Abstract

Keywords

Article 3(2); general renvoi clauses; ITC 789; Baldwins; Tradehold.

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1 Introduction

South African double taxation agreements (DTAs) generally adhere in many respects to the Model Tax Convention on Income and on Capital of the Organisation for Economic Co-operation and Development (OECD MTC).1 The OECD MTC defines only a few of the terms used therein and, in respect of the interpretation of undefined terms, includes the general renvoi clause, article 3(2). All South African DTAs also include a version of this clause.2

Article 3(2) currently reads as follows:3

As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires or the competent authorities agree to a different meaning pursuant to the provisions of Article 25, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

The inclusion of a provision in a treaty that deals with the interpretation of undefined terms is somewhat unusual,4 but there are a number of reasons for including such a provision in treaties aiming to grant relief against international juridical double taxation.5 There is, namely, a need for DTAs to closely interact with the contracting states' domestic tax laws, since DTAs place a restriction on the contracting states' right to levy taxes under these domestic tax laws.6 If the domestic laws change, which they frequently do,

there also is a need for DTAs to adapt to these changes without requiring in each instance a renegotiation of the treaty.7

The application and interpretation of general renvoi clauses raise numerous questions, many of which have been addressed by tax scholars and foreign courts. From a South African perspective, four of these issues in particular have been addressed in judgments by South African courts, and the aim of this article is to consider how the South African courts have dealt with these issues.8 The four issues are introduced in part 2 of this article. The introduction takes the form of a brief explanation of the conflicting views expressed by international scholars and foreign courts in respect of each issue. In the next part of the article, three South African reported judgments are analysed in order to ascertain the courts' view in respect of these issues. The article concludes in part 4 with findings on how these judgments aid the application and interpretation of general renvoi clauses in South African DTAs.

2 Issues regarding the application and interpretation of general renvoi clauses considered in this article

2.1 The ambulatory versus static approach

In broad terms, article 3(2) provides that an undefined term in a DTA shall have the meaning that it has under the domestic law of the contracting state applying the DTA. In situations where the meaning in the domestic law changed after the DTA had been concluded, the issue arises as to which domestic meaning must be taken into account under this general renvoi clause: the meaning that existed when the DTA was concluded (a static approach), or the meaning that existed when the DTA was applied (an ambulatory approach)? These situations are not rare occurrences, given the fact that most states amend their domestic tax laws far more frequently than they renegotiate their DTAs.

Since 1995, article 3(2) has made it clear that the relevant domestic meaning is the meaning "at that time"; that is, at the time of application of the DTA. If a DTA includes a post-1995 version of the general renvoi clause,9 it is thus clear that an ambulatory approach should be taken. There are, however, still a substantial number of DTAs, including DTAs concluded by South Africa, that include a pre-1995 version of the general renvoi clause and that accordingly do not expressly prescribe either the static or the ambulatory approach.10 In respect of these DTAs the question thus remains whether the static or the ambulatory approach should be adopted.

According to Du Toit and Hattingh, the static approach was the approach prescribed under "the international law of treaties" in the period prior to the 1995 amendment of article 3(2).11 There was also foreign case law in support of the static approach during this period, notably the Canadian case of R v Melford Development Inc (Melford Development).12 One of the main arguments in favour of the static approach in preference to the ambulatory approach is that the latter may give a contracting state the ability to change the effect of a DTA by amending the meaning of a term under its domestic law.

In contrast, there is also support for the ambulatory approach in respect of general renvoi clauses based on the pre-1995 version of article 3(2) in a number of foreign decisions13 and scholarly writings.14 The Commentaries to the OECD MTC (the Commentaries) have also stated since 1992 (thus after the Canadian decision in Melford Development mentioned earlier, but before the 1995 amendment to article 3(2) of the OECD MTC) that the ambulatory approach was the correct approach.15

