What is a Protocol?
When reviewing tax treaties, there may be a document called "Protocol" that exists separately from the main text of the treaty.
The name "Protocol" may suggest that it is a supplementary document of lesser importance than the main text of the treaty, but this is not necessarily correct.
Regarding the Protocol attached to the treaty, the Ministry of Finance clearly explains that the provisions of the Protocol, which form an inseparable part of the treaty,have the same effect under international law as the provisions of the main text of the treaty.と明確に説明しています。
Therefore, if you only read the main text of the treaty and do not check the Protocol, you may overlook the actual rules of the treaty.
Two Common Types of Protocol
In the practice of tax treaties, the term "Protocol" is used in two main contexts.
One is a Protocol that is created simultaneously with a new tax treaty when it is concluded, supplementing specific provisions of the treaty text. The other is an Amending Protocol, which modifies the content of an existing tax treaty.
In the former case, detailed definitions that are difficult to fit into the treaty text, treatment of specific domestic systems, details of arbitration procedures, and exceptions for specific income may be stipulated.
In the latter case, the treaty itself is amended by deleting, replacing, or adding specific provisions of the existing treaty.
A Protocol should therefore be understood as part of the treaty's legal architecture rather than simply explanatory material.
Japan-Specific Provisions Can Appear in Protocols
For example, in the Protocol attached to the new tax treaty between Japan and Armenia, in addition to examples of permanent establishments (PE), there is a provision that allows for renegotiation based on a request from Japan if Armenia recognizes a lower interest tax rate or exemption in future treaties with other countries.
Furthermore, the details of arbitration procedures in mutual consultations are also specified in the Protocol.
This is a clear example showing that the Protocol does not merely explain the treaty text, but has legal effects on future treaty relations and the arbitration procedures themselves.
Anonymous partnerships in the Protocol
In tax treaties concluded by Japan, there may be special provisions regarding anonymous partnerships, which are a unique form of investment in Japan.
For instance, in the Protocol of the recent Japan-Ukraine tax treaty, it is stipulated that if income from certain anonymous partnership contracts is deducted from the taxable income of the payer in Japan, Japan can tax it according to domestic law.
Similar considerations can be confirmed in the Amending Protocol between Japan and France and the Japan-Pakistan treaty.
Thus, there may be unique points specific to Japan placed in the Protocol that cannot be understood by reading only the model treaty.
Amending Protocols Can Materially Change a Treaty
A representative example of a Protocol that amends an existing treaty is the Japan-U.S. tax treaty amendment protocol signed in 2013 and effective in 2019.
This amendment relaxed the exemption requirements for certain dividends, established a principle of exemption for interest in the source country, introduced an arbitration system in mutual consultation procedures, and expanded the scope of collection assistance.
For the Japan-UK tax treaty, significant changes have also been made regarding the taxation of certain parent-subsidiary dividends and interest, PE attributable income, arbitration, and collection assistance through the 2013 amendment protocol.
Therefore, searching and reading only the old treaty text may lead to conclusions that differ from the current tax relations.
The Japan-France amendment protocol also has connections to social security
The Protocol of tax treaties may include interesting provisions beyond pure income classification and withholding tax rates.
In the 2007 amendment protocol of the Japan-France tax treaty, measures were introduced to allow income deductions in the country of employment for certain social insurance premiums paid to the social security system of the other country, in relation to the Japan-France social security agreement. Additionally, provisions to secure Japan's source country taxation on anonymous partnership income are also established.
It can be said that this is one of the rare examples where tax treaties and social security agreements intersect in practice.
Protocols and the MLI Are Different
The BEPS Implementation Treaty (MLI) also has the effect of modifying existing tax treaties, so it may appear similar to the Amending Protocol, but the mechanisms are different.
The Amending Protocol is usually concluded between Japan and a specific counterpart country, and it individually amends their bilateral treaty.
In contrast, the MLI is a multilateral treaty, and both Japan and the counterpart country select it as a target treaty, modifying existing bilateral treaties to the extent that their mutual reservations and notifications align.
Therefore, when reading the current tax treaties, Original Treaty → Amending Protocol → MLI there may be multiple layers that need to be confirmed.
The consolidated version is for convenience, but it is not a treaty in itself
The Ministry of Finance may publish a consolidated text that incorporates the Amending Protocol and others into the original treaty.
While it is very convenient in practice, the Ministry of Finance itself states that the consolidated text is created for convenience to facilitate understanding of the application relationships and has no legal effect.
Therefore, for important matters, it is necessary to confirm not only the consolidated text but also the original treaty and the full text of the Protocol.
Practical Takeaway
A Protocol is not merely a "footnote" or simple commentary on the treaty text. A Protocol concluded simultaneously with a treaty has important legal effects as an inseparable part of the treaty, and the Amending Protocol changes the existing treaty itself.
Especially in Japan's tax treaties, important practical matters such as anonymous partnerships, arbitration procedures, specific domestic systems, and future renegotiation obligations may be included in the Protocol.
When reviewing tax treaties, it is important to read not only the Treaty but also the Protocol as a single legal package. This article explains the general functions of the Protocol. For the legal effects of individual Protocols, it is necessary to check the specific wording of the relevant treaty and Protocol.
※This document explains the general functions of the Protocol. To understand the legal effects of individual Protocols, it is necessary to refer to the relevant treaties and the specific wording of the Protocols.
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