2006 IBFD TAX DAY

INTERNATIONAL TAXATION COURT

AMSTERDAM

NETHERLANDS

IN THE CASE CONCERNING SECUROBITS

THE REPUBLIC OF PEARONIA

APPLICANT

v.

THE REPUBLIC OF APPALARIA

RESPONDENT

2006

MEMORIAL FOR THE APPLICANT

ii

TABLE OF CONTENTS

Table of Abbreviations iv

Index of Authorities v

Statement of Jurisdiction ix

Statement of Facts x

Questions Presented xiii

Pleadings

I. THE APPALARIAN TAX AUTHORITIES CIRCULAR GOES BEYOND MERE

INTERPRETATION OF THE TREATY AND AMOUNTS TO TREATY OVERRIDE 1

A. The Treaty is to be interpreted in the light of the OECD Commentaries 1

i) The role of the Commentaries in the interpretation of the Treaty 1

ii) The use of the Commentaries to interpret a treaty concluded with

a non-OECD member 4

B. Definition of know-how under the Circular is inconsistent with the treaty

meaning by not requiring know-how to be imparted 5

i) The definition of know-how under the Treaty 5

ii) The Circular contradicts the Treaty meaning of know-how 8

C. Considerations in the matter of Securobits 9

i) Payment for the training and troubleshooting services provided by Securobits to

CompuTV’s employees 9

ii) Payment for the customer list 11

iii) Payments to Securobits for marketing assistance 13

D. The Circular goes beyond mere interpretation of the Treaty, and amounts

to treaty override 14

II. BY APPLYING THE RATE APPLICABLE IN 2003 TO ITEMS OF INCOME PAID IN

2004 APPALARIA IMPOSED TAX IN CONTRAVENTION WITH THE TREATY 17

A. From 1 January 2004, the Treaty provides for 5% withholding tax on

royalties and for no tax on technical services fees 17

B. The right to withhold tax on royalties and technical service fees under

Treaty arises when payment is made 18

i) Term "paid" must be given a bilateral treaty meaning 18

ii) Interpretation based on ordinary meaning and requires income to be actually paid 19

iii

iii) OECD Commentaries require income to be actually paid 19

iv) Different wording than that used in the Treaty is required to cover accrued income 21

C. Timing issues in the matter of Securobits 22

Conclusion and prayer for relief 23

Annex 37

iv

TABLE OF ABBREVIATIONS

AITA Appalarian Income Tax Act of 1997

Art. article

ATO Australian Tax Office

BIFD Bulletin for International Fiscal Documentation

Circular Cicular Letter of 2002 issued by the Appalarian Tax

Authorities explaining the application of certain provisions of

AITA on withholding of taxes to certain types of income

Commentaries

OECD Commentaries on the Articles of the Model Tax

Convention

ET European Taxation

IBFD International Bureau of Fiscal Documentation

IFA International Fiscal Association

m. no. marginal number

MFN most favoured nation

OECD Organization for Economic Cooperation and Development

OECD Model OECD Model Tax Convention on Income and on Capital

para. paragraph

Sec. Section

TAG Taxation Advisory Group

US Model U.S.A. Model Income Tax Treaty (1996)

VCLT Vienna Convention on the Law of Treaties 1969

Treaty Convention between Pearonia and Appalaria with Respect to

Taxes on Income and on Capital of 1995

v

INDEX OF AUTHORITIES

Books, treatises

American Law Institute, "Federal Income Tax Project – International Aspects of United States

Income Taxation II: proposals of the American Law Institute", 1992

Engelen, F.A., “Interpretation of tax treaties under international law”, IBFD, 2004

Oxford University Press, Concise Oxford Dictionary, 1999

Philip Baker, "Double Taxation Conventions and International Tax Law", Looseleaf, 2006

Raad, C. van, "Materials on international and EC tax law", International Tax Center Leiden, 2005

Toit, C.P. du, "Beneficial ownership of royalties in bilateral tax treaties", IBFD Publications,

1999

Vogel, K., "On Double Taxation Conventions: a Commentary to the OECD, UN and US Model

Conventions for the Avoidance of Double Taxation of Income and Capital",1997

Ward, D.A.et al, “The interpretation of income tax treaties with particular reference to the

commentaries on the OECD Model”, IBFD, 2005

Articles

Ault, H.G., “The Role of the OECD Commentaries in the Interpretation of Tax Treaties”, in

Alpert, H.H. and K. van Raad (eds.), "Essays on International Taxation", 1993, pp. 61-68

Avery Jones, J.F., et al, “The origins of concepts and expressions used in the OECD Model and

their adoption by states”, BIFD 5/2006, pp. 220-254

Avery Jones, J.F., Bobbett, C., “The treaty definition of royalties”, BIFD 1/2006, pp. 23-28

Avery Jones, J.F., “The Effect of Changes in the OECD Commentaries after a Treaty is

Concluded” BIFD, 1/2002, pp. 102

Bruggen, E., "Good faith in the application and interpretation of double taxation conventions",

British Tax Review, 2003, 1, 25-68

Bruggen, E., "Source taxation of consideration for technical services and know-how with

particular reference to the treaty policy of China, India and Thailand", Asia-Pacific Bulletin,

3/2001, pp. 42- 60

Evans, K., “Treaty treatment of technical assistance, management and administrative fees in

Malaysia”, CCH Journal 1/1990, pp. 11-16, pp. 37-43

García Heredia,”Who knows the riddle of know-how? Spain becomes entangled in the web of

vi

intangibles”, ET, 3/2005, pp. 103-112

Hofbauer, I. "Most-favoured-nation clauses in double taxation conventions - a worldwide

overview", Intertax 10/2005, pp. 445-453

Hughes, D., "Withholding taxes and the most favoured nation clause", BIFD, 3/1997, pp. 126-

130

Mehta, N. "The effect of the MFN clause in the Indian treaties on royalties and fees for technical

services payments" Asia-Pacific tax bulletin, 3/2002, pp. 54-71

Oliver, J.D.B. et al., "Beneficial ownership", BIFD 7/2000, pp. 310-325

Sonntag, K., "The tax treatment of engineering in international large- project contracting",

Intertax, 1/1997, pp. 9-12

Tenore, M., "Timing issues related to changes in treaty residence or source", Intertax, 3/2006, pp.