One of the arguments in favour of the ambulatory approach is that it may be too cumbersome to go back to "old law" continually,16 especially since DTAs typically have such long lifespans. Furthermore, if changes are made to the scope of a domestic tax liability after the conclusion of a DTA, the distributive rule in the DTA will follow the scope of the domestic tax liability only if an ambulatory approach is adopted. However, if the static approach is used in preference to the ambulatory approach, applying the limitation imposed under the DTA on a contracting state's right to tax a particular income stream may become problematic.17 Moreover, it might have been the intention of the contracting states when concluding the DTA that the meaning would change as domestic laws change, again in the context of DTAs' long lifespan.18 Lastly, the concern mentioned earlier that under the ambulatory approach a contracting state may change the effect of a DTA by amending its domestic law is addressed by the qualification in article 3(2) that the context may require that the amended domestic meaning not be used. Avery Jones thus argues that, when the amendment to the domestic meaning is aimed at enlarging the taxing jurisdiction of the contracting state making that amendment, the context may require that the amended domestic meaning not be used.19

As a matter of practice in South Africa, the South African tax collecting authority "tended to" follow the ambulatory approach already as early as in 1993, thus before the 1995 amendment to article 3(2) of the OECD MTC.20

In part 3 this article considers whether South African case law has indicated a preference for the one approach over the other in respect of general renvoi clauses based on the pre-1995 version of article 3(2).

2.2 The use of a different expression in the domestic law

Article 3(2) provides that an undefined21 treaty "term" shall have the meaning that "it" has under the domestic law of the contracting state applying the treaty. Due to the fact that the OECD MTC serves as the basis for DTAs entered into by many different states, each with its own unique domestic tax legislation, the OECD MTC in many instances uses terms "of a wide nature".22 There is then often a divergence between the wide terms used in DTAs and the expressions used in the domestic (tax) law of the states that use the OECD MTC as the basis for the negotiation of their DTAs.23

This gives rise to the following question: if an expression other than the treaty term is used in the domestic (tax) law, can the meaning of that expression in the domestic law be taken into account for the purposes of the general renvoi clause? The controversy lies in how the word "term" in article 3(2) should be interpreted - in particular whether it should include a "concept".24 Some scholars support this possibility and argue that the meaning of a different but comparable expression in the domestic law may thus be taken into account under article 3(2).25 However, this view is not shared by all,26 based on a more restrictive interpretation of the word "term".

In part 3 below the article considers whether South African courts have taken a view on this issue. However, it must be emphasised that, even if the meaning of a different expression in the domestic law may indeed be taken into account under article 3(2), the treaty term will ultimately be given that domestic meaning only if the qualifications mentioned in part 2.4 below are met.

2.3 The use of deeming provisions in domestic law

Legislation often includes deeming provisions that give terms that appear in that legislation a meaning different from their usual (ordinary) meaning. The question that arises in the context of general renvoi clauses is whether deeming provisions that give meaning to terms in domestic legislation may also give meaning to treaty terms under general renvoi clauses.

The main concern raised against this possibility is that deeming provisions may "neutralise" the application of a DTA by enabling treaty override in some circumstances, in that they may extend the tax jurisdiction of a contracting state.27 A number of scholars and foreign courts have nevertheless supported the possibility that deeming provisions may be taken into account under the general renvoi provision.28

In part 3 below, the article considers whether South African courts have been prepared to take deeming provisions into account under general renvoi clauses. Here, too, it is important to emphasise that, even if the answer is that deeming provisions may be taken into account, the question whether the treaty term will in fact be given the deemed domestic meaning remains subject to the qualifications discussed in part 2.4 below.

2.4 The domestic meaning as a "last resort" or as the "leading principle"

Article 3(2) provides that a domestic meaning "shall" apply to give meaning to a treaty term "unless the context otherwise requires".29 Many issues arise with regard to the application and interpretation of this phrase.30 The issue

considered in this article is whether the approach of giving an undefined term in a treaty its meaning under domestic law in terms of a general renvoi clause is only "a last resort" or "the leading principle".31

