research Associate 2011
t.kulcsar@ibfd.org
IBFD
P.O. Box 20237
1000 HE Amsterdam
The Netherlands
Tel. +31-20-554-0307
2
Contents
1. CHAPTER 1: THE IMPORTANCE OF SUBNATIONAL TAXES AND
THEIR PLACE IN THE LEGAL SYSTEM 5.
1.1. The general aspects of subnational taxation 5.
1.2. A brief overview of the constitutional aspects of subnational taxation 6.
2. CHAPTER 2: SUBNATIONAL TAXES AND DOUBLE TAXATION REGARDING

DIRECT TAXES 9.
2.1. Domestic double taxation caused by subnational taxes 9.
2.2. International double taxation caused by subnational taxes 10.
2.3. Alleviation of international double taxation caused by subnational taxes 10.
2.4. Double Tax Conventions and the power to tax 10.
2.5. The application of the OECD MTC to subnational taxes 12.
2.5.1. Paragraph 1 of Article 2 of the OECD MTC: Taxes covered 12.
2.5.2. The OECD Commentary on Paragraph 1 of Article 2 13.
2.5.3. Examples of Taxes covered in different treaties 14.
2.5.4. Imposed on behalf of 15.
2.5.5. Reservations on Paragraph 1 of Article 2 17.
2.5.6. Paragraph 3 of Article 2 of the OECD MTC 17.
2.5.7. Paragraph 4 of Article 2 of the OECD MTC 18.
2.5.8. Articles 23 A and 23 B: The exemption and the credit method 20.
2.5.8.1.The OECD and the UN MTC 20.
2.5.8.2. The US MTC 21.
3
2.5.8.3.Examples in DTCs of the elimination of double taxation caused by
subnational taxes 22.
2.5.8.4. Treaty case law on Article 23 B in relation to subnational taxes 25.
2.5.9. The provisions of Non-discrimination, MAP, Exchange of Information
and Assistance in the Collection of Taxes in relation to subnational taxes 28.
2.5.9.1. Article 24: Non-discrimination 28.
2.5.9.2. Article 25: Mutual Agreement Procedure 29.
2.5.9.3. Article 26: Exchange of Information 30.
2.5.9.4. Article 27: Assistance in the collection of taxes 32.
3. CHAPTER 3: SUBNATIONAL TAXES AND OTHER INTERNATIONAL
TREATIES 32.
3.1. OECD Model Double Taxation Convention on Estates and Inheritances and on Gifts
(1982) 33.
3.1.1. Non-discrimination/Exchange of Information in the Model Double Taxation

Convention on Estates and Inheritances and on Gifts 33.
3.2. Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax

Matters (1988) 34.
3.3. OECD Agreement on Exchange of Information on Tax Matters (2002) 34.
3.3.1. Examples of TIEAs 35.
3.4. Transport Tax Treaties 35.
3.5. Subnational Taxes and the WTO/GATT 36.
4. CHAPTER 4: OVERALL CONCLUSIONS 38.
5. SELECTED BIBLIOGRAPHY 40.
4
1. CHAPTER 1: THE IMPORTANCE OF SUBNATIONAL TAXES AND THEIR
PLACE IN THE LEGAL SYSTEM
1.1.The general aspects of subnational taxation
The following features of subnational taxation have been observed by the OECD and the EU
in the last decades:
1. Countries show significant diversity in the share of subnational governments in the

general government revenue (aggregate tax revenue) and the general government
expenditure2.
2. The application of subnational taxes and the level of the fiscal autonomy of subnational
bodies do not depend on the constitutional background of a country (whether it is a
federal or a unitary country)3.
3. The subnational bodies share in government expenditure has been increasing faster than
their revenues (from own taxes or taxes shared with the central government), which
necessitates higher level of intergovernmental transfers from the central government to
the subnational bodies4.
OECD data from 1985, 2001 and 2005 show that the share of subnational public bodies in
government expenditure varied from 4 - 6 percent (Greece) to 54 - 60 percent (Canada)
whereas the subnational tax revenue (derived from own and shared taxes) ranged between 3 -
3.7 percent (Greece) and 50 percent (Canada) 5.
According to the EUs statistical data, the share of subnational bodies in tax revenue
amounted to around 31 percent in 2009 (ranging from 0.7 percent (Greece) to 35.6 percent
2
OECD, Fiscal Relations Across Levels of Government, OECD Economic Outlook 74, 2003, 144. Also in
European Commission, Taxation Trends in the European Union, 2011, 66.
3 OECD, supra n. 2, at 144. and European Commission, supra n. 2, at 68. Also in Blchliger, Tax Assignment
and Tax Autonomy in OECD Countries in Bosch/Durn, Fiscal Federalism and Political Decentralization,
Lessons from Spain, Germany and Canada, 2008, Edward Elgar Publishing Limited, 56.
4
OECD, supra n. 2, at 144. and Blchliger, supra n. 3, at 56 57.
5
OECD, supra n 2, at 145. and Blchliger, supra n. 3, at 56.
5
(Sweden)6. In countries with more than two levels of government (namely, the countries with
States or regions), a trend towards a higher revenue share for States or regions is visible7.
The EU also provided data on local government tax revenue that indicate differences
depending on whether the model was based on the arithmetic average or the GDP-weighted
average of the share of local government. The first model did not show any trend whereas the
latter model signalled an increase in local revenue, indicating a pick-up in the larger
countries and a decline in the smaller EU Member States 8.
1.2. A brief overview of the constitutional aspects of subnational taxation
Both federal and non-federal countries apply subnational taxes. As regards the first group,
The USA, Brazil, Mexico, Germany, Canada, and Spain are the most well-known examples
of countries with traditionally a federal structure. However, there are several differences even
among these countries. First, the way these countries arrived at their current structure varied
as there are countries where a political decision was made by subnational bodies to grant
power to a central body (for example, the USA) whereas in other places a unitary country
was divided into subnational regions (for example, Belgium, Spain and Italy) 9. Secondly,
countries can be categorized based on what the justification (including the fiscal
considerations) for the introduction of the federal structure was10.
The legal ground on which subnational taxation is based is another differentiating point
among countries (irrespective of whether they are federal or not). Is it the national or regional
constitution, legislation, case law or just simple unwritten customs? In the USA, no fiscal
constitution, namely, explicit set of constitutional rules establishing the fiscal powers of the
national and subnational governments and the relationship between them exist 11 . In
6
European Commission, supra n. 2, at 67.
7
Id.
8
Ibidem 68.
9
Sacchetto, Analysis of Fiscal Federalism from a Comparative Tax Law Perspective in Bizioli/Sacchetto,
Tax Aspects of Fiscal Federalism, A Comparative Analysis, 2011, 11., IBFD. Also in Vanistendael,
Federalism and the Euro Crisis, World Tax Journal, October 2011, 405.
10
Id
11
Hellerstein, The United States in Bizioli/Sacchetto, Tax Aspects of Fiscal Federalism, A Comparative
Analysis, 2011, IBFD, 26.
6
contrast, in Germany Chapter 10 of the German Basic Law (Grundgesetz) contains the
Financial Constitution (Finanzverfassung) which lies down the rules on the power to tax12.
(However, it must be noted that other parts of the Constitution also contain tax relevant
provisions.)
Due emphasis must be given to the fact that the taxing power of a subnational body, its
revenue spending capacity (its capability to spend the revenue it collected or/and the revenue
it received from the central government), and the administrative aspects of subnational
taxation (like tax collection) are different features of the fiscal power of a subnational body
and a subnational body does not necessarily avail all of them. Accordingly, the two most
important competences, namely the revenue spending and the taxing competence, have
usually been separated and according to the statistics the revenue spending capacity has been
allocated to lower level governments to a higher extent than the taxing capacity13. This can be
a result of the increasing allocation of new responsibilities to local bodies or the revocation
and replacement of the inefficient local taxes by national taxes14. As it was said, there is no
relationship between the allocation of these competences to local governments and a
countrys constitutional structure15 thus even in countries which are traditionally regarded as
centralized, revenue sharing can reach high levels. The extent of the shared revenue is usually
set by a formula, often stipulated in the Constitution, determined by the central government
and/or the local public bodies.
The trends to allocate revenue to local bodies and let them avail of taxing power could be the
result of a turn to more democratic, participatory forms of government and the need for
higher accountability of political leaders16 whereas it is held that the expenditure assignment
could bring efficiency by giving the responsibility for spending public money to that
governmental body which represents and is the closest to the beneficiaries of the spending17.
Consequently, certain nationwide public needs (military, international transportation, foreign
12
Englisch/Tappe, The Federal Republic of Germany in Bizioli/Sacchetto, Tax Aspects of Fiscal Federalism,
A Comparative Analysis, 2011, IBFD, 274.
13
Ter-Minassian, Intergovernmental Fiscal Relations in a Macroeconomic Perspective: An Overview in Ter-
Minassian (1997), Fiscal Federalism in Theory and Practice, IMF, 3.
14
Blchliger, supra n. 3, at 56.
15
Id.
16
Ter-Minassian, supra n. 13, at 3.
17
Ibidem 4.
7
affairs) are never assigned to subnational bodies as their importance and wide implication
justify their central management18. Finally, the increasing local revenue makes transfers from
the central government to local bodies redundant19.
As regards the competence to tax, a few principles have been established to be invoked in
assigning taxing power to subnational level. First, all or most of the taxing power could only
be assigned to subnational governments if there is a long-established tradition of close
policy coordination among different governmental levels and homogeneity of economic
conditions among the geographical regions as if these conditions are not met, the central
government may face a weakened redistribution capacity and the loss of taxation as a
macroeconomic management instrument20. The different taxing regimes of the subnational
bodies could also lead to market distortions, inequalities and tax competition between the
different regions. However, as a fully centralized model, where all taxing power is vested in
the central government, is also not an ideal solution, the taxing power is often divided to a
different extent between the central government and the local public bodies. The question
whether the taxing rights should overlap or should be strictly separated is usually answered
depending on three main factors21:
- the mobility of the tax base,
- the distribution of the tax base among the different regions,
- and the stability of the revenue.
According to Ter-Minassian 22 taking into account these factors, enterprises and natural
resources are usually taxed by central governments, whereas individuals, immovable property
and local services are less mobile and can thus be taxed by local bodies. However, local taxes
on individuals could cause migration whereas subnational governments often participate in
the revenue from the taxation of natural resources located in their territory. Foreign trade is
usually taxed by national governments and on the ground of coordination/administration
difficulties VAT is levied at national level. Yet, countries show diversity in terms of the
18
Id.
19
Bahl/Bird, Subnational Taxes in Developing Countries: The Way Forward, 2008, Public Budgeting and
Finance, 3.
20
Ter-Minassian, supra n. 13, at 8.
21
OECD, supra n. 2, at 151.
22
Ter-Minassian, supra n. 13, at 9 - 10.
8
factors determining the structure of their tax system (namely, in certain countries political,
historical or other (like compliance) considerations could be more decisive). For example, in
contrast with the above mentioned logic of levying VAT at national level, Sales Taxes are
imposed at subnational level in the USA23 and partly in Brazil (ICMS)24.
2. CHAPTER 2: SUBNATIONAL TAXES AND DOUBLE TAXATION

