Last week we discussed the taxes covered by the DTA as set out in Article 2In this week’s blog, we will be discussing Article 3 of the DTA – General Definitions; it is important to understand the application of the defined terms in the DTA and its interpretation by either US or Australian courts. I am not going to explain every definition set out in Article 3, but rather focus on certain specific terms and their interpretation.


Article 3 provides general definitions and rules of interpretation applicable throughout the DTA. Certain other terms are defined in other articles of the DTA. For example, the term “resident” is defined in Article 4 (Residence), the term “permanent establishment” is defined in Article 5 (Permanent Establishment), and the term “royalties” is defined in Article 12 (Royalties).


Article 3 of the DTA can be broken down into two parts. Paragraph 1 defines some principal terms used throughout the DTA and Paragraph 2 makes provision for terms not defined in the DTA and how they should be interpreted.

Paragraph 1

The definitions of the terms person, “company”, “enterprise of a Contracting State”, and “international traffic” are similar to the definitions in the U.S. Model. The “competent authority” for the United States is the Secretary of the Treasury or his delegate and for Australia the Commissioner of Taxation or his authorized representative. The terms “United States” and “Australia” are defined to include the continental shelf areas of the two countries for exploration and exploitation of their natural resources. Definitions are provided for the terms “Contracting State,” “State,” “United States tax,” ”Australian tax,” and “resident of one of the Contracting States.”

The definitions of a United States corporation and an Australian corporation in terms of the DTA are of importance. The DTA specifically excludes from these definitions, corporations under the laws of the Contracting States are residents of both States. A corporation created and organized under the laws of a state of the United States is considered by the United States to be a United States corporation; but such a corporation could also be considered by Australia to be an Australian corporation if it is managed and controlled in Australia or if it does business there and its voting power is controlled by Australian resident shareholders. If such a situation does arise, the dual resident corporation is not considered a resident of either country for purposes of the Treaty and is therefore not entitled to benefits granted by either State under the Treaty to residents of the other State.

We are the only multi-disciplinary international CPA firm in the United States that specializes in U.S.– Australia taxation.

Paragraph 2

Paragraph 2 provides that terms not defined in the Convention shall have the meaning which they have under the laws of the Contracting State concerning the taxes to which the Convention applies unless the context of the Convention requires a different interpretation.

Under the terms of Article 24 (Mutual Agreement Procedure), the competent authorities may agree on a common definition of an otherwise undefined term. The term “context” includes the purpose and background of the provision in which the term appears. An agreement by the competent authorities for the meaning of a term used in the Convention would supersede conflicting meanings in the domestic laws of the Contracting States. Difficulties arise when international rules of interpretation are applied to a DTA which may differ from a state’s domestic fiscal interpretation. Such a conflict might arise because on an international level the courts would look to the Vienna Convention (for example, the interpretation of matters such as non-defined terms in Article 3(2), multi-lingual versions of the treaty, aids to interpretation such as external materials, etc.), which would then need to be compared with the domestic approach to statutory fiscal interpretation. The domestic approach may differ, for example, the domestic law may require a more literal approach; the natural vs the specific meaning of words in the statute, the use of the OECD commentary; the application of Article 3(2) of the treaty for non-defined terms (and possible conflict between the contracting states as to such definitions); domestic case law precedent etc.

A further issue that should be highlighted is the timing of the enactment of a treaty and the subsequent domestic law of a contracting state which may be applicable under Article 3(2).

The question is whether the “static approach” or the “ambulatory approach” to interpretation should be taken. The static approach means the term has the meaning given under domestic law at the time the treaty was entered into – which may be different from the meaning at the time the term is being applied (due to changes in domestic law, for example). The ambulatory approach means the term has the meaning which it has under the contracting state’s domestic law as that is amended from time to time. So the interpretation of the term can be at a later date from the entering into of the treaty.

These two approaches may give rise to the conflict concerning undefined terms within a treaty, however, it should be noted that the ambulatory approach is generally seen as the more common method of interpretation of undefined terms. (This approach was used in the US case of Kappus v Commissioner, 337 F. 3d 1053 (DC Cir. 2003)). In addition, the OECD commentary itself supports the ambulatory approach to interpretation.


Due to the different approaches taken to the rules of interpretation for treaties or conventions and the approaches applied to the interpretation of domestic fiscal legislation, Article 3 (2) could be seen as leading to an apparent dichotomy.

It is therefore recommended to make sure that your international structure does not fall within terms not defined in the DTA as this could lead to an expensive exercise to resolve.

Our team of International Tax specialists at Asena Advisor has an in-depth knowledge of how to interpret international tax treaties and ensure that your international structure is not open to ambiguity.

Shaun Eastman

Peter Harper