A number of scholars support the "last resort" view.32 They argue that one should not overemphasise the use of the words "shall" and "require" in article 3(2). Rather, the context and purpose of the DTA should take more prominence.33 Therefore, a DTA "must be interpreted from its own meaning and context [and] [o]nly if this does not yield an answer can one reach to domestic law as an interpretation aid."34 One of the fears in this regard is that the adoption of divergent domestic law meanings may result in one of the objects of DTAs, being the granting of relief against international juridical double taxation, not being achieved. The argument is that, should the source and resident states adopt divergent domestic law meanings with regard to the distributive rules provided for under the DTA, this might result in a conflict in the qualification of income. As a result, both states may tax the income, each under a different distributive rule, with the resident state refusing to grant tax relief in respect of the tax levied by the source state.35

Proponents of the "leading principle" view place emphasis on the wording of article 3(2). They argue that the words "shall"36 (instead of "may") and "requires"37 indicate a preference for the domestic meaning that can be dislodged only if there are "reasonably strong" arguments to the contrary.38 With reference to the fear that international juridical double taxation may arise if divergent domestic meanings are adopted by the resident and source states, they point out that this risk has now fallen away "in nearly all instances" due to the development of a different understanding of the resident state's obligation to give tax relief under article 23A or article 23B.39 Under this understanding, the resident state is obliged to give tax relief in respect of taxes levied by the source state in those instances where it and the source state adopted different meanings for a treaty term due to divergent domestic meanings.40 The risk of international juridical double taxation is thus reduced under this view.

Avery Jones, who is a supporter of the "leading principle" view, notes that article 3(2) is not the only provision in the OECD MTC that includes the

qualification "unless the context otherwise requires". A similar qualification is also included in article 3(1), which contains a list of definitions applicable to the OECD MTC. Avery Jones argues that the reasons that would be required to overthrow a definition of a term under article 3(1) might have to be stronger than those required to overthrow a domestic meaning under article 3(2). The basis for his argument is that it is far less certain that the treaty negotiators agreed upon the domestic meaning than that they agreed upon a definition in article 3(1).41

In part 3 this article considers whether South African case law is leaning towards an approach whereby treaty terms are given their meaning under domestic law in terms of general renvoi clauses only as a matter of "last resort", or whether such an approach is "the leading principle".

3 South African case law in which reference was made to the general renvoi clauses in South African DTAs

There have been occasions where a South African court has given an undefined term in a DTA the meaning that it has in South African domestic tax law without referring to the general renvoi clause in the applicable DTA. ITC 187842 is such an example. In this case, the court considered the South Africa-United States (US) DTA. One of the issues that arose was the interpretation of the following phrase in that DTA:43

for a period or periods aggregating more than 183 days in any twelve-month period commencing or ending in the taxable year concerned.

The OECD MTC and Commentaries,44 which the court consulted, use the expression "fiscal year" instead of "taxable year", but the court did not attach any importance to this difference in terminology. The term "fiscal year" is not defined in the OECD MTC and the OECD has proposed that its meaning be determined in accordance with article 3(2).45 It is not used in the South African Income Tax Act (ITA),46 and neither is the term "taxable year". The court in ITC 1878 accepted without explanation that the "fiscal year" of the taxpayer, a non-resident company, ran from 1 March to 28 February.47 This, of course, is the "year of assessment" for individuals, but not necessarily

companies.48 As pointed out above, the court did not refer to the general renvoi clause, but it is nevertheless noteworthy that the court used a domestic meaning for a different term ("year of assessment") to give meaning to the treaty term ("taxable year").

Considered below are three judgments in which a South African court was tasked with the interpretation of a DTA and the court expressly referred to the general renvoi clause in that DTA.

3.1 ITC 789

ITC 78949 concerned non-resident shareholders' tax (NRST) levied under 1941 income tax legislation of the Union of South Africa (1941 ITA).50 The South Africa-United Kingdom (UK) DTA, signed in October 1946, included the following exemption from NRST:51

There shall be exempt from the Union non-resident shareholders' tax – (a) any amount in respect of which the person chargeable with such tax is a company, if the amount so chargeable represents the whole or a portion of the taxable income of a private company which, under the law of the Union relating to the taxation of the income of private companies, is apportionable … to a public company which is a resident of the United Kingdom.

The case concerned a private company that had a portion of its taxable income apportioned "under the law of the Union" to its UK shareholder. The court in ITC 789 had to determine whether the UK shareholder qualified as a "public company" for the purposes of the above-mentioned exemption under the DTA.