REGARDING DIRECT TAXES
Subnational taxes are capable of causing double taxation in many ways. They could be
responsible for double taxation in purely domestic or in international situations.
2.1. Domestic double taxation caused by subnational taxes
First of all, in a domestic situation subnational taxes could introduce a second (or even a third
or fourth) level of taxation under federal taxes. In this scenario, double taxation is caused by
the aggregation of a state and a federal tax. In other words, subnational taxes just duplicate
the tax burden on the same tax base or taxpayer. A taxpayer could have to pay a 20 percent
CIT to the federal budget and an additional 2 percent local tax computed on the same tax base.
As a consequence, the same tax base could bear altogether 22 percent of tax. For example, in
Germany the subnational business tax on income (Gewerbesteuer) takes over the taxable
base computed for corporate income tax purposes and adjusts it by certain add-backs and
deductions25. However, a subnational governmental body could also introduce taxes on a tax
base or taxpayer different from the tax base, taxpayer subject to federal taxes26. In this case,
no double taxation arises as the state and the federal tax are harmonized and aimed at
different taxpayers/tax base.
Secondly, it is easy to ascertain that the interaction of taxes levied by different regional
subnational bodies could also result in double taxation within one state.
23
Rienstra, United States, Value Added Tax sec. 8. - County Surveys IBFD, accessed: 1 December 2011.
24
Tonanni/Wagner, Brasil Value Added Tax sec. 8.1. County Surveys IBFD, accessed: 1 December 2011.
25
Perdelwitz, Germany - Corporate Taxation sec. 2.2., Country Analyses IBFD, accessed: 10 November 2011.
26
See, for example, Italy where provincial and municipal taxes cannot apply on taxable income already subject
to state taxation. Corasaniti et al, Fiscal Federalism in Italy, Tax notes international, Falls Church.,Vol. 55,
2009, 482.
9
2.2. International double taxation caused by subnational taxes
In accordance with the objective of this paper, attention must be paid to cross border
situations, when double taxation is caused by the fact that income derives in a country in
which subnational taxes are levied or derived by a person having his residence in a country in
which subnational taxes are introduced. Yet, it cannot be excluded that both the source and
the residence country introduced subnational taxes in its tax system.
As, according to US courts, double taxation caused by national and subnational governments
is fully accepted by US courts and by international norms of conduct 27 more attention must
be paid to the relief from double taxation caused by subnational taxes than to the reasons for
this phenomenon.
2.3. Alleviation of international double taxation caused by subnational taxes28
The methods to mitigate international double taxation generated by subnational taxes do not
fundamentally differ from the methods used to alleviate international double taxation caused
by national taxes levied by different states. The different solutions can be based on either
unilateral provisions of a national/subnational government or a bilateral agreement between
the two parties. Some countries like the USA and Canada adopted unilaterally rules extending
TC to subnational income taxes 29 . Yet, if unilateral relief is not available Double Tax
Conventions could in certain circumstances represent a solution to the problem.
2.4. Double Tax Conventions and the power to tax
Subnational taxes provide revenue and thus to a certain extent - independence from a
central government. This independence can, on the other hand, be preserved by two means in
27
Pomp/McIntyre, Double Trouble: Double Taxation Aspects of Formulary Apportionment in the International
Context, 1994, NTA Proceedings 236-238, 1. and 5.
28
The discussion on the relief from domestic double taxation caused by subnational taxes falls out of the scope
of this paper.
29
Pomp/McIntyre, supra n. 27, at 3. and 6.
10
relation to Double Tax Conventions. The first one is when subnational bodies and their taxes
are covered by a DTC. In this scenario, local taxes are acknowledged and respected by the
Contracting States. On the other hand, this acknowledgment is not absolute as a State,
depending on its own legal structure, could have the right to abolish local taxes irrespective
of a DTC or not to include the formerly covered local taxes when a DTC is renegotiated.
Furthermore, DTCs could also limit the right of subnational governments to levy their taxes.
The second option is that subnational governments conclude with each other or potentially
with separate States treaties. The reason to give the right to subnational governments to
conclude DTCs lays down in the concept of DTCs, namely to allocate the taxing rights and
give relief from double taxation. It could be the subnational governments responsibility to
decide whether its public expenditures or functions performed indicate the need to preserve
their local taxes or it could give up its taxing right in certain situations.
There are examples of Double Tax Conventions concluded by subnational bodies. One of the
examples is Quebec, which as a province of Canada concluded a few treaties. Quebec signed,
for example, a Social Security30 and an Income and Capital Tax Treaty with France31. The
latter applies between Contracting Parties (and not between States) and - with respect to
Quebec to taxes levied by the Government of Quebec. In a similar vein, Greenland
concluded a treaty with Denmark32 whereas the Government of the United Kingdom has
issued a letter of entrustment to the Government of Anguilla (hereinafter "Anguilla") to
negotiate, and conclude an agreement for the exchange of information with respect to taxes
with the Government of Canada33.
Finally, two methods to eliminate double taxation may be included in Double Tax
Conventions, namely either the exemption or the credit method. Residence countries are
normally obliged34 to grant exemption/give credit for foreign tax if the income is taxed in the
source state in accordance with the provisions of a Convention. Yet, according to some, the
30
France - Quebec Social Security Treaty (2003), Tax Treaties IBFD.
31
France - Quebec Income and Capital Tax Treaty (1987), Tax Treaties IBFD.
32
Denmark- Greenland Income Tax and Mutual Assistance Treaty (1979), Tax Treaties IBFD.
33
Anguilla - Canada Exchange of Information Treaty (2010), Tax Treaties IBFD.
34
On this point, see para 1 of Article 23 B of the OECD Model Tax Convention on Income and on Capital:
...shall allow... as a deduction from , OECD Model Tax Convention on Income and on Capital, 2010, Models
IBFD.
11
foreign tax credit rules are fundamentally not designed to eliminate double taxation caused by
the coexistence of subnational and federal taxes in one State35. In contrast, some also argue
that the fundamental aim of DTCs is to alleviate double taxation irrespective of the reasons
for it. Thus, DTCs are negotiated and put in place to eliminate all types of double taxation
caused by either national or subnational taxes.
As it is shown and will further be revealed, the application of DTCs to subnational taxes is a
complicated issue and it raises many questions, which are only partly answered by the OECD
MTC and the DTCs based on it.
2.5. The application of the OECD MTC to subnational taxes
2.5.1. Paragraph 1 of Article 2 of the OECD MTC: Taxes covered
According to Para 1 of Article 2 of the OECD MTC, taxes levied by political subdivisions
and local authorities are within the scope of the MTC as it says: This Convention shall apply
to taxesimposed on behalf of political subdivisions or local authorities. The paragraph
does neither define political subdivisions nor local authorities. It does not specify what
imposition on behalf of is.
It is also worth taking a look at other Models and at multilateral treaties to determine whether
subnational taxes come within their scope or whether they provide definition of subnational
taxes. Para 1 Article 2 of the UN MTC36 does not differ from the OECD MTC as taxes levied
by political subdivisions or local authorities are covered. Para 3 of Article 2 of the US
MTC37 excludes US state taxes from the scope of the Treaties signed by the USA. However,
as will be discussed, local taxes of the other Contracting Parties are often covered. Article 2
(1) of the draft version of the Netherlands Model38 contains identical provisions to the OECD
MTC. The ASEAN Income Tax Treaty39 clearly refers to taxes imposed by the Contracting
35
Pomp/McIntyre, supra n. 27, at 2.
36
United Nations Income and Capital Model Convention, 2001, Models IBFD.
37
United States Model Income Tax Convention, 2006, Models IBFD.
38
Netherlands Income and Capital Model Convention, 1986, (draft version) in Van Raad, Materials on
International & EU Tax Law Vol 1, 2010/2011, 800 - 820.
39
Intra-ASEAN Model Double Tax Convention on Income, 1987, Models IBFD.
12
States. The Treaties of the Caribbean Community 40 and the Arab Economic Union
Council41 are silent on the level of government imposing a tax. However, the latter covers
taxes on income from certain sources thus it cannot be excluded that subnational taxes are
covered. The former talks about taxes on income, profits or gains and capital gains arising in
a Member State and lists the types of taxes covered in Schedule I. of the Treaty without
mentioning subnational taxes. Subnational taxes are covered by the Nordic Convention.
2.5.2. The OECD Commentary on Paragraph 1 of Article 242
It is stated in Para 1 of the Commentary on Article 2 that It is immaterial on behalf of which

