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The ability of some countries to unilaterally change, or "override;' their tax treaties through domestic legislation has frequently been identified as a serious threat to the bilateral tax treaty network. In most countries, treaties (including tax treaties) have a status superior to that of ordinary domestic laws (see, e.g. France, Germany, the Netherlands). However, in some countries (primarily the US, but also to some extent the UK and Australia) treaties can be changed unilaterally by subsequent domestic legislation. This result clearly violates international law as embodied by the Vienna Convention on the Law of Treaties ("VCLT"), which is recognized as customary international law even by countries (such as the US) that have not formally ratified it. However, since in the same countries courts are likely to follow domestic law even if it violates international law, both taxpayers and the other treaty partner have little practical recourse in the case of a treaty override beyond terminating the treaty, which is an extreme and rarely taken step. Therefore, the OECD in 1989 issued a report (the "OECD Report") urging member Countries to refrain from treaty overrides.

How serious of a problem are treaty overrides? This chapter argues that the seriousness of the issue has been exaggerated. In practice, most countries, including the US (which was clearly the target of the OECD Report), rarely override treaties, and when they do, in most cases the override can be justified as consistent with the underlying purposes of the relevant treaty. Moreover, treaty overrides can sometimes be an important tool in combating tax treaty abuse. Thus, I believe that if used correctly, treaty overrides can be a helpful feature of the international tax regime, albeit one that should be used sparingly and with caution.

This chapter is divided into five parts. After this Introduction, Part 2 summarizes the conventional negative view of treaty overrides, as embodied in the VCLT and the OECD Report. Part 3 explains the theoretical position of the US, which on paper is a broad justification of all treaty overrides, whether or not they are consistent with the purpose of the treaty and whether or not they are intentional. Part 4 examines the actual practice of the US in treaty overrides and shows that in practice the US has rarely abused its treaty override rule, but has in fact mostly used it to combat tax treaty abuses. Part 5 concludes by examining the role that treaty overrides can play in the international tax regime and suggesting a "middle way" between the extreme positions taken by the OECD and the us.


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