The term "public company" was defined in the 1941 ITA.52 The parties and the court accepted that the term in the treaty would have the meaning set out in this definition and the court noted that this was "placed beyond doubt" by the general renvoi clause in the 1946 South Africa-UK DTA.53 The court held that the UK resident company did not meet that definition in the 1941 ITA and that the exemption in the DTA accordingly did not apply.54

At first glance, the judgment in ITC 789 does not add much to an understanding of the interpretative issues surrounding general renvoi

clauses highlighted in part 2. However, it may be of some interest to the issue identified in part 2.1, that is whether the ambulatory or statutory approach should be followed in respect of general renvoi clauses based on the pre-1995 version of article 3(2). The general renvoi clause considered in ITC 789 was such a clause. In this regard, it is noteworthy that certain provisions of the 1941 ITA relating to the taxation of the income of private companies were changed after the conclusion of the 1946 South Africa-UK DTA. As noted above, the NRST exemption in the DTA applied in respect of55

any amount … which, under the law of the Union relating to the taxation of income of private companies, is apportionable … to a public company.

This provision thus did not expressly state whether, for the purposes of this exemption, the law pertaining to the taxation of the income of private companies applied as at the conclusion of the DTA, or as at the application of the DTA. The taxpayer conceded that56

'the law of the Union relating to the taxation of the income of private companies' includes any alteration of that law introduced subsequent to the date of the [DTA].

The court expressly agreed with this view.57

The phrase "under the law of the Union relating to" in this exemption from NRST is comparable with the phrase in the general renvoi clause in the DTA, which stated that undefined terms in the DTA should have the meaning "under the laws of that Contracting Government relating to the taxes".58 It is not surprising that the exemption from NRST should mirror any changes in the domestic tax law with regard to the manner of calculating the amounts subject to NRST. One thus cannot infer from this alone that the general renvoi clause would have been interpreted in the same ambulatory manner. The correlation in the wording of the NRST exemption and the general renvoi clause is nevertheless noteworthy and the court's approach at least indirectly shows that it was not averse to adopting an ambulatory approach.

3.2 Baldwins (South Africa) Ltd v Commissioner for Inland Revenue

The decision by the Appellate Division (AD) in Baldwins (South Africa) Ltd v Commissioner for Inland Revenue (Baldwins)59 also dealt with the NRST exemption in the 1946 South Africa-UK DTA. As in ITC 789,60 the AD had to decide whether a UK company which was the sole shareholder of the South African taxpayer company was a "public company" for the purposes of the NRST exemption in the DTA. One of the issues considered by the court was whether the definition of "public company" in the 1941 ITA could be used to give meaning to the term in the DTA. The taxpayer pointed out that this definition included categories of companies that could apply only to local and not to foreign companies, and argued that this was an indication that it was not the intention of the contracting states that the definition in the 1941 ITA would apply to the NRST exemption in the DTA.61 The taxpayer further argued that the meaning of the treaty term "public company" should instead derive from the company laws of either the Union of South Africa62 or the UK. According to the taxpayer, this would have resulted in the taxpayer's UK parent company qualifying as a "public company".63

The AD disagreed with this argument and noted as follows:64

I can find nothing …which shows clearly that the term 'public company' cannot have the meaning which has been assigned to it in …. our Income Tax Act…. On the contrary there is at least one very good reason why no other meaning should be assigned to it, and that is that otherwise the legislature of the United Kingdom could, by altering its definition of 'public company', alter the incidence of a Union tax in the Union. Such a possibility could never have entered the minds of the two contracting Governments.

Some scholars argue that this statement in Baldwins supports the static approach discussed in part 2.1.65 When evaluating this argument it is

important to note that there is no mention in the reported judgment of any actual amendment of either the definition of "public company" in the 1941 ITA or the meaning of "public company" in UK company law in the period after the conclusion of the 1946 DTA and leading up to the years of assessment considered in Baldwins. The statement of the court was thus not made in the context of deciding which of two possible meanings, one existing at the time of the conclusion of the DTA and an amended one existing at the time of the application of the DTA, should be used for the purpose of the DTA's general renvoi clause. Furthermore, it seems that the concern of the AD was aimed mainly at the possibility that, if a domestic meaning from UK law were to be used (as proposed by the taxpayer), the UK could, by amending its legislation, force South Africa to give an exemption from a tax levied by South Africa. There is no indication that the AD would have been equally concerned had South Africa amended its own legislation to extend the circumstances under which it would give exemption from NRST. It thus seems that Baldwins does not add to the debate on the static versus ambulatory approach.