authorities such taxes are imposed; it may be the State itself or its political subdivisions or
local authorities. According to Vogel the convention encompasses taxes as are based on, or
derived from, governmental fiscal sovereignty43. Thus, fees/levies and other duties which
are not the consequences of the governments fiscal power are not covered.
Neither the OECD MTC nor the Commentary defines the notion of political subdivisions or
local authorities. It is not a surprise. As the OECD MTC is a Model, the objective of Article
2 is to widen as much as possible the field of application of the Convention by including,
as far as possible, and in harmony with the domestic laws of the Contracting States, the taxes
imposed by their political subdivisions or local authorities 44. Thus, the Article and its
notions must be interpreted as broadly as it is possible.
The Commentary sets out examples of political subdivisions and local authorities (constituent
States, regions, provinces, Departments, cantons, districts, Arrondissements, Kreise,
municipalities or group of municipalities, etc.). Consequently, it is held by some authors that
the division of the authorities is based on geographical levels45. This is a contradiction. On
40
CARICOM Income Tax Treaty, 1994, Tax Treaties IBFD.
41
Arab Economic Union Council Income and Capital Tax Treaty, 1973, (unofficial translation) Tax Treaties
IBFD.
42
OECD Model Tax Convention on Income and on Capital: Commentary on Article 2, 2010, Models IBFD.
43
Vogel (1990), Klaus Vogel on Double Tax Conventions, Kluwer, 83.
44
Recitals of the OECD Model Tax Convention on Income and on Capital: Commentary on Article 2, 2010,
Models IBFD.
45
Lang, Taxes Covered What is a Tax according to Article 2 of the OECD Model?, Bulletin for
International Taxation (June 2005), 217.
13
one hand, the OECD tries to capture as wide range of taxes as it can, on the other hand, in the
view of these authors the MTC only encompasses taxes that are levied by local governmental
bodies whose division is based on their geographical location. If this reasoning is correct it
could mean that those governmental bodies which are not divided on geographical basis, but
their ambit is differentiated on the basis of other factors, like business activities, economical
sectors or political aspects may not be covered. For example, the taxes of an authority which
levies a special income tax on certain economical sectors like energy, telecom or health care,
irrespective of the residence of the taxpayers within a country could be covered by the notion
of taxes imposed on behalf of a Contracting State. In contrast, if an authority levies taxes
on all companies and economical sectors within a certain geographical area that authority can
constitute a local authority or a political subdivision.
(Again, it must be highlighted that the Commentary only sets out examples of political
subdivisions and local authorities. However, the use of etc in the list could also indicate
that the division of those political subdivisions and local authorities that are not mentioned in
the enumeration would follow the same pattern and a geographical approach.)
As the concepts of political subdivision and local authority are not defined, unless the context
otherwise requires, these concepts could rely on the domestic law of the Contracting States 46.
Again, the intention of a broad coverage by the OECD seems to be clear. If the OECD would
provide for a definition, it would automatically limit the scope of the Article.
2.5.3. Examples of Taxes covered in different treaties
Apart from political subdivisions and local authorities Treaties use words like administrative
subdivisions 47 , administrative-territorial units 48 , Land 49 in their Article 2 to more
explicitly cover the public bodies imposing subnational taxes. There are Treaties in which no
reference is made to taxes imposed by political subdivisions but to local authorities 50 or only
to political subdivisions and not to local authorities 51 . This could mean that the treaty
46
OECD, Model Tax Convention on Income and on Capital Art. 3. Para 2., 2010, Models IBFD.
47
Belgium - San Marino Income Tax Treaty (2005), Tax Treaties IBFD.
48
Azerbaijan - Romania Income and Capital Tax Treaty (2002), Tax Treaties IBFD.
49
Germany - Pakistan Income Tax Treaty (1994), Tax Treaties IBFD.
50
Bangladesh - Thailand Income Tax Treaty (1999), Tax Treaties IBFD.
51
Czech Republic - South Africa Income Tax Treaty (1996), Tax Treaties IBFD.
14
negotiators did not consider important to differentiate local authorities and political
subdivisions. It could be a result of the fact that the OECD does also not pay any attention to
explain the difference between local authorities and political subdivisions.
In a similar vein, the general definition of subnational taxes in Article 2 (1) of the OECD
MTC is often replaced by Treaties. For example, This Convention shall apply to taxes
whether of national or local character52.
The Belgian MTC53 confirms the guiding status of Article 2 as it uses different phrasing to
describe its local public bodies in Article 22 (2) b). Thus, the MTC talks about political
subdivisions or local authorities in Article 2, but municipalities and conurbations are
mentioned in Article 22.
Finally, both the OECD and the academic literature neglect the difference between local
authorities and political subdivisions54 and local authorities or political subdivisions55.
2.5.4. Imposed on behalf of
It is obvious that imposition of a tax is not the same as the manner in which a tax is levied.
Yet, neither the OECD MTC nor its Commentary defines the words imposed and on
behalf of whereas the academic literature only deals with the latter. As a consequence
uncertainty could be experienced.
According to some, the notion of on behalf of could include an economic aspect that the
payments effectively accrue to the person on behalf of whom the tax was levied56. Similarly,
another decisive factor could be whether the proceeds come within the purview of the
sovereign powers of the person on behalf of whom the tax was levied. Consequently, that
person has to have full discretion and control over the spending of the revenues and a
mere role in the assessment/enforcement does not matter 57 . Thus, if these concepts are
correct, the mere legislation of a subnational tax could not be enough to regard a tax as
subnational, there should be an economic link between the subnational body imposing the tax
52
Azerbaijan - Cyprus Income and Capital Tax Treaty (1982), Tax Treaties IBFD.
53
Belgium Income and Capital Model Convention (Belgian Draft) (2007), Models IBFD.
54
Italy - Spain Income Tax Treaty (1977).
55
Italy - Mozambique Income Tax Treaty (1998).
56
Brandstetter (2011), Taxes Covered: A Study of Article 2 of the OECD Model Tax Conventions, 101.,
IBFD.
57
Ibidem 102.
15
and the revenue from the tax including the subnational bodys power to decide about the
spending. However, these approaches seem farfetched as they indicate that if a subnational
body does not have full autonomy over the revenue derived from its tax, but according to the
Constitution or other domestic legislation has to share its revenue with the national
government or with other bodies, its tax is not a subnational tax.
The fact that the OECD MTC on Income and Capital has a vague notion of subnational taxes
becomes even clearer if one compares the concept of subnational taxes in Article 2 with the
notion applied by the EU in its 2011 Taxation Trends in the European Union Report58. In
the Report, the EC structured the different governmental levels as follows:
- central government: its competence extends normally over the whole

economic territory
- state government: exercising some functions of government at a level below
that of central government and above that at local level
- local government: its competence extends only to only a local part of the
economic territory.
The EU acknowledges that this classification and the statistical data provided by its Report
give little clue to the degree of autonomy of the subnational government as such59.
The Paper also states that taxation involves a) setting the tax base, b) defining the rates, c)
collecting the tax and d) attributing the revenues. According to the Report, subnational
governments can be invoked at each stage. Different concepts are differentiated on the
ground of the involvement of the subnational government. In case of own taxes of the
subnational bodies, these bodies are responsible for all four stages of the tax raising process.
Depending on the degree of the involvement of a subnational body, the Paper also
differentiates between joint and shared taxes. In case of the former, a central government
sets the tax base and collects the tax revenue but the tax rate is determined by a subnational
government. In case of the latter, the subnational bodies are entitled for the revenue collected
by the central government but do not participate in the other three aspects. Finally, it is
acknowledged that other modalities may exist.
58
European Commission, supra n. 2, at 66.
59
European Commission, supra n. 2. at 68.
16
In conclusion, the notion of subnational taxes in the Taxation Trends in the European
Union Report is a more elaborated concept which highlights the vagueness of the concept
applied by the OECD MTC. The OECD MTC only recognizes taxes imposed (namely,
legislated, drawn up) by a subnational body as subnational taxes. The EU differentiates four
different competences and admits that these competences can be mixed between the different
governmental levels. However, for the classification among governmental levels the EU
seems to more clearly apply a geographical approach.
2.5.5. Reservations on Paragraph 1 of Article 2
Brazil, Canada, Chile and the USA reserve their position on that part of Paragraph 1 of Art. 2,
which states that the Convention should apply to taxes of political subdivisions or local
authorities. South Africa reserves its position on that part of Paragraph 1 which states that the
Convention should apply to taxes of local authorities. On the other hand, Romania reserves
the right to include taxes imposed on behalf of administrative-territorial units.
2.5.6. Paragraph 3 of Article 2 of the OECD MTC
In the OECD MTC, an indicative list of taxes to which the Treaty shall apply is given.
According to Lang, the taxes mentioned are the ones which exist at the time when the treaty
is signed60. Lang further argues that there is a controversy in the Commentary (Para 6) on
Article 2 as the Commentary regards the list of taxes illustrative but says that in principle...it
will be a complete list of taxes by the Convention61.
Based on the importance of Article 2 (3), it could be inferred that if a subnational tax is not
set out in Article 2 (3), it is intentionally left out62. However, it seems illogical to think that
treaty negotiators know every subnational tax in a federal country and are willing to list them
in Article 2 (3). The Working Party No. 30 of the OECD Fiscal Committee further argued
60
Lang, supra n. 45, at 220.
61
Id.
62
Id.
17
that it is possible that negotiators forgot to include certain taxes63 , especially subnational
taxes, which receive less attention or are lesser known. On the other hand, according to some,
a tax must explicitly be excluded from the scope of a treaty. If there is no explicit exclusion
the scope of a Treaty will encompass the tax if it meets the requirements stipulated in Art. 2
(1-2)64. Some straightforwardly say that it is even unnecessary to list all subnational taxes if
the general description of taxes covered in Article 2(1) includes taxes imposed by political
subdivisions65.
Paragraph 3 of Article 2 of the UN MTC also provides for a non-exhaustive list of taxes to be
covered. The US MTC explicitly names the taxes to be covered but of course, as state taxes
are excluded from the scope of the MTC, only federal taxes are mentioned.
2.5.7. Paragraph 4 of Article 2 of the OECD MTC
The provisions of the OECD MTC (and the identical US and UN MTC) extend the scope of a
treaty to any identical and substantially similar taxes that are imposed after the date of
signature of the Convention. A new tax is said to be similar or identical to taxes described
and/or listed in Article 2 (1-3)66. As a result, a Treaty could also be extended to new taxes
similar or identical to taxes existing in the other Contracting State and listed in Article 2 (3).
Thus, for example if Country A imposes an income tax at the date of signature of the
Convention, a substantially similar tax introduced in Country B after the signature of the
Convention will also be covered by the Convention. However, it could also be argued that
Paras 1 and 2 of Article 2 give the general framework of a Treaty and Paragraph 3 of Article
2 only specifies this general scope. Thus, according to this reasoning, similarity could only be
established in relation to the general definition in Paras 1 and 2 and the illustrative list of
taxes in Para 3 may not pay a significant role in constituting similarity.
As regards similarity, taxes that are factually similar or based on the same or similar
objectives are generally intended to come within the treaty scope under Art. 2 (4) 67 .
63
Id.
64
Ibidem 221.
65
Joosen/Taferner, Getting the (Foreign Tax) Credit One Deserves?, European Taxation, April 2006, 182.
66
67
Brandstetter (2011), supra n. 56, at 60.
18
Similarity cannot be established only by way of the position of a governmental body in the
legal hierarchy of a State. In other words, a local indirect and a local direct tax will not be
similar just because of the fact that both of them are levied by a subnational body.
Yet, as Para 4 does not refer to the position of the public body imposing a tax at all, if Article
2 (1) or (3) covers or lists taxes of political subdivisions, two similar types of taxes will be
regarded as substantially similar in spite of the fact that they are imposed in different
counties by different local governmental bodies.
In addition, a substantially similar tax could either be imposed in addition to or in place

of an existing tax. Therefore, if Article 2 (1) of a Convention follows the OECD MTC, it
seems that it does not matter whether a tax is first levied at the level of a state then
subsequently at the level of a subnational body as it will be covered either as a tax in
addition to or in place of an existing tax if other criteria are met. This conclusion can be
supported by the fact that, as it was said, there is no reference in Para 4 to the level of
government imposing the tax. This practically means that, if for example, a political
subdivision of Country B introduces an income tax formerly levied by the central government
of County A or B at the date of signature of the Convention, the Convention will be
applicable.
A Hungarian case68 concerned a Hungarian company with a PE in Germany. The taxpayer