132-142

Vogel, K., "The influence of the OECD Commentaries on treaty interpretation", BIFD 12/2000,

pp. 612-616

Ward, D.A., “The interpretation of income tax treaties with particular reference to the

commentaries on the OECD Model”, BIFD 3/2006, pp. 97-102

Waters, M., "The relevance of the OECD Commentaries in the interpretation of tax treaties", in

"Praxis des Internationalen Steuerrechts: Festschrift für Helmut Loukota zum 65. Geburtstag", pp.

671-689

Wattel, P.J., Marres, O. "Characterization of fictitious income under OECD-patterned tax

treaties", ET 3/2003, pp. 66-79

Model Treaties and Treaties

OECD Model Tax Convention on Income and on Capital and Commentaries, 6th Version, July

2005, IBFD Tax Treaties Database

Vienna Convention on the Law of Treaties, 1969, United Nations, Treaty Series, vol. 1155, p.

331-512.

United States Model Income Tax Convention, September 20, 1996, with technical explanation,

IBFD Tax Treaties Database

Australia-UK Income Tax Treaty of 21 August 2003, IBFD Tax Treaty Database.

Austria – Mexico Income And Capital Tax Treaty of 13 April 2004, IBFD Tax Treaty Database.

France-Ukraine Income And Capital Tax Treaty of 31 January 1997, IBFD Tax Treaty Database.

vii

India-Ireland Income Tax Treaty of 6 November 2000, IBFD Tax Treaty Database.

Luxembourg - U.S.A. Income And Capital Tax Treaty of 3 April 1996, and US Technical

Explanations of 19 September 1996, IBFD Tax Treaty Database.

Taiwan-UK Income Tax Treaty of 8 April 2002, IBFD Tax Treaty Database.

OECD and U.N. Documents

"Draft Articles on most-favoured-nation clauses with commentaries" Yearbook of the

International Law Commission, 1978, vol. II, Part Two

Recommendation of the OECD Council concerning Tax Treaty Override adopted by the Council

on 2 October 1989

Recommendation of the OECD Council concerning the Model Tax Convention on Income and on

Capital, adopted by the Council on 23 October 1997

OECD TAG on Treaty Characterization Issues Arising from E-Commerce, adopted by the OECD

on 7 November 2002

The tax treatment of software OECD report , adopted by the OECD on 23 July 1992

Treaty Characterisation Issues Arising from E-Commerce, adopted by the OECD on 7 November

2002

The elimination of double taxation: fourth report of the Fiscal Committee, Organisation for

European Economic Co-operation, 1961

Third report on reservations to treaties, Draft Guideline 1.2, International Law Commission, UN,

1998.

Taxation of New Financial Instruments, Paris, OECD, 1994.

National Case Law and Rulings

Australia

High Court of Australia, FCT vs Sherrit Gordon Mines Ltd, 137 CLR 612, 1977

Canada

The Queen v Farmparts Distributing Ltd, 80 DTC 6157 (FCA)

Tax Court of Canada, Hasbro Canada Inc v the Queen, 96-19,1998

viii

France

Reply Bockel, 4 June 1984 (France-Switzerland tax treaty)

India

Graphite Vicarb, 12 September 1992 (India-France tax treaty)

High Court of Calcutta, CIT vs Hindusthan Paper Corpn Ltd, ITA Nos 257/1986, 1994

Indian Authority for Advance Rulings, India Re Y’s Application, New Delhi, P 30/1999

Indian Central Board of Direct Taxes, Notification No. 11050 [F.No.501/2/83-FTD] dated 30

August 1999

Indian Central Board of Direct Taxes, Notification No. S.O. 54(E) dated 19 January 2001

Income Tax Appellate Tribunal (Mumbai ‘A’ Bench), Hindalco Industries Ltd v Assistant

Commissioner of Income Tax, ITA Nos 3772 and 3774/Mum/1996, 2005

Malaysia

Malaysian Court of Appeals, El Limited v The Director General of Inland Revenue

(Euromedical), (1981) 2 MLJ 208 (at trail); (1983) 2 MLJ 57 (Fed CA)

Netherlands

Hoge Raad, 21 February 2003, case 37.011, IBFD Tax Treaty Case Law Database summary

Portugal

Portuguese Administrative Court, Borealis Polímetros, 2003

ix

STATEMENT OF JURISDICTION

The Republic of Pearonia and the Republic of Appalaria have agreed to submit the present

controversy for final resolution by the International Taxation Court. In accordance with statute of

the Court, the jurisdiction of the International Taxation Court comprises all cases that the parties

refer to it.

x

STATEMENT OF FACTS

This dispute arises out of Appalaria responsibilities over the material breach of the 1995 double

taxation agreement between the Appalaria and Pearonia (Treaty).

The Appalaria and Pearonia Treaty, which entered into force in 1997, generally follows the

OECD Model Tax Convention (OECD Model). The following official statement accompanied

the publishing of the Treaty in Pearonia:

“The treaty contains separate articles applying to royalties and technical service

fees (Arts. 12 and 13, respectively), which allow taxation in the source state of up

to 15% on royalties and 10% on technical service fees. After some discussion it

was agreed to follow the definition of royalties suggested in the OECD Model

Convention and to follow the definition of technical service fees that has been

used in some earlier conventions signed by both countries.”

In 2002, Appalaria issued an administrative guidance, under the form of a circular letter,

interpreting, inter alia, the concept of royalties. According to the preamble of the Circular, such

guidance was aimed at clarifying uncertainties arising from several tax disputes in Appalaria,

concerning the interpretation of the certain types of income subject to the withholding of tax,

namely royalties.

The application of the Circular resulted in additional source taxation in Appalaria and

consequently increased requests for foreign tax credits in Pearonia.

xi

The Treaty includes a most-favoured nation (MFN) clause covering amongst others royalties and

fees for technical services. Accordingly, if Pearonia concludes a more beneficial treaty with

another OECD member the same rate or scope as provided for in that more beneficial treaty shall

also apply under the Treaty. The MFN clause is automatically activated as from the date on

which the relevant Pearonia Convention or Agreement enters into force.

In 2002 Pearonia concluded a treaty with the Tangerine Republic (an OECD member), which

disallows source state taxation of technical service fees, and limits source taxation of royalties to

5 %. This treaty was ratified in 2003 and entered into force on 1 January 2004.

The matter of Securobits, in which the two countries were unable to reach a mutual agreement,

was selected as the test case of this dispute.

