Legislative History of United States Tax Conventions Vol. 4: Model Tax Conventions

LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS
PREPARED BY THE STAFF OF
THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION
IN FOUR VOLUMES
Volume 4 Model Tax Conventions
U.S. GOVERNMENT PRINTING OFFICE 73095 0 WASHINGTON : 1962
For sale by the Superintendent of Documents, U.S. Government Printing Office Washington 25, D.C.
HeinOnline -- 4 Legislative History of United States Tax Conventions i 1962
HeinOnline -- 4 Legislative History of United States Tax Conventions ii 1962
LEGISLATIVE HISTORY OF LNITED STATES TAX CONVENTIONS SUMMARY OF CONTENTS

VOLUME 1
PART I-INCOME TAX CONVENTIONS
Page
. --Section 1. General Information ... ------------Section 2. Australia Section 3. Austria Section 4. Belgium --------------------------------Section 5. Canada -Section 6. Denmark ---------------------Section 7. Finland Section 8. France -- Section 9. Germany --------------------------------------Section 10. Greece Section 11. Honduras ------------Section Section Section Section Section Section Section Section Section Section Section Section Section Section 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. VOLUME 2 India Ireland Israel_ Italy Japan - N etherlands_- - - - - - - - - - - - - - - New Zealand--Norway---------------Pakistan_ Sweden Switzerland Union of South AfricaUnited Arab RepublicUnited Kingdom_ -_ VOLUME 3
PART II-DEATH TAX CONVENTIONS
(3) (65) (151)
(239)
(413) (681) (741) (799) (1275) (1357) (1437)
- (1503) - (1579)
(1631) (1651) (1889) (2013) (2067) (21.73) (2319) - (2381) (2457) -- -- (2541) (2565)
Section Section Section Section Section Section Section Section Section Section Section Section Section Section
General Information ----------------------------Australia ... . --Belgium -------Canada -Finland -----------------------France-Greece ------------Ireland Italy --Japan -N orw ay -................ Switzerland U nion of South Africa ---------------------------United Kingdom-. -
(2961) (2967)
(3007)
(3045) (3257) (3309) (3409) (3485) (3529) (3587) (3687) (3745) (3791) (3865)
--
HeinOnline -- 4 Legislative History of United States Tax Conventions iii 1962
PART III-GIFT TAX CONVENTIONS
Section 1. General Information ----------------------------------Section 2. Australia --------------------------------------------Section 3. Japan ----------------------------------------------VOLUME 4

PART IV-MODEL TAX CONVENTIONS
(3955) (3961) (3993)
Section Section Section
(3999) 1. League of Nations ---------------------------------2. Organisation for European Economic Cooperation (OEEC__ (4441) 3. Organisation for Economic Cooperation and Development (4703) (OECD) ----------------------------------------
(iv)
HeinOnline -- 4 Legislative History of United States Tax Conventions iv 1962
PART IV MODEL TAX CONVENTIONS
(3997)
HeinOnline -- 4 Legislative History of United States Tax Conventions 3997 1962
SECTION 1 LEAGUE OF NATIONS
(3999)
CONTENTS OF SECTION 1
Page
1. Report on Double Taxation submitted to the Financial Committee By Professors Bruins, Einaudi, Seligman And Sir Josiah Stamp (Document E.F.S.73.F.19.; April 5, 1923)
-----------
(4003)
2. Double Taxation And Tax Evasion-Report and Resolutions Submitted By The Technical Experts to the Financial Committee of the -League of Nations (Document F.212; February 7, 1925) 3. Double Taxation and Tax Evasion-Report Presented By The Committee of Technical Experts on Double Taxation and Tax Evasion (Document c.216.M.85.1927.1I.; April, 1927) ---4. Double Taxation And Tax Evasion-Report Presented By The General Meeting of Government Experts on Double Taxation and Tax Evasion (Document C.562.M.178.1928.I1.; October, 1928) 5. Fiscal Committee Reports to the Council on the Work of the Committee: First Session (Document C.516.M.175.1929.II.; October 26, 1929) Second Session (Document C.340.M.140.1930.II.; May 31, 1930)_ Third Session (Document C.415.M.171.1931.II.A.; June 6, 1931) Fourth Session (Document C.399.M.204.1933.IL.A.; June 26,
1933) -. .-------------
(4057)
(4111)
(4151) (4195) (4203) (4225)

(4241)
Fifth Session (Document C.252.M.124.1935.II A.; June 17, 1935)_ (4249) Sixth Session (Document C.450.M.266.1936.I1.A.; October 21,
1936) ---. 1937) -........ -----------------.............................-----
(4257) (4265) (4271)
Seventh Session (Document C.490.M.331.1937.II.A.; October 16, Eighth Session (Document C.384.M.229.1938.II.A.; October 25, Ninth Session (Document C.181.M.110.1939.I1.A.; June 21, (4275) 1939) -------------------------------------------------Tenth Session (Document C.37.M.37.1946.II.A.; April 25, 1946)_ (4295) 6. London and Mexico Model Tax Conventions-Commentary and Text (4319) -(Document C.88.M.88.1946.II.A.; November, 1946)
1938) -------- - - -
(4001)
E.F.S. 73. F. 19.
LEAGUE OF NATIONS
ECONOMIC AND FINANCIAL COMMISSION
Report
ON
DOUBLE
TAXATION
BY
submitted to the Financial 'Committet
PROFESORS BRUINS, EINAUDI, SELICMAN AND SIR JOSIAH STAMP
(4003)
LEAGUE OF NATIONS
GmKKVA,
April 5th, 1923.
Economic and Financial Commission
Report.
ON
DOUBLE TAXATION
SUBMITTED TO THE FINANCIAL COMMITTEE
BY
PROFESSORS BRUINS, EINAUDI, SELIGMAN AND SIR JOSIAH. STAMP
(4005)
INTRODUCTION
GENEVA, April 3rd, 1923.
of double taxation, decided in September 1921 to ask certain economists to prepare a report
The Fina-icial Co,,mittee of the League of Nations, which was entrusted with the study The following were accordingly invited:
on the matter.
Prof. Bruins (Commercial University, Rotterdam). Prof. Senator Einaudi (Turin University). Prof. Seligman (Columbia University, New York). Sir. Josiah Stamp, K.B.E. (London University). The tenns of reference given to these four experts were fiied in March 1922 by a Sub-Committee of the Financial Committee (Doc. E.F.S. 253. A. 152) ; they were as follows: (x) What are the economic consequences of double taxation from the point of view:
(a) of the equitable distribution of burdens; (b) of interference with economic intercourse and with the free flow of capital? To what extent are these consequences similar in the different types of cases commonly described as double taxation? (2) Can any general principles be formulated as the basis for an international convention to remove the evil consequences of double taxation, or should conventions be made between particular countries, limited to their own immediate requiiements ? In the latter alternative, can such particular conventions be so framed as to be capable ultimately of being embodied in a general convention? (3) Are the principles of existing arrangements for avoiding double taxation, either between independent nations (e.g., the lRone Convention) or between the component portions of a federal State, capable of application to a new international convention? (4) Can a remedy be found, or to what cxtent can a remedy be found, in an amendment of the taxation system of each individual country, independently of any international agreement ? (5) To what extent should the conventions on the subject of double taxation establish an international control to prevent fraudulent claims? After an exchange of views by correspondence, the experts met in Geneva in March, I923, and have drawn up the following-report, which they beg to submit to the Financial Committee. Professor Senator Einaudi was unable to be present at the meeting in Gene'a, but he is in agreement with the views expressed in this document.
(4006)
CONTENTS
Pane
INTRODUCTION
.3.........
..............
. . . .
PART I.
ECONOMIC CONSEQUENCES OF INTERNATIONAL DOUmLI TAXATION ............... 5
PART II.
GENERAL PRINCIPLES WHICH GOVERN INTERNATIONAL COMPETENCE IN TAXATION:
...................... Secion 1. General observations . ... ........ ............................ A. The basis of .taxation ..... ................. B. The elements of economic allegiance ....... Section II. Economic allegiance and classification of wealth for the purposes of ........................... taxation ................. PART III.
APPLICATION OF THE PRINCIPLES:
18 8 22
27
Secion I. The four general methods of avoiding double taxation ........... Section I. Application to death duties and property taxes ............. .............. Section Ill. Application to the taxation of income .....
ADDENDUM: ALLOCATION OF EARNINGS .................
40 .. 43 45 52
..............
(4007)
ECONOMIC AND FINANCIAL COMMISSION
Report by the Experts

ON
DOUBLE TAXATION
PART I.
ECONOMIC CONSEQUENCES OF INTERNATIONAL DOUBLE TAXATION.
Two Classes of Economic Consequences. The first question in the terms of reference is as follows: What are the economic consequences of double taxation from the point of view:
(i) of the equitable distribution of burdens; (2) of interference with economic intercourse and with the free flow of capital? To what extent are these consequences similar in the different types of cases commonly
described as double taxation? This indicates that double taxation is regarded as having two fields of operation, in one of which the taxes may be described as burdens on existing economic rewards, and in the other as an interference with new or potential economic intercourse. It is not demonstrable how far these two fields may overlap or whether they must be mutually exclusive and exhaust the whole area of possibility. In our view, the distinction drawn is a sound one and it is fundamental. Double taxation will be either a burden or an interference, but there is very little overlapping, and nearly all actual cases can be assigned to one or the other category ; whether a given tax talls into one or the other is largely determined by the time of first imposition of the tax in relation to the time when the capital is invested to which the burden applies. The economic consequences that flow from the two classes of cases are of a very widely different description.
73095 0-62-vol.
2-2
(4009)
-6
Of course, the imposition of a new tax (or an increase in an old one), if it applies to some revenues or sources of income already in existence at that date and equally to all similar revenues or new sources of income which may come into existence after that date, will be found really to have consequences in the two fields of operation above described. But this does not invalidate the -ollowing arguments about the effect of the tax in those separate fields. It does, however, introduce important difficulties in the treatment of double taxation in practice, and it is for most administrations well-nigh impossible to maintain any relief differentiating for all future time between two sections of one class of wealth according to a date of "origin ". It may be well to give a brief description of the. process of amortisation or capitalisation': All capital goods posses, a capital value which represents a capitalisation of their income value. The process through which income is transmuted into capital is expressed in the rate of interest. The equilibrium with which we have to deal here is the equilibrium between capital and income. Given a general rate of-interest, any change in income values will tend to engender a change in capital values which will restore the equilibrium between the two on the old level. When the rate of interest itself changes, the equilibrium between income and capital values will be reached on a new level. The level is found in the rate of interest; the equilibrium is one between capital and income. Capital values will accordingly fall when, with an unchanged rate of interest, incomes decrease; or when, with an unchanged income, the rate of interest rises: vice vers4, capital values will rise when the rate of interest falls, or when, with an unchanged rate of interest, income values increase. In so far as such changes in capital values are produced by taxes, we may speak of the capitalisation or amortisatiou, of taxation. This effect of a.new tax is enhanced by inequality. Any inequality of taxation augments the disturbance of the economic equilibrium between the over-taxed and the under-taxed goods and under certain circumstances sets in motion forces which will establish a new equilibrium. When a special tax is imposed on a .particular cLiss of commodities, it will, under certain conditions, fall entirely on the individual who owned the commodity before the tax was imposed; and the future purchaser, notwithstanding that he pays the tax every year, will be immune because "he tax will be discounted or amortised through a depreciatiorl of the capital value of the commodity by a sum equal to the capitalised value of the tax. The present owner of the under-taxed goods and the purchaser or future owner of the over-taxed goods will, through this tendency toward economic equilibrium, receive an equal Pet return on the new capital value'of the-goods in question. For otherwise there would be a shifting of demand from the over-taxed to the under-taxed goods which would soon re-establish an equilibrium. This process of capitalisation or amortisation may also be termed the absorption of taxation, because all the future taxes may be said to be absorbed into the lower selling price. We may therefore speak indistinguishably of the capitalisation, the amortisation, the d,scounting or the absorption of the tax. Some economists emphasise more than others the general effects of capitalisation as applied to all taxes and not -imply to special or unequal taxes. For the purpose of this memorandum, we regard any such change as a simple change in capital values and reserve the term" capitalisation " or " amortisation " for the phenomenon due to any inequality. These paragraphs are quoted or adapted closely from a forthcoming treatise on Public Finance by one of the authors of the present report.
(4010)
- 7 Thc Broad Differences between the Two Classes. The first point that emerges upon a careful consideration of the problem is that a difference exists in "economic consequences " when a new tax is imposed (or an existing tax is made much heavier) between the position of capital invested from abroad in the taxing country prior to the tax and tha, invested after the tax. We have arrived at the opinion that the conclusions expressed in the "Note on the Effect of Double Taxation " are incontrovertible within the sphere touched upon in that Note, i.e., the effect of double taxation upon the placing of new capital. I The Note was evidently not a note upon the extent of the burden of double taxation nor the necessity for remedying it. It may be advisable to recapitulate here a summary of its arguments. In the illustrative terminology of the original Note, "Morania" was specified as the country of investment. T' is had the advantage of not raising (subconsciously) any prejudices or presumptions which might cling round the use of an actual or specific country. The term "nonresident " investor indicates an investor outside Morania. (i) Any non-resident investor placing his investment in Morania, knowing it will be subject to taxation there, throws back upon the borrower the burden of the Moranian tax primarily or apparently placed upon himself (the non-resident investor), and, as an investor, is not in this event subject to double taxation (paragraph 8 of the Note.)
(2)
Taxation imposed in Morania on investments placed there by investors of other countries will act as an impediment to the movement of capital to Morania. The reason of this restriction of movement is that a marginal quantity of the (e.g.) British capital has by reason of the imposition of the Moranian tax (contracted with freedom from such taxation) been induced to seek other fields of investment (paragraph 12 of the Note).
(3) Any relief from double taxation given in order to encourage the movement abroad of capital which, in the absence of such relief, finds it unprofitable to move must be extended on practical grounds to all investments, whether old ones or new. (4) Taxation imposed in the country of investment, after the (late of investment, of a weight greater than that anticipated or provided for by the investor will impose double taxation in a true sense, from which the investor will find it difficult to escape owing to the effect of amortisation (paragraph 21 of the Note). Certain conclusions follow logically from the arguments in that memorandum, which may be briefly stated as follows: So far as concerns taxation in existence at the time when an investment is made, the "burden" of double taxation is a misnomer. It can only be rightly called a "burden " if a hindrance to free action is a "burden ". As a matter of fact, it is rather a "barrier ", and the ap,5earance of double taxation is, in fact, for the most part negatived by the ordinary operation of economic forces. If, however, to be debarred from such an extensive or profitable operation as one might have had if the "barrier" did not exist is a' burden ", then in this sense the barrier is a burden. But it is doubtful whether this is a very satisfactory use of terms; for in an analogous case, if an exporter, thinking that he would like to export goods to a country for the first time, finds on
the Economic and Financial Commission of the League" and has been published document N' E.F.S. 16a, A. 16a, dated May 31st, i9a;.
The Note prepared for Sir Basil Blackett by an anonymous author was "circulated by him to as League of Nations
(4011)
-8enquiry that he is effectively "shut out " by a tariff, he would hardly describe that tariff as a burden upon his exports when such exports do not exist. He might, however, rightly have done so if, with an established trade, the tariffs were put on and if, with no increase of price in theimporting country, he then bore the duty. The more common tariff case, which, indeed, corresponds closely to this taxation question is, where for many classes of goods he is excluded, but where with others there is a sufficient rise in price in the importing country still to give him a satisf -tory margin of profit after paying the duty. So, in the case of double taxation, whatever investment exists in the area when the barrier is put up suffers a burden ; whatever investment thereafter from outside gets over the barrier escapes the burden. But much potential investment is kept back altogether, and this part is "barred ", not "burdened ". In somc senses this case is only a particular illustration of a general theory relating to the effects of tax-%in general, including taxes on consumption. It is a truism of public finance that a tax on consumption is not only a burden on those who consume but a barrier to those who iow no longer consume because they are dissuaded from consumption through the rise of the price of the commodity in question due to the tax. So the burden and the barrier, in the case of double taxation, are striking instances of this general doctrine.
The Outside Investors' Outlook. It is clear that, when an investment has once been made and a new tax is imposed, the owner of that investment at the moment of imposition must bear the full brunt of the burden, as the yield of his investment is reduced by it; and if he tries to sell the investment the price that he gets is similarly reduced in a world market on account of the burden. This unquestionably is a burden in every sense of the word. In the case of a new investment being sought or invited after the tax, the investor takes it into full consideration and does not make the investment unless he can get a return at the general world rate. Broadly speaking, therefore, if any one bears the tax or suffers the consequences of the tax burden, it is the country imposing it. The position to'non-resident investors would be somewhat as follows: Having ioo units to invest on which is required a net yield of 6 per cent. (y), and knowing that the gross yield will be subject to Moranian tax of loper cent., the non-resident investor will calculate that'this zo per cent. tax will reduce his gross yield on the investment by 2/s per cent. (x), and he will accordingly demand a gross yield of 6 s/a per cent. If the non-resident's income tax in his own country allows for Moranian taxes as an expense, his actual income will be: Gross yield ...... ...................... . Less foreign tax xo% ....... .................. Actual income for non-resident's home taxation ...... .. 6.66 units (y+x) 66 units (x) 6.o units (y)
In the British system, a deduction of foreign tax from foreign income is allowed as an expense. as shown above. The United States provision is, however, for a d~luction of the foreign tax from the home tax (in case of its citizens), making a complete relief frofn double taxation entirely at the cost of the investor's home exchequer. This will necessitate a modification of the above figures, without, however, altering the practical conclusions. This illustration will make it clear that the non-resident investor, by demanding 6.66 per cent. and getting it (for it is assumed that he will not invest unless he does get it), has thrown back on the Moranian borrower the burden of
(4012)
- 9the .66 units Moranian taxation. Nominally the non-resident investor pays .66 units Moranian tax aid his non-resident tax in addition, i.e., he suffers double taxation; in reality, he pays only his home or residence tax, for he has secured or protected himself against the Moranian taA by the additional yield required before he invested. We feel, therefore, that it is undoubtedly true as a general principle that any de facto nonresident investor throws back (or will ultimately throw back) on the Moranian borrower the burden of income tax existing at the time ef the investment, although that tax is primarily imposed on the non-resident lender. At the same time, it must not be thought that the two comparatively distinct cases of barriers and burdens are entirely without influence upon each other. If the would-be investor in a foreign country's investments has been "trapped" on a previous occasion by taxes imposed after his investment has been made, or if he has seen others trapped, he will desire to take into account, when he makes a new investmert, not merely the existing taxes i.e., the barriers, but also the possibility of a trap by future additional taxes; and to that extent he will amortise or insure against not merely existing taxes but the possibility of later ones. "Once caught, twice shy. " We believe the distinction drawn between the "burden ' and the "barrier" has an important bearing on any practical measures which may be devised. It is quite one thing to say that no investors shall be penalised or "trapped " after they have made their investment, and quite another to say that there should be no tariff against the easy flow of invested capital, wherever it may be wanted. It may be that the practical conclusions arrived at (or remedies proposed) for both cases will prove to be the same, but it is not necessarily so, and should not be assumed so at the outset. We have thus far spoken of the tax as a burden or a barrier for the investor. But it must not be forgotten that in the case of Morania, the country in which the investment is made, the tax cannot possibly be a barrier without proving to be a burden or, not to confuse the meaning we have attached to this term, an economic handicap to the Moranian inhabitant. That is to say, if Morania is a debtor country, making rapid strides in agriculture or industry as a result of the investment of foreign capital, the imposition of a Moranian tax on this foreign capital will tend to check the investment and thus, through the relative dearth of capital, to increase the Moranian rate of interest. The increase in the rate of interest will inevitably retard economic progress and will have complicated effects on the various classes of the community. On the one hand, a rise in the rate of interest will increase the cost of production in Morania and thus ultimately be an added charge on the consumer. Similarly, the higher rate of interest will tend to depreciate the capital value of all existing Moranian securities and thus be felt by all present owner. This leads, however, to a slight consequential mitigation of the plain doctrine. In-the ordinary.case of capitalisation, as explained above, a new tax is a burden only upon the existing holder or old investor and not upon the new purchaser. In the case, however, of the Moranian tax just cited, it is possible that the increase of the general Moranian rate of interest will tend, in so far as there is a connection between interest and profits, also to augment to a certain extent the remuneration of the existing holders of Moranian shares of varying yield. And this will be especially true in the case where Morania is in a stage of rapid progress in continual need of foreign capital. The same, however, would not be true, at least during the lifetime of the securities, of the existing holder of Moranian bonds and shares whose rate of return is fixed. From these considerations flow two consequences. In the first place, the evils of double taxation, which are ordinarily severe for old investors, while being only ostensible evils of double taxation in the case of new investors, may in the above instances have their fullest effect only in respect of a particular class of old Moranian investors, namely the bond-holders. For the old shareholders in Morania, whether Moranians or foreigners, may receive an offset or
(4013)
x0
compensation for the new taxation in their increased dividends. This may also apply to a certain extent even to old business enterprises in general. In the second place, however, despite this possible allevia':on of the evils of real double taxation, the new Moranian tax imposes a more than compensating burden on the great mass of the consumers - a burden which may ultimately turn out to be far greater than appears at first blush. On the whole, a debtor country in the peculiar circumstances of Morania ought therefore to be exceedingly chary of levying such a new tax on foreign investments.
The Burden of Old Taxes and Recent Taxes considered. It will be obvious from the foregoing that what we may call old taxes will not have an equal clai', with the new to relief from burdens, and that the older the tax the less of a true tax it is as a general rule. For the property or investment is likely to have changed hands by sale and the burden thus to have been amortised or, by general economic forces, acclimatised to the holder, so that it has become less "burdensome." The claim to consideration of new taxes recently imposed, or high rates of taxes recently imposed, is much more acute and real. It is true that some writers allege that the doctrine of an old tax, like the land tax, being no tax at all, as it has come down for many decades subject to purchase and sale and subject to inheritance, is an unsound doctrine. They say: Suppose you repeal the tax, the existing owner of the land is immediately benefited. Therefore the burden of the tax is upon him. in the same way they deny the validity of the doctrine of capitalisation or amortisation leaving the new holder free of the tax. It is said that, if the tax is repealed, the individual benefits and therefore the incidence of the tax must be upon him. But this is obviously playing with words. All that it really amounts to is an assertion that the incidence of the benefits of the repeal of the tax is entirely upon holders at the time of the repeal; and lie principle of amortisation holds good with regard to that also, because all subsequent holders are compelled to buy"- free " of the special benefit, i.e., they do not get it. It is merely the converse case of amortisation, and not the reductjo ad absurdum of it.
Some Limitations to the Preceding Doctrine of the New Investor. But as to this pure or extreme doctrine (that the investor throws back on the borrowing country the burden of a tax imposed by that country on his investment) certain limiting conditions must be considered, First, it must be asked whether the clear economic bargaining of the new investor may not be offset by other economic factors, such as ignorance and inertness, so that the investor does not make the precise catallactic calculation which we have assumed ; secondly, whether a new investment in an existing business may not sometimes contain an element of coml)ulsion which would tend to assimilate a new tax to an old tax; thirdly, whether the doctrine, however true of free forms of investment, is equally true of investment in businesses and in land ; fourthly, in the case of taxes which are graduated, whether the degree or extent of amortisation can actually be fixed, and if so, whether it extends to a large or important part of the tax ; fifthly, whether the doctrine is applicable to cases where the tax is smaller than the difference between the rates of interest in the two countries; and, sixthly, what modifications of the theory should be made because of fluidity of capital and conditions of supply.
(4014)
1I -
(a) Investors' ignorance. On the first point - the ignorance of the investor - it is clear that no practical propositions can be founded upon, or take advantage of. this factor. If the well-informed investor takes certain factors into consideration, it seems legitimate to assume that the " normal market " is made up of people with such information, especially in view of the wide publicity which gives " expert " advice over a considerable area of'" foreign investment. " It is true that the foreign country may succeed in getting a certain amount of money from a class of persons who are too ignorant or too lazy to know the full burdens to which their investment will be subjected. ,iut
to counterbalance this class, there will be another class who over-estimate the terrors of the
unknown and who, by reason of their undue ignorance, do not put up the money they might otherwise have done and who thus, by limiting the supply, tend to drive up the price (yield) that the foreign borrower must pay. It is thought that these two classes of incorrectly informed people may tend to balance each other and that the result may not be far different from everybody acting upon precise arithmetical knowledge. The qualification to the general doctrine is therefore insignificant. (b) Investment in existing businesses. On the second point, we believe that complete and direct amortisation or absorption is only to be found in the case of new investments where the investor is quite free in his choice, as in the case of the rentier whose only end in view is the net revenue to he secured, and who, in making his choice, is led only by his calculations of net income 2nd valuation of risk. The burden admittedly exists over the whole field of old investments made in a time of lower taxation. Even among the new investments, however, there is a class for which double taxation is not only a barrier but also a burden. A man is free to make an investment or not to make it, as he wishes, in the case of a wholly new enterprise to be started ; but it a man has a going concern with a paramount need for new capital in order to preserve the old capital from extinction, lie is not free in the same sense. His choice is either to let the business lose ground, to the disadvantage of his original capital in the business or to invest new capital in it, well knowing that the return upon it will, to a special extent, be taken away by taxation. So in this class of new investment there is an element of compulsion which must in many cases render double taxation a real burden. The man who feels compelled to follow up old capital with new in the same direction must be put to some extent in the same category as the man with the old investment. (c) Investments in land. The validity of the general principle may be thought to turn partly upon the fact that if the forcid-er does not invest capital in Morania the relative scarcity of capital there will cause the rate of interest to rise to such a point that it will attract the foreigner and give him the yield he wait, after deducting the tax. The question.may be asked whether this is true of investments i land. The failure of the foreigner to invest in Moranian land would not ordinarily affect ie price or the yield of the land which is there, irrespective of ownership. The selling price of the land would be a capitalisation of its present and prospective yield, and its yield wou!d be unaffected. It is not necessary to consider the extreme cases where the change in the own-.-sihip would carry with it better methods of cultivation and a superior yield, or where the fallin. away of the foreign investor is so supremely important as to affect the price of land to an unlimited extent. The situation underlying tbe general objection in the case of land is, of
(4015)
12 -
course, that, inasmuch as its annual value is settled on Ricardian principles in relation to a margin, it does not form part of the mobile world-supply like ordinarily invested capital. It is thus suggested that investments in land are in a different category, because'they are an investment in a marginal rent and, by economic teaching, questions of a margin are not affected by taxation. There is, however, no reason whatever to suggest that a new investment in land abroad will be made on other conditions than a new investment in anything else abroad. The foreign investment in land is, in strict theory at least, a blend of investment in fixed-yield investment and in profit-making investment. In practical life the foreign investor in land is very largely only the latter, i.e., an investor in a profit-making concern, and the investment of capital in land will raise its commercial rent (interest), though not its Ricardian rent. It is clear that in an undeveloped primitive country part of the tax must be thrown back on the Moranian borrower; and, whatever may be the state of development of the country of origin, unless the gross yield anticipated is sufficient to absorb the Moranian taxation, the foreign investor will not put his money into the venture. This must be a governing factor when considering any new investment abroad. The selling price of the land will indeed be a capitalisation of its present and prospective yield. But when the conditions affecting the capitalisation change, i.e., the rate of interest, then the "value " will be affected. One may not be able to alter the Ricardian rental point by a tax, but one can affect the rate at which it would be capitalised for purchase. In connection with investments abroad in profit-making concerns "amortisation " is not a very apt term. In our general conception we regarded the tax as a permanent capital loss on the person owning at the time of the first imposition. But this does not happen with new investments. For investments in profit-making concerns to which, as pointed out above, investments in land must be assimilated, the real issue is whether the conditions as a whole in the country of origin are sufficient to give a yield large enough to absorb the "origin" tax and still leave enough to attract the foreign capital. If they are, then foreign capital will come; but if not, it will stay away. In the case of a profit-making investment, the tax is thus absorbed qud expense of the business [except in the special case mentioned above under(b)].whereas, in the case of a fixed-yield investment, the tax is amortised qud tax. If it can be so absorbed, the yield to the home and the foreign owner of Moranian land, assuming the land developed to a like stage by capital, may be the same and yet sufficient to attract and adequately to remunerate foreign capital on the net yield basis described. This, perhaps, is not the same thing as saying that the tax will be thrown back on the Moranian borrower. In the case of ordinary investments and securities, the burden still virtually rests upon Morania, because the lessened demand for Moranian securities, due to the abstention of the foreign investor, would decrease the market value of the Moranian securities; while, in the case of fixed investments like land, the influence of the abstention of the foreign investor upon the market value of the land would be less marked than in the case of wholly liquid securities. It is agreed, however, that on this point there will usually be a small difference of degree only, and that no practical utility is served by making a distinction in the case of land. (d) Where the tax is a graduatedone, hrw can it be amortised ? The question as to how a graduated tax in Morania to which non-resident investors are liable is amortised, where one investor would be liable at a high rate and another at a low rate, is one that raises many delicate and difficult problems, to which there is probably no final solution obtainable by analysis. Preliminary to judgment upon the issues here, one may attempt to settle
the effect upon market price, in an ordinary internal market, of investments specially exempted
from the graduated taxation if there were, say, two types of sellers and two types of buyers -
both buyers and sellers being ordinary residents liable to a graduated tax - one seller suffering
(4016)
13 -
a to per cent. rate or tax and another, grouping together in one simple expression the whole type of the higher class, suffering 45 per cent. ; and also one buyer who has to contemplate a io per cent. rate after he has purchased, and another buyer a 45 per cent. rate. Any variations in the assumptions made as to buyers and sellers of these four classes or as to the capital they can put on the market would add to the intricacy of the problem. All that one can urge is that in a complex market of many buyers and sellers, liable to diverse tax rates, there would be at least an amortisation of the highest common factor of the taxation borne by all those in the market. The ultimate price will give to some buyers a "consumers' rent," so to speak, because the tax to be borne by them is not completely amortised by the price paid, and will leave others just level or to some extent penalised. One imagines the amortisation to be probably the amount of tax which represents the centre of gravity of the demands of all the buyers in the market, the arithmetic average, so that with one rich person and a number of comparatively poor persons, the rate amortised would be closer to the minimum rate than if there were a number of rich persons and only a few moderately well off. But in so far as rich people in a market probably often benefit by a market price settled by people in different circumstances from themselves, these rich people secure a considerable consumers' rent on any particular purchase they make at the market price, so that it may be untrue to say that the rich people actually are induced t offer only such a price as will allow amortisation of their own rate of tax. They will probably offer a higher price than this would justify, and thus cut into their "consumers' rent. " The matter is clearly not one susceptible of final analysis. It is nut merely upon the conditions of demand that we have to look, but also upon the controlling influence of the conditions of supply, for the degree of capitalisation will frequently stand in direct relation to the breadth and satiety of the market. In proportion, as the market becomes saturated, either because of an increase in the supply of securities or because of a falling-off in the demand by investment companies or individuals of varying degrees of opulence, the degree of capitalisation will diminish. For reasons of simplicity, this analysis will not be pursued, for obviously, if introduced, it becomes clear that the matter is still less susceptible of final analysis. In the case of a graduated income tax consisting of a normal or base tax (with or without degression features) and a graduated surtax, we appear to be justified in stating that it would hardly be legitimate to regard the amortisation as coinciding with the level of the normal tax and ignoring the higher taxation. For the particular point in the scale at which the "normal" tax is the actual tax appropriate to the amount of income in question is more or less an accidental point, depending upon administrative machinery and the convenience of the country in question. It would lead to the rather doubtful conclusion that amortisation in the United States is limited ti 8 per cent., that in the United Kingdom it is 25 per cent., and that in Germany it is non-existent, merely because the administrative method of securing graduation varies in these three countries. Graduated taxation by the country of origin (Morania) does not, therefore, invalidate, even if in some circumstances it may modify, the general principle that the tix is thrown back on the borrowing country, so far as the placing of new investments is concerned. The problem is not dissimilar from that arising in connection with the tax-exempt bonds of ti:e United States. Issuers of such bonds will no doubt endeavour to fix the rate of interest offered at a point which will just attract the investor on 'the margin of the demand, and in normal circamstances that investor will tend to be one to whom the yield from the tax-exempt bond is just larger than the yield from a tax-liable bond. Every investor in tax-exempt bonds whose effective rate of tax per dollar of actual income is higher than the effective rate of the marginal investor will thus secure for himself a bonus in the yield of the tax-exempt bond. The suggestion that the holders of tax-exempt bonds in reality enjoy no exemption because they have to pay so much more for the bonds is, therefore, not a good one. -That contention is true at the margin of investment, but not above it. Other investors, intra-marginal, get
(4017)
14 -
" consumers' rents" on their investments, and the graduated taxation rearranges these and modifies their amount. It would hardly be credible that only an 8 per cent. normal tax is capitalised and that no part of the remainder all the way up to 58 per cent. is capitalised. The amount of the normal rate is only a point in a graduated scale at which it is convenient to pass from one kind of administrative metl.od to another: it has no virtue in itself. In the first place, this argument assumes that the 8 per cent. rate of the United States tax is a flat rate, whereas the effect of the personal and family deductions converts the flat rate into a graduated effective rate on each dollar of any individual's actual total income. If the argument as to impossibility of capitalisation of the.graduated surtax is well founded, it is equally applicable in principle to the graduated effective rate of tax below the surtax point of liability. Precise analysis of the economic reactions would suggest that the point of capitalisation will lie somewhere between the lowest and the highest effective, rates of income taxation per dollar of actual total income and that this point will be determined by the respective demands for, and supply of, tax-exempt securities. It might, of course, happen that in the United States, with the large amount of outstanding tax-exempt securities bought even by small investors, the point of capitalisation lies, in fact, very close to the 8 per cent. rate of tax, i.e., very close to the surtax exemption line; but, if the. supply of securities were small, the point of capitalisation would undoubtedly lie very much above the surtax point of liability, and in that ease much more than an effective rate of 8 per cent. would be amortised. Where investments are made in Morania by a number of individuals whose respective total Moranian incomes make them liable to varying graduated effective rates of Moranian tax, the gross yield offered by the Moranian borrower will need to be sufficient to attract the marginal investor, who will tend, of course, to be the one whose graduated eflctive rate of Moranian tax is highest among the foreign lenders. In that event, the Moranian borrower will thus tend to have to pay a gross yield which is more than sufficient to take the burden of Moranian tax off the remaining investors. These remaining investors, whose respective total individual Moranian incomes must be less than the Moranian income of the marginal investor, will thus enjoy a bonus yield. But this fact, far from invalidating the general principle that the investor throws back the tax to the Moranian borrower, confirms it. The distinctive difference between the case of the tax-exempt bonds and the case of investments in Morania, when Morania has a graduated tax, is that in the former case the bonus yield accrues to all investors above a certain limit of total income from all sources, while in the latter case the bonus yield accrues to all investors below a certain limit of total income exclusively Aforanian. More subtle considerations arise in dealing with the effect on the price of securities. Some foreign investments in Moranian securities may be of small amount, subject only to the normal tax, and others will be of large amounts subject to super-tax, only part of which may be amortised. The foreign investor, whether small or large, will not invest unless he finds it profitable to do so, and the point is how far the price of Moranian securities is affected by this fact and the real burden thrown on Morania. The foregoing emphasises the difference between the effect, in general, of taxation and of exemption, of the broad principle of which this is a particular application. It has been put by one of the authors of this report in one of his books as follows: " In all cases of a special graduated tax, a surplus benefit accrues to investors with a total income below a definite amount, which amount represents the point of marginal investment and therefore of capitalisation. In all cases of exemption from a graduated tax, a surplus benefit accrues to investors with a total income above a certain amount, which amount represents the point of marginal investment and therefore of capitalisation. If a special graduated tax ranging from 8 % to 58 % is imposed on a certain class of bonds, and
(4018)
15 -
if the market conditions are such as to cause the price of the bonds to fall 20% because of the tax, the bond-holder, who would other wise be liable to a tax of so % on his income, gains io %on each dollar of bonds owned. On the other hand, if a certain class of bonds is exempt from a general income tax or from a tax on all bonds which is graduated from 8 % to 58 %, and if the market conditions are such that the bonds rise 20% in value because of the exemption, the owner of the tax-exempt bonds, who would have been liable to a tax of 30 %, gains io % on each dollar of bonds owned. " (e) Where the origin tax is smaller than the dillerence between the interest in two countries. If the general level of return on investment in a new country A, say Morania, is far above the general world rate, what would be the result, supposing the general world-rate return on investment of a certain kind is8% ? If the return on such investment in Morania is io %, and if Morania imposes an income tax of io %, a non-resident citizen may still be tempted to invest in Morania, where he will get 9 % instead of 8 % at home. It is not quite right to say that the tax imposed by Morania is no burden upon the non-resident citizen of B. for it reduces a potential io % to 9 %, a rate which i; still sufficiently high to make the non-resident invest in Morania instead of anywhere else. :n other words, as long as the discrepancy in the rate of investment in Morania, as compared with the outside rates, is ;ufficiently great to attract investments because it covers the tax, ti,' burden will be borne by the investor and not thrown back upon Morania. This criticism is, within the theoretical limits, valid, but the margin between the outside rate and the Moranian rate must be a margin of real interest and not a premium for risk or ignorance or a narrower marketability or any other economic return. The margin must be real and not due to any risk. If it is real, then the larger it is, the more quickly it will tend
to vanish owing to the influx of new capital; and the smaller it is, the less likely is it to cover
completely the postulated new tax. Clearly, the reduction of the rate to 9% 'vill slow down the flow of the capital from abroad and delay the day when Morania enjoys the advantages of foreign capital at the lowest rate. The day, therefore, when Morania must bear the burden of its own tax according to the general principle is merely postponed if the tax is a light one, and the. apparent exception is due only to the fact that it takes time for the principle to prevail. (f) Limitations Idue to fluidity of capital and effects of supply on'narket conditions. Under cer ain conditions the general principle may be defeated by special circumstances relating to the fluidity or the supply of capital. For example, it has been shown in the United States that the capitalisation due to the imposition of a special mortgage tax drove up the rate of interest in such States as New York and California, where there was a great fluidity of capital and a proximity of lending centres like New York City and San Francisco, by the amount of the tax and in fact by something in addition, representing an insurance premium against the chance of the mortgage being put on the assessment list. But such a result was not observable in a State like Wisconsin. In other words, while the general principle is incontrovertibly true, there may be exceptions due to abnormal conditions connected with fluidity of capital and amount of available investment, which' at times may be of practical importance. But we do not lay any great stress upon this in setting out the main principle. Summary of the foregoing. It is agreed:
i. That in most cases the imposition of a new or higher tax penalises the existing nonresident investor.
(4019)
2. That, subject to certain limitations, it prevents non-residents from making a new invest-
ment unless the terms offered by the borrowing country are such as really to throw back the burden of the tax upon the taxing country.
Imperfection In Amortisatlon Unimportant. The second principle is not destroyed even though the effective rate of taxation is confined to the normal rate. If the taxing country succeeds in imposing only, say, a normal rateand not a supertax, it will generally happen that the normal. rate itself is a sufficient. barrier for these conclusions to be true. If a fence is erected of a certain height adequate to keep a person out, even with a substantial addition to its height it still does no more than keep that person out. Therefore, if the normal advantages offered by a country to a foreign investor are not great enough to compensate for the normal tax in the. country of investment, it is quite academic to discuss how far the non-resident investor takes into consideration the graduation of the tax beyond the normal figure. It may be accepted that the exclusive effect will be identical. Going back, however, to the first point, viz., the effect of the imposition of a tax upon existing holders, it has been assumed that the existing holder will be" hit." For if he retains the investment h" will derive an income reduced below that which he anticipated, and if he attempts to part with the investment he will at once bear the capitalised loss. This doctrine, however, assumes that the person who buys it from him would be subject to a like disability, and that in buying himself free from it he thrusts the burden back upon the vendor or first holder at the time of imposition. This will be true in the case where the tax that has been imposed is a differential tax upon this particular class of incom., but it will not hold good to an equal extent if the tax in question is a part of a general income tax. It may be accepted as a general doctrine that, while a special tax upon a specific source ot income will depress pro tanto the capital market value of the properties or securities yielding that income, a general income tax on all sources of income alike has, at most, a moreuncertain effect upon general security values. (As has been previously stated, economists differ as to the probable extent of this kind of change in capital values.) A foreign investor, therefore, in Morania, after Morania has put on an additional income tax, ir suffering the burden of double taxation and finds his income reduced. Any other person outside Morania who buys that investinent from him would be similarly burdened, and will*therefore offer a lower price to buy himself free from the burden. But a resident in Morania can buy the investment from the foreign investor and not be subject to double taxation. He will therefore have no extra burden to capitalise, and will not have to offer a price very much below the price existing prior to the imposition of the extra burden. He will give the current price for securities bearing a single Moranian tax. In short, the doctrine of the capitalised burden upon the holder at the time of imposition is true only for sale to another non-resident investor, and is not true if the foreign investor-sells to a resident in Morania. Thus the foreign investor is "pinched" by an unprofitable investment, but he finds a way of getting his original money back by sale in Ike Moranianmarket. Hence, double taxation sets up, first, a tendency for new investment to be restricted to capital available within the borders of the country itself. It acts like a tariff for concentrating manufacture within the country and restricting international intercourse. It sets up a tendency for old investments to change ownership from foreigners to Moranian investors and to make the country still more self-contained. In throwing the body of foreign-held securities upon the Moranian market, it doubtless tends to depress capital values (i.e., to increase the rite of interest
(4020)
17 -
in Morania to a point where the non-resident investor would sacrifice in the reduced sale price the whole of the possible advantages he gets in escaping his double taxation by sale). The foregoing is a special application of a general theoiy and deals with only one phase of general economic consequences of ta-.ation or exemption. When we are dealing with general economic consequences of any change in values, the field becomes almost limitless and there is no recognised stopping place. It is like the discussion of the effects of a special tax on dwellings. One may consider, first, the consequences to the tenant as opposed to the owner ; but it is also possible to consider further consequences where the tenant is a producer of commodities which are sold to middlemen before reaching the consumer. The economic consequences might be stated almost ad infinitum so far as the effect on commodities, distribution of wealth in general, consumption and national prosperity are concerned. We have inthis memorandum carried the argument to the stage indicated only because it is completely relevant to the main question of our enquiry: Which exchequer ought to bear the burden of paying for any relief given for double taxation ? It has no other interest than its bearing upon this question.,
(4021)
PART II. GENERAL PRINCIPLES WHICH GOVERN INTERNATIONAL COMPETENCE IN TAXATION. SECTION I. GENERAL OBSERVATIONS. A.
THE BASIS OF TAXATION.
The Principle of Ability to Pay. The older theory of taxation was the exchange theory, which was related directly to the philosophical basis of society in the " social contract," according to which the reason and measure of taxation are in accordance with the principles of an exchange as between the government and the individual. This took two forms: the cost theory and the benefit theory. The cost theory was that taxes ought to be paid in accordance with the cost of the service performed by the Government. The benefit theory was that taxes ought to be paid in accordance with the particular benefits conferred upon the individual. Neither the cost nor the benefit theory was able to avoid or to solve the problem of international double taxation. For the services conferred by a given government affect not only the person of the taxpayer resident within that government's area (his personal safety, health and welfare) but also the property that he possesses within the limits of that area (not, of course, the property outside it), the services by which that property benefits being its physical defence from spoliation, its protection from various kinds of physical deterioration and the maintenance of a systemn of legal rights surrounding it. Where the property was in one State and the person in another State, the complications were obvious. There was, moreover, no satisfactory method of apportioning either the cost or the benefit. There is, however, no need to enter into the details of these methods, as the entire exchange theory has been supplanted in modern times by the faculty theory or theory of ability to pay. This theory is more comprehensive than he preceding theory, because it includes what there is of value in the benefit theory. So far as the benefits connected with the acquisition of wealth increase individual faculty, they constitute an element not to be neglected. The same is true of the benefits connected with the consumption side of faculty, where there is room even for a consideration of the cost to the government in providing a proper environment which renders the consumption of wealth possible or agreeable. The faculty theory is the more comprehensive theory. .The objection may be made that faculty does not attach to things, and that many taxes are imposed upon things or objects. This is true of the so-called real or impersonal taxes as opposed to personal taxes. This distinction, however, must not prevent the recognition of the fact that all taxes are ultirrately paid by per.ons. So-called real or impersonal taxes - taxes in rem, as
(4022)
'9
the English-speaking countries term them - which are often chosen for reasons of administrative convenience, are ultimately defrayed by persons and, through the processof economic adjustmcnt, ultimately affect the economic situation of the individual. Whu., we de-1 with the question of personality, we are confronted by the original idea of personal political allegiance or iationality. It is first of all necessary to consider briefly the issues that aris, upon politicalallegiance. A citizen of a country living abroad is frequently held responsible to his own country, though he may have no other ties than that of citizenship there. His is a political fealty which may involve political duties and may also confer political rights. It may well be that the political' rights are such as to imply a political obligation or duty to pay taxes. In modern times, however, the force of political allegiance has been considerably weakened. The political ties of a non-resident to the .mother-country may often be merely nominal. His life may be spent abroad, and his real interests may be indissolubly bound up with his new home, while his loyalty to the old country may have almost completely disappeared. In many cases, indeed, the new home will also become the place of a new political allegiance. But it is well known that in some countries the political bond cannot be dissolved even by permanent emigration; while it frequently happens that the immigrant has no desire to ally himself politically with what is socially and commercially his real home. In the modern age of the international migration of persons as well as of capital, political allegiance no longer forms an adequate test of individual fiscal obligation. It is fast breaking down in practice, and it is clearly insufficient in theory. A second possible principle which may be followed is that of mere temporary residence;everyone who happens to be in the town or State may be taxable there. This, however, is also inadequate. If a traveller chances to spend a week in a town when the tax collector comes around, there is no good reason why he should be assessed on his entire wealth by this particular town ; the relations between him and the government are too slight. Moreover, as he goes from place to place, he may be taxable in each place or in none. Temporary residence is plainly inadmissible as a test. A third possible principle is that of domicile or permanent residence. This is a more defensible basis, and has many arguments in its favour. It is obviously getting further away from the idea of mere political allegiance and closer to that of economic obligation. Those who are permanently or habitually resident in a place ought undoubtedly to contribute to its expenses. But the principle is not completely satisfactory. For, in the first place, a large part of the property in the town may be owned by outsiders: if the government were to depend only on the permanent residents, it might have an insufficient revenue even for the mere protection of property. In the second place, most of the revenues of the resident population may be derived from outside sources, as from business conducted in other States: in this case, the home government would be gaining at the expense of its neighbour. Thirdly, property-owners like the absentee landlords of Ireland or the stockholders of railways in the western State of America cannot be declared devoid of all obligations Lothe place whence their profits a re derived. Domicile, it is obvioi ;, cannot be the exclusive consideration. A fourth possible principle is that of the location of the wealth. This again is undoubtedly to a certain extent legitinlatz. For a man who owns property has always been considered to have such a close relation wit.. the government of the town or country where his property is situated as to be under a clear obligation to support it. While the principle of location or situs seemed to be adequate as long as we were dealing with the older taxes on property owned by the living or passing on death, the term became inadequate under the more modern systems of the taxation of income or earnings. It has become customary, therefore, to speak of the principle of location in the case of property, and the principle of origin in the case of income. Further consideration makes us realise that these two principles
(4023)
20 -
are not exactly coterminous; because, even though the income may be earned in a certain place, after it has beeai earned it becomes property, and is therefore susceptible of a different situs. Tangible, corpureal property is more difficult of movement, and in some cases, when it consists of immovables, cannot be moved a, all; but certain forms of incorporeal property can be easily moved The legal writers and the courts attempt to surmount certain of the resulting difficulties by distinguishing between the actual and the constructive location of property. We thus have the possibility ofincome origindting in country A by trading within that country or physically arising from crops, p" perty, etc. in that country,, being actually found, so far as it consists, for instance, of securities, in a strong box in country B; so that in one sense the property, or the rights ro it. may be said to exist in country B. It may, however, well be that the whole apparatus for producing the income that is non-physical, namely ; the brains and control and direction, without which the physical adjuncts would be sterile and ineffective, are in country C; and therefore it may be said in another sense that the origin of the income is where the intellectual element among the assets is to be found. Finally, it may be said that the location of the property is in couw'ry D, where the owner of the property has his residence. There is thus a possible difference between the theory of origin and the theory of location,if one examines the legal view of the matter. Apart. from these considerations, however, and chiefly for reasons which are just the reverse of those mentioned in the preceding case, the location or origin of the wealth cannot be the only test. Permanent residents owe some duty to the place where they live, even if their property : 'situated or their income derived elsewhere. Practically, therefore, apart from the question of nationality, which still plays a minor r6le, the choice lies between the principle of domicile and that of location or origin. Taking the field of taxation as a whole, the reason why tax authorities waver between these two principles is that each may be considered as a part of the still broader principle of economic interest or economic allegiance, as against the original doctrine of political allegiance. A part of the total sum paid according to the ability of a '-erson ought to reach the competing authorities according to his economic interest under each authority. The ideal solutios. is that the individual's whole faculty should be taxed, but that i, should be taxed only once, and that the liability should be divided among the tax districts according to his relative interests in each. The individual has certain economic interests in the place of his permanent residence or domicile, as well as in the place or places where his property is situated or from which his income is derived. If he makes money in one place he generally spends it in another.
The Doctrine of Economic Allegiance. The starting-point of the modern theory must therefore be the doctrine of economic allegiance. In the most complex cottimunities, with more fully developed taxation expedients, this doctrine Is given qusfititative exptession by reference to terms of economic faculty or ability of the individual to pay. That is to say, the taxes, though measured by things, eventually fall upon persons and ought to fall upon them in the aggregate according to the total resources of the individual, leading to progressively larger sums being paid by the people who are richer. The point is that when the money has left the pocket of the individual, its destination is not a single one but is due to all those governments to whom the individual owes economic allegiance. How, then. should the sum that he finally pays reach these several goiernmehts which render him service? The problem consists in ascertaining where the true economic interests of the individual are found. It is Ottly after att analysis of the constituent elementsof this economic allegiance that we shall be able to determine where a persot ought to be taxed or how the division ought to be made a between the various sovereignties that impose the tax.
(4024)
21 -
The problem of the ideal division of the tax is a little different from that of the actual remission of the tax. There may be a conflict between the fiscal principle arrived at on purely theoretical grounds and the desirable financial or economic expedients, having regard to the state of the national budget in each country. In other words, what ought to be done may be quite clear; but what it may be practically possible for a Government to give up in the way of revenue in the light of its historical development may be quite another thing. In what follows we shall limit ourselves to the principles which ought to govern the ideal fiscal allocation of the tax. The doctrine of economic allegiance, based on the faculty of the individual or his ability to payj, has now come to be widely accepted in connection with the ordinary taxes on property and income. But in the case of the so-called death duties, this conclusion is still only partially accepted, even in modern legislation. It is, however, in our opinion, entirely susceptible of proof that the doctrine of economic allegiance applies no less to death duties than to the incomre tax or the property tax. The payment of a tax on the occasion of succession to property on death is of considerable antiquity and has assumed many forms. In former times it took the shape primarily of fees for the probate of wills. More recently it has developed.into a series of taxes known by various names but including three chief forms: the tax on the propeity as a whole, sometimes called the estate duty or estate tax ; the tax on the share going to the recipient, sometimes called the legacy duty or direct inheritance tax ; and, thirdly, the tax on the recipient, graded according to the relationship, sometimes called the collateral inheritance tax. In former times the inheritance tax or succession duty - using this generic term to cover all the various forms of the tax - was defended on the exchange principle, sometimes as a charge made by the government to defray the cost of the probate of thewill, sometimes asa charge made by the government in-return-for the benefits conferred upon the individual through the privilege of succession. This early stage in the philosophy of the tax still lingers in some countries, especially where. the legal conception prevails of the tax as a payment for the privilege of succession. In other countries where it has been customary to impose a tax on the transfer of wealth inter vivos, it was an easy step to justify the inheritance tax as a similar tax on the transfer of wealth, but in this case on the transfer from the decedent to a living person, whether his heir or successor.. In all these instances, the principle of nationality or political allegiance also played a considerable r6le. With the development of modern economic life, and especially with the greatly increased importance attached to the inheritance tax or death duties, the philosophical ground has been shifted. As in the case of other taxes, not only have political considerations given way to those of an economic nature, but the exchange theory - whether in the shape of the cost theory or the benefit theory - has been supplanted by the more modern doctrine of faculty or ability to pay. The controlling principle of the inheritance tax is therefore nowadays recognised to be that of economic allegiance, precisely as in the case of the so-called property tax or the income tax. In the case of the estate duty, the force of economic allegiance is quite obvious. If people are to pay taxes in accordance with their ability to pay, it is open to any government to choose the time at which to measure this ability. The government may seize the elements of ability while the wealth is being created. and levy an income tax ; it may take the ability as found in the wealth when the yield has come to fruition and impose a property tax; it may take the wealth' when it is in process of being disposed of and attempt to reach the ability by a graduated consumption tax on luxuries; or, finally, it may choose not some particular stage in the lifetime of the owner, but the period of his death, and measure the ability at that particular moment. Whpre, therefore, we have a tax on the inheritance as a whole, or the so-called estate duty, we are clearly no less in the-presence of the doctrine of economic allegiance than in the case of an income tax or a property tax. This is especially true in so far as the tax may be regarded as a
73095 0-62-vol. 4 -3
(4025)
22 -
deferred additional income tax, collected at a time which has conspicuous advantages in mitigating its burdensome character or perhaps even promoting rather than retarding the accumulation of capital. The situation is a little less obvious in the case of a tax on the share going to the beneficiary. Here it may be said that the tax can be defended on the faculty theory, by considering the receipt of the share as an evidence of the special faculty of the individual. The general ability of the individual recipient is measured by his income; but income tax laws uniformly refrain from taxing the inheritance as income. None the less, as the share of the inheritance indubitably increases the ability of the individual recipient; it should be considered in the light of something akin to special faculty, measurable upon tile individual at his residence. But this is only the smaller aspect. It is absorbed in larger considerations. For, while it is possible to lIok upon a given amount of wealth at a man's death either retrospectively or in anticipation - that is, either backward or forward - on tile whole the retrospective view is dominant. The annual faculty attaching to the past income, the privilege of amassing and the privilege of settling by will, all cling round the person deceased and his place of residence; the distant residences zind circumstances of ultimate beneficiaries have no influence upon the retrospective view. Graduation of the tax upon the amount of the inheritance is only a rudimentary concession to the faculty of the recipient. We have not reached that stage of thought which would impose a higher inheritance tax upon an individual simply because he was in other respects wealthier. If we levy a graduated or progressive inheritance tax, we grade the tax according to the amount of the inheritance and not according to.the wealth of the recipient. Since, therefore, economic allegiance in this case is so closely associated with the inheritance as such, the conclusion follows that it is the domicile or residence of the decedent and not of the recipient that is to be considered as of paramount importance. When we come to the question of the collateral inheritance tax, the problem of economic allegiance arises in a slightly different form. One of the essential elements in faculty or ability to pay is the sacrifice involved. The principle of equal sacrifice has been made by some authors the very corner-stone of the entire doctrine. It is obvious, however, that the more remote the relationship of the heir or beneficiary, the smaller is the degree of expectation which he might have had of succeeding to the estate, and the smaller consequently would be the sacrificeundergone by him in giving up a share of the estate. In order to render the sacrifice somewhat more equal, it is therefore necessary to increase the tax in'proportion to the remoteness of the relationship. This is everywhere an accepted principle of modern death duties. We see, then, that the principle of economic allegiance applies to the inheritance tax no less than to the income tax and the property tax.
B. TtI
ELEMENTS Or1EcoNOsMtc ALLEGIANCE.
The Four Elements of Economic Allegiance. On the assumption, therefore, that economic allegiance is the basis upon which the total tax paid by the individual should reach the competing authorities, we have to ask what is the true meaning of economic allegiance and what are the ways hi which it can be subdivided. In what ways and to what extent can'a man be served by two or more governments that he should owe them any duty ? In the attempt to discover the true meaning of economic allegiance, it is clear that there are three fundamental considerations: that of (i) production of wealth; that of (2) possessionof wealth;
(4026)
23 -
that of (3) disposition of wealth. We have to ask where the wealth is really produced, i.e., where does it really come into existence; where is it owned; and, finally, where is it disposed of ? Byproduction of wealth we mean all the stages which are involved up to the point v. c;ie wealth coming to fruition, that is, all the stages up to the point when the physical production has reached a complete economic destination and can be acquired as wealth. The oranges upon the trees in California are not acquired wealth until they are picked, and not even at that stage until they are packed, and not even at that stage until they are transported to the place where demand exists and until they are put where the consumer can use them. These stages, up to the point where wealth reaches fruition, may be shared in by different territorial authorities. By dispositionof wealth we mean the stage when the wealth has reached its finalowner, who is entitled to use it in whatever way he chooses. He can consume it or waste it, or re-invest it; but the exercise of his wil to do any of these things resides with him and there his abty to pay taxes is apparent. By possession of wealth we refer to the fact that between the actual fruition of production into wealth and the disposing of it in consumption there is a whole range of functions relating to cstablishing the title to the wealth and preserving it. These are largely related to the legal framework of society under which a man can reasonably expect to make his own what has been brought into. existence. A country of stable government and laws which will render him those services without which he could not enter into the third stage of consumption with confidence is a country to which he owes some economic allegiance. The question thus arises as to the place where these property rights are enforceable. Mere possession without the privilege of enforcing the rights to the property is of very little economic importance. The three considerations of weight in economic allegiance thus really become four, namely, the acquisition of wealth, the location of wealth, the enforceability of the rights to wealth and the consumption of wealth. Corresponding to these four considerations would be the four points which become of significance in considering the proper place of taxation. The principle of acquisition corresponds to the place of (t) origin of the wealth ; the principle of location to that of (2) the situsof the wealth ; the principle of legal rights to the place of (3) enforcement of the rights to wealth ; the principle of consumption or appropriation or disposition to the place of (4) residence or domicile. It is not pretended that every function falls easily into one of these four classes. For example, a manager of an estate in Java may be said to be the directing brain living in Java, and some of the legal rights relating to that.estate may be enforceable in Java; on the other hand, the final control and direction may be-in the hands of directors in Amsterdam; finally, the actual recipient of a part of the profits may be a shareholder in London. It is not easy in the last analysis to decide whether the production or origin stage car be said to end in Java or Whether the brains in Amsterdam are not an essential part of all the operations concerned in production. Moreover, before the London shareholder can get hold of the wealth, two sets of legal rights may have to be exercised: first, those relating to incorporation of the company in Amsterdam: and, secondly, those relating to the omnership by the company of the property in Java. The analysis is therefore not in any sense final.
Origin or Situs. In addition to the above, we may toitch upon some further complications. When we are speaking of the origin of the wealth, we refer naturally to the place where the wealth is produced, that is, to the community the ec nornic life of which makes possible the yield or the acquisition of the wealth. This yield or acquisition is due, however, not only to the particular thing but to the human relations which may help in creating the yield. The human agency may be:
(4027)
-24(i) The superintendent or management of the labour and, organisation at-the sihus,,4.g., the local manager of a tea plantation;
(2)
The agencies for transport over -sea or land touching various territorial jurisdictions, which assist in bringing worthless objects to points at which they begin to be near their market;
(3) The seat and residence of the controlling power that decides the whole policy upon which finally depends the question whether the production of the wealth will ever be a profitable production or not. It chooses the local management, decides the character of the expenditure of capital and the times and methods of cultivation, decides the rmarkets that are to be utilised and the methods of sale and, in short, acts as the co-ordinating brain of the whole enterprise; (4) The selling end, that is, the place where the agents for selling ply their calling and where the actual markets are to be found. It may be said that no one of these four elements can be omitted without mining the efforts of the other three and spoiling the whole apparatus for the production of wealth. These have no relation whatever to the place where the final owner enjoys hisincome from the labours ofthe four elements. The four of them are thus in different measures related to the origin of the... weath, that is, its production as a physical product. The origin of the wealth therefore may have to be considered in the light of the original physical appearance of the wealth, its subsequent physical adaptations, its transport, its.direction and its sale. Another warning may be given as to the real meaning of (i) origin and its relation to (2) situs. In order to explain -this, it is necessary to recall the familiar distinction between taxes on income and taxes on capital wealth.. The contrast is usually drawn between income taxes. and property taxes. By the former are meant taxes on the wealth as it arises with the.characteristics of a flow; by the latter are meant taxes on the embodiment of wealth as a fmid or a tling. The economic distinction is, of course, that between income and capital, wealth as a fiow being income, wealth as a fund being capital. Popularly, however, income taxes are contrasted with property taxes - a really indefensible nomenclature, for a man can own or have property in income from a thing as well as in the thing itself. The newer term of capital levy as opposed.to income duty is really preferable. But as the older custom is so ingrained, we shall here continue to speak of property taxes as opposed to income taxes, and we shall include under the term property taxes not only taxes on the mass of wealth but taxes on various kinds of property, like land or movables; and, again, not only taxes on property in the hands of the living, but also taxes on property passing by death. In the case of income taxes, we properly speak of the principle of origin and-refer to the origin of the income or the place where the earnings are created. In the case of propert y taxes, however, we should more properly speak of economic location - the place where tht property is economically to be found, i.e., the place where are to be found the successive instalnients of earnings which are capitalised into the fund of wealth that we call capital or, more popul4rly, property. The true economic location is to be distinguished from the physical location, usuaLly termed silus. Frequently, of 6ourse, these coincide. But in tle case of many classes of wealth the temporary situs may be quite distinct from the true economic location. A vessel plying between two ports may at a given time be in a dry dock remote from both; a bond ormortgage on a piece of real estate may be kept in a deposit box distinct from the location of the land or from the home of the owner. Physical situs is one thing; origin or economic location is
(4028)
-25quite another thing: they do not necessarily coincide. Physical situs is of importance in economic allegiance only to the extent that it reinforces economic location.
Residence and Domicile. in addition to the above points as to the real meaning of origin and the connection between economic location and physical situs, somewhat similar observations are to be made in connection with the concept of residence or domicile. It is clear that by residence in this sense we mean not mere temporary residence but permanent residence, or what in some countries is called habitual residence. This, however, is not necessarily the same thing as domicile. Domicile, in Englishspeaking countries, is an inference from the facts, supplemented by the intention of the taxpayer. A man's domicile is usually the place where he chooses to exercise his political rights, such. as voting, and where he is surmmoned to discharge political obligations, like jury service. A change of domicile is a serious matter and has ordinarily to be inferred from all the surrounding facts. In French law, however, a distinction is made between legal and actual domirile, the legal domicile being the result of a legally authenticated change that is requested by the individual. The actual domicile in France, like the Wohnsitz in German law, denotes the principal or habitual residence. The domicile may be in one State according to one legal system and in a different State according to the other legal system, to that the taxpayer would be subject to simultaneous taxation in both States. Moreover, it is even possible, in some of the continental countries of Europe, to have one's domicile in more than one place. ;It is clear, therefore, that, in order to avoid double taxation, domicile or habitual residence must everywhere be interpreted alike for the purposes of taxation. One of the very first points preliminary to making international conventions or agreements on double taxation is to define the terms so that there will be no possibility of misinterpretation. We should like to make the suggestion that .the Legal Section of the League of Nations consider this matter and prepare a memorandum on the present use of the term " domicile" and on a possible approach to some international agreement on this .subject. In this memorandum, however, we shall use the term "domicile" in the senise of.permanent or habitual residence.. Passing over these considerations, it may be said that there are four main questions which have to be asked when the question of economic obligation is under consideration. They arebroadly:
(i) Where;is the yield physically or economically produced ?
(2) Where are the final results of the process as a complete production of wealth actually to be found ?(3) Where can the rights to the handing-over of these results be'clforced ? (4) W%'here is the wealth spent or consumed or otherwise disposed of ? It is obvious from this discussion that the most important factors in the situation are (i) and (4), that is, the origin of the wealth and the residence or domicile of the owner who consumes the wealth. Most of the discussion or, double taxation has centred around these two points of origin and residence. It is clear, however, that the other two factors may sometimes become of importance, -although -in most cases they .are significant only in reinforcing the claims of either origin or domicile. Itis important therefore tokeep continually in mind the exact meaning of each of the four factors in economic allegiance, and in every particular case to attempt to estimatethe relative weight to be attached to each of them. Upon the decision as-to the relative importance of these
(4029)
26 -
four factors depends the entire question of taxation and remission. Where all four factors are in agreement, no difficulty can arise; where they are in disagreement a choice must be made between them or a compromise must be adopted. If the first three pinciples are of overvhelming importance as compared with the fourth, i.e., if situs and the place of enforcement re-enforce the place of origin to such an extent as to make it far more important than domicile, the presumption is clearly in favour of the composite principle of origin being predominant.
Economic Allegiance and Income. The relevance of the foregoing to different classes of taxation. So far as taxes on earnings, yield or income are concerned, it is easy to discern at the present time a rough classification of countries into three categories: (i) Those whose fiscal system is not developed beyond a stage of separate taxes upon things and different objects of wealth (such as France and Belgium before the war, with their irnp6ts rdels,, and the German States, with their Ertragssteuern) (2) Those that have a system of taxes upon separate kinds of wealth, which amounts in the aggregate, roughly, to a kind of tax upon total income, and are often supplemented by an actual tax upon total wealth (e.g., in France and in Italy under the law of 1919, designed to take effect in 1923 but now indefinitely postponed; (3) Those countries which have a pure income tax upon total annual resources as one of the main sources of revenue, such, for example, as the United States, Germany, Great Britain and Holland (the scheduled system in Great Britain being merely administrative machinery towards a pure graduated tax, the schedules themselves having no separate validity or existence except as a part of the whole). It is clear that countries with three different points of view will 'have a divergent outlook upon first principles. It will be obvious that, in the case of the income tax, if our ideal of taxation is the tax on pure income, there is no such thing as the taxation of the separate stages until wL .ave ascertained whether the whole sequence of operations has ended in a profit, and, if so, how much; and then we must go back and allocate that profit over all the different operations in tile countries in which they may have taken place. In practice, such an allocation may be said almost to baffle analysis. It may well be that productive operations up to a certain point have been well and profitably conductLd and that the whole of the excellent results to this point are thrown away by bad selling. Are, then, 'he countries that shared in the profitable stages of the operation to receive nothing? It may well be that the precise amount of profit to be allocated to particular countries is never foally determinable when we have such complex operations as the raising of produce, its transport to countries where it is sold and the direction of the whole of these operations from another country, with a set of legal apparatus in every one of these countries which is indispensable to the whole sequence. In so far, therefore, as the problem of taxation is a problem of taxing income, it may well be that the determination of these different classes of economic allegirnce is not merely exceedingly difficult in practice but not always exactly determinable in economic theory. If, however, the ideas of taxation are not so advanced as to have an all-inclusive conception of income, then different considerations arise. Countries of origin, such as tropical and agicultural countries, see only the beginnings of production; recipients of the final wealth live abroad. Are
(4030)
27 -
such countries to be at the mercy of every kind of legal conception of income and income taxation in all these different countries with which they have relations before they know what their taxation is to be ? They would say at.once: "We must take for granted the existence of the economic and legal apparatus for the rest of the world; we know what the value of the produce is when it leaves our shores in the light of the world economic organisation. All that we can do is to measur. the taxation due to us from the person who takes that away by reference to that value. " We jet back, therefore, to the tax in rens or the specific tax upon things, as the main source of revenue by which economic allegiance in such countries can be gauged; and theywould refuse to be bothered with questions as to whether the whole of the operations ultimately resulted in a profit or a loss to some unknown foreign recipient. So far, therefore, as-we are considering taxes upon capital wealth, such as death duties, capital levies, property taxes and other taxes avowedly on mere stages of wealth, it is well to determine theoretically to which country the true economic allegiance of the different matters falls, and such an analysis may have utility as a basis of actual practice. When, however, it comes to the consideration of the taxation of pure income, it is difficult to establish that such an.analysis can have great practical value ; at any rate modern income is such a composite product and such a complex conception that even theoretically it is not easy to assign in a quantitative sense the proportions of allegiance of the different countries interested. Unless in theory the quantitative assignment can be made, it obviously is difficult to make it the basis of any practical plan. In order that the theory of the assignment of economic allegiance to different countries may, however, be considered, we shall now endeavour to make a more detailed analysis of its constituent elemen~s. We .apprehend that the value of this analysis is twofold: (I) To snow which countries have the greater title in theory to impose specific taxes upon particular forms of wealth, with special reference to capital wealth in the form of sucression aind death duties, stamp duties, general property taxes, rates and land taxes, and other specific taxes apparently paid by things and not regulated by the financial ability of persons;
(2) To show the extreme complexity of the subject as soon as we are dealing with a tax on pure income.
SECTION II.
ECONOMIC ALLEGIANCE AND CLASSIFICATION OF WEALTH FOR PURPOSES OF TAXATION. Wealth as a capital fund may be classified into movables and immovables, a classification which roughly corresponds to the Anglo-American division into personalty and realty, or personal property and real estate. But movables may further be divided into corporeal and incorporeal goods, or tangible and intangible wealth Both corporeal and incorporeal wealth, again, may be further classified according to the degree of its relation to, or dependence on, the land. Finally, wealth as a flow includes personal elements which are referable either to real estate or to personalty. Accordingly we may develop the following scheme and attempt to apply to each category the four criteria of economic allegiance: origin, situs, enforceability and domicile.
(4031)
28 -
Immovables.
I. IMMOVABLES: LAND AND HOUSES.
x. Acquisition or Origin. (a) As between Productionand sale. Agricultural products are generally sold and paid for on the spot, or certainly in the country where the products are produced. Even if there is an international market, the initial compensation to the producer is-generally in the country of production. It is there that the first sales at least are made and that payments are received. It is true, indeed, that in certain cases, as especially in tropical productions like tobacco in Sumatra, the products are sent directly from the plantation to some other country to be sold. But in such cases we are really dealing -with commercial .or financial enterprises, whi6h will be considered under a subsequent head. With the great mass of agricultural products it remains true that there is little, if any, divergence of interest between the country of production and the country of sale. In the same way, house rents are almost always paid over on the spot. Even if they are ultimately transferred to some absentee landlord, the immediate payment is generally made to his agent in the locality. Here also, therefore, it may be said that there is in the main not likely to be any complication arising from the distinction between production and sale. (b) As between thie location "jfthe land and the Personalityof the individual as contributing factors. in p7roduction. Strictly speaking, a distinction is here possible between pure economic rent and agricultural profits, and it might be said that agricultural profits depend in no small degree on the personality of the individual. In most cases, however, the individual farmer or manager must reside on the spot. It is only where the successful exploitation of the land i.intimately bound up with financial and commercial considerations or. in other words, where the capital invested in the land, rather tuan the character of the land, is the outstanding factor, that the personality of the ow-ner is of real importance. Ii most cases, however, the yield of land depends to an overwhel iing extent upon the land itself. The most capable individual is almost helpless where the soil is incorrigibly poor or the rainfall inadequate. While the individual can somewhat modify the characteristics of the land, he cannot completely change them. An intelligent'owner of a house in the slums - ill not, because of his intelligence, be able to secure a higher rent than a stupid or inefficient owner of a lot in a fashionable or business section. In general, therefore, earnings from land and houses - that is, from rqal estate or immovable property -may be said to be so intimately bound up with the real estate itself as to render the place where the.yield arises the overvhelming factor in the element of origin. The individual landowner forms, in most cases, an economic part of the society where the land is situated; his economic interests are so closely interwoven with the land that it is there that his chief economic allegiance is due. The final destination of the produce, the place of management and of receipt of profits could all be changed, but location never.
2. Situs.
This consideration obviously re-enforces that of origin. its yield ariss.
The land is physically located where
(4032)
-29
3. En/orceabilityor legal status. The chief element in the legal status is the protection afforded by the title to the physical property. This also is obviously bound up directly with the property itself. 4. Domicile. It is undeniable that the individual owes some duty to the place where he lives. He receives benefits from, and confers benefits upon, that commurity. He receives benefits in that he enjoys not only the protection of the laws but the various conveniences that are afforded by the community where he chooses to live. Reciprocally, it is true that he confers benefits upon that community by spending his money there. The whole framework of the way he cap possibly spend his life by the consumption of his income in goods and services is subject to that protection of law ad hoc to his own possessions as he is in process of enjoying them, and generally to the social and economic order which makes that expenditure easy and far-reaching and effective. It is, however, as we now know, really not a question of benefits conferred or of benefits received ; the problem of economic allegiance is one not of benefits but of duties or obligations. From this point of view aswell, it is natural to say that the community in which the individual has cast his lot and in which he lives his daily life is at least entitled to some measure of support from him. Summing up these four considerations, we are led to the conclusion that, inasmuch as the second and third elements in economic allegiance strongly re-enforce the first (origin), domicili ought to play only a slight role as compared with origin. Most countries, as a matter of fact, allow it to play no role at all. We should be disposed, however, to maintain that, as a matter of pure theory, the claim of domicile to at least a small share ought not to be overlooked. This conclusion, however, obviously applies more completely to a tax on the property itself, whether in the form of a real tax, a land tax, an inheritance tax or a capital levy. But it is true even to some extent of a pure income tax. If an absentee landowner plays, because of his large rent roll, a considerable part in his place of habitual residence or domicile, it does seem that the place of domicile should not be entirely denied a right to ask him for at least a slight support. But, at the very best, the proportion allotted to domicile would e exceedingly small. Bushless, Enterprises.
II. BUSINESS ENTERPRISES OF AN IMMOVABLE CHARACTER OR CLOSELY CONNECTED