carried out its business activities solely through its German PE and did not pay local business
tax in Hungary. The taxpayer relied on a non-binding ruling issued by the local governments
notary and interpreted Article 2 of the DTC between Germany and Hungary, concluded in
1977, that it covered the Hungarian local business tax. In the taxpayers view, the Treaty
restrained Hungary to exercise its taxing right (to levy the local business tax). Still, the
taxpayer could not turn for explicit help to Article 2 (1) of the Treaty as the general definition
of taxes covered in that specific treaty did not mention taxes imposed by political
subdivisions and local authorities. It is a focal point as without the general concept of local
taxes in Article 2 (1) only Article 2 (3) or may be Article 23 could provide assistance for
relieving double taxation caused by a local tax. Article 2 (3) enumerated taxes to be covered
including the Hungarian income taxes and the local contribution to communal
68
HU: SC, 4 Sept. 2008, Kfv.I.35.103/2008/4., Tax Treaty Case Law IBFD.
19
development. The latter contribution was abolished in 1989 and, according to the court,
could not be interpreted as an identical or substantially similar tax as its taxable object and
taxable person were different. As regards income taxes, the SC reminded that the Hungarian
local business tax was categorized by the European Court of Justice (C-283/06 and C-312/06)
and the ECJ declared the tax to be a non-turnover tax as it is not passed on the next taxpayer.
However, the local business tax was a tax on production, namely on the supply of products
and not on the income received for the supply. According to this reasoning, the local business
tax could not be regarded as a real income tax. Consequently, the tax was not covered and
had to be paid.
2.5.8. Articles 23 A and 23 B: The exemption and the credit method
2.5.8.1. The OECD and the UN MTC
The two conventional ways of eliminating double taxation by the residence state are to
exempt foreign income (covered by Article 23 A of the OECD MTC) or to give credit for the
foreign tax paid (Para 2 of Article 23 A and Article 23 B of the OECD MTC). As regards the
exemption method, it does not raise questions in relation to subnational taxes as if the
residence country decides to exempt foreign income the fact that the income is taxed in the
source country at subnational level does not make a difference. (Still, it must be borne in
mind that the actual DTCs or domestic law could deviate from the MTC and apply special
provisions on subnational taxes in relation to the exemption method.)
Paragraph 1 of Article 23 B of the OECD MTC sets two conditions to be met for granting a
tax credit. The foreign income may be taxed in the other Contracting State and this taxation
is in accordance with the provisions of the Convention. If these requirements are met, the
residence state could grant either a full or an ordinary tax credit.
Article 23 B does not contain any provisions on subnational taxes. Furthermore, the
Commentary on Article 23 A and 23 B neither explicitly lists subnational taxes as factors to
be responsible for double taxation nor depicts situations in which subnational taxes cause
20
double taxation69. This could be the result of the fact that the OECD MTC allocates taxing
rights and relieves double taxation at the level of States. Moreover, based on the description
of the different instances of economic and juridical double taxation in the Commentary, there
is an overlap between double taxation caused by subnational taxes and double taxation
generated by independent States. Yet, it could be argued that if the OECD felt necessary to
stipulate subnational taxes in Article 2, attention should have been given to them in the
Commentary on Article 23 B as well.
As it was said before, tax relief will only be granted if income is taxed in a source state in
accordance with the provisions of the Convention. When the OECD defines the phrase
taxation in accordance with the provisions of this Convention the organization only focuses
on issues deriving from the classification of income for treaty purposes and from timing
mismatches70. Thus, here again, no explicit guidance is given on subnational taxes.
In conclusion, it is assumed that if income is taxed in the source state at subnational level, in
accordance with a Treaty, credit is given for the subnational taxes.
2.5.8.2.The US MTC
The US MTC regulates the relief from double taxation with respect to subnational taxes in a
clearer way as it is stated that taxes referred to in paragraphs 3 a) and 4 of Article 2 (Taxes
Covered) shall be considered income taxes and credited against US tax. Thus, subnational
taxes can only be credited if they are listed in Article 2 (or implemented subsequently as
identical or substantially similar to the taxes listed therein). For example, in the Germany-
USA Income and Capital Tax Treaty 71 , the German local trade tax (Gewerbesteuer) is
credited against the US tax as it is listed in Article 2 of the Treaty72.
69
Para 3 of the OECD Model Tax Convention on Income and on Capital: Commentary on Articles 23 A and 23
B Concerning the Methods for Elimination of Double Taxation, 2010, Models IBFD.
70
Para 32.1-32.8 of the OECD Model Tax Convention on Income and on Capital: Commentary on Articles 23 A
and 23 B Concerning the Methods for Elimination of Double Taxation, 2010, Models IBFD.
71
Convention between the Federal Republic of Germany and The United States of America for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to
certain Other Taxes, 1989, Tax Treaties IBFD.
72
Para 1 of Article 23 of the Germany-USA Income and Capital Tax Treaty, 1989, Tax Treaties IBFD.
21
2.5.8.3. Examples in DTCs of the elimination of double taxation caused by subnational
taxes
In the Double Tax Convention between Quebec and France a unique solution is applied. The
Treaty73 in general, in spite of the fact that Quebec is a province of Canada, does not cover or
refer to Canada (neither in Article 1 nor in Article 2). There are a few exceptions including
that the term national covers French and Canadian nationals and the term company also
means corporation for Canadian law purposes. However, Canadian national taxes, not
covered by Article 2, are explicitly mentioned in Article 22 Elimination of double taxation.
With respect to France the Treaty generally exempts income from French taxes if it is taxable
in Quebec. However, in case of Directors fees (Article 16) and Artistes and athletes
(Article 17) a French taxpayer who is subject to tax in Quebec can only claim credit against
the payable French tax. Additionally, the Treaty introduces a cap and limits the credit to be
given in France. The limit is the aggregate amount of the credit for the tax paid in Quebec
and the credit for the tax payable to the Government of Canada, which aggregate amount may
not exceed the French tax payable on income from the above mentioned sources.
In a similar vein, with respect to Quebec, double taxation shall be avoided with a deduction
of the French tax from the tax payable in Quebec. However, a limit is also adopted as the
deductible tax first must be set off against the Canadian national tax and only the remaining
part can be credited against the tax payable in Quebec.
This practice means that Article 22 of the Treaty brings into play a tax, the Canadian
national tax which is not even covered by the Treaty to set a limit for the FTC. The Treaty
applies a type of cross crediting and allows the taxpayers resident in Quebec to claim a
credit for a national French tax, against a subnational tax payable in Quebec. Thus, the treaty
has bridged the gap between a subnational and a national tax.
Switzerland applied a different solution under its domestic law. It did not allow this type of
cross crediting and separated the federal and the cantonal/municipal taxes for FTC
73
Areement Between The Government of the French Republic and the Government of Quebec For the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income,
(unofficial translation), Tax Treaties IBFD.
22
purposes 74 . Consequently, as cantonal/municipal taxes represented 2/3 of the overall tax
burden, only 2/3 of foreign tax was credited if an income escaped the Swiss federal taxation.
If, on the other hand, no cantonal/municipal, but only federal taxation arose 1/3 of the foreign
tax was credited. Thus, taxpayers were not able to set off a national tax against a subnational
tax.
The DTC between Belgium and the Netherlands 75 applies another solution to avoid a
limitation to the local taxes for residents earning income in the other state. Its Article 2 (1)
covers taxes imposed by political subdivisions and local authorities. In Article 2 (3) the
Treaty mentions the additional surcharges on the above taxes and prepayments and the
supplementary taxes on the income tax including surcharges levied by municipalities and
local communities. This phrasing means that if no Belgian income tax is levied the
surcharges are not due either76. This is the case when, for example, employment income,
derived by a Dutch national who is resident in Belgium, is taxed in the Netherlands77 and it is
exempted by Belgium 78 . This approach treats Belgian residents differently on the ground
whether their professional income is from the Netherlands or from Belgium. The first group
of people was exempted whereas the latter group was subject to tax. This applies to all taxes,
but was apparently, not considered acceptable for subnational municipal taxes.
In this case The Protocol of the Treaty resolves that matter as its Para 24 says with respect to
Para 1 of Article 23 of the Treaty that For the determination of the additional taxes
established by Belgian municipalities and conurbations, Belgium shall take into account,
74
Hull, The Foreign Tax Credit in Switzerland, Bulletin for International Taxation, March 2002, 125. and
126.
75
Convention Between The Kingdom of Belgium and The Kingdom of The Netherlands for Avoidance of
Double Taxation and The Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital
(unofficial translation), 5 June 2001., Tax Treaties IBFD.
76
Kosters, An Analysis of the New Tax Treaty Between Belgium and the Netherlands, European Taxation,
September 2001, 315.
77
Id.
78
Article 23 (1) a) says Where a resident of Belgium derives income, other than the dividends, interest or
royalties referred to in paragraph 5 of Article 12, or owns items of capital which are taxed in the Netherlands in
accordance with the provisions of this Convention, Belgium shall exempt such income or these items of capital
from taxation but may, in calculating the amount of tax on the remaining income or capital of that resident,