Turning to the phrase "unless the context otherwise requires", the AD in Baldwins referred to a judgment of the Privy Council where that court held as follows:66

Now, when the interpretation clause in a statute says that such and such an expression shall include so and so, a court in construing a statute is bound to give effect to the direction unless it can be shown that the context of the particular passage where the expression is used shows clearly that the meaning is not in this place to be given effect to, or unless there can be alleged some general reason of weight why the interpretation clause is to be denied its application.

The court in Baldwins indicated that it would thus depart from the domestic meaning of "public company" in the 1941 ITA only if the context "clearly" showed otherwise, or if there were some other reasons "of weight".67 Also, it was pointed out earlier that Avery Jones argues that the reasons required to overthrow a definition of a term under article 3(1) (which also includes the phrase "unless the context otherwise requires") might have to be stronger than those required to overthrow a domestic meaning under article 3(2). If one takes this argument further, the reasons will have to be stronger to overthrow a statutory definition in domestic legislation when interpreting that legislation68 than a domestic meaning under article 3(2) when interpreting a

DTA. Amongst other considerations, one should bear in mind that only one legislature is involved in making domestic law as opposed to two in respect of DTAs.69 However, in Baldwins the court made no such distinction. Arguably, the court therefore required an equally strong indication that the context required otherwise in the case of both these instruments.

3.3 Commissioner for the South African Revenue Service v Tradehold

3.3.1 Background

Commissioner for the South African Revenue Service v Tradehold (Tradehold)70 concerned the imposition of an "immediate exit tax". An exit tax is a tax that is levied due to the fact that a person has left the tax jurisdiction of a state; that is, upon "tax emigration".71 In the case of an immediate exit tax, the taxable amount is calculated with reference to the value of the emigrating taxpayer's assets at the point in time immediately prior to the tax emigration.72 The tax is levied even though no actual transfer of assets took place and there is thus no realised gain at that stage.

The taxpayer in Tradehold was a South African incorporated company that relocated its "place of effective management" from South Africa to Luxembourg. According to Gutuza,73 the taxpayer thus became simultaneously tax resident in both South Africa and Luxembourg under each state's domestic tax laws. It was tax resident in Luxembourg only for the purposes of the South Africa-Luxembourg DTA, however.74

Shortly thereafter, an amendment to the definition of "resident" in the ITA resulted in the fact that the taxpayer ceased to be a tax resident of South

Africa for the purposes of the ITA too.75 The Commissioner argued that at this stage a deeming provision in the Eighth Schedule to the ITA triggered the imposition of the exit tax.76 Under this deeming provision,77 the taxpayer was "treated … as having disposed" of its only relevant asset, its shareholding in a subsidiary company.

In response to the Commissioner's argument, the taxpayer argued that South Africa was prevented from levying the exit tax under a provision in the South Africa-Luxembourg DTA that is based on the current article 13(5) of the OECD MTC.78 This provision gave the contracting state in which the alienator was resident (Luxembourg, in the case of Tradehold)79 the exclusive taxing right in respect of the "alienation" of assets consisting of shares.