CompuTV (company resident in Appalaria) concluded a five-year agreement with Securobits

(company resident in Pearonia) concerning security systems to be incorporated into the sound

systems and televisions manufactured by CompuTV. According to the agreement, Securobits

was required to supply various types of hardware, including hardware and software for a central

control unit designed to collect and analyse customer information. In addition, Securobits was

required to train CompuTV staff in several areas, namely in the installation of the control unit,

security systems and proper use by customers of the systems. Securobits was also required to

assist CompuTV on a five-year marketing campaign in Appalaria and supply CompuTV with

lists of potential customers. Finally, the agreement includes a license of Securobits logo, to be

used in CompuTV products incorporating Securobits technology. The contract provides that

xii

payment for all goods and services supplied to CompuTV in a calendar year is to be paid within

three months of the end of the year.

In March 2004, when CompuTV paid Securobits, tax was withheld at 5% from the payments for

use of the Securobits brand name and logo. Appalarian tax authorities later reassessed CompuTV

and required tax to be at 15% on all the payments except for the payments for the chips, sensors

software and other security apparatus.

Securobits requested Pearonia to initiate a mutual agreement procedure with Appalaria to resolve

the issue of double taxation, but the two tax authorities failed to reach an agreement. Pearonia

submitted a claim against Appalaria in the International Taxation Court to resolve the dispute.

xiii

QUESTIONS PRESENTED

Pearonia requests that the Court to decide:

i) Whether the Circular issued and applied by the tax authorities of Appalaria goes beyond

mere interpretation of the Treaty and amounts to treaty override;

ii) Whether in the matter of Securobits, the correct interpretation of the treaty should determine

that:

- the payments for the lists of potential customers qualify as business profits under the

Treaty;

- the payments for the training (including the troubleshooting support services) qualify

as technical services under the Treaty;

- the payments for assistance with the marketing campaign qualify as technical services

under the Treaty.

ii) Whether Appalaria is acting manifestly in breach of the Treaty by requiring that tax be

withheld from the amounts paid to Securobits at the rate applicable in 2003 and not at the

rate applicable in 2004, under the Treaty as modified from 1 January 2004.

1

PLEADINGS

I. THE APPALARIAN TAX AUTHORITIES CIRCULAR GOES BEYOND MERE

INTERPRETATION OF THE TREATY AND AMOUNTS TO TREATY

OVERRIDE

1. The unjustified broadening of the concept of know-how in the Circular represents tax treaty

override. The concept of know-how has a particular treaty meaning. That meaning includes

“imparting” of knowledge. The Circular extends the concept to include any payment for

information, without mentioning that such information must be imparted. As a result of such

erroneous interpretation, in the matter of Securobits, payments for services arising in

Appalaria were wrongly qualified as royalties, leading to unjustified taxation in Appalaria.

A. The Treaty is to be interpreted in the light of the OECD Commentaries

i) The role of the Commentaries in the interpretation of the Treaty

2. Tax treaties are international agreements entered into between states. The conclusion and

interpretation of such treaties is governed by public international law, particularly by the

Vienna Convention on the Law of Treaties (VCLT).

3. Article 31(1) of the VCLT states that a treaty shall be interpreted in good faith in accordance

with the ordinary meaning given to the terms of the treaty in their context and in the light of

its object and purpose.

2

4. The starting point for the interpretation of a substantive treaty provision should be the

definitions provided in the treaty itself. The term royalty has been explicitly defined in Art.

12 of the Treaty and in a cross-border scenario that definition should prevail over the

definition of ‘royalty’ as appearing in the Appalaria Income Tax Act.

5. The definition of royalties1 includes, within its scope, the term “information concerning

industrial, commercial or scientific experience”. In classifying as royalties payments received

as consideration for “information concerning industrial, commercial or scientific,

experience”, the treaty refers to the commonly known concept of know-how. The Circular

issued by Appalaria reiterates this statement.

6. According to para. 2 of Art. 3 of the Treaty, when applying or interpreting the treaty, any

term not defined2 shall, unless the context otherwise requires, have the meaning that it has

under the law of Appalaria. When a tax treaty does not define a term employed, and the

context of the treaty so requires, it can be given a meaning different from domestic law

meaning thereof.

7. The context in broad sense includes all of the items (interpretative elements) that may be

taken into account in interpreting treaties under Arts. 31 and 32 of the VCLT. Accordingly,

the text of the treaty, the OECD Model and Commentaries, unilaterally published material

(such as the press release issued by Pearonia), jurisprudence dealing with similar issues and

1 Definition originates from the 1961 OEEC Fourth Report.

2 Even a term used in a particular treaty definition.

3

scholars writings should first be used to adequately resolve an interpretative question.3 The

domestic meaning should be placed at the bottom of the interpretation hierarchy.4

8. By interpreting the Treaty according to the said rules, the term “information concerning

industrial, commercial or scientific, experience”, as demonstrated below, has a particular

treaty meaning. Even though such term may have a particular meaning in the internal law of

Appalaria, if that meaning contradicts the one assigned to the term by the context, the

internal law definition should be set aside.5

9. The parts of the Commentaries6 that explain and interpret the term “information concerning

industrial, commercial or scientific, experience” are to be referred in order to establish the

ordinary meaning of treaty term, under Art. 31(1) of the VCLT.7

10. Alternatively it may be considered that the meaning of the term set out in the Commentaries

provides a special meaning, under Art. 31(4) of the VCLT.8 The Commentaries should

therefore be taken into account as evidence that a special meaning exists.9

3 Applying the Vienna context definition to the expression “unless the context otherwise requires” would make no

sense because the Vienna context was not meant to be used in isolation from other factors, see John F. Avery Jones,

et al., The Interpretation of tax treaties with particular reference to Art. 3(2) of the OECD Model, British Tax

Review, p.104. 4 "Federal Income Tax Project – International Aspects of United States Income Taxation II: the Proposals of

American Institute" Philadelphia: The American Law Institute, 1992, pp. 43-46. 5 Prof. Ward et al., refer that if the relevant commentary is unambiguous in the meaning it ascribes to the term, the

authors are of the view that the internal law definition could be ignored and the commentary then would govern the

interpretation of the undefined term. See Ward et al., "The interpretation of income tax treaties with particular

reference to the commentaries on the OECD Model", 2005, p. 121. 6 Paragraphs 11 to 11.6, as updated from time to time. See Annex for the position of the applicant as to the relevance

of later commentaries in the interpretative process. 7 Prof. Vogel in a seminal article on the influence of the OECD Commentaries on treaty interpretation proposes a

step-by-step approach for the use of the Commentaries on tax treaty interpretation. According to Vogel, a term

already used by the Draft Convention of 1963 and explained by its Commentaries, should be considered to have

become in the course of time part of the “international tax language”. In other words, it should be assumed that the

meaning attributed to that term by the Commentaries is its “ordinary meaning” within the meaning of Art. 31(1) of

