Introduction

The controversy relating to the eligibility of tax treaty benefits to fiscally transparent entities has come up before courts around the world.[1] This article recapitulates the evolution of the Organisation for Economic Cooperation and Development (‘OECD’) position, examines relevant case law on the issue and analyses the likely future judicial approach in India.

OECD Model and The MLI on Fiscally Transparent Entities: Tracing the Evolution

In 1999, the OECD released a report on the application of the OECD Model Tax Convention to Partnerships[2]. The Partnership Report analyses the application of the convention to partnerships by providing examples covering various situations[3].

In line with the Partnership Report, para 8.8 of the OECD Model Commentary 2010 to Article 4 provides that where a state disregards a partnership for tax purposes and treats it as fiscally transparent, taxing the partners on their share of income, the firm is not liable to tax and may not, therefore, be considered a resident of that state. In such a case, as the income of the partnership ‘flows through’ to the partners, they may claim benefits of the treaties concluded by the respective states in which they are resident. The result will be achieved even if, under the domestic law of the state of source, the income is attributed to an opaque partnership. However, the OECD left it to the contracting states (who do not agree with the above interpretation) to provide for resultant relief, keeping in mind potential double taxation.