apply the rate of tax which would have been applicable if such income or items of capital had not been
exempted.
23
notwithstanding the provisions of paragraph 1(a) of Article 23, and any other provision of
this Convention, the professional income exempted pursuant to paragraph 1(a) of Article 23.
These additional taxes shall be calculated on the tax which would have been payable in
Belgium if the income in question had been derived from Belgian sources.
The DTC between Belgium and Germany stipulates almost identical provisions to the Dutch-
Belgian Treaty in its Article 2 (3) 1) and Article 23 (2) 1) 79 . A small difference is that
whereas the Treaty with the Netherlands mentions surcharges on the above taxes and
supplementary taxes on the income tax the Treaty with Germany explicitly talks about
municipal surcharge on the individual income tax.
The 2002 Protocol (Article 2) of the German-Belgian Treaty also extends the right of
Belgium to levy municipal taxes on certain income exempted under Article 23 (2) 1) of the
Treaty. However, this Protocol has been only effective since 1 January 2004. The 2002
Protocol amended the so called Final Protocol, whose provisions were integral part of the
Treaty. Yet, the Final Protocol was silent on Belgian local taxes. Thus, on certain income,
derived and taxed in Germany and exempted by Belgium, the surcharges could not be levied
by Belgian municipalities till 2004.
Having regard to the opportunity to not pay municipal taxes the Belgian tax administration
issued a circular on the inclusion of foreign employment income, which is exempt under
certain Treaties, in the tax base of municipal surcharges, if the Treaties allow80. It is a crucial
question whether a Treaty allows Belgium to take into account for municipal tax purposes
and eventually tax the income from sources located in the Treaty partner country if that
income is previously exempted by the provisions of a Treaty. Consequently, Belgium and its
subnational governmental bodies would commit treaty override if Belgian municipal taxes,
surcharges are covered by a Treaty and the Treaty does not authorize Belgium to levy
surcharges on exempted income but Belgium and its subnational bodies would still do so.
However, if certain Treaties do not allow Belgium to follow its practice, Belgium is forced to
79
The Convention Between the Kingdom of Belgium and the Federal Republic of Germany for the Avoidance
of Double Taxation and for the Settlement of Certain Other Questions With Respect to Taxes on Income and
Capital, Including the Business Tax and the Land Taxes, Tax Treaties IBFD.
80
Offermans, Treaties Between Belgium and Germany, the Netherlands, San Marino Employment income
derived from Germany, the Netherlands and San Marino included in tax base for Belgian municipal surcharge
(29 October 2008), News IBFD.
24
differentiate its residents on the basis of the source of their income. Some of those residents
will be subject to municipal taxes whereas others are not.
2.5.8.4.Treaty case law on Article 23 B in relation to subnational taxes
A relevant aspect of Belgiums unique approach is that it apparently causes double taxation.
This fact was revealed both in academic spheres81 and at courts. Regarding the latter, two
cases were decided at the Hoge Raad in 2010 dealing with the treaty between Belgium and
The Netherlands. At the outset, it is worth noticing that the Supreme Court held that double
taxation arose in both cases and was caused by the parallel imposition of the Dutch income
tax and a Belgian municipal surcharge. In the first case 82 , the taxpayer was resident in
Belgium but had a business in the Netherlands. Both countries taxed the income from the
business (the Netherlands by an income tax, Belgium by a municipal tax) and as Belgium
refused granting exemption from municipal taxes the taxpayer turned in vain to the Dutch
authority and counted upon the elimination of double taxation. This is a unique perspective as
the burden to eliminate double taxation traditionally lies on the state of residence 83 . As
Article 23 (2) a-b) of the treaty between Belgium and the Netherlands only requires the
Netherlands to grant credit when it imposes tax on its own residents income taxed by
Belgium, not surprisingly, the Hoge Raad dismissed the taxpayers request, and also stated
that the case does not constitute an incompatible impediment of the freedom of establishment.
In the second case84, whose facts are similar to the first, the Court of Appeals ruled that the
taxpayers claim for double tax relief from the Netherlands is unfounded as the Netherlands
practice is in accordance with the provisions and principles of the OECD MTC and the
internationally accepted norms on attribution of taxing rights. The SC added that the denial of
the relief is not in contrast with the EC Treaty, European Convention of Human Rights and
the International Convention on Political and Civil Rights.
81
On this point see Offermanns, Treaty Between Netherlands and Belgium (1970 and 2001) Maastricht
Seminar provides perspectives (15 Jan. 2009), News IBFD.
82
NL: SC, 5 March 2010, 08/03099, Tax Treaty Case Law IBFD.
83
Para 8 of the OECD Model Tax Convention in Income and on Capital: Commentary on Article 23 A and 23 B
Concerning the Methods for Elimination of Double Taxation, 2010, Models IBFD.
84
25
The issue of addressing subnational taxes in Articles 23 A and 23 B is highlighted by a case
in Luxembourg, where the domestic legislation did not provide for a unilateral relief from
double taxation caused by the municipal business tax (hereinafter: MBT)85. Thus, if a DTC
did not grant credit against MBT or was not applicable, the taxpayer encountered double
taxation. As a consequence, it was an important question whether the Double Tax
Conventions between Luxembourg and other countries covered the MBT or not. The
traditional position of the tax authority was to refuse the FTC against MBT under the DTCs.
In the above-mentioned case, the DTC between Luxembourg and Spain was under scrutiny as
the tax administration, following its practice, refused to grant credit for the Spanish
withholding tax against the MBT86.
The taxpayer, a bank resident in Luxembourg, received interest income from Spain in 199887.
The Treatys wording in Article 24 (1) (b), Luxembourg shall allow as a deduction from the
tax on the income of that resident an amount equal to the tax paid in Spain, was almost
identical to Para 2 of Article 23 A of the OECD MTC88. The taxpayer reasoned that the
foreign withholding tax should not only be creditable against the Luxembourg Corporate
Income Tax but also against the Municipal Business Tax. The tax authorities argued that the
foreign withholding tax was only creditable against Corporate Income Tax. The Court of First
Instance ruled in favour of the taxpayer and broadened the crediting opportunities to MBT.
However, the Court of Appeals reversed the favourable judgement and limited the FTC for
the state level CIT.
Still, it is worth taking a closer look at the case and the arguments of the two parties. The
Luxembourg-Spain Treaty said that Luxembourg shall allow as a deduction from the tax on
the income of that resident an amount equal to the tax paid in Spain. Thus, the wording of
the Treaty could be broadly interpreted as it stipulated tax on the income. Furthermore,
Article 2 of the Treaty covered taxes on income...imposed on behalf of a Contracting State
or of its political subdivisions or local authorities.... Article 2 (3) also listed the municipal
trade (business) tax as a tax to which the Treaty shall apply. As a consequence, it is hard to
85
Joosen/Taferner, supra n. 65, at 178.
86
Id.
87
Lux: Tibunal Administratif (Administrative Court), Case 18793/19298, 11 July 2005, Tax Treaty Case Law
IBFD.
88
26
establish that the MBT was not covered by the expression tax on income. However, the
government claimed that the fact that the treaty does not contain rules regarding the order
according to which the foreign tax must be credited against the various Luxembourg taxes on
the income sufficiently demonstrated that it was not the intention of the parties to allow a
credit against MBT89. It seems that the government deviated in its reasoning from Article 2
and concentrated on the fact that Article 24 1 (b) of the Treaty does not explicitly refer to the
MBT. This point underpins the importance of the fact that Article 23 B should cover the topic
subnational taxes. On this point, it must also be noted that based on the importance of the
question, the treaty negotiators are generally expected to be cautious and refer to taxes they
want to be covered90. Yet, it is indeed Article 2 where this question is generally addressed.
Therefore, one could argue that the treaty negotiators did follow the traditional route set by
the OECD (e.g. cover MBT by Article 2) and cannot be blamed for not referring explicitly to
MBT in Article 24.
However, in this case the Court of Appeals seemed to agree with the government and
penalized the taxpayer for the allegedly vague treaty language of Article 24 of the DTC
between Luxembourg and Spain, and Article 23 of the OECD MTC. The Court of Appeals
stated that the primacy of international law is strictly limited to the matters covered by the
provisions in question91. Thus, the fact that, as it was said, the DTC in Article 24 did not
contain specific rules on the computation of exemption or credit, indicated in the view of the
Court of Appeals, that, in the light of Article 3 (2), the concept of deduction and its limits
must be interpreted according to the Luxembourg domestic law which denies credit against
MBT.
Finally, the Luxembourg government also argued that Article 2 in the Double Tax
Convention only lists the Municipal Business Tax to settle potential problems regarding
certain PE issues92. Thus, the government deliberately tried to limit the scope of Article 2.
This argument can hardly be upheld if one takes a look at the wording, the structure and the
position of Article 2. Moreover, Articles 23 A and 23 B of the OECD MTC in contrast with
Articles 24, 26-27 do not limit or deviate from Article 2. Therefore, it seems a rather unique
89
Id.
90
91
92
Id.
27
argument that without any explicit wording in the Convention - Article 2 of a Treaty is only
applicable to certain situations.
As the paper unveiled, it may be reasonable to address the issue of subnational taxes in
Articles 23 A and 23 B. If this is not done, as it is demonstrated in the case discussed, a turn
to the domestic law is possible in some countries. However, it is argued that a turn to
domestic law as regards credit and exemption computation rules does not mean that limits
can be imposed on the application of a Treaty93.
It is also worth noticing that the France-Luxembourg 94 and the Germany-Luxembourg 95

