The tax treaty exemption method obliges the state of residence to exempt income from taxation that may be taxed in the source state. Art 23A para 3 OECD Model contains the so called progression proviso, which allows the state of residence to consider the exempt income when determining the tax rate to be applied to the non-exempt income. According to long standing administrative practice and presumably the prevailing doctrine, the progression proviso is only applicable in the state of residence. In contrast, the Austrian Federal Tax Court states in a recent decision that the progression proviso can also be applied if Austria is the source state of a person with unlimited tax liability who is not a resident of Austria under tax treaty law. Sylvia Auer, Matthias Petutschnig and Kristin Resenig critically present and question the possibility of a progression proviso in the source state.