WITH IMMOVABLES. Enterprises under this head may be divided into three classes: first, those directly dependent upon the land, like mines and oil wells; secondly, those where the land plays a somewhat less important role, as in the case of industrial establishments or factories; and thirdly, those where other elements than land become of increasing importance, as commercial establishments with a fixed location. Ila. MINES, OIL WELLS AND THE LIKE. z. Acquisition. (a) As between production and sale. The distinction between the place of production and that of sale is apt to be more marked than in the preceding case of immovables, for the mineral or other products are far more commonly
(4033)
30
sold through selling agencies in different places or countries. This, however, simply means that instead of a single origin we have several places of origin - that is, instead of o (origin), we may 2 s have o, 0 ,o . It involves the question not as between origin and domicile but as between the different places of origin. This point, which becomes of special importance in all business taxation, raises the problem of the allocation of earnings - a subject to which special reference is made in the addendum to Part III, section III. (b) As between the location of the plant and the personality ol the owne, or manager.. The larger and more industrial the undertaking, the less possible is it to be successful without outside capital and individual enterprise, and the less possible to carry on by small, individuals tied to the land. But, while the yield is more largely due to the ability of the individual than in the case of agriculture, it will in the main depend after all upon the richness of the mine or the quality and quantity of the oil. On the whole, therefore, the place of origin or economic location remains of almost as much importance as in the case of land itself. domicile, the considerations here are anaenjorceability and (4) In the case of (2) situs, (3) logous to those in the preceding category. The general conclusion, therefore, must be very much as in the case of land, with a slightly greater stress to be laid on domicile. But inasmuch as origin still constitutes the greatly preponderant element, this difference may be neglected.
II b. INDUSTRIAL ESTABLISHMENTS OF PLANTS CONSISTING CHIEFLY OF FACTORIES. x. Origin. (a) As between production and sale. Inasmuch as it is still more usual for the factory to have its selling agencies in various places, the problem of the division of o into o, o, o3 is of somewhat greater importan, - than in the case of mines. (b) As between location and personality. It is true that the manager of the factory can generally do most effective work on the spot, but this i. not necessarily so. In not a few instances the real brains of the management may be found at a distance. This is, however, apt to be the exception. 2. Situs. This in the main re-enforces origin. There is, however, a modifying consideration. When once the factory is erected, location is an important factor: but it mustnot be 'forgotten that location was voluntary - the owner could quite well have decided not to erect it there but somewhere else. This is not so with agricultural land. '
(4034)
31
As regards (3) enforceability and (4) domicile, the considerations are very much as in the preceding case. An exception may, however, be noted in the case of enforceability, with corporations or companies where the place of birth (charter) may be different from the location of the head office. Inasmuch, however, as the enforceability of economic rights is now usually, through the comity of nations, extended also to corporations which are technically chartered elsewhere, this matter is not of commanding significance. The conclusion would be that, while the importance of domicile is somewhat greater than in the case of mines because of the difference in the personal element in origin, still, on the whole, the place of origin, because of its re-enforcement by (2) situs and (3) enforceability, is of preponderant weight.
II C. COMMERCIAL ESTABLISHMENTS WITH A FIXED LOCATION, i.e., WITH A MAIN OR HEAD OFFICE IN A PARTICULAR PLACE.
1. Origin. (a) As between production and sale. Here the nfluence of sales and the possible existence of many selling agencies or branches are of outstanding significance. The problem of the division of o into ol , ol, ol becomes of commanding importance. (b) As befteen location and personality. Tne situation here is analogous to that in the case of factories, but with still greater stress to be laid upon personality. While in most cases the commercial manager can do most effective work on the spot or in the place where the head office is situated, there are many exceptions to the rule ;.and control at a distance is far more possible than before. In regard to (2) situs, (3) enforceability, and (4) domicile, the considerations are precisely the same as in the case of factories, except that as to situs a commercial business can be more easily moved than a factory, with its nexus and environment of workers and their dwellings. The conclusion would be that, while the importance of domicile is somewhat greater than in the preceding two cases because of the personal element in the matter of origin, none the less, in the main, the place of origin, because of its re-enforcement by (2) location and (3) enforceability, remains of considerably greater significance than domicile. In this entire second category, then, with its three divisio-1s, we are led to the conclusion that in an ideal division a preponderant share should be assigned to the place of origin, even though tLhis share itself, varying with the different classes, should be slightly smaller than in the case of land. When we are dealing with property taxes, as in the case of capital levies or death duties, a distinction might further be made between the land element in the enterprise and the personal ,lement capitalised under the name of " goodwill. " In the case of an income.tax, however, such a distinction would largely be meaningless.
(4035)
-32
Ntovables with a Fixed Location. III.

TANGIBLE OR CORPOREAL MOVABLES WITH A FIXED LOCATION.
As in the preceding category, such movables may be classified according to the degree of their dependence on the land. There are two chief classes:
IIIa.
MOVABLi.ES
DEPENDENT
PRIMARILY ON THE LAND.
In this class are to be put factory machinery, agricultural implements, and flocks and herds. Te first two classes obviously are of no economic value apart from the plot on which, or the farm in wh;ch, they are utilised. Flocks and herds also are generally dependent upon a particular piece of land for sistenance, although in nomadic countries or places like the Far West of the United States or the Argentine, the herds are not infrequently itinerant, according to the grazing rights which may vary from month to month in the different sections. In such instances, however, 2 3 we have to deal with o, o , o as in the case of commercial establishments. But whether we are dealing with a fixed or a variable location, the origin of the yield is so closely connected with the land that the entire class ought to be treated like land, i.e., only a slight importance should be attached to the domicile of the owner as over against the origin of the yield.
I1 b.
MOVABLES DEPENDENT NOT SO MUCH ON THE LAND AS ON THE INDIVIDUAL.
In this category we should put money, both coin and paper, jewelry, household furniture, pictures .nd libraries.
z. Origin.
As to the four elements of economic allegiance in question, since there is no money-yield at all, origin plays no part. These forms of wealth can only be enjoyed where the owner is present. The " yield " of benefits cannot be sent to him. 2. Situs. The influence of technical location as apart from the residence of the owner is negligible. In the main, the situs may be saud to follow the domicile, because the jewelry and the money, e.g., can really afford an economic utility to the owner only when associated with him or on his person. The jewelry might, of course, be leftfor a time in a safe-deposit box or the money put into a bank. But this in itself would not be sufficient to estabEsh a claim of the fortuitous temporary place of deposit as -an important consideration. W,.here the actual situs differs from the residence of the owner, constructive location must take precedence of actual location, because the constrnctive location is the one of real economic importance. The only doubt here arises in some cases of household furniture, pictures and libraries. Ordinarily, of course, these movables are found in the place of residence or domicile. They would have no economic meaning anywhere else. But it may happen that an individual possesses two homes in different countries anc( that in each there may be found valuable furniture; pictures and libraries; yet we can properly speak of his habitual residence or domicile in only one of these countries. In such a case, the situs of his secondary home may not re-enforce, but oppose,
(4036)
33 -
domicile, and in that event it is not unreasonable to say that the country of this secondary home may also prefer a claim. In fact, from this point of view, it may even be said, with some degree of reason, that a distinction might be made between household furniture and libraries over against the-other categories, and that the former should go with the real estate, thus making the actual situs more important than the constructive location. 3. En orceability. Enforceability follows the domicile. 4. Domicile. This is the one outstanding factor. Since, therefore, domicile is strongly re-enforced by (3) enforceability and in most cases by (2) situs, the conclusion points to domicile as the chief consideration of weight, with the single exception that, where there are several homes, the actual physical location of the furniture, pictures and libraries (but not money or jewelry) is to be preferred to their constructive situs at the domicile of the owner. In this whole class of cases it is obvious that there is no application at all to the income tax except possibly in so fa" as a professional library may help its owner to secure an income. This would, however, fall rather under the head of professional earnings, to be considered later.
IV. TANGIBLE OR CORPOREAL MOVABLES NOT ORDINARILY CAPABLE OF A FIXED LOCATION. The most striking example of this is vessels. There are in reality three. classes of vessels: a) ocean tramps, b) regular ocean liners plying the high seas, and c) vessels engaged in coastwise traffic or internal navigation where the coast or the navigable water fronts on, or traverses, different countries. The fact that the same vessel may shift fro.:, one to another of these classes is embarrassing. But at any given time the distinction .s generally observable. I. Origin. If the vessels ply the high seas, there is no particular country to which the origin of the yield can be ascribed. If, however, they ply navigable waters which traverse different countries, we have, as in several of the preceding categories, not one, but several, places of origin, that is ol, o2, o3, and we are confronted by a problem which must be solved in a similar way. Moreover, in the case of ocean liners there are apt to be in several countries large and extensive docks and appurtenant property which materially contribute to the profitable operation of the vessels. Finally, it may be remarked that, inasmuch as the economic yield of vessels depends partly on- the seamanship of the captain and to a larger degree upon the business sagacity of the owner, the element of personal management becomes of importance, and that this management may be carried on in the one or the other country. But, as in the case of immovables, die controlling consideration is the existence of the traffic: origin therefore .re-enforces domicile (the home of the owner) only to a partial extent.
(4037)
34 2. Situs.
There is no permanent physical situs in any taxahle sovereignty. The mere.fact that the vessel happens at any particular tithe to be in one port as compared with another is of very little significance. 3. En/orceability. This is a consideration of great importance. Practically it means the country where the ships are registered and the flag of which they fly. This is perhaps the only mod 'n -instance where political allegiance still plays a r6le: for the registry of a ship is its nationality. Btlit it plays a r6le only because of its economic implications. 4. Domicile. The domicile of the owner is in itself of slight consequence as compared with the other elements of economic allegiance. It becomes of importance only in so far as it is re-enforced by some of the preceding elements. In the main, then, in the case of sea-going tramps, the country of registry possesses the chief claim to economic allegiance. If, as frequently occurs, there is a distinction between the country of registry and the country of domicile or direction, the greater part of the tax ought to go to the country of registry. Where the country of registry is changed in order to evade certain obligations to the country of domicile or direction (as in the recent transfer of American vessels to the Panama flag in order to escape the rigours of the i8th amendment with reference to intoxicating liquors), there is no rcason why the country of registry should not receive a preponderant share of the tax. When we are dealing, however, with vessels plying navigable waters which traverse different countries, the place of (I) orgin becomes, at least for the purpose of the income tax, more important than (3) place of registry and should be substituted for it. It would be a case of oi 02, ol. as found in ordinary business enterprises. A Dutch flag on a boat plying on the German Rhine should not exempt the vessel from its economic allegiance to Germany. For purposes of the property tax or death duties, however, registry should be the paramount consideration. Similar conclusions, although in a somewhat modified form, would seem t9 apply to ocean liners. Registry is the chief consideration, but for purposes of income tax (rather than of property tax or death duties) the other country, where expensive docks and shipping offices are found, might reasonably prefer a claim to a part of the earnings. Securities and Credits.
V.
INTANGIBLE P)ERSONALTY OR INCORPOREAL MOVABLES.
The most important classes in this category are real estate: mortgages, corporate securities, Government bonds and private credits.
V a. MORTGAGES ON REAL ESTATE.
1. Origin. Strictly speaking, we ought to suhdivide mortgages into two classes. In most cases, indeed, owners of real estate borrow money on mortgage in order to benefit the real estate. They desire
(4038)
35 -
to put improvements into the land or to build houses on the land or to add to the area, and presumably therefore to the yield, of the land. In other cases, however, owners of real estate borrow money for purposes unconnected with the land, such as to meet personal obligations or to make outlays which have nothing to do with the land. Inasmuch, however, as it is impossible to probe into the intentions of the borrower, we must assume in the present discussion that a mortgage on real estate is in most cases intended in one way or another to benefit the real estate. The capital loaned has, indeed, been amassed or saved by the lnder; but when it has been transferred to the borrower who owns the land, its value as a capital fund and as a security for the income is to agreat extent the value of, i.e., the prosperity of, the land. The economic basis of the security is, therefore, to be found in the community where the land yields its produce. It might, ineed, be claimed that, inasmuch as the country of the borrower r.ceives the benefit of th, ise of the capital, that country should not levy any tax. But to this ii may be rejoined that the country of the creditor also secures a benefit through the revenue accruing to the land which might, but for the assistance rendered by the loan, either not exist or not exist to the same extent. Again, it might be said that the country of origin (the debtor country) already, in most cases, taxes the land and ought not again to tax the mortgage on the land. In an income tax, however, the tax on the interest on the loan is deducted from the tax on the income from the land ; in a property tax or inheritance tax a similar custom ought to be followed and is, in practice, very frequently followed ; so that if the country of origin were prevented from imposing a tax on the mortgage it would obviously suffer.
2. Situs.
The mere fat that the piece of paper representing the mortgage is deposited in a safe or a bank apart from the residence of the owner is too insignificant to warrant a claim to serious consideration. If it were to be given any weight it would make the taxability of the security a matter of mere chance according as the security was moved from one bank or trust company to another. What is of importance here is not the actual physical location but the constructive or economic situs of the security. This would seem to be in the hands of the resident or the owner. 3. Enjorceability. This re-enforces origin, at least in the case of property taxes or succession duties. case of an income tax, however, it is of less significance. 4. Domicile. This remains of considerabic weight from the ixeint of view of consumption or disposition of the wealth. On the whole, then, the argtntenti ,eem to be bilanced btwlen origin and domicile. Considerations i and 3 argue for origin ; cousilerazions 2 and 4 argue'for domicile. From one point of view. the mortgage on real estate ought to ia: treated like a factory, with somewhat more impor'ance attached to the place of origin. On the other hand, when the mortgage covers land situated in several countries, the necessi.y of a fractional division of o (origin) would be embarras ing, and to that extent weakens the claim of origin. Attention, however, must be cal'led to the distinction between taxes on'property or death duties on the on hand and taxes on pure income on the other. In the case of property In the
(4039)
36 -
taxes, the argument in favour .of origin would seem to be stronger. To assign to the mortgage as property a real economic value is to bring it into close relation to the land on which the mortgage is based. The capital security of the mortgage is the land itself. But in the income tax the case is different. The interest on the mortgage (liable to income tax) can be, and is, paid out of the other income of the borrower from far-away sources if the yield of the property fails. Moreover, the varying returns from different mortgages depend in no small degree upon the knowledge arid investing ability of the lender. Again, in the case of an income tax, it is more difficult to draw the line between mortgages and other securities. In addition, if, as we shall see in a moment, the principle of domicile is to be preferred in the case of ordinary securities, it is obv(,ius that it would be possible for the borrower to obtain his money by constituting a company with shares or bonds so as to defeat the application of the principle of origin to the mortgage. The conclusion, therefore, would seem to be that, while the arguments are fairly balanced, the preponderant importance ought to attach to origin in the case of the property tax or death duties, and to domicile in the case of the income tax.
V
b. CORPORATE
SHARES,
i.e., SHARES IN COMPANIES OR OTHER ASSOCIATIONS.
i. Origin.
Corporate shares would, indeed, be worth nothing if the company had no earnings; but the yield depends after - T on the activity of the legal owners, the shareholders. While the success of a venture is, of course, in part bound up with the economic prosperity of the community in which the operations are carried on, it is the shareholders who elect the board of directors and the managcr. In the case of origin, therefore, as in the case of an ordinary business, the personality of the owner is of considerable importance. It must be remembered, moreover, that we are here dealing not with a tax on the corporation or business but with a tax on the shareholder. We are not discussing the question as to whether, in an income tax, for instance, the tax on the corporation as such is to be regarded as virtually a tax upon the shareholder, and whether therefore the additional tax on the shareholder is to be considerezl a double tax. That is a question of double taxation arising from the imposition of two taxes by the same sovereignty what we are concerned with in this memorandum is double taxation arising from the simultaneous taxation of property or income by different jurisdictions. Neve theless, if origin in the case of corporate shares be interpreted to mean the place where the dividends are earned, it is obvious that additional complications will arise from the fact that the company may produce its goods in one State and sell them in another, or have its chief office in one State and yet secure most of its earnings from sales in other States. Here the multiplicity of the claims of origin, that is, ol, o2, o3, will constitute a serious embarrassment in considering the fractional rights of each particular share and to that extent eakens the claims'of origin.
2. Situs.
Thik;, as in the preceding case of real-estate mortgages, is negligible. 3. Enforceability. This sometimes becomes of importance, c.s:cially in the case of registered shares as over against shares to bearer. Where there is interference with the free play of capital, the particular place in which the legal rights to the security are enforceable may become of considerable significance. What is here involved is the question of the international capital market..
(4040)
37 -
4. Domicile. This is of considerable importance, especially when it is re-enforced by some of the other domicile coaverge, the case for domicile is strong; situs and (4) instance, (2) factors. When, lor when, in the case of securities to bearer, 2, 3, and 4 converge, the case for domicile becomes still stronger. Even in the case of registered shares, it not infrequently happens that shares can be registered in a branch office, and if this branch office, as is usually the case, is found in th place of domicile, then again 2, 3 and 4 converge in making domicile of paramount importance, Where the place of registry, however, coincides with the place of origin, as in certain registered securities, origin acquires some significance. We must, however, remember the practical difficulty of the country of origin reaching the foreign shareholder. In a few cases this difficulty may be overcome for income tax by making the corporation itself deduct the dividends; but ordinarily this difficuiltv somewhat weakens the claim of origin and strengthens that of domicile. It is not easy to see how death duty or property tax can effectively be recovered by the corporation of the country of origin from a non-resident shareholder. Moreover, if we follow the principle of origin exclusively and do not allow the country of domicile to tax any foreign corporate securities, there is grave danger that the individual may put his entire fortune into such foreign securities, in which event the country of domicile would go empty-handed. The general conclusion, therefore, must be that, while from a certain point of view it is posto demand a division between the principles of origin and of domicile, certain considerations sible come into play which make domicile the predominant factor. In the first place, the element of of the shareholder - enters, as we have seen; into tbe question of origin ; personality- th.t is, secondly, even where there is a distinct place of registry, this is apt to be just as frequently the place of domicile as the place of origin ; and, thirdly, under conditions of modern life, the wealth which belongs to the individual who transfers his permanent residence or domicile to another country is likely to consist to an increasing degree of such investments or securities. The preponderant argument, therefore, is in favour of domicile.
V C.
CORPORATE
BONDS.
Corpo;ate bonds are economicallv, although not legally, analogous to corporate shares. In debenture shares " and sometimes carry a title to profits. England they are often referred to as :" Even in other countries, where the bonds are so-called mortgage bonds, the similarity to realestate mortgagei is in reality slight. The mortgage may, in fact, be put not on the real estate but on the entire property oi the corporation in question. From the economic point of view, moreover, corporate bonds, like corporate shares, really constitute a part of the corporate capital, the real difference being only that they are first in the order of preferential security. There is, distinguishing for the purposes here discussed between corporate theref re, slight warrant for bonds and corporate shares.
V d.
PUBLIC
SECURITIES,
i.e., BONDS
OF STATE AND
LOCAL GOVERNMENT.
Although it might be claimed that government bonds are analogous to real-estate mortgages and that, at least for purposes of the property tax and death duties, the place of origin
T3095 0-62-vol.
4(-
(4041)
38 -
(the country of iss ,) should prevail, the common practice of governments in exempting from taxation at least foreign-held bonds would seem to re-enforce the claim of domicile to the position of preponderant importance. As a matter of fact, it would be difficult to distinguish in principle between the bonds of a private corporation and those of a public corporation so far as the essential elements of the economic allegiance of the bondholder are concerned. We are therefore led to the conclusion that the one should he assimilated to the other.
V e.
GENERAL COMMERCIAL CREDITS.
By this is meant the credits which result not from permanent investment of capital but from mere temporary loans or transactions. Here the considerations would seem to be as follows:
I. Origin.
As between the debtor and the creditor, the origin of the yield is due as much to the activity of the creditor as of the debto'. It is well-nigh impossible to ascribe the real economic origin to either country.
2. Situs.
The book location of the credits is of negligible importance. 3. Enforceability. The place where the payments are to be nwadc or are receivable is likewise really of slight weight, although in some countries, like France and Italy, some stress is laid on this. From the economic point of view, enforceability, or what the French call exigibility, is in reality of minor significance. Moreover, exigibility is by no means the only legal consideration in the question of enforceability which may also, in part at least, be found in the creditor country.
4.
Domicile.
This becomes the really important factor, especially as it is partly re-enforced by.(r) origin, and sometimes by (3) enforceability. General comnmercial credits, therefore, ought to be taxable according to the principle of domicile.
VI.
PROFESSIONAL EARNINGS AND SALARIES.
Inasmuch as these are due wholly to-the activity of the individual, the sole factor involved is that of domicile. It is only in cases where there is a branch of the law office, engineering firm and so forth in another country that any question can arise. But in such cases the occupation becomes a commercial enterprise rather than a profession, and ought to be treated as in II.b.
(4042)
39 -
Conclusion.
Summing up the preceding discussion, it would be desirable ideally to apportion economic allegiance as between origin and domicile as follows:
CATEGORY OF WEALTH
PREPONDERANT ELEMENT.
I. Land. .".......
Origin
.................. X
Domicil.
II a. Mines, oil wells, etc......
...................
. ...
x
x x x (regist) x (prop'y)
II b. Commercial establishments ..... ............... III a. Agricultural implements, machinery, flocks and herds
III b. Money, jewelry, furniture, etc......
........... x (income) X X X X X
IV. Vessels ...... ... ......................... V a. Mortgages ........ ....................... V b..Corporate shares. . .................. V c. Corporate bonds V d. Public securities. .................... V e. General credits ........................ VI. Professional earnings ....... ..................
That is to say, the categories of wealth in which origin is more important are: I, II a, II b, III a, IV, V a (property). Those categories in which domicile is more important are: III b, V a (income), V b, V c, V d, V e, VI.
Putting it another way, all corporeal wealth, including immovables and tangible movables, except III b, would be assigned predominantly or wholly to the place of origin; all intangible wealth, except Va (property) would be assiigned predominantly or wholly to domicile or residence. To allocate the exact proportion of economic allegiance to origin or domicile in each particular category is well-nigh impossible. Such an attempt would savour too much of the arbitrary. Btkt where any two countries desire to make such an allocation, they would do well to be guided, ideally at least, by the above analysis. Where it would be too complicated to make the exact apportionment between the claims of origin and domicile in each category of wealth, a certain rough justice can be attained by turning over all the categories of the first division completely to the place of origin, and by turning over all the categories in the second division completely to the place of domicile. What each country would lose in the one case it would roughly gain in the other, and there would be the great additional advantage of comparative simplicity.
(4043)
PART III. APPLICATION OF THE FOREGOING PRINCIPLES.