DTCs explicitly exclude the MBT from the FTC. Thus, no debate over the potential crediting
of foreign tax against MBT can emerge. However, this straightforward exclusion of MBT
from crediting in these two Treaties suggests that explicit exclusion of subnational taxes from
FTC is needed if subnational taxes are covered by Article 2.
2.5.9. The provisions of Non-discrimination, MAP, Exchange of Information and

Assistance in the Collection of Taxes in relation to subnational taxes
2.5.9.1. Article 24: Non-discrimination
In brief, Paragraph 1, 2 and 5 of Article 24 of the OECD MTC prohibit discrimination in

certain circumstances caused by any taxation or any requirement. Paragraph 3 of Article
24 prohibits less favorably levied taxation on PEs whereas Para 4 disallows certain
limitations on deductibility. Paragraph 6 declares that the provisions of the Article,
notwithstanding the provisions of Article 2, shall apply to taxes of every kind and description.
Thus, Article 24 clearly deviates from Article 2 and covers all taxes, even those not
captured by Article 2.
The UN MTC, the US MTC and the Nordic Convention contain similar provisions96.
93
Ibidem 182.
94
See the Editors notes in Lux: Tibunal Administratif (Administrative Court), Case 18793/19298, 11 July
2005, Tax Treaty Case Law IBFD.
95
96
28
Furthermore, the US Model Technical Explanation97 on Article 2 declares that Article 24
(Non-Discrimination) applies with respect to all taxes, including those imposed by state and
local governments.
As subnational taxes are covered by taxes of every kind and description taxpayers can
invoke the provisions of Article 24 if they meet the requirements laid down in the Article.
Therefore, protection is guaranteed even if a taxpayer is taxed in a discriminative manner by
a subnational tax, not per se covered by the scope of the Convention. Not surprisingly, a few
countries have reserved the right to restrict the scope of the Article (mainly to the taxes
covered by the Convention) 98. In conclusion, Article 24 covers taxes of every kind and
description including subnational taxes. However, if a Treaty lacks provisions similar to
Article 24 (6) of the OECD MTC, the scope of the Convention is limited to Article 299. Thus,
in this case, subnational taxes are only covered if the general definition (Para 1 of Article 2)
or the enumeration of taxes (Para 3 of Article 2) covers them.
2.5.9.2. Article 25: Mutual Agreement Procedure
Article 25 of the OECD MTC can be applied if actions of one or both of the Contracting
States result in taxation not in accordance with the provisions of the Convention.
Furthermore, the provisions of MAP can be called upon for elimination of double taxation in
cases not provided for in the Convention100.
The questions to be answered include:
- can the levying of a subnational tax (as an action) result in taxation not in
accordance with the provisions of the Convention?
- do subnational taxes cause double taxation in cases not provided for in the
Convention?
97
Attached to the United States Model Income Tax Convention, 2006, Models IBFD.
98
Paras 85 and 92 (Reservations on the Article) of the OECD Model Tax Convention on Income and on Capital:
Commentary on Article 24 Concerning Non-discrimination, 2010, Models IBFD. See also the Position of Non-
member Countries, Para 10.
99
100
Para 3 of Article 25 of the OECD Model Tax Convention on Income and on Capital, 2010, Models IBFD.
29
Both questions must be answered in the affirmative. The paper previously revealed that the
concept political subdivision is not clearly defined in the MTC. Moreover, the notion of
tax also raises several questions 101 . Additionally, Article 2 often provides for a non-
exhaustive but illustrative enumeration of taxes that could leave room for debate over the
possible application of the Convention to a subnational tax. Thus, taxation not in accordance
with the provisions of the Convention can be an issue.
As regards the second question, it was demonstrated that neither Articles 23 A and 23 B nor
the Commentary on Articles 23 A and 23 B102 deals explicitly with double taxation caused by
subnational taxes. Thus, MAP may offer a solution for this problem.
2.5.9.3. Article 26: Exchange of Information
The scope of the Article has been considerably broadened from 2000103. It is held that Article
26 applies, inter alia, to domestic laws concerning taxes of every kind and description. This
fits in the pattern set previously by Article 24. However, in contrast with Article 24, the
OECD felt important, for an unknown reason, to state explicitly in Article 26 that taxes of
every kind and description can be imposed on behalf of political subdivisions or local
authorities of the Contracting States. Thus, it could be argued that Article 24, which does not
contain these provisions, does not cover subnational taxes. (The Nordic Multilateral Double
Taxation Convention applies the same solution. In spite of the fact that municipal income
taxes are covered by its Article 2, the Nordic Convention does not explicitly mention
subnational taxes in its Non-discrimination Article104.)
101
102
Para 3 of the OECD Model Tax Convention on Income and on Capital: Commentary on Article 23 A and 23
B Concerning the Methods for Elimination of Double Taxation, 2010, Models IBFD.
103
Para 10.1 of the OECD Model Tax Convention on Income and on Capital: Commentary on Article 26
Concerning the Exchange of Information, 2010, Models IBFD.
104
Helminen, Scope and Interpretation of the Nordic Multilateral Double Taxation Convention., Bulletin for
International Taxation, January 2007, 25.
30
Despite the OECD did not refer explicitly in Article 24 to taxes levied by political
subdivisions/local authorities, the Commentary on Article 24 extends the MTC to those
taxes105.
Paragraph 1 of Article 26 also confirms that The exchange of information is not restricted by
Article 1 and 2. Surprisingly, at the moment only Morocco and Thailand reserve the right
not to include these words106.
Furthermore, the provisions of exchange of information also set a limit, namely that the
taxation, which gives rise to the exchange of information, cannot be contrary to the
Convention. This condition is similar to the one in Article 25.
Finally, the fact that information on subnational taxes can be obtained, if they are covered by
Article 2, does not mean that subnational bodies, local authorities or political subdivisions
can get access to the Treaty directly. These public bodies are only able to apply the
Convention if they are regarded as competent authority of a Contracting State. The definition
of competent authority is given in Para 1 f) of Article 3 of the MTC.
Article 26 (Exchange of Information and Administrative Assistance) of the US MTC applies

with respect to all taxes imposed at the national level107. This is a clear difference between
the OECD MTC and the US MTC. The latter restricts the information to be exchanged to
taxes imposed at national level. Article 26 of the US MTC also moves away from Article 24
of the US MTC as the provisions of the Non-discrimination clause do encompass subnational
taxes.
Another solution, often applied in the US Treaties is that Article 1 (Taxes covered) sets the
scope of the different Articles thus no further clarification is needed in those Articles
regarding their scope. For example, in the Korea (Rep.) - United States Income Tax Treaty
105
Para 81 of the OECD Model Tax Convention on Income and on Capital: Commentary on Article 24
Concerning Non-discrimination, 2010, Models IBFD.
106
See Position of Non-member Countries of the OECD Model Tax Convention on Income and on Capital:
Commentary on Article 26 Concerning the Exchange of Information, 2010, Models IBFD.
107
Article 2 of the US Model Technical Explanation attached to the United States Model Income Tax
Convention, 2006, Models IBFD.
31
(1976)108 Article 1 says For the purpose of Article 7 (Non-discrimination), this Convention
shall also apply to taxes of every kind imposed at the National, state, or local level. For the
purpose of Article 28 (Exchange of information), this Convention shall also apply to taxes of
every kind imposed at the National level.
2.5.9.4. Article 27: Assistance in the collection of taxes
Article 27 allows explicitly assistance in respect of the collection of revenue claim from taxes
of every kind and description imposed on behalf of political subdivisions or local authorities.
The Article also says that its application is not restricted by Article 2. However, assistance
can only be given if the taxation (which resulted in the revenue claim) was not contrary to the
Convention. On this point Article 27 departs from Article 26, namely in case of the former,
the imposition of such taxes (which result in the revenue claim) is also limited if contrary to
other instrument to which the Contracting States are parties109. This could mean that if
another Convention limits the imposition of subnational taxes between the parties, no
collection of revenue claim can be carried out, if the revenue claim was generated by
subnational taxation not in accordance with that other Convention.
3. CHAPTER 3: SUBNATIONAL TAXES AND OTHER INTERNATIONAL

TREATIES
This Chapter examines international conventions, other than Double Tax Conventions on
Income and on Capital. In this Chapter we look whether local and subnational taxes are
included and defined in the OECD Model Double Taxation Convention on Estates and
Inheritances and on Gifts, the Council of Europe/OECD Convention on Mutual
Administrative Assistance in Tax Matters, the OECD Agreement on Exchange of Information
on Tax Matters, other TIEAs, Transport Tax Treaties or in the GATT.
108
Convention Between the United States of America and the Republic of Korea for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and the Encouragement of
International Trade and Investment, 1976, Tax Treaties IBFD.
109
Para 2 of Article 27 of the OECD Model Tax Convention on Income and on Capital.
32
3.1. OECD Model Double Taxation Convention on Estates and Inheritances and on
Gifts (1982)110
The OECD MTC on Estates, Inheritances and on Gifts shows a few similarities to the MTC
on Income and on Capital. First, the Commentary on Article 2 of the OECD Model Tax
Convention on Estates, Inheritances and on Gifts says that Article 2 is intended to widen as
much as possible the field of application of the Convention by including as far as possible,
and in harmony with the domestic laws of the Contracting States, the taxes imposed by their
political subdivisions or local authorities. Thus, it covers subnational taxes. Second, it also
does not provide for a definition of political subdivisions and local authorities. Furthermore,
political subdivisions/local authorities are also only illustratively listed in its Commentary.
Finally, the illustration of political subdivisions/local authorities is also based on their
geographical location.
The MTC on Estates, Inheritances and on Gifts does not contain the expression in
particular in Article 2 (3) which could indicate that the enumeration of taxes is not
illustrative. On one hand, this exhaustive listing of taxes goes against the fundamental
concept of widening the scope of the Convention as much as it is possible. On the other hand,
this inconsistency could be reasonable in the light of the fact that the number of taxes
covered by DTCs on Estates, Inheritances and on Gifts is considerably lower than the number
of taxes within the scope of the DTCs on Income and Capital111.
3.1.1. Non-discrimination/Exchange of information in the Model Double Taxation

Convention on Estates and Inheritances and on Gifts
The provisions of Non-discrimination in Article 10 of the OECDs Estates, Inheritances and

Gifts MTC do not deviate from the MTC on Income and Capital. Thus, they apply to taxes
of every kind and description. As regards the Exchange of Information (Article 12),
information can only be exchanged concerning taxes covered by the Convention insofar as
the taxation thereunder is not contrary to the Convention. The latter requirement can be found
in the Income and Capital MTC but the former condition limits the scope of the exchange of
110
OECD Model Double Taxation Convention on Estates and Inheritances and on Gifts, 1982, Models IBFD.
111
33
information. Thus, if Article 2 of a DTC on Estates, Inheritances and on Gifts does not apply
to subnational taxes, no information on those taxes can be shared.
3.2. Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax

Matters (1988)112
The Convention applies the same twofold method as bilateral Double Tax Conventions, thus
it describes the taxes to be covered by the Convention in Article 2 and lists the existing taxes
to which the Convention shall apply in Annex A. Accordingly, the Convention applies to all
forms of compulsory payments to general government (that is to say general government,
political sub-divisions thereof or local authorities...) 113 . The convention follows bilateral
DTCs and does not define political subdivisions or local authorities.
Finally, despite its broad scope, the Convention gives a leeway to the Contracting Parties as
in Article 30 (Reservations) the opportunity is given to limit the scope of the Convention
regarding the type of the taxes and the type of the assistance to be provided. However, the
Convention would be rendered ineffective if the Contracting Parties could restrict its ambit
without any limit. Therefore, the Convention only allows reservations in Article 30 if certain
criteria are met.
3.3. OECD Agreement on Exchange of Information on Tax Matters (2002)114
This Agreement is drawn up to promote international co-operation in tax matters through