4

11. It should be recalled that OECD member countries “should follow the Commentaries on the

Articles of the Model Tax Convention, as modified from time to time, when applying and

interpreting the provisions of their bilateral tax conventions that are based on these

Articles”.10

12. In addition to the Commentary, there is clear authority in the form of legislation of several

countries,11

rulings12

and case-law13

demonstrating that the term know-how should be

interpreted within its treaty context and not by recourse to domestic law.

ii) The use of the Commentaries to interpret a treaty concluded with a non-OECD member

the Vienna Convention. See Vogel, “The influence of the OECD Commentaries on treaty interpretation”, 12 BIFD

12/2000, p. 614. 8 Prof. Ault suggested that the parties negotiating a tax treaty, if they adopt a provision that is identical to the OECD

Model, tacitly refer to the views expressed by the Commentaries regarding the meaning of the provision adopted.

Those views could then be considered as a “special meaning” intended by the parties which would be decisive under

Art. 31(4). See Ault, “The Role of the OECD Commentaries in the Interpretation of Tax Treaties”, in Alpert, H.H.

and K. van Raad (eds.), "Essays on International Taxation", 1993, pp. 61, 65. 9 In a recent article, Watters suggested other examples of terms having a “special meaning” used but not defined

under the model, such as “permanent home”, “centre of vital interests”, “beneficial ownership”, “special

relationship”. See Waters, "The relevance of the OECD Commentaries in the interpretation of tax treaties", in

"Praxis des Internationalen Steuerrechts: Festschrift für Helmut Loukota zum 65. Geburtstag", pp. 671-689. 10

Recommendation of the OECD Council concerning the Model Tax Convention on Income and on Capital,

adopted by the Council on 23 October 1997. 11

See, e.g., the reference in Hasbro Canada Inc v the Queen (1998) to the case of Canada where “the Income Tax

Act will be amended to provide that the present non-resident withholding tax on royalties paid by a resident of

Canada to a non-resident shall apply to a somewhat wider range of payments. The proposed amendment will be

based on the definition of royalties suggested by the OECD fiscal committee and used as a model by Canada in

several of its international tax agreements.”(Canada, House of Commons Debates 1968). The definition of royalties

similar to the Model’s definition was adopted in internal law by Australia (1967), the Netherlands (1970) and Italy

(1973). See Avery Jones “The origins of concepts and expressions used in the OECD Model and their adoption by

states”, BIFD 6/2006, pp. 220-254. 12

E.g., ATO Ruling 2660, Income Tax: Definition Of Royalties (Australia). 13

Amongst others: High Court of Australia (1977) 137 CLR 612, Federal Commissioner of Taxation vs Sherrit

Gordon Mines Ltd.

5

13. Paragraph 12 of the Commentaries to Art. 3 refers that “the context is determined in

particular by the intention of the Contracting States when signing the Convention(…)”.

14. The arguments set out above (i.e. relevance of the Commentaries) are applicable in a

situation where one of the parties to the treaty is not a member of the OECD. In the absence

of evidence to the contrary, it is to be presumed that by adopting a provision of the Model the

parties intended that that provision of the treaty negotiated by them should be interpreted on

the same basis as set out in the OECD Commentaries. A statement, issued by Pearonia,

confirming that the parties agreed to follow the definition suggested in the OECD Model,

supports this presumption. 14

In addition, there is authority case law demonstrating the use of

Commentaries to interpret treaty provisions following the OECD Model entered into with

non-OECD members.15

B. Definition of know-how under the Circular is inconsistent with the treaty meaning by

not requiring know-how to be imparted

i) The definition of know-how under the Treaty

15. Having determined the role of the Commentaries in the interpretation of the Treaty, the next

step is to ascertain the treaty meaning of the payment for “information concerning industrial,

commercial or scientific experience”, with the assistance of the Commentaries.

14

In a recent ruling of the Indian Authority for Advance Rulings, in the case of Abdul Razak Menon (276 ITR 306),

reliance was placed on Press Notes accompanying a signing of a tax treaty for the purposes of interpreting a treaty

provision. Such use was apparently supported on the basis of Art. 32 of the VCTL (see point 16).

6

16. The Commentaries include a third-party definition of “know-how” given by Association des

Bureaux pour la Protection de la Propriété Industrielle, according to which know-how is

“undivulged technical information that is necessary for the industrial reproduction of a

product or process, directly and under the same conditions; inasmuch as it is derived from

experience, know-how represents what a manufacturer cannot know from mere examination

of the product and mere knowledge of the progress of technique”.16

17. The Commentaries highlight the essential characteristic of a know-how contract, under which

“one of the parties agrees to impart to the other, so that he can use them for his own account,

his special knowledge and experience which remain unrevealed to the public”.17

The term

“impart” has particular importance as it conveys a meaning equivalent to that of “use of, or

right to use” employed in the first part of the royalty definition of Art. 12(3) of the Treaty.

18. Although interpreting literally, the “use of, or right to use” refers only to the first part of the

definition, the Applicant submits that the term “use of, or right to use” has to be understood

to pertain to the second part of the definition as well, i.e. to “information concerning

industrial, commercial or scientific experience”. This is supported by contextual and dynamic

interpretation of the concept of royalties.

15

In a recent Netherlands Supreme Court decision (Hoge Raad, 21 February 2003, case 37.011, V-N 2003/13.9),

which involved non-OECD countries, the court supported its view by referring to para. 5 of the Commentary to Art.

15 of the OECD Model, which since 1992 explicitly states that the term 183 days refers to physical presence. 16

Para. 11 of the Commentaries to Art. 12. 17

Para. 11.1. of the Commentaries to Art. 12.

7

19. On one hand, the Commentaries, through the “imparting principle”, incorporate the element

of transferability (of the proprietary rights as a whole) or licensing (certain rights to use the

property), which is essential to all intellectual property rights.

20. On the other hand, from the historical point of view, the possible reason for originally not

including “use of, or right to use” in relation to know-how payments could have been the

embryonic stage, at that time, of many intellectual property laws. Since the character of

know-how is also of a less manifest, less exact nature than the other types of intellectual

property, it could have been difficult, at that time, to envisage a right on know-how which

could be transferred or licensed to third parties.18

21. In the Applicant’s view, presently there is no ground to treat payments for know-how

differently from payments for other types of intellectual property rights mentioned in Art.

