Michael Lang, "Income Allocation Issues Under Tax Treaties", Tax Notes International, April 21, 2014, p. 285.

No implications of specific safe harbours (p. 287)

Therefore, a special provision is no indication that something else applies outside its explicitly defined scope of application. Such a deviation from the OECD model can often be better understood against the background of the negotiations, during which doubts arose about the application of a provision to a specific situation that the negotiators had in mind. The negotiators would then want to eliminate these doubts. Therefore, such provisions often serve to solve a specific issue. This does not provide any clue about what applies when the regulation did not seem questionable during the negotiations or did not come under consideration….

Relevance of subsequent OECD Commentary (p. 289)

The differentiated reasoning adopted by the court, however, is not very conclusive: "A later OECD Commentary should only be of assistance if not in conflict with the Commentary in existence at the time of the Convention." [fn 15: Tax Court of Canada, May 13, 2011, 2007-2583 (IT)G, Her Majesty the Queen v. Peter Sommerer, 2011 TCC 212.p.47.] If the later version of the OECD commentary generally does not constitute a relevant interpretation material, it also cannot be relevant whether the later version is in conflict with the earlier version….

One cannot deny the allure of conciliatory solutions, but it is of little help in this particular case. The mere mention of the word "clarification" calls for skepticism….

Allocation conflict in Sommerer (pp. 289-90)

[S]ubsection 75(2)…is an allocation rule that can lead to the income being taxed in the hands of a person resident in Canada. If this were to result in the taxation in Canada of Sommerer (who is resident there), it would cause a conflict of allocation, since Austrian tax law allocates the income to the private foundation. Therefore, the legal questions actually relevant here are which legal consequences will be triggered under treaty law in such an allocation conflict.

D. Economic Double Taxation

This conflict of allocation was clearly identified by the Federal Court of Appeal. One must agree with the court that the consequence is economic double taxation — the same increases in value are subject to taxation in the hands of different persons in different states:…

…It is not understandable why the court still assumes that the application of the treaty generally leads to the avoidance of economic double taxation.

Allocation conflict in OECD Partnership Report (p. 290)

In the case of allocation conflicts, it seems obvious to take a look at the OECD partnership report. [fn 22: OECD, "The Application of the OECD Model Tax Conventions to Partnerships," Issues in International Taxation No. 6 (1999).]…

…Case study 16 is based on a situation that resembles one that the Canadian courts had to decide:

Example 16

P is a partnership established in State P. Partner B is a resident of State R while partner A is a resident of State P. State P treats the partnership as a taxable entity while State R treats it as a transparent entity. P derives royalty income from State R that is not attributable to a permanent establishment in State R. P has an office in State P and may therefore be considered to have a permanent establishment in State P. [fn 23: OECD, "The Application of the OECD Model Tax Conventions to Partnerships," Issues in International Taxation No. 6 (1999), at p. 45.]

The considerations made by the Canadian courts regarding treaty law are based on the assumption that Austria treats the private foundation as a taxpayer, while Canadian tax law treats it as transparent. If from this point of view one compares the private foundation with a partnership, Austria is in the position of State P and Canada in that of State R….

Majority opinion in partnership Report (p. 292)

[A]ccording to the majority's opinion regarding the solution of case study 16, the allocation of income in its source state is ultimately determinative — the royalties originate in State R and, under the tax laws of State R, must be allocated to the partners resident there. When applied to the case decided by the Canadian courts, this would mean that only the allocation of income according to Canadian law matters for the application of the treaty, since this involves gains from the alienation of Canadian companies. If one follows the opinion of the majority at the OECD, then Canada, as the residence state of Sommerer, can continue to exercise the right of taxation for the income allocated to him under Canadian tax laws.