exchange of information. The Agreement sets a model for bilateral and for multilateral
agreements as well. Article 3 contains provisions for Taxes covered. According to the
multilateral version, taxes imposed by political sub-divisions or local authorities will only be
covered if they are listed in the instrument of ratification, approval or acceptance.
112
Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters (1988) in Van
Raad, Materials on International & EU Tax Law Vol 1, 2010/2011, 1624-1673.
113
Sub-paragraph 24 of Article 2 of Council of Europe/OECD Convention on Mutual Administrative Assistance
in Tax Matters (1988): Commentary on the Provisions of the Convention in Van Raad, Materials on
International & EU Tax Law Vol 1, 2010/2011, 1640.
114
OECD Agreement on Exchange of Information on Tax Matters (2002) in Van Raad, Materials on
International & EU Tax Law Vol 1, 2010/2011, 1674-1691.
34
As regards the bilateral version, it does not refer expressly to local taxes in Article 3. Taxes to
be covered are enumerated. However, in contrast with the MTC on Income and on Capital the
list is not illustrative (the expression in particular is left out).
According to the Commentary on Article 3, the scope of a bilateral agreement depends on the
parties thus if they wish so, subnational taxes can be covered (Para 9.). Both versions apply
automatically to identical taxes but substantially similar taxes are only covered if the
parties so agree. The scope of a Convention can further be expanded by mutual agreement of
the Contracting Parties in the form of exchange of letters. In conclusion, local taxes will only
be included if the Contracting Parties explicitly agree and stipulate them in the Convention. It
means that the OECD Agreement on Exchange of Information has a limited scope compared
to Article 26 of the OECD MTC which applies to taxes of every kind and description. Still,
as it will be shown in Section 3.3.1. practice will show the actual scope of the TIEAs.
3.3.1. Examples of TIEAs
Most of the TIEAs follow the OECD Agreement on Exchange of Information on Tax Matters
in the sense that they only list the taxes within the scope of the Treaties. However, there are
some which instead of listing the taxes to be covered describe the taxes or apply a general
definition. Thus, for example, the Aruba - Canada Exchange of Information Treaty 115
mentions all taxes imposed or administered by the Parties. The Treaty between Denmark
and Andorra 116 covers taxes of every kind and description imposed in the Contracting
Parties which could include subnational taxes. Finally, there are some which refer to the
domestic law and declare that taxes covered by this Agreement are the existing taxes
imposed by the laws of the Contracting Parties.117
3.4. Transport Tax Treaties
First and foremost, it must be said that there is no international Multilateral Model
Convention for Transport Tax Treaties (Hereinafter: TTT). Thus, these Treaties show huge
diversity regarding their form, their phrasing and the taxes covered. Transport Tax Treaties
115
Aruba - Canada Exchange of Information Treaty, 2011, Tax Treaties IBFD.
116
Andorra - Denmark Exchange of Information Treaty, 2010, Tax Treaties IBFD.
117
See for example, Antigua and Barbuda - France Exchange of Information Treaty, 2010, Tax Treaties IBFD.
35
usually just simply enumerate the taxes within the scope of the Agreements or they exempt
certain income from all taxes otherwise levied by the parties. Consequently, in most of the
cases no interpretative provisions are stipulated relating to the taxes they cover. Yet, there are
some Treaties with definitions and interpretative provisions 118 whereas other treaties refer
back to domestic law119. Additionally, another solution is if the Treaties only refer to the
place of taxation but do not regulate the taxes to be levied 120 . A TTT can also contain
reference to the Double Tax Convention between the parties121. Finally, there are also some
TT Treaties which explicitly extend their scope to political subdivisions 122 or state level
taxes123. In conclusion, without any international harmonization the Transport Tax Treaties
apply different solutions and no generally applicable conclusions can be drawn regarding the
taxes they cover.
3.5. Subnational taxes and the WTO/GATT
Trade law has three relevant and unavoidable keystones from a tax law point of view124.
However, it is questionable whether the provisions of Most-Favoured Nation 125 and the
National Treatment126 or the WTOs state aid regulations (ASCM)127 cover taxes levied at
subnational level.
A closer look at the MFN or the NT principle will reveal that neither Article I. nor Article III.
pays attention to the level of the government imposing a tax. The former talks about customs
duties and charges of any kind whereas the latter mentions internal taxes and other internal
charges and internal charges of any kind. Furthermore, Annex I. of the ASCM specifies
the grouping of direct and indirect taxes but disregards mentioning the level of the imposing
governmental body.
118
See for example, Belgium - Jordan Transport Tax Treaty (1981), Tax Treaties IBFD.
119
United States - Venezuela Transport Tax Treaty (1987), Tax Treaties IBFD.
120
Guernsey - Iceland Transport Tax Treaty (2008), Tax Treaties IBFD. See also Azerbaijan - Netherlands
Transport Tax Treaty (1996), Tax Treaties IBFD.
121
Also in the Azerbaijan - Netherlands Transport Tax Treaty (1996), Tax Treaties IBFD.
122
See for example, Belgium - Iceland Transport Tax Treaty (1970) (terminated), Tax Treaties IBFD.
123
See for example, Bahrain - Singapore Transport Tax Treaty (1993), Tax Treaties IBFD.
124
Rosembuj, Taxes and the World Trade Organization, Intertax Vol 35, Issue 5/6, 2007, 348.
125
WTO, The General Agreement on Tariffs and Trade, 1986., Article I.
126
WTO, The General Agreement on Tariffs and Trade, 1986., Article III.
127
WTO, The Agreement on Subsidies and Countervailing Measures.
36
However, before concluding that the trade rules allow the uncontrolled application of
subnational taxes and neglects their impact on trade, it must be highlighted that Para 12 of
Article XXIV of the GATT imposes the obligation on each contracting party to take such
reasonable measures as may be available to it to ensure observance of the provisions of this
Agreement by the regional and local governments and authorities within its territories.
Annex I. of the GATT (Notes and Supplementary Provisions) qualifies the above mentioned
obligation in its comment on Article III. and explains that the expression reasonable
measures means that contracting parties only have the responsibility to repeal the local
governments actions if the local governments measures are inconsistent with both the letter
and the spirit of the GATT. Furthermore, the WTO does not require any abrupt elimination
of the inconsistent measure if it causes serious administrative and financial difficulties.
Thus, the so-called federal clause 128 in Article XXIV does not seem to put an absolute
burden on the contracting parties to erase their conflicting subnational taxes in all
circumstances. This is the result of the fact that the WTO dropped the idea to adopt a text
which places an unconditional obligation on the contracting parties (namely, full
responsibility for the local governments actions) or a solution where the subnational public
bodies are not distinguished from the central government129. Yet, as it is for the case law to
determine the clear meaning of the legal text and provide for a uniform interpretation, a few
questions on Para 12 of Article XXIV of the GATT have emerged. (For example, who has the
right to decide that a measure taken to ensure the observance of the provisions of the GATT
was reasonable? 130 Additionally, it was interpreted whether the federal clause only
applies to those subnational taxes which the federal government cannot control as they fall
outside its jurisdiction under the states constitution.131)
Finally, it must be said that the GATT does not specify the meaning of regional and local
governments and authorities. Thus, it is also for the WTO case law to establish which bodies
128
GATT, Analytical Index: Guide to GATT Law and Practice, 6 th Edition (1994)., 771.
129
Ibidem 772.
130
Ibidem 775.
131
Ibidem 772. and 774.
37
are covered. For example, it was decided that the Canadian provincial liquor boards are
included132.
4. CHAPTER 4: OVERALL CONCLUSIONS
1. The research paper has examined the legal aspects of the application of international
tax treaties to subnational taxes. As it was acknowledged, no attention was paid to
the practical administration of subnational taxes. Indirect tax issues were also out of
the scope of the research.
2. It has been shown that there may be many reasons for countries to have subnational
taxes. Accordingly, countries show diversity in the reasons for implementing these
taxes and also in the constitutional/economic background of their subnational taxation.
It was, however, also noticed that also non-federal countries have subnational taxes
(Chapter 1).
3. The paper argued that subnational taxation can cause double taxation. For mitigating
cross border double taxation for taxes on income, capital, estates, inheritances and on
gifts tax treaties based on the OECD MTCs can be applied. Yet, their application to
subnational taxes raises several questions. (Chapter 2)
4. The MTC on Income and on Capital does cover subnational taxes but the concept of
subnational taxation in Article 2 seems to be vague. Articles 23 A and 23 B do not
explicitly address the problem of relieving double taxation caused by subnational
taxes, which can also raise uncertainties (Chapter 2).
5. We have noted two important consequences of the vague definition in Article 2. First,
DTCs show diversity in their application to subnational taxes. Second, taxpayers can
be exposed to double taxation (Chapter 2).
6. The paper also shed light on the fact that other types of international treaties use
similar concepts and also do not clarify the meaning of subnational taxation. The
OECD MTC on Estates and Inheritances and on Gifts in contrast with the MTC on
132
Ibidem 777.
38
Income and on Capital requires the explicit enumeration of the taxes to be covered.
The Council of Europe/OECD Convention on Mutual Administrative Assistance in
Tax Matters follows the approach to subnational taxes taken by the OECD MTC on
Income and on Capital whereas the scope of the OECD (Model) Agreement on
Exchange of Information on Tax Matters only covers subnational taxes if those taxes
are listed by the parties. Finally, Transport Tax Treaties are not harmonized at all thus
no conclusions can be drawn regarding the application of TTTs to subnational taxes
(Chapter 3).
7. The WTO rules do not contain specific provisions on subnational taxes. However,
responsibility is placed by Article XXIV of the GATT (the so-called federal clause)
on the national governments to take all reasonable measures to ensure that their
subnational governmental bodies comply with the WTO rules. It was stated that WTO
case law is used to qualify the scope of this obligation (Chapter 3).
39
5. SELECTED BIBLIOGRAPHY
Bahl/Bird, Subnational Taxes in Developing Countries: The Way Forward, 2008, Public
Budgeting and Finance, 1 25.
at:http://www.ifc.org/ifcext/fias.nsf/AttachmentsByTitle/FIAS_Conference_RaisingTaxesThr
oughRegulation_PaperBahlBird/$FILE/SubnationalTaxes_BahlBird.pdf, accessed: Nov. 1,
2011.
Corasaniti et al, Fiscal Federalism in Italy, Tax Notes International, Falls Church., Vol. 55,
2009, 479 - 484.
Cui, Fiscal Federalism in Chinese Taxation, World Tax Journal, October 2011, 455 480.
EC, Taxation Trends in the European Union, 2011., 1-428. at

http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analy
sis/tax_structures/2011/report_2011_en.pdf, accesseed: 1 November, 2011.
Helminen, Scope and Interpretation of the Nordic Multilateral Double Taxation

Convention., Bulletin for International Taxation, 2007, 23-38.
Hull, The Foreign Tax Credit in Switzerland, Bulletin for International Taxation, 2002, 124
- 129.
Joosen/Taferner, Getting the (Foreign Tax) Credit One Deserves?, European Taxation,
2006, 178-183.
Joumard/Kongsrud, Fiscal Relations Across Government Levels, OECD Economic Studies

No. 36, 2003/1, at http://www.pisa.oecd.org/dataoecd/21/34/33638994.pdf, November 15
2011.
Kosters, An Analysis of the New Tax Treaty Between Belgium and the Netherlands,
European Taxation, September 2001, 315 324.
40
Lang, Taxes Covered What is a Tax according to Article 2 of the OECD Model?,
Bulletin for International Taxation, 2005, 216 - 223.
Lexner, Selected Issues in the Denmark U.S. Tax Treaty, Tax Notes International, VOL.
6. Number 8., February 2011, 609 - 629.
OECD, Network on Fiscal Relations Across Levels of Government:

COM/CTPA/ECO/GOV/WP (2009)11: Explaining the Subnational Tax Grants Balance in
OECD Counties, at http://www.oecd.org/dataoecd/2/47/44349057.pdf, accessed: November
15 2011.
OECD, Fiscal Relations Across Levels of Government, 2003, OECD Economic Outlook
74, 143 160. at http://www.oecd.org/dataoecd/58/18/23465547.pdf, accessed: November 15
2011.
Offermans, Treaties Between Belgium and Germany, the Netherlands, San Marino
Employment income derived from Germany, the Netherlands and San Marino included in tax
base for Belgian municipal surcharge (29 October 2008), News IBFD.
Offermanns, Treaty Between Netherlands and Belgium (1970 and 2001) Maastricht
Seminar provides perspectives (15 Jan. 2009), News IBFD.
Perdelwitz, Germany - Corporate Taxation sec. 2.2., Country Analyses IBFD, accessed: 10
November 2011.
Pomp/McIntyre, Double Trouble: Double Taxation Aspects of Formulary Apportionment in

the International Context, 1994, NTA Proceedings 236-238, 1-7.
Rienstra, United States, Value Added Tax sec. 8. - County Surveys IBFD, accessed: 1
December 2011.
Rosembuj, Taxes and the World Trade Organization, Intertax, 2007, 348 365.
41
Tonanni/Wagner, Brasil Value Added Tax sec. 8.1. County Surveys IBFD, accessed: 1
December 2011.
Vanistendael, Federalism and the Euro Crisis, World Tax Journal, October 2011, 400 - 452.
WTO, The General Agreement on Tariffs and Trade, 1986., at

http://www.wto.org/english/docs_e/legal_e/gatt47_e.pdf, accessed: November 15 2011.
Book (contributions)
Blchliger, Tax Assignment and Tax Autonomy in OECD Countries in Bosch/Durn,

Fiscal Federalism and Political Decentralization, Lessons from Spain, Germany and
Canada, 2008, Edward Elgar Publishing Limited., 56 73.
Brandstetter (2011), Taxes Covered, A Study of Article 2 of the OECD Model Tax
Conventions, IBFD.
Englisch/Tappe, The Federal Republic of Germany in Bizioli/Sacchetto, Tax Aspects of

Fiscal Federalism, A Comparative Analysis, 2011, 273 326. IBFD.
GATT (1994), Analytical Index: Guide to GATT Law and Practice, 6th Edition.
Hellerstein, The United States in Bizioli/Sacchetto, Tax Aspects of Fiscal Federalism, A

Comparative Analysis, 2011, 25 76. IBFD.
Sacchetto, Analysis of Fiscal Federalism from a Comparative Tax Law Perspective in

Bizioli/Sacchetto, Tax Aspects of Fiscal Federalism, A Comparative Analysis, 2011, 1
22. IBFD.
Ter-Minassian, Intergovernmental Fiscal Relations in a Macroeconomic Perspective: An

Overview in Ter-Minassian (1997), Fiscal Federalism in Theory and Practice, IMF., 3 -
25.
42
Vogel (1990), Klaus Vogel on Double Tax Conventions, Kluwer.
Model Conventions/Commentaries
Belgium Income and Capital Model Convention (Belgian Draft) (2007), Models IBFD.
Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters

(1988) in Van Raad, Materials on International & EU Tax Law Vol 1, 2010/2011, 1624-1673.
Intra-ASEAN Model Double Tax Convention, 1987, Models IBFD.
Netherlands Income and Capital Model Convention, 1986, (draft version) in Van Raad,
Materials on International & EU Tax Law Vol 1, 2010/2011, 800 - 820.
OECD Agreement on Exchange of Information on Tax Matters (2002) in Van Raad,

Materials on International & EU Tax Law Vol 1, 2010/2011, 1674-1691.
OECD Model Double Taxation Convention on Estates and Inheritances and on Gifts, 1982,
Models IBFD.
OECD Model Tax Convention on Income and on Capital, 2010, Models IBFD.
OECD Model Tax Convention on Income and on Capital: Commentary, 2010, Models IBFD.
United Nations Model Double Taxation Convention, 2001, Models IBFD.
United States Model Income Tax Convention, 2006, Models IBFD.
United States: Technical Explanation of the United States Model Income Tax Convention,
2006, Models IBFD.
43
Double Tax Conventions
Arab Economic Union Council Income and Capital Tax Treaty, 1973, Tax Treaties IBFD.
Azerbaijan - Cyprus Income and Capital Tax Treaty (1982), Tax Treaties IBFD.
Azerbaijan - Romania Income and Capital Tax Treaty (2002), Tax Treaties IBFD.
Bangladesh - Thailand Income Tax Treaty (1999), Tax Treaties IBFD.
Belgium Germany Income and Capital Tax Treaty (1967), (unofficial translation), Tax
Treaties IBFD.
Belgium - Netherlands Income and Capital Tax Treaty (2001), (unofficial translation), Tax
Treaties IBFD.
Belgium - San Marino Income Tax Treaty (2005), Tax Treaties IBFD.
CARICOM Income Tax Treaty, 1994, Tax Treaties IBFD.
Czech Republic - South Africa Income Tax Treaty (1996), Tax Treaties IBFD.
Denmark- Greenland Income Tax and Mutual Assistance Treaty (1979), Tax Treaties IBFD.
France Quebec Income and Capital Tax Treaty, Tax Treaties IBFD (unofficial translation)
(1987).
Germany - Pakistan Income Tax Treaty (1994), Tax Treaties IBFD.
Germany - United States Income and Capital Tax Treaty (1989), Tax Treaties IBFD.
Italy - Spain Income Tax Treaty (1977), Tax Treaties IBFD.
44
Italy - Mozambique Income Tax Treaty (1998), Tax Treaties IBFD.
Transport Tax Treaties
Azerbaijan - Netherlands Transport Tax Treaty (1996), Tax Treaties IBFD.
Bahrain - Singapore Transport Tax Treaty (1993), Tax Treaties IBFD.
Belgium - Iceland Transport Tax Treaty (1970), Tax Treaties IBFD.
Belgium - Jordan Transport Tax Treaty (1981), Tax Treaties IBFD.
Guernsey - Iceland Transport Tax Treaty (2008), Tax Treaties IBFD.
United States - Venezuela Transport Tax Treaty (1987), Tax Treaties IBFD.
Exchange of Information Treaties
Andorra - Denmark Exchange of Information Treaty, 2010, Tax Treaties IBFD.
Anguilla - Canada Exchange of Information Treaty (2010), Tax Treaties IBFD.
Antigua and Barbuda - France Exchange of Information Treaty, 2010, Tax Treaties IBFD.
Aruba - Canada Exchange of Information Treaty, 2010, Tax Treaties IBFD.
Social Security Treaty
Entente En Matiere De Securitie Sociale Entre Le Gouvernement De La Republique

Francaise Et Le Gouvernement Du Quebec, Tax Treaties IBFD.
45
Tax Treaty Case Law
HU: SC, 4 Sept. 2008, Kfv.I.35.103/2008/4., Tax Treaty Case Law IBFD.
Lux: Tibunal Administratif (Administrative Court), Case 18793/19298, 11 July 2005, Tax
Treaty Case Law IBFD.
Tibunal Administratif (Administrative Court), Case 18793/19298, 11 July 2005, Tax Treaty
Case Law IBFD.
46

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IFA Research Paper: The application of international tax treaties to

1. CHAPTER 1: THE IMPORTANCE OF SUBNATIONAL TAXES AND

THEIR PLACE IN THE LEGAL SYSTEM 5.

1.1. The general aspects of subnational taxation 5.

1.2. A brief overview of the constitutional aspects of subnational taxation 6.

2. CHAPTER 2: SUBNATIONAL TAXES AND DOUBLE TAXATION REGARDING

2.1. Domestic double taxation caused by subnational taxes 9.

2.2. International double taxation caused by subnational taxes 10.

2.3. Alleviation of international double taxation caused by subnational taxes 10.

2.4. Double Tax Conventions and the power to tax 10.

2.5. The application of the OECD MTC to subnational taxes 12.

2.5.1. Paragraph 1 of Article 2 of the OECD MTC: Taxes covered 12.

2.5.2. The OECD Commentary on Paragraph 1 of Article 2 13.

2.5.3. Examples of Taxes covered in different treaties 14.

2.5.4. Imposed on behalf of 15.

2.5.5. Reservations on Paragraph 1 of Article 2 17.

2.5.6. Paragraph 3 of Article 2 of the OECD MTC 17.

2.5.7. Paragraph 4 of Article 2 of the OECD MTC 18.

2.5.8.1.The OECD and the UN MTC 20.

2.5.8.2. The US MTC 21.

2.5.8.4. Treaty case law on Article 23 B in relation to subnational taxes 25.

2.5.9. The provisions of Non-discrimination, MAP, Exchange of Information

and Assistance in the Collection of Taxes in relation to subnational taxes 28.

2.5.9.1. Article 24: Non-discrimination 28.

2.5.9.2. Article 25: Mutual Agreement Procedure 29.

2.5.9.3. Article 26: Exchange of Information 30.

2.5.9.4. Article 27: Assistance in the collection of taxes 32.

3. CHAPTER 3: SUBNATIONAL TAXES AND OTHER INTERNATIONAL

3.1.1. Non-discrimination/Exchange of Information in the Model Double Taxation

3.2. Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax

3.3. OECD Agreement on Exchange of Information on Tax Matters (2002) 34.

3.3.1. Examples of TIEAs 35.

3.4. Transport Tax Treaties 35.

3.5. Subnational Taxes and the WTO/GATT 36.

4. CHAPTER 4: OVERALL CONCLUSIONS 38.

5. SELECTED BIBLIOGRAPHY 40.

1.1.The general aspects of subnational taxation

1. Countries show significant diversity in the share of subnational governments in the

1.2. A brief overview of the constitutional aspects of subnational taxation

2. CHAPTER 2: SUBNATIONAL TAXES AND DOUBLE TAXATION

2.1. Domestic double taxation caused by subnational taxes

2.3. Alleviation of international double taxation caused by subnational taxes28

2.4. Double Tax Conventions and the power to tax

2.5. The application of the OECD MTC to subnational taxes

2.5.1. Paragraph 1 of Article 2 of the OECD MTC: Taxes covered

2.5.2. The OECD Commentary on Paragraph 1 of Article 242

It is stated in Para 1 of the Commentary on Article 2 that It is immaterial on behalf of which

2.5.3. Examples of Taxes covered in different treaties

2.5.4. Imposed on behalf of

- central government: its competence extends normally over the whole

2.5.5. Reservations on Paragraph 1 of Article 2

2.5.6. Paragraph 3 of Article 2 of the OECD MTC

2.5.7. Paragraph 4 of Article 2 of the OECD MTC

In addition, a substantially similar tax could either be imposed in addition to or in place

A Hungarian case68 concerned a Hungarian company with a PE in Germany. The taxpayer

2.5.8. Articles 23 A and 23 B: The exemption and the credit method

2.5.8.1. The OECD and the UN MTC

2.5.8.4.Treaty case law on Article 23 B in relation to subnational taxes

It is also worth noticing that the France-Luxembourg 94 and the Germany-Luxembourg 95

2.5.9. The provisions of Non-discrimination, MAP, Exchange of Information and

2.5.9.1. Article 24: Non-discrimination

In brief, Paragraph 1, 2 and 5 of Article 24 of the OECD MTC prohibit discrimination in

2.5.9.2. Article 25: Mutual Agreement Procedure