12(3). Nowadays the concept of know-how acquired a common meaning, it became

recognised and protected under intellectual property laws, in a trend similar to that

concerning software.

22. Know-how can be owned, just as any traditional types of intellectual property and, using the

words of the Circular, the owner nowadays “has a right to legal protection in most of the

countries of the world, including Appalaria”. Although the rights relating to know-how

cannot generally be registered in a public register, this does not affect the status of know-how

as intellectual property. 19

18

The Circular refers to the same when stating “…….[know-how] is often not capable of being encapsulated in such

a way as to make it capable of registration”. 19

As set out in the Commentaries to Art. 12, para. 8.

8

23. This interpretation is confirmed by the language of some recently concluded tax treaties, such

as the Austria-Mexico treaty, which includes the term “use, or right to use” with respect to

payments relating know-how.20

In addition, recent US Technical Explanations also include

the same interpretation.21

ii) The Circular contradicts the Treaty meaning of know-how

24. The Circular deviates from the treaty meaning of “know-how” since it ignores the “imparting

principle”. According to the Circular, a payment for know-how “does not require the

payment to be for ‘the use of, or the right to use’ the intangible property, but only that the

payment is ‘for’ the information”. The Circular does not mention the concept of “imparting”

knowledge. By abandoning an essential element of the know-how concept, the Circular

brings within the scope of Art. 12 of the Treaty items of income, which clearly fall outside of

that article.

25. The effect of the Circular is that the borderline between royalties and other types of income,

inter alia, technical service fees, is blurred. The Circular fails to proper distinguish between

know-how and technical service fees with negative consequences for taxpayers, as the matter

of Securobits demonstrates.

20

Austria – Mexico Income And Capital Tax Treaty (2004). 21

Luxembourg - U.S.A. Income And Capital Tax Treaty (1996), the US Technical Explanations state: “Paragraph 3

defines the term "royalties" as used in the Convention as payments of any kind received as a consideration for the

use of, or the right to use, any copyright (...); or for the use of, or the right to use, information concerning industrial,

commercial, or scientific experience”.

9

26. Know-how agreements envisage the transmission of pre-existing technological information,

which is not part of the public knowledge.22

The provider of know-how imparts such

information to the recipient, so that he can use them for his own account. Independent use by

the recipient inevitably involves that the provider has to disclose or explain the processes,

formulas and context on which the technology is based. In contrast, contracts for technical

services envisage the rendering of services that suppose the application, not the assignment,

of technology in the rendering of a service. Rather than imparting his experience, the service

provider uses it himself in the rendering of the technical services. All that he conveys is a

result of the application of his special knowledge and experience.23

27. In conclusion, the Applicant submits that because the Circular does not reflect that know-

how implies imparting of knowledge while technical services simply imply the application of

such knowledge, the Appalarian tax authorities wrongly re-assessed the tax on payments

made by CompuTV to Securobits.

C. Considerations in the matter of Securobits

28. The appropriate qualification of the payments under the contract between Securobits and

CompuTV should be determined by using a “break down” method.24

22

Para. 11.1 of the Commentaries to Art. 12 states that “It is recognised that the grantor is not required to play any

part himself in the application of the formulas granted to the licensee and that he does not guarantee the result

thereof”. 23

Para. 11.2 of the Commentaries to Art. 12 states that a know-how contract “differs from contracts for the

provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute

work himself for the other party. Payments made under the latter contracts generally fall under Art. 7”. 24

Para. 11.6 of the Commentaries to Art. 12 of the OECD Model. Although the contract at issue maybe categorised

as a mixed contract, it is possible to identify and separate each supply and service and the consideration relating

thereto due to the different methods of calculation agreed upon by the parties for each supply and service under the

10

i) Payment for the training and troubleshooting services provided by Securobits to CompuTV’s

employees

29. The training provided by Securobits to the CompuTV’s staff does not involve any

transmission or imparting of special knowledge relating to the technology on which the

security systems developed by Securobits are based, with the purpose of enabling CompuTV

to reproduce either the central system or the chips and sensors supplied by Securobits.

30. The training merely guides CompuTV employees as to the standard procedures on how to

build up/operate the central system and install the chips in televisions with the use of the

components (hardware, software, chips, sensors) purchased by CompuTV. Such training

provides only guidance as to the application of Securobits’ pre-existing know-how and not

by any way a transmission of that know-how. The contract does not provide for any transfer

of technical documentation, designs or blueprints that substantiate the transmission of know-

how.

31. The fact that more complex technical problems, which cannot be resolved by CompuTV

employees by using standard procedures, are handled by Securobits’ technical staff through

troubleshooting support services, demonstrates that know-how as regards Securobits’

technology is not transferred to CompuTV.

contract. In addition the royalty element (use of the logo) is only of an ancillary and largely unimportant character

(taking into account the whole transaction) and should not, in any way, be viewed as the predominant element.

11

32. It is sometimes recognized as indication that a certain payment falls within royalties if the

amount payable as consideration is dependent on (i) the use to be made of, or the benefit to

be derived from such knowledge or service; or (ii) the sales or profits of a particular good or

service.25

In this case, the training programme is remunerated on the basis of the number of

days and employees present in the training, without any link to the benefits derived or profits

generated by CompuTV from the sales of security systems.

33. Contracts under which no imparting/assignment/transfer of technical information is made to

the recipient cannot be qualified as know-how contracts within the context of the Treaty.

The training provided under the contract between Securobits and CompuTV should therefore

be qualified as technical services under Art. 13 of the Treaty and cannot be taxed by

Appalaria as royalties.

34. The analysis relating to the training services of Securobits also applies to troubleshooting

services. Accordingly, payments for these services have to be taxed as technical service fees

under Art. 13 of the Treaty.

ii) Payment for the customer list

35. The payment by CompuTV to Securobits for the customer list cannot be qualified as

royalties, since Securobits does not impart any knowledge to CompuTV by handing over

such list.

25

This element is sometimes found in domestic laws of OECD member countries, e.g. Canadian law.

12

36. It is commonly accepted that Securobits does not divulge to CompuTV the basis on which

the selection of the customers’ names included in the list are made. The composition of the

customer list by Securobits amounts to applying its own know-how in the course of

providing services to CompuTV. Thereafter, Securobits presents the result of application of

its own know-how to CompuTV.

37. Securobits used for drawing up the customer list its own information and information

supplied by CompuTV about its own customers. The fact that information was assembled

from different databases and later perfected means that Securobits did not transfer any

exclusive information, but simply carried out a selection service.