SECTION I.
THE GENERAL
METHODS OF AVOIDING DOUBLE TAXATION. The Four Alternatives.
The bearing of the foregoing treatment of economic allegiance upon the problem of double taxation. it wi.! be seen from the foregoing that the conception of faculty comprises a number of .e:ants not alj of which are of conspicuous or equal importance, the outstanding elements ",rg tn:o.e connected with acquisition or production, and those connected with outlay or i1a Aniption. The relief of double taxation, for the two-fold purpose of relieving an excessive hard,:n upon certain individuals and of avoiding certain economic consequences to which reference hnibe-:n made, involves the surrender of revenue by Governments. The question therefore at orce arises: Which Governments should give up revenue, and to what extent ? Obviously the foregning discussion of economic allegiance is, in its broad aspect, pertinent to this enquiry. B-ut, before discussing how Govcrrnments ought to view this matter, it may be well to ask how do they, in fact, regard it in the light of their historical development and constitutional prac, ice. A su vev of the whoie field of recent taxation shows how completely the Governments are dcolnnated by the desire to tax the foreigner. It seems to be clearly instinctive in layingdown .eneral principles to treat " origin " as of first importance, and residence as of " secondary inportance; i.e., if tie origin and source of income are within a country s borders, it is assumed that that country ha the prime right of taxation on that income, although it goes to some person :.broad. There arc a few moditications, but this is the main instinctive principle. From this flow,; the consequence that, when double taxation is involved, Governments would be prepared to giv: up residence rather than origin as establishing the prime right. ', nis preference for origin a,; the prime principtle is of a piece with the common instinct that taxes are p-id by things rather than by persons. But if we recognised facts and were not prevented by .istorical accidents and administrative cowardice or frailty from taxing every man in 1s!: sum ur.on Ins t, al recources instead of getting at him piecemeal, the ongin would far less instinctive. It l:ads direct to the consequence that countries creditor idea on balance ,-?iaud -ear the main cost of relieving double taxation, and countries debtor on balance should contribute nothing to that cost. Although countries hold so instinctively to this origin principle i. theo-ry (and actually apply it when the foreigner has made investments already and is helpless), they drop the principi. at once as soon as the practical question of new investment arises.. Cau origio, then, be so sacred a principle ? Daring the past year or "oloans have been sought, for example, in the British money market by umune,'ou; foreign borrowers; Australia, New Zealand, France, Brazil have each recently isued their securities yielding fixed rates of return. One and all are distinguished by a common fe-ature, namely, the exemption of the yield from all taxation, present or future, of the borrowing 'ttuntry. The United Kir,gdom itself, when under the necessity during the war of raising all the money it could abroad, offered its Government war securities to persons not domiciled (and,
(4044)
41 -
as respects :ncome taxation, even to persons not ordinarily resident) in the United Kingdom, free of all internal taxation. These practical examples strongly confirm the general principle already reached in theory that, as respects fixed-yield investments at least, the investor throws back on the borrowing country the burden of that country's taxation. In the light of these examples, it seems safe to conclude that the contention as to the burden of such taxation is irresistible. It would seem that when Government and powerful municipalities are borrowing and attempting to attract f-,reign capital, they are willing to forego the tax on the foreigner, but that theywould not be willing to do so in the case of the foreigner's money invested in general securities in trading concerns within their borders. It is only the urgency of their own claims they are prepared to recognise. They would need to take a much more parental interest in the affairs of their subjects, their commerce and the development of their country to be capable of such an act of self-abnegation as to recognise, by means of intentional losses of revenue, an exemption for foreign money invested in profit-making industriil enterprises within their borders. Nevertheless, this would appear to be the only logical consequence of the way in which they act in relation to their own needs. It would, no doubt, be easier to find some half-way house in this matter if we were faced with the old groups of taxes, such as taxes in rem and taxps in personam, i.e., impersonal taxes, following the land or the business wherever it might be situated, and those which follow the person only. But in a modem income tax these distinctions are lost sight of: the tax upon the land or the business has no flat relation to the value of that business, but is graduated or may be graduated with the personal fortune of the distant resident. If, for example, the Mora- " nian au*'osities were to say that they would not exempt the foreigner's investment in land or in a mortgage upon their land, but that they would exempt an investment in securities, it is obvious that a Moranian business would find it easier to raise capital from abroad on general debentures or some kind of bond which approximated rather to the share class than to a charge upon property. Nevertheless, it may be possible that for some countries this is the only line upon which any practical compromise can be found, viz. : that the country of origin should have some vested right to tax the foreigner to the extent of the ordinary tax attached to property itself, even though the income from such property might form part of the general income taxed abroad. We propose to state briefly the four main possible alternatives, but it is well to indicate here that their application to all States is by no means identical. Certain of them may have much greater force as the best remedy in countries in which taxes on specific objects of wealth are the main fiscal expedient. Again, there may be a different remedy in countries where the group of taxes is intended to have a net result equivalent to a rough income tax ; an,, thirdly, there may be a different choice where the main fiscal expedient is a tax on pure income. Thus one solution as between two countries falling into this last class.may be best, and another solution for countries falling in the first class may be best, and again some other solution as between one country of the first class and another country in the third may commend itself.
The four alternatives broadly stated. The four possible alternatives appear to be as follows: (I) A country might deduct from the tax due from its residentz any tax paid by them on their income from abroad (analogous to the United States practice in the case of its own citizens). This throws the whole burden of increased taxation in debtor countries upon the creditor country, and is opposed to the general practice observed by foreign Governments when issuing their loans. If this course were followed,
(4045)
42 -
Government- need no longer make provision for making the loans free of tax to nonres oent investors, knowing that it will fall upon the exchequer of the creditor country. It is to be doubted whether such creditor countries as the United States, Great Britain and the Netherlands, having regard to their interests abroad, would ever agree permanently to put their exchequers at the mercy of all the unknown increases of taxation of foreign Governments. This may be called the method of deduction ior income from abroad. (2) The extreme converse, viz. : that the country of origin should exempt all non-residents from taxation imposed on income drawn from sources within its borders, recognises the theoretical fact that the country wanting the money cannot successfully " tax the foreigner" ; it can only shut him out. It would have the effect of increasing the flow of capital from abroad and the development of less-favoured regions. This may be called the method of exemption lor income going abroad. (3) It may be possible by convention to divide specific taxes so that a portion should be borne by the country of origin and the remainder by the country of residence, e.g., a Moranian having an investment in England and being liable to 5/- in the thereon might recover 2/6 from the British Government, and also in his own country be charged only half the normal rate of tax in relation thereto. This is an attempt to recognise both principles and to spread the burden upon the two Governments. It would leave in an unsatisfactory position issues of State loans, and is open to many of the objections, though not to the same extent, as those raised to the first proposal. This may be called the method of division of the tax. (4) By convention it might be determined to attach origin taxation specifically and wholly to particular classes of investments or embodiments of weaith, such as rents of land and of houses and mortgages on real property, but to exempt the non-resident in respect of income derived from business securities. The country of residence would allow the whole of the foreign tax Ps a deductien from its income tax on the resident in respect of such sources of income, but would charge other sources in full. The country of origin would retain its specific origin taxes -in full. It would be necessary to'give the country of residence complete power of charging all sources except for certain specified exemptions, so that the scope of its liability to remit the tax would be easily determined, and the investor, from his total income-tax demands, would be able to deduct certain specified taxes on any real property he might have. It might be desirable to impose some limit upon the power of the country of origin to levy in future specially heavy specific origin taxes, which would unduly deplete the exchequer of the country of residence. This may be called the method of classification and assignment of sources.
(4046)
43 -
SECTION II.
APPLICATION OF THESE PRINCIPLES TO DEATH DUTIES AND PROPERTY TAXES. Death Duties and the Method of Classification. In considering the question of the division of economic allegiance between the two main factors of origin and residence, in the matter of succession and death duties, levies on capital, property taxes and the like, we must first consider for a moment the possible claim of some other clement of economic allegiance to preference. We have, in other words, to take account here of the element of enforceability, which still plays somewhat of a r6le in certain countries in the case of succession or death duties. Under the older theory, still accepted in the legal systems of some countries, the inheritance tax is rtgarded as an indirect tax or a tax on the transfer. It might then be justifiable to claim that the country of transfer alone should impose the tax. Under the newer theory of faculty or economic allegiance, however, enforceability is only one of the four elements in the problem, and constitutes, as we have learned, one of the minor elements. It is of importance, in reality, only in re-enforcing on the one hand the doctrine of origin or sius and, on the other hand, the doctrine of domicile.. Of itself it ought .to exert in modem times no controlling influence. The same is to be said of the physical situs of the paper representatives of the wealth in question. The fact that the securities which form a part of an estate happen to be in a particular bank or safe deposit is in modern times of no significance. Sifus is of consequence only as reenforcing true economic location. The real chotce,'therefore, in the case of the inheritance tax is between the principle of origin or true economic situs and the principle of domicile. Applying the conclusions reached in our discussion of economic allegiance above at page 39, we should prefer the claim of origin or true economic situs in class I, real estate, and class III a, movable property closely connected with real estate, like machinery, agricultural implements and flocks and herds. On the other hand, we should undoubtedly prefer the claim of domicile in class V b, corporate shares; class V c, corporate bonds; and class V d, general commercial credits. The only points on which there might be any doubt would be the various divisions of class II, industrial and commercial enterprises; class IV, vessels; and class V a, real-estate mortgages. As to vessel., the correct conclusion in our opinion is that the inheritdnce tax should be imposed by the country of registry, especially in the case of ocean-going vessels, modified, however, by the consideration that where an individual owned ships plying navigable streams which traverse several countries, the principle of registry should give way to that of origin or economic location. In the case of real-estate mortgages, the country of location of the real estate would, as is intimated above, seem to have priority in the case of the inheritance tax, differing in this respect from the income tax. Finally, as to industrial and commercial enterprises, it is far easier in the case of the inheritance tax than in the case of an income tax to make a distinction between the property associated with the land and the capital element or goodwill in the business. It would hence seem logical to recommend a division of the inheritance tax between the two countries, assigning to the country, where the enterprise itself has been located or conducted the greater part of the tax, and to the country of the decedent's residence, the tax on the element representing the gqodwill.
(4047)
44 -
In the main, therefore, it may be said in the case of the inheritance tax that the tax on the real estate or on the movables closely associated with the real estate, including mortgages, should go to the country where the real estate is located; and that the personal property not so a_-Xciated with real estate, and especially the incorporeal or intangible wealth, in the shape of corporate and public securities, should be assigned to the country of the decedent's domicile. The conclusion would therefore be that where two competing authorities are dealing with succession or death duties, they can with profit adopt the lines of the fourth method mentioned in the last section and pay regard to the di'ision of economic allegiance between the two main classes of origin and residence on the lines that have just been elaborated. In these competing claims, where one country has the predominant right to taxation on the grounds of origin, it might take over the entire right to include such items within its scope, this right being wholly surrendered by the other authority whose share of economic allegiance through residence was. slight. In other cases the respective shares of the burden involved in granting relief on a full claim might be decided between them by specific agreement according to these principles. Finally, in the case of large wealth, the share of allegiance due to residence might be much more fully recognised than it has been. Possibly the complications arising from an attempt to get an exact assignment as under method 4 would be so great that it would be desirable to have a general compromise or commutation by making some more or less arbitrary division, i.e., method 3. It would save a great deal of academic discussion and yield more immediately practical results. Whether, however, we provide either for a division of the tax or more simply for a remission by the one country of the tax inappropriately levied by the other, we are confronted by the existence in modern times of graduated o progressive taxation. There may be such a system of graduated succession duties in either or both of the respective countries, and it may easily happen that the remission by one country of a tax levied at a higher rate by another country might lead to rembarrassment and to injustice. In order to obviate this result, we suggest the following plan : The country of residence should apply to the entire estate the appropriate ra'd bf tax and should then deduct from the sum thus payable the amount of the tax actualy levied (according to the princip!e laid down above) on that part of the estate situated in the country of origin, provided that the amount so deducted does not exceed the sum which would have been levied on that part of the estate if ithad been situated in the country of residence. In order to carry out this principle of division and to obviate the dangers of double taxation, we further suggest that provision should be made for an interchange of information among the respective countries involved. If conventions are made between two countries, it would be comparatively simple to provide for this interchange of information. If a convention is imade anong several countries simultaneously, the possibility might well be considered of establishing some central a-.,encv to which all the relevant facts should be reported. The League of Nations might be of considerable use in this respect. A- the preceding considerations andi conclusions as applicable to death duties are equally applicable to other forms of taxation if fundled wealth, such as the capital levy and the general property tax, as well as to the so-called impersonal taxes (like the French and Italian imfidts ridels or the -erman Erlragssleuern) on property, produce or business.
(4048)
45 -
SECTION III.
APPLICATION OF THESE PRINCIPLES TO THE TAXATION OF INCOME. Income Tax and the Methods of Classification or Division. In this section we shall discuss the income tax proper in its developed form, as found in Great Britain, the United States and the German Empire. The discussion would also apply to that part of the French ncome tax known as the conplementary tax, or impdf global, as well as to the similar Italhan tax contemplated by the I.aw of 1919, the enforcement of whi,:h has recently been postponed. On the other hand, the existing schedule income taxes (imp6ts cidulaires) of France and Italy contain such large elements of impersonal taxation (impts reds) that they are rather to be assimilated to the taxes discussed in the preceding section, amenable to method 4 as modified by method 3. We have already indicated that the economic conception of income is so complex and that the legal and statutory definitions of income by different countries are so diverse that the problem of double taxation is much more seriously complicated for this class of taxes than for any other. In theory we should, of course, consider that the fourth method would be the soundest. But this memorandum has already shown that it is aLnost impossible in economic theory to get a direct assignment of a iuantitative character of finally resultant income amongst all the national agents who may be said to have had a finger in the pie. If it is theoretically difficult we may conclude that it will be no less difficult in practice unless a compromise or arbitrary assignment is adopted. To give one illustration, the simple case of a resident in country A receiving the rent of a farm in country B is the clearest example of the division of economic allegiance, as it might well be that country B could claim to have the whole of the tax on income and that country A should give up its claim. In a second instance, the resident in country A has half of the ownership of a farm in country B which in the return it produces contains the elements both of rent and of business profit. Tflie business carried on by this resident also has other property and activities, and as a net res-ilt produces an income for the resident in country A which is similar to that imagined in the first instance. Is the income derived from rent or from profits, or from a combination of these with possible losses in other directions, or to what is it due ? If there is no systematic valuation of annual yields on proper lines, how is the rental value to be determined when it is mixed with other elements ? Again, a legal entity in the form of a company is interposed between the resident in country A and the farm in country B. The rent or produce of the farm is only one of the items of income of this legal entity. This company receives a real or constructive rent, it mixes this rent with losses from other sources, and as a *resultit pays a very small sum in the shape of dividends to the resident in country A. Has that resident received, or has he not, the rent of the farm ? It will be seen that simplicity only exists in a minority of cases involving income tax and that we soon get into the region of impracticability if we attempt to apply method 4 with precision. We are driven to ask, therefore, whether we snould not endeavour to commute or compound the rights and difficulties of the fourth method by adopting the third, that is, not to attempt to get at exact elements of economic allegiance but to adopt a broad line and to say that where double taxation of income is involved each country shall give up a flat or fixed proportion of the sum due to it. This idea is very attractive, and it may well be possible to arrive at conventions between particular countries on these lines. It is necessary, however, at the outset to iirjicate
(4049)
46 -
two important considerations that arise. First, it is riot possible on the grounds of pure economic theory to indicate what proportions should actually be adopted. The reason is quickly seen. A particular country A may be much more concerned in its relations with the rest of the world as a country where origin predominates and residence is unimportant than a country B which, in its relations with the rest of the world, is predominantly acountry of residence and only to a lesser extent a country of origi.. Thus the proportion presenting a true compromise for count.y A and the rest of the world may be adopted which is inappropriate for the relations of country B to the rest o the world. .,)es not end here. Even for country A, when one has decided on its Second, the difficul, relationship to the r~st of the world - say a proportion of one-half - that one-half may be quite an incorrect rate for every convention with separate countries with which it has to deal. That is t6 say, it may be its true rate in dealing with all the other countries taken together, but quite a wrong rate in dealing with them separately. The relations, for example, of Brazil to the rest of the world in the division of economic allegiance might be made up of a very large proportion of allegiance in its dealings with Great Britain and the United States and a very small proportion in its dealings with the Argentine. "These points will indicate that, even if a broad proportion could be determined for a given country by economic theory as a compromise under method 3 for the details of method 4,they would still have to be redetermined piecemeal for each separate country with.which it had relations. It does not appear, therefore, that method 3really has a fundamental basis in economic theory which is capable of easy application. The .econd consideration applicable to method 3in relation to income tax to which we ought to drav attention is no less important. Suppose it has been decided as between two countries that each should give up a half of the total tax upon income originating in one country and received in another. By hypothesis the actual rate of tax upon the resident is an amount varying with his total wealth, and in making an allowance it has to be shown what he has received or is entitled to receive from the other country. Now it is of the essence of this method that the resident shall not gain by the relic: in double taxation, that is, ehall not be in a better position than he would be if his income were all derived in the country where he resides. Relief is desired only to the extent of the excess over such a sum; and therefore the essence of method 3 is that the country of residence should give relief by a definite amount.that has been levied in the country of origin, with, if it is desired, a maximum for that relief equal to one-half of the rate of tax levied by the country of residence. How is the rate that he has suffered in another country to be determined ? The simple case of the receipt of interest on a foreign mortgage presents little difficulty; but the great mass of double taxation has"a rather more complex incidence. A common case is the following. A resident in New York holds shares in, let us say, a motor company in the United States, which has two large branch businesses, one in France and the other in England. These two branch businesses are taxed on their operations to the full in France and England, and in consequence the total resources of the corporation in the United States are reduced, and the amount of income which it distributes by way of dividends to the shareholders in New York is diminished. The shareholder realises this and has a grievance. He asks for the necessary relief under method 3. itow does he establish what he has suffered ? He has little knowledge of the details of the operations of his corporation and cannot explain them in detail. The actual effects upon his dividend, that is, how much greater the dividend might have been if the foreign income tax had not been imposed, can only be determined by the corporation itself. The corporation goes to the fiscal authorities and indicates to them that its income consisted of a million dollars in a given year, that Sioo,ooo were made in France and $2oo,ooo were made in England, and that the sums bore certain anounts of taxation in those respective countries. Owing to the ways in which the laws of those countries compute income, it may well be that the rates of tax imposed under those laws are quite different from the rate which the total tax bears
(4050)
47 Moreover, if the English and
French businesses are separate companies, the American company may have brought into its accounts only the dividends received, which may be either less or more than the profits made in that year. Thus, the determination of the actual tax which must be regarded as borne by the sums shown in the American accounts as received from thcse two corporations is not a simple idea in practice but may be very complex. Again, having established that but for these taxes abroad its income might have been so much larger, the American corporation then has to indicate whether the whole of this benefit would have passed to the New York shareholder or not, i.e., if the dividends paid are only.$8oo,ooo out of a million of profits, whether the tax must be regarded as wholly applicable to the dividends or as going to swell the reserves, or being proportionately divided between them. The wider the operations of a corporation and the more complex the fiscal systems with which it has to deal, the more difficult is the determination of the actual effects of taxationabroad. Once it has arrived at a settlement with the fiscal authorities, the fiscal authorities can afford the corporation the necessary relief and enable it to pay the larger dividend to its shareholders or they can afford the information only to the corporation and enable the corporation to advise all its shareholders, who are then in a position to approach the fiscal authorities, and to deal with the necessary individual relief. The system of Great Britain under which taxation is deducted at the source from dividends enables the relief to be passed on by lessening the amount of the deduction by each corporation from its shareholders. Other systems necessitate the whole computation being made by corporations who alone can discuss it with the fiscal authorities and afterwards inform the shareholders. If, for instance, the shareholder in New York owns shares in a large number of companies, each of which arrives at different settlements on the grounds of double taxation, he must either make a series of claims for each or wait until he has received full information from all his sources of wealth and then have one complete settlement of his relief from his personal tax.. It may be said that method 3 has been actually adopted by the British Imperial Government in relation to its Dominion Governments, and this aspect needs very careful consideration. If it has been successfully adopted there, why should it not be possible elsewhere ? There are, however, other important considerations. First of all, the amount of relief afforded by'each Government. Under this head it will be recognised that the relations existing between the Dominions and the British Government introduce factors hitherto not discussed by us, namely, the factors of imperial allegiance and common imperial service, which induce the respective Governments to make concessions to each other. This would enable a proportion to be arrived at on particular lines which has no present parallel or analogy as between two entirely distinct Governments, whatever may be the ultimate development of feelings of interdependence and consequent spirit of concession fostered by the League of Nations. The ease, therefore, with which a proportion has been agreed upon may be deceptive if it is thought.that it indicates any really economic or theoretical principle, or that it would be equally acceptable at present between two entirely unconnected Governments. Secondly, the use of a common language, the existence (,f a common conception of income so that divergences are of the smallest character, the easy relations that exist of a political character to enable the necessary data to be determined i these facto's would put the easy working of method 3 at a maximum in the case of the British 'npirc. It is not to be expected that a similar ease in working could be found as between cuemitries with diverse language, diverse income-tax systems, diverse conceptions of income and less effective political connections. We are given to understand that very considerable complications on the lines of those we h:,%c indicated above actually exist in the British system, and that it is only by a very highly dieloped civil service and a taxing department of very great intelligence and skill that these difficulties are even roughly surmounted. We are warned that even the moderate degree of
to tme income computedaccording to United States methods.
(4051)
48 -
success in practice attending the British compromise with its Dominions cannot be confidently anticipated in any other circumstances.
Income Tax and the Exemption of the 'Non-Resident. In short, we doubt whether, except in particular cases of neighbouring couptries with like ideas, or in the separate commonwealths of a single inclusive federal government, the apparent facility afforded by method 3 of overriding the complications of method 4 would really be found to exist at present in practice. Method 3 accordingly offers in its practical working, and in the theoretical determinations that are necessary in the first place, such complications that we are driven to ask whether method 2 may not have much to be said for it where it is difficult to adopt 3 and where method 2 would not be unfair in its results. Over a very wide area it might well be that, after the complications of method 4 or method 3 had been worked out, the final results upon the exchequers of two adjoining countries, with no great differences in economic allegiance as between them, would not be greatly different from the resultsof adopting method 2 ; and a very great deal of trouble might be avoided if method 2 were adopted in the first instance, with its rough approximation to justice. It follows that in those countries in which conditions are fairly equal it might be advisible to adopt method 2, and that a large part of the double taxation problem of the world as a whole, as regards the area affected, although perhaps not as regards the number of questions involved, would be covered by method 2. This would still leave, as between countries not economically balanced in this matter, countries whose relations were distinctly those of debtor and creditor, the necessity of working out some other method. Thus, over the whole field covering those countries which are, so to speak, upon an equal footing, and where the cases of double taxation are not too numerous and too.complicated, method z would afford the readiest means of clearing up the problem. The question of the relations with important creditor countries still remains as a subject of special consideration and discussion. There are other supplementary reasons why method 2, opposed though it is to the instinctive conceptions of many countries to-day,. is worthy of consideration. The first part of our report dealing with the economic effects upon investments indicates that a debtor or borrowing country, when it really wants money, can only get it either by exempting the foreign investor from its taxes or by putting up the rate of interest to such a point as to make the country of origin itself pay the taxes normally borne by the foreigner. This leads directly to the view that method 2 has an economic foundation. The third argument in support of method 2 is that it does, in fact, confon with the actual practice of countries that require capital to-day. Thus, method 2 has three points in its favour: first, that it accords with what Governments are doing to-day so far as the money-that they cannot get themselves is concined, and that it only requires an extension of a Government's solicitude beyond its own needs to those of its own industries; secondly, that it accords witl the true economic interests of the investments of the country; and, thirdly, that it is the best escape from all the complications of methods of greater theoretical exactness. We are united in rejecting method x as being, from the point of view of the income tax proper as discussed in this section, no complete and proper solution of the matter. It may well be said that, so far, the solution provided may be very imposing in the area to which it apparently applies, but that, in fact, it deals with the fewest and least important cases and makes elaborate arrangements for the interchange of economic interests between people who, in fact, hardly ever economically meet in this connection. It may -be said that it leaves still to be decided .the great mass of important cases which fall between distinctly creditor
I .
(4052)
- 49 and distinctly debtor nations. Must it, then, be admitted that no sohuioj. is obtainable at the present time ? There are, no doubt, considerable administrative difficulties even in method -. B.ut they do not appear to be insuperable; and although they arc similar in character to the difficulties under the other methods, they tend to be less ditlictilt to manage in the case of method 2. Naturally the creditor countries tend to be those in which corporations with highly complex trading relations with the rest of the world have their headquarters, and the problem where income flows to an individual through such a corporation is more definitely within the hands of the administrative machine closely associated with those corporations. In the simple case of a resident in Holland who has income from an American farm, the United States Government can merely require evidence of ownership and the amount of American tax paid in respect thereof to be given in an approved forn before some authorised representativw in Holland in order to repay at the Dutchman's residence or to his agent any tax that had been paid in the United States, or, indeed, to exempt the farm from the appropriate original charge. In the case of a corporation in the United States distributing fully taxed United States income by way of dividends to the Dutchman, the duty would he upon the corporation to give the shareholder a certificate as to the amount of American tax appropriate to his dividend, that is to say, the amoun t by which his dividend would have been increased if no such tax had been payable, al upon the s :ength" of this a repayment or exemption would be due to the Dutchman. In the case of government and municipal loans, the exemption of the foreigner would fit in quite closely with existing economic methods. The complicated case of the American corporation distributing dividends out of income only partially taNed in the United States would still have to be settled as between the corporation and the United States Treasury in order to'indicate what actual burden was falling upon the Dutch shareholder. The object of the foregoing is to show that even method 2 in this complicated economic world is not without considerable administrative difficulties. But it does fit more closely to the facts of the case, and especially so iar as England is concerned, where the taxpayer could show clearly by his dividend warrant what British tax he has suffered, it is the most feasible method. No doubt the creditor countries or, the whole would be willing to solve the method of double taxation by offering the debtor countries method 2. They would he more reluctant to give methods 3 and 4, partly because of the greater cost falling upon their exchequers and partiy becausc of the more complex theoretical and practical considerations at stake. On the other hand, the debtor countries would no doubt be very reluctant to accept method 2, for the reasons that it would be the most burdensome to their exchequer, and, second, that it does violence
to what are at present their insdictive ideas as to their rights to origin taxation. It will be clear that under itclhtod . where the country of origin would tax pure and predominant origin assets, such as land :tnd real estate, in their simple form, but would refrain from taxing shares in compaties belogitig zo foreigers, it is open to the taxpayers by merely changing the legal enttities, that is t, saiy, by interposing a company between the property and the owner, to turn direct o.-nershti, into 4harelioldership. Conversely, by dissolving existing intermediate entities so tut h 'te fo:'-i. sutareholder becomes a direct holder, it is possible for the individual to shift .ccordit., to h:s owvn interest from one class of assets to the other and to regulate under which schieme of taxe-s he will fall. It is highly undesirable to have any such power in the hands of the taxpayer or to encourage any such tendencies. Mdethod 4, even if modified by method 3., has these complications, whereas method 2 deals uniformly with the individual deriving income fromo abioad. It is possible that he creditor countries might be willing to make individual conventions with debtor countries, under which method 2 would be adopted as the main method; but a conc,-ssior. might be niade ir principle to the principle of origin, limited as in method 4, not, however,
(4053)
50 -
to be carried out by dealing with the individual. Thus, as bdtween Britain and the Argentine if all British investors in the Argentine were repaid Argentine taxation by the Argentine Government and all Argentine residents were repaid by the British Governent all British income tax charged at the source in respect of their British investments, then at the end of a period of a year the Argentine Government would say: "We have given up i million units of revenue under this system, whereas yon, the British Government, on the other hand, have only given up 1oo,o such units. If method 4 had been conceded'and we were entitled to retain the income tax on the origin for real estate, etc., the depletion of our exchequer would have been only 8oo,ooo units. Please put us in the position that we should have been in if method 4 had been adopted and had been practicable, and make good to us. the difference of 200,000 units that we have temporarily suffered by giving up the purely origin taxes, or, on the other hand, make good some appropriate approved proportion of it. " Things that may be too complicated to deal with administratively as between individuals and to explain to them may very well be capable of presentation between two Governments for an'excheqner transfer in the aggregate ; and, if the fiscal system of the Argentine enabled them to say that out of the aggregate repayments and allowances made to British investors they could assign a certain sum to income from land and buildings and so forth, then a possible basis would exist for meeting the wishes of the creditor country not to be wholly at the mercy of the debtor country's taxation, and for carrying through the main economic principles of method 2. At the same time, so far as the debtor countries are concerned, it would be possible to avoid doing complete violence to the present obvious and strongly-held views as to their rights to origin taxation in the case of certain specific properties, and also in many instances to avoid throwing too great a burden upon the exchequers of those debtor countries. Complete frankness requires us, however, to call attention to the fact that even this method is not without its difficultics. The reason why individuals may ordinarily be counted upon to set in motiona the machinery providing for a remission of double ta'\ation is the obvious one that they will experience the benefit in their own purse. The motive which actuates them in undergoing all manner of annoyances and obligations in their domains is pure self-interest, and they will leave no stone unturned to put all the relevant facts before the Government in question. But in so far as the Governments themselves, rather than the individuals, are invested with the obligation of classifying the repayments, it will be mure difficult for the Government in question to secure fro,a the individual all the relevant facts, since the individual will not have the same motiv% for presentation of all t' e details. This is not, indeed, an insuperable difficulty, but it is or- that ought to be mentioned at this point. At the present stage of our considerations, however, we do not see any other form of compromise which is likely to reconcile the conflicting interests and to have any prospect of success upon three points: 'r) to reconcile the widely opposed interests of debtor and creditor exchequers; (2) to admit those ideas which. though wid..ly accepted in many countries, are, in our view, in relation to income tax, to a considerable extent economically undeveloped in so far as they ascribe undue importance toorigin taxation ; and, lastly, (3) to conform to what is, in the experience of fiscal admim:istra ions, practically possible in dealing, in such a complex world, with the injome ol individual persons. It may well be that there will be some countries which feel unable to secure the principles of me*.hod 4 by combining the administrative machinery of method 2 with an aggregate collective settlement between two exchequers, because they would be reluctant to turn over to tie settlement by Government, matters which primarily affect individuals and which may be attended by so many controversial questions. In such cases there is nothing left for them hut to approach other nations with a view to the adoption of conventions under method 4 as modified by 3. But we can only earn them that they will find it e':tremely difficult to make conventions of this character with creditor countries having highly developed income taxes because, in the administration of
(4054)
51
method 4 even as modified by method 3, so many practical and theoretical difficulties will be found. If, however, such countries can secure a measure of relief from double taxation by a reciprocal arrangeme:nt with other countries under method 4 even as modified by method 3, because method 2 appear to them to be burdensome or economically undesirable, it may well be a start which will lead to later developments.
Conclusion. To suIn) : (z) On the subject of income taxation in its developed form, the reciprocal exemption of the non-resident under method 2 is the most desirable practicai method of avoiding the evils of double taxation and should be adopted wherever countries feel in a position to do so.
(2) Where method 2 is repugnant owing to a reluctance to abandon the principle of origin, method 4 as modified by method 3 may be the subject of mutual conventions; but even then it is best carried out by an administrative system similar to method 2, supplemented by a collective settlement on agreed lines between the two Governments.
(3) Where countries debire method 4, but do not care to have it carried out by combining method 2 with such an overhead government settlement, they muZt'make the best arrangement they can under method 4, perhaps modified by method 3. But we hold out no hopes of this proving to be a smooth and practicable arrangement. It can be only approximate and not an instrument of that degree of sensitiveness and accuracy which devcloped communities expect. Looking forward to the future, the influence of example by others and the spirit encouraged by tie operations of the League of Nations indicate the possibility of a development away from lccaliscd ideas and from the earlier stages of economic thought typified by strict adherence to the principle of origin. Moreover, as semi-developed countries become more industrialised, with the rsulting attenuation of the distinctions between debtor and creditor countries, the principle ofpersonal faculty at the place of residence will become more widely understood and appreciated and the disparity between the two principles will become less obvious, so that we may looK forward to an ultimate developmerit of national ideas on uniform lines toward method 2, if not as a more logical and theoretically defensible economic view of the principles of income taxation, at.least as the most practicable solution of the difficulties of double taxation.
(4055)
F. 212
LEAGUE OF NATIONS
DOUBLE
TAXATION
ID
TAX EVASION
Report and Resolutions

SUBMITTED BY THE
TECHNICAL EXPERTS
to the Financial Committee of the League of Nations.
Price: 7/6.
0.40.
73095 0-62-vol.
4(-
(4057)
F. 212
Geneva, February
7 th,
1925.
LEAGUE OF NATIONS
DOUBLE
TAXATION
AND
TAX EVASION
Report and Resolutions

SUBMITTED BY THE
TECHNICAL EXPERTS
to the Financial Committee of the League of Nations.
(4059)
Geneva, February
7 th, 1925.
PRELIMINARY
NOTE
On October 17th, 1922, the Secretary-General of the League of Nations, in accordance with a proposal which was made by the Financial Committee and approved by the Council,
requested a number of European countries to state whether they would be prepared to nominate
a technical official to sit on a Committee formed to study the questions of double taxation and
tax evasion. The Financial Committee considered that "in order to arrive at any real solution of these two important questions, it was essential to obtain the opinion of the representatives of certain Governments. Still better results might be anticipated if a meeting of these representatives were convened in order to discuss the possibility of an agreement to enable common action to be taken upon certain points, and to permit the drawing up of schemes, bilateral agreements and other arrangements concerning double taxation and the evasion of taxation" The Governments thus consulted agreed and nominated the following official experts: Belgium: Czechoslovakia: France: Great Britain: Italy: Netherlands: Switzerland:
M. CLAVIER, Director-General of Direct Taxation. Dr. VALNICEK, Head of Department at the Ministry of Finance. M. BAUDOUIN-BUGNET, Director-General of Direct Taxation.
Sir Percy THOMPSON, K.B.E., C.B., Deputy-Chairman of the Board of Inland Revenue. Prof. PASQUALE D'AROMA, Director-General of Direct Taxation. Dr. SINNINGHE DAMSTIt, Director-General of Direct Taxation, Customs and Excise. M. BLAU, Director of the Federal Taxation Department.
After the third session, the British member, Sir Percy Thompson, was appointed to sit upon a commission in India, and his place was taken by Mr. G. B. CANNY, C.B., of the Board of Inland Revenue. M. Baudouin-Bugnet, the French member, having been appointed one of the "Presidents de Chambre" at the Audit Office, was replaced by M. BORDUGE, his successor as Director-General of Direct Taxation. As their official duties made it impossible for them to be absent from their country for any length of time, the experts met on five occasions, at Geneva: First Session: Second Session: Third Session: Fourth Session: Fifth Session: June 4 th-9 th, 1923. October 8th-I3th, 1923. March 31st-April 7 th, 1924. October 2oth-2 7 th, 1924. February 2nd-7th, 1925.
They elected as their Chairman, for the entire work of the Committee, Dr. PASQUALE D'AROMA, the Italian representative. M. LAON-DUFOUR, Secretary of the Financial Committee of the League of Nations, acted as Secretary.
(4061)
The experts have submitted separate memoranda - about twenty in all - to the Financial Committee 1. In these they explain the legislation in their respective countries or give their personal views. Moreover, at the end of each session - the Minutes of the various meetings can be consulted at the Secretariat of the League of Nations by the members of the Financial Committee - they reported to the Financial Committee on the progress of their work 2. It is impossible to reproduce here the numerous documents which give in detail the results of their investigations. The experts have now the honour to submit to the Financial Committee the text of the resolutions on which they have agreed. The resolutions are preceded by a report containing a statement of the grounds on which they are based and a commentary thereon.
.............. . Documents F. 46 and 144. Al. BAUDOUIN-BUGNET and M. BORDUGE . . F. 40, 141, I67 and 204. M. BLAU ........... .... F. 34 and 129. Al. CLAVIER .... .. . .... .. F. 47 and 192. M. S NNINOn DAST.... . . ............ F. 35, 77 and 123. Sir Percy THOMPSON........... .. F. 37, 38 and 130. Dr. VALNICEK ...... .............. F. 41, 48, 51 and 139. I First Session, Document F. 5o; Second Session, Document F. 8o; Third Session, Document F. 146; Fourth Session, Document F. 193. 1 M. D'AROMA ...
(4062)
CONTENTS
Page PRELIMINARY NOTE ................ .............................. 3
REPORT
Part I. INTRODUCTION ...................................... DOUBLE TAXATION:
Part II. 1. 2. 3. 4.
Investigations conducted previously to, or at the same time as, our own . .... Definite attempts hitherto made to solve the problem ............. ...... Origin of the main ideas on which our work has been based . . ... Comments on the resolutions: ................. (a) Impersonal taxes (imp6ts reels) ...... .................... (b) Personal or general taxes ........ ........................ (c) Fiscal domicile .........
7
10 12
.5 18 20
Part III. TAX EVASION:
Definition - Theoretical investigations and definite attempts to deal with ... ............................. the problem ........ ...... . Evasion in the assessment of taxes .................. 2. ... .................... 3. Evasion in the recovery of taxes ..... .... ................... 4. Conclusions regarding tax evasion ..... I. Part IV.
GENERAL CONCLUSION ........ ........................
22
23 27 27
29
TEXT OF THE RESOLUTIONS

DOUBLE TAXATION ........... .............................. 31
TAX EVASION .............
.................................
34
Appendix. -
Note by M. L9oN-DUFoUR, with graphs ...
..............
...
36
(4063)
DOUBLE TAXATION AND TAX EVASION.

REPORT AND RESOLUTIONS
submitted by the TECHNICAL EXPERTS to the Financial Committee.
PART I.
INTRODUCTION.
about a more equitable Our task, as we understood it, consisted in endeavouring to bring taxation and to check international assignment of taxation, to prevent the evil effects of double in the present condition made be can change no that recognised fully have we But evasion. tax countries or withof affairs without some modification of the domestic legislation of the various out international conventions. we have agreed It should therefore be understood that the recommendations on which unless the League and which are set out in the following pages will be of no practical value in the free exercise of of Nations adopts them, and unless the various countries themselves, for the laws and their sovereign powers, recognise them and obtain parliamentary approval conventions which they will necessitate. endeavouring to prepare We have regarded our task as being that of technical experts and tax evasion. We have the best possible system for remedying the evils of double taxation official capacity, and it contributed to the common stock the experience we have gained in our a character, that this has been our desire, by omitting consideration of interests of too special of the League, and even experience should serve the general interests of all States Members proposals which some of us non-Members. On more than one occasion we have had before us although they were at experts, technical as accepted have indeed and accept desired to of our Governopinion of trend general the with even and legislation variance with our own that our agreement ments or their expressed views. We were able to do so because we knew bind the Governments by or non-agreement to any particular proposal would not in any way which we were nominated. very general character, The terms of reference given us by the League of Nations were of a representatives - since and although only seven European countries were asked to nominate bound to proceed slowly in so the Council and the Financial Committee felt that they were out their task in an intercomplex a question - the experts selected have attempted to carry League. the of purpose high the with conformity in spirit national
(4065)
PART II.
DOUBLE TAXATION.
I.
INVESTIGATIONS CONDUCTED PREVIOUSLY TO, OR AT THE SAME TIME AS, OUR OWN.
Certain work accomplished outside the Financial Committee has been of great assistance to us. First of all, we may mention the discussions which have taken place at several of the Congresses of the Institute o] International Law with regard to the problem of double taxation, and, in particular, the resolutions on succession duties 1 adopted at its Thirtieth Congress at
Grenoble in
1922.
On July 2nd, 1923, the Economic Committee o/the League o/ Nations obtained the Council's approval for a series of recommendations which were, as a result, communicated to all States Members of the League. The object of these recommendations was to secure the application of part of Article 23 of the Covenant (equitable treatment of industry); they referred, among other matters, to the fiscal treatment of foreign companies and nationals. We have paid special attention to Article 3, which relates to the principle to be followed in taxing foreign undertakings established in a country and the observations which the Economic Committee formulated 2 in connection with this article when communicating it to the Financial Committee . This the recommendations concur in we entirely and taxation, question is related to that of double which have been submitted to the States Members of the League. The League of Nations Sub-Committee on Ports and Maritime Navigation, which is a sub-section of the Advisory Committee for Communications and Transit, requested us to hear its representatives during our fourth session in Geneva. In October 1924, these representatives explained to us the Sub-Committee's views on double taxation in the case of the shipping industry, which are practically the same as those of the International Chamber of Shipping. The InternationalChamber ol Commerce was no sooner founded than it placed on its agenda the problem of double taxation (Resolution No. 11 of the Constituent. Congress in 1920). The 3 London Congress in 1921 adopted four general principles . The special Committee appointed in London to report on the question continued its work under the Chairmanship of Professor SUYLING (Netherlands). It attempted to embody the principles laid down at the London Congress in a number of rules capable of being put into actual practice. It based its suggestions on new factors which might arise in the fiscal legislation of various countries, and it took into consideration the views obtained by the Secretary-General of the Chamber after consultation
I Document F. 14. I Document E. 92 (2), pages 2 and 3. 5 Document E. F. S. - A. 157.
(4067)
-8
with the various national committees. On December 2oth, 1922, the "Committee on Double Taxation" drew up a first series of resolutions 4 which were submitted to the Congress at Rome. These recommendations were cast in a new form after further consultations 5 on November 22nd, 19236, and, finally, on March Ist, 1924 7. In studying this problem, the International Chamber of Commerce maintained close contact with the League of Nations, and in March 1923 8 it communicated to the Financial Committee the principles laid down by the London Congress. The Secretary of our Committee was invited to be present at the sessions of the Committee of the Chamber in 1923 and 1924. Finally a fact of special importance - the International Chamber of Commerce in April 1924 sent to us during our third session a delegation consisting of M. CLItMENTEL, its President and founder, Sir Algernon FIRTH (Great Britain) and Mr. ROuNsON (United States), assisted by Mr. MCCULLOCH and Mr. ROOK.R, representing the General Secretariat. This delegation explained to us the Chamber's views and commented on the resolutions adopted in March 1924. Subsequently, the Chamber sent us memoranda which it had received from the various national 9 committees , setting out certain definite cases of double taxation; these we examined at our fourth and fifth sessions. lhe following are the main provisions of the resolutions adopted by the Chamber10 : Resolution I, which applies to all direct taxes without exception, lays down the principle that"i order to avoid double tAXation, the best means would be to accept residence as a basis of the tax on income. They [the Committee] recognise, however, that the application of this principle could not be expected completely to preclude all taxation according to its origin of income derived from landed property or even from commercial or industrial enterprises. "In all cases, without exception, where taxation according to origin cannot be avoided, the Committee consider that a distinction must be made between taxes affecting income at its origin and those which affect the taxpayer by reason of his residence and are charged on his entire income. They consider it essential that the country of origin should confine itself to taxing incomes accrued within its territory by a tax at the source, at the same time strictly limiting this taxation. "It follows from the above that the country of origin is not entitled to require from the non-resident taxpayer declarations covering any composite part of his income, no matter what its origin may be." The Chamber recommends that some system of relief should be adopted, btt does not, however, define the system. It expresses a desire that States should come to an agreement as to the definition of fiscal residence and that more bilateral conventions should be concluded. In Resolution II the request is made that the principle of reciprocal exemption should be applied to the shipping industry, and in Resolution III the opinion is expressed that taxes on successions should be assimilated to taxes on income. The Italian National Committee made a reservation. It did not agree with the fundamental principle of accepting residence as the basis for all taxation. It held that, although the criterion of residence might be accepted in the case of personal taxes, the criterion of taxation according to the origin of the income is fairer and more equitable in the case of imp6ts ridels.
4 Documents F. 5 and F. 5 a. 5 Document F. 75. 'Document F. i o, . Document F. 140. Decument E. 1'. S. - A. 157. Documents F. 19o and F. 191. 0 Document F. 14o.
(4068)
- 9Apart from this work, which is being carried on by organisations unconnected with the Financial Committee, we have profited by the results of the investigations undertaken and completed by a special Committee of Economists before we ourselves began to deal with the problem. These economists were: M. BRUINS, Professor at the Commercial University, Rotterdam; M. EINAUDI, Professor at Turin University; Mr. SELIGMAN, Professor at Columbia University (New York), Sir Josiah STAip, G.B.E., Professor at London University. When the Financial Committee was instructed in 1921 to study the question of double taxation, it decided to examine this vast field of investigation first of all from the theoretical and scientific point of view. We have accordingly been asked to consider the administrative and technical aspects of the question. During 1921 and 1922, the economists discussed the subject by correspondence. Then, in March 1923, they met at Geneva and drew up a report, a most important work of economic analysis which, in conformity with the Financial Committee's programme, was communicated to us and served as the basis for our work. This masterly report has been of inestimable value to us, and we wish to express our deep sense of obligation to the authors and to associate ourselves with the thanks officially conveyed to them by the Financial Committee and the Council of the League of Nations. It is essential for us here to analyse this document. The first part explains the economic consequences of double taxation both as regards the equitable distribution of fiscal burdens and the influence of double taxation on economic intercourse and the free flow of capital. It approves, defines and develops the conclusions contained in a note 12 "by an anonymous author" communicated in 1921 to the Financial Committee by its British member, Sir Basil BLACKETT 13 . In its pure or extreme form, the doctrine is "that the investor throws back on the borrowing country the burden of a tax imposed by that country
on its investors "14
' .
The four economists examine in detail the conditions which limit, and consequently must modify, this theory. They consider the following points: investors' ignorance, investments in existing businesses, investments in lands, cases in which the tax is imposed on a progressive scale, cases in which the origin tax is smaller than the difference between the rates of interest prevailing in two countries, limitations due to the fluidity of capital and effects of supply on market conditions, etc. The second part deals with the general principles which govern international competence in the matter of taxation. The authors recapitulate. the older fiscal theories (the cost theory and the benefit theory) and the theory of nationality, and they develop the modern doctrine of "economic allegiance", to the effect that "a part of the total sum paid according to the ability of a person ought to reach the competing authorities according to his economic interest under each authority". They then analyse economic allegiance and proceed to show that four questions have to be answered: I. Where is the yield physically or economically produced ? Where are the final results of the process as a complete production of wealth actually to be found ? 3. Where can the rights to the handing-over of these results be enforced ? 4. Where is the wealth spent or consumed or otherwise disposed of ?
2.
It Document
2 '
F. i9 (printed booklet). The author of this note is Mr. W. H. COATss, LL.B., B.Sc. (Econ.), British Inland Revenue Department. Document E. F. S. - A. i6 a (printed booklet). 14Page ro of Document A. 16 a.
(4069)
I0 -
The discussion leads to the conclusion that the most important elements of the question are points i and 4, that is to say, the origin of the- wealth and the domicile of the owner who consumes the wealth. The authors then consider in succession the various sources of wealth (immovable property, business enterprises, movable property with a fixed location, movable property without a fixed location, mortgages, shares, bonds, public securities, general commercial credits and professional earnings). They give a table 15 in which they ideally apportion economic allegiance as between origin and domicile. In their view, origin is more important in the case of land, commercial, industrial and agricultural establishments, etc., and, as far as a tax on capital is concerned, mortgages. The element of domicile is, on the contrary, more important in the case of movable property, transferable securities of every kind, general credits and personal earnings and, in so far as a tax on income is concerned, mortgages. The third part of the report is devoted to the application of these principles and develops four general methods by which double taxation may be avoided. In the first, which may be called "the method of total deduction" - a method applied in principle in the United States the country of domicile deducts from the tax due from its residents the whole of the tax paid by them abroad ol their income. The second method is the extreme converse: the country of origin exempts all non-residents from taxes imposed on income drawn from sources within its borders. The third method consists in dividing the tax and allocating the relief given between the two States. This is the system which has been tried in the British Empire as between Great Britain and the Dominions. Lastly, the fourth method, which may be called the method of the assignment of income, consists in apportioning particular classes of wealth specifically and wholly to the countries concerned, so that, when this division has been made, each country, independently of the other, taxes the part of the wealth which is, so to speak, assigned to it. The authors finally point out the advantages and disadvantages of each of these four systems and conclude by "looking forward to an ultimate development of national ideas on uniform lines toward method 2". We cannot conclude this survey of earlier work, which has assisted us in our task, without some reference to the various memoranda submitted by the Economic and Legal Sections of the League of Nations and particularly to the detailed investigation into the various methods of relief which has been carried out by M. LItoN-DtFOUR, Secretary of the Financial Committee. This investigation is illustrated by a number of graphs which give a clear idea of the practical working of the various systems, and we reproduce some of these graphs as an appendix.
2.
DlrFINITE
ATTEMPTS HITHERTO
MAIDE TO SOLVE THE
PROHLEM.
We were thus in possession of the views of certain committees of expert. and the opinion of the commercial and industrial world as represented by the International Chamber of Commerce, and we had the report of the four economists as a solid foundation for our work. But we were also able to take into consideration the definite endeavours made by means of legislation or international agreements (especially within the last twenty years) to overcome the drawbacks of double taxation. Certain provisions in the internal legislation of States are intended to obviate double taxation, either wholly or partially. We may quote four examples:
Document
. 19,
page 31.
(4070)
Ii
Since 19o6, a law in Belgium 16 has provided for the reduction of the rate of taxation (this may amount to three-quarters) on profits earned abroad. The law of October 2 9 th, 191 9 , concerning taxes on income allows the deduction from taxable income of that part which has already been taxed under another head and the deduction from the taxation leviable of the tax already paid on part of this income. Finally, the super-tax is not as a rule leviable on foreigners who have not been resident in the country for at least six months. As regards succession duties, the law of August 1oth, 1923, authorises the deduction from the duties leviable in Belgium of the death duty on transference (droit de mutation par djcds) levied abroad on immovable property situated abroad and forming part of the estate of a person resident in the Kingdom. In the Netherlands 17, the tax chargeable on the total income, including income derived from abroad, is first calculated, and then the tax which would be due on the latter category if it were taken alone. This second sum is then deducted from the first. The actual rate of taxation abroad is not taken into consideration. In Switzerland,* the legislation of the Canton of Zurich provides that income earned in a business situated abroad shall only be taxable to the extent of one-third. The Federal law concerning the war tax contains a similar provision. The cantonal laws of Basle-Town and Geneva also grant exemption to income derived from businesses situated abroad. In the United States 18 taxes paid abroad by a United States citizen on income originating abroad is deducted from the tax due o total income. But a maximum is fixed for this deduction. This maximum is determined by calculating the tax on the portion of the income originating abroad (at the American rate applicable to the taxpayer's total income). The system instituted between Great Britain and the Dominions is, as regards its form. something midway between a national law and a true international treaty. The economic, financial and political ties between the various parts of the British Empire have not prevented the evils of double taxation, which have formed the subject of numerous reports and investigations, but they have rendered the conclusion of arrangements easier. These agreements are . set out in a note by Sir Basil BLACKETr, member of the Financial Conmittee"1 In the case of income taxed both in the United Kingdom and in a l)ominion, a deduction at the )ominion rate is made from the rate charged in the United Kingdom. A mnaximum is fixed for this deduction (namel), one-half the rate of taxation in the United Kingdom), and it is the Dominion concerned which has to grant the necessary de(hction if the total relief is to be equal to the lower of the two rates of taxation. We now come to actual international agreements or treaties. These are already fairly mmnerons. They have been collected and their contents circulated by the Secretariat.
Before the war, the Austro-Hungarian Empire concluded with a number of States forming
part of the German Empire certain conventions which are still in force between Prussia, Saxony, etc., and the Sitccession States. The treaty with Prussia, which dates from 1899, has been issued as a special document 20, as have two treaties concluded by the (anton of Basle-Town with lrussia 2t and the Grand-IDuchy of Baden 22
.fter the war, the new conditions resulting front the dismemberment of a nber of European
)ne after vmpires increased the difficulties arising out of the rival claims of diffterent States. the other, treaties were concluded between certain of the .\ostro-Hungarian Succession State, ;irl(1 lg 1 Ih.eln vs or Ibetween them and neighbouring States. We may," mention those concluded
Memoraldunl F . -, by At. CLAVIER. 17 Memorandum F. 35 by M. SINNINGIE DAMSTil. 18 See Memorandum 1. 138 by the Secretariat. t See Document F. F. S. - A. I6 (printed booklet). Documlelt F. 15 (3). II Document F. 15 (2).
22D,cment F. 15 ()
(4071)
12 -
by the German Empire with Austria 23 and Czechoslovakia 24 in 1921, by Austria and Czechoslovakia 3 in I9zi, and by Hungary with Roumania 26 in 1923 and with Czechoslovakia 27 in 1922. The German Reich signed in 1923 a convention with seven Swiss cantons 28. We must, however, make special mention of the Convention 29 signed at Rome on June 13th, 1921 30, between Austria, Hungary, Italy, Poland, the Kingdom of the Serbs, Croats and Slovenes and Roumania. This instrument is the first known example of a collective convention laying down common principles to be followed by a large number of States. As a matter of fact, several of the above Powers have concluded bilateral treaties based on the same principles. The Genoa Economic Conference in 1922 especially drew the attention of all nations to this Convention. Czechoslovakia, the only Succession State which had not signed the Rome Convention, signed a special treaty with Italy 31on March ist, 1924. This is the most recent treaty known.
3.
ORIGIN OF THE MAIN IDEAS ON WHICH OUR WORK HAS BEEN BASED.
Our discussions were based, first, on the whole of the theoretical work referred to above; secondly, on the suggestions put forward by the Institute of International Law and by the International Chamber of Commerce; and, finally, on existing laws and conventions. It was indeed far from easy to fit all this information into a single general scheme. It was even very difficult to ascertain any general tendencies in this mass of rather disefmected plans, ideas and facts. After long discussion, we finally arrived at agreement on certain fundamental points. I. - All the treaties concluded between the Central European States both before and after the war in the main followed quite definitely the last system mentioned by the economists, namely, the system of the assignment of income, that is to say, apportionment according to country of origin. The Rome Convention, the only scheme for a collective convention which has yet materialised, embodies the same idea. The provisions of the treaty between Italy and Czechoslovakia may be summed up as
follows 32:
If we look at this treaty as a whole, we shall see that it is based on the principle of establishing difterent rules according to the different categories of taxes. With this object in view, the treaty first lays down (Articles 1-5) regulations for the application of the various imp6ts rdels, and, moreover (in Articles 6 and 7), rules for the application of "personal taxes" (general income-tax and taxes on capital). As regards the first category of taxes, the treaty adopts the following classification: (a) Taxation on incoie derived from immovable property (Article r); (b) Taxation on income derived from moneys invested (Article 2): (t) income from capital secured by mortgage: (2) income from securities issued by the State,
Document 1. 29 (5 and 7). Document F. 29 (1 and 4). Document F. iO (i and 2). Document F. r68. 21 Document F. 21 (i). .2 Document F. I96. 29 Document E. F. S. - A. 135: F. 44:Erratum to A. 135. El-glish text. " In course of ratification between certain countries. :3 Document F. 143. "' This treaty, like tihe Rome Convention, doc not'deal with succession duties.
(4072)
provinces, communes or any other legal entities; (3) income derived from savings bank deposits; (4) income derived from the investment of other movable capital; (5) earned income (Article 3); (6) income arising from carrying on an industry or business (Article 4); (c) Taxation on life annuities and taxation on any other form of income not provided for in the preceding articles (Article 5). According to the general rule adopted for the imposition of the imp6ts riels on all such income, the taxes must be levied in the country of origin, that is to say, the country in which the source of the income in question is located (situation of the immovable property, situation of the mortgage, productive occupation, operation of the factory, etc.). Provision is made for a single exception in the case of taxation of life annuities (Article 5) and other forms of income not specially dealt with in the treaty. In such cases the principle of taxation according to domicile .s recognised. Further, as regards the imp6ts riels, the treaty provides, with a view to giving effect to the rule of taxation in the country of origin, for the assignment of income derived from carrying on an industry or business, if the industry has its headquarters in the territory of one of the contracting States and one or more establishments in the territory of the other State. This rule also applies to taxation on income derived from the investment of moneys in interest-bearing concerns (current or deposit accounts, etc.), if the banks, companies or other credit establishments which receive sums on deposit and pay interest thereon - have their headquarters in one of the contracting States and branches in the other contracting State. As regards the second category of taxes (personal taxes), the principle of domicile is given a wider application than in the case of imp6ts res. Indeed, in the case of "personal taxes", the rules adopted ill the treaty for the imp6ls rids apply also to the personal tax levied on the taxpayer's total income, but only in the case of income derived from immovable- property, from mortgages or from an industry or business, in so far as such industry or business is not carried on by a joint-stock company, and, lastly, in the case of earned income. On the other hand, the principle of domicile applies to all other categories of income (income derived from securities issued by the State, provinces or other legal entities; income derived from deposits on current account or savings-bank deposits; income derived.from life annuities, and other personal income not especially indicated in the treaty). As will be seen from the preceding paragraphs, the principle of classification and assignment of income according to origin is applied in the treaty not only to imp6ts ries but also - although within narrower limits - to personal taxes. As regards the latter category of taxation, these provisions lead to lighter taxation, because, if the income is divided up between the contracting States and the rates of tax are graduated, it is impossible to apply the rate corresponding to the taxpayer's total income. This is, no doubt, intentional, because the treaty was to be concluded between States in which the "real" taxation of income was the more important - if not almost the only - system of taxation in force. (In Italy, the supplementary graduated tax on income, which has recently been introduced, comes into force in 1925.) Let us take, for instance, the case of an Italian resident in Italy possessing a total income of a million lire, of which 300,ooo are derived from immovable property and factories in Czechoslovakia, and the rest (700,000) from securities issued either in Italy or in Czechoslovakia, immovable property or factories situated in Italy. The latter country can only apply to that portion of the income which it is entitled to tax the rate applicable to 700,000 lire. II. -- Here, then, is one first interesting feature, the importance of which we duly recognise. But there is a second point, regarding which we cannot do better than quote the four economists (Document F. i9, Part III, Section i).
73095 0-62-vol. 4-
(4073)
14 -
"But, before discussing how Governments ought to view this matter, it may be well to ask how do they, in fact, regard it in the light of their historical development and constitutional practice. "A survey of the whole field of recent taxation shows how completely the Governments are dominated by the desire to tax the foreigner. It seems to be clearly instinctive in laying down general principles to treat 'origin' as of first importance and *residence' as of secondary importance, i.e., if the origin and source of income are within, a country's borders, it is assumed that that country has the prime right of taxation on that income, although it goes to some person abroad. There are a few modifications, but this is the main instinctive principle. From this flows the consequence that, when double taxation is involved. Governments would be prepared to give ip residence rather than origin as establishing the prime right." In other words, taxes based on the idea of origin are, particularly in the form of imp6ts rjels, still very widely applied, and States, particularly those which are developing, and new countries would find it difficult to dispense with them. Il1. -- But there is yet a third point. During our discussions we were struck, in considering the comparative development of fiscal ideas, by the progress made by the conception of the personal tax based on the idea of domicile.. The preponderating importance of this conception in taxation first became manifest in Great Britain and in the United States in the nineteenth century. Most of the other nations of Europe and America seem to be moving slowly but definitely in the same direction. The idea of the personal or general tax is clearly connected with the idea of domicile and not with that of origin or source. This leads logically to the reciprocal exemption in the country of origin of income, the owner of which resides abroad, that is to say, the second method defined by the economists. But, as the economists themselves recognised, this method - which is the simplest one - although suitable in the case of two countries in which conditions are fairly equal, can hardly be applied in the case of countries "not economically balanced in this matter; countries whose relations were distinctly those of debtor and creditor". The first method, which consists in refunding to the taxpayer the tax which he has paid abroad, places a country's budget' at the mercy of increased.taxation in another country. The third method (allocation of relief) has been tried within the British Empire under the most favourable conditions, e.g., similar principles of taxation, a common tongue, experienced administrative staff and common attachment to the Empire. In spite of this, we do not think that it would be possible to adopt generally such a very complicated system in the international sphere. IV. - We observed, therefore, that the method of assigning income, which formed the basis of numerous treaties in Central Europe and of a collective convention, appeared at first sight to be the one Which was most generally in use. But the evolution of fiscal practice, by adding personal taxes to taxes founded on the idea of origin or by substituting the former for the latter, and our desire to attain universality in our decisions, made it necessary for us to take into account the difficulties caused by differences in the various fiscal systems. But, as we have demonstrated above - and in this respect we are in agreement with the scientific experts none of the three systems can be applied integrally and by itself. How were we to escape from this dilemma ? After very long discussion, we believe that we have discovered the solution in refraining from suggesting any one single system as applicable to every form of taxation. Our fundamental idea is based on the following fact: there exist in the world many different kinds of taxes - imp6ts riels or schedular taxes, and general or personal taxes on income (to the latter may be added succession duties and taxes on capital). We therefore began by differentiating between iunp6!s rdels or schedular taxes, on the one hand,
(4074)
---15 and the personal or general tax, on the other, and we have intentionally made different suggestions in connection with each of these main categories of taxes. In the case of the irnp6ts rdels, we have recognised the primary importance of the idea of origin, that is to say, the system of the assignment of income; in the case of the general or personal tax, on the contrary, we have recognised the primary importance of the idea of domicile. Within each of these main categories, we have had to establish special divisions, take account of minor differences, provide for exceptions, and borrow from the Dutch and American systems the idea of deduction, though restricting the application of this idea to a'small number of types of income and establishing maximum limits for such relief.
4.
COMHMENTS ON THE
RESOLUTIONS.
The division which we have established between the imp6ts riels or schedular taxes, and the general or personal income tax has been made for purely practical purposes and no inference in regard to economic theory or doctrine should be drawn from this fact. British legislation is entirely founded on the principle of the personal tax, and it is significant that the very expression "inMp6ts rdcls" has no precise equivalent in the English language. In the course of our discussions on this subject, Sir Percy THoMIPSON said 33 : "Any classification into 'imnp6ts riels' and 'inp6ts personnels' would become positively dangerous if any attempt was made, from the mere difference of nomenclature, to draw conclusions as to the different economic effects of these taxes". Tise survival in many States of the inip6t rdelis a fact which we have noted without drawing conclusions therefrom. It is due principally to two causes. New countries which need foreign capital for their general development desire to have a share in the taxes levied on income arising in their territory, and they are unwilling to leave them to the countries, often already very rich, which have provided the capital. Moreover, from a technical point of view, the collection of iinpdts rdels, which does not involve the declaration by the taxpayer of his total income, is, generally speaking, easier and surer than in the case of the iinp6ts personnels. There would be no point in our undertaking here to give very detailed definitions of the imp6t rdel, also known as the schedular tax, which is charged on the income arising from specific sources and not on the income of persons as such. It is, however, important that we should dispel two possible misapprehensions. The expression "cidulaire" employed, for instance, in Belgian and French legislation has no more than an etymological connection with the English word "schedule", which appears in the English income-tax legislation. The "schedules" of the English income-tax are only divisions under which income is classified for the purpose of defining the rules for its computation. On the other hand, the French "imp6t cidulaire" on immovable property, for instance, is quite unconnected with that part of the general income-tax which applies to this immovable property. The same is the case in Belgium. Again, when we speak of taxation "at the source", we mean the assessment of the tax and not the method of its collection. In Great Britain, as on the Continent, certain taxes are collected on behalf of the Treasury by a third party - for instance, the company which pays a dividend or interest on stock. In both cases, the tax is "collected at the source". But in Great Britain it is a case of a personal tax, while in Italy, France, Belgium or Switzerland it is a case of an ionp6t del or schedular tax. (a) Impersonal Taxes (lnip6ts rjels). At the head of our resolutions with regard to inip6ts rdels, we recognise the fact that "only the State in which the source of income is situated is entitled to impose impersonal or schedular
April ith, Is
t
(4075)
taxes". The various paragraphs which follow set out in detail what we hold to be the source of the income. We would here offer the following observations: In cases in which an enterprise carries on its activities in several States, we have been led to lay down the principle of the division of income between these States. The four economists, in their Report, and particularly in its Appendix, have indicated the principles in accordance with which this division might be effected. In the various conventions concluded in Central Europe, we find that there are already provisions on this subject; we would mention particularly the Treaty, and the regulations for its application, of 1921 and 1922 between Austria and Czechoslovakia 4, and the Treaty of March 1924 between Danzig and Poland 15, which provide a sufficiently accurate basis for computing the division of profits. For instance, the latter agreement contains provisional rules which take the kilometric length as the basis or index of division in the case of transport enterprises, and gross receipts and profits in the case of other business enterprises. The regulation for the application of the treaty between Austria and Czechoslovakia also provides methods for the flat-rate computation of the profits of firms, according as the establishments sell, purchase, or purchase and sell simultaneously. A Royal Decree of August 28th, 1922, in Belgium contains similar provisions 3. Such apportionment of profits constitutes, then, an operation which, though delicate, is feasible, and which is already carried out in several countries. It should even be noted that these operations in treaties concluded in Central Europe apply both to personal taxes and imp6ts r des. One particular class of industrial and business enterprise, namely maritime shipping concerns, has engaged our special attention, and forms, as will be seen, the subject of a special resolution. The International Chamber of Commerce and the special Sub-Committee of the League of Nations which deals with maritime transit communicated to us their views on this subject. For several years past, negotiations have been in progress between seven or eight leading countries for the regulation, by bilateral agreements, of the system of taxation to be applied (on the basis of reciprocal exemption) to maritime shipping concerns. England, the Netherlands, the United States and Japan have enacted domestic laws providing for such exemption, applicable to all taxes without exception, both taxes in rein and the general tax on income. The United States, Norway, Sweden and Denmark have recently concluded conventions of this kind 37with Great Britain. We have taken these recent cases into account, but have paid even greater attention to the very special character of the maritime transport industry. When an industrial concern carries on its activities throughout the whole world, the importance of the actual headquarters, or the "brain" of the enterprise, becomes paramount; and, above all, very serious technical difficulties may be encountered in determining an apportionment of the profits. The representatives of the Maritime Sub-Committee of the League of Nations have asked how it is possible to determine the profits earned in each of the twenty or twenty-five ports at which a vessel belonging to a trans-Atlantic company may have loaded or discharged cargo, when ten or fifteen different countries have to be taken into consideration. After carefully examining the situation, we came to the conclusions set out in the two subsections of paragraph (a). These conclusions, however, only apply to imp6ts rels. We first took care to lay down in the first sub-section of paragraph (a) that the profits of any shipping company which only calls at a port and has no office, agency or branch there should not come under the rule requiring division. In the second sub-section, we have admitted an exception to the general principle of division, although we fully realise that certain countries may not readily
34Documents F. io and F. 2x (2). . Document F. 169. 16Document F. 47. 37Document F. 2oo.
(4076)
17 -
agree to grant total exemption from impdls riels to the great shipping concerns which possess a definite organisation in their territory. The only solution we can suggest for this difficult problem is the conclusion of bilateral agreements which would take into account the great differentes in the position of the various mercantile fleets, as well as political and general economic considerations.
Imp6ts riels or schedular taxes on trans/erablesecurities occupy an important place in the budgets of certain nations. Perhaps no question has given rise to so much discussion, both among theorists and legislators, as that of the taxation of State bonds and shares or bonds issued by companies. International conventions have dealt with this subject from very different points of view. Thus, the conventions between the countries of Central Europe and the Rome Convention have, in general, favoured the imposition of the tax by the State in which the debtor, that is to say, the incorporated company or legal entity which pays the interest, is situated. The International Chamber of Commerce ("Committee on Double Taxation"), in its resolutions of December 1922, left States free to choose between the domicile of the creditor and the domicile of the debtor. In their report the economists, M. BRUINS, M. EINAUDI, Mr. SELIGMAN and Sir Josiah STAIMP, have accepted the principle that it is the State of domicile of the creditor, i.e., the possessor of the security, that has the right to tax the income arising from all such securities. But they point out how the free flow of wealth is hindered by the conflicting provisions of the various fiscal laws and that the movement of capital into the State where it would, from the point of view of economic laws, be put to the best use is diverted by changes in the rate of taxation or the sudden imposition of new taxes. We have realised how difficult it is to establish a hard-and-fast principle. In such matters, general economic considerations (need of ensuring the free flow of capital), the difference between the financial and the commercial policy of States (need for a State, according to circumstances, to seek or reject pecuniary assistance from foreign investors), and, finally, the absolute necessity of obtaining the balancing of the budget by means of appropriate fiscal arrangements are elements in the problem which cannot, in the present troubled state of the general European economic situation, be reconciled, unless we take the view that bilateral agreements will supply a corrective to the unduly rigid character of a general principle and make it possible to harmonise the various competing interests. We have consequently drawn up resolution G, which, we should point out, only refers to imp6ts rdels and not to the general income-tax. Let us suppose, for instance, that Morania levies a tax of lo per cent. on the income from bonds issued by a Moranian company. Morania might, in principle, impose this tax without drawing any distinction between Moranian or foreign holders of these securities. But she will be able to conclude a convention with Imeria under which a person domiciled in the latter country may request the refund of, or exemption from, the aforesaid to per cent. tax, upon production of an affidavit or certificate proving that 38 he is domiciled in Imeria . On the other hand, Morania may agree with Imeria that this latter State retains the right to tax - for the benefit of her own treasury - the income from Moranian securities owned by persons domiciled in Imeria. It will be seen that taxation in the country of origin is maintained as a principle, particularly for administrative reasons. For the collection of the tax in the State of domicile of the debtor, i.e., of the company or legal entity paying the interest, is in point of fact easier, and affords a greater guarantee of accuracy. We also have, in our resolution, specially referred to precautions against evasion, in order to avoid excessive relief. Collusion is always to be feared: a foreigner will maintain that he is the owner of a share and will actually become so, but only for the period necessary to ensure that the person really concerned shall obtain repayment or exemption.
88An affidavit is an undertaking by the State guaranteeing the identity ofa person residing in its territory.
(4077)
- I8 -The resolution which we propose rests, therefore, on the assessment of the tax in the country of the debtor, an arrangement which corresponds to collection in the country of origin; but we recommend a series of modifications which, through the medium of bilateral agreements, provide the required elasticity. (b) Personalor -General Taxes. The resolutions on which we are about to comment apply not only to the general incometax - otherwise known as the impNt personnel - but also: (I) to succession duties and (2) to taxes imposed on a person's total wealth or total capital. As regards the latter, we have decided to consider only permanent taxes and to exclude exceptional charges, such as a special capital levy or war taxes. It is, in fact, almost impossible to make suggestions in regard to taxes imposed under exceptional conditions. As has already been indicated, the first resolution, which relates to the general tax, gives preference to the principle of taxation by the country of domicile alone. In the subsequent resolutions, consideration is given to exceptions to this principle and to the practical application of these exceptions in the form either of deductions or the division of the total income. It is desirable, in commenting on these resolutions, to take a hypothetical case and quote certain figures: A taxpayer domiciled in Morania has a total income of ioo,ooo crowns, consisting of 70,000 crowns derived from Moranian securities and property, 20,000 crowns from rent or profits accruing from factories situated in Imeria, and Io,ooo crowns from dividends paid by an Imerian incorporated company. It is postulated in Resolution i that, in principle, Morania alone is entitled to collect a tax on the total income. According to Resolution 2, when for special reasons Imeria deems it necessary to impose a personal tax applicable to income derived from Imeria but belonging to foreign nationals, the two countries should, if possible, conclude a bilateral convention. The income liable to be taxed in this way by Imeria will include income accruing from immovable prgperty and factories in Imeria belonging to Moranians, but not dividends upon shares. In Resolution 3, paragraphs I and 2, we indicate the different ways in which relief is to be given: Assuming that Imeria has imposed a general tax on all the factories and immovable property owned by Moranians, provision has to be made to prevent or limit double taxation, due to the fact that Morania might tax its own national on his income of Ioo,ooo crowns. Let us suppose, by way of illustration, that the rate of income-tax in Morania is 5 per cent for a total income of Io,ooo crowns, Io per cent for an income of 20,00o crowns, 30 per cent for an income of 8o,ooo crowns and 40 per cent for an income of Ioo,ooo crowns. In the case referred to above, the general income-tax collected by Morania would normally amount to 40,000 crowns. First Method. Under (a): Morania calculates the tax which would be levied on 20,000 crowns (the income subject to relief), i.e., to per cent of 20,000 crowns, or 2,ooo crowns. Morania grants a deduction to the extent of 2,ooo crowns, and will therefore only collect 38,000 crowns, irrespective of the rate of taxation applied to that income in Imeria. This method has the merit of obviating all check upon the tax actually paid in Imeria by the taxpayer. It exposes the Moranian Treasury, however, to the risk of exempting a Moranian national from a sum larger than that which he has actually paid abroad. We have accordingly suggested, under (b), another method of relief. Under (b), account may also be taken of the rate of the Imerianf tax chargeable on immovable property Morania and factories. Let us assume that this tax is 8 per cent, i.e., that it amounts to i,6oo crowns. will give relief to the extent of i,6oo crownsand will only collect 38,400 crowns. Should the Imerian rate it amount, for example, to i2 per cent of tax be higher than the Moranian on the same sum - should Morania-may limit the relief to that corresponding to her own rate, i.e., 2,ooo crowns, and may collect 38,000 crowns; this leads to the same result as that indicated under (a). As Imeria continues to enforce its 12 per cent rate, the taxpayer will have to pay 2,400 crowns as the Imerian tax and will receive relief in Morania only to the extent of 2,000 crowns. It may therefore be argued that in this case there will be double taxation to. the extent of 400 crowns, owing to the difference between the rates of taxation in the two countries.
(4078)
19 -
This method of calculating relief has already been suggested by the four economists in the case of successionduties. As stated above, it has been applied in Belgium for the past year. The last paragraph in (i)embodies a different conception, intended to prevent the abuses which might possibly occur in spite of the limited number of exceptions admitted to the principle of the general tax being collected in the country of domicile. Take the case of a 'Moranian manufacturer or landowner whose total income is ioo,ooo crowns, 0,0ooo crowns of which he derives from immovable property or commercial establishments situated in Imeria. Relief in this case would, even when the maximum is applied, represent a very large sum. Our proposal is that the country of domicile should in every case limit the relief it gives to a certain percentage of the tax imposed on the whole of the income, for example, to a fourth of the tax, i.e., /4 X 40,000 = IooOO crowns. The object of this arrangement is that the party concerned should be taxed in his country of residence, where he enjoys the protection of the laws and obtains the advantage of national institutions. Secoud Method. Morania concludes a convention with hnieria providing for a division of the income subject to relief; for instance, such revenue may be assigned in the proportion of 3/4 to Morania and //4to Imeria. We shall continue to employ the figures already used and shall assume that a Moranian possesses a total income of oo,ooo crowns, 20,ooo of which (rents and profits accruing from factories) are derived from Imeria. The latter country will not tax the 2o.ooo crowns - the actual income derived from the factories and immovables - but only 5,000 (at her own rate of taxation). Morania will tax the remaining three-quarters, i.e., i5.000 crowns, but she will net tax the remaining quarter at all. The result is that, instead of taxing the zoo,ooo crowns (as under the first method) and granting relief, Morania will tax only 95,000 crowns. She will, how. ever, tax this amount not at the rate applicable to 95,000 crowns but at the rate applicable to Ioo,ooo crowns. She will therefore collect 40 per cent on 95,000 crowns, i.e., 38,000 crowns. Should each country receive half, Imeria would tax io,ooo crowns as income from factories and immovable property; Morania would tax 9o,ooo crowns at the rate, however, of 40 per cent applicable to ioooOO and would thus collect 36,ooo crowns. Should the division be made so that a fifth went to Imeria, Morania would collect 40 per cent on 96,oooor 38,400, which is more than she would obtain under the first method. The system outlined in No. 2, therefore, resembles that of the simple division of income, but differs from it in that the scale of taxation applied by the country of domicile is always the scale applicable to the entire income, although the whole of the latter is not taxed in the country of domicile.This is a difference which, having regard to the steeply graduated rates of modern taxation, may prove to be of great importance. Apart from the consideration referred to above, the proposed arrangement appeared to be necessary in order that persons with the same total income should not be called upon to pay taxes of very different amounts, according as they derived their income from a single country or from a number of countries. Both the methods proposed for affording relief 39 clearly uphold the principle of taxation by the country of domicile. Under both systems it is necessary for the country of domicile to be aware of the taxpayer's total income, and, in both cases, the rate corresponding to such total income is applied by the country of domicile. The field to which the relief is applicable, i.e., the list of special types of income which may be subjected to the general tax elsewhere than in the cotintry of domicile and in respect of which relief may be given (first method), or a division may be made (second method), is not clearly demarcated in our resolutions and may be enlarged as a result of discussions between States concluding bilateral conventions. We have merely pointed out that these forms of income include income from immovable property and industrial, agricultural and commercial concerns, but not dividends. In this respect it is interesting to compare our resolutions with the terms of the Rome Convention 40 and other treaties, for example, the treaty between Italy and Czechoslovakia 41. It is laid down in Article 6 of the latter treaty, which relates to personal taxation on the total income of the taxpayer, that "income derived from immovable property, industry, or commerce (in so far as such industry or commerce is not carried on by joint-stock companies), mortgages and earned income shall be dealt with according to the rules laid down in the respective articles relating to these sources of income. In the case of every other kind of income, including .. Detailed comparison of these systems inter se and also of these systems with the methods employed by various States is given in the appendix with the help of graphs. '0 Document E. F. S. A. 135. *t Document F. I 4 3 .
(4079)
20 -
dividends from shares and interest on securities, taxation shall be levied" by the country of domicile. The list of exceptions to the principle of domicile accordingly includes mortgages and earned income in addition to the income given in our list. Resolution 4 supplements the first three resolutions. It calls attention to the necessity of special arrangements to deal with the complications arising from the difference in the character of various systems of taxation, seeing that some countries merely impose a general income-tax, others only schedular taxes, whereas others again make use of both these taxes. This is a question where the decisive factor will be the relative importance in each particular case of the interests involved. It should be stated that the sacrifices which the country of origin may possibly be called upon to make in connection with schedular taxes will a priori perhaps be smaller than the sacrifices required in the case of a general income-tax. Experience shows that the rates of these latter taxes, being graduated, are liable in most cases to reach a much higher level than the rates of the imp6ts rdels. (c) Fiscal Domicile. Throughout the whole of the foregoing we have constantly met the expressions "country of domicile", "domicile of the debtor", "domicile of the creditor", etc. One of the most difficult parts of our work is to determine the exact meaning of these expressions. )omicile has, moreover, a different meaning according as it is applied to individuals and to legal entities. On reading works on fiscal theory, or the internal laws of various States, or existing international conventions on taxation, we are constantly struck by the variety of the terms useddomicile, residence, mere stay, abode, nationality, seat and locality of the main establishment. These terms recur and overlap, and it is impossible at the first glance to form a clear conception applicable to the subject of double taxation. The Legal Section of the League of Nations Secretariat has set out in a highly interesting memorandum 42 all these differences relating to legislation and theory. We are of opinion that our first step should be to eliminate a possible source of confusion. The resolutions which follow refer only to principles or to treaties relating to double taxation, and we are far from suggesting that, in regard to domicile, mere residence, etc., the various States should modify their conceptions of private, administrative or even internal fiscal law. In reading these resolutions, it should be borne in mind that they apply only to fiscal domicile, and only tofiscal domicile defined purely with a view to the application of the preceding resolutions. Secondly, we have acquired the conviction that no single solution can be applied indiscriminately to all categories of taxes. A given conception of fiscal domicile, which would serve as the basis for an agreement in respect of one class of taxes, would be useless in dealing with another class. There is nothing illogical about this; even in the internal legislation of individual countries the fiscal domicile of the taxpayer is not always regarded in the same light, where the major categories of taxation are concerned. We have had therefore, in the case of individuals, to consider two distinct definitions, one applicable to income-tax and the other to succession duties. Annual taxes are taxes applicable to the taxpayer's activities and to the income which he has acquired during a short period. They are apt to be modified year by year according to changes in the taxpayers' financial position Succession duties, on the other hand, are levied once and for all, and the intention is to assess the whole of the taxable "faculty" of a person at the time when his capital and property are about to change hands. It will be realised that nationality may be an important consideration in connection with succession duties. It is also conceivable that account should be taken, on the other hand, of a number of different residences in the case of annual taxes. We lay down general principles and provide for exceptions to which effect can be given by bilateral agreements. 42Document F. 43.
(4080)
21 -
The resolution relating to general income-tax consists of three paragraphs. The first states the principle and the second provides for the not-infrequent case of persons who have residences in, or regularly visit, a number of countries. It is couched in somewhat elastic terms, the object being to admit arrangements of all kinds. Experience shows, indeed, that no universal rule can be formulated. Czechoslovakia has concluded conventions with five other countries: the treaty with Austria provides that a taxpayer who has been resident for eight months in one of the two countries shall be taxed by that country; the conventions with Italy and Poland, on the other hand, recognise a division of the income in one case, and in the other, by way of exception, a division of the tax, in proportion to the period of sojourn in the respective countries. We desire to call special attention to the last paragraph in our resolution, which reads as follows: "States shall always be free to tax their nationals on that part of their total income, wealth or capital not taxed under the terms of the previous paragraphs." Actuated by considerations of justice, we have sought to prevent an abuse which is occurring to an ever-increasing extent. Wealthy persons who have invested their property in easily transferable securities move from one country to another, making only a short stay in each, and possess no immovable property in their own name. They may thus evade all treaty provisions, as these provisions necessarily have regard to external indications or other evidence of a real sojourn in the country. It is our object in the last paragraph of the resolution to frustrate the aims of these taxable persons and, in short, to give the State of which they are nationals the right to charge the taxes which they have sought to avoid by withdrawing themselves from the contractual provisions laid down by the various States. In the case of legal entities (joint-stock companies), we propose that the fiscal domicile should be the place where the concern has its effective centre, i.e., the place where the "brain", management and control of the business are situated. If this definition is accepted, businesses will be prevented from nominally transferring their headquarters to a place where the taxes are lower than in the country in which the effective centre of the business is situated.
(4081)
PART Il.
TAX EVASION.
I.
DEFINITION
THEORETICAL
INVESTIGATIONS WITH THE
AND DEFINITE
ATTEMPTS TO DEAL
PROBLEM.
It may, perhaps, be useful to preface the following considerations by dispelling a misunderstanding and defining the scope of the questions relating to tax evasion, a subject which public opinion Often confuses with the exportation of capital. Capital is exported abroad for m.ny reasons. Some investors think that the rate of interest abroad is more attractive or suppose that their capital will be better managed abroad; some seek to protect themselves against risks of ultimate expropriation and yield to fears of a political nature; others desire in general to minimise their risks by dividing up their wealth in a number of different countries. Finally and there have been many and striking instances of this fact in recent years - nationals of a country whose budget shows a deficit, and whose issues of paper money become more and more numerous, fear above all the definite depreciation of their currency, which in that case is the cause of the export of capital abroad and its failure to return to the owner's own country. In this flight of capital due to these various reasons, considerations of taxation play only a secondary part. The matter on which we have been working has been taxation evasion, that is to say evasion which, particularly by means of the flight of capital, enables the interested persons to escape taxation which is legally due. On the one hand, there are cases of taxpayers who deliberately defy the law and resort to concealment; on the other hand, there are the individuals who, owing to carelessness, forgetfulness or negligence, do not carry out their obligations in the matter of taxation, or who, where (owing to the obscurity of the law) doubts exist as to its interpretation,
take the benefit of the doubt in their own favour. We recognise that the extent to which evasion of taxation occurs differs greatly in different countries and that the nature of this evasion also differs widely. In some countries evasion is mainly due to fraud; but there are others in which evasion due to fraud is almost negligible and the evasion which exists is mainly due to the other reasons which we have mentioned. But,
without doubt, whatever may be the cause of the evil, the budgets of many countries are suffering in a greater or lesser degree from the open wound of tax evasion, and in such cases the expert officials of revenue departments can, least of all, afford to disregard this evil. But we are impressed by the moral character of the problem before us. It is true that there are many possible causes for a deficit in the collection of public revenues, from bad harvests and unemployment to export of capital, itself caused by the various considerations above mentioned. But none of these has the immoral character peculiar to fraudulent evasion, and none, we may add, has stich a decidedly international character. The fact, therefote, that the League of Nations has been occupied with the question since the third year of its existence need cause no surprise. But the question differs from that of double
(4082)
23 --
taxation in that, as far as we are aware, no enquiry has been conducted by any international body on the subject of tax evasion. The definite attempts made by Governments to combat evasion in the international field have not been numerous. In 1843 and 1845, Belgium concluded with France and the Netherlands 43 conventions for the exchange of information concerning immovable property possessed in one of the contracting countries by inhabitants of the other. In 1907, France concluded with Great Britain an agreement 44 under which the taxing authorities of the two countries exchange certain information with a view to counteracting the evasion of death duties. After the war, Germany concluded with Czechoslovakia and Austria '5 detailed arrangements for administrative and judicial assistance in taxation questions. In the treaty between Italy and Czechoslovakia 46, Article 11, it is stated in general terms that the parties will "assist each other in levying and collecting direct taxes", and it is indicated that a separate convention will be concluded on the subject. These few examples showed us, however, the path, or rather the paths, which had to be followed. There are, indeed, two distinct lines of approach to the subject of taxation evasion looked at from an international point of view - the one leading to detection of evasion in the assessment of tax, the other to the recovery of tax. In the one case, the taxpayer invests his capital or cashes his coupons abroad, and leaves the revenue authorities of his country in ignorance of his wealth; in the other, the taxpayer who is lawfully taxed in his own country takes refuge in another country in order to make the recovery of tax from him impossible. We have examined both aspects of the question, and have submitted certain resolutions which will be found below in regard to each of them.
2.
EVASION IN THE ASSESSMENT OF TAXES.
We should point out first of all that, in investigating the question of double taxation, we are almost inevitably led to consider the possibility of some sort of international co-operation between the various taxation authorities. Thus, the Financial Committee's terms of reference to the four economists 17 included the question: "To what extent should the conventions on the subject of double taxation establish an international control to prevent fraudulent claims for relief ?" During our discussions on fiscal domicile we had to examine evasion in the case of taxpayers without any fixed residence. In connection with the system to be applied to transferable securities, we have seen how necessary it is to provide against the abuse of claims for relief from taxation, inasmuch as we are dealing both with exemption from and repayment of tax. But this is not all. Methods of assessing various taxes may react on each other. Let us take the case of a taxpayer domiciled in Morania and possessing Imerian transferable securities payable in Imeria. If he wishes to obtain exemption from the Imerian schedular tax, he must produce an affidavit proving his nationality and domicile. The Imerian revenue authorities receive the affidavit, but if they do not send it back to Morania with an endorsement as to the amount of the coupons which have been exempted from taxation, the Moranian revenue authorities will probably be unaware of the fact that their national has received this income, and will not tax him thereon. Thus, the taxpayer may wholly avoid taxation.
43
' ,O
Document F. 7 (2 and in). 44 Document F. 7 (9).

