The Meaning and Scope of the Ancillary Principle Under Model Tax Conventions

Abstract

This article discusses the meaning and scope of the ‘ancillary principle’ as laid down in various provisions of the OECD, UN and US Model Tax Conventions and the Commentaries thereon, i.e. the principle according to which if, under a mixed contract, an activity is ancillary to another main one, the former transaction is to receive the tax treatment accorded to the latter. Although the ancillary principle is specifically considered in various articles of the Model Tax Conventions and the Commentaries thereon, neither the meaning of the word ‘ancillary’ nor the scope of such rule is precisely clarified. The term ‘ancillary’, in fact, takes on different meanings and, thus, has divergent scopes in the relevant provision of each tax treaty. This may eventually cause two states to understand and apply the principle in a given case differently, thus leading to situations of double taxation or non-taxation. Moreover, a far-stretched interpretation of the principle could result in an erosion of the source state’s taxing rights in favour of exclusive residence-based taxation. Lastly, despite being influenced by the need to simplify taxpayers’ obligations and to facilitate their monitoring by tax authorities, the application of the ancillary principle raises several concerns in terms of potential competitive distortions between domestic and international businesses.