38. Moreover, the payment for the customer list not only falls short of the treaty meaning of

payment for know-how but also does not meet the “minimalist requirement” of the Circular,

as it cannot even be considered to have been made “for” information.

39. CompuTV does not pay for the information contained in the list in the abstract sense. It only

pays a commission to Securobits on the basis of materialised sales, i.e. after each sale to a

customer whose name appeared on the list, regardless of whether or not CompuTV actually

used the list to make such sale. In a Canadian case, which was decided by reference to the

OECD Model and Commentaries, buying commissions were held to clearly fall outside the

scope of payments for know-how. 26 The same conclusion should apply to selling

commission, such as the one paid by CompuTV to Securobits.

26

Hasbro Canada Inc v the Queen (1998) 1 ITLR 341 (Tax Court of Canada, Montreal). This case deals with the

buying commission paid by a Canadian company to certain related companies in Hong Kong and whether these fall

under the 'information concerning industrial, commercial or scientific experience' in s212(1)(d) of the Canadian

13

40. The payment for the customer list has to be qualified as payment for a service provided by

Securobits to CompuTV and cannot be taxed by Appalaria as royalties. 27 Such payment

does not either fall under Art. 13 of the Treaty, as the supply of a customer list is not a

service of a technical or consultancy nature. The fact that technology may be used in

providing a service is not indicative of whether the service is of a technical nature.28 The

service is also not of an advisory nature. The payment for the customer list should therefore

qualify as business profits of Securobits.

iii) Payments to Securobits for marketing assistance

41. The assistance with the marketing campaign given by Securobits to CompuTV cannot be

qualified as provision of know-how, as the type of information supplied by Securobits falls

out of the scope of the treaty meaning of know-how.

42. Expertise in finding the customers for a product or service, advertising a product or service,

approaching customers, presenting products in an appealing way does not involve any special

knowledge which any market player could not possess on the basis of analysing a certain

market.

Income Tax Act 1988. It was held that they did not. The court used the Commentaries in interpreting the royalties

concept. 27

On payments for customer lists as not royalties see Discussion at 2005 IFA Congress and J. Avery Jones “The

treaty definition of royalties” BIFD 1/2006, pp. 23-28. 28

Specific software might have been used to perfect the customer list. According to the OECD TAG report, “In that

respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge

may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be

14

43. Designing a marketing campaign, even if it is adjusted to the characteristics of a market, can

be done by examining and perceiving the market concerned. Know-how would require a sort

of knowledge that goes beyond the “state of arts”29

and that the receiver cannot know from

mere examination of a process or product.30

44. The assistance with the marketing campaign should therefore be qualified as a service and

cannot be taxed by Appalaria as royalty.

D. The Circular goes beyond mere interpretation of the Treaty, and amounts to treaty

override

45. As outlined above, Appalaria thereby abuses its discretion of developing domestic

terminology for tax purposes by artificially construing a term of a tax treaty with the aim or

the effect of altering the equitable distribution of tax revenue in cross-border scenarios. By

this action, Appalaria fails to perform the tax treaty in good faith.

46. The violation of the Treaty by a unilateral action of Appalaria eroded certainty and security

for taxpayers (as demonstrated in the matter of Securobits) and ultimately poses a question as

to whether the Treaty serves any purpose, if it can be altered at any time and at will by

Appalaria.

a technical fee, however, unless that special skill or knowledge is required when the service is provided to the

customer.” See OECD report on Treaty Characterisation of Electronic Commerce Payments (2002), paras. 39 to 42. 29

See Vogel, K. "On Double Taxation Conventions", 3rd edition, 1996 (Vogel) pp. 794 m.mo. 60. 30

Para. 11 of the Commentaries to Art. 12.

15

47. By signing the Treaty with Pearonia, Appalaria undertook the obligation to respect and apply

the said Treaty provisions. The principle “pacta sunt servanda” codified in Art. 26 of the

VCLT states that “every treaty in force is binding upon the parties to it and must be

performed by them in good faith”. 31

48. The extension of the scope of a term, as demonstrated above, through the use of a Circular is

inconsistent with the Treaty as it brings within the concept of “royalties” items of income

that clearly do not qualify as royalties within the context of the Treaty. According to the

preamble of the circular, the guidance was aimed at “clarifying uncertainties” arising from

royalties. Contrary to this, the Applicant maintains that the circular constitutes treaty override

and not in any way a clarification.32

49. A statement, issued by Pearonia, refers that the parties agreed to follow the definition

suggested in the OECD Model. The press release of Pearonia qualifies under international

law as a unilateral interpretative declaration33

and is a useful tool in interpreting the “context”

of the Treaty34

. Appalaria, having acquiescenced Pearonia position and in the absence of an

objection, is precluded of afterwards contesting a statement to which it apparently consented.

31

The principle of good faith not only puts a limit on the reference to domestic law (for the purpose of the

interpretation and application of a tax treaty) but also prevents Appalaria from eroding or evading its obligations

under the treaty by subsequently amending in its domestic law the scope of terms not defined on the treaty, either by

means of legal definition or otherwise. The principle of permanency of commitments also requires that Appalaria

should not be allowed to make a convention partially inoperative by amending afterwards in its domestic law the

scope of terms not defined in the Convention. See Bruggen, E., "Good faith in the application and interpretation of

double taxation conventions", British Tax Review, 2003, 1, 25-68 citing amongst others O'Connor, "Good Faith in

International Law", Darmouth, 1991. 32

The term “treaty override” refers to a situation of enactment of domestic legislation (including administrative

guidance) intended to have effects in clear contradiction to international treaty obligations. 33

Draft Guideline 1.2, International Law Commission. 34

See supra note 14.

16

50. In addition, in the same year (2002) when the Circular was published, Pearonia signed a

treaty with the Tangerine Republic where it relinquished source taxation on technical

services. The coincidence of dates reinforces the apparent intention of minimising the effects

of the MFN clause by extending the domestic scope of know-how.

51. The Recommendation of the OECD Council concerning Tax Treaty Override35

refers that its

member countries should avoid any legislation, which constitutes a treaty override.

Appalaria, as a member of the OECD, is required to follow such recommendation.36

52. For these reasons, the Circular issued and applied by the tax authorities of Appalaria, going

beyond mere interpretation of the Treaty, amounts to a manifest tax treaty override.