Document F. 29 (2 and
6).
Document F. 14 3. 47 Document F. i9 (Introduction).
(4083)
Let us now suppose that the taxpayer has not applied for an affidavit and that, although domiciled in Morania, he has paid the Imerian schedular tax without protest. He may have an interest in so doing if he wishes to avoid taxation in his own country; for, by not applying for an affidavit, he hopes to leave the Moranian revenue authorities in ignorance of the very existence of his Imerian securities. He therefore pays the Imerian schedular tax, but escapes the Moranian general tax; if the Imerian securities were issued "free of tax", the question of an affidavit would not arise. The cases which we have quoted are not imaginary, and either involuntary or delibeiate tax evasion in assessment occurs very frequently. We have attempted to suggest measures the object of which is both to supply omissions in existing supervision and to combat attempts at evasion. Our investigation into the question of double taxation and the few treaties existing between some of the European States has suggested to us the idea of the exchange of information on taxation matters, an idea which has been clarified and defined in the course of our deliberations. The resolutions, of which the text is annexed, call for the following comments: Vhat persons are to be the subject of the information to be given ? The revenue authorities of a country X will furnish to countries Y and Z information concerning persons or companies domiciled in those two countries, but not necessarily concerning the nationals of country X itself. Thus, in the example given above, Imeria will supply to Morania information concerning the income arising in Imeria of a Moranian; but it does not follow that she will necessarily give Morania information concerning income paid in Imeria to an Imerian domiciled in Morania. It goes without saying that the conventions which we contemplate may provide for the exchange of information without any distinction of nationality. What will be the scope of the information to be given ? Here we have drawn no distinction between the various taxes and have merely reviewed the various categories of wealth or income which a taxpayer may possess. The headings Nos. 1, 2, 3, 5, relating to income other than that from transferable securities, call for no explanation. Heading No. 4, which is concerned with transferable securities, raises a series of very delicate questions, to which the considerations expressed at the beginning of our resolutions apply with particular force. In the case of income, evasion would theoretically be suppressed if the State in which the income is payable, or in which the interest on a deposit is credited, communicated to the State of domicile of the possessor not only the affidavit - in the case of a claim to exemption from tax - but also, in all circumstances, the total value of coupons and interest paid, in conformity with a procedure similar to that already provided for under the laws of some countries. It would be necessary, also, upon a death, for the State of domicile of the deceased person to be furnished with all documents, such as inventories, records of legal ownership, etc., establish-. ing the existence of the capital. This would be a generalisation and extension of the system of exchanging information now in force between France and Great Britain under the terms of the Treaty of November 15 th, 1907 48. The question has been asked whether it would be advisable to include special provisions to combat certain practices by which it is possible to evade the payment of duties on the transfer of property from one person to another upon a death. For example, discussion turned particularly upon the question of opening "joint accounts" or other similar means whereby it is possible to escape taxation. A proposal was put forward to prohibit the opening of a joint account in any country by foreigners not domiciled in that country. After discussion, we came to the conclusion that our task was merely to offer general suggestions without discussing in detail all the various forms of procedure which facilitate tax evasion. Therefore, while fully recognising
4s
Document F. 7 (9).
(4084)
25
how desirable it would be to check these practices, we have not felt called upon to recommend any special measures. We are also aware of the difficulties and objections which may be raised to all measures aimed at combating tax evasion; we shall examine the principal ones, and shall thus be able at the same time to offer a commentary on the text of our resolutions. The first criticism passed on the existing convention between France and England is that it increases the mischievous consequences of double taxation on account of the conflict of laws in respect of domicile. "The mutual interchange of information may thus, in some cases, bring, quite correctly under existing law, the whole of a personal estate under liability to taxation in both countries" 49. To this objection, which may be made both in respect of income-tax and succession duties, it may be replied that the proposed resolutions form an indivisible whole, and that their object is to prevent both double taxation and tax evasion. The foregoing criticism will be seen to furnish a fresh proof of the close connection between these two problems. A second objection is based on "the inviolability of banking secrecy". The fact cannot be disguised that public opinion in many European countries does not accept the idea that public officials should have power to require information from a third party concerning a taxpayer's .personal estate, and that these officials should transmit such information to another State. It will be remembered in this connection that the Genoa Conference of 1922, when it requested the League of Nations "to study the question of measures for international co-operation to prevent tax evasion", made a reservation to the effect that "any proposal to interfere with the freedom of the market for exchange or to violate the secrecy of bankers' relations with their customers is to be condemned". We are fully aware of the importance of the part played by banks in economic life, and in putting forward our. resolutions we have endeavoured to avoid hindering their activities and to preserve as far as possible the secrecy of their operations, as is shown by the following considerations, to which some of our number attach more weight than others. In the first place, it is only a question of the exchange of information between officials who are themselves bound by the strictest rules of professional secrecy. In many countries it is the usual practice for employers to declare to the revenue authorities the amount of the salaries they pay to their employees, workmen, etc., which is perhaps as confidential as the amount of dividends received, or even the total of a deposit account in a credit establishment. There is no reason to suppose that secrecy would be violated by the revenue authorities; in practice, moreover, the transmission of information should be accompanied by every conceivable precaution against leakage. Secondly, it is not a question of relations between bankers and their clients in the strictly economic and banking sense of the term. Handing share and bond coupons over a counter, filling in a counterfoil or list of securities, paying a customer the value in money of such interest or dividends as have previously been paid in or will be paid in later by the corporate trading body issuing the security, cannot be said to involve on the part of the bank any estimate of the financial position of the customer or, on the part of the customer, any confidence in the ultimate solvency of the bank, which acts as an intermediary. The position is different in the case of sums left on deposit or current account. However, having regard to the importance of the objections, we have sought to indicate in the actual wording of our resolutions the great care which should be displayed in acting on the lines of our suggestions. In the second preliminary observation we point out that we make our recommendations as technical experts, and go on to state that "it will only be possible to carry out
49See Document F. 7, No. 6, page 17, Sect. 12.
(4085)
26 -
these recommendations in any given country if public opinion in that country is sufficiently prepared, and if the Government of the country considers that the measures advocated are compatible... with public opinion". Thirdly, one of our number expressed himself apprehensive on a certain point. He said that tax supervision in his country worked excellently, thanks to the patriotism of the people, who understood that the system of collection at the source, the communication of documents to the revenue officials and all other administrative measures were conceived and applied in the interests of the national exchequer. If, however, they believed that such information would be utilised for the benefit of the exchequer of another State, he thought that his countrymen (bankers, employees in business houses and officials alike) would be less ready to accept such measures, and this attitude might react prejudicially on the collection of taxes in the country itself. In order to meet this objection, we have been careful to say in our second preliminary observation that "the carrying out of our recommendations will only be possible in any country it the Government of the country considers that the measures recommended are compatible... with the system employed by the said Government for the collection of its own taxes". There remains a fourth difficulty, the most serious of all. Suppose that two or three, or even five or six, countries conclude with one another a convention on the lines indicated, and that the transmission of information succeeds to the satisfaction of all. Has the problem been really solved ? Not entirely, for in each country, although the system is complete as regards the other contracting countries A, 1I,C, and D, it is not so inlrinsicallY. There is nothing to prevent the taxpayer from transferring his securities to yet another country which has not concluded any convention with the countries A, B, C and D; and, in spite of the barriers to exportation which may be set tip by the countries A, B, C and D, that country will become, if not a convenient refuge, at least a possible haven for unscrupulous taxpayers. This objection undoubtedly falls to the ground if it is pushed too far. It would be an exaggeration to say that, if there were a single country outside the various conventions against tax evasion concluded by the rest of the world, everything previously achieved would be rendered nugatory. Nevertheless, reduced to its real proportions, the difficulty remains a serious one. If only two or a few States conclude an agreement, there is some danger of a flight of capital with the object of avoiding taxation. Notwithstanding this, however, we felt that we ought to suggest appropriate remedies to deal with evasion in-connection with the assessment of taxes. But in order to mark the importance of this point, we have prefaced our text by an observation which forms an integral part thereof, and which we venture to quote: "The question of fiscal evasion can only be solved in a satisfactory manner if the international agreements on this matter are adhered to by most of the States and are'concluded simultaneously. Otherwise the interests of the minority of States which would alone have signed the conventions might be seriously prejudiced". It remains to explain the penultimate paragraph of our resolution. We were unanimous in recognising, in principle, that, to secure the effective suppression of tax evasion, there should be a general and complete exchange of information necessary to the assessment of taxes. Nevertheless, in view of the fact that the legislation of a great number of countries does not as yet allow the revenue authorities to obtain certain information, whether it be front the taxpayer himself, or a third party; that public opinion in different countries is opposed to any extension of the powers of the revenue authority in this sphere; that, consequently, it would be difficult at the present time to secure any alteration of the law in those countries; and, finally, having regard to the considerations set out in the preceding paragraphs, we have to recognise that the exchange of information should actually be limited to that in the possession of States or which they can obtain in the course of their administrations. This is the first step in the struggle against tax evasion.
(4086)
27 -
3.
EVASION IN
THE RECOVERY OF TAXES.
The distinction which is drawn in all fiscal legislation between measures for the assessment of taxes and measures for their recovery must necessarily find a place in our investigations on evasion. In this sphere also taxpayers may endeavour to leave their country to escape the just claims of their country's exchequer. We submit three resolutions regarding the action which might be taken by the administrative or judicial authorities of a State with a view to the recovery of taxes. In drafting these resolutions, we have endeavoured to avoid all interference with national sovereignty. In paragraph 2, we state explicitly that the taxes to be recovered are not to be regarded as privileged debts in the State to which application is made. Should a fiscal claim not yet possess the final character of "res judicala", a State need only take conservatory measures (paragraph 3). The production of documents authorising executory measures is a question which the States concerned will have to regulate in bilateral conventions in conformity with their internal legislation. We have not considered it necessary to enter into further details. The treaty concluded between Czechoslovakia and Germany in 1921 5 supply a number of very valuable instances of tle application of the ideas contained in the resolutions. It will be observed that we have not laid such stress on the general and even universal character which ought to distinguish these conventions as we did in the case of evasion in regard to the assessment of taxation. There are States which may, indeed, consider themselves better protected than others by their geographical position against the risk of this kind of evasion; they may consequently be less ready to conclude conventions. It is, however, incontestable that neighbouring States situated in the same continent have a vital interest in taking action against wealthy taxpayers who leave their country rather than bear their proper share of the public charges.
4.
TAX EVASION
CONCLUSION.
Before concluding our remarks, we think it desirable to draw attention to the connection which exists between the two problems of tax evasion and double taxation. In the course of our report, we have already noticed this fact in one of its aspects. On the one hand, conventions suggested for avoiding double taxation may contain special measures against evasion, destined to prevent any abuse arising from their application; on the other hand, the exchange of information may perhaps lead to duplication in the levying of taxes. This is tantamount to saying that, in elaborating any practical measure for dealing with one of these problems. account must also be taken of the other. But before any reform can be undertaken - indeed, as soon as we come to consider whether, and to what extent, remedies can be found for the evils of double taxation and tax evasion we perceive the points which these problems have in common. In every country taxation questions are daily assuming greater importance, and, in the opinion of certain observers, are tending to bring the Minister of Finance and the taxpayer into opposition. On the one hand, we have the State, whose functions and charges are constantly increasing, and, on the other, the citizen, who is obliged from his income, or even from his capital, to provide the necessary funds. In the international sphere, also, we see two opposing tendencies. Taxpayers, alarmed by proposals for fiscal control, do not understand why, before or during the framing of measures
60 Document F. 29 (2).
(4087)
28 -
which may prove embarrassing to them, States do not come to some agreement in order suitably to define their respective jurisdictions as regards taxation, and to avoid double taxation. On the other hand, if States, in concluding agreements to avoid double taxation, are driven to make sacrifices in the matter of the yield from taxation, owing to the granting of exemption, or relief, or the reduction in the rates of their taxes, etc., they may properly endeavour to find compensation for what they thus surrender in measures against tax evasion. Essentially, however, the connection between the two problems is much more a moral than a material one; the idea of justice in the distribution of taxes is the predominating consideration in all the investigations which we have conducted, both in regard to double taxation and evasion. The International Chamber of Commerce, which had, of course, only to investigate the first problem and which represents a large body of taxpayers throughout the world, clearly perceived this close dependence, and a delegation from that body in April 1924 informed us, through its spokesman, M. CLAMENTEL, that "business men, who are a very worthy class, will welcome any carefully considered and equitable measures which the experts may think it desirable to propose for the prevention of tax evasion". We desire to point out that these measures are in the interest of all honest taxpayers. At the present time, there is a great deal of concealment of income, and there are taxable persons who pay no taxes at all. If the tax on all this income could be brought into the treasuries of the various States concerned, those States would find, as compared with the present position, a very important additional yield, which might not only enable them to indemnify themselves for the sacrifices necessitated by the abolition of multiple taxation, but also to reduce the rates of their taxes or to redeem their loans. We have clearly shown that public opinion in a number of countries is not yet ripe for the adoption of certain of the proposed measures. A change may, perhaps, take place when public opinion comes to realise clearly that the suppression of evasion may, and indeed must, contribute to lightening a burden of taxation on those honest citizens whose case was authoritatively placed before is by M. CLIMENTEL, the first President of the International Chamber of Commerce. Further, the question is one of interest for all States, even for those in which, owing to special circumstances, the question of tax evasion is perhaps of less importance than in others. The balancing of the budgets of the different countries is, indeed, one of the principal factors in the stabilisation of the exchanges, so essential to the re-establishment of normal economic relations. The crisis in the export trade, with its lamentable corollaries - unemployment, restriction of international relations with resultant paralysis (inter alia) of luxury trades - will be largely overcome if nations understand that their general interests are closely bound together, and that, above all, an endeavour should be made to secure the reign of morality among the peoples of the world. The League of Nations is peculiarly qualified to support this principle of economic and moral solidarity.
NOTE.
We have applied ourselves to the study of direct State taxes. Where the communes or provinces of a State levy an additional percentage tax upon the basis of the State's direct taxes, any question of double taxation can be solved by the adoption of our resolutions, We recognise, however, the possibility of double taxation and evasion in the case of other kinds of taxes; but we have reached the conclusion, after consideration, that this latter matter should not be the subject of any prolonged examination on our part. In the first place, the financial results of double taxation and evasion in this class of taxes are, in our opinion, very limited; in the second place, the differences and complexities of the various legislatures are far more accentuated in this sphere than in the sphere of direct taxes. For these reasons, we think we ought to limit ourselves to expressing the hope that States will, in this connection, draw up special rules, which would be the subject of examination in other quarters.
(4088)
PART IV.
GENERAL CONCLUSION.
The Financial Committee has now before it the resolutions which we adopted and the commentaries on their origin and scope. I. It is, of course, not for us to state what action should be taken on these resolutions; that is a question on which a decision can be taken only by the Financial Committee and the Council of the League of Nations, who requested our several Governments to nominate us to carry out this enquiry. We have considered it useful, however, to indicate to the Financial Committee the results of our discussions regarding the subsequent course of the enquiries conducted and the work done in regard to double taxation and tax evasion. We would suggest that the Financial Committee might consider the desirability of summoning a conference of technical experts on broader lines than our own gatherings. In the first place, a larger number of countries might be represented on this conference. During our discussions we fully realised the invaluable assistance which we would have derived in our investigations from the presence of experts belonging to certain countries, both on account of the economic and financial importance of these countries and the peculiarities of their legislation. Again, this new conference of experts should be given terms oj re/erence different from ours. They might be based on the resolutions we are now submitting, but they should instruct the delegates to ascertain if it be possible to prepare preliminary draft conventions. The latter might provide the programme for an international conference, which would not, of course, be summoned until the conventions had been sufficiently considered and until public opinion in the various countries had been adequately informed and educated on these problems. Broadly speaking, this is the procedure which we personally consider desirable for the purpose of continuing the work in the field which we have explored. II. We now desire to lay before the Financial Committee the opinions we formed in the course of our discussions after considering the work undertaken and successfully carried through by the League of Nations in other economic spheres and the memoranda supplied by the Legal Section of the Secretariat. Let us take the case of an international treaty on double taxation or tax evasion concluded between two or more countries. Who, it may be asked, will settle the difficulties connected with the application or interpretation of this treaty ? A number of international conventions contairr provisions laying down a procedure by which resort may be had to a technical body with a view to obtaining an amicable settlement before a dispute between two or more of the contracting States regarding the interpretation or application of the convention is brought before the Permanent Court of International Justice or any other arbitral tribunal. This is indeed the system laid down, with various modifications, in the Convention relating to Customs Formalities (Article 22), the Convention on the Freedom of Communications and
73095 0-62-vol. 4-
(4089)
30 -
Transit signed at Barcelona in 1921 (Article 13) and the Statute on the International Regime of Railways signed at Geneva in 1924 (Article 35). We have thought that one of the questions which it might be desirable to consider in the future is that of the creation of an international organisation. This body would undertake the duties of conciliation or voluntary and advisory arbitration between States in regard to the interpretation of the conventions concluded between them. It would possess no judicial power strictly so called and would not act as a court of appeal in regard to individual cases. It is also possible that this institution might assist States by giving them advice, if they so requested, and might help them to conclude conventions or to give conventions already drafted a more general character. At the present stage of the work undertaken in connection with double taxation and tax evasion, we cannot, of course, do more than make very general suggestions. The practical carrying out of these suggestions will depend on the action which the Financial Committee or the Council may think it desirable to take in regard to our resolutions.
In concluding this report, we are specially anxious to testify to the spirit of friendliness and concession which has characterised all our proceedings. Every one of our number has endeavoured to contribute as largely as possible to the solution of one of the most important questions now before the League of Nations. Throughout the whole course of our work we have received most valuable assistance from M. LoN-DUFOUR, Secretary to the Financial Committee. During our protracted discussions he has made valuable suggestions and assumed the heaviest share in the work of framing our report. The appendix to this report reproduces, moreover, with the aid of graphs, his highly interesting investigation into the question. We desire to express our high appreciation of the aid thus generously given us and the assistance of the members of the Secretariat, who have so ably interpreted and summarised our discussions. (Signed) d'AROMA.
BLAU.
BORDUGE.
CANNY.
CLAVIER. SINNINGHE DAMSTg. VALNICEK.
(4090)
TEXT OF THE RESOLUTIONS.
Double Taxation.
I.
IMPERSONAL
OR
SCHEDULAR
TAXES
(Impits rnels).
Generally speaking, the experts recognise that only the State in which the source of income. is situated is entitled to impose impersonal or schedular taxes. They applied these principles. in succession to various kinds of income: A. Immovable property (land and buildings): Taxes on the actual or presumed rental value should be levied by the State where the property is situated. B. C. Agriculturalundertakings: As above. Industrial and commercial establishments.
x. When the whole of an undertaking is carried on in one and the same country, the income should be regarded as originating in that country, irrespective of the nationality of the owner of the undertaking. 2. If the enterprise has its head office in one of the States and in another has a branch, an agency, an establishment, a stable commercial or industrial organisation, or a permanent representative, each one of the contracting States shall tax that portion of the net income produced in its own territory. Therefore, the financial authorities of the interested States shall be able to request the taxpayer to hand in general balance-sheets, special balance-sheets and all other relevant documents. (a) In the case of shipping enterprises,. railway companies, trans-Atlantic cables, aerial navigation companies and electrical power undertakings, the principle of division is applicable, in proportion to the profits originating in a particular country, provided that there exists in that country a genuine organisation (office, agency or branch) in which business is actually carried on and that it is not - as in the case of shipping companies, for example - merely a question of vessels calling at ports. Nevertheless, in the case of maritime navigation undertakings, in view of the very particular nature of their activities and of the difficulty of apportioning their profits, particularly in the case of companies operating in a number of countries, the experts admit an exception to this principle - to the effect that the tax should, subject to reciprocity, be imposed only by the country in which the real centre of management and control of the undertaking is situated. (b) Insurance companies. - The principle of division also applies to profits realised through an insurance agent representing in the same locality more than one company. (c) Banks. - The. same principle of division; excluding, however, operations effected by a bank belonging to a specified country in another country, when its operations are confined to discounting or to paying over money. D. Mortgages. - The State in which the immovable property is situated should alone have the right to levy a schedular tax on mortgages.
(4091)
32 -
E. Directors' fees. - The State which has the right to levy this tax is the State in which the company has its fiscal domicile. F. Earned income. - The tax should be levied in the State in which the trade or profession is normally and habitually carried on, subject to the right of States to conclude among themselves special conventions to meet the case of persons employed in the neighbourhood of a frontier, or engaged in a profession, employment or trade which necessitates crossing the frontier.
G. Transferablesecurities, deposits and currentaccounts. As regards interest on:
(I) Public funds and bonds issued by companies or other legal persons; (2) Deposits and current accounts: the State in which the debtor is domiciled shall, as a rule, be entitled to levy the schedular tax, but the experts recommend the conclusion of agreements whereby (particularly by means of affidavits and subject to proper precautions against fraud) reimbursement of, or exemption from, this tax would be allowed in the case of securities, deposits or current accounts of persons domiciled abroad, or whereby the tax would be levied either wholly or in part by the State in which the creditors are domiciled. Public funds include bonds issued by the State, provinces, departments, communes and by regularly constituted public bodies. As regards interest on deposits or current accounts, the head or branch office which pays the interest should be regarded as the debtor. The above regulations shall also apply to the various kinds of schedular taxes on dividends charged upon shareholders, it being clearly understood that there is no reference here to the tax on industrial and commercial preits mentioned in paragraph C above.
H. Various credits and annuities. - As regards interest on credits other than those already
considered, and on annuities, the State in which the creditor is d9 miciled shall have the right to impose the schedular tax. The definition of "domicile" shall in this instance be the same as that adopted for the .purposes of the general income-tax.
I.
PERSONAL OR GENERAL INCOME-TAX.
I. The general income-tax, i.e., a tax (which may be at a progressive rate) charged upon the whole income of a taxpayer, from whatever source derived, should, in principle, be imposed only by the State of domicile.
2. When for its own reasons a State, other than the State of domicile, finds it necessary to impose a general income-tax on income arising from a particular source or sources in its own country, bilateral conventions should, if possible, be entered into between the States concerned with a view to avoiding any double imposition caused by taxation of this character. The kinds of income upon which the State of origin may impose such a tax include: (a) income from immov-able property; (b) income from agricultural undertakings and industrial or commercial establishments, exclusive of dividends upon shares therein.
3. The precise method of avoiding qouble taxation must be a matter to be worked out in ,detail between the States concerned, having regard to the circumstances and nature of the respective fiscal systems; but the experts indicate two methods which may be of assistance'to -any States which may contemplate entering into such conventions:
(4092)
33 (I) Deduction by the State of domicile from the general income-tax of a sum which will bet (a) Either the tax calculated according to the State's own scale and charged exclusively on income produced in the other countries, each of the latter being taken separately, (b) Or the tax actually paid abroad on the income arising abroad; this sum may be limited to the amount to be deducted in accordance with paragraph (a). In order to prevent a taxpayer whose entire income arises abroad from escaping all taxation in his State of domicile, the amount to be deducted on the above basis should in all cases be restricted to some fraction of the total tax chargeable in the State of domicile.
(2)
In the State of the origin of the income, only a portion of the income arising there should be taxed, the other portion being taxed in the State of domicile of the taxpayer, but at the rate applicable to his total income from every source.
4. Similar steps might be taken, or exemption might be granted, in the country of the origin of the income by means of bilateral conventions in cases where double taxation arises by reason of the existence of a general tax in the country of domicile, side by side with schedular taxes in the country of the origin.
III.
PERMANENT
TFAxEs ON THE, TAXPAYER'S TOTAL
WEALTH OR CAPITAL: SUCCESSION
DUTIES.
The rules adopted for the general*income-tax are applicable mutatis midandis to permanent taxes on the taxpayer's total wealth or capital and to succession duties.
IV. I.
FiSC.\L DOMIIci..
Fiscal Domicile of Individuals.
A. General Income-Tax (taxes on the total wealth or capital). The State of domicile, for purposes of the general income-tax, shall be the State in which the taxpayer normally has his residence for a portion of the year, the term "residence" being understood to mean a permanent home. If a taxpayer has a residence or sojourns otherwise than occasionally in different States, each of the said States may levy a general tax; it is desirable, however, in order to avoid double taxation, that those States should adopt, a special standard of liability to taxation, or else that they should agree on a proportional division of taxation. States shall always be free to tax their own nationals on the whole of their income, wealth or capital not taxed under the terms of the above paragraph. B. Succession Duties.
The State in which the deceased had, at the time of his death, chosen to take up his residence with the manifest intention of remaining there, shall for purposes of succession duties be considered as the State of domicile.
(4093)
34 -
States which are unable to accept this definition in its entirety shall retain their own internal legislation. Should double taxation ensue, they might, for the purpose of avoiding it, agree to base taxation upon the nationality or the principal establishment of the deceased or to adopt some method of relief.
2.
Fiscal Domicile of Companies or Corporale Bodies.
The State which has the right to levy the tax is the State in which the head office is situated, or, if that office is not the real centre of management and control of the undertaking, the State in which this centre is situated.
Tax Evasion.
A.
ASSESSMENT 0F "TAX.
In view of the very special nature of the problem of tax evasion, the experts consider that they must, at the outset, submit the following observations, which should he read together with the text of their recommendations: i. Unlike double taxation, in connection with which any problems arising between two States can be settled appropriately by means of bilateral conventions, lhe question of tax evasion can only be solved in a satisfactory manner if the international agreements on this matter are adhered to by most of the States and if they are concluded simultaneously. Otherwise, the interests of the minority of States, which would alone have signed the conventions, might be seriously prejudiced. 2. As regards the carrying out of the recommendations, which the members of the Committee, in their capacity of technical experts, submit as being in their opinion the most suitable for counteracting tax evasion, the experts desire to emphasise the fact that it will only be possible to carry out these recommendations in any given country if, in the first place, public opinion in that country is sufficiently prepared, and, secondly, if the Government of the country considers that the measures advocated are not only compatible with public opinion, but also are required for the collection of its own taxes. The experts consider that the effective method of avoiding tax evasion is for the revenue authorities to undertake to supply on a basis of reciprocity to other countries, in respect of persons or companies domiciled in those countries, such information as may be required for tax assessment, for which purpose it is necessary to ascertain both the income and capital value of: (i) Immovable property; (2) Mortgages; (3) Industrial, commercial or agricultural undertakings; (4) Movable securities, deposits and current accounts, as determined by means of affidavits or any other documents, proving the existence of capital or the payment of the income; (5) E"arned income, including directors' fees.
(4094)
135 -
Nevertheless, having regard to circumstances of different kinds, the experts recognise that this exchange should be limited actually to the information which is in the possession of States or which the States can obtain in the course of their fiscal administrations. In the opinion of the Committee, it is essential that agreement on the subject of tax evasion should be reached, if not universally, at least by a majority of States, in order to obviate the serious disadvantages which might result for certain countries if the procedure in question were adopted by a minority of States only.
B.
COLLECTION OF Tax.
(Administrative and Judicial Assistance.) States might consider the possibility of allowing their administrative or judicial authorities to act for other States for the recovery of fiscal debts the liability for which can be shown to be res judicata. If this principle were adopted, States would conclude with one another, for its application, Conventions which might contain the following provisions: i. Each State shall recover within its territory, in accordance with its own law, taxes due in another State, including taxes due from persons not nationals of the latter State. The State to which such an application is made may not, however, be requested to apply any method of execution not provided for under the law of the State making the application. 2. Taxes to be recovered shall not, in the State to which application is made, be regarded as privileged debts. 3. Prosecutions and other measures of execution shall be carried out, without exequatur, on the production of documents proving that the liability in question is res judicata. If the fiscal debt may still be the subject of an appeal, conservatory measures may be taken on the production of a decision executable against the debtor.
(4095)
APPENDIX.
NOTE BY M. LRON-DUFOUR ON THE VARIOUS METHODS SUGGESTED FOR REMEDYING DOUBLE TAXATION AND THEIR GRAPHICAL REPRESENTATION. The various methods suggested for the avoidance or alleviation of double taxation consist of different expedients, designed to exempt or relieve certain incomes, to divide between the two Governments concerned the taxes collectible, or to classify the incomes into various categories so as to determine those which are taxable in each country. To assist in elucidating the question, it may be useful to employ graphical methods to illustrate the various systems. Let the different portions of the income or capital of a taxpayer domiciled in country X be shown on a horizontal line drawn from a point 0. Let OB represent the whole income or capital and AB the part of this income or capital taxed in another o A i country Y, which is known as the "country of origin", to indicate that the income or capital in question is derived from abroad. Country X clearly has the right to tax the portion of the wealth represented by OA. Double taxation results from the fact that both country X (country of domicile) and country Y (country of origin) desire to tax a part or the whole of AB. When later we come to refer to income, it must be understood that, in reality, it is'rather with general wealth that we are concerned, because this wealth is taxed in some cases according to its capital value and in other cases according to the annual income or profits F . 1. / which it brings in. Fg Having thus shown the income or wealth by a horizontal line, we can now show by means of a vertical line the total tax in respect of each amount of income for each of the D two countries X and Y; we can then work out curves of taxation (Fig. I) which will start respectively from the point 0 in the case of country X and from the point A in the case of country Y. For example, the income OB will be liable in country X to a tax represented by BC; the income AB will be required in country Y to pay the tax B). These o A B curves are straight lines when the scale of taxation is proportional; when, however, it is graduated, they assume a hyperbolic form. If there is complete double taxation, the tax claimed by country X would be represented by BC and the tax claimed by country Y by BD. BD represents the amount of the double taxation. Let us now examine the various measures which the two countries X or Y may take to abolish or limit double taxation. These measures are based on two distinct ideas, which can, however, l e combined. The first group of measures aims at an assignment ol income. Since the country of domicile X and the country of origin Y both have claims on the income AB, they will arrange to apportion this income so as to prevent any overlapping of claims. The second group of measures is based on th.-calulation of the tax. Assuming a definite assignment of income as between X and Y, these countries then agree to apportion the tax and grant relief in accordance with certain rules. Methods II and IV below L are-based exclusively on the consideration of income; and
I have thought it advisable to retain the nomenclature of the methods already explained by the four
economists, and have therefore numbered the first four methods indicated below so as to correspond to the numbers in the economists' report (Document F. i9, Part III, Section i) and to those in the report by the Technical Experts (pages 9 and Yo of the present brochure).
(4096)
Methods I, III and V exclusivelv on the calculation of tax: before the other methods (VI and VII) can be applied, the income must first be allocated and the method of calculating the tax settled.
METHOD I. -
TOTAL DiE.t'carox.
Country Y collects the tax BD on the income AB, which under its own legislation is taxable in that country. The country of domicile X first calculates the tax on the whole of the taxpayer's income OB. It then deducts 13D, the amount of the tax actually collected by the country of origin, without any restriction whatever. It therefore only collects CD (Fig. 2). This system has the great disadvantage of placing the budget of the country of domicile X at the mercy of country If the latter increases its scale of taxation and Y. collects BD, instead of BD, country X will find the amount of its tax reduced and will only collect CD1 instead of CD. This system may lead to curious results: 0
Fig. 2.
(a) Take the case of two taxpayers, Peter and Paul. The forner has his entire capital OA invested in X, his country of domicile; the latter, who is a richer man than Peter. has in his country X the same capital OA as his neighbour, but has in addition the capital AB invested in a foreign country V. If the system of total deduction is adopted, without any maximum being fixed, the taxpayer Paul will pay his country of domicile the sum represented by CD,. This is less than the amount paid. by his less wealthy neighbour Peter, who, however, has the same amount of capital invested in their common country of domicile. (b) A taxpayer invests part AB of his fortune abroad in 1924, it beig assumed that his total wealth OB is the same as it was in 1923. If there is no limit to-the amount of the relief, the State of domicile will remit for 1924 BD,, i.e., a sum larger than the tax on the portion of the wealth invested abroad when calculated on its own scale. In 1924, it would give up more than it collected in 1923 - an inequitable arrangement. (c) Finally, if (Fig. 3) the scale of taxation is higher in country Y than in country D X, and if the income A1l is considerably larger than the income OA, it may well happen that point 1) appears above point C, in which case C total relief becomes impossible, since the country Fig. 3 of domicile collects less than the other country. Hence both theorists and legislators themselves have been led to apply correctives to this system by fixing a maximttn for the relief borne by the State of domicile. This is what was called for by the Special Committee of the International Chamber of Commerce in its 1922 draft resolution (Doc. F. 5a); it is also the principle embodied in Methods V (American Legislation) and VI (League of Nations Experts), which we shall consider later on.
(4097)
.38
OF THE NON-RESIDENT.
MEITHOD II. -
EXEMPTION
This method decides the problem of double taxation by carrying to its limit the idea of the division of income, i.e., it exempts all income earned abroad C from taxation by the country of origin. Let OB be the total income of a taxpayer domiciled in X. The distinction between OA, income earned in X, Fig. 4. and AB, income earned in Y, disappears. Country Y collects nothing and country X collects the tax BC on the income OB at the rate applicable to such income. This method is advantageous to creditor countries which have numerous investments abroad. It leads, however, to the result that, if there are two taxpayers in the country of origin Y who possess identical immovable property or factories bringing in the same income AB, the B one domiciled in Y will be liable to the tax, while the other A will be exempt. Instances may be given of the partial application of this method: i. Great Britain and the United States have concluded a convention in regard to the profits earned by shipping companies, under which British vessels plying to American ports are exempted from all taxation, subject to reciprocal treatment being given to American vessels plying to British ports. It will, however, be seen that this does not imply the remission of taxation on the whole of the income derived from the foreign country. Taxation is remitted only in respect of a very special kind of income. 2. As regards succession duties, the entire estate (with the exception of immovable property) is considered as forming an indivisible whole under the treaty between Austria and Germany, and it is assigned to the State of domicile or the State of which the deceased was a national.
METHOD
II1.
ALLOCATION
OF
RELIEF.
The portion BD of the tax collected by country Y is divided, as a result of a convention, into two portions: C A portion BG, which will still be collected by country Y, and a portion DG, which is relinquished by country Y. Thus the country of domicile X only collects GC, instead of BC. The burden of the relief has been shared. rig 5. This is the method which, with some alterations and qualifications, has been adopted between Great Britain and its Dominions. The problem has been divided into two disD tinct parts; the complete relief from double taxation being effected, on the one hand, by a sacrifice on the part of the United Kingdom, and, on the other hand, by another , and subsequent sacrifice on the part of the Dominion. The arrangement recommended in the report of the Royal Commission of 1920 in paragraph 70 (see Document E.F.S./ 0 A A. 16, p. 31) is as follows:
(4098)
39 -
"i. That in respect of income taxed both in the United Kingdom and in a Dominion, in substitution for the existing partial reliefs there should be deducted from the appropriate rate of the United Kingdom income-tax (including super-tax) the whole of the rate of the Dominion income-tax charged in respect of the same income, subject to the limitation that in no case should the maximum rate of relief given by the United Kingdom exceed one-half of the rate of the United Kingdom income-tax (including super-tax) to which the individual taxpayer might be liable; and "2. That any further relief necessary in order to confer on the taxpayer relief amounting in all to the lower of the two taxes (United Kingdom and the Dominion) should be given by the Dominion concerned." Let us suppose, for the sake of simplicity (Fig. 6), the case of a taxpayer resident in England
C C
Fi . 6.
Fi .7
0 B 0 B whose total income OB is derived from a Dominion. Let BC be thetax due in the United Kingdom, M being the centre of BC. If the Dominion tax BD is less than BM, the United Kingdom relinquishes BD and there is no double taxation. If the Dominion tax BD is larger than BM (Fig. 7), the United Kingdom does not agree to give relief to the whole extent of BD. It only relinquishes BM. If the Dominion ,continued to levy BD, there would D be double taxation to the extent of DM. The Dominion should therefore give up the part DM of the tax due to it. The result is that the taxpayer contriFig. 8 butes CM to the United Kingdom and BM to the Dominion. It may also happen that the Dominion tax BD (Fig. 8) is higher than the United Kingdom tax BC. Under the provisions for the granting of relief by the United Kingdom contained in paragraph i, the United Kingdom relinquishes M BM, which is half BC. In order that the relief should be equal to the lower of the two taxes in accordance with the provisions of paragraph 2, the Dominion should relinquish CM. The total relief is then equal to BC and consists of 5 two equal parts: BM, granted by the United Kingdom, 0 and MC. granted by the Dominion. The above remarks are quite general and illustrate the method of relief in its most simple form. They disregard many details which complicate the problem considerably. Under the scheme, the relief in respect of any income is tobe computed by reference to the respective rates of tax and without regard to any variation in amount between the United Kingdom and the Dominion assessments for the year of claim; and, as pointed out in the report of the Royal
(4099)
40 --
Commission, the same source of income may be assessed at very different figures according to United Kingdom legislation and according to Dominion legislation. The taxation of dividends on shares also gives rise to complications. As a matter of fact, neither the economists hor the Government experts think that the system adopted within the British Empire can be brought into general use for international purposes. IV.
ROME CONVENTION OR SIMPLE ASSIGNMENT OF INCOME.
METHOD
The whole of the income OB is divided as a result of an agriement into two parts, one part, OA, being taxed by the country of domicile, and the other, AB, by the country of origin. Each country applies its D own rates of taxation to the part of the income assigned to it. As a result, the country of domicile X has no claim on Fig 9. the income AB. No increase in the rate of taxation imposed by country Y in any way affects the amount collected by country X. For example, under Article 6 of the Treaty between A BItaly and Czechoslovakia regarding general income-tax, the 0 income derived from work, immovable property, mortgages, industry and commerce (in so far as such industry or commerce is not carried on by joint-stock companies) is assigned to the country of origin Y, while all other forms of income are assigned to the country of domicile X. The technical experts of the League of Nations have recommended in regard to schedular the adoption of the principle that the income should, in the rase of an taxes or impdts r~els industrial or commercial undertaking with branches, in more than one country, be divided (Resolutions, Chapter 1, C. 2.) As regards succession duties, all immovable property is assigned to the country of origin (the State where the property is situated) under the treaties concluded between Czechoslovakia, Austria and Germany. Under most of these treaties (Czechoslovakia with other countries), other forms of property are divided up. At this' point a comparison should be drawn between Method IV (Rome Convention) and Method I (Total Deduction), from the point of view of the taxpayer's interests, assuming the preliminary assignment of income between the country of origin and the country of domicile to be the same. When the rate of taxation in the country of origin is low, or when the portion C AB of the income taxed in that country is small, the taxpayer will derive greater benefits under Method IV (Rome Convention), which exacts from him AL in the case of country X, and BD in the case of country Y, than under Method I (Total Deduction), by which he has to pay CD to country X and BD to country Y. Eig.10. But in proportion as the rate of taxation in the counL try of origin is raised (or the proportion of AB to OB increases), the difference between the results produced by the two , methods diminishes. Draw a line AM parallel to the straight line LC. When, on account of an increase in the rate of taxation, point D happens to be at M, the two methods of calculation give the same result. Country X B A 0 collects AL = CM and country Y collects BM.
(4100)
41 -
If point D, is above M, and if the country of origin collects BD1 , the country of domicile collects AL = CM under Method IV (Rome Convention) and CD 1 (which is less
than CM) under Method I, the method described as the "total deduction" system.
METHOD
V.
AMERICAN LEGISLATION.
Under this system, just as in Methods I and III above, there is no assignment of income as between any two countries. Taking the income exactly as it is taxed, American legislation recognises the principle of deduction, as in Method I, but sets a limit to its action. Instead of dividing up the tax, as in Method III, American law lays down a maximum limit of deduction, calculated solely in accordance with the laws of the country of domicile. Any income-tax paid to a foreign country by a taxpayer who is a citizen of the United States on his income derived from a foreign country is deducted from the total amount of the Federal tax (Section 222 (a), paragraph 2, of the Federal law). A maximum, however, is imposed in paragraph 5: "The amount of the credit taken under this subdivision shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's net income .... from sources without the United States bears to his entire net income ... for the same taxable year." Take the case of a citizen of the United States whose total income, OB, is $ioo,ooo, part C of which, AB, $20,000, is earned in country Y. Let BD be the tax collected by Y on the $20,000 and BC the American -, tax on the $ioo,ooo. Under the law a maximum rate of relief, BP, is fixed. This maximum is determined in such Fig.] 1. a way that the ratio of BC to BP is the same as the ratio of OB = IOO,OOO to AB = 20,000. Point P on the graph D, will be obtained by drawing a straight line AP parallel to the straight line OC. p In this way, if the tax collected by the country of origin . is less than BP, the United States will collect CD, and we D get the same result as under Method I. -" If, in consequence of the increase of the rate of taxation in the country of origin, point D1, indicating the tax BD 1 B A collected by the country of origin, falls above P, the United 0 States collect CP and the country of origin BD5 . Double taxation, represented by the section DIP, therefore, exists to some extent.
As we pointed out previously, the systems which we are about to consider, i.e., the systems proposed by the technical experts of the League of Nations, assume that the countries concerned have, as in Method IV, carried out a classification of income by previous agreement. After this assignment of a revenue has been made, certain rules for calculating the tax are proposed (Resolutions - Chapter II, paragraph 3). In principle, the country of domicile alone is entitled to collect the general income-tax. But, as an exception to this principle, the experts lay down that the country of origin may tax income accruing from immovable property, agricultural undertakings and industrial and commercial establishments, exclusive of dividends. The methods recommended by the technical experts for the prevention of double taxation which may result from these exceptions are indicated below as Methods VI and VII.
(4101)
42 -
METHOD VI.
The technical experts propose that the State of domicile shall deduct from the general incometax a sum which will be:
(a) Either the tax calculated according to the State's own scale and charged exclusively on income produced in the other countries, each of the latter being taken separately ; (b) Or the tax actually paid abroad on income arising abroad; this sum may be limited to the amount to be deducted in accordance with paragraph (a). In order to prevent a taxpayer whose entire income arises abroad from escaping all taxation in his State of domicile, the amount to be deducted on the above basis should in all cases be restricted to some fraction of the total tax chargeable in the State of domicile.
Paragraph (a) may be explained as follows:
Let AB represent income taxed by the country
of origin Y, i.e., the income in respect of which relief is to the line 0B1 = AB, and erect a perpendicular from B, intersecting the curve at point K. Now draw a horizontal line KG. The deduction provided in paragraph (a) is represented by BG. The country of domicile will collect Fig. 12, CG instead of BC. The country of origin will collect the tax D on income AB at its own rate, i.e., BD. There will accordingly be double taxation DG if the tax BD collected by the country of origin is greater than BG. -G This deduction was also recommended, as the maximum relief, by the four economists in connection with succession -duties (Document F. x9, p. 44). 0 B1 A 5 In paragraph (b) the technical experts revert to Method I described above, under which the relief given is equal to the tax actually paid abroad, but they are in favour of fixing a maximum which is, in point of fact, calculated by applying the same rule as in paragraph (a), i.e., BG. It is interesting (omitting all consideration of questions relating to the previous classification of income, a classification not carried out under the American system) to compare the method of tax calculation described above as No. V with the present method (No. VI). If the is not graduated, the deductions under the two systems will be the same (Fig. 13); for an income 0B1 = AB, under the rate applied by the country of domicile, the tax will be BK, which is equal to the maximum relief BP. The tax, however, is frequently graduated. If we combine in Fig. 14 the features of Figs. I2 and ii, we shall see where the difference arises.
B1
(4102)
43 -
The maximum BP laid down by American law is obtained by drawing, from point A, a line parallel to the straight line OC; the maximum proposed by the League of Nations experts is obtained by drawing a line parallel to the straight line OK. The curve OC being concave, it is clear that any point K taken between 0 and C on the curve will give an angle KOB, which is less than the angle COB. The American maximum BP is therefore always greater than the maximum BG, no matter what may be the ratio between the income assigned to the country of origin and the country of domicile respectively, i.e., no matter what may be the position of point A on the line OB. The idea which forms the starting-point for determining the maximum is the same in both methods, i.e., the country of domicile should not, by reason of the fact that a part (AB) of the taxpayer's property is invested abroad, remit a sum larger than the tax on that portion calculated at its own rate of taxation. Under Method V, however, the rate adopted for the purpose of this calculation is that applicable to the taxpayer's total income; under Method VI the rate is that applicable only to the portion invested abroad. It is this difference which is illustrated by the graph Fig. 14. It is necessary also to discuss the last paragraph of the recommendations of the technical experts quoted above. The paragraph is as follows: "In order to prevent a taxpayer whose entire income arises abroad from escaping all taxation in his State of domicile, the amount to be deducted on the above basis should in all cases he restricted to some fraction of the total tax chargeable in the State of domicile." The first clause in the above sentence furnishes an obvious reason for imposing this maximum, but this fraction-limit would also operate when the income is not entirely derived from abload. If a very small portion (OA) of the taxpayer's property C is invested in his own country, the deduction provided for in paragraphs (a) and (b) (ascertained as in Fig. 12 by making OB, = AB, and taking BG = B1 K) would be BG; this would absorb practically the whole of the tax to the detriment of the country of domicile. The fraction-limit .. Fig. 15. BQ accordingly operates in any case, the result being that there are separate maxima: A maximum provided for in paragraphs (a) and (b), calculated in accordance with the amount of the income derived from abroad; and A fractional maximum as provided for in the third paragraph, fixed as a flat rate, at a quarter, fifth, one-tenth, etc., of the tax chargeable on the taxpayer's total wealth. 0 A B1 B METHOD VII. As an alternative method, the technical experts propose (Chapter II, resolution 3, paragraph (2)): " Taxation in the State of origin of only a portion of the income arising there, the other portion being taxed in the State of domicile, but at the rate applicable to thetotal income from
every source."
Let us suppose that a taxpayer domiciled in country X possesses a total income (OB) amounting to Ioo,ooo francs, of which 8oooo francs (OA) are earned in X, and 20,000 francs, (AB), consisting of profits accruing from a factory, are earned in Y. If we assume that the two countries X and Y have, by treaty, agreed that a portion three-quarters, for instance - of the income derived from the factory will be taxed in the country of origin, the remaining quarter (AF) should be taxed by the country of domicile X at the rate applicable to the whole.
(4103)
44 -
C .'~ " L /and L A F B
H
Fig.
r.
"
The rate applicable to the whole is represented by the angle COB. We now draw a perpendicular from the point F, intersecting the straight line OC at H. The country of domicile X will collect FH, i.e., the part AF (5,000 francs) of the income derived from the factory will be taxed at the rate corresponding to ioo,ooo francs (OB) in exactly the same way as the remainder of the income, not at the rate corresponding to 85,ooo francs (OF), which would give a tax FL (less than FH). The country of origin Y, on the other hand, will tax 15,000 francs, representing three-fourths of the income derived from the factory (FB). At what rate will it levy this tax ? It will do so not at the rate applicable to the 15,ooo francs but at that applicable to .the taxpayer's
total income in country Y. It is even conceivable that the country of origin Y itself might, in the same way as country X, take into consideration the whole of the taxpayer's wealth. If the wealth of a taxpayer domiciled in X is located in three different States, X, Y and Z, Fig. i6 shows the manner in which the State of domicile X would apply the tax. AB may still be taken as representing the total income located abroad, and AF the total lump portions of this income assigned to the country of domicile X. It will be observed that under this method (Method VII) the technical experts start from Method IV (Rome Convention), but take into consideration the graduated rate of the tax and the right of the country of domicile to apply this rate even to the portion of the income which is derived outside its own borders. It is interesting to note the consequences of variations in the "treaty" percentage according to which the income is divided between the two countries, i.e., to note, in the form of a graph, the effects of the movements of point F between points A and B in Fig. I6. Take first of all the two extreme cases: that in which point F coincides with B, and that in which it coincides with A. If the point F coincides with B, this means that the country of domicile retains its right to tax the whole of the income derived abroad, i.e., there is double taxation without any alleviation, even partial. If, however, the point F coincides with A, this means that the country of origin can tax the whole of the income at issue as it wishes, and that the country of domicile taxes only the income derived within its territory; but it taxes this income at the rate applicable to the taxpayer's total income. It is clear that in this extreme case Method VII is in actual practice the same as Method V (American Method). Let us again (Fig. 17) consider Fig. 13 above, in which the straight line AP is C parallel to the straight line OC. Under the American Method, the State of domicile collects CP. In the method we are at present explaining, the country of domicile will levy an amount obtained by drawing from point A H I! a perpendicular intersecting the straight line OC at the Fig I7. point.H. It is obvious that AH is equal to CP, since the straight lines AP and OC are parallel. It is now desirable to ascertain what occurs in cases ,-' between the two extremes when point F shifts between A and B. We can, for instance, compare Method VI with / Method VII, i.e., the two methods proposed by the League of Nations technical experts. It will then 0 A B be seen that, according to circumstances, the country
(4104)
45 -
of domicile will, purely from the point of view of taxation, choose one or other of these methods. This means that Method VII, which rests on the division of income with a maximum rate, will afford greater or lesser advantages than Method VI, according to the percentage adopted by agreement for the division of the income. c If in Fig. i8 we take the point G, which was fixed in the manner shown in Figs. i3 and 14 by making OB5 = AB, drawing the perpendicular BK and then drawing the horizontal line KG, the country of domicile will collect the sum CG under , Method VI. If a line is now drawn from point G parallel to the straight line OC, it will intersect the horizontal line OB at a point R. Fig. 18. If the income is divided in the manner proposed under Method VII in such a way that point F coincides with R, it is clear that Methods VI and VII are in. this instance identical, ,K for in this case the straight line RH, representing the tax ......-""-----collected by the country of domicile, is obviously equal to the straight line CG. B A R 8, 0 If'point F falls to the right of point R, the country of domicile collects under Method VII a sum larger than CG. If, on the other hand, point F falls to the left of point R, the country of domicile collects under Method VII an amount less than the amount CG which it collects under Method VI. It will accordingly be seen that various countries may find it convenient to adopt Methods VI and VII, the two methods proposed by the technical experts, as being applicable to a special set of circumstances or to differences in systems of taxation.
73095 0-62-vol. 4-(4
(4105)
C. 368. M. 115. 1925. II. Geneva, June Iith, 1925.
DOUBLE TAXATION AND TAX EVASION.
EXTRACT OF THE REPORT OF THE FINANCIAL COMMITTEE TO THE COUNCIL OF THE LEAGUE OF NATIONS. June 8th, 1925. (I) At the end of 1921, the Financial Committee, instructed by the Brussels Conference to discover possible ways of solving the double taxation problem, decided that it would first of all investigate the question from a purely general point of view. They therefore entrusted the task of studying double taxation in its theoretical aspect to four expert economists, whose report (Document F. Lg) was published in March 1923. In June 1922, the Financial Committee decided to call in a number of technical experts on fiscal matters to examine from an administrative and practical point of view both the problem of double taxation and that of tax evasion, which had just been submitted to the League of Nations. These experts sought to obtain every kind of information which could be of value, and, in particular, they were in communication with the International Chamber of Commerce, which had, from the time of its foundation, been investigating the question of double taxation. The conclusions now before the Congress o1 the International Chamber follow closely those of the experts, and the results of the discussions of the Congress may be of help in the subsequent work by the League of Nations. At the suggestion of the Financial Committee, the resolutions of the experts were published in March 1925, with an explanatory report (Document F. 212). (2) During its present session, the Financial Committee examined this text. M. d'Aroma, who had presided over the work of the technical experts, came to Geneva and personally submitted a number of comments on the report and the xesolutions. (3) The Financial Committee support the recommendations of the experts concerning the proposal to convene a Conference of technical experts on a wider basis and including representatives of countries other than the seven which nominated the present experts. This Conference would take the resolutions of February 7th, 1925, as its basis, and would see if it were possible to draw up preliminary drafts for international Conventions. (4) The Financial Committee strongly urge that the future Conference should, while seeking to provide a remedy for tax evasion and double taxation, take into consideration the disadvantage of placing any obstacles in the way of the international circulation of capital, which is one of the conditions of public prosperity and world economic reconstruction. (5) Subject to this observation, the Financial Committee are in agreement with the general lines of the ideas set out by the experts in their resolutions of February 7th, 1925.
(4107)
2-
RESOLUTIONS OF THE COUNCIL OF THE LEAGUE OF NATIONS.
I. March rith, 1925:

