Interest and Non-Discrimination under the OECD Model Convention

The taxation of interest in cross-border situations can often give rise to instances of discrimination, many of which can be remedied through a careful consideration of the non-discrimination rules contained in Article 24 OECD MC. This provision operates in tandem with the distributive rules of the tax treaty, but is not, in general, limited by them. A core difficulty of the application of the non-discrimination provision lies in establishing comparability of situations necessary to identify acceptable distinctions drawn in national law from those that are prohibited. This is especially challenging in the context of interest deduction limitation rules, which often do not simply attached consequences to the recipient's residence but to other criteria, which are however closely linked. This chapter proposes a test that builds on the traditional idea of simply adding the protected condition to characteristics of the disadvantaged taxpayer but refining this approach by searching for scenarios in which the "closely linked" criteria can the detached from each other to single out the basis of the discrimination. This test aims to improve on the rather rough traditional approach without the need for reference to a state's alleged discrimination aims and their "legitimacy" within the international tax system. The contribution goes on to show that both Article 24(4) and Article 24(3) OECD MC have an important role to play for cross-border interest payments to ensure equal treatment with respect to deductibility, the level of taxation and the granting of withholding tax credits.