35

Recommendation of the OECD Council concerning Tax Treaty Override adopted by the Council on 2 October

1989. 36

Recommendation of the OECD Council concerning the Model Tax Convention on Income and on Capital,

adopted by the Council on 23 October 1997.

17

II. BY APPLYING THE RATE APPLICABLE IN 2003 TO ITEMS OF INCOME

PAID IN 2004 APPALARIA IMPOSED TAX IN CONTRAVENTION WITH THE

TREATY

53. Appalaria is acting manifestly in breach of the Treaty by applying the 15% withholding tax

rate for payments on royalty and technical services fees made by CompuTV to Securobits in

March 2004. From 1 January 2004, 5% withholding tax applies to royalties and no source

taxation is due on technical services fees under the Treaty. As Arts. 12 and 13 of the Treaty

refer to income "paid", all payments made after 1 January 2004, fall within the scope of

royalties and technical service fees applicable at that date.

A. From 1 January 2004, the Treaty provides for 5% withholding tax on royalties and

for no tax on technical services fees

54. The Treaty initially provided for 15% withholding tax on royalties and 10% withholding tax

on technical service fees.

55. The entry into force of the treaty between Pearonia and an OECD member Tangerine

Republic, providing for a more favourable treatment of royalties and technical service fees,

has activated the MFN clause in Art. 29 of the Treaty.

18

56. The 5% tax on royalties and no source taxation on technical service fees under the Pearonia-

Tangerine Republic treaty apply automatically from the date of entry into force of this treaty,

that is, 1 January 2004.37

B. The right to withhold tax on royalties and technical service fees under Treaty arises

when payment is made

57. Both articles of the Treaty refer to the term "paid" thereby authorising a state to levy tax only

when income is actually paid. The wording and the context of the Treaty exclude income

accrued but not paid from the scope of these articles. This interpretation is supported by the

Commentaries and country practices in framing the wording of tax treaty provisions.

i) Term "paid" must be given a bilateral treaty meaning

58. Under Art. 3(2) of the Treaty, any term not defined in the treaty shall, unless the context

otherwise requires, have a domestic law meaning. The purpose and the context of the Treaty

require the term "paid" to be given a contextual interpretation.

59. First, divergent interpretation of the term by reference to domestic law leads to timing

mismatches, which may eventually lead to double taxation, hence conflicting with the

purpose of a tax treaty to eliminate double taxation. Secondly, significant disparities in an

37

When concluding the Treaty, the intention of the parties was that the MFN clause becomes effective on the entry

into force date of the Pearonia-Tangerine Republic treaty. If the intention would have been different, another

wording would have been included. Under, e.g., the India-Switzerland treaty of 2 November 1994, the MFN clause

does not enter into force until the contracting states enter into further negotiations with regard to the favourable

treatment.

19

interpretation given by Appalaria constitute a breach of principle of reciprocity, on which tax

treaties are based.38

60. Thus, in the context of Treaty the term "paid" has a bilateral treaty meaning and must be

interpreted uniformly by Pearonia and Appalaria.

ii) Interpretation based on ordinary meaning and requires income to be actually paid

61. Following the rules of the VCTL, the term "paid" first of all should be interpreted "in good

faith in accordance with the ordinary meaning to be given to the term[s] of the treaty in

[their] context and in the light of its object and purpose".39

The ordinary meaning of the word

"to pay" in the context of provisions of Arts. 12 and 13 is to "give (someone) money due for

work, goods, or an outstanding debt".40

It is evident that the ordinary meaning does not

comprise income not yet paid.

iii) OECD Commentaries require income to be actually paid

62. The Treaty is based on the OECD Model and hence any interpretation of terms under the

OECD Model and Commentaries can be used to ascertain the meaning of the term.41

38

The principle of reciprocity requires to take into account the meaning given to the term by other Contracting State

and also determines the context of a treaty. This principle is explicitly recognised, e.g., in the OECD Commentary to

Art. 3, see para. 12. 39

Art. 31(1) of the VCLT. 40

Concise Oxford Dictionary, Oxford University Press, New York, 1999, p. 1048. 41

For the use of the Commentaries, see above explanation given on this issue in the first submission, under sub-

heading "A. The Treaty is to be interpreted in the light of the OECD Commentaries".

20

63. The Commentaries explain the term "paid" or "payment", uniformly used in articles 10, 11

and 12 of the OECD Model, as "the fulfilment of the obligation to put funds at the disposal of

the creditor in the manner required by contract or custom".42

According to the Commentaries,

the term "has a very wide meaning".43

However, the wide meaning comprises only the wide

range of methods in which payment may be settled, e.g., by performance in kind or set-off of

mutual obligations.44

The substantive requirement that there must be a fulfilment of

obligation or a shift of a material benefit to the creditor remains inherent to the term “paid”.45

Therefore, income treated as "accrued" under the laws of a state, when a creditor has not yet

received any benefit, is not regarded as income "paid" under Arts. 10, 11 and 12 of the

OECD Model.46

64. It means that Arts. 12 and 13 of the Treaty, incorporating the identical concept of "paid",

require the shift of material benefit to the creditor to trigger the application of withholding

tax on royalties and technical services fees. The Treaty does not allow Appalaria to impose

withholding tax on income when there was not shift of benefit to a creditor resident in

Pearonia.

42

Para. 7 to the OECD Commentary on Art. 10, para. 5 to the OECD Commentary on Art. 11 and para. 8 to the

OECD Commentary on Art. 12. 43

Ibid. 44

Supported by Vogel, "On Double Taxation Conventions: a Commentary to the OECD, UN and US Model

Conventions for the Avoidance of Double Taxation of Income and Capital" (1997), p. 714, m.no. 15. 45

Supported by Wattel, and Marres "Characterization of fictitious income under OECD-patterned tax treaties" 3 ET

(2003), pp. 66-79. 46

Explicitly recognised with respect to interest payments in "Taxation of New Financial Instruments", Paris, OECD,

1994, p. 26: "Article 11 of the [OECD Model] considers only interest paid and to impose a withholding tax yearly

21

iv) Different wording than that used in the Treaty is required to cover accrued income

65. It was the intention of Pearonia and Appalaria to include the term "paid" in Arts. 12 and 13

of the Treaty so that amounts that are accrued but not paid are excluded from the scope of

application of these articles. A state wishing otherwise drafts its treaty provisions in a way

that the term “paid” is not mentioned.