The Council authorises the Secretary-General and the Financial Committee, if the latter think fit, to invite certain Governments to appoint experts with a view to holding a conference of experts on double taxation and tax evasion. II. June I1th, 1925: The Council notes the great progress made in the examination of the problems of double taxation and tax evasion. It has received the report and the resolutions of the technical experts, which were published in March 1925 at the suggestion of the Financial Committee. It notes that the Financial Committee are in agreement with the principal conclusions of this document anOd that they support the recommendation made to summon a conference of technical experts on a wider basis. On these latter points, the Council confirms its previous decision given on March 14th, 1925, and instructs the Secretary-General to issue the necessary invitations on its behalf.
(41081)
REPORT ON DOUBLE TAXATION

Submitted to the Financial Committee by Professors BRUINS. EINAUDI, SELIGMAN and Sir Josiah STAMP (E. F. S. 73. F. g) 2/$0.50
MEMORANDUM ON BALANCE OF PAYMENTS AND FOREIGN TRADE BALANCES

1910-1923
Vol. I gives balances of international payments during the year 1922 for 13 countries with explanations on the methods used in compiling the estimates and notes on capital movements, trade balances, visible and invisible trade, etc. It contains also summarised tables of trade (by quantity and value) for post-war years up to the end of 1923 compared with 1913 for about 40 countries, together with trade tables of values calculated at 1913 prices (absolute and percentage figures) for 24 countries and percentage tables of trade by countries. Vol. II gives detailed trade tables of 42 countries for the years 1910-1922, distinguishing merchandise, gold bullion and specie and silver bullion and specie; also tables for 19r2, 1913 and post-war years, by principal articles and by country, and tables by months for r921 and 1922. The volume contains notes on the manner of compiling trade statistics in 33 countries. Vol.
Vol. I . . . 2/6 12/$0.50 $3.00
II . . .
MEMORANDUM ON CURRENCY
New Edition
1913-1923
Giving statistics for about .50 countries up to the end of 1923, of note circulation, gold reserves, deposits, discount rates, clearings, prices, etc., together with an introduction reviewing the currency history of the year 1923 and notes on the currency systems and recent legislation in different countries. This volume also contains complete notes with reference to the manner in which all the important existing index numbers of wholesale prices have been compiled. 10/$ 2.50
MEMORANDUM ON CENTRAL BANKS

1913 and 1918-1923
Being a r6sum6 and analysis of the balance sheets of the central banks in 37 countries, containing a general introduction concerning their legal status and post-war development and detailed notes explaining the balance sheets. 10/$ 2.50
(4109)
AUTHORISED AGENTS FOR THE PUBLICATIONS OF THE LEAGUE OF NATIONS

ARGENTINE Libretta . El Ateneo., CalicFlorida 371, BuNOS AmiOs. AUSTRALIA Australasian Publishing AUSTRIA and GERMANY Rikola Verlag A. G.,I1, Co., Ltd.,229, Clarence Street HUNGARY Ferdinand Pfeifer (Zeidler Bros.), Kossuth LaloS Utca 7 SZ. BUDAPEST,IV, KBn. INDIA Oxford University Pes, BOMBAY,MADRAS and CALCUTTA% ITALY Librerla Fratelli Boca, Via Marco Minglhetti, 23-29. ROB. JAPAN Maruzen Co., Ltd. (Maruzen-Kabushikli-Kastla), 81-IS Nlhonbashl Tori-Sanchome, TOKIc. MEXICO Pedro Robredo, Moxico. Avenidas dn Argentina y Goatemaia,
Radetzkyplatz, 5,VIENNA.
BELGIUM Agencc Dechenne, Messagerles de Ia Presse, S. A., t8-20, run du Peroll, BRUSSOLS. BOLIVIA Fiores, San RomanyCia., Librerla -Renacimiento,,LA PAz. BRAZIL Llvrarla F. Drigulet &CIGa.,28,Rua Sachet, Rio DE AINlnio. BULGARIA Librairle FranCalse et Etrangtre, S. & J.Carasso, B-d. "Tsar Osvoboditei" No 4a,SOFA,. CANADA WilliamTyrrell & Co., Ltd., 78,Yonse Street, TORONTO. CHILE Alexander R. Walker, Abumada 357, SANTIAGODE COILE. COSTA RICA Librerta Viuda de Lines, SAN JOS D COSTA RICA. OUBA Rambla Bouza y Cia., HAVANA. CZECHOSLOVAK IA Librairie F. Topic, ii Narodol, PnAoUs. DENMARK V. Pins Boghandel-Pov] Branoer. 13,Nlrregade, Corn. ECUADOR Victor Janer,GUAY"AQUIL. FINLAND AkademskaBokhandeln, 7,Alexaodersgatan, HSLIInOtoS. FRANCE Inoprimerie It Libralrie Berger-Levralt, 186, Boulevard Saint-Oermain, PARIS (vi,). GREAT BRITAIN, DOMINIONS and COLONIES Constable & Co.,Ltd.,t0 4 it,Orange Street, LONDON, W.C. 2. GREECE Eleftheroudakis o Barth,Ilternational Library, Place do IaConstitution, ATuai S. GUATEMALA J. Humberto Ayrntao, Librerta Cervants, toa, Calls Orlente, No. 5. OAUTSMA1A. HAWAII Pan-Pacific Union, HONOLULU. HONDURAS Llbrerla Viuda de Lines, SAN lo0s DR COSTA RIoA.
NETHERLANDS Martinus NiJhoff, BoekhandelaarUltgever, Lange oorhout 9, TOe HAous. NICARAGUA Librerla Viuda
de Lines, SAN JOS D COSTA RimC.
NORWAY Olaf Norli, Universitetagaten 24, OSLO(Christiania). PANAMA Librerla 1. Preclado It CIa., Lda., Apartado de Correo 7t, PANAMA. PERU Alberto Uiioa, Apartado de Correo i28, LIBA. POLAND Oebetbmer & Wolff, ullca Slenklewicza 9 (Zgoda I), WARSAW. ROUMANIA -Cartes Romneasct - 3-5, Boul. Academie, BUOCA IST. SAAR BASIN Librairle Marguet, 74, Bablhfstrause, SA,,nnncx. SALVADOR Librerla Mata y Centel], SAN SALVADOR. KINGDOM OF THE SERBS, CROATS AND SLOVENES Librairie Franaise, Henri Soubre, tI, Knez Mihajilova ulica, BELGRADE. SPAIN Centro Editorial -Minerva-, TudescosS9-41, MDRID, E. It. SWEDEN C. E. Friltze, Hotbokbandel, Fredegatan 2, STOCIROLM. SWITZERLAND Librarie Payot & Cis, GINTA,. MIONTREUX,NEUCHATEL, B BENZ. LAuMANNS, VRVXY,
UNITED STATES World Peace Foundaton, 4O, Mt.Vernon Street, BOSTON, 8. MASS. URUGUAY Libreln Maximino Garcia, Call Sarandl 461, MONTVIDEO. VENEZUELA Luis Nieves, Oeste 8, No. 17, CA,.OCA.
For other countries, apply:
Publication Sales Department, League of Nations, Geneva (Swiqerland).

(Calafogsw sut on applicatiow.)
(4110)
C. 216. M. 85. 1927. II.
LEAGUE OF NATIONS
DOUBLE TAXATION
AND
TAX EVASION
REPORT
PRESENTED BY THE
Committee of Technical Experts on Double Taxation and Tax Evasion
GENEVA, 1927.
1/8 $0.30.
(4111)
OTHER PUBLICATIONS ON DOUBLE TAXATION AND TAX EVASION
DOUBLE TAXATION
REPORT AND
AND TAX
EVASION
RESOLUTIONS submitted by the Technical Experts to the Financial Committee of the League
of Nations (F. 212).
Price :1/6 $0.40
REPORT ON
DOUBLE TAXATION
Submitted to the Financial Committee by Professors BRuiNs, EINAUDI, SaLios&N and Sir-Josiah STAMP. (E.F.S.73.F.19). Price : 2/- $0.50
MEMORANDUM ON DOUBLE TAXATION

By Sir Basil P. BLACKETT, K.C.B., C.B.,
and Note on the Effect of Double Taxation upon the Piacing of Investments AbroadPrepared for and circulated'by Sir Basil P. BLACKETT,. K.C.B., C.B. (E.F.S.16.A.16.1921). Price :4/- $0.80
A certain number of roneoed documents at 6d ($0.10) each. For list giving the titles apply to Publications Sales Department.of the League of Nations, Geneva (Swltzerland)
(4113)
[Distributed to the Council and to the Members of the League.]
C. 216. M. 85. 1927. II.

Geneva, April 1927.
LEAGUE OF NATIONS
DOUBLE TAXATION
AND
TAX EVASION
REPORT
PRESENTED BY THE
Committee of Technical Experts on Double Taxation
and Tax Evasion
Publications of the League of Nations
i1. ECONOMIC AND FINANCIAL 1927, I!. 40.
(4115)
CONTENTS
Page
Covering Letter ............ TAX I.

EVASION:
...............................
DOUBLE TAXATION AND
4 5 1o
12
REPORT OF THE COMMITTEE OF TECHNICAL EXPERTS ON
Introduction ."...........
.............
Convention for the Prevention of Double Taxation A. Text of the Convention ....... .................. B. Commentary ........ ....................... Convention for the Prevention of Double Taxation in the special matter of Succession Duties : A. Text of the Convention ....... .................. B. Commentary ...... ....................... .... Convention on Administrative Assistance in Matters of Taxation : A. Text of the Convention .... .................. B. Commentary ......... ....................... Convention on Judicial Assistance in the Collection of Taxes A. Text of the Convention ..... .................. B. Commentary ......... ....................... Proposals regarding Future Organisation ...... ................ ....
II.
.9
20
III.
22 23
IV.
...
26
27
V.
31
8.d.N. 20 (F.) 10 (A) (pro.) +
1.225 (F.) 1.025 (A.) 5/27. imp. do Jounal do G noo.
(4117)
LETTER ADDRESSED BY THE CHAIRMAN OF THE COMMITTEE OF TECHNICAL EXPERTS ON DOUBLE TAXATION AND TAX EVASION TO THE CHAIRMAN OF THE FINANCIAL COMMITTEE
London, April
12th, T927.
The Committee on Double Taxation and Tax Evasion had been instructed to prepare
draft conventions based on the resolutions adopted by the technical experts in February 1925 with a view to the avoidance of double taxation and the prevention of tax evasion. In pursuance of these instructions, the four annexed draft Conventions have been drawn up, and I have now the honour to submit them to the Financial Committee ot the League of Nations. The Committee on Double Taxation and Tax Evasion is fully conscious that the work which it has just concluded is imperfect in that it does not provide solutions for all the difficulties which may arise in this very complex question. But, having regard to the diversity of the legislative systems represented in the Committee, and the necessity for finding formule capable of acceptance by everyone, it will be recognised that the experts were bound to confine themselves to indicating general rules, leaving particular points of difficulty to be dealt with - in the spirit of the accepted general principles -by those on whom the task ot negotiating the bilateral conventions will ultimately fall. I The Committee on Double Taxation and Tax Evasion accordingly considers that it should not delay presenting its conclusions, and that the results which it has obtained can be utilised forthwith by Governments desirous of concluding conventions in the near future. It is in the light of these considerations that the Committee on Double Taxation and Tax Evasion has drawn up the annexed report, which it has the honour to submit herewith to the Financial Committee. (Signed) Pasquale d'AROMA.
(4118)
REPORT PRESENTED TO THE FINANCIAL COMMITTEE OF THE LEAGUE OF NATIONS BYTHE COMMITTEE OFTECHNICAI EXPERTS ON DOUBLE TAXATION AND TAX EVASION
London, April I2th, 1927. INTRODUCTION. In presenting its general and final report, the Committee of technical Experts on Double Taxation and Tax Evasion thinks it desirable briefly to recall the development of the League of Nations work in this matter. The International Financial Conference held at Brussels in 192o recommended that the League of Nations should take up the question of double taxation 1. The Financial Committee, to which the question was referred, towards the end of 192o entrusted the theoretical study of Double Taxation to four economists, M. BRUINS, M. EINAUDI, M. SELIGMAN and Sir Josiah STAMP, whose report (document F. i9) was published in March 1923. Meanwhile, the International Economic Conference, which had met at Genoa in April 1922, recommended that the League of Nations should also examine the problem of the flight ol capital '. In June 1922, the Financial Committee decided to have both questions, namely, double taxation and tax evasion, studied from an administrative and practical point of view. It entrusted this work to a group of high officials of the fiscal administrations of various countries, namely M. CLAVIER, M. BAUDOIN-BUGET (subsequently replaced by M. BORDUGE), Sir Percy THOMPSON (temporarily replaced by Mr. G. B. CANNY), Professor Pasquale d'AROMA, Dr. SINNINGHE DAMSTt, M. BLAU and Dr. VALNICEK. Notwithstanding the great difficulties of the question, these experts, after holding several meetings, agreed upon a series of Resolutions which they submitted, together with a general report, to the Financial Committee in February 1925 (document F. 212). The Financial Committee, in its report dated June 1925, expressed its agreement with the main lines of the experts' Resolutions, but urged the importance, in any future enquiries, of taking into consideration "the disadvantage of placing any obstacles in the way of the international circulation of capital, which is one of the conditions of public prosperity and world economic reconstruction".
1 Recommendations of the Brussels Conference. Resolution proposed by the Commission on International Credits, No. 2: "Apart from the above-mentioned proposals . . . the Conference believes that the activities of the League of Nations might usefully be directed towards promoting certain reforms and collecting the relevant information required to facilitate credit operations. In this connection the Conference considers it well to draw attention to the advantages of making progress under each of the following heads. . . . An international understanding which, while ensuring the due payment by everyone of his full share of taxation, would avoid the imposition of double taxation which is at present an obstacle to the placing of investments abroad."
I Recommendations of the Genoa Conlerence. Resolution proposed by the Financial Commission, No. 13: "We have considered what action, if any, could be taken to prevent the flight of capital in order to avoid taxation, and we are of the opinion that any proposals to interfere with the freedom of the market for exchange ; or to violate the secrecy of bankers' relations with their customers are to be condemned. Subject to this proviso, we are of the opinion that the question of measures for international co-operation to prevent tax evasion might be usefully studied in connection with the problem of double taxation which is now being studied by a Committee of experts on behalf of the League of Nations. We therefore suggest that the League of Nations should be invited to consider it."
(4119)
As regards the future progress of their work, the experts suggested, in their report dated February 1925, that the Committee should be enlarged, and that it should be requested to prepare preliminary draft conventions on the basis of the Resolutions of 1925. This recommendation was supported by the Financial Committee and approved by the Council, which authorised the Secretary-General to issue the necessary invitations. Consequently the following Committee was constituted : .4rgentine : Dr. Salvador ORIA, late Secretary of State in the Ministry of Finance, Member of the Board of the National Mortgage Bank. Replaced at the third session by M. Julian ENcIso, Councillor of Legation, Geneva. Belgium M. Ch. CLAVIER, Director-General of Direct Taxation and Land Survey in the Ministry of Finance. Czechoslovakia : Dr. Vladimir VALNICEK, Chief of Section in the Ministry of Finance. Replaced at the third session by H.E. Dr. Bohumil VLASAK, Minister Plenipotentiary, Head of Department in the Ministry of Finance. France M. BORDUGE, Councillor of State, Director-General of Taxation'and Registration, Ministry of Finance. Germany Dr. Herbert DORN, Director in the Ministry of Finance. Great Britain Sir Percy THOMPSON, Deputy Chairman, Board of Inland Revenue. Italy Professor Pasquale d'AROMA, Vice-Governor of the Bank of Italy, late Director-General in the Ministry of Finance. Assistant : Dr. Gino BOLAFFI, Head of Section in the Ministry of Finance, Department of Direct Taxation. Japan Mr. Kengo MORI, Financial Commissioner of Japan in London. Replaced by Mr. Takashi AoKi, Representative in London of the Bank of Japan. Assistant : M. YAMAJI, Japanese Delegation to the Reparation Commission.
Netherlands Dr. J. H. R. SINNINGHE DAMSTP, Director-General of Taxation.
For Colonial questions : Dr. L. J. VAN DER WAALS, Director in the Colonial Department. Poland Professor Stefan ZALESKI, Professor of Political Economy at the University at Posen. Assistant (for questions of succession duties): M. Edouard WERNER, Head of Department, Ministry of Finance. Switzerland M. Hans BLAU, Director of the Federal Taxation Department. United States ot Professor Thomas S. ADAMS, President of the American Economic AssociaAmerica tion, former Economic. Adviser to the U.S.A. Treasury Department, Professor at Yale University. Assistants : Mr. Mitchell B. CARROLL, Chief of Tax Section, Department of Commerce; Miss Annabel MATTHEWS, Attorney, attached to the Board of Inland Revenue, Treasury Department. Venezuela : Dr. Federico Alvarez FEO, Professor of Finance at the University of Caracas. It should be mentioned here that, although the members of the Committee are nominated by their respective Governments, they only speak in their capacity as experts, i.e., in their own name.
(4120)
The Committee has suffered a great loss by the sudden death in December 1926 of Dr. Vladimir VALNICEK, who had served on the technical expert committee since its formation in 1923. The members of the Committee desire to take this opportunity of paying a tribute
to their colleague and friend, who, owing to his- wide experience, afforded the most valuable assistance to the Committee. The Committee has held three sessions First Session - Geneva, May I 7 th to 22nd, 1926. Second Session - Geneva, January 5th to 12th, 1927. Third Session -- London, April 5th to 12th, 1927. With the authorisation of the Council of the League of Nations, the International Chamber of Commerce was invited to send a delegation to assist in an advisory capacity at the experts' meetings. The delegation consisted of : President of the Comptoir d'Escompte of Geneva, Chairman M. Robert JULLiARD, of the Double Taxation Committee of the International Chamber of Commerce. At the first session only : Senior Partner in Messrs. Price, Waterhouse & Co., New Mr. George 0. MAy, York, Chartered Accountants, member of the Double Taxation Committee of the National American Committee of the International Chamber of Commerce. At the second and third sessions : Doctor of Law, member of the Double Taxation Committee M. Jean DUCHENOIS, of the International Chamber of Commerce.
At the third session : Sir Algernon FIRTH, Bart.,
Ex-President of the Association of British Chambers of Commerce, member for Great Britain on the Double Taxation Committee of the International Chamber of Commerce, Chairman of the Committee on Double Taxation of the British National Committee of the International Chamber of Commerce.
The experts thank the delegation of the International Chamber of Commerce, whose presence at their discussions on double taxation was of much value; they greatly appreciate the spirit of wholehearted co-operation displayed by the delegation and are grateful for the valuable assistance given. The Advisory and Technical Committee for Communications and Transit having expressed the desire to explain its views with regard to measures for avoiding double taxation in connection with maritime and inland navigation companies, the Committee of Experts, at its first session, heard the following delegates :
M. SUGIMURA,
M. CLEMINSON,
M. PALANCA, M. WEINBRENNER,
Chairman of the Advisory and Technical Committee for Communications and Transit; Director of the Chamber of Shipping of the United Kingdom; Manager of the Navigazione Generale Italiana ; and Financial Manager of the Danube Navigation Company.
The experts much appreciated the valuable assistance given by these representatives of large organisations, particularly well qualified to examine the very special and complex questions which arise in connection with the taxation of navigation companies.
73095 0-62-vol. 4-
(4121)
- 8As already stated, the new Committee of technical Experts was asked to consider whether it would be possible to draw up preliminary draft conventions on the basis of the February 1925 Resolutions. At its first session, the Committee began its work by reviewing the Resolutions proposed in February 1925, and examined these in detail. It appeared that the Resolutions as a whole met with general approval, including also the approval of those experts who had not taken part in the previous work. Such changes of text as seemed desirable related to points of detail only, and were, moreover, unanimously approved. Further, the Committee endeavoured to prepare draft conventions on the basis of these Resolutions. It was considered expedient to divide up the subject-matter into four separate conventions. The question of double taxation has to be treated in two conventions (a) Draft Convention for the Prevention of Double Taxation. (b) Draft Convention for the Prevention of Double Taxation in the special matter of Succession Duties. The question of tax evasion has also to be dealt with in two conventions (c) Draft Convention on Administrative Assistance in Matters of Taxation, (d) Draft Convention on Judicial Assistance in the Collection of Taxes. A question discussed at great length by the Committee was, whether the Conventions should be collective, that is, signed by as many States as possible, or whether they should be merely bilateral. It would certainly be desirable that the States should conclude collective conventions, or even a single convention embodying all the others. Nevertheless, the Committee did not feel justified in recommending the adoption of this course. In the matter of double taxation in particular, the fiscal systems of the various countries are so fundamefitally different that it seems at present practically impossible to draft a collective convention, unless it were worded in such general terms as to be of no pradtical value. In the matter of tax evasion also, although unanimity would not seem to be unattainable, there is no doubt that the accession of all countries to a single Convention could only be obtained as the result ot prolonged and delicate negotiations, while there is no reason to delay the putting into force of bilateral conventions which would immediately satisfy the legitimate interests of the tax-payers as well as those of the Contracting States. For this reason, the Committee preferred to draw up standard bilateral conventions. If these texts are used by Governments in concluding such conventions, a certain measure of uniformity will be introduced in international fiscal law and, at a later stage of the evolution of that law, a system oi general conventions may be established which will make possible the unification and codification of the rules previously laid down. Such are the four draft bilateral Conventions which the experts have the honour to submit to the Financial Committee. Detailed commentaries on them will be found in the following pages, as well as in the Report (document F. 212) attached to the text of the Resolutions adopted in February 1925. This report contains important considerations on the basic principles which have guided the Committee in its work. The Committee would, nevertheless, briefly recall the circumstances in which it has undertaken and carried out its work. It was fully aware of the difficulties inherent in the twofold problem submitted to it, as well as of those which may arise when the bilateral conventions come to be concluded. It felt compelled to make every effort to overcome these difficulties, in view of the importance of the results it is hoped to attain. Double taxation, which affects mainly undertakings and persons who exercise their trade or profession in several countries, or derive their income from countries other than the one in which they reside, imposes on such taxpayers burdens which, in many cases, seem truly excessive, if not intolerable. It tends to paralyse their activity and to discourage initiative
(4122)
-9-and thus constitutes a serious obstacle to the development of international relations and world production. At the same time, any excessive taxation, by its very burden, brings in its train tax evasion, the nature and grave consequences of which have been emphasised on earlier occasions; the suppression of double taxation is therefore closely connected with the measures for the systematic prevention or checking of such evasion. It is for this twofold purpose that efforts will have tO be made to secure international cooperation, with a view to making it possible to put a stop to an evil which has become especially acute owing to the increase in the fiscal -burdens consequent upon the war; the measures advocated by the'experts could not fail to bring about a reduction in, and a better distriblition of, such burdens. A word of explanation should be added in regard to the methods used. The Committee endeavoured to reach complete agreement on all essential points. In view of the diversity of fiscal systems, of the different economic interests and the divergent conceptions, both in regard to theory and to practice, obtaining in the various countries, unanimous agreement could not lke reached in regard to all the questions which had to be dealt with. Points on which complete understanding could not be arrived at have been left for negotiation and decision to any States when, in the future, they seek to conclude bilateral treaties. The Committee has striven earnestly to restrict to the utmost possible extent the number of questions thus left open. In order to arrive at practical results with the least possible delay and at the same time not to exceed its instructions, the Committee refrained from examining in detail several co-related questions of international law, such as the doctrine of reciprocity, the treatment of foreign nationals, and the principle of the most-favoured nation, in their relation to the problem of double taxation. The Committee is of opinion, however, that these problems should be submitted to a detailed examination from the financial, economic and legal points of view. It considers, moreover, that the fiscal laws throughout the world will undergo a gradual evolution and that this will, in the future, make it possible to simplify the measures it has recommended and possibly even to unify fiscal legislation. In order to make systematic and continuous international co-operation possible in this field, the Committee suggests that a body should be set up under the auspices of the League of Nations ; the powers and duties of this body will be explained in detail in the final part of the present Report.
(4123)
10 -
I.
DRAFT OF A BILATERAL CONVENTION FOR THE PREVENTION OF DOUBLE TAXATION.
A.
TEXT OF THE CONVENTION.
Article 1. The present Convention is designed to avoid double taxation in the sphere of direct impersonal or personal taxes, in the case of the taxpayers of the Contracting Parties, whether nationals or otherwise. For the purposes of this Convention the following shall be regarded as impersonal taxes (a) ..... .............. (b) ...... .............. (c) .. ........ ........ . For the purposes of this Convention, the following shall be regarded as personal taxes: (a) ...... .............. (MI ...... ......... ..... (c) ..... .............. I. Impersonal Taxes.
Article 2. The income from immovable property, i.e., that which corresponds to the actual or presumed rental value of such property, as well as any other income from such property which,is not covered by Article 5, shall be taxable in the State in which the property in question is situated. This rule shall apply to income from mortgages or other similar claims Article 3. Income from public funds, bonds, including mortgage bonds, loans and deposits or current accounts, shall be taxable in the State in which the debtors of such income are at the time resident. Nevertheless, if such income is paid in one of the Contracting States to persons domiciled in the other Contracting State, the tax applicable thereto shall be refunded upon production of proper evidence. In such case the said income may be taxed in the State of domicile of the creditor. Article 4. Income from shares or similar interests shall be taxable in the State in which the real centre of management of the undertaking is situated. Article 5. Income from any industrial, commercial or agricultural undertaking and from any other trades or professions shall be taxable in the State in which the persons controlling the undertaking or engaged in the trade or profession possess permanent establishments.
(4124)
II
The real centres of management, affiliated companies, branches, factories, agencies, warehouses, offices, depots, shall be regarded as permanent establishments. The fact that an undertaking has business dealings with a foreign country through a bona/lde agent of independent status (broker, commission agent, etc.), shall not be held to mean that the undertaking in question has a permanent establishment in that country. Should the undeitaking possess permanent establishments in both Contracting States, each of the two States shall tax the portion of the income produced in its territory. In the absence of accounts showing this income separately and in proper form, the competent administrations of the two Contracting States shall come to an arrangement as to the rules for apportionment. Nevertheless, income from maritime shipping concerns shall be taxable only in the State in which the real centre of management is situated. Article 6. The fees of managers and directors of joint-stock companies shall be taxable in accordance with the rule laid down in Article 4. Article 7. Salaries, wages or other remuneration of any kind shall be taxable in the State in which the recipients carry on their employment. Salaries of officials and public employees who are serving abroad shall, however, be taxable in the State which pays these salaries. Article 8. Public or private pensions shall be taxable in the State of the debtor of such income. Article 9. Annuities or income from other claims not referred to in the previous paragraphs shall be taxable in the State of fiscal domicile of the creditor ot such income. II. Personal Taxes. Article io.
The personal tax on the total income shall be levied by the State in which the taxpayer has his fiscal domicile, i.e.', his'normal residence, the term "residence" being understood to mean a permanent home. If the State of domicile does not impose impersonal taxes on its taxpayers domiciled therein, it shall deduct from its personal tax the lesser of the two following amounts : (a) Either the amount of the tax which would be levied exclusively on such part of the income as is taxed in the other Contracting State, or (b) The amount of the tax paid in the said State, including the personal tax when for special reasons the State of origin has imposed such a tax on income from immovable property or from industrial, commercial or agricultural undertakings situated within its territory. These deductions shall not in total exceed x per cent of the total personal tax leviable in the State of domicile. When the State of domicile imposes impersonal taxes, the deductions provided for above shall not include impersonal taxes which correspond or relate to income taxed in the other Contracting State.
(4125)
12 -
Article
ii.
In the case of taxpayers who possess a fiscal domicile in both Contracting States, the personal tax shall be imposed in each of these States in proportion to the period of stay duririg the fiscal year, or according to a division to be determined by agreement between the competent administrations. III. Miscellaneous Provisions.
Article 12.
The principles laid down in the preceding articles shall be applicable mutatis mutandis, to the recurrent taxes on total wealth, capital, or increments of total wealth, according as these taxes are impersonal or personal. Article 13. As regards any special provisions which may be necessary to enable the present Convention to be applied, more particularly in cases not expressly provided for, the financial administrations of the two Contracting States shall confer together and take the measures required in accordance with the spirit of this Convention. Article 14. Should a dispute arise between the Contracting States as to the interpretation or application of the provisions of the present Convention, and should such dispute not be settled either directly between the States or by the employment of any other means of reaching agreement, the dispute may be submitted, with a view to an amicable settlement, to such technical body as the Council of the League of Nations may appoint for this purpose. This body will give an advisory opinion after hearing the parties and arranging a meeting between them if necessary. The Contracting States may agree, prior to the opening of such procedure, to regard the advisory opinion given by the said body as final. In the absence of such an agreement, the opinion shall not be binding upon the Contracting States unless it is accepted by both, and they shall be free, after resort to such procedure or in lieu thereof, to have recourse to any arbitral or judicial procedure which they may select, including reference to the Permanent Court of International justice as regards any matters which are within the competence of that Court under its Statute. Neither the opening of the procedure before the body referred to above nor the opinion which it delivers shall in any case involve the suspension of the measures complained of ; the same rule shall apply in the event of proceedings being taken before the Permanent Court of International Justice, unless the Court decides otherwise under Article 41 of its Statute.
B.
COMMENTARY.
The explanations given in the introduction to this report and in document F. 212 of February 1925, indicate the essential principles by which the Committee was guided in framing the draft Convention on Double Taxation ; the experts think, therefore, that it will be sufficient if, in the tollowing pages, they merely comment on each article of the draft. Article i. This article defines the purpose of the present Convention ; it is designed to avoid double taxation in the sphere of direct taxes in the case of the taxpayers of the contracting Parties.
(4126)
13 -
The tendency of modem fiscal law is to consider that all persons domiciled in a State should be liable to the same taxation therein whatever their nationality may be. This is why Article i of the draft speaks of all taxpayers, whether nationals or otherwise. Supposing, for instance, that two States A and B have concluded a convention on these lines, the nationals of a third State C which had not concluded a similar agreement will nevertheless be entitled to the benefits of the treaty, if they are taxpayers of States A and B, either because they have their fiscal domicile in these States or derive income from them. If, for economic reasons, or with a view to inducing certain States to conclude similar conventions, the contracting parties deem it preferable provisionally to limit the scope of the Convention to their own nationals, they need only delete in the text of Article r the words "whether nationals or otherwise". They may, on the other hand, extend its application to the nationals of States with which they have concluded such conventions.
After stating the general purpose of the Convention, Article i defines its scope : it governs direct impersonal or personal taxes. Desirous of avoiding any controversy on matters of doctrine, the experts have not defined the two great categories of direct taxes. They merely note, by way of indication, that impersonal taxes are in most cases levied on all kinds of income at the source, irrespective of the personal circumstances of the taxpayer (nationality, domicile, civil status, family responsibilities, etc.) thus differing from personal taxes which rather concern individuals and their aggregate income. The Contracting States will themselves decide which of their direct taxes they regard, for the purposes of the Convention, as being impersonal or personal taxes. Similar forms of taxation levied on behalf of subordinate public bodies (provinces, cantons or departments, municipalities, etc.) may be included in the list, if circumstances justify such a measure. The assignment of individual taxes to the two categories of direct taxes mentioned above is particularly important, as the draft lays down different provisions as regards each of these categories. I. Article 2. Article 2 emb9dies a generally accepted principle : that income from immovable property, i.e., the income which corresponds to the actual or presumed rental value, as well as every other form ot income Irom immovable property not covered by Article 5, shall be taxable in the State in which the property in question is situated. The above principle applies, irrespective of the nature of the right or fact (property, usufruct, possession, lease in perpetuity etc.), from which the taxable income is derived. The term "other income from such property" is only intended to cover income which is not derived from industrial, commercial or agricultural undertakings, mentioned in Article 5 of the draft. The second paragraph of Article 2 lays down that the rule set forth in the first paragraph shall apply to income from mortgages and other similar claims. This provision is intended to apply to income from mortgages or other similar claims, whether it is deducted from the income derived from the immovable property or not. If the deduction referred to is not made, special measures will have to be taken in order to prevent the State of domicile from having to grant excessive relief. Impersonal Taxes.
(4127)
14
Article 3. This clause deals with income derived from investments in transferable securities other than shares. It lays down that income from public .funds, bonds, including mortgage-bonds, loans, and deposits or current accounts shall be taxable in the State in which the debtors of such income are.at the time resident. By " public funds" is meant the securities issued by the State or by other public bodies (provinces or departments, cantons, municipalities, other public establishments, etc.). The bonds considered are those of non-commercial (soci#tds civiles) or commercial companies, even if secured by mortgages. As regards loans, deposits, or current accounts, these terms are here useal with their legal or customary meaning; as a rule, this clause will only be applied to income from noncommercial loans, deposits or current accounts. Interest on professional accounts opened for business purposes by traders or persons engaged in industry is, in fact, included under profits of business undertakings, which are covered by Article 5. As regards interest on deposits or current accounts, the debtor is the establishment or branch which pays this interest. The second paragraph of Article 3 provides for an exception to the rule laid down in the first paragraph : if the income referred to in. this clause "is paid in one of the contracting States to persons domiciled 'in the other contracting State, the tax applicable thereto shall be refunded upon production of proper evidence. In such case, the said inc1fne may be taxed in the State of.domicile of the creditor." This is a special clause to be discussed between the contracting States. The refunding of the tax by the State of the debtor will generally depend upon economic or budgetary conditions ; the levying of the tax by the State of the creditor will in some cases, however, be justified by reasons of equity, but will not be compulsory. Such refund may be limited to certain forms of income and made contingent upon the -application of the deduction provided for under Article io. Where necessary, measures will have to be taken to prevent fraud by means of affidavits or other documents signed by or on behalf of the persons entitled to the income. In this connection, reference should be made to the draft Convention on Administrative Assistance. Article 4. Income from shares or similar interests is the subject of Article 4 of the draft ; under the pruvisions of this article, it is taxable in the State in which the real centre of management of the undertaking, that is to say the management and control of the business, is situated, so that the case of a purely nominal centre of management is excluded. This clause will have to be supplemented if it is agreed that the system of refunds contemplated in the second paragraph of Article 3 shall apply also to dividends. Here, again, the determining factors will be economic or budgetary considerations, or even political circumstances. In regard to this article, the British expert has expressed dissent. In his view, a second. mandatary paragraph ought to be added to Article 4, identical with the second paragraph of Article 3. The principle of taxing business profits in the State in which they are earned has been conceded in Article 5, and provision has been made in Article iofor a deduction of the tax so charged from the personal tax in the State of domicile. In the view of the British expert it is unreasonable that the financial burden of granting relief from double taxation in respect of the additional tax on dividends should also fall on the State of domicile.
(4128)
15 -
Article 5. This clause has reference to income from any industrial, commercial or agricultural undertakings, and from any other trades or professions ; it is to be taxable in the countries in which the persons controlling the undertakings or engaged in the trade or profession, possess permanent establishments. The word "undertakings" must be understood in its widest sense, so as to cover all undertakings, including mines and oilfields, without making any distinction between natural and legal persons. The second paragraph gives a list of the establishments which are considered as permanent they are: real centres of management, affiliated companies, branches, factories, agencies, warehouses, offices, depots, no matter whether such establishments are used by the traders themselves, by their partners, attorneys, or their other permanent representatives. Nevertheless, the iact that an undertaking has business dealings with a foreign country through a bona fide agent of independent status (broker, commission agent, etc.) shall not be held to mean that the undertaking in question has a permanent establishment in that country. The words "bona fide agent of independent status" are intended to imply absolute independence, both from the legal and economic point of view. The agent's remuneration must not be below what would be regarded as a normal remuneration. The Committee has not expressed an opinion on the point- whether purchasing offices or sales offices are to be considered as places of business, this being a question of fact. Paragraphs 2 and 3 of this clause govern the case in which the undertaking possesses permanent establishments in both contracting States ; in that event, "each of the two States shall tax the portion of the income produced in its territory". This is an application of the so-called system of apportioning the income according to its source. "In the absence of accounts showing this income separately and in proper form, the competent administrations of the two contracting States shall come to an arrangement as to the rules for apportionment." These rules will vary essentially according to the undertakings concerned; in certain States account is taken, according to the nature of the undertakings, of the amount of capital involved, of the number of workers, the wages paid, receipts, etc. Similarly, in cases where the products of factories are sold abroad, a distinction is often made between "manufacturing" and "merchanting" profits, the latter being the difference between the price in the home market and the sale price abroad, less cost of transport. These criteria are, of course, merely given as indications. The last paragraph of Article 5 contains an express exception to the principle laid down in the first paragraph : it provides thai income from maritime shipping concerns shall be taxable only in the State in which the real centre ot management is situated. This paragraph may, according to circumstances, be deleted or its provisions limited. They. may also be extended to cover river, lake or air navigation. Should the last paragraph of Article 5 be omitted, the rules for apportionment laid down in that article would remain applicable. Article 6. This article provides that the fees of managers and directors of joint stock companies shall be taxable in accordance with the rule laid down in Article 4, that is, in the State in which the real centre of management of the undertaking is situated. This, provision is designed to cover the special tax on variable fees, which are deducted from profits and hence constitute a part of the latter. Fixed salaries, on the contrary, come within the category of general expenditure and are governed by the following article.
(4129)
06 -
Article 7.
Salaries, wages and other remuneration of any kind (with the exception of the fees mentioned in Article 6) shall be taxable in the State in which the recipients carry on their employment. The income is actually produced in that State and the tax can easily be levied at the source. Nevertheless, special clauses may be inserted to meet the case of persons working in the vicinity of the frontier or engaged in any.itinerant occupation, employment 6 r trade. The second paragraph of Article 7 lays down that salaries of officials and public employees who are serving abroad shall be taxable in the State which pays these salaries. The fiscal regime for diplomatic or consular agents is, however, at present the object of special studies which are.being carried on in conjunction with the Committee of Jurists for the Progressive Codification of International Law. Article 8. This article provides that public or private pensions shall be taxable in the State of the debtor of such income. It appeared both right and practical that all pensions should be made subject to the same rules. A rticle 9. Contrary to the above-mentioned provisions, annuities or income from other claims not referred to in the previous paragraphs shall be taxable in the State of fiscal domicile of the creditor of such income. The exception which is thus made for annuities is justified by the special nature of this form of income, since the recipient is free to select the country which is to be liable for the payment. II. Article io. Under the terms of this article, the personal tax on total income is to be levied by the State in which the taxpayer has his fiscal domicile, i.e., his normal residence, the term "residence" being understood to mean a permanent home. This provision is of double import : it specifies .the place at which the personal or general tax shall be levied and, further, gives a definition of fiscal domicile in terms which were discussed at great length aud are those accepted by the majority of the existing codes of law. The words "permanent home" convey the idea of an establishment intended to last for some time. Even a person who stays at an hotel for several months may be considered as normally residing there. Moreover, a State is always free to tax any of its own nationals who would not be taxed becanse they are continually moving about. Article io provides for a modification of the rnle which it lays down. In order to avoid double taxation, the State of domicile, if it does not levy impersonal taxes on persons resident therein, will make a deduction from its personal tax with regard to the income taxed in the country of origin. But what should be the amount of such deduction ? It is to be limited to the lesser of the two following amounts, i.e. : (a) The amount of the tax which would be paid in the State of domicile exclusively on such part of the income as is liable to taxation in the State of origin; or (b) The amount of the tax paid in the State of origin. Persbnal Taxes.
(4130)
17 -
decides Where, for special reasons, whether economic or fiscal, one of the contracting States income from to impose, in addition to its impersonal taxes, a personalor supplementary tax on produced immovable property and from industrial, commercial or agricultural undertakings only to not within the country, the reduction provided for under (b) above shall apply additional to the impersonal taxes paid. in the country of origin on such income, but also to. personal tax paid there under this head, subject to the limitation already referred amount total the of I cent per x exceed total in not may deductions two the Moreover, of the personal tax levied in the country of domicile. from This restriction is designed to prevent a taxpayer whose whole income is derived abroad from escaping all taxation in his country of domicile. The following example will explain the application of the system of deductions advocated 20,000 by the experts: A taxpayer domiciled in State A draws a total income of ioo,ooo francs, of which are derived from an industrial or commercial undertaking situated in State B, which, under this head, levies an impersonal tax of 3,000 francs and a personal tax of I,ooo francs, i.e., a total of 4,000 francs. the total The tax in State A, which does not levy impersonal taxes, will be calculated on 20,000 francs, but of the income (for instance, at the rate of 2o per cent), i.e., ioo,ooo X 20
ioo
above, so that the fiscal authorities will deduct therefrom the sum of 4,000 francs mentioned
the tax will be reduced to 20,000 -
on If, however, in the State of domicile the personal tax only amounts to 3,000 francs to be reduced an income of 20,000 francs, 3,000 francs will be deducted and the tax will then that its
20,000 -
4,000 = 16,ooo francs.
nationals engage in business in other States. The relief provided for above will be granted in particular in cases in which the State. of domicile only levies a general income tax. If this general tax is of a purely complemenor at any tary nature, and is additional to impersonal taxes, there will be no need for relief, io lays rate such relief will have to be limited. For this reason, the last paragraph of Article under for down that, if the State of domicile levies impersonal taxes, the deductions provided to (a) or (b) in Article io shall not include the impersonal taxes corresponding or relating the income taxed in the State of origin. The experts have further contemplated another method of avoiding double taxation. The tax in the State of domicile of the taxpayer would be calculated at the rate applicable is to the whole of his income, but it would only be levied on that part of his income which its ot taxable in that country, that is to say, exclusive of the income taxed in the country origin. Thus a taxpayer domiciled in State A drawing a total income of ioo,ooo francs, 20,000 in of which is derived from immovable property situated in State B, would only be taxed State A on 8o,ooo francs, but at the rate applicable to ioo,ooo francs.
Article ii.
the fact 3,000 = 17,000 francs. A State will thus not suffer loss owing to
This article is designed to cover a special case, namely, that of taxpayers with a fiscal domicile in both contracting States. In this case, the tax will be imposed in each of these States in proportion to the period of stay during the fiscal year, or according to a division tQ be determined by agreement between the competent administrations, for instance, in proportion to the amount of income produced in each country. This clause might, if necessary, be applied to taxpayers who change their domicile during the fiscal year. I The percentage is to be determined by the contracting parties.
(4131)
I8 -
III. Miscellaneous Provisions. Article 12. Article 12 provides that the principles laid down in the preceding articles shall be applicable, mutatis mutandis, to the recurrent taxes on total wealth, capital or increments of total wealth, according as these taxes are impersonal or personal. Succession duties form the subject of a separate Convention. As regards taxes of an exceptional nature, special agreements may have to be concluded, having due regard to the nature of these taxes. This provision of Article 12 is, moreover, not compulsory, inasmuch as countries which conclude a convention will have the option of omitting this article.
Article 13.
Any special provisions which may be necessary to enable the Convention to be applied more particularly to cases not expressly provided for shall be settled by agreement between the financial administrations of the contracting States in accordance with the spirit of the Convention. Article 13 is designed to give effect to this principle.
Article 14.
There still remained to determine the procedure which should be followed in the event of a dispute as to the interpretation or application of the Convention ; this procedure is laid down in Article 14, which is based upon the text inserted in other international conventions, .in particular the Convention for the Simplification of Customs Formalities signed at Geneva on November 3rd, 1923. It seemed advisable, however, to state that the contracting States will have the option of accepting the opinion of the advisory body fn advance.
One more observation : The draft Convention applies more particularly to countries which levy impersonal taxes and also a personal or general tax ; but the articles proposed could also be made to serve in the event of the simultaneous existence of a general tax in the country of domicile and schedular taxes in the country of origin ; moreover, these articles could be abridged if the fiscal systems of the two contracting States were sufficiently similar to one another.
(4132)
19 -
II.
DRAFT BILATERAL CONVENTION FOR THE PREVENTION OF DOUBLE TAXATION IN THE SPECIAL MATTER OF SUCCESSION DUTIES. A.
TEXT OF THE CONVENTION.
Article i.
The purpose of the present Convention is to prevent taxpayers of the Contracting States from being subjected to double taxation in the matter of succession duties. For the purpose o1 this Convention, the following shall be regarded as succession duties (a) . . . . . . . . . . . . . .
(b)
(c)
. ..
. .
. . .
. .
. . . . . Article 2.
. .
Succession duties shall be levied by the country of domicile of the deceased, that is to say, by the country in which the deceased, at the time of his death, had taken up his residence with the manifest intention of remaining there. These duties may be levied on the total of the property left by the deceased, including property situated in another country, but, where necessary, the deductions provided for in Article 4 shall be effected and only the difference shall be collected. In the absence of a domicile as defined in the preceding paragraph, the country of which the deceased was a national shall be considered his country of domicile. Article 3. If the deceased was domiciled in one of the Contracting States and leaves property in the other Contracting State, the latter State may levy succession duties on such property, but only at the rate applicable to their value, exclusive of the other assets situated in any other State. Article 4. In order to obviate the double taxation which would result from the simultaneous application of the two preceding articles, the country in which the deceased was domiciled shall allow the lesser of the two following amounts to be deducted in respect of the categories of property specified below : (a) The actual amount of duty levied by the country of domicile on assets situated in another country; (b) The actual amount of duty payable on such assets in the country in which the assets are situated. The categories of property referred to above are the following (a) Immovable property, furniture and fittings; (b) Mortgages; (c) Capital invested in industrial, commercial or agricultural undertakings, exclusive of shares;
(d)
. . . . . . . . . . . . . .
and any other form of property which is or may subsequently be taxed by the two countries simultaneously in the country in which it is situated. Article 5. Debts chargeable to or secured on specific property shall be deducted from the value of that property.
(4133)
20 -
Other debts shall be divided among specified classes of assets in accordance with special agreements to be concluded between the Contracting Parties. A rlicle 6. Should a dispute arise between the Contracting States as to the interpretation or application of the provisions of the present Convention, and should such dispute not be settled either directly between the States or by the employment of any other means of reaching agreement, the dispute may be submitted, with a view to an amicable settlement, to such technical body as the Council of the League of Nations may appoint for this purpose. This body will give an advisory opinion after hearing the parties and arranging a meeting between them if necessary. The Contracting States may agree, prior to the opening of such procedure, to regard the advisory opinion given by the said body as final. In the absence of such an agreement, the opinion shall not be binding upon the Contracting States unless it is accepted by both, and they shall be free, after resort to such procedure or in lieu thereof, to hav6 recourse to any arbitral or judicial procedure which they may select, including reference to the Permanent Court of International Justice as regards any matters which are within the competence of that Court under its Statute. Neither the opening of the procedure before the body referred to above nor the opinion which it delivers shall in any case involve the suspension of the measures complained of; the same nile shall apply in the event o proceedings being taken before the Permanent Court of International Justice, unless the Court decides otherwise under Article 41 of its Statute.
B.
COMMENTARY.
The problem of devising suitable methods of avoiding double taxation in the matter of death duties is as difficult as the corresponding problem in relation to income tax. Here, again, double taxation arises from the fact that both the domicile of the deceased and the situation of his assets constitute grounds upon which States are in the habit of levying a duty on the occasion of death. Article r. Article i defines the object of the Convention and makes provision for indicating what taxes are to be regarded as succession duties in each of the contracting States for the purpose of the Convention. The laws of the various States, indeed, provide for various kinds of succession duties. There are, for instance, succession duties levied on the whole of the estate without taking into account the number and degree of relationship of the heirs, succession duties levied on the shares of the heirs, duties on transfer of property. Article 2. Article 2 sets forth the principle that it is the State in which the deceased was domiciled which may assess for taxation the whole of the estate of may be situated but subject to certain deductions which defines the term "domicile" and it will be observed definition of domicile adopted for the purpose of personal the deceased, regardless of where it are provided by Article 4. It also that the definition differs from the taxes on income.
(4134)
-2
It is clear that the conception of domicile appropriate to a duty which is levied once and for all on the occasion of death must imply a greater degree of permanence than the conception on which an annual tax such as the income tax is based. It is unlikely that any State would claim the right to levy a death duty on the whole property of a deceased person on the ground that, at the time of his death, he was temporarily resident within its borders, if his permanent home and true economic allegiance lay elsewhere. But when it is sought to define the precise character and degree of permanence of the residence which should exist in order to justify a claim to tax on the ground ot domicile, wide divergencies of view are found to exist in the different legal systems of the various countries of the world. In these circumstances, it has not been found possible to do more than frame a definition which seems to command the greatest common measure of agreement in the various codes of law. It is hoped that the conception of domicile which the Committee has adopted will command a wide measure of acceptance among the various States. If so, the conclusion of bilateral agreements, and possibly general agreements for the avoidance of double death duties, will be greatly facilitated, and in its absence it is difficult to see how satisfactory arrangements could be made to attain the object in view. Article 3. Article 3 states the principle that the State in which assets belonging to a deceased person are situated, whatever may be the domicile of the deceased, may levy a duty on such assets. Of course, it in no way limits the right of the State to determine according to its own law what assets must be regarded as situated within its jurisdiction. Article 4. Article 4 contains a provision which will avoid double taxation in the case of those classes of assets regarding the situation of which there is a common conception in both the Contracting States. The Committee has earnestly endeavoured to reach an agreement on this very difficult matter. There were some differences of opinion, but a measure of agreement has been arrived at on the clauses which the Committee has the honour to submit herewith. The measures which have been unanimously recommended will solve the difficulty of double death duties in regard to some very important categories of assets and, as regards the remainder, it is to be hoped that a mutual appreciation of the advantages which accrue from the elimination of double taxation in the sphere in which the Committee has been able to agree will lead States to concert reciprocal measures for extending the remedy into spheres in which varying legal conceptions at present constitute too serious a difficulty. In order to prevent misapprehension, it is desirable to explain that the term "mortgages" used in this article does not include mortgage bonds. Article 5. Article 5 deals with the question of debts. It provides that debts which are secured on or relate to specific assets shall be deducted from the value of the assets. As regards other debts, the Contracting States are left to make such detailed administrative arrangements as may suit their particular circumstances. It is intended that normally the term "debts" shall include "legacies". Article 6." This article is identical with the last article in the draft Convention relating to Taxes on Income and is intended to serve a similar purpose.
(4135)
22 -
Ill.
DRAFT OF A BILATERAL CONVENTION ON ADMINISTRATIVE ASSISTANCE IN MATTERS OF TAXATION.