To counter this argument, the Commissioner contended that the tax emigration that triggered the exit tax was not an "alienation" as contemplated under the DTA and that the DTA thus did not restrict South Africa's right to levy the exit tax.80 The SCA was accordingly left with the task of giving meaning to the word "alienation" in the South Africa-Luxembourg DTA. The word "alienation" is used in article 13 of the OECD MTC to indicate the event that gives rise to the gains covered by each of its sub-paragraphs.81 The most common dictionary meaning for the word

"alienation" is "the transfer of ownership".82 However, states often include in their domestic tax legislation a definition for the term "alienation", or a definition for a different but comparable term,83 and this definition frequently gives the term a meaning that includes events that do not involve a transfer of ownership.84

All of the above also holds true for the Eighth Schedule to the ITA. This is the part of the ITA in terms of which provisions relevant to the exit tax, forming part of capital gains tax (CGT),85 were included at the time that the South Africa-Luxembourg DTA was applied. Under this part, the trigger event for the levying of CGT is the "disposal" of an asset, rather than its "alienation". The term "disposal" is defined in general terms to include an "event … which results in the … transfer … of an asset".86 Certain specific events are also expressly included, such as the "sale … or any other alienation or transfer of ownership" of an asset.87 In addition to this general definition of a "disposal", a number of events are "treated" as disposals.88 At the time of the application of the South Africa-Luxembourg DTA, tax emigration was one such event.

The question considered in Tradehold was thus whether tax emigration, which involves no actual transfer of assets, can be regarded as an "alienation" for the purposes of a provision in a DTA based on the current article 13(5) of the OECD. This question had been considered prior to Tradehold by foreign courts. The Dutch Hoge Raad, for example,89 had considered it in respect of a Dutch exit tax on substantial shareholding.90 In terms of the relevant Dutch tax legislation, tax emigration from the Netherlands was deemed a "vervreemding" and triggered the imposition of the Dutch exit tax.91 The Hoge Raad had to consider provisions in three

Dutch DTAs, each based on the current article 13(5) of the OECD MTC.92 The court was primarily concerned with the question whether the levying of the exit tax, which had been introduced after the conclusion of the respective DTAs, constituted treaty override. However, the court referred to the general renvoi clauses included in these DTAs and held that the deemed vervreemding constituted an "alienation" under the treaties.93

Scholars, too, have considered whether tax emigration that triggers an exit tax can constitute an "alienation" for the purposes of article 13. Some scholars support this possibility. They contend that the treaty term "alienation" has a wide, autonomous meaning that includes tax emigration. Alternatively (or additionally) they contend that this outcome is achieved by referring to the domestic meaning of the term as provided for in the general renvoi clause.94 These scholars also argue that the Commentary pertaining to article 13 supports their view.95 There are, however, authors that argue against this possibility.96

3.3.2 The court's finding on the application of the general renvoi clause

The tax court97 in the Tradehold matter held that the deemed disposal constituted an "alienation" under the DTA. It never mentioned the general renvoi clause in the South Africa-Luxembourg DTA, but stated as follows:98

I am unable to see any reason why a deemed disposal of property should not be treated as an alienation of property for purposes of … the DTA. I agree in this regard with counsel for the appellant, who argued that it would be absurd if a taxpayer were to be protected in terms of … [the DTA] from liability for tax resulting from a gain from an actual alienation of property, but not from a deemed alienation of property.

On appeal, the SCA referred to two arguments advanced by the Commissioner in averring that no "alienation" as contemplated in the DTA had taken place.99 The first argument was that, since tax emigration is a deemed disposal under the South African ITA, it cannot be regarded as an actual disposal and thus also not as an "alienation" under the DTA. The Commissioner's second argument was that "alienation" should have the meaning that it (and not the term "disposal") would have under South African non-tax law, bearing in mind that the word "alienation" itself is not defined in the ITA;100 in this context, "alienation" does not include tax emigration.101

The court rejected the Commissioner's argument and held that South Africa was prohibited from imposing the exit tax in these circumstances under the DTA.102 In order to analyse the judgment of the SCA in the light of the issues raised in part 2 of this article, one must first determine which of the following two alternatives played out in the SCA's judgment: the SCA gave the treaty term "alienation" the meaning that it (or a comparable term) has in South African domestic law under the general renvoi clause included in the South Africa-Luxembourg DTA; alternatively, the SCA gave the treaty term "alienation" an autonomous meaning that includes tax emigration. Which of these alternatives is the more likely one is discussed next by analysing various statements made by the SCA and scholars' understanding of the SCA's judgment.

