Interaction between Tax Treaties and Domestic Law in Japan – The Role of a Coordinating Statute

Abstract

One of the weak spots in the recent OECD/G20 initiative against BEPS is the implementation of treaty obligations into domestic law of each state. Even when the recommendations in the 2015 deliverables make their way to the agreed provisions of the expected multilateral instrument, the exact degree of their implementation in each state is entirely left to an internal deliberation within each state under its constitutional structure. There is no guarantee that all states involved will fully implement the treaty obligations. Some states might have the incentive and the ability to “underride,” “override,” or “half-ride” the new treaty provisions. This problem is not unique to the implementation of the BEPS multilateral instrument. The relationship between treaty and domestic law is a more general topic prevalent in international taxation. At a practical level, taxpayers and their advisors are facing issues in the interaction between existing tax treaty provisions and domestic law provisions on a daily basis. It is no wonder why this topic has been discussed by prominent commentators in a number of occasions.

This essay describes a solution in Japan on some of these issues. It focuses on the role of a coordinating statute that is legislated by the Diet. Since 1969, Japan has a unified statutory scheme to make a bridge between tax treaty law and domestic law: “the Law concerning the Special Rule for Income Tax Law, Corporation Tax Law, and Local Tax Law in Implementing Tax Treaties”, in short, Tax Treaty Implementation Law (“TTIL”). TTIL helps mitigate the risk of uncertainty in the case of possible conflict (and of legal vacuum) between tax treaty and domestic law on a number of specific issues in Japan. Moreover, there exist a number of practically significant provisions in Income Tax Law and Corporation Tax Law to accommodate treaty obligations under Japan’s domestic law. A glance at such rules will reveal the preservation of old treaty status even after the 2014 tax reform introduced AOA into Japan’s domestic law.

Keywords: tax treaty

JEL Classification: H87, K34