A. TEXT OF THE CONVENTION.
Article I. With a view to obtaining a better apportionment of fiscal burdens in the interest both of Governments and taxpayers, the Contracting States undertake, subject to reciprocity, to give each other administrative assistance in regard to all matters required for the purpose of tax assessment. Such assistance may consist in (a) The exchange of fiscal information available in either of the contracting countries. The exchange will take place following a request concerning concrete cases, or, without any special request, for the classes of particulars defined in Article 2 ; (b) Co-operation between the administrative authorities in carrying out certain measures of procedure. Article 2. The exchange of information as contemplated in paragraph (a) of Article I shall relate to natural or juristic persons taxable in one of the two contracting countries. The particulars given shall include the names, surnames and domicile or residence of the persons concerned, and their family responsibilities, if any, and shall have reference to I (x) Immovable property (capital value or income, rights in rem, charges by way of mortgage or otherwise); (2) Mortgages or other similar claims (description of the -mortgaged property, amount and rate of interest) ; (3) Industrial, commercial or agricultural undertakings (actual or conventional profits, business turnover, or other factors on which taxation is based) (4) Earned income and directors' fees; (5) Transferable securities, claims, deposits and current accounts (capital value and income) ; any information collected by an administration, more especially in connection with exemption or relief granted by that authority by reason of the taxpayer's domicile or nationality; (6) Successions (names and addresses of deceased and heirs, date of death, estate, shares of heirs and other bases of the tax). Artick 3. In no case shall the effect of applying the provisions of the preceding articles be to impose upon either of the Contracting States the obligation of supplying particulars which its own fiscal legislation does not enable it to procure, or of carrying out administrative measures at variance with its own regulations or practice. The following list may be curtailed or added to, according to circumstances.
(4136)
23 -
Article 4. The State to which application is made may refuse to carry out such application if it considers that it is contrary to public policy. Article 5. The appropriate administrative authorities shall be empowered to communicate with each other direct for the purpose of giving effect to the provisions of the present Convention. Article 6. Administrative assistance shall be given without payment, subject to the refund of any exceptional expenditure (investigations, expert opinions, etc.) which may be incurred in special cases. Article 7. The administrations' shall from time to time communicate to each other statements regarding their powers of investigation and control in fiscal matters and their administrative procedures. Article 8. The highest authorities of the financial administrations of the two States shall concert measures to implement the present Convention.
B.
COMMENTARY.
From the very outset, the Committee realised the necessity of dealing with the questions of tax evasion, and double taxation in co-ordination with each other. It is highly desirable that States should come to an agreement with a view to ensuring that a taxpayer shall not be taxed on the same income by a number of different countries, and it seems equally desirable that such international co-operation should prevent certain incomes from escaping taxation altogether. The most elementary and undisputed principles. of fiscal justice, therefore, required that the experts should devise a scheme whereby all incomes would be taxed once, and once only. The Committee realised, however, that it must avoid the risk of the draft Convention appearing in some quarters as an extension beyond national frontiers of an organised system of fiscal inquisition. The employment of technical methods to deal with fraud in matters of taxation is no doubt wholly to be recommended, both for the good of the communities reaping the benefit of such taxation and in the interests of the taxpayers themselves, since any fraud which goes unpunished leads to an unfair distribution of the burden of public expenditure and to the payment by one set of persons of sums properly due by others. In the first place, the Committee desires to observe that, where relief is sought by a taxpayer in pursuance of arrangements made between two countries for the avoidance of double income tax, it is clearly necessary that the country granting this relief should have full information in regard to the assessment and the amount of tax paid in the other country, and provision to this effect has generally been made in the conventions which have hitherto been concluded. Knowing by experience, however, how thankless and difficult is the task of preventing fraud in each country separately, the experts were anxious that their scheme should in no case present the appearance of an organised plan of attack on the taxpayer. In preparing the attached draft Convention, the Committee has sought to obviate any misunderstanding by framing the provisions dealing with tax evasion in the form of a scheme
73095 0-62-vol. 4-
10
(4137)
24 --
of administrative assistance. Arrangements for such assistance are already in force between several countries in respect of certain classes of income, and may without difficulty be extended, subject to the conditions referred to in Report F. 212, 1925, and within the limits laid down in the draft Convention. Furthermore, as will be explained later, such assistance is a corollary of the general principles which have been adopted for the avoidance of double taxation. Article i. We may now consider how, in the view of the experts, such a scheme of assistance should work in practice. First of all it must be reciprocal, that is to say, States will be bound to afford each other assistance only under identical conditions ; in other words, subject to any provisions to the contrary, a country will only be entitled to demand information of a kind which it is itself in a position to supply. Such assistance may work in two ways, according as it takes the form of co-operation between administrative departments, which will undertake, on each'other's behalf, enquiries, verifications and expert valuations as required for the assessment of the various taxes ; or as it consists in the exchange of information, which will be either supplied on request in specific cases or furnished as a matter of regular routine in connection with certain subjects which will be specified in the conventions to be concluded. Article 2. With respect to the supply of information, Article 2 of the draft Convention lays down general rules which Governments are advised to follow. The provisions governing immovable property, industrial, commercial or agricultural undertakings and earned income raise no serious difficulties, and some of them have already been embodied in conventions concluded between various countries. This also applies to successions, for the Government departments in the different countries already possess the requisite information and certain of these departments already exchange information regularly. A more difficult question arises in the case of transferable securities, which the Committee discussed at length in its report of February 7th, 1925. The difficulty is due, first, to the fact that the means at the disposal of Governments do not afford as effective a check in this case as in that of other taxable wealth ; and secondly, to the fact that every attempt to improve the methods of ascertaining the capital value of and the income derived from movable property, in particular from bearer securities and current accounts, produces a serious and complicated train of consequences when such measures are applied within the national boundaries, and that these effects would be greatly intensified if any attempt were made to carry investigations across the frontiers. There seems, however, to be no objection to inserting a clause in the Convention to the effect that a country which, in the normal course of its fiscal administration, obtains possession of information in regard to transferable securities, claims, deposits and current accounts, should impart, on a reciprocal basis, that information to a foreign State which is interested in the matter from the point of view of the equitable distribution of taxation. In some cases, e.g., in cases where relief is sought, the assistance which it may be possible for the relieving State to afford may be considerable. For instance, taxpayers may apply to a given country, on grounds of domicile, for exemption or abatement as regards certain taxes on stocks and shares. In that case, it must be admitted that the preferential treatment claimed by such psrsons cannot, in all fairness, be extended to them unless their circumstances really entitle them to such treatment ; since, moreover, they are applying for relief in respect of taxes levied in one country, on the ground that they are already taxed on that same income by another country, it is only natural that the latter should be informed that certain of its
(4138)
25 -
citizens have advanced the plea of domicile, and- that it should be enabled to verify that they are duly taxed. In such cases, the taxpayer can always obtain the application of ordinary law ; by his action in seeking to benefit by the exemption which has been provided in order to avoid double taxation, he agrees to abide by the consequences of his choice, and cannot object to the accuracy of his statement being subsequently checked. Articles 3 and 4. These articles limit the right to administrative assistance in such a way as to ensure that no country shall be committed to undertake enquiries or proceedings at variance with its own laws or practice. Articles 5 to 8. Articles 5 to 8 deal solely with measures of execution.
The above are the considerations by which the Committee has been guided in framing the draft Convention on Administrative Assistance. While fully recognising the difficulties of this delicate subject and the necessity of making such amendments to the text as may be necessary to allow for special circumstances, the Committee, viewing *the matter solely from the angle of practical administration, is of the opinion that the clauses it has drafted and adopted are calculated to ensure a more equitable distribution of fiscal burdens. In conclusion, the Committee would again point out that the adoption of its recommendations could not, in an circumstances, hamper the free circulation of wealth or the working of economic laws ; on the contrary, the putting into force of these provisions should make it possible to prevent the course-of trade and the movement of capital from being influenced by fiscal considerations arising out of the diversity of laws on the subject. The agreements to be concluded in regard to administrative assistance should, however, secure the accession of the majority of the States, as. was pointed out by the experts in their Report F. 212 of February 1925. The Committee desires, therefoie, once again to lay special stress on the importance of this part of its resolutions.
(4139)
26 -
IV.
DRAFT BILATERAL
CONVENTION ON JUDICIAL COLLECTION OF TAXES.
ASSISTANCE IN THE
A.
TEXT.OFTHE CONVENTION.
Article I. The Contracting States undertake to give each other mutual assistance in the collection of the following taxes I : (a) . . . . . . . . . . . . . . (b) . . . . . . . . . . . . . . . . (c) . . . . . . . . . . . . Article 2. The assistance in question shall apply both to the principal of the tax and to charges incidental thereto (costs, interest) 1. Article 3. Assistance shall only apply to fiscal debts which are res judicat,e, apart from the case provided for in Article ii. Article 4. The recovery of fiscal debts, as provided in the previous articles, shall be effected at the request of the creditor Government (State making the application) addressed to the State having jurisdiction over the person or the property of the debtor (State to which application is made). Article 5. The request ot the State making the application shall be issued by the highest authority of its financial administration or by an authority designated under the agreement contemplated in Article 12, and shall be accompanied by an order of execution (titre exlcutoire) certified by that authority. It must be addressed directly to the corresponding authority of the State to which application is made. The authority of the State making the application shall further certify that the liability in question is res judicata. Article 6. The State making the application shall furnish a translation of the documents transmitted in the language oi the State to which application is made. I The Contracting States shall decide in agreement with one another whether the Convention is applicable to State taxes only or to provincial, communal and other taxes also. 2 Penalties of a fiscal nature, etc., may also be inserted. 3 May be deleted or modified according to circumstances.
(4140)
.-
;27
Article 7. The State to which application is made shall comply as soon as possible with the request addressed to it. Nevertheless, it may refuse to do so if it considers that it is unable to comply with this request for reasons of public policy. In such case it shall inform the State making the application as soon as possible.
Article 8 1.
Prosecutions and other measures of execution shall be carried out without exequatur. Article 9. The fiscal debt which forms the subject of the request shall be collected in accordance with the laws of the State to which application is made, but this does not oblige the latter State to employ a means of execution which is not provided for by the laws of the State making the application. Nevertheless, at the request of the State making the application, the State to which application is made may, if it thinks fit, adopt a special form of procedure, even if not provided for by its laws, subject to the condition that such procedure is not contrary to its laws.
Article To.
The taxes which it is sought to collect shall not be regarded as privileged debts in the State to which application is made.
Article ii.
If a fiscal debt is still liable to be appealed against, the State making the. application may request the State to which application is made to take conservatory measures, to which the above provisions shall be applicable mutatis mutandis. Article
12.
The highest authorities of the financial administrations of the two States shall concert measures to implement the present Convention. In particular, they may, by agreement, draw up rules for the disposal of the sums collected, for the determination of an average rate of exchange for the conversion of these sums and for the expenses of collection.
B.
COMMENTARY.
In the introduction to its report, the Committee explained the reasons why, in regard to the collection of taxes also, it preferred the form of a simple bilateral Convent ion. Article i. The taxes which it is desired to collect will be enumerated, so that no doubt will exist as to the scope of the Convention. Moreover, this method enabiles States to include in the Convention, if they deem it desirable, all kinds of taxes in addition to direct taxes. The question whether the Convention will also apply to provincial or communal taxes and to taxes levied by other public bodies is left tor decision to the contracting Parties. As it was not considered essential to extend the Convention in this direction, the Committee thought it best only to
1 May be deleted or modified according to circumstances.
(4141)
28 -
mention these taxes in a footnote. As regards the "centimes additionnels", it is well known that, by their very nature and in accordance with generally recognised principles, these are collected with the principal tax, and there is no need for any special rule in regard to them. Article 2. The word "collection" is used in a fairly wide sense in this Convention. It is intended to cover riot only*the actual measures of execution but also preliminary measures, such as the serving of the documents of execution, etc. On the other hand, it would seem necessary to state definitely whether the Convention is to extend to incidental charges, such as costs of execution, interest on arrears, etc. It will be for the States concerned to decide, in agreement with one an ther, how far it is necessary to enumerate these incidental charges and also to consider the question, referred to in a footnote, of fiscal penalties, which are provided for in many codes of law. Article 3. Article 3 corresponds to Rule 3 in the 1925 Resolutions (document F. 212, page 35), the grounds for which will readily be understood. It would hardly be desirable to invite a foreign administration to take measures to collect a debt which was still liable to be cancelled on appeal. As regards temporary measures, this article gives a reference to Article ii. Article 4. Article 4. defines the nature of the assistance in question. This will be granted by the State in which the debtor is living or in which his property is situated. It should be noted that the jurisdiction of the State is the true criterion and that the nationality of the debtor is not to be considered. In taking this view, the Committee had in mind the principle stated in document F. 212 (page 35, Rule i) which lays down that the State must also afford assistance in respect of taxes due from'persons other than nationals of the State making the application. This rule, which has already been adopted in 'regard to double taxation, is fully in accord with the principle of international solidarity, by which the ex'perts have constantly been guided. In their separate treaties, however, the States will be free to introduce exceptions to this rule, when this may be necessary in order to avoid running counter to public opinion in their own countries, as might be the case, for instance, where the measures in question would have to be taken against the nationals of the State to which application is made. The terms "State making the application" and. "State to which application is made" were used with a .viewto simplifying the drafting of the subsequent articles. Article 5. Although the principle of mutual assistance is fully recognised, it is equally certain that this principle should only be applied subject to certain safeguards. There is always a possibility of administrative errors, and if these occurred in an international question of this kind they might give rise to serious and awkward situations. It is. necessary, therefore, to take all possible precautions, and in particular to require that. the highest authority in each of the fiscal administrations, or another administrative authority designated by common consent in accordance with Article 12,. is to take the necessary measures, in order to ensure as far as possible that the documents produced shall be correct and that the administration collecting the debt shall take proper action. As regards the second paragraph, Article 3 should, be referred to.
(4142)
29 -
Article 6. This article is based on the same principle as Article 5. It may happen that the State to which application is made, in order to comply with a request for execution, will require a translation of the documents sent to it. As, however, this necessity will not arise in every State, the Committee thought it best to point out in a footnote that the provision could be omitted or modified. Article 7. The fundamental principle of the assistance to be granted having already been stated in Articles i and 4, the first sentence of Article 7 is merely intended to indicate the necessity for prompt assistance. The need for despatch is mentioned again in the last sentence, which, together with the second, provides for the possibility ota refusal on grounds ot public policy. Reasons of this kind are sometimes present and induce the fiscal authorities to exercise a certain indulgence. As the State making the application cannot possibly foresee, or even be aware of, all the more general corsequences to which its request may give rise, the State to which application is made must have the right to refrain from measures which would prejudice its vital interests. The State making the application must, however, he immediately informed of the fact so that it may be able, if circumstances admit, to choose another method ot procedure. Article 8. This article, which is of a subsidiary character, emphasizes the principle, already set forth in Article 5,of direct communication between the fiscal authorities of the two countries concerned, without the need for using diplomatic or judicial channels. In some States, however, the laws would not allow a request put forward in accordance with Article 5 to be complied with unless accompanied by a writ of execution issued by a judicial authority. In order to meet this special case, the footnote indicates that the article may require to be modified. Article o. This article explains the system by which the fiscal debt will be recovered. This system - which will be found in Rule i, page 35, of document F. 212 -- provides that, in principle, the means of execution employed will be those provided for in the State to which application is made, and this for two reasons. In the first place, the enforcement of a foreign law would at once involve the revenue officials in difficulties and would hence become a source of inconvenience, vexation and complaint for both parties. In the next place, public opinion would object to the taking of measures foreign to the laws of the State to which application is made. Imagine, for example, the position ot a State which has never known the practice of imprisonment for debt and which, under the terms of a treaty, is nevertheless forced to lock up someone (perhaps one of its own nationals) who has not paid his taxes abroad and persists in saying that all his property has disappeared. Care must also be taken to respect the scruples which the public in the State making the application may feel on account of differences in the measures taken to execute judgments. It would certainly offend public opinion if the State to which application is made were to adopt methods of constraint alien to the laws of the creditor State. The people of Morania would say : "Why does Imeria imprison a fellow-countryman of ours who, if hc had remained in our territory, would merely have had his property seized ?" In view of these considerations, the Committee proposes a rule based to some extent on the highest common factor, i.e., that no means of execution should be employed unless it is included in the laws of both States concerned. It is clear, of course, that this restriction only
(4143)
30 -
applies to means of execution in the general sense ; the details must in all cases be governed by the laws of the State to which application is made. The system thus laid down in the first paragraph of Article 9 is only subject to a very slight exception, which is explained in the second paragraph, and may be considered from two points of view. It is possible,on the one hand, that the two States in question have several modes of procedure at their disposal;which are common to them both ; in such cases the State' making the application may, in making its request for assistance, specify the procedure which, having regard to the object, it deems the most appropriate. On the'other hand, it may happen that the State making the application may attach some importance to formalities of execution which, although not employed in the State applied to, are not incompatible with its laws. For example, in the State to which application is made notification may be valid if it has been served at the domicile of the debtor, whereas the laws of the State making the application require that notification should be served on the debtor in person. In such a case the State making the application may express the desire that the latter procedure should be followed in serving the notification. The State to which application is made is free to accede to this request or to refuse it. The request might be refused on the grounds that the laws of the State to which application is made explicitly prohibit the measure asked for (not a very likely reason in the example chosen), or that it would be too difficult to serve the notification in the manner indicated. Article IO. This article simply expresses the idea already contained in Rule 2 of document F. 212 (page 35). The granting of a preferential position to foreign taxes would at once give rise to legal difficulties ; moreover, it would in many cases be a cause of loss both to public and to private creditors, and would therefore inevitably render the execution of judgments under the Convention an unpopular measure. A rticle i r. The rule laid down in Article 3, though framed in the interests of moderation, might nevertheless 'have the effect of enabling the debtor to evade the claims made upon him. It is therefore desirable that the creditor State should be able, through the State to which application is made, to have recourse to conservatory measures, which would be carried out in accordance with the laws of the State to which application was made. Article 12. In view of the diversity of the different systems of law and the more or less general character of the above provisions, it will be necessary to draw up regulations for the application of the Convention. In the Committee's opinion, it would be best that these rules should not be laid down in the Conventions themselves. They are of too special a nature, and, moreover, the fact.that they were embodied in a convention might delay the introduction of changes which circumstances or experience had shown to be necessary. Accordingly, the Committee proposes that the highest fiscal authorities should be left free to agree upon the practical measures necessary to implement the Convention. In order to make this intention clear, a second sentence giving a few examples has been added to Article 12.
(4144)
31
V.
PROPOSALS REGARDING FUTURE ORGANISATION.
The task of the Committee of technical Experts is now concluded with the submission of the draft Conventions which it was asked to prepare. The Committee desires, nevertheless, to add a few observations on the necessity of creating a permanent organisation for the future. The completion of these draft Conventions by no means solves the problems of double taxation and administrative and judicial assistance, nor would even the approval of the Conventions by a general Conference have that result. The preliminary work done and the texts which have been established are only the first step. Clearly, the value of these texts will depend upon the extent to which the Governments take them as a basis when negotiating bilateral conventions. A list will be found below of measures likely to promote the conclusion of conventions of this kind. Furthermore, the model Conventions must be revised and supplemented at regular intervals in order to keep pace with the changes which may take place in the fiscal systems, and to embody such alterations as experience alone can suggest. In addition to conventions, a number of other international measures would be useful in order to eliminate double taxation and to secure a more equitable distribution of fiscal burdens. It would be well, for example, to draw up a procedure of conciliation and arbitration, to which reference was made in the Technical Experts' Report of February 1925 (document F. 212, page 30) ; to draw up model rules for the apportionment of taxation applicable to the profits or capital of undertakings working in several countries ; to standardise the fiscal clauses in commercial treaties; and, lastly, to give advice when required to administrations engaged in preparing fiscal reforms. For these reasons the Committee suggests that a standing committee on taxation questions should be set up as a part of the League organisation. This committee should be composed of a limited number of members selected for their individual technical qualifications ; it would meet once or twice a year, or more often as circumstances might dictate. Its chief task would be to hasten the solution of the problems of double taxation and admi.nistrative and judicial assistance. The committee might, in particular, give its attention to the following points : (i) Periodical investigations and reports on the general situation in regard to these problems ; (2) The preparation of model bilateral conventions or collective conventions and revised texts thereof; (3) The preparation of any other international measures calculated to eliminate double taxation and to secure a more equitable distribution of fiscal burdens; (4) Comparison of fiscal systems; (5) Preparation of general conferences, should such be contemplated. Such a committee, if established, might also be of service to the Council as an advisory committee on taxation questions, even apart from the problems of double taxation and administrative and judicial assistance. The results of the work just mentioned might be embodied in a series of publications issued under the direction of the committee. We give below explanations regarding these. publications, and these explanations at the same time will indicate the guiding principles on which the committee's work should be based. These publications might be as follows :
(4145)
32 -
(a) Annual Collection of Conventions on Double Taxation and Administrative and Judicial Assistance The conclusion of bilateral conventions would be made easier if all the fiscal administrations throughout the world had access to the texts of the conventions already concluded. They would then be able to take advantage of the work done abroad and to keep abreast of the progress made in this matter in other countries. The publication of these texts would have the further effect of strengthening the tendency towards uniformity in future conventions. With this object, it would be well to publish an annual collection of the original texts of the treaties and, if necessary, of the French and English translations. The first volume might contain all the treaties, agreements, conventions, exchanges of notes and other international engagements now in force, and each annual volume thereafter might include all the
international engagements signed during the previous year.
A yearbook of this kind could be published with very little trouble or expense.
It will
be remembered that the Legal Section of the Secretariat of the League already publishes a Treaty Series containing, in the original language or languages and in French and English, the texts of all international engagements registered with the Secretariat. Thus engagements concerning double taxation.have to be translated in any case. If the volumes of the special collection of conventions relating to double taxation were produced in the same form as the general Treaty Series, the same type might be used for both, and this would considerably reduce printing costs. The publication of a special series of double taxation conventions would not mean any duplication of the general series. The latter is very voluminous ; it did not begin to be published until 192o, but it already consists of 50 volumes, containing 1,218 treaties and other international engagements. Of all these, about 2o conventions or groups of conventions deal with double taxation and administrative and judicial assistance. Furthermore, treaties are not published in the general series until they have been registered with the Secretariat, and cannot be presented for registration until they have been officially ratified. On account of the considerable period which sometimes elapses between signature and ratification, and again between ratification and presentation for registration, the Secretariat is frequently unable to publish conventions in the general series for a considerable time after signature. In the special collection, conventions on double taxation and administrative and judicial assistance could be published immediately after signature, i.e., in the course of the following year. These conventions become of interest to taxation experts as soon as they are signed, and continue to be of interest, even in the unusual event of their failing subsequently, owing to considerations of home or foreign policy, to be ratified.
(b)
Memoranda on Existing Systems of Taxation.
For any administration wishing to negotiate with the administration of another country a bilateral convention for the prevention of double taxation, it is essential to have an accurate and detailed knowledge of the taxation system of that country. It would be most useful, with this object, for the fiscal administrations of all countries to draw up surveys of their fiscal systems on uniform lines. These surveys - which would illustrate the similarities and differences of the fiscal burdens in different countries, excluding purely formal differences, as of terminology - would lighten to a considerable extent the work of any negotiators who might be called upon to bring the various fiscal systems into harmony. In.this connection, the Committee of Experts recalls the fact that Article IX of the
(4146)
-- 33 Recommendations of the Brussels Financial Conference' advocated a series of analogous publications. This article has so far never been fully applied, owing to the frequent changes which have occurred since the war in the fiscal legislations of many States. At the present time a certain stability seems to have been achieved, and the moment appears to have arrived when the task which was first proposed in 1920 might be begun. The surveys drawn up by the administrations of the different countries might be published under the direction of the committee, which would need to produce a questionnaire or detailed scheme in order to have them framed on uniform lines. The committee should be empowered to suggest to the authors of the surveys any additions or alterations it might think desirable. (c) Annual Report.
Once a year the committee might draw up a report on the progress made during the year with regard to double taxation and administrative and judicial assistance. Attention might be drawn in this report to the special characteristics of the conventions concluded during the past year and any new principles they might contain, to the signature or ratification of collective conventions and to the characteristics of the evolution of the principal fiscal systems. The report might perhaps be published as an introduction to the annual collection of conventions. Lastly, it would be useful to publish a halt-yearly bulletin in which the administrations of the various countries would announce any changes in their legislation or procedure. This bulletin might also contain a bibliography of the books and publications appearing with regard to double taxation, administrative and judicial assistance and comparative fiscal law.
Article IX of the Recommendations of the Brussels Financial Conference reads as follows "IX. In order to enlist public interest, it is essential to give the greatest publicity possible to the situation of the public finances of each State. "The Conference is therefore of the opinion that the work already accomplished by the Secretariat in its comparative study of public finances should be continued, and it suggests that the Council of the League of Nations should request all its Members and all the nations represented at this Conference to furnish it regularly not only with budget estimates and final budget figures but also with a half-yearly account of actual receipts and expenditure. At
the same time, countries should be urged to supply as complete information as is possible on
the existing system of taxation, and any suggestions which may appear to each State to be useful for the financial education of the public opinion of the world. "With the aid of the information thus obtained, the League of Nations would be enabled to prepare pamphlets for periodical publication petting out the comparative financial position of the countries of the world, and making clear the various systems of taxation in force."
(4147)
DOCUMENTS ISSUED FOR. THE INTERNATIONAL ECONOMIC CONFERENCE

(Geneva, May 1927)
INTERNATIONAL STATISTICAL YEARBOOK ....
MEMORANDUM ON PRODUCTION AND TRADE
........-.......
................
..-..
".........7/6
........ OF
$2.'00"
1/6 $0.40 1/3 $0.30 1/6 $0.40
FINAL REPORT OF THE TRADE BARRIERS COMMITTEE' OF THE INTERNATIONAL CHAMBER COMMERCE (C.E.I.5. (1). 1926.11.62) ................ ......... . ... ...... TARIFF LEVEL INDICES (C.E.1.37.- 1927.11.34) ............... ................
CUSTOMS
NOMENCLATURE AND CUSTOMS CLASSIFICATION.
Nomenclature (Dr. Trendelenburg) (C.E.I. 32. : TARIFF SYSTEMS AND CONTRACTUAL METHODS, by Dr. Serruys, Member of the Economic Committee of the League of Nations and of the Preparatory Committee for the International Economic Conference (C.E.I.31. - 1927.11.26).. 8d $0.15 METHODS OF ECONOMIC RAPPROCHEMENT, by EugAne Grossmann, Professor of -Political Economy at Zurich University. Submitted to the Preparatory Committee for the International Economic Conference (C.E.C.P. 24 (1)) (11.69.1926).. . ....... ,. 1/6 $0.40 ESTIMATES OF TILE WORKING POPULATION OF CERTAIN COUNTRIES in 1931 and 1941, by Professor A. L. Bowley. Submitted to the Preparatory Committee for the International Economic Conference (C.E.C.P. 59 (1).) (11.67.1926) .... . ........ . ...... . / 0.26 CARTELS AND COMBINES, by Dr. Kurt Wiedenfeld, Professor of Economics at the University of Leipzig. Submitted to the Preparatory Committee for the International Economic Conference (C.E.C.P. 57. (1). - 1926.11.70) ............ ............. .... .3. $0:30 SUMMARY MEMORANDUM ON VARIOUS INDUSTRIES (C.E.I.19. - 1927. 11.10) .... . . . ." 1/6 $0.4, SHIPBUILDING (C.E.l.8. - 1927.11.2) ... ..................... ......... 1/6 $0.40
COMMERCIAL TREATIES
Possibility of unifying Customs 1927.11.24) ... ......... 3/-$0.75'
COTTON INDUSTRY (C.E.I.9. CHEMICAL INDUSTRY
1027.II.)
................. . .... .......................... 1927.1l.6): ...................... ......... 16.1927.11.7). ......
....
.. " ...
3/4/6/3/,.4/-
$0.75 $1.00 $1.oO $0.75
(C.E.I. 10. -
1927.11.4)..
MECHANICAL ENOINEERINO. (C.E.I. 15. Volume I ..... . ...... Volume II. ....... ............ ELECTRO-TECHNICAL INDUSTRY. (C.E.1.
.......... "...........
$1..00
MEMORANDUM ON TIlE IRON AND STEEL INDUSTRY.

MEMORANDUM ON THE COAL INDUSTRY.
(C.E.I. 17. - 1927.11.8) . . . . . . ..... "... ..
4/-'S1.00 .. 2/6 $0.60 2/ $0.50
Volume I ..................... Volume II .. . . . ....... .

MEMORANDUM
(CE. 18. -".1927.II.9) .. ....... ....... ........... ..........
ON TILE POTA:SH INDUSTRY (C.E.I. 21. -1927.11.12)......... NATURAL SILK INDUSTRY (C.E.I.24. 7- 1927.1i.15).........
I/- $0.25 .. 1/3 $0.30 ARTIFICIAL SILK INDUSTRY (C.1E..30.1927.11.25)..............."..........2/$0.50 THE LEGISLATION ON CARTELS AND TRUSTS (C.E.I.35. - 1927.IL33): ..... '.......1/6 $0.40 CARTELS AND COMBINES (Dr. K. WIEDENFELD, Leipzig). "(C.E.C.P.57 (1). -:1926.11.70) . 1/3 $0.30 CARTELS AND TRUSTS AND THEIR DEVELOPMENT (C.E.C.P.95. - - 1927.11.21). . ..... .. 1/3 $0.30 ...... .....
For complete catalogue apply Publications Sales Department of- the League of Nations, Geneva (Switzerlan'd)
..
(4148)

ARGENTINE Librerta . El Atenso ", Calls Florida 371, BUrNoS AIRES. AUSTRALIA New South Wales: Angus & Robertson Ltd., 89-95. Castlereagh Steet. SYDNEY. Victoria: Robertson &Mullcas Ltd., 107-113, Elizabeth Street. MELBOURNE. BELGIUM Agenc Dechenne, Messageres de Ia Presse, S.A., x8-20, rue do Persil, Baussas. BOLIVIA Flores, San Romdn y Cia., Librera "Renacinlento".
LA PAZ.
BRAZIL Livraria F. Briguiet & Cia., 23, Rua Sachet, Rio

JANEIRO.
DR
BULGARIA Librairis Franjalse et Etrangtre, a S. & J. Carasso. B-d "Tsar Osvoboditel" No. 4 , SoIA. CANADA League of Nations Society In Canada, 279, Wellington Street, OTTAWA. CHILE Alexander R. Walker, Ahumada 357. SASTIAOO
D CHILE.
HONDURAS Libreria Viuda do Lime, SAMJoss Uz CosTA ia . HUNGARY Ferdinand Pfeifer (Zeidler Bros.), Kosouth LAas. UtCa 7 SZ., BUDAPEST IV, Her. ITALY Libreria Fratelil Bocca, Via Marco Mnghot, 26-4, Roua. JAPAN Marnzen Co., Ltd. (Maruzen-Kabuahlkl-Kaeha), x-10, Nihoubahi Tori-Sanchome, Toxso. LATVIA LatvijasTelegrafkAgentura, Kr. Barona lola 4, Ricia. LUXEMBURG (G.-D.) Librairie J. Heintz6, M. Hagen, successer, Plat Guillaume 8, LtnxaseuaG. MEXICO Pedro Robredo, Avenidas do Argentina y Guatemala, MExicO. NETHERLANDS Martinus Nijhoff, Boekhandelar-Uitgever, Lang Voorhout 9, THE HAGUE. NEW ZEALAND Walter Nash, Fletcher's Buildings, 4, Willis Street,
WELLINGTON.
COLOMBIA Libreria Colombians, P. O. Box x99, BoGOTI. COSTA RICA DR COSTA RIa. Libreria Viuda de Lines, SAN TOS31 CUBA Rambla Bouza y Cia., HAVANA. CZECHOSLOVAKIA Librairie F. Topic,* It Narodni, PoAGmoz DENMARK V. Pics Boghandel - Pov Branner, 13, Nlrregde,
COPENHAGEN.
DUTCH EAST INDIES Algemeene Boekhandel G. KolH & Co., BATAVIAWSLTSVRIoEDN. ECUADOR Victor Janer, GUAVAgU1L. FINLAND Akademiska Bokhandeln, 7, Alexandersgatan, Ha.antroymOs. FRANCE Imprimerie et Librairie Berger-Levrault t36 , Boulevard Saint-Germain, PARIS (VIe). GERMANY Theod. Thomas Komm, Gesch., Talstrasse 13, L pzso. GREAT BRITAIN, NORTHERN IRELAND and the CROWN COLONIES Constable & Co., Ltd., so and rs, Orange Street,
LONDON, W.C.2.
NICARAGUA Librer-a Vinda do Lines.. SAMJose D COSTARIca. NORWAY Olaf Norli, Universitetagaten 24, OsLo. PANAMA Libreria I. Preciado y Cia., Lda., Apartado do Co' e 71, PANAMA. PERU Alberto Ulloa, Apartado do Corres 128, Loss., POLAND Gebethner & Wolff, ulica Sienklewitca 9 (Zgoda xS), WARSAW, PORTUGAL J. Rodrigues & Ca., Rua Aurea 186-i88, laseoN. ROUMANIA "Carted Ronalnesa ", 3-5, BouL Acaderniel BUCHAREST. SAAR BASIN Librahde Parisienne, Maison Marguet, M. Golbert. Successor, 4. Friedrich Wilbelmstrasse, SA.RERUC. SALVADOR Librerfa Mats y Centeil, SAN SALVADOR. SERBS, CROATS and SLOVENES (Kingdom of the) Librairie "Vreme ", BELG A E. SPAIN Centro Editorial " Minerva ", Tudescos 39-41,
MADRID, E. 12.
GREECE Eleftheroudalds & Barth, International Library, Place de Ia Constitution, ATHENS. HAITI Librairie-Papeterie Mine D. Viard, Angle des rues do Centre et des Casernes, PORT-AU-PRINCE. HAWAII Pan-Pacific Union, HONOLULU. For other countries, apply:
SWEDEN C. E. Fritte, Hofbokbandel, Fredagatan 2, STOCZOLM. SWITZERLAND Librairie Payot & Cie, GENEVA,Lsus&su, Vit., MONTREUX, NEuc5iATAL and BERN3, UNITED STATES World Peace Foundation, 40, Mt. Vernon Stee, BOSTON9 (Mass.). URUGUAY Libreria Maximino Garcia, Calls Sarandl 46!, MONTIv xO. (Complete catalogue sent on application.)
Publications Sales Department of the League of Nations, Geneva (Switzerland).
(4149)
C.562.M.178.928.II.
LEAGUE OF NATIONS
DOUBLE TAXATION
AND
TAX EVASION
REPORT
PRESENT9D BY THE
General Meeting of Government Experts on Double Taxation and Tax Evasion
GENEVA, x98.
1/6
40.40
(4151)
C. 562. M. 178. 1928. II.

CORRIGENDA
LEAGUE OF NATIONS
DOUBLE TAXATION
AND TAX
EVASION
REPORT PRESENTED BY THE GENERAL MEETING OF GOVERNMENT EXPERTS ON DOUBLE TAXATION AND TAX EVASION
Page 12. -
Article 5, third and fourth lines should read as follows: " in the countries in which the permanent establishments are situated". Article 3 should read as follows: " If the deceased was domiciled in one of the Contracting States and leaves in the other Contracting State property falling within the categories enumerated in Article 4, the latter State may levy succession duties on such property, but only at the rate applicable to their value, exclusive of the other assets situated in any other State." third line, after the word " among " insert Article 5,
"
Page 22. -
Page 23. -
the
73095 0-62-vol. 4-
11
(4153)
C. 562. M. 178.
CORREIGEDA
1928.
II.
SOClRT9l
DES
NATION!
DOUBLE
IMPOSITION
ET IVASION
FISCALE
RAPPORT PRASENT]
PAR LA R]UNION t)N]RALE D'EXPERTS GOUVERNEMENTAUX EN MATI]RE DE DOUBLE IMPOSITION

ET D'AVASION FISCALE.
Page 9. Page io. Page 12. -
Article 13, deuxi6me ligne, apr~s Convention, lire
((notamment &des cas non express~ment pr6vus,

Article i, quatri6me ligne, lire.:
n)... etc.
apays doivent y tre soumises aux ))... etc.

Avant-dernier alin6a, deuxi~me ligne, lire:
((entreprises de navigation maritime et adrienne)). Dernier alin~a, premi6re ligne, lire : ((Si les entreprises de navigation maritime ou adrienne ... etc.
Page 14. P,,ge
22.
Avant-dernier alin6a, derni~re ligne, lire
((r~els correspondants ou Article 3, lire:
a...
etc.
((Si le de cujus qui 6tait domicili6 dans Fun des Etats contractants laisse dans l'autre Etat des biens appartenant aux catdgories dnumdrdes d l'article 4, celui-ci peut percevoir ,,... (le reste sans changement). Page 23. Page 27. Article 5, deuxibme alin~a, lire: ( Les autres dettes seront r~parties entre les diverses categories) ... etc. Article 2, deuxi6me alin~a, troisibme ligne, aprbs (( disposent ,, lire ((Ies Etats en ce domaine .
(4154)
[Distributed to the Council and the Members of the League.]
C. 562. M. 178.
1928.11.
Geneva, October 1928.
LEAGUE OF NATIONS
DOUBLE TAXATION
AND
TAX EVASION
REPORT
PRESENTED BY THE
General Meeting of Government Experts on Double Taxation and Tax Evasion
Publications of the League of Nations
I1. ECONOMIC AND FINANCIAL 1928. I1.49.
(4155)
CONTENTS
Page
INTRODUCTION
I.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OF DOUBLE TAXATION IN THE
.5
BILATERAL CONVENTIONS FOR THE PREVENTION SPECIAL MATTER OF DIRECT TAXES:
General Considerations ............. .......................... A. Text of Draft Convention No. Ia .......... .................... B. Commentary .......... ............................. C. Text of Draft Convention No. lb .......... .................... D. Commentary ........... ............................. ..................... E. Text of Draft Convention No. Ic .......... F. Commentary .............. .............................
MATTER OF SUCCESSION DUTIES :
7 7 i....10 16 8
19
21
II. BILATERAL CONVENTION FOR THE PREVENTION OF DOUBLE TAXATION IN THE SPECIAL A. B. III. Text of the Draft Convention ........ Commentary .............. ...................... ............................. .... 22 23
BILATERAL CONVENTION ON ADMINISTRATIVE ASSISTANCE IN MATTERS oF TAXATION: A. " Text of the Draft Convention ........... B. Commentary ... ........... ....... ...................... .................. .... 25 26
IV.
BILATERAL CONVENTION ON ASSISTANCE IN THE COLLECTION OF TAXES : A. Text of the Draft Convention ......... ...................... B. Commentary .............. .............................
PROPOSALS REGARDING FUTURE ORGANISATION ......... .................
29 30
34
V,
ANNtEX: List of Members at the General Meeting of Government Experts, (;cneva, October
22nd to 31st, 1928 .............. ............................. 37
S. d N. 1,7oo (F.) i.i5o (A.) 11/28.Imp. du J. de G.
(4157)
REPORT PRESENTED BY THE GENERAL MEETING OF GOVERNMENT EXPERTS ON DOUBLE TAXATION AND TAX EVASION
Geneva, October 31st, 1928.
INTRODUCTION.
In submitting its report the General Meeting of Government Experts on Double Taxation and Tax Evasion thinks it desirable to recall that it was convened in compliance with the resolution adopted by the Council of the League on June 17th, 1927, which was worded as follows: " The Council requests the Secretary-General' to forward to the Governments of all States Members and non-Members of the League of Nations the report of the technical experts on double taxation and tax evasion, with the request that they express their opinion on its contents, and to convene a general meeting of Government experts in 2928 for the purpose of discussing this report." The Meeting began work at Geneva on October 22nd, 1928. The list of its experts is given in the Annex to the present report. At its first meeting, the Meeting unanimously adopted the following resolution " The Meeting, which is attended by the representatives of twenty-seven countries, notes that, as regards their main principles, the model draft Conventions prepared by the technical experts constitute a useful basis of discussion for the preparation of model texts, whose object shall be to prevent double taxation and tax evasion." In passing this resolution, the Meeting endorsed by implication the principles adopted by the technical experts which are set out in the introduction to their report (document C.226.M.85, 1927). The Meeting declared in particular that it agreed with the technical experts in recognising that, although it would be desirable for States to conclude collective conventions, or even a single general convention embodying all the others, the extreme diversity of existing fiscal systems made it impossible at the present time to recommend a convention which could be unanimously accepted, unless the text were worded in such general terms as to be devoid of any practical value. . The first discussions on the technical experts' draft showed, however, that, for certain reasons explained in the General Considerations preceding the draft Conventions for the Prevention of Double Taxation in the Special Matter of Direct Taxes, it would be desirable to add to the text already prepared two other model texts more capable of adaptation to the fiscal systems of certain States or groups of States. The Meeting does not claim to have completed its work in this connection; it recognises that further model texts can still be framed, more particularly to meet the case of countries with a system of impersonal taxes. It also considers that, as regards succession duties, drafts differing from the present one might be submitted to Governments with advantage. .
(4159)
-6
Moleover, the General Meeting of Government Experts on Double Taxation and Tax Evasion decided to make certain changes in the texts previously recommended by the technical experts. These changes are embodied in the texts submitted and the comments have been corrected in the light of the changes made. In the course of its discussions, the Meeting endeavoured to reach complete agreement on all essential poirits. In view, however, of the diversity of fiscal systems, the differences in national economic interests and the divergent conceptions concerning both theory and practice, unanimous agreement could not be reached in regard to all the questions which had to be dealt With. Points on which complete understanding could not be achieved have been left for decision co any States desiring in the future to negotiate bilateral treaties. The Meeting, however, earnestly strove to reduce to a minimum the number and importance of questions thus left open. In order, moreover, to confine itself strictly to its terms of reference, the Meeting refrained from examining in detail several correlated questions of international law, such as the doctrine of reciprocity and the principle of the most-favoured-nation clause in its relation to the problem of double taxation. It considered that these questions might be usefully studied by the organisation whose creation is recommended in the final part of the present report. In conclusion, the Meeting desires to pay a tribute to the work done by the Committee of Technical Experts appointed by the League. The work of this Committee served as the basis of discussion and enabled the Meeting to reach the conclusions herewith set forth. It was even able to a very large extent to make use of the texts drawn up by the technical experts, in its Commentary on the ConVentions which it recommends, only amending them in so far as was necessitated by thp changes which had tb be made in the earlier draft Conventions. It desires on the present occasion to express its great appreciation of the work undertaken under the auspices of the League in the matters of double taxation and tax evasion, and particularly its appreciation of the results set forth in the report of the technical experts which it was called upon to examine.
(4160)
- 7-
BILATERAL CONVENTIONS FOR THE
'REVENTION OF DOUBLE TAXATION IN
THE SPECIAL MATTER OF I)IRECT TAXES.