The first statement of the SCA worth noting is the following statement:103

The [South Africa-Luxembourg] DTA is based upon the [OECD MTC], which has served as the basis for similar agreements that exist between many countries. In interpreting its provisions, one must therefore not expect to find an exact correlation between the wording in the DTA and that used in the domestic taxing statute… [I]nevitably the wording in the DTA cannot be expected to match precisely that used in the domestic taxing statute. In SIR v Downing (supra) Corbett JA remarked … 'The convention makes liberal use of what has been termed "international tax language" (see Ostime …)' … . Sub-article 2 [of article 3] provides for a general rule of interpretation for terms used in the DTA that are not defined. 'Alienation' is not one of the defined terms and thus article 3(2) finds application …

In a later statement, the SCA held as follows:104

The crisp question that falls to be determined is whether the term ‘alienation’ as used in the DTA includes within its ambit gains arising from a deemed (as opposed to actual) disposal of assets. As mentioned above105 the term must be given a meaning that is congruent with the language of the DTA having regard to its object and purpose.

Classen argues that the court "relied heavily" on article 3(2),106 which presumably means that her view is that the court gave a domestic meaning to the treaty term "alienation". Du Plessis, however, favours the view that a domestic meaning was not given to the treaty term. She argues that the court by implication held that the context required that a domestic meaning

not be used107 and that the SCA gave the treaty term an autonomous meaning that includes tax emigration. In support of her view, she points out that the SCA referred to the use of "international tax language" in DTAs in the passage quoted above.108

With regard to the phrase "international tax language", Prokisch explains that it refers to the "common international understanding" of a treaty term. He further argues that, by using this term in a DTA, the contracting parties to that DTA intend for the term to have that meaning,109

unless they prefer to give the term a special meaning, either by formulating a special definition of the term or by using a term which has a clear relation to domestic law.

Prokisch's explanation opens up a number of possibilities relating to the motivation for including a widely-used term in a DTA. Two of these are relevant here. The first is that the contracting parties elected that treaty term in order to convey that the "common international understanding" for that term should apply to their DTA. The second possibility is that the treaty term has "a clear relation" to a term used in the domestic law of either or both of the treaty parties and the parties intended for the treaty term to have the meaning that the term has in their domestic laws.

What did the court in Tradehold have in mind with its reference to "international tax language"? One should note that the court referred to the phrase immediately after its statement that one cannot expect the words used in DTAs to perfectly match those used in domestic tax legislation. Arguably, the court may have been advocating the second possibility raised by Prokisch and felt it necessary to explain that a treaty term may have "a clear relation" not only to an identical term used in the domestic law,110 but also to a different, comparable term. Therefore, when determining the domestic meaning of a treaty term under the general renvoi clause (to which the court referred in its statement in the following paragraph), it is not

surprising that the treaty and domestic laws may use different terms for the same concept.

The view preferred in this article is that the court's initial reference to the general renvoi clause is an indication that the court considered the domestic meaning of the treaty term as its starting point. As shown in the highlighted sentence in the last paragraph quoted from the judgment earlier, it then also considered whether the adoption of that meaning would be supported by the "context", which would arguably include the purpose of the DTA.111 It probably found that it would be supported. Otherwise, one would have expected it to consult possible aids to the determining of an alternative, autonomous meaning. These aids could have included foreign case law, writings of foreign scholars, or the Commentaries.112 As shown earlier, there is at least some guidance from these sources on the meaning of the treaty term "alienation" in the context of tax emigration.

The SCA concluded as follows, with the highlighted sentence possibly confirming the use of the domestic meaning of "disposal" under the general renvoi clause:113

[24] Article 13 is widely cast… It is reasonable to suppose that the parties to the DTA were aware of the provisions of the Eighth Schedule114 and must have intended article 13 to apply to capital gains of the kind provided in the Schedule ... There is, moreover, no reason in principle why the parties to the DTA would have intended that article 13 should apply only to taxes on actual capital gains resulting from actual alienations of property.

[25] Having regard to the factors mentioned, I am of the view that the term "alienation" as it is used in the DTA is not restricted to actual alienation. It is a neutral term having a broader meaning, comprehending both actual and deemed disposals of assets giving rise to taxable capital gains.