66. For example, the US Model Technical Explanations explicitly recognise that the absence of

term “paid” in the royalty article of the said Model is intended to bring amounts accrued but

not paid within its scope.47

Treaty practice amongst OECD Members illustrates that states

either include or eliminate such terms any in order to achieve taxation at a specific point in

time.48

67. Therefore, by an explicit reference to the term “paid” in Arts. 12 and 13, the parties agreed to

grant taxing rights at the moment when income is actually paid.

on an accruing discount would not seem to be in accordance with the provisions of Article 11 because such discount

is not paid until redemption". 47

Para. 174 of US Model Technical Explanations states: “Unlike the OECD Model, paragraph 1 does not refer to an

amount ‘paid’ to a resident of the other Contracting State. The deletion of this term is intended to eliminate any

inference that an amount must actually be paid to the resident before it is subject to the provisions of Article 12.

Under paragraph 1, an amount that is accrued but not paid also would fall within Article 12”. It must be noted that

the Technical Explanations refer to the 1996 version of the OECD Model when the term was present in Art. 12(1) of

the OECD Model. It was deleted in 1997 to make the beneficial ownership test in Arts. 10-12 of the Model

consistent, but the reference to the term “payment” (instead of “consideration” in the US Model) in Art.12(2)

maintains the requirement of royalty income to be paid. 48

With regard to the term “paid” see, e.g., India-Ireland tax treaty (2000) or Taiwan-UK tax treaty (2002) or France-

Ukraine tax treaty (1997) (all use term "paid" and "payment" in articles of royalties). With regard to the treaties

excluding terms "paid" and "payment" see, e.g., Arts. 11, 12 of Australia-UK tax treaty (2003) (uses terms

"beneficially owned" and "payments or credits").

22

C. Timing issues in the matter of Securobits

68. The contract between Securobits and CompuTV explicitly states that payment for services

provided during a calendar year is to be paid within three months of the end of the year.

69. Securobits rendered the relevant services to CompuTV throughout 2003 and CompuTV paid

on 20 March 2004 accordingly. Under Arts. 12 and 13 of the Treaty, this income is

considered to be paid in 2004. Technical services fees paid in 2004 fall under the business

profits article of the Treaty, as modified as of 1 January 2004.

70. For these reasons, the tax treatment in force in 2004 under the Treaty must be applied to the

amounts remitted to Securobits, hence royalties paid to Securobits must be subject to 5% tax,

and services fees must be taxed only in Pearonia, the residence state of the company.

23

CONCLUSION AND PRAYER FOR RELIEF

For the foregoing reasons in this Memorial, the Applicant respectfully requests that this

honourable Court:

i) DECLARES that Appalaria materially breached the Treaty by issuing administrative

guidance, under the form of a Circular, departing from the definition of royalties agreed

upon between the parties;

ii) DECLARES that in the matter of Securobits:

− the payments for the training (including the troubleshooting support services) qualify

as technical services under the Treaty;

− the payments for the lists of potential customers qualify as business profits under the

Treaty;

− the payments for assistance with the marketing campaign qualify as technical services

under the Treaty.

iii) DECLARES that tax on the amounts paid to Securobits in 2004 is to be withheld at the

rates applicable in 2004.

PEARONIA LEGAL TEAM

Tiago Cassiano Neves, Julija Petkevica

Rita Szudoczky, Anna Berglund and Carlos Perez

1

ANNEX: THE RELEVANCE OF LATER COMMENTARIES IN THE

INTERPRETATIVE PROCESS

A1. The above submissions take into account later commentaries as they provide valuable

guidance in the interpretative of the present dispute. The following corresponds to the

understanding of the Applicant as regards the use of later commentaries in the present

interpretative process.

A2. OECD member countries should follow the Commentaries on the Articles of the Model Tax

Convention, as modified from time to time [emphasis added], when applying and interpreting

the provisions of their bilateral tax conventions that are based on these Articles.1

A3. Since the treaty was concluded in 1995 and up to the current 2005 version of the OECD

Model Convention and Commentary, various new paragraphs to the commentary to Art. 12

were added or replaced. New paragraphs mainly include useful examples designed to

distinguish payments for the supply of know-how and payments for the provision of

services.2

A4. Commentaries made after a treaty is concluded may be considered not be in the same

category as Commentaries in place at the time the treaty was concluded. But that is not to say

that later Commentaries are to be excluded altogether from the interpretation process.

1 Recommendation of the OECD Council concerning the Model Tax Convention on Income and on Capital, adopted

by the Council on 23 October 1997. 2 Such paragraphs were based on the report of the OECD TAG on Treaty Characterization Issues Arising from E-

Commerce, adopted by the OECD on 7 November 2002 and included in the 2003 OECD Model and Commentary.

2

A5. The following are arguments in favour of using later Commentaries when interpreting a

treaty concluded. First, there is no rule that anything that happens after the treaty is

concluded is irrelevant. Secondly, refusing to take later Commentaries into account can result

in such Commentaries being frozen in time and therefore failing to adapt to changes in

business or technology. Thirdly, it is common for national legislation to be interpreted to take

account of later developments3. There is no rule that the same should not apply in

interpreting treaties. Finally, if later Commentaries are not used, the result could be a

different interpretation of identical wording in treaties entered into at different times.

A6. In determining the use of later Commentaries in any particular circumstances, it is important

to differentiate between (substantial) changes that fill gaps in the existing Commentaries or

amplify the existing Commentaries and changes that simply record a treaty practice or clarify

an already existent element.

A7. In the case of Art. 12, the new Commentary simply adds new examples designed to assist

practitioners and judges in how to interpret arguments, which were already there when the

treaty was concluded.4

A8. The new paragraphs inserted in Art. 12 record what some of the OECD Member countries

have been doing in practice in respect of the interpretation and application of the term Know-

3 Both under domestic interpretation rules or through interpretation by reference of Art. 3(2).

4 The OECD TAG (which included representatives business community) considered that that it was useful to

provide greater guidance in the Commentary, on the basis of the above criteria and factors, on the distinction to be

3

how. Several rulings and case-law mentioned in this pleading of OECD member Countries

support this understanding.

A9. In conclusion, later Commentaries (i.e. after 1995) to Art. 12, namely dealing with the

concept of know-how, do not include any significant changes and therefore cannot be said in

any way to amplify the existing Commentaries, fill a gap or reverse prior Commentaries. The

Later Commentaries simply provide useful guidance on how to distinguish in practice

payments of know-how and services and should therefore have a legitimate role in the

interpretative process of the present dispute.

made between payments for the provision of know-how and payments for the provisions of services. Such guidance

was inserted in the treaty without altering the fundamental elements of the meaning of know-how.