(;ENERAL CONSIDERATIONS.
In their report, the technical experts had stated that their draft bilateral Convention for the Prevention of Dcuble Taxation applied inoie particularly to countries which levy impersonal taxes and also a personal general tax ; but that the model text they proposed could also be made to serve in the event of the simultaneous existence of a general tax in the country of domicile, and schedular taxes in the country of origin. They added that the text of the Convention could be abridged whenever two contracting States possessed sufficiently similar fiscal systems. From the very outset it became clear to the General Meeting of Government Experts that it would be highly desirable to draw up, in addition to the first text, such simplified texts. The Meeting therefore added to the draft Convention for the Prevention of Double Taxation prepared by the technical experts two new texts of model bilateral Conventions which draw no distinction between impersonal and personal taxes, the first applying particularly to relations between countries in which taxation by reference to domicile predominates, and the second to relations between countries possessing different fiscal systems. It should be mentioned that, in drawing up the articles of these drafts, it was endeavoured to make the texts as similar as possible, in order to reduce to a minimum differences of interpretation.
A. TEXT O I)RAFT CONVENrION No. [11. Article I. The present Convention is designed to prevent double taxation in the sphere of direct impersonal or personal taxes, in the case of the taxpayers of the Contracting Parties, whether nationals or otherwise. For the purposes of this Convention the following shall e regarded as impersonal taxes
(a) ....... ..................... (b) ........ .................... (c)...... ...................... For the purposes of this Convention, the following shall be regarded as personal taxe s (a) ..... ................... . (b) ............................
.c . . . . . . . . . . . . . . . . . . . ..
I.
Impersonal Taxes.
Article 2. The income from immovable property, i.e., that which corresponds to the actual or presumed rental value of such property, as well as any other income from such property which is not covered by Article 5, shall be taxable in the State in which the property in question is situated. This rule shall apply to income from mortgages or other similar obligations.
(4161)
-8
Article 3. Income from public funds, bonds, including mortgage bonds, loans and deposits or current accounts, shall be taxable in the State in which the debtors of such income are at the time resident. Article 4. Income from shares or similar interests shall be taxable in the State in which the real centre of management of the undertaking is situated. Article 5. Income, not referred to in Article 7, from any industrial, commercial or agricultural undertaking and from any other trades or professions shall be taxable in the State in which the establishments are situated. permanent . The real centres of management, branches, mining and oilfields, factories, workshops, agencies, warehouses, offices, depots, shall be regarded as permanent establishments. The fact that an undertaking has business dealings with a foreign country through a bona-fide.agent of independent status (broker, commission agent, etc.) shall not be held to mean that the undertaking in question has a permanent establishment in that country. Should the undertaking possess permanent establishments in both Contracting States, each of the two States shall tax the portion of the income produced in its territory. The competent administrations of the two Contracting States shall come-to an arrangement as to the basis for apportionment. Nevertheless, income from maritime shipping and air navigation concerns shall be taxable only in the State in which the real centre of management is situated. Article 6. The fees of managers and directors of joint-stock companies shall be taxable in accordance with the rule laid down in Article 4. Article 7. Salaries, wages or other remuneration of any kind shall be taxable in the State in which the recipients carry on their employment. Salaries of officials and public employees who are serving abroad shall, however, be taxable in the State which pays these salaries. Article 8. Public or private pensions shall be taxable in the State of the debtor of such incoe, Article 9. Annuities or income from other sources not referred to in the previous paragraphs shall be taxable in the State of fiscal domicile of the creditor of such income. II. P,'rsonal Taxes. Article io. The personal tax on the total income shall be levied by the State in which the taxpayer "iis fiscal domicile, i.e., his normal residence, the term " residence " being understood to
i permenent home
(4162)
The State of domicile shall deduct from its personal tax the lesser of the two following amounts : (a) Either the amount of the tax actually paid in the other Contracting State on income from immovable property (Article 2) and on income from industrial, commercial or agricultural undertaking (Article 5) ; or (b) The amount of the tax relating to the income referred to in paragraph (a) at the rates in force in the State of domicile. of the total personal tax leviable in the This deduction shall not in total exceed x per c,,nt State of domicile. above When the State of domicile imposes impersonal taxes, the deduction provided for shall not include impersonal taxes which correspond or relate to income taxed in the other Contracting State. ti. lrtide In the case of taxpayers who possess a fiscal domicile ifi both Contracting States, the personal tax shall be imposed in each of these States in proportion to the period of stay during the fiscal year, or according to.a division to be determined by agreement betwecn the competent administrations Ill. Miscellaneous Provisions. 12. Article The principles laid down in the preceding articles shall be applicable, inutatis snutandis, to the recurrent taxes on total wealth, capital, or increments of total wealth, according as these taxes are impersonal or personal. Article 13. As regards any special provisions which may be necessary to enable the present Convention to be applied, more particularly in cases not expressly provided for, the financial administrations of the two Contracting States shall confer together and take the measures required in accordance with the spirit of this Convention. Article 14. Should a dispute arise between the Contracting States as to the interpretation or application of the provisions of the present Convention, and should such dispute not be settled either directly between the States or by the employment of any other means of reaching agreement, the dispute may be submitted, with a view to an amicable settlement, to such technical body as the Council of the League of Nations may appoint for this purpose. This body will give an advisory opinion after hearing the parties and arranging a meeting between them if necessary. The Contracting States may agree, prior to the opening of such procedure, to regard the advisory opinion given by the said body as final. In the absence of such an agreement, the opinion shall not be binding upon the Contracting States unless it is accepted by both, and they shall be free, after resort to such procedure or in lieu thereof, to have recourse to any arbitral or judicial procedure which they may select, including reference to the Permanent Court of International Justice as regards any matters which are within the competence of that Court under its Statute. Neither the opening of the procedure before the body referred to above nor the opinion which it delivers shall in any case involve the suspension of the measures complained of ; the same rule shall apply in the event of proceedings being taken before the Permanent Court of International Justice, unless the Court decides otherwise under Article 41 of its Statute.
(4163)
1O COMMENTARY.
B. Article i.
This article defines the purpose of the present Convention; it is designed to prevent double taxation in the sphere of direct taxes in the case of the taxpayers of the Contracting Partie. The tendency of modem fiscal law is to consider that all persons domiciled in a State should be liable to the same taxation therein whatever their nationality may be. This is why Article i of the draft speaks of all taxpayers, whether nationals or otherwise. Supposing, for instance, that two States A and B have concluded a convention on these lines, the nationals of a third State C which had not concluded a sivnilar agreement will nevertheless be entitled to the benefits of the treaty, if they are taxpayers of States A and B, either because they have their fiscal domicile in these States or derive income from them. If, for economic reasons, or with a view to inducing certain States to conclude similar conventions, the Contracting Parties deem it preferable provisionally to limit the scope of the Convention to their own nationals, they need only delete in the text of Article I the words " whether nationals or otherwise ". They may, on the other hand, extend its application to the nationals of States with which they have concluded such conventions.
*
After stating the general purpose of the Convention, Article i defines its scope : it governs direct impersonal or personal taxes. Desirous of avoiding any controversy on matters of doctrine, the experts have not defined the two great categories of direct taxes. They merely note. by way of indication, that impersonal taxes are in most cases levied on all kinds of income at the source, irrespective of the personal circumstances of the taxpayer (nationality, domicile, civil status, family responsibilities, etc.) thus differing from personal taxes which rather concern individuals'and their aggregate income. The Contracting States will themselves decide which of their direct taxes they regard, for the purposes of the Convention, as being impersonal or personal taxes. Similar forms of taxation levied on behalf of subordinate public bodies (provinces, cantons or departments, municipalities, etc.) may be included in the list, if circumstances justify such a measure, as well as. the tax on business turnover in so far as this is in the nature of direct taxation. The assignment of individual taxes to the two categories of direct taxes mentioned above is particularly important, as the draft lays down different provisions as regards each of these categories. If necessary, the rules governing impersonal taxes might be made to apply to all special forms of income tax imposed by the State of origin and limited to income derived from sources situated in that State. I. Article 2. Article 2 embodies a generally adcepted principle : that income from immovable property, i.e., the income which corresponds to the actual or presumed rental value, as well as every other form of income from immovable property not covered by Article 5, shall be taxable in the State in which the property in question is situated. The above piinciple applies, irrespective of the nature.of the right or fact (property, usufruct, pos -,ssion, lease in perpetuity, etc.), from which the taxable income is derived. The term " other income from such property " is only intended to cover income which is not derived from industrial, commercial or agricultural undertak.ngs, mentioned in Article 5 of the draft. Impersonal Taxes.
(4164)
Ir
The second paragraph of Article 2 lays down that the rule set forth in the first paragraph shall apply to income from mortgages and other similar obligations. This provision is intended to apply to income from mortgages or other similar obligations whether it is deducted from the income derived from the immovable property or not. If the deduction referred to is not made, special measures will have to be taken in order to prevent the State of domicile from having to grant excessive relief. Article 3. This clause deals with income derived from investments in transferable securities'other than shares. It lays down that income from public funds, bonds, including mortgage-bonds, loans, and deposits or current accounts shall be taxable in the State in which the debtorsof such income are at the time resident. By." public funds " is meant the securities issued by the State or by other public bodies (provinces or departments, cantons, municipalities, other public establishments, etc.) The bonds considered are those of non-commercial (socites civiles) or commercial companies, even if secured by mortgages. As regards loans, deposits, or current accounts, these terms are here used with their legal or customary meaning; as a rule, this clause will only be applied to income from non-commercial loans, deposits or current accounts. Interest on professional accounts opened for business purposes by traders or persons engaged in industry is, in fact, included under profits of business undertakings, which are covered by Article 5. As regards interest on deposits or current accounts, the debtor is the establishment or branch which pays this interest. The Contracting States shall decide whether a second paragraph should be added to Article 3 providing for an exception to the rule laid down in the first paragraph. This exception might be worded as follows : " If this income is paid in one of the Contracting States to persons domiciled in the other Contracting State, the tax applicable thereto shall be refunded upon production of proper evidence. In such case, the said income may be taxed in the State of domicile of the creditor." This would be a special clause to be discussed between the Contracting States. The refunding of the tax by the State of the debtor will generally depend upon economic or budgetary conditions ; the levying of the tax by the State of the creditor will in some cases, however, be justified by reasons of equity, but will not be compulsory. Such refund may be limited to certain forms of income and made contingent upon the application of the deduction provided for under Article io Where necessary, measures will have to be taken to prevent fraud by means of affidavits or other documents signed by or on behalf of the persons entitled to the income. In this connection, reference should be made to the draft Convention on Administrative Assistance. A request was put forward that the tax on income from bonds might, if necessary, be shared according to tte rules laid down in Article 5. This view was not generally accepted, but it was thought that the procedure suggested might be adopted by countries where special circumstances existed. The same observation applies'to income from shares and to managers' fees referred to in Articles 4 and 6 below.
(4165)
12 -
Article 4. Income from shares or similar interests is the subject of Article 4 of the draft ;under the provisions of this article, it is taxable in the State in which the real centre of management of the undertaking, that is to say the management and control of the business, is situated, so that the case of a purely nominO centre of management is excluded. This clause will have to be supplemented if it is agreed that the system of refunds contemplated in the commentary on Article 3 shall apply also to dividends. Here, again, the determining factors will be economic or budgetary considerations, or even political circumstances. It must also be noted that draft Convention No. I b contemplates this more extended system of relief. Artice 5. This clause has reference to income from any industrial, commercial or agricultural undertakings, and from any other trades or professions, not referred to in Article 7 ; it is to be taxable in the countries in which the persons controlling the undertakings or engaged in the trade or profession, possess permanent establishments. The word " undertakings" must be understood in its widest sense, without making any distinction between natural and legal persons. The second paragraph gives a list of the establishments which are considered as permanent they are: real centres of management, branches; mine and oilfields factories, workshops, agencies warehouses, offices and depots, no matter whether such establishments are used by the traders themselves, by their partners, attorneys, or their other permanent representatives. Nevertheless, the fact that an undertaking has business dealings with a foreign country through a bona-fide agent of independent status (broker, commission agent, etc.) shall not be held to mean that the undertaking in question has a permanent establishment in that country. The words " bona-fide agent of independent status " are intended to imply absolute independence, both from the legal and economic points of view. The agent's remuneration must not be below what would be regarded as a normal remuneration. The Committee has not expressed an opinion on the point whether purchasing offices or sales offices and plants are to be considered as places of business, this being a question of fact. Paragraphs 2 and 3 of this clause govern the case in which the undertaking possesses permanent establishments in both Contracting States; in that event, " each of the two States shall tax the portion of the income produced in its territory " This is an application of the so-called system of apportioning the income according to its source. " The competent administrations of the two Contracting States shall come to an arrangement as to the bases for apportionment." These bases will vary essentially according to the undertakings concerned ; in certain States account is taken, according to the nature of the undertakings, of the amount of capital involved, of the number of workers, the wages paid, receipts, etc. Similarly, in cases where the products of factories are sold abroad, a distinction is often made between " manufacturing " and " merchanting " profits, the latter being the difference between the price in the home market and the sale price abroad, less cost of transport. These criteria are, of course, merely given as indications. The last paragraph of Article 5 contains an express exception to the principle laid down in the first paragraph : it provides that income from maritime shipping or air-navigation concerns shall be taxable only in the State in which the real centre of management is situated. " If maritime shipping or air-navigation concerns carry on other activities independent ol shipping (for example, the business of sale of goods, banking or of a warehouse-keeper), such activities will respectively be dealt with in accordance with the other provisions of this Convention. "
(4166)
13 -
Furthermore, the scope of the last paragraph of Article 5 may be extended so as to apply also to river and lake shipping. Article 6. This article provides that the fees o managers and directors of joint-stock companies shall be taxable in accordance with the rule laid down in Article 4, that is, in the State in which the real centre of management of the undertaking is situated. This provision is designed to cover the special tax on variable fees, which are deducted from profits and hence constitute a part of the latter. Fixed salaries, on the contrary, come within the category of general expenditure and are governed by the following article. Article 7. Salaries, wages and other remuneration of any kind (with the exception of the fees mentioned in Article 6) shall be taxable in the State in which the recipients carry on their employment. The income is actually produced in that' State and the tax can easily be levied at the source. Nevertheless, special clauses may be inserted to meet the case of persons working in the vicinity of the frontier or engaged in any itinerant occupation, employment or trade. The second paragraph of Article 7 lays down that salaries of officials and public employees who are serving abroad shall be taxable in the State which pays these salaries. The fiscal regime for diplomatic or consular agents is, however, at present the object of special studies which are being carried on in conjunction with the Committee of Jurists for the Progressive Codification of International Law. Article 8. This article provides that public or private pensions shall be taxable in the State of the debtor of such income. It appeared both right and practical that all pensions should be made subject to the same rules. In the special case of private pensions, however, the country of the debtor may be taken to be that in which the activity was carried on within the meaning of Article 7, or that in which the parties concerned subsequently established their domicile. Article 9. Contrary to the above-mentioned provisions, annuities or income from other claims not 'referred to in the previous paragraphs shall be taxable in the State of fiscal domicile of the creditor of such income. The exception which is thus made for annuities is justified by the special nature of this form of income, since the recipient is free to select the country which is to be liable for the payment. II. Article io. Under the terms of this article, the personal tax on total income is to be levied by the State in which the taxpayer has his fiscal domicile, i.e., his normal residence, the term " residence being understood to mean a permanent home. PersonalTaxes.
(4167)
14 -
This provision is of double import : it specifies the place at which the personal or general tax shall be levied and, further, gives a definition of fiscal domicilein terms which were discussed at great length and are those accepted by the majority of the existing codes of law. The words" permanent home " convey the idea of an establishment intended to last for some time. Even a person who stays at an hotel for several months may be considered as normally residing there. Moreover, a State is always free to tax any of its own nationals who would not be taxed because they are continually moving about. Article io provides for a modification of the rule which it lays down. In order to avoid double taxation, the State of domicile will make a deduction from its personal tax with regard to the income taxed in the country of origin. But what should be the amount of such deduction ? It is to be limited to the lesser of the two following amounts, i.e. : (a) Either the amount of the tax actually paid in the other Contracting State on income from immovable property (.irticle 2) and from industrial, commercial or agricultural undertakings (Article 5) ; or (b) The amount of the tax on the income referred to in paragraph (a) at the rates in force in the State of domicile. This deduction may not exceed x per cent 1 of the total amount of the personal tax levied in the country of domicile. This restriction is designed to prevent a taxpayer whose whole income is derived from abroad from escaping all taxation in his country of domicile. The following example will explain the application of the system of deductions advocated by the experts : A taxpayer domiciled in State A draws a total income of ioo,ooo francs, 20,000 of which are derived from an industrial or commercial undertaking situated in State B, which, under this head, levies an impersonal tax of 4,000 francs. The tax in State A will be calculated on the total of. the income (for instance, at the rate of 20 per cent), i.e., Ioo,ooo X 20 = 20,000 francs, but the fiscal authorities will deduct there100
from the sum of 4,000 francs mentioned above, so that the tax will be reduced to 20,00 - 4,000 I6,ooo francs. If, however, in the State of domicile the tax only amounts to 3,ooo francs on an income of 20,000 francs, 3,000 francs will be deducted and the. tax will then be reduced to 20,000 - 3,000 = 17,ooo francs. A State will thus not suffer loss owing to the fact that its nationals engage in business in other States. The relief provided for above will be granted in particular in cases in which the State of domicile only levies a general income tax. If this general tax is of a purely complementary nature, and is additional to impersonal taxes, there will be no need for relief, or at any rate such relief will have to be limited. For this reason, the last paragraph of Article io lays down that, if the State of domicile levies impersonal taxes, the deductions provided for under (a) or (b) in Article io shall not include the impersonal taxes correspondiilg.or relating to the income taxed in the State of origin. The experts have further contemplated another method of avoiding double taxation. The tax in the State of domicile of the taxpayer would be calculated at the rate applicable to the whole 6f his income, but it would only be levied on that part of his income which is taxable in that country, that is to say, exclusive of the income taxed in the country of its origin. Thus a taxpayer domiciled in State A drawing a total income of ioo,ooo francs, 20,0oo of which is derived from immovable property situated in State B, would only be taxed in State A on 8o,ooo francs, but at the rate applicable to oo,ooo francs. The percentage is to be determined by the Contracting Parties.
(4168)
15 -
Article ii. This article is designed to cover a special-case, namely, that of taxpayers with a fiscal domicile in both Contracting States. In this case, the tax will be imposed in each of these States m proportion to the period of stay during the fiscal year, or according to a division to be determined by agreement between the competent administrations, for instance, in proportion to the amount of income produced in each country. This clause might, if necessary, be applied to taxpayers who change their domicile during the fiscal year. III. Miscellaneous Provisions. Article
12.
Article i2 provides that the principles laid down in the preceding articles shall be applicable, mutatis mutandis, to the recurrent taxes on total wealth, capital or increments of total wealth, according as these taxes are impersonal or personal. Succession duties form the subject of a separate Convention. As regards taxes of an exceptional nature, special agreements may have to be concluded, having due regard to the nature of these taxes. The provision of Article 12 is, moreover, not compulsory, inasmuch as countries which conclude a convention will have the option of omitting this article. Article 13. Any special provisions which may be necessary to enable the Convention to be applied more particularly to cases not expressly provided for shall be settled by agreement between the financial administrations of the Contracting States in accordance with the spirit of the Convention. Article 13 is designed to give effect to this principle.
Article 14.
There still remained to determine the procedure which should be followed in the event of a dispute as to the interpretation or application of the Convention ; this proceduire is laid ,ventions, down in Article 14, which is based upon the text inserted in other international in particular the Convention for the Simplification of Customs Formalities signed at Geneva on November 3rd, 1923. It seemed advisable, however, to state that the Contracting States will have the option of accepting the opinion of the advisory body in advance.
73095 0-62-vol.
4-
-12
(4169)
I6 lb.
C.
TEXT OF DRAFT CONVENTION NO.
The present Convention is designed to prevent double taxation as regards the following specified taxes, in the case of the taxpayers of the Contracting States, whether nationals or otherwise. (a) ..... ...................... . ...... (b) ...... ............... (c) . . .. . . . . . . . . . . . . . . . . . Article i. Taxes at the fiscal domicile. A. In principle, income shall be taxable by the State in which the taxpayer has his fiscal domicile, i.e., his normal residence, the term" residence " being understood to mean a permanent home. B. In the case of taxpayers who possess a fiscal domicile in both Contracting States, the tax imposed in each of these States in proportion to the period of stay during the fiscal year, or according to a division to be determined by agreement between the competent administrations. Article 2. Taxes at Source. The following classes of incomes shall be taxable by priority at their respective sources as described below : A. Income from Immovable Property. The income from immovable property, i.e., that which corresponds to the actual or presumed rental value of such prcperty, as well as any other income from such property which is not covered by paragraph B belcw shall be taxable in the State in which the property in question is situated. This rule shall apply to income from mortgages or other similar claims. Industrial, Commercial or A gricultural Income. Income from any industrial, commercial or agricultural undertaking, and from any other trades or professions not referred to in paragraph D, shall be taxable in the State in which a permanent establishment is situated. The real centres of management, branches, mining and oil-fields, factories, workshops, agencies, warehouses, offices, depots, shall be regarded as permanent establishments. The fact that an undertaking has business dealings with a foreign country through a bona-fule agent of independent status (broker, commission agent, etc.) shall not be held to mean that the under. taking in question has a permanent establishment in that country. Should the undertaking possess permanent establishments in both Contracting States, each State shall impose the tax applicable to that part of the income produced on its territory. The competent administrations of the two Contracting States shall come to an arrangement as to the basis for apportionment. Nevertheless, income from maritime shipping and air navigation shall be taxable only in the State in which the real centre of management is situated. B. Fees of Managers and Directors. The fees of managers and directors of joint-stock companies shall be taxable in the State where the real centre of management of the undertaking is situated. C.
(4170)
17 -
D. Salaries and Wages. Salaries, wages or other remuneration of any kind shall be taxable in the State in which the recipients carry on their employment. Salaries of officials and public employees who are serving abroad shall, however, be taxable in the State which pays thesd salaries. E. Public Pensions. Public pensions shall be taxable in the State of the debtor of such income. Article 3. Relie through Deductions and Relunds. A. Deductions. On reporting his or its total income from all sources, any person or company domiciled in the territory of one of the Contracting States shall be granted relief in respect of taxes payable in the other Contracting State on income taxable under Article 2 by priority in such other Contracting State. Foi this purpose the State of domicile shall deduct from its tax on the total income the lesser of the two following amounts : (a) The tax imposed by the other Contracting State on income taxable by priority therein; or An amount which represents the same proportion of the tax payable on the total income (,) as the income taxable by priority bears to the total income. B. Relunds. The State which has collected an origin tax on revenues not enumerated under Article 2 shall refund the amount on production of proper evidence. Article 4. As regards any special provisions which may be necessary to enable the present Convention to be applied, more particularly in cases not expressly provided for, the financial administrations of the two Contracting States shall confer together and take the measures required in accordance with the spirit of this Convention. Article 5. Should a dispute arise between the Contracting States as to the interpretation or application of the provisions of the present Convention, and should such dispute not be settled either directly between the States or by the employment of any other means of reaching agreement, the dispute may be submitted, with a view to an amicable settlement, to such technical body as the Council of the League of Nations may appoint for this purpose. This body will give an advisory opinion after hearing the Parties and arranging a meeting between them if necessary. The Contracting States may agree, prior to the opening of such procedure, to regard the advisory opinion given by the said body as final. In the absence of such an agreement, the opinion shall not be binding upon the Contracting States unless it is accepted by both, and they shall be free, after resort to such procedure or in lieu thereof, to have recourse to any arbitral or judicial procedure which they may select, including reference to the Permanent Court of International Justice as regards any matters which are within the competence of that Court under its Statute.
(4171)
x8 -
Neither the opening of the procedure before the body referred to above nor the opinion which it delivers shall in any case involve the suspension of the measures complained of ; the same rule shall apply in the event of proceedings being taken before the Permanent Court of International Justice, unless the Court decides otherwise under Article 4X of its Statute.
D.
COMMENTARY.
Draft bilateral Convention No. Ib for the Prevention of Double Taxation from the previous one in that it assigns income from transferable securities differs essentially State of domicile and does not maintain the distinction previously adopted by priority to the between impersonal and personal taxes or between schedular and general taxes. Article x provides that, in principle, the State of domicile shall levy its tax on all kinds of income. Article 2 contains a list of the forms of income taxed by priority at their source. Double taxation is prevented by a system of abatements and- refunds which is provided for in Article 3. The. abatements will be allowed by the State of domicile in respect of taxes paid in virtue of the right of priority in the State of origin. The abatement allowed will either be equal to the amount of the taxes levied in the State of origin or will be based on a percentage of the tax at domicile, depending on the ratio between the income derived from the country of origin and the total income. Further, refunds will be allowed by the State of origin where it collects tax on income over which it has no right of priority, for example, in the case of income from transferable securities. Inasmuch as the language of Convention Ia has been employed to a large extent in Convention Ib, the Commentary applicable to Convention Ia applies, mtutfis mutandis, to Convention Ib.
(4172)
19 -
E. TEXT OF DRAFT CONVENTION No. Ic.

Article i. The present Convention is designed to prevent double taxation as regards the following specified taxes in the case of the taxpayers, whether nationals or otherwise, of the Contracting States :
(a)...... (b) ...... (c)....
................... ................... ............ ..
........
Article 2.
The income from immovable property, i.e., that which corresponds to the actual or presumed rental value of such property, as well as any other income from such property which is not covered by Article 3, shall be taxable in the State in which the property in question is situated. This rule shall apply to income from mortgages or other similar obligations. Article 3. Income derived from any industrial, commercial or agricultural undertaking and from any other trades or professions, and not referred to in Article 7, shall be taxable in the State in which the permanent establishments are situated. The real centres of management, branches, mining and oil fields, factories, workshops, agencies, warehouses, offices, depots, shall be regarded as permanent establishments. The fact that an undertaking has business dealings with a foreign country through a bona-fide agent of independent status (broker, commission agent, etc.) shall not be held to mean that the undertaking in question has a permanent establishment in that country. Should the undertaking possess permanent establishments in both Contracting States each of the two States shall tax the portion of the income produced in its territory. The competent administrations of the two Contracting States shall come to an arrangement as to the basis for apportionment. Nevertheless, income from maritime shipping and air navigation shall be taxable only in the State in which the real centre of management is situated. Article 4. The fees of managers and directors of joint-stock companies shall be taxable in the State where the real centre of management of the undertaking is situated. Article 5. Salaries, wages or other remuneration of any kind shall be taxable in the State in which the recipients carry on their employment. Salaries of officials and public employees who are serving abroad shall, however, be taxable in the State which pays these salaries. Article 6. Public or private pensions shall be taxable in the State of the debtor of such income.
(4173)
--
20 -
Article 7. The income from movable assets shall be taxable in the State in whose territory the creditor has his fiscal domicile, i.e., his normal residence, the term" residence "being understood to mean a permanent home. When the other Contracting State levies a tax, by means of deductions at the source, on income from capital originating in the territory of that State, the right to this taxation shall not be affected by the rule in sub-paragraph.i. In this case the State if domicile which, in addition to its ordinary direct tax, levies a special tax on income originating in the other State, shall refrain from levying that tax or shall deduct therefrom the tax paid in the other State. In order to avoid or to mitigate the effects of such double taxation as is not, under the various fiscal systems, prevented by the provision of the previous sub-paragraph, the Contracting States shall come to an agreement, if necessary, to allow either the 'remission, in respect of the tax levied by the State of domicile, of the whole. or part of the tax deducted by the State of origin, or a refund, upon production of proper evidence by the State of origin, of the whole or part of the tax collected by it by means of deductions. Article 8. Annuities or income from other claims not referred to in the previous paragraphs shall be taxable in the State of fiscal domicile of the creditor of such income. Article 9. In the case of taxpayers who possess a fiscal domicile in both Contracting States, a tax collection of which under this Convention depends on domicile shall be imposed in each of the Contracting States in proportion to the period of stay during the fiscal year or- according to a division to be determined by agreement between the competent administrations. Article io. The principles laid down in the preceding articles shall be applicable, mutatis mnutandis, to the recurrent taxes on total wealth, capital or increments of total wealth. Article ii. If, under the provisions of this Convention, either of the Contracting States has surrendered any taxable element of income or wealth, it shall retain the right to apply to the entire taxable property not exempted the rate of its general tax on income or total wealth corresponding to the whole of the income or total wealth of the taxpayer: Article 12. As regards any special provisions which may be necessary to enable the present Convention to be applied, more particularly in cases not expressly provided for, the financial administrations of the two Contracting States shall confer together and take the measures required in accordance with the spirit of this Convention. ' Article 13. Should a dispute arise between the Contracting States as to the interpretation or application of the provisions of the present Convention, and should such dispute not be settled either directly between the States or by the employment of any other means of reaching agreement, the dispute
(4174)
21 -
m~y be submitted, with a view to an amicable settlement, to such technical body as the Council of the League of Nations may appoint for this purpose: This body will give an advisory opinion after hearing the parties and arranging a meeting between them if necessary. The Contracting States may agree, prior to the opening of such procedure, to regard the advisory opinion given by the said body as final. In the absence of such an agreement, the opinion shall not be binding upon the Contracting States unless it is accepted by both, and they shall be free, after resort to such procedure or in lieu thereof, to have recourse to any arbitral or judicial procedure. which they may select, including reference to the Permanent Court of International Justice as regards any matters which are within the competence of that Court under its Statute. Neither the opening of the procedure before the body referred to above nor the opinion which of; the same rule shall it delivers inany case involves the suspension of the measures complained f apply in the event of proceedings being taken before the Permanent Court o International Justice, unless the Court decides otherwise under Article 41 of its Statute.
F. COMMENTARY. Draft Bilateral Convention No. Ic, like the immediately previous one, does not distinguish between impersonal and personal or between schedular and general taxes. It retains, as regards, taxation at the source, the main provisions of Draft No. la, and does not differ essentially from it except as regards the taxation of income from. movable capital. As regards the latter, it .provides that the tax shall in principle be levied by the State of domicile. If the State of origin also levies a tax by deduction at the source, the State of domicile is under obligation either not to levy a special tax upon the same income or to deduct from such tax the amount the other State. Further, it is agreed that, if part of the income is still subject to double paid in. taxation, the Contracting States may, where circumstances require, take special steps either
to deduct from the tax levied by the State of domicile the whole or part of the tax deducted by
the State of origin or to grant a refund by the State of origin of the whole or part of the tax levied by deduction at the source. As the language of Convention la has been employed to a large extent in Convention Ic,
the Commentary applicable to Convention Ia applies, mnuatis mutandis, to Convention Ic.
(4175)
22 --
II.
BILATERAL CONVENTION FOR THE PREVENTION OF DOUBLE TAXATION IN THE SPECIAL MATTER OF SUCCESSION DUTIES.
A.
TEXT OF THE DRAFT CONVENTION.
from being subjected to double taxation in the matter of succession duties. For the purpose of this Convention, the following shall be regarded as succession duties (a) ..... ............. (b) .... ............ ..
Article i. The purpose of the present Convention is to prevent taxpayers of the Contracting, States
(c) ....
..........
..
Article. 2.
Succession duties shall be levied by the country of domicile of the deceased, that is to say, by the country in which the deceased, at the time of his death; had taken up his residence with the manifest intention of remaining there. These duties may be levied on the total of the property left by the deceased, including property situated in another country, but, where necessary, the deductions provided for in Article 4 shall be effected and only the difference shall be collected. In the absence of a domicile as defined in the preceding paragraph, the country of which the deceased was a national shall be considered his country of domicile. Article 3. If the deceased was domiciled in one of the Contracting States and leaves property in the other Contracting State, the latter State may levy succession duties on such property, but only at the rate applicable to their value, exclusive of the other assets situated in any other State. Article 4. In order to obviate the double taxation which would result from the simultaneous application of the two preceding articles, the country in which the deceased was domiciled shall allow the lesser of the two following amounts to be deducted in respect of the categories of property specified below : (a) The actual amount of duty levied by the country of domicile on assets situated in another country; (b) The actual amount of duty payable on such assets in the country ill which the assets are situated. The categories of property referred to above are the following (a) Immovable property, furniture and fittings belonging thereto; (b) Any other categories of property which may be agreed upon by the Contracting Parties.
(4176)
23
Articl 5. Debts chargeable to or secured on specific property shall be deducted from the value of that property. Other debts shall be divided among specified classes of assets in accordance with special agreements to be concluded between the Contracting Parties. Artic/e 6. Should a dispute arise between the Contracting States as to the interpretation or application of the provisions of the present Convention, and should such dispute not be settled either directly between the States or by the employment of any other means of reaching agreement, the dispute may be submitted, with a view to an amicable settlement, to such technical body as the Council of the League of Nations may appoint for this purpose. Thisbody will give an advisory opinion after hearing the parties and arranging a meeting between them if necessary. The Contracting States may agree, prior to the opening of such procedure,, to regard the advisory opinion given by'the said body as final. In the absence of such an agreement, the opinion shall not be binding upon the Contracting States unless it is accepted by both, and they shall be free, after resort to such. procedure or in lieu thereof, to have recourse to any arbitral or judicial procedure which they may select, including reference to the Permanent Court of International Justice as regards any matters which are within the competence of that Court under its Statute. Neither the opening of the procedure before the body referred to above nor the opinion which it .dqlivers shall in any case involve the suspension of the measures. complained of; the same rule shall apply in the event of proceedings being taken before the Permanent Court of International Justice, unless the Court decides otherwise under Article 41 of its Statute.
B.
COMMENTARY.
The problem of devising suitable methods of avoiding double taxation in the matter of death duties is as difficult as the correspoiding problem in relation to income tax. Here, again, double taxation, arises from the fact that both the domicile of the deceased and the situation of his assets constitute grounds upon which States are in the habit of levying a duty on the occasion of death. A,'icle i. Article i defines the object of the Convention and makes provision for indicating what taxes are to be regarded as succession duties in each of the Contracting States for the purpose of the Convention. The laws of the various States, indeed, provide for various kinds of succession duties. There are, for instance, succession duties levied on the whole of the estate without taking into account the number and degree of relationship of the heirs, succession duties levied on the shares of the heirs, duties on transfer of property. Articl 2. Article 2 sets forth the principle that it is the State in which the deceased was domiciled which may assess for taxation the whole of the estate of the deceased, regardless of where it may be situated but subject to certain deductions which are provided by Article 4. It also defines the term" domicile " and it will be observed that the definition differs from the definition of domicile adopted for the purpose of-personal taxes on income.
(4177)
24 -
It is clear that the conception of domicile appropriate to a duty which is levied once and for all on the occasion of death must imply a greater degree of permanence than the conception on which an annual tax such as the income tax is based. It is unlikely that any State would claim the right to levy a death duty on the whole property of a deceased person on the ground that at the time of his death, he was temporarily resident within its borders, if his permanent home and true economic allegiance lay elsewhere. But when it is sought to define the precise character and degree of permanence of the residence which should exist in order to justify a claim to tax on the ground of domicile, wide divergencies of view are found to exist in the different legal systems of the various countries of the world. In these circumstances, it has not been found possible to do more than frame a definition which seems to command the greatest common measure of agreement in the various codes of law. It is hoped that the conception of domicile which the Committee has adopted will command a wide measure of acceptance among the various States. If so, the conclusion of bilateral agreements, and possibly general agreements for the avoidance of double death duties, will be greatly facilitated, and in its absence it is difficult to see how satisfactory arrangements could be made to attain the object in view. Atick 3. Article 3 states the -principle that the State in which assets belonging to a deceased person are situated may, even if that person were domiciled abroad, levy a duty on such of these assets as are~enumeratea in Article 4. Article 4. krticle 4 contains a provision which will entirely prevent double taxation in the sphere of .succession duties, as it lays down that, in respect of assets taxed by the country in which the property is situated, as provided in Article 3, the country in which the deceased was domiciled shall allow the lesser of the two following amounts to be deducted from the amount of tax due to itself under Article 2 : (a) The actual amount of the duty levied by the country of domicile on assets situated in another country and taxed under Article 3 above; (b) The actual amount of duty payable on such assets in the country in which the assets are situated. Article 4 further provides that the rule of taxation in the country in which the property is situated, with a corresponding deduction in the country of domicile, shall be applicable to immovable property and furniture and fittings belonging thereto, and to any other categories of property which may be agreed upon by the Contracting Parties. A rticl 5. Article 5 deals with the question of debts, It provides that debts which are secured on or relate to specific assets shall be deducted from the value of the assets. As regards other debts, the Contracting States are left to make such detailed administrative arrangements as may suit their particular circumstances. It is intended that normally the term " debts " shall include "legacies" Article 6. This article is identical with the last article in the draft Convention relating to Taxes on Income and is intended to serve a similar purpose.
(4178)
25 -
III.
BILATERAL CONVENTION ON ADMINISTRATIVE ASSISTANCE IN MATTERS OF TAXATION.
A.
TEXT OF THE DRAFT CONVENTION.
Article r.. With a view to obtaining a better apportionment of fiscal burdens in the interest both of Governments and taxpayers, the Contracting States undertake, subject to reciprocity, to give each other administrative assistance in regard to all matters required for the purpose of tax assessment. Such assistance may consist in (a) The exchange of fiscal information available in either of the contracting countries. The exchange will take place following a. request concerning concrete cases, or, without any special request, for the classes of particulars defined in Article 2 : (b) ,Co-operation between the administrative authorities in carrying nut certain measures of procedure. Article 2. The exchange of information as contemplated in paragraph (a) of Article i shall relate to natural or juristic persons taxable in one of the two contracting countries. The particulars given shall include the names, surnames and domicile or residence of the persons concerned, and their family responsibilities, if any, and shall have reference to I : (I) Immovable property (capital value or income, rights in rein, charges by way of mortgage or otherwise) ; Mortgages or other similar claims (description of the mortgaged property, amount (2) and rate of interest) ; (3) Industrial, commercial or agricultural undertakings (actual or conventional profits, business turnover, or other factors on which taxation is based) (4) Earned income and directors' fees ; (5) Transferable securities, claims, deposits and current accounts (capital value and income) ; any information collected by an administration, more especially in connection with exemption or relief granted by that authority by reason of the taxpayer's domicile or nationality ; (6) Successions (names and addresges of deceased and heirs, date of death, estate, shares of heirs and other bases of the tax). Article 3. In no case shall the effect of applying the provisions of the preceding articles be to impose upon either of the Contracting States the obligation of supplying particulars which its own fiscal legislation does not enable it to procure, or of carrying out administrative measures at variance with its own regulations or practice. I The folowing list may he ctirtailed or added to, according to circutnstance .
(4179)
26 -
Article 4. The State to which application is made may refuse to carry out such application if it considers that it is contrary to public policy. Article 5. The appropriate administrative authorities shall be empowered to communicate with each other direct for the purpose 6f giving effect to the provisions of the present Convention. Article 6. Administrative assistance shall be given without payment, subject to the refund of any exceptional expenditure (investigations, expert opinions, etc.) which may be incurred in special cases. Article 7. The administrations shall from time to time communicate to each other statements regarding their powers of investigation and control in fiscal matters and their administrative procedures. Article 8. The highest authorities of the financial administrations of the two States shall concert measures to implement the present Convention.
B.
COMMENTARY.
From the very outset, the Meeting of Government experts realised the necessity'of dealing with the questions of tax evasion and double taxation in co-ordination with each other. It is highly desirable that States should come to an agreement with a view to ensuring that a taxpayer shall not be taxed on the same income by a number of different countries, and it seems equally desirable that such international co-operation should prevent certain incomes from escaping taxation altogether. The most elementary and undisputed principles of fiscal justice, therefore, required that the experts should devise a scheme whereby all incomes would be taxed once, and once only. The Meeting realised, however, that it must avoid the risk of the draft Convention appearing in some quarters as an extension beyond national frontiers of an organised system of fiscal inquisition. The employment of technical methods to deal with fraud in matters of taxation is no doubt wholly to be recommended, both for the good of the communities reaping the benefit of such taxation and in the interests of the taxpayers themselves, since any fraud which goes unpunished leads to an unfair distribution of the burden of public expenditure and to the payment by one set of persons of gums properly due by others. In the first place, the Meeting desires to observe that, where relief is sought by a taxpayer in pursuance of arrangements made between two countries for the avoidance of double income tax, it is clearly necessary that the country granting this relief should have full information in regard to the assessment and the amount of tax paid in the other country, and provision to this effect has generally been-jnade in the conventions which have hitherto been concluded. Knowing by experience, however, how thankless and difficult is the task of preventing fraud in each country separately, the experts were anxious that their scheme should in no case present the appearance of an organised plan of attack on the taxpayer.
(4180)
27 -
In preparing the attached draft Convention, the Meeting has sought to obviate any misunderstanding by framing the provisions dealing with tax evasion in the form of a scheme of administrative assistance. Arrangements for such assistance are already in force between several countries in respect of certain classes of income, and may without difficulty be extended, subject to the conditions referred to in Report F. 212, 1925, and within the limits laid down in the draft Convention. Furthermore, as will be explained later, such assistance is a corollary of the general principles which have been adopted for the avoidance of double taxation. A rticle I. We may now consider how, in the view of the experts, such a scheme of assistance should work in practice. First of all it must be reciprocal, that is to say, States will be bound to afford each other assistance only under identical conditions ;in other words, subject to any provisions to the contrary, a country will only be entitled to demand information of a kind which it is itself in a position to supply, and it will only be able to supply such information to the extent that it is itself able to obtain it. Such assistance may work in two ways, according as it takes the form of co-operation between administrative departments, which will undertake, on each other's behalf, enquiries, verifications and expert valuations as required for the assessment of the various taxes; or as it consists in the exchange of information, which will be either supplied on request in specific cases or furnished as a matter of regular routine in connection with certain subjects which will be specified in the conventions to be concluded. Article 2. With respect to the supply of information, Article 2 of the draft Convention lays down general rules which Governments are advised to follow. The provisions governing immovable property, industrial, commercial or agricultural undertakings and earned income raise no serious difficulties, and some of them have already been embodied in conventions concluded between various countries. This also applies to successions, for the Government departments in the different countries already possess the requisite information and certain of these departments already exchange information regularly. A more difficult question arises in the case of transferable securities, which the Committee of Technical Experts discussed at length in its report of February 7th, 1925. The difficulty is due, first, to the fact that the means at the disposal of Governments do not afford as effective a check in this case as in that of other taxable wealth ; and secondly, to the fact that every attempt to improve the methods of ascertaining the capital value of and the income derived from movable property, in particular from bearer securities and current accounts, produces a serious and complicated train of consequences when such measures are applied within the national boundaries, and that these effects would be greatly intensified if any attempt were made to carry investigations across the frontiers. There seems, however, to be no objection to inserting a clause in the Convention to the effect that a country which, in the normal course of its fiscal administration, obtains possession of information in regard to transferable. securities, claims, deposits and current accounts, should impart, on a reciprocal basis, that information to a foreign State which is interested in the matter from the point of view of the equitable distribution of taxation. In some cases, e.g., in cases where relief is sought, the assistance which it may be possible for the relieving State to afford may be considerable. For instance, taxpayers may apply to a given country, on grounds of domicile, for exemption or abatement as regards certain taxes on stocks and shares. In that case, it must be admitted that the preferential treatment claimed by such persons cannot, in all fairness, be extended to them unless their circumstances really
(4181)
28 -
entitle them to such treatment ; since, moreover, they are applying for relief in respect of taxes levied in one country, on the ground that they are already taxed on that same income by another country, it is only natural that the latter should be informed that certain of its citizens have advanced the plea of domicile, and that it should be enabled to verify that they are duly taxed. In such cases, the taxpayer can always obtain the application of ordinary law ; by his action in seeking to benefit by the exemption which has been provided in order to avoid double taxation, he agrees to abide by the consequences of his choice, and cannot object to the accuracy of his statement being subsequently checked. Articles 3 and 4. These articles limit the right to administrative assistance in such a way as to ensure that no country shall be committed to undertake enquiries or proceedings at variance with its own laws or practice. Articles 5 to 8. Articles 5 to 8 deal solely with measures of execution.
The above are the considerations by which the Committee has been guided in framing the draft Convention on Administrative Assistance. While fully recognising the difficulties of this delicate subject and the necessity of making such amendments to the text as may be necessary to allow for special circumstances, the Meeting, viewing the matter solely from the angle of practical administration, is of the opinion that the clauses it has adopted are calculated to ensure a more equitable distribution of fiscal burdens. In conclusion, the Meeting would again point out that the adoption of its recommendations could not, in any. circumstances, hamper the free circulation of wealth.; on the contrary, the putting into force of these provisions should make it possible to prevent the course of trade and the movement of capital from being influenced by fiscal considerations arising out of the diversity of laws on the subject. The agreements to be concluded in regard to administrative assistance should, however, secure the accession of the majority of the States, as was pointed out by the Technical Experts in their Report F. 212 of February 1925. The Meeting desires, therefore, once again to lay special stress on the importance of this part of its resolutions.
(4182)
29 -
IV. BILATERAL CONVENTION ON ASSISTANCE IN THE COLLECTION OF TAXES.
A. TEXT OF THE DRAFT CONVENTION. Article I.
The Contracting States undertake to give each other mutual assistance in the collection of the following taxes I (a). ..... (b) ....
(C). .. .........
............. .............
...... Article 2.
The assistance in question shall apply both to the principal of the tax and to charges incidental thereto (costs, interest) I
Article 3.
Assistance shall only apply to fiscal debts which are res judicatta, apart from the case provided for in Article ii. Article 4. The recovery of fiscal debts, as provided in the previous articles, shall be effected at the request of the creditor Government (State making the application) addressed to the State having jurisdiction over the person o!" the property of the debtor (State to which application is made).
Article 5.
The request of the State making the application shall be issued by the highest authority of its financial administration or by an authority designated under the agreement contemplated in Article 12, and shall be accompanied by an order of execution (litre exdcutoire) certified by that authority. It must be addressed directly to the corresponding authority of the State to which application is made. The aut .)rity of the State making the application shall further certify that the liability in question is res judicata. .4rticle 6 . The State making the application shall furnish a translation of the documents transmitted in the language of the State to which application is made. 'he C(oitactig States sI all agree with each other whether the Cony, ition is applicable to State taxe. only or to provincial. coitunal and other taxes also.
I
Penalties of a fiscal nature. etc.. niav also he inserted.
3 May be del'ted or modified according to circumstances.
(4183)
30 -
Article 7. The State to which application is made shall comply as soon as possible with the request addressed to it. Nevertheless, it may refuse to do so if it considers that it is.unable to comply with this request for reasons of public policy. In such case it shall inform the State making the application as soon as possible.
Article 8
'.
Prosecutions and other measures of execution shall be carried out without _exequatur.
Article 9.
The fiscal debt which forms the subject of the request shall be collected in accordance with the laws of the State to which application is made, but this does not oblige the latter State to employ a means of execution which is not provided for by the laws of the State making the .application. Nevertheless, at the request of the State making the application, the State to which application is I[iade may, if it thinks fit, adopt a special form of procedure, even if not provided for by its laws, subject to the condition that such procedure is not contrary to its laws. Article io. The taxes which it is sought to collect shall not be regarded as privileged debts in the State to which application is made.'
Article Ii.
If a fiscal debt is still liable to be appealed against, the State making the application may request the State to which application is made to take conservatory measures, to which the above provisions shall be applicable, inutatis mutandis. Article
12.
The highest authorities of the financial administrations of the two States shall concert measures to implement the present Convention. In particular, they may, by agreement, draw up rules for the disposal of the sums collected, for the determination of an average rate of exchange for the conversion of these sums and for the expenses of collection.
B.
COMMENTARY.
Article i. The taxes which it is desired t,o collect will be enumerated, so that no doubt will exist as to the scope of the Convention. Moreover, this method enables States to include in the Convention, if they deem it desirable, all kinds of taxes in addition to direct taxes. The question whether the Convention will also apply to provincial or communal taxes and to taxes levied by other public bodies is left for decision to the Contracting Parties. As it was not considered essential to extend the Convention in this direction, the Meeting thought it best only to mention these taxes in a footnote. As regards the " centimes additionnels ", it is well known that, by their very nature and in accordance with generally recognised principles, these are collected with the prinpal tax, and there is no need for any special rule in regard to them.
tMavbe deleted or modified according to circnstancec.
(4184)
Article 2.
31 -
The word" collection " is used in a fairly wide sense in this Convention. It is intended to coker not only the actual aeasures of execution but also preliminary measures, such as the serving of the documents of execution, etc. On the other hand, it would seem necessary to state definitely whether the Convention is to extend to incidental charges, such as costs of execution, interest on arrears, etc. It will be for the States concerned to decide, in agreement with one another, how far it is necessary to enumerate these incidental charges and also to consider the question, referred to in a foctnote, of fiscal penalties, which are provided for in many codes of law. Article 3. Article 3 corresponds to Rule 3 in the 1925 Resolutions (document F. 212, page 35), the grounds for which will readily be understood. It would hardly be desirable to invite a foreign administration to take measures to collect a debt which was still liable to be cancelled on appeal. As regards temporary measures, this article gives a reference to Article ii. Article 4. Article 4 defines the nature of the assistance in question. This will be granted by the State in which the debtor is living or in which his prolerty is situated. It should be noted that the jurisdiction of the State is the true criterion and that the nationality of the debtor is not to be considered. .In adopting this rule, the Meeting had in mind tile principle stated in document F. 212 (page 35, Rule i) which lays down that the State must also afford assistance in respect of taxes due from persons other than nationals of the State making the application. This rule, which
has already been adopted ill regard to double taxation is lily iii accord with the principle of
international solidarity, by which the experts have constantly been guided. In their separate treaties, however, the States will be free to introduce exceptions to this rule, when this may be necessary in order to avoid running counter to public opinion in their own countries as might be the case, for instance, where the measures in question would have to be taken against the nationals of the State to which application is made. The terms ' State making the app,.iiion and " State to which application is made were used with a view to simplifying the drafting of the subsequent articles. Article 5. Although the principle. of mutual assistance is fully reccgnised, it is equally certain that this principle should only be applied subject to certain safeguards. There is always a possibility of administrative errors and, if these occurred in an international question of this kind, they
might give rise to serious and awkward situations. It is necessary, therefore, to take all possible precautions, and in particular to require that the highest authority in each of the fiscal administrations, cr another administrative authority designated by common consent in accordance with Article 12. is to take the necessary measures, in order to ensure as far as possible that the documents produced shall he correct and that the idministration collecting the debt shall take proper action. As regards the second paragraph, Article 3 should le referred to. ,tich" t ii. i 5. It Iliit happen that thl State to riCi' Ihis article is hasedl oii the saie priuicipl ::i mhich application is made, in order to Coi11ply with a request for executioii, will require a tranusition of the doculiients sent to) it. As, however, this necessity will not arise in every State, the Mleeting thought it be.,t to point cit in a footnote that the pr\ision could be omitted or niodilied.
73095 0-62-vol.
4-
13
(4185)
32 -
Article 7. The fundamental principle of the assistance to be granted having already been stated in Articles I and 4, the first sentence of Article 7 is merely intended to indicate the necessity for prompt assistance. The need for despatch is mentioned again in the last sentence, which, together with the second, provides for the possibility of a refusal on grounds of public policy. Reasons of this kind are sometimes present and induce the fiscal authorities to exercise a certain indulgence. As the State making the application cannot possibly foresee, or even be aware of, all the more general consequnces to which its request may give rise, the State to which application is made must have the right to refrain from measures which would prejudice its vital interests The State making the application must, however, be immediately informed of the fact so that it may be able, if circumstances admit, to choose another method of procedure. Article 8. This article, which is of a subsidiary character, emphasises the principle, already set forth in Article 5, of direct communication between the fiscal authcrities of the two countries concerned, without the need for using diplomatic or judicial channels. In some States, however, the laws would not allow a request put forward in accordance with Article 5 to be complied with unless accompanied by a writ of execution issued by a judicial authority. In order to meet this special case, the footnote indicates-that the article may require to be modified. Article 9. This article explains the system by which the fiscal debt will be recovered. This system - which will be found in Rule i, page 35, of document F. 212 - provides that, in principle, the means of execution employed will be those provided for in the State to which application is made, and this for two reasons. In the first place, the enforcement of a foreign law would at once involve the revenue officials in difficulties and would hence become a source of inconvenience, vexation and complaint for both parties. In the next place, public opinion would object to the taking of measures foreign to the laws of the State to which application is made. Imagine, for example, the position of a State which has never known the practice of imprisonment for debt and which, under the terms of a treaty, is nevertheless forced to lock up someone (perhaps one of its own nationals) who has not paid his taxes abroad and persists in saying that all his property has disappeared. Care must also be taken to respect the scruples which the public in the State making the application may feel on account of differences in the measures taken to execute judgments. It would certainly offend public opinion if the State to which application is made were to adopt methods 6f constraint alien to the laws of the creditor State. The people of Morania would say : " Why does Imeria imprison a fellow-countryman of ours who, if he had remained in our territory, would merely have had his property seized ? In view of these considerations, the Meeting proposes a rule based to some extent on the highest common factor, i.e., that no means of execution should be employed unless it is included in the laws of both States concerned. It is clear, of course, that this restriction only applies to means of execution in the general sense ;the details must in all cases be governed by the laws of the State to which application is made. The system thus laid down in the first paragraph of Article 9 is only subject to a very slight exception, which is explained in the second paragraph, and may be considered from two points of view. It is possible, on the one hand, that the two States in question have several modes of procedure at their disposal, which are common to them both ;in such cases the State making the application may, in making its request for assistance, specify the procedure which, having regard to the object, it deems the most appropriate. On the other hand, it may happen that the
(4186)
33 -
State making the application may attach some importance to formalities of execution which, although not employed in the State applied to, are not incompatiLle with its laws. For example, in the State to which application is made nctificaticn may be valid if it has been served at the domicile of the debtor, whereas the laws of the State making the application require that notification should be served on the debtor in perscn. In such a case the State making the application may express the desire that the latter procedure should be followed in serving the notification. The State to which application is made is free to accede to this request or to refuse it. The request might be refused on the grounds that the laws of the State to which application is made explicitly prohibit the measure asked for (not a very likely reason in the example chosen), or that it would be too difficult to serve the notification in the manner indicated. Article io. This article simply expresses the idea already contained in Rule 2 of document F. 212 (page 35). The granting of a preferential position to foreign taxes would at once give rise to legal difficulties ; moreover, it would in many cases be a cause of loss both to public and to private creditors, and would therefore inevitably render the execution of judgments under the Convention an unpopular measure.
Article ii.
The rule laid down in Article 3,though framed in the interests of moderation, might nevertheless have the effect of enabling the debtor to evade the claims made upon him. It is therefore desiratle that the creditor State should Le aLle, through the State tc which application is made to have recourse to conservatory measures, which would be carried out in accordance with the laws of the State to which application was made.
Irtide 12.
In view of the diversity of the different systems of law and the more orlessgeneral character of the above provisions it will be necessary to draw up regulations for the application of the Conventicn. In the Meeting's opinion, it would be best that these rules should not be laid down in the Conventions themselves. They are of toe special a nature, and, moreover, the fact that they were embodied in a convention might delay the introduction of changes which circumstances or experience had shown to be necessary. Accordingly, the Meeting proposes that the highest fiscal authorities should be left free to agree upon the practical measures necessary to implement the Convention. In order to make this intention clear, a second sentence giving a few examples has been added to Article i2.
(4187)
34 -
V.
PROPOSALS REGARDING FUTURE ORGANISATION.
The Committee of Technical Experts suggested that a Committee to study taxation questions should be set up as part of the League organisation. It expressed the opinion that this Committee should be composed of a limited nurhber of members selected for their individual technical qualifications, that it should meet once or twice a year as circumstances might dictate,.and that its chief task should be to hasten the solution of the problems of double taxation and administrative assistance or of assistance in connection with the recovery of taxes. The Committee might give its attention to the following points :
i. Periodical investigations of the general situation in regard to problems of double taxation and administrative assistance or of assistance in connection with the recovery of taxes and the drafting of reports on these matters. 2. The preparation of model bilateral conventions or collective conventions and revised texts thereof. 3. The preparation of any other international measures calculated to eliminate double taxation and to secure a more equitable distribution of fiscal burdens. 4. Comparison of fiscal systems. 5. Preparation of general conferences should such be contemplated. 6. Study of all kindred questions of international law, such as the question of reciprocity and that of the relation between the most-favoured-nation clause and questions of double taxation.
The General Meeting of Government Experts examined the suggestions of the Committee of Tlechnical Experts with the greatest interest, and unanimously adopted the following resolution : " The General Meeting of Government Experts on Double Taxation and Tax Evasion has taken note of the proposals concerning future organisation previously put forward by the technical experts. It desires to signify its unanimous approval of these proposals and to emphasise the importanlce it attaches to their prompt application, considering the appointment of a Committee to study questions concerning taxation within the framework of the League's organisation to be an essential condition of the development of the action undertaken in this sphere under the auspices of the League of Nations. " This Committee should consist of a.small number of members selected for their technical qualifications and to represent the principal fiscal systems; but the General Meeting of Government Experts hopes that it will be possible to make arrangements for the Committee thus appointed to remain in close and permanent contact with the countries not represented thereon." The Meeting holds that, in addition to the work suggested by the Committee of Technical Experts, the latter might deal with all questions connected with the study of fiscal problems -in particular, methods for the prevention of double taxation in the matter of income derived
(4188)
35 -
from patents and authors' rights ; rules for the apportionment of the profits or capital ot undertakings operating in several countries ; measures for the avoidance of the double taxation of trusts and companies possessing a large number of transferable securities. In a more general way, this Committee would be of assistance to the Council in all questions of taxation, even outside the problems of double taxation and administrative assistance and co-operation for the collection of taxes. The above-mentioned problems would form the subject of a series of publications to be issued by the Committee. The technical experts had also suggested that the future organ should publish the following documents : (a) Annual Collectlion of Conventions on Double Taxation, Administrate Assistance and Assistance in the Collection of Taxes. The General Meeting is very glad to note that the Council had already, by a resolution of September i5th, 1927, authorised the Secretariat to publish such a collection. The provisional edition of the first volume of the collection (document C. 345. M. 102. 1928. I), which has been distributed at the General Meeting, shows the great practical usefulness of this publication. As the experts said, the conclusion of bilateral conventions would be made easier if all the fiscal administrations throughout the world had access to the texts of the Conventions already concluded. They will then be able to take advantage of the work done abroad and to keep abreast of the progress made in this matter in other countries, Moreover, the publication of these texts would have the further effect of strengthening the tendency towards uniformity in future Conventions. Memoranda on Existing Systems of Taxation. For any administration wishing to negotiate with the administration of another couihtry a bilateral convention for the prevention of double taxation, it is essential to have an accurate and detailed knowledge of the taxation system of that country. It would be most useful, with this object, for the fiscal administrations of all countries to draw up surveys of their fiscal systems on. uniform lines. These surveys-which would illustrate the similarities and differences of the fiscal burdens in different countries, excluding purely formal differences, as of terminologywould lighten to a considerable extent the work of any negotiators who might be called upon to bring the various fiscal systems into harmony. In this connection, the Meeting recalls the fact that Article IX of the Recommendations of the Brussels Financial Conference I advocated a series of analogous publications. This article has so far never been fully applied, owing to the frequent changes which have occurred since the war in the fiscal legislations of many States. At the present time a certain stability seems to have been achieved, and the moment appears to have arrived when the task which was first proposed in 1020.might be begun. (b) I Article IX of the Recommendations of the Brussels Financial Conference reads as follows IX. In order to enlist public interest, it is essential to give the greatest publicity possible to the situation of the public finances of each State. .The Conference is therefore of the opinion that the work already accomplished by the Secretariat in its comparative study of public finances should be continued, and it suggests that the Council of the League of Nations should request all its Members and all the nations represented at this Conference to furnish it regularly not only with budget estimates and final the budget figures but also with a half-yearly account of actual receipts and expenditure. At same time, countries should be urged to supply as complete information as is possible on the existing system of taxation and any suggestions which may appear to each State to be useful for the financial education of the public opinion of the %%orld. " With the aid of the information thus obtained, the League of Nations would be enabled financial position of setting out the comparative to prepafe pamphlets for periodical publication of taxation-in force." the countries of the %Norld,and making clear the various systems
(4189)
36 -
. The surveys drawn up by the administrations of the different countries might be published under the direction of the Committee which it is recommended to set up, and this Committee would need to produce a questionnaire or detailed scheme in order to have them framed on uniform lines ; it should also be empowered'to suggest to the authors of the surveys any additions or alterations it might think desirable. (c) Annual Report. Once a year the committee might draw up a report on the progress made during the year with regard to double taxation, administrative assistance in the collection of taxes. Attention might be drawn in this report to the special characteristics of the conventions concluded during the past year and any new principles they might contain, to the signature or ratificafion of collective conventions and to the characteristics of the evolution of the principal fiscal systems. The report might perhaps be published as an introduction to the annual collection of conventions. Further, it would be useful to publish a half-yearly bulletin in which the administrations of the various countries would announce any changes in their legislation or procedure. This bulletin might also contain a bibliography of the books and publications appearing with regard to double taxation, administrative assistance in the collection of taxes and comparative fiscal law. Finally, the General Meeting of Government Experts wishes to point out that these documents would be of the highest interest, and unanimously recommends their publication.
(4190)
37 Annex.
GENERAL MEETING OF GOVERNMENT EXPERTS ON DOUBLE TAXATION AND TAX EVASION Geneva October 22nd to 31st, 1q28.
Chairman: M. CLAVIER (Belgium), Director-General of Direct Taxation and Land Survey in the Ministry of Finance. Deputy Chairmen: M. Hans BLAU (Switzerland), Director of the Federal Taxation Department. M. M. BORDUGE (France), Councillor of State, Director-General 6f Direct Taxation and Registration, Domains and Stamps in the Ministry of Finance. Dr. J. H. R. SINNINGrE DAMSTE (Netherlands), Director-General of Taxation. Professor H. DORN (Germany), Director in the Ministry of Finance. Sir Percy THOMPSON, K.B.E., C.B. (Great Britain), Deputy Chairman, Board of Inland Revenue. LIST OF EXPERTS. 4ustria: Belgium: Dr. R. EGGER, Ministerial Councillor in the Federal Ministry of Finance. M. CLAVIER, Director-General of Direct Taxation and Land Survey in the Ministry of Finance. For Questions o! Succession Duties : M. NEMERY, Director-General of Registration in the Ministry of Finance. Dr. Iv. BAINOFF, Assistant at the University of Sofia. M. Tsi-TCHE, Acting Chargd d'Affaires of the Chinese Republic in Paris. Assistant: Dr. ScIE-ToN-FA, First Secretary of the Chinese Legation in Paris. Dr. Boh. VLASAK, Minister Plenipotentiary, Chief of Section in the Ministry of Finance. M. LADEMANN, Councillor of.State, Head of the Department of Direct Taxation. M. E. S. VON DER HUDE, Chief of Section at the Ministry of Finance. Assistant: Count DE REVENTLOW, Assistant Chief of Section in the Ministry of the Interior. M. Job. SUIJA, Deputy-Minister of Finance. M. M. BORDUGE, Councillor of State, Director-General of Direct Taxation, Registration, Domains and Stamps in the Ministry of Fnance. Professor Herbert DORN, Director in the Ministry of Finance. Replaced during the last three days o the Meeting by: M. Werner PAASCHE, Senior Councillor in the Ministry of Finance. Sir Percy THOMPSON, K.B.E., C.B., Deputy Chairman, Board of Inland Revenue.
Bulgaria: China: Czechoslovakia: Danzig: Denmark: Estonia: France: Germany: Great Britain:
(4191)
Greece. Hungary:
38 -
Irish Free State: Italy: Japan: Latvia: Netherlands:
Norway: Poland:
'Roumania: South A/rica:
Spain:
Sweden: Switzerland:
United States
o/ America:
Union o/ Socialist Soviet Republics:
M. Vassili DENDRAMIS, Greek Minister at Berne. M. Al. KNEPPO, Ministerial Councillor in the Ministry of Finance. Assistant: M. L. DE PILISY, Ministerial Secretary in the Ministry of Finance. Mr. W. D. CAREY, Revenue Commissioner. Dr. Gino BOLAFFI, Head of Section in the General Directorate of Direct Taxation, Ministry of Finance. M. S6tar6 ISHIWATA, Secretary in the Ministry of Finance. Assistant: M. Sh. YAMAJI, Secretary in the Ministry of Finance. M. Fr. KEMPELS, Director of the Taxation Department in the Ministry of Finance. Dr. J. H. R. SINNINGHE DAMSTE, Director-General of Taxation. Assistants: M. B. J. DE LE~uw, Inspector of Registration and Domains. For Colonial Questions: Dr. L. J. VAN DER WAALS, Director in the Colonial Ministry. Dr. C. L. LANGE, Secretary-General of the Inter-Parliamentary Union. Assistant: M. W. KENT, Chief of Division in the Ministry of Finance. Professor Stefan ZALESKI, Professor of Political Economy at the University of Poznan. For Questions ol Succession Duties: M. Edward WERNER, Head of Department in the Ministry of Finance. M. Constantin ANTONIADE, Envoy Extraordinary and Minister Plenipotentiary accredited to the League of Nations. Mr. A. F. CORBETT, of the Inland Revenue Department. Assistant: Mr. Aken L. ALBRIGHT, of the High Commissioner's Office, London. Professor A. FLORiS DE LEMus, Professor of Political Economy at the Central University of Madrid. Assistants: M. Pedro MARICHALAR Y MONREAL, Marquis DE MONTESA, Chief of the Department of Public Funds. M. Emilio MARTINEZ AMADOR, Head of Section in the Ministry of Foreign Affairs. Dr. G. W. DE KUYLENSTIERNA, Chief of Division in the Ministry of Finance. Assistant: M. C. J. EKENBERG, Councillor at the Audit Office. M. H. BLAU, Director of the Federal Taxation Department Assistant: Dr. FROLICHER, Secretary of Legation of the First Class in the Federal Political Department. Professor Thomas S. ADAMS, of Yale University. Assistants: Mr. Mitchell B. CARROLL Chief of Tax Section, Department of Commerce. Miss Annabel MATTHEWS, Attorney, attached to the Office of the General Council, Board of Internal Revenue, Treasury Department. M. LiuBiMov, Financial Agent of the U.S.S.R. Assistant: M. LASHKEVITCH, Legal Adviser to the U.S.S.R. Embassy at Paris.
(4192)
39 -
II tn ., drisoyry ('paciiv: aIIber M. Robert JULLI1.IID, President of the Comptoir d'Escompte of Geneva, InternationalChI
o Comnmnercc:
Chairman of the I)ouble Taxation Committee of the International

Chamber of Commerce. Assistants:
M. J. l)ucHEnNois, Doctor of Law, Assistant Secretary-General of the French National Committee of the International Chamber of Commerce. M. V. DEL Rio, Head of the Finance Group of the International Chamber
of Commerce.
Sir Samuel INSTONE, Director of the International Air Transport Association.
Mr. H. M.CLEMINSON, Secretary of the International Shipping Conference. )r. Koppj., Barrister, Member of the Board of Directors of the Limited Compan y.Schnltheiss Patzenhofer Brauerei, Berlin.
(4193)
(Distributed.to the Council and the cemb-rs of the Leza -.-
Official No.:
0. 516. V. 175. 1929.