3.3.3 The implications of the judgment for the issues considered in this article

Assuming that the SCA in Tradehold did indeed give the domestic meaning of "disposal" to the treaty term "alienation" under the general renvoi clause in the applicable DTA, what deductions can one make with regard to the issues discussed in part 2?

With regard to the issue highlighted in part 2.2, the SCA in Tradehold was prepared to give to a treaty term ("alienation" in this case) the meaning that a different expression ("disposal" in this case) bears in domestic legislation with reference to the general renvoi clause in the applicable DTA. It thus supports the view that the meaning of a different but comparable expression in the domestic law may in appropriate circumstances be taken into account under the general renvoi clause.

Furthermore, with regard to the question raised in part 2.3, that is whether deeming provisions in the domestic law may be taken into account under the general renvoi clause, the SCA's judgonment supports such a possibility.115

With regard to both these conclusions, the court emphasised the need to take into account the context, including the purpose of the DTA, when considering whether a domestic meaning should be used.

Lastly, with regard to the issue identified in part 2.4, that is whether a domestic meaning under article 3(2) should be used either "as a last resort", or as a matter of strong preference, the judgment does not make a clear impact. One can possibly say that the court accepted at the outset that a domestic meaning would apply and that it was looking for a reason why this should not be the case. This might thus indicate a preference for the domestic meaning. However, how "strong" the reasons for departing from this meaning should be is not apparent from the SCA's judgment.

4 Conclusion

General renvoi clauses in DTAs based on article 3(2) of the OECD MTC provide that an undefined term in a DTA shall have the meaning that it has in the domestic law of the contracting state applying the DTA unless the

context otherwise requires.116 There are many issues pertaining to the application and interpretation of these clauses, only four of which are considered in this article.

The first issue arises in those scenarios where a domestic meaning was amended after the conclusion of the relevant DTA. The question is then whether an ambulatory or static approach should be preferred. Since the redrafting of article 3(2) in 1995, it clearly prescribes the ambulatory approach. Accordingly, the domestic meaning at the time of the application of the DTA is the relevant meaning. With regard to clauses in DTAs based on the pre-1995 version of article 3(2), the position is less clear. Arguably, this issue has not yet been directly addressed by South African courts, and also not by the AD in Baldwins. However, some comments in ITC 789 may indirectly support the adoption of the ambulatory approach.

The second issue arises in those scenarios where the domestic law uses an expression that differs from the term used in the DTA. The question to be considered is whether the domestic meaning of the different but comparable expression in the domestic law may be taken into account under the general renvoi clause. The decision of the SCA in Tradehold arguably supports this possibility. The court in ITC 1878 did not refer to the general renvoi clause, but it is noteworthy that it used the meaning of a different expression in the ITA when it interpreted an undefined term in a South African DTA.

Another issue concerns deeming provisions in domestic law. In particular, the issue is whether these deeming provisions pertaining to the domestic meaning of a term may under general renvoi clauses be taken into account when an undefined term in the applicable DTA is interpreted. Again, the decision in Tradehold supports this possibility.

The fourth issue considers whether a domestic meaning may under article 3(2) be applied only "as a last resort", or whether on the contrary it will apply unless there are "reasonably strong arguments" that the context requires otherwise. In Baldwins the AD showed a strong preference for the use of a domestic meaning under a general renvoi clause, indicating that it would depart from it only if the context "clearly" showed otherwise, or if there were some other reasons "of weight". The more recent judgment in Tradehold is not as clear in its expressed preference for the use of a domestic meaning.

The combined picture that emerges from these judgments over a 60-year period is that South African courts do not regard the use of domestic meanings under article 3(2) "as a last resort". They have instead been willing to use domestic meanings whilst noting the lack of weighty reasons

to the contrary. They were moreover prepared to do so even in those instances where the expression used in the domestic law differed from the term used in the DTA and in instances where the meaning in domestic law was based on a deeming provision. Possibly, they have also leaned towards a preference for the ambulatory approach as a matter of default in those cases where a general renvoi clause in a DTA does not expressly prescribe whether a static or ambulatory approach should be adopted.

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List of Abbreviations