[F. /Fiscal / 14.]
II.
Geneva, October 26th,
1929.
LEAGUE OF NATIONS
FISCAL
COMMITTEE
RE2?GT TO THE COUNCIL ON THE WORK OF THE FIRST SESSION OF THE COMMITTEE Held in Gen'va Iroin October 1 7 th to 26th,
1929.
CONTENTS.
Introduction ..... I.
...
...
..................................
. . ... 2 3
Examinatic. ,, .,.cently concluded'International Conventions for the Avoidance Al)-:,, ,'axation ................................... II. G,.nec. l'osition with regard to the Problems of Double Taxation and Tax Evasion III. Examination of the Questions left open by the General Meeting of Government Experts: Definition of the Terms " Autonomous Agent " and " Permanent I' tablisli ic t . . . . . . . . . . . . . . . . . . . . . . . 11. Rules for Apportitmment of Profits or Capital from Industrial or Commercil i'2terpries operating in Several Countries, and Meaures ideIioend to avoid Double Taxation of International Trusts and i,lding Companies " . . ........ . ...... .......... the Principles involved in the Avoidance ofthe Double Taxation C. t:,,. .............. of Authors' and Inventors' Rights ....... 1). The Question of Reciprocity and of the Most-favoured-nation Clause as They affect the Problen of DIuble Taxation ............ A IV. V. St .y of the Possibility of exten:ling the leaures designed to avoid Double Taxation to Turnover Tax, Stamp Duties and Various Charges in respect .................... ..... of International Commerce ... Study of the P-ibility of co;t'-l:diotg Muhtii,ter::i Conventions for the Avoidance Number ofCountries seem of Double Taxation on 'oints on which a Sufficient ........................ ...... to be in Agrcetcnt ..... .................... ... Taxation of Foreign Motor Vehicles ...... Representation of the Fiscal Committee on the International Conference on the .... ... ...................... Treatment of Foreigners .... ............ Appointment of Corresponding Members .............
4 5 6
VI. VII. VIII.
6 7 8 8
INTRODUCTION.
w
.
ihe iscal Committee has the honottr to submit to the Council the following report on the . f itfirst session, held in Gen.Va from October x7 th to 26th, 1929.
.. 15, , i ' ., 1.\. . I 1/99. Imp. guriditt.
Series of League of Nations Publications II. ECONOMIC AND FINANCIAL
1929. II. 44.
(4195)
The following members of the Committee were present:
M. BORDUGE (Chairman).
Professor Th. S. ADAMS. M. BLAU. Dr. BOLAFFI.
Al. CLAVIER.
Professor Dr. FLORES DE LEMUS. Dr. Fel. MLYNARSK. M. W. PAASCHE (in the place of Professor Dr. DORN). Dr. Sinninghe DAMSTE. Sir Percy THOMPSON, K.B.E., C.B. Representing the International Chamber o[ Commerce:
M. R. JULLIARD.
EXAMINATION
OF
RECENTLY
CONCLUDED INTERNATIONAL OF
CONVENTIONS
FOR
THE AVOIDANCE
DOUBLE TAXATION.
The Committee notes that, since the General Meeting of Government Experts held in Geneva in October 1928, a number of international agreements have been concluded for the prevention of double taxation in its widest sense. In the first place, there is the Convention concluded on May 12th, 1929, between Hungary and Poland, which deals with direct taxation, in rem and in personam. The Convention is chiefly based on the system laid down in draft Convention Ia of 1928 (document C.562.M.78.1928.II); as regards the personal income tax and the permanent tax on total wealth, however, there is a difference between .the system actually adopted and the system recommended in draft Convention Ia, inasmuch as, in the case of these taxes, the Treaty applies a system very like that of taxing at the source. It should also be remarked that in mtatny cases it has been found useful to go into details of application which are not contained ill draft In. Administrative and judicial assistance is only provided for in the Convention in a provisional clause (Article 15), in virtue of which the countries undertake to lend each other mutual assistance and, if necessary, to conclude a special agreemlent. On the same date, the two above-mentioned States concluded a Treaty dealing with succession duties. Its fundamental provisions are to the effect that immovable property and undertakings (or shares in undertakings) will only be taxed in the country in which they are situated, and that, as regards the other parts of the inheritance, it will be in the first instance the country of which the deceased was a national which will levy the tax, subject to an exception in the case of the deceased's having had his domicile in the other contracting State (Article 2). A special clause (Article 2d) refers to the possibility of taxing the deceased's heir. Reference should also be made to the Agreement between the Free City of Danzig and Poland signed at Danzig on May 29th, 1929. It deals with taxes on income and total wealth and a few other taxes of the same kind. The Agreement follows the principles of draft Convention Ic, although there are a few changes, particularly as regards wages and salaries (compare Article VI of the Agreement with Article 5 of draft Ic). The same Powers further concluded two Agreements referring respectively to succession duties and the tax on bills of exchange. The former corresponds to the principles of draft Convention II of 1928; in the second, the two States are obliged, in the event of their imposing a stamp duty on a bill of exchange, to deduct the duty already levied by the other State. In virtue of the Treaty of July 12th, 1926, between Austria and Czechoslovakia, the two administrations have concluded a new arrangement with regard to the fiscal regime applicable to gainful enterprises carrying on their activities in the two States. This Treaty, together with the Treaty of the same date concerning the taxation of railway and shipping ..,terprises (see "Collection of International Agreements", document C.3 5.M.1o2.I928.II, pages 224 and 12o), 4 entered into force on January 26th, 1929. The Committee next draws attention to ain Agreement (Protocol) of June 15th, between Hungary and Austria, aiming at the reciprocal exemption of foreign railway undertakings within a zone extnding to 15 kilometres on either side of the frontier. Lastly, it sho A. be observed that the idea of a complete exemption of foreign shipping continues to make progress. Some of the above-mentioned Agreements contain clauses establishing such exemption. Moreover, three new Agreements deal solely with the subject: (a) the Arrangement dated January ixth, 1929, between Norway and the Netherlands (see Supplement No. I to the "Collection of International Agreements", document C.35.M.1 .1929.1I page 28); 34 (b) the Agreement between Great Britain and Greece of July 31st, 1929; and (c), the Exchange of Notes between Great Britain and Japan on August ioth, 1929.
(4196)
-3 II.
GENERAL -POSITION WITH REGARD TO THE PROBLEMS OF DOUBLE TAXATION AND
TAX EVASION. The Fiscal Committee, when examining the International Conventions designed to avoid double taxation concluded since the General Meeting of Government Experts held in Geneva in October 1928, noted that the number of documents signed was not very great. Nevertheless, in any just appreciation of the position, account must be taken of the fact that the recommendations of the General Meeting of Government Experts have not yet had time to bear full fruit. The Committee has been semi-officially informed by its various members that numerous conversations are in progress, and that probably, in a relatively short time, several important Conventions will be signed. Ill.
EXAMINATION OF THE QUESTIONS LEFT OPEN BY THE GENERAL MEETING OF GOVERNMENT EXPERTS.
The General Meeting of Government Experts had pointed out that the Fiscal Committee ought to take up several of the questions submitted to it, which it had not had time to examine in detail, namely: Measures to be taken to avoid double taxation of income derived from patents and from authors' rights; Rules for the apportionment of profits or capital of industrial or commercial enterprises operating in several countries; Measures for the avoidance of double taxation of trusts and companies owning large amounts of easily transferable securities. The Fiscal Committee placed these various questions on its agenda, and decided to add to them the study of the definition of the terms .autonomous agent " and 'permanent establishment ",which, if universally recognised, would greatly facilitate the application of the rules incorporated in the model Conventions relating to the taxation of foreign undertakings. A. Definition ofthe Terms Autonomous Agent " and *Permanent Establishment ".
"
The following text is an attempt to define the terms "autonomous agent and "permanent establishment ". The Fiscal Committee adopted this text on a first reading, but reserved the right to examine it on a second reading at its next session, by which time it win have received the comments of its corresponding members. In its endeavour to determine the principles which it might adopt as a guide in defining the terms "autonomous agent "' and "permanent establishment ",the Committee found that four criteria were employed in different countries. (e) The first is a criterion of a legal nature, it being considered that the only agents dependent on an enterprise are those having sufficient powers to conclude contracts binding upon that enterprise. The Committee considered that this criterion was admissible but was not applicable to every case. " (b) According to the second system, there is no "permanent establishment unless the agent has a fixed depot. There are cases, however, in which the presence of an agent of an enterprise may connote, for that enterprise, the existence of a permanent establishment, although the enterprise undoubtedly has no fixed depot; this is particularly the case with insurance companies and certain buying agencies. (c) The third system takes into account the relations between the agent and -the enterprise. the only dgents regarded as not autonomous being those in receipt of fixed emoluments. This may be a determining but it is not an indispensable factor in deciding whether there is a non-autonomous agent, i.e., a permanent establishment. (d) The fourth criterion is that of the continuity of the relations between the agent and the enterprise. This criterion is not absolute and requires closer definition. Taking the above systems into consideration, the Committee concluded that it would be advantageous to disengage a eneralprinciple governing the matter, and to list a number of indices which constitute a presumption in avour of the existence of a permanent establishment.
sense."
legal rather than in the strit sense report, the term "agent" is employed in the broad commercial In this
(4197)
-4 The fundamental principle is: When a foreign enterprise regularly has business relations another, country through an agent established there, who is authorised to act on its behalf, in it shall be deemed to have a permanent establishment in that country. A permanent establishment may be presumed to exist: (i) When the agent carries out the whole or part of his activities in an office or other premises placed at his disposal by the enterprise; (2) When the office or premises where the agent carries out the whole or part of his activities are designated by outward signs as being an establishment of the enterprise itself; (3) When the agent is habitually in possession, for the purposes of sale, of a stock of goods belonging to the enterprise, exclusive of samples; (4) When the agent, having a business headquarters in the country, is a duly accredited agent (/ondd de pouvoirs) who habitually enters into contracts on behalf bf the enterprise for which he works; (5) When the agent is an employee who habitually transacts commercial business on behalf of the enterprise in return for remuneration. A broker who places his services at the disposal of an enterprise in touch with customers does not, in his own person, constitute a permanent order to bring it into establishment of the enterprise, even if his work for the enterprise is continuous or carried on Similarly, a commission agent (commissionnaire) who acts in his own at regular periods. undertakings and receives the normal rate of commission does not name for any number of constitute a permanent establishment of any of the undertakings he represents. Lastly, there cannot be held to be any permanent establishment in the case of commercial travellers not coming under any of the above-mentioned categories. Commentary. The essential elements of the relationship between the agent and the foreign enterprse which constitutes a permanent establishment are: (i) The authorisation given the agent to act lor the foreign enterprise; and (3 The fact of his carrying out these trantactions regularly; and (3) The fact of his carrying them out in an establishment. In connection with the application of such a principle, it is immaterial where the contract is concluded, or where title to property passes. This concept excludes: (i) Casual or even frequent transactions through a broker, because such an intermediary merely brings the parties together; (a) Sales through a commission agent who acts in his own name for any number of parties; (3) Travelling salesmen who have no establishment. It is important to distinguish the agent who constitutes a permanent establishment from the commission agent (commissionnaire) who acts in his own name and not in that of the party for whose account he acts. The commission agent is, under the law of many countries, an independent persoi in business for himself and is responsible to persons buying from him the products which the real vendor has shipped to him to sell. In most instances, the buyers do not know the real seller and the latter dot not know the buyers. Each looks to the commission agent, whose primary r61e is that of a responsible intermediary between sellers and buyers who would otherwise have difficulty in entering into communication. He usually disposes in wholesale of consigned stocks and keeps no permanent stock on behalf of any one seller. The commission agent (commissionnaire) in this sense is not to be confused with the socalled commission gent (agent a la commission) who has a stock of goods enterprise on consignment, and makes retail sales out of it continuously belonging to a foreign for the account of the foreign enlerprise. Such a "commission agent " usually acts expressly, if not in fact, for the foreign enterprise, inasmuch as the contract of sale or invoice uiually bears the name of the foreign enterprise and the agent usually signs on its behalf. Rules lor Apportionment of Pro/its or Capital Irom Industrial or Commercial Enterprises operating in Several Countries, and Measures designed to avoid Double Taxation o] International Trusts and " Holding Companies," , of The General Meeting of Government Experts on Double Taxation and Fiscal Evasion, held in November. 1928, recommended that the Fiscal Committee should examine the possibility of establishing " rules for the apportionment of the profits or in several countries " and " measures for the avoidance of capital of undertakings operating double taxation of trusts and companies possessing a large number of transferable securitiesthe ". The General Meeting has not itself entered into the details of this question. In the three alternative model bilateral Conventions which it prepared, it made the following proposal on this point: "Should the undertaking possess permanent establishments in both contracting States, each of the two States shall tax the portion of the income produced in its territory. The B.
(4198)
-5competent administrations of "the two contracting States shall come to an agreement as to the basis for apportionment. In the commentary on this article, the General Meeting mentioned various methods of apportionment: " These bases will vary essentially according to the undertakings concerned; in certain States account is taken, according to the nature of the undertakings, of the amount of capital involved, of the number of workers, the wages paid, receipts, etc. Similarly, in cases. where the products of factories are sold abroad, a distinction is often made between manufacturing ' and ' merchanting' profits, the latter being the difference between the price in the home market and the sale price abroad, less cost of transport. These criteria are,. of course, given merely as indications. " At its first session, the Fiscal Committee held a preliminary discussion of the whole question. It soon came to the conclusion that, in order to do any useful work, it would be essential to have a detailed knowledge of the present practice in the various countries. With this object in view, the Committee has sent a letter to all its members and corresponding members, requesting the- , to supply it with detailed iniormation on the subject. The Committee has further asked the representative of the International Chamber of Commerce whether that body would find It possible to co-operate in this enquiry and, if so, to inform it what, in the opinion of the members of the Chamber, would be the best methods of apportionment. The Committee decided to add to the study of this question the examination of a resolution voted by the Jntemational Chamber of Commerce at its Congress held at Amsterdam in July i929. This resolution provides that: "The fact of an undertaking having business relations with a foreign country through a local company holding some or all of the shares does not imply that the undertaking has a permanent establishment in that country. This question was examined in detail by the Committee. After discussion, it became clear that the principle at issue, though of great importance, only affected a small number of cases. The Committee also found that this question formed but a part of the general question of the distribution of the profits of industrial or commercial undertakings. It was therefore decided to postpone consideration of this point and to take no decision until the replies to the questionnaire relating to the principal question had been received and analysed. C. Study o] the Principles involved in the Avoidance ol the Double Taxation ol Authors' and Inventors' Rights.
The General Meeting of Government Experts has suggested that the Fiscal Committee should endeavour to discover a method for the avoidance of double taxation levied on the income derivei from patents and authors' rights. During the present session, it has conducted a preliminary enquiry into this subject. Certain members were of opinion that the regime had been fixed by Article 9 of the draft Convention No. la, which is: worded as follows: "Annuities and income from other sources not referred to in the previous paragraphs shall be taxable in the State of fiscal domicile of the creditor of such income. Other members pointed out that, at previous meetings, no decision had been taken either with regard to authors' rigits or the income derived from patents. This argument seemed to be confirmed by the fact that the Government experts' report recommended the Fiscal Committee to-study th: questio'. also observed that the above-mentioned Article 9 contained Certain members of the Committee " a printer's error, since the word sources " should have been "crIances ". In support of this argument, they advanced the fo"owing reasons: crdances " had always been employed (i) In all previous documents the word (document F.2x2, page 32, (h); document C.216.M.85.1927.II, pages it and 16); (2) The text of Article 9 had been taken from the above documents and had been adopted without alteration by the General Meeting of Government Experts; (3) The last part of the article refers to creditors (creanciers), which implies the existence of a " crance,"; .(4) The commentary on this article twice employs the expression "creances" but makes no mentior of "sources " (document C.562.M.I 7 8.I928.II, page 13); (5) Article 8 of Draft Ic, based on the Article 9 referred to above, also contains the word "criances" (document C.562.M.I 7 8.e928.II, page 20), so that, if the word "sources" is maintained in Art he 9, Draft Ia, the provisions of Draft Ic would differ from those of Draft Ia, which would be contrary to the intention expressed by the Government experts. Lastly, certain members of the Fiscal Committee thought that, in certain cases, the income derived from authors' rights or patents might come under Article 5 of the draft Convention, which
(4199)
refers to industrial, commercial or agricultural undertakings and any other trades or rl-ofesiols. carried on in the person's own place of residence. While not wishing to express an opinion on the text of the Article 9 of Draft Ia adopted hy the Government experts, the Fiscal Committee thinks that, before any decision is taken wilil regard to the method of avoiding double taxation in the case of authors' and inventors' rights it would be desirable to institute an enquiry into the fiscal regime at present applied to them in tih10 various countries. For this purpose, it has drawn up a questionnaire to be sent to the regular and corresponding members of the Fiscal Committee. It proposes to resume its enquiries at its next session, when it will have had time to analyse the replies received. D. The Question olReciprocity and of the Most-favoured-nation Clause as they allect the Probl': of Double Taxation. The General Meeting of Government Experts had also recommended that the Committee should proceed with " the examination of all points of international law connected with questions of double taxation, such as reciprocity and the relations between the most-favoured-nation clause and questions of double taxation ". A preliminary exchange of views on these points showed that they were very complex. The Fiscal Committee therefore proposes to study them again at its next session. IV.
STUDY OF THE POSSIBILITY OF EXTENDING THE MEASURES DESIGNED TO AVOID DOUBLE TAXATION TQ TURNOVER TAX, STAMP DUTIES AND VARIOUS CHARGES IN RESPECT Or INTERNATIONAL COMMERCE.
At its Congress at Amsterdam, the International Chamber of expressed the wish that the study of the best means of avoiding double taxation shouldCommerce be extended to the following: "Turnover tax: duties, stamps, and various charges ,n instruments of international commerce (such as cheques, bills of exchange, letters of credit, etc.). " The Fiscal Committee has no information as to the reasons which led the International Chamber of Commerce to adopt this resolution. The Committee realises the undesirability of asking States to agree to limit their sovereignty in fiscal matters unless the unfettered of such sovereignty obviously causes real hardship to taxpayers or is attended by serious exercise economic disadvantages. The Committee is unaware in what way the existing system entails either of these effects in any marked degree, and, in the absence of such information, it does not feel able to make any definite recommendation. It requests the Secretariat to obtain from the International Chamber of Commerce all requisite information in this connection and to collect such further data as may be necessary for its enquiry. V.
STDY OiF THE POSSIBILITY OF CONCLUDING MULTILATERAL CONVENTIONS FOR THE AVOIDANCE OF DOUBLE TAXATION ON POINTS ON WHICH A SUFFICIENT NUIBER OF COUNTRIES SEEI TO BE IN AGREEIENT.
The Committee noted the following resolution adopted by the International Chamber of Commerce at its Amsterdam Congress in July 1929: " The International Chamber of Commerce considers that it would be highly desirable for an international conference to be convened as soon as possible, consisting of: (a) Treasury officials, and (b) representative business men, appointed by the International Chamber of Commerce, for the purpose of unifying as far as possible the systems applied for the abolition of double taxation and preparing a multilateral convention for this purpose." The Committee unanimously agreed that bilateral conventions only constitute a partial solution of the problem of double taxation. Though recognising that this solution present time in most cases to be the only. possible one, the Committee felt that it appears at the should always be borne in mind that multilateral conventions would be better calculated to secure the desired unity of method and principle. It therefore thinks that an endeavour should be made to conclude such conventions as soon as agreement, even on a limited scale, seems to be possible. For instance, the Committee held that a multilateral convention for the avoidance of double taxation in the case of commercial and industrial enterprises having permanent establishments in several countries cannot be concluded until a precise definition of the terms " permanent establishment "' and " autonomous agent " has been secured. The Committee hopes that the study it has undertaken in this connection will definition capable of general acceptance, and that, when this result has been achie,-d, lead to a be taken to prepare a multilateral convention regulating the taxation of industrial and steps may commercial enterprises which conduct business in more than one country. The Committee is also glad to note that the International Chamber of Commerce has instructed its national Committees to work to the same end. At its next session, the Committee proposes to examine .-,ch conclusions as these national Committees have reached.
(4200)
- 7VI.
TAXATION OF FOREIGN MOTOR VEHICLES.
On September x9 th, 1929, the Council of the League of Nations authorised the Fiscal Committee to co-operate with the Permanent Committee on Road Traffic in studying the questions involved by the taxation of foreign motor vehicles. This joint action had already been requested by the Advisory and Technical Committee on Communications and Transit, which, at its March 1929 session, adopted the following resolution: The Advisory and Technical Committee for Communications and Transit has noted the resolution of the Permanent Committee on Road Traffic concerning taxes on foreign motor vehicles, and requests its Chairman to take all the necessary steps for the joint examination of this question by the Permanent Committee on Road Traffic and the Fiscal Committee recently appointed by the Council of the League of Nations. " The resolution of the Permanent Committee on Road Traffic referred to -in the above resolution is as follows: The Committee, having taken note of the material submitted to it by the Secretariat, and having heard the information supplied by the representatives of the International Chamber of Commerce, the International Association of Recognised Automobile Clubs and the Alliance internationale du Tourisme, requests the Chairman of the Advisory and Technical Committee to take steps, by whatever procedure may be the most appropriate and with the assistance of fiscal experts, to enquire into the possibility of a general agreement between States with a view to the introduction of a system of taxes on foreign motor vehicles entering their respective territories which, by its nature and its method of enforcement, would not constitute a hindrance to international motor touring; " Recommends that this question should be studied in conjunction with the following resolutions adopted by the Committee, which are based on certain desiderata drawn up by the International Association of Recognised Automobile Clubs and the Alliance internationale de Tourisme: (I) That no taxes on foreign motor vehicles should be levied during the '.st two months, at least, of their stay in the country; " '(2) That the method of collecting such taxes should be simplified to the utmost. possible extent, in particular by making it the general rule to levy the daily licence fees at the time of leaving the country; "' (3) That the tax on foreign motor vehicles should not be leiable when the motorist merely com- to the Customs frontier office, for instance, to have his triptych endorsed, without proceeding further into the country. The Committee has conducted a preliminary enquiry and indicates below the general lines which it thinks should be followed in reaching the solution it contemplates. The Committee is of opinion that the ideal method of apportioning the various taxes on motor-cars (road taxes, luxury taxes) would be for each State merely to tax the motor-cars registered in its territory, and entirely to exempt fcreign cars. Certainly, this method, if adopted, would greatly encourage international traffic-both tourist and goods traffic-and would, moreover, provide a full and complete remedy for the evil of double taxation. Although the latter point is not without importance, the former seems still more essential. It seems that Governments would be well advised to exempt motor-cars registered in countries which do not levy any tax on foreign cars, not in order to avoid double taxation-an impossibility in, this casebut in order to apply the principle of reciprocity. The Committee, however, wonders whether, in order to attain a first result at least, it would rot be desirable for the present to limit exemption to private touring-cars; as, generally speaking, these cars only undertake journeys of short duration and are not heavy like lorries and char-i.bancs, exemption is justified in their case and might be included within the framework of a general Convention. Such a Convention would not prevent the conclusion of bilateral agreements between various countries concerning the taxation of heavy motor-cars used for the transport of goods or the public conveyance of persons. Complete exemption, i.e., exemption not limited in duration, would eliminate the formalities which the levying of a tax makes necessary and would render Recommendations 2 and 3 of the Permanent Committee on Road Traffic superfluous. On the other hand, exemption covering only a few months would necessitate the maintenance of supervisory formalities. Naturally, if complete exemption were accorded to lorries and char-.-bancs, the Government in question would have to reserve the right to take special steps in cases where the owners of these cars misused the facilities granted them. Thus, for instance, a foreign motor-car used solely in one country and never leaving that country would still be subject to taxation. Another question discussed was whether the right to exemption (total or partial) should be accorded to cars the owner of which resides in the territory of one of the contracting parties, or to cars registered in the territory of the contracting party.. As, in reality, these two methods are practically the same, the Committee suggested that.the second might be selected, if only on
73095 O-62-vol.
4-
14
(4201)
account of the greater facility afforded of furnishing proof. A motorist crossing a frontier might not always be in a position to prove that his domicile entitled him to exemption (the passport system not being eternal), whereas proofs of registration are to be found on the car itself. If, in order to make sure that the greatest possible number of countries shall be parties to the Convention, it be thought undesirable to accord complete exemption, exemption might be granted for a period of three months (as already laid down in the laws of several countries). The foregoing proposal satisfies Recommendation i of the Permanent Committee on Road Traffic. The second recommendation of this Committee is concerned with the method Of levying taxes, and calls, in so far as day-to-day taxes are concerned, for the acceptance of the system of levying these taxes at the time cars leave the country. The Committee is of opinion that this recommendation is a reasonable one and that its acceptance would facilitate international traffic. True, the system which would result from its acceptance would involve a certain amount of risk for the creditor country, since there always remains the possibility of evading a tax which has not been paid. But in the particular case of motor-cars, this danger may perhaps be greatly reduced by the Customs formalities to which foreign cars are subject. The necessity of keeping Customs documents up to date obliges motorists to go to a Customs office from time to time, and the authorities may .then ascertain whether the road tax has been paid. The third recommendation of the Permanent Committee on Road Transport is not such as to give rise to much comment. It seems to be rather an exaggeration to tax a person merely for having made a short journey in order to have his triptych visaed, and countries which do this might well accede to the recommendation of the Committee, without any alteration of their internal legislation. The mere issuing of instructions to their administrative agents would be sufficient. As to formalities, it might be possible to use Customs booklets as control documents. Otherwise, it would be well to introduce a special booklet. The last question examined by the Committee was whether all the exemptions, general and otherwise, should be included in one multilateral Convention, or whether two Conventions should be drawn up-one for those countries which accord complete exemption, and the other for those which favour exemption limited to a definite period only. The Committee holds that the best solution would be the conclusion of a single Convention whereby all the signatory States would accord restricted exemption, but an additional optional Protocol might be signed by such States as agreed to full and complete exemption. As exemption is -accorded on a basis of reciprocity, it is thought that the most-favoured-nation clause inserted Jn the commercial treaties should not be invoked in this connection. It would be as well to elucidate this point. The Convention would obviously be no obstacle to the conclusion of bilateral agreements by countries not bound to one another by the stipulations of the proposed Convention, but desirous of restricting exemption to certain countries or of restricting its duration. On the basis of these principles, the Committee has drawn up a draft Convention, which it has discussed with a delegation of the Permanent Committee on Road Traffic. It has commissioned three of its members to continue to collaborate with the Transit Organisation in drawing up the final text of the draft. VII.
REPRESENTATION OF THE FISCAL COMMITTEE ON THE INTERNATIONAL CONFERENCE ON THE TREATMENT OF FOREIGNERS.
In a resolution adopted on August 31st, 1929, the Council called upon the Fiscal Committee to send to the International Conference for the Conclusion of a Convention on the Treatment of Foreigners two of its members, to be present at the meetings of the Confeience in a consultative capacity. The Committe,discussed the fiscal clauses to be incorporated in the draft Convention. It endeavoured to determine the scope of these clauses, and considered the various questions which might be raised by the Government delegates to the Conference. It appointed M. BORDUGE, Chairman of the Committee, and M. BLAU as its representatives. Viii.
APPOINTMENT OF CORRESPONDING MEMBERS.
The Fiscal Committee found that, as at present constituted, it had only nineteen corresponding members. It considers that, in view of the character of its work, it is extremely important that there should be corresponding members of the Fiscal Conmmittee in the largest possible number of countries. Indeed, only on this condition can there be any hope of giving the maximum effect to the studies undertaken by the Committee, particularly in connection with the question of unifying the methods employed for the avoidance of double taxation, The Fiscal Committee hopes that the Council will extend the list of its corresponding members as much as possible.
(4202)
:Distributed to the Council and the Members of the League.]
Offiesa; No.:
0. 340. Vt'1. 140. 1930.

[F.,/Fiscal/4i.]
II.
Geneva. May 31st, 1930.
LEAGUE
OF NATIONS
FISCAL COMMITTEE
REPORT TO THE COUNCIL ON THE WORK OF THE SECOND SESSION OF THE COMMITTEE Held in Geneva Irorn May 22%d to 31st, z93o.
(ONTENTS.
Page
Introduction ....... .... ................................. I. Examination of recently concluded International Conventions for the Avoidance of Double Taxation ......... .. ......................... II. General Position with regard to the Problems of Double Taxation and Tax Evasion III. Examination of the Questions left open by the General Meeting of Government Experts: A. Definition of the Term " Autonomous Agent " in Relation to the Term "Permanent Establishment ".. .......... B. Rules for Apportionment of Profits or Capital from Un,iertakin.i,s operating in Several Countries, and Measures designed to avoid Double Taxation of International Trusts and Holding Companies' C. Study of the Princip!es involved in the Avoidance of the Double Taxation of Authors' Rights and Patents ... .... .............. D. The Question of Reciprocity and of the Most-favoured-nation Clause as they affect the Problem of Double Taxation .... ........ IV. Grant. by the Rockefeller Foundation ....... .. ................... V. Possibility of concluding Multilateral Conventions for the Avoidance of Double l'axation on Points on which a Sufficient Number of Countries seem to be in Agreement ....... .. ............................... VI. Taxation.of Foreign Motor Vehicles ......... .................... VII. Customs Dut' s and Fiscal Charges applicable to Newspapers .... ........ VIII. Draft Resolution submitted by Sir Percy Thompson ...... ............ Appendices. 1. Clauso r6 of Finance Bill 193o-Great Britain ............... Sunimuary by Professor Adans of the Replies received to the Questionnaire on Apportioin~ment of Profits or Capital from Enterprises operating in Several Countries ......... .............................. . .... 111. Summary by M. Clavier of the Replies received to the Questionnaire on Taxation of Authors' Rights and Patents ......... ....................
(.F. (.)
3 3 3
5 7 7
8 9 9 9
io
o 17
u. -
(A.) p-
v.
613.. +
I.oo (F.) 955 (A.)
8/j5. Ip.
K-fl
Series of League of Nations Publications II. ECONOMIC AND FINANCIAL 1930. 11. 23.'
(4203)
-3
INTRODUCTION. The Fiscal Committee has the honour to submit to the Council the following report relating to the work of its second session held at Geneva from May 22nd to 31st, 1930. The following members of the Committee were present: M. BLAU (Chairman per interim in the absence of M. BORDUGE). Professor Th. S. ADAMS, assisted by M. ALVORD and Mr. CARROLL. Dr. Gino BOLAFFI.
M. CLAVIER.
M. Diez DE MEDINA. Professor Dr. FLORLS DE UMUs. M. MANTZAVINOS, assisted by M. BERTZAS. M. PAASCHE (replacing Professor DORN). Dr. SINNINGst, DAMST11. M. TETREL (replacing M. BORDUGE), assisted by M. BOISSARD. Sir Percy THOMPSON, K.B.E., C.B. Represenling 'h. ItternationaJ Chamber of Commerce: M. R. JULLIARD. I.
EXAMINATION Or RECENTLY CONCLUDED INTERNATIONAL CONVENTIONS FOR THE AVOIDANCE
OF DOUBLE TAXATION. On February 22nd, 1928, Hungary and Yugoslavia concluded a Convention Ifor the prevention of double taxation in the matter of direct taxes (including contributions levied on account of tubordinate public corporations, communes, etc.). The Convention, is based on the distinction between impersonal and personal taxes, both the terms being interpreted in their ordinary sense. In so far as concerns important taxes, the Convention follows the principles embodied in the 1928 model conventions. There is a slight difference as regards directors' fees: if these are paid in respect of services at a branch, the State in whose territory the branch is situated has the right of assessment (compare Article 7 of the Convention with Article 6 of draft Ia.). It may be noted further that under Articles 6 and 7, in determining the domicile of juridical persons, not only the real centre of management of the undertaking (vide Article 4 of draft Ia) but also the head office of the company is taken into account, the latter having priority over the said centre ofmanagement. This stipulation recurs inArticle 9 (personal tax). In principle, the personal tax is levied in the taxpayer's State of domicile, with the exception of income from immovable property (including mortgage debts) and industrial and commercial undertakings, and earned income (the latter forms of income are not excepted in the abovementioned article in draft Ia). The tax on total wealth is based on the same principles as the personal tax on income. As regards administrative and legal assistance, there is only one provision dealing with this matter (Article 14). As regards the exemption of shipping, the Committee can mention, in addition to Article 12 of the above-mentioned Treaty, seven Agreements: between Belgium and Sweden (May 31st, 1929), Canada and Japan (September 21st, 1929, Exchange of Notes), Canada and the Netherlands SeptemI)er 23rd, 1929, Exchange of Notes), Canada and Greece (September 3oth, 1929, Exchange of Notes), Canada and Sweden (November 21st, 1929, Exchange of Notes), France and Sweden (l)ecember Igth, 1929, January 25th, 1930, Exchange of Notes), Canada and Germany (April 17th, 1930, Exchange of Notes). Total or partial exemption from the road-tax has been provided for in arrangements between lh., Netherlands and certain other countries-namely, Belgium, Denmark, Germany, Great Britain and Northern Ireland. and 'weden. These arrangements have been brought into operation by enactment ofsimultaneous internal legislation Finally, a Treat" was concluded between Austria and Hungary (June 25th. 1928), providing for administrative and legal assistance; the whole of this Treaty corresponds to the Treaty between Austria and Czechoslovakia of July 12th, 1926 (document C.3 4 5.M.1o2.1 9 28.II, p. 224). II.
Gr'INERAL POSITION WtVI~I REGARD TO THE PROBLEMS OF DOUBLE TAXATION
AND TAX EVASION. The Fiscal Committee has taken note of the draft law recently submitted to the Congress of th' United Sta..es of America with a view to avoiding double taxation. The Committee welcomes this attempt, tle more so because the system of combating the superimposing of taxes by inicrnl1 legislation has already shown itself as very efficacious. Proof of this is given in the (ollectin of Agreements (document C. 3 4 5.M.1o2.1 9 28.II, pages 185-211) and in Supplement I (document C.365.M.13 4 .19 29 .II, pages 36-40). It is to be hoped that several States will be influenced to follow the same path, which will lead to the disappearance of the law of double taxation in a considerable field.
The Fiscal Comnittee only reeived communication of this Convention during its session in May 193o.
(4'205)
-4
III.
EXAMINATION OF THE QUESTIONS LEFT OPEN BY THE GENERAL MEETING OF GOVERNMENT EXPERTS.
The Fiscal Committee continued at its second session the study of the various questions which the General Meeting of Government Experts in 1928 had not been able to go into sufficiently thoroughly. A. Definitionof the Term " Autonomous A gent "in Relation to the Term "Permanent Establishment". Tile Committee examined on second reading the definition of the term "autonomous agent " in relation to the term " permanent establishment " which it had provisionally accepted at its previous session, and adopted the following text: In its endeavour to determine the principles which it might adopt as a guide in defining the terms ."autonomous agent "I and " permanent establishment ", the Committee found that four criteria were employed in different countries. (a) The first is a criterion of a legal nature, it being considered that the only agents dependent on an enterprise are those having sufficient powers to conclude contracts binding upon that enterprise. The Committee considered that this criterion was admissible, but was not applicable to every case. (b) According to the second system, there is no "permanent establishment", unless the agent has a fixed depot. There are cases, however, in which the presence of an agent of an enterprise may connote, for that enterprise, the existence of a permanent establishment, although the enterprise undoubtedly has no fixed depot; this is particularly the case with insurance companies apd certain buying agencies. (c) The third system takes into account the relations between the agent and the enterprise, the only agents regarded as not autonomous being those in receipt of fixed emoluments. This may be a determining but it is not an indispensable factor in deciding whether there is a non-autonomous agent, i.e., a permanent establishment. (d) The fourth criterion is that of the continuity of the relations between the agent and the enterprise. This criterion is not absolute and requires closer definition. Taking the above systems into consideration, the Committee concluded that it would be advantageous to disengage a general principle governing the matter. The fundamental principle is: When a forei,.- enterprise regularly has business relations in a country through an agent established there who is authorised to act on its behalf, it shall be deemed to have a permanent establishrr.,!nt in that country. A permanent establishment will thus exist when the agent, being established in the country: (a) Is a duly accredited agent (ondd de ponvoir), who habitually enters into contracts on behalf of the enterprise for which he works; (b) Is bound by an employment contract and habitually transacts commercial business on behalf of the enterprise iti return for remuneration from the enterprise; (c) Is habitually in possession, for the purposes of sale, of a depot or a stock of goods belonging to the enterprise. As evidence of tile existence of an employment contract under the terms of (b) may be taken, more~over, the fact that the administrative expenses of the agent, in particular the rent of premises, are paid by the enterprise, or the fact that the latter's intervention is manifested by outward signs. A broker who places his services at the disposal of an enterprise in order to bring it into touch with customers does not in his own person constitute a permanent establishment of the enterprise, even if his work for the enterprise is to a certain extent continuous or is carried on at regular periods. Similarly, the fact that the commission agent (commisseonraire)acts in his own name for one or more enterprises, and receives a normal rate of commission, does not in principle imply the existence of a permanent establishment for any of those enterprises. This may not be the case, however, if he is required to devote the whole of his activities to a single enterprise. Lastly, there cannot be held to be any permanent establishment in the case of commercial travellers not coming under any of the above-mentioned categories. British Government Bill. At this session Sit Percy Thompson, the British member of the Committee, communicated to his colleagues a clause (Appendix I) which the British Government had submitted to Parliament in the Finance Bill of the year in order that it might be possible for Great Britain to conclude international agreements for the avoidance of double taxation resulting from divergent definitions of the term "autonomous agent
I In this report, the term
" agent "is employed in the broad commercial sense rather than in the strict legal sense.
(4206)
The Committee noted Sir Percy Thompson's communication with great interest and thanked him for showing them this proof of confidence. The contents of the clause do not differ materially from the conclusions adopted by the Fiscal Committee in the above report. The British clause would appear of a nature greatly to facilitate the conclusion of international agreements on the basis of the recommendations adopted by the Fiscal Committee. B. Rules for Apportiwnmcnt of Profits or Capital Irom Undertakings operating in Several Countries and Measures designed to avoid Double Taxationof InternationalTrusts and" HoldingCompanies". At its previous session the Fiscal Committee had framed a detailed questionnaire on this question which it had forwarded to all its members and corresponding members in order to obtain full intormation concerning the practices at present followed in the different countries. The Committee received replies concerning some twenty countries. This copious and very important documentation has been summarised in a report prepared by Professor Adams (Appendix II). The Committee has also received communication of the conclusions arrived at by the International Chamber of Commerce. The Committee held an exhaustive discussion, which revealed the complexity cfthe question and the numerous obstacles which face any attempted solution. Nevertheless, while fully realising the difficulty of the task, the Fiscal Committee is of opinion that the moment has come to deal with the real substance of the question, since, until this is settled, one of the principal causes of double taxation will continue to exist. The Committee decided to concentrate chiefly on this point. It feels that for the same reason the grant of the Rockefeller Foundation (see hereafter) should be employedprimarily for this object. The Committee requested a Sub-Committee composed of M. BLAu, M. BORDUGE, Professor DORN, Professor Dr. FLORkS DE L.Umus and Sir Percy THOMPSON to prepare the discussion
for the next session.

C.
Study of the Principlesfor the Avoidance of Double Taxation of Author's Rights and Patents. As in the case of the preceding question, the Committee had forwarded to all its members a questionnaire on authors' rights and patents. The replies received have been summarised in a report drawn up by M. Clavier (Appendix III). The General Meeting of Government Experts, which was held at Geneva in October 1928, suggested that the Fiscal Committee should endeavour to discover a method for the avoidance of double taxation levied on the income derived from authors' rights and patents. At its first session, the Fiscal Committee made a preliminary study of this subject. Certain members were of opinion that the r6gime had been fixed by Article 9 of the draft Ia, drawn up by the Government experts (document C.562.M.I 7 8.I 9 28.II). This article is worded as follows: "Annuities and income from other sources not referred to in the previous paragraphs shall be taxable in the State of fiscal domicile of the creditor of such income." Other members pointed out that, at previous meetings, no decision had been take either with regard to authors' rights or the income derived from patents. This appeared to be confirmed by the fact that the Government experts' report recommended the Fiscal Committee to study the question. Certain members of the Committee also observed that the above-mentioned Article 9 contained a printer's errjr, since the word "sources " should have been "eriances". In support oi'this argument, they at' anced the following reasons: i. In all previous documents the word "crdances "had always been employed (document F. 2X2, page 32, litt. H. document C.2i6.&M.8 5 .I92 7 .II, pages xi and x6); 2. The text of Article 9 had been taken from the above documents and had been adopted without alteration by the General Meeting of Government Experts; 3. The last part of 'the article refers to creditors (" crdanciers ") which implies the existence of a " crdance "; 4. The commentary on this article twice employs the expression "crances ", but makes no mention of "sources " (document C.562.M.1 7 8,I928.II, page 13): 5. Article 8 of draft Ic, based on the Article 9,referred to above, also contained the word "criances " (document C.562.M.1 7 8,r928.1I, page 2o), so that, if the word "sources" is maintained in Article 9, draft Ia, the provisions of draft Ic would differ from those of draft Ia, which would be contrary to the intention expressed by the Government experts. Lastly, certain members thought that, in certain cases, the income derived from authors' rights or patents might come under Article 5 of draft Ia, which refers to industrial, commercial or agricultural undertakings and any other trades or professions carried on in the person's own place of residence. Without wishing to offer any opinion on the text of Article 9 of draft. Ia adopted by the Government experts, the Fiscal Committee, at its first session, came to the conclusion that, before any decision was reached as to the method of avoiding double taxation on authors' rights and patents, it would be advisable to enquire into the fiscal systems at present applicable to them in the various countries. It accordingly drew up a questionnaire which was sent to the regular and corresponding members of the Fiscal Committee.
In the Report of the Fiscal Committee on itsfirst session, document C.5x6.M.i .tgs .II . page 5, the text of 75 9 the Resolution voted by the International Chamber of Commerce at the Amsterdam Congress in July iz92 has been nisprinted. The correct text isas follows: " The fact that an undertaking has busbies dealings with a foreign country through a local company the stockof which it ownesin whole or in part,shouldnot be held to mean that the undertaking in question has a permanent establishment in that country. " No correction is necessary in the French teat.
(4207)
During the present session, the Fiscal Committee has considered the replies received to this questionnaire and which have been summarised by M. Clavier (Appendix III). On the basisof these data the Committee has adopted in first reading the following conclusions: The Committee did not wish to offer any opinion on the drafting of Article 9, -asit appears in draft In, which is incorporated in the Government experts' report. The Committee was of opinion that, without going into these questions, one could solve the problem by determining the category in whicl income derived from authors' or inventors' rights should be placed for the purpose of the application of the model conventions. This would obviously make it possible to bring such income under the system contemplated . for income of a similar nature in the model conventions, and it would thus have the effect of preventing such income from being taxed simultaneously in more than one country. The examination of the replies received from Governments led to the following conclusions: (a) Fees collcted, y the A utlhor or Inventor himsell.
In most countries, when the fees are collected by the author or inventor himself, they are treated as pro/essional earnings (with a few exceptions, particularly in one country, where income of this kind is regarded as income derived from movable capital). The Committee considered that this system was fair and consistent with the ec-,'omic nature of income of that kind. That amounts to saying that in the international sphere the income will follow the rule laid down in the model conventions for professions carried on in the person's own place of residence when he has no permanent establishment abroad, and will consequently always be taxable in the country of the author's or inventor's domicile. Fees ocllected by the Heirs or Assigns (Legatees, Donees, etc.) ol the Author or Inventor. Certain countries take the view that the personality of the heirs and assigns is a continuation, in a sense, of the personality of the author or inventor, and that the nature of the rights in question is not modified by their free transfer. They therefore consider th;pt income derived from authors' rights and patents is in the nature of proessionalearnings in the case of heirs or assigns, just as much as in the case of authors and inventors. Another group of countries hold that the transfer of authors' rights or patents to heirs or assigns modifies the nature of the rights and makes them similar to rights the income from which is taxed as income from niovablc capit4l. This argument is strengthened by the fact that on the transfer a succession or donation duty is collected, similar to that imposed in like circumstances on transfers of movable capital. Whether the income in question is regarded as professional earnings or income from movable capital in the international sphere, by following the rules laid down in the model conventions one always find, that the right of taxation belongs to the country in which the heir or assignis domiciled. (b) (c) Authors' or Patents' Fees collected by Grantees. The same problem arises when copyright or patent fees are collected by grantees. In this case, however, it should be observed that the income received by the grantee is entirely different in nature from that received by the author himself or his heirs or assigns. The income received by the latter, whether in the form of a transfer fee paid once for all or in the form of royalties or shares, follows the rules for the income from authors' rights referred to under (a) and (b) above, and is therefore taxable in the country in which the intitulee is domiciled. The income received by the grantee, on the other hand, will always be in the nature of industrial or commercial income, and will be taxed as such ir the international sphere, according to the rules established for the taxation of the income of undertakings operating in the territory of one or more countries. In most of these cases the authors' rights and patents become part of the assets of the grantees' undertaking, and the income derived therefrom cannot be separated from the aggregate income of the undertaking. This applies, for example, in the case of a publisher who buys a writer's work in order to publish a book and place it on sale; and. it applies also to a manufacturer who buys a patent to use it in manufacturing his goods. There are also cases, however, in which income from authors' rights and patents is distinguishable from the grantee's other income. We may mention the case of a publisher who buys tile copyright of a musical eomposi.ion in order to sell the performing rights to theatre and concert iang.s, or the case of a trader who buys patents from different inventors in order to sell them or lease the right of exploitation to a mapufacturer or manufacturers. As we have already observed, however, in both cases the income is industrial or commercial and should in principle be t-xed as such. (d) Authors' or Inventors' Fees collected by Persons or Bodies (Authors' Societies, Inventors' Societies, etc.) specially entrusted witl the Collection o/ such Income.
a. The person or body entrusted with collection, whether he receives a commission or takes a share in the income from the authors' rights or patents, will only be taxed on his own profits and by the c6ontry in which lie carr.:es on business, while the income received by the author or inventor is taxed by the country in which the latter is domiciled.
(4208)
2. Where special bodies exist for the purpose of collecting authors' fees or fees (authors' societies, inventors' societies, etc.), certain countries impose a flat-rate tax on patent the society which collects the fees in the capacity of the author's or inventor's agent, and this applies even if the author or inventor is resident abroad. Inasmuch as the latter pays income-tax in the country in which he is domiciled, it is undeniable that this system may give rise to double taxation. Such is the case if the amount of the flat-rate tax imposed on tlse body which acts on the author's or inventor's behalf exceeds the tax that would be payable on the commission actually drawn by that body. The Committee is of opinion that, in order to avoid this double taxation, the country in which the body is domiciled should limit itself to taxing only the commission actupfly drawn by the body. From what has been shown in the foregoing report, the conclusion may be drawn that income from authors' rights or patents, which is characteristically such and does not fall into the class of industrial or commercial income, should always be taxed by the country in which the intitulee is domiciled. D. The Question of Reciprocity and o the Most-/avoured-nationClause as they afedt the Problem o/ Double Taxation. The General Meeting of Government Experts had recommended that this question should be examined by the Fiscal Committee. The latter arrived at the following conclusion: In view of the fact that the bilateral or multilateral agreements on double taxation are based on the principle of reciprocity, that is to say, involve reciprocal treittment for the nationals of the contracting parties, the Fiscal Committee, while not wishing to give an opinion on an exceedingly difficult point of international law, considers that the application of the most-favoured-nation clause to the nationals of a coufitry which had not acceded to the said agreements would constitute a treatment of those nationals contrary to equity and to the spirit of the clause. Nevertheless, in order to prevent this point from arising, it is desirable that in commercial or establishment treaties concluded in the future it should be made clear that the most-favourednation clause in its application to fiscal matters does not extend to special provisions for the avoidance of double taxation. IV.
GRANT BY THE ROCKEFELLER FOUNDATION.
The Fiscal Committee has been informed that a gift of 9o,0oo dollars has been offered to the League of Nations by the Rockefeller Foundation to enable the League to carry on its work relating to double taxation. The Committee unanimously desires to add its thanks to those already expressed by the Council to the Rockefeller Foundation for its generous action. The members of the Committee also express their particular gratitude to their distinguished colleague, Professor Adams, who, in taking the initiative to which this most generous donation is due, has given fresh proof of his devotion to the work undertaken by the Fiscal Committee in the matter of double taxation. The Fiscal Committee, having been invited by the Secretariat to express its opinion as to the kind of work it would be desirable to undertake in order to make the best use of the funds placed at the League's disposal by the Rockefeller Foundation, makes the following recommendations: I. In order to enable the Fiscal Committee to pursue the studies it has undertaken in the vast field of double taxation, the Committee should be provided with a staff of specialists who v.ould be recruited and directed by the League Secretariat and who would work on lines laid down by the Fiscal Committee and in contact with its members. 2. This staff would, primarily, carry out research work in regard to the methods of allocating or apportioning profits made or distributed by undertakings operating in two or more countries. For that purpose the following subjects should be examined in detail: (a) The laws in force in the different countries; regulations, decrees, orders and" decisions; administrative practice and procedure; working principles and methods of accounting; their effect upon international double taxation: (b) Methods-more particularly accounting methods---of ascertaining taxable profits which could be adopted by the fiscal administrations of the various countries and which would at the same time be equitable and reasonable from the point of view of the undertakings taxed, and would as far as possible prevent international double taxation, more particularly: (i) When the taxable profits are computed on the basis of separate accounts; (ii) When empirical methods are employed to obtain an approximate estimate of such profits; (iii) When a system of fractional apportionment is employed.
(4209)
-- _8 3. The staff should undertake any other studies relating to double taxation which might be required of it by the Secretary-General of the League of Nations in consultation with the Fiscal Committee. 4. The staff should further keep up to date and render accessible so far as possible the information it has collected. The Fiscal Committee, being of opinion that the Rockefeller grant should be used primarily for the study of the question of the apportionment of profits, requested the Sub-Committee of five members appointed to prepare discussion of the problems, namely, M. BLAU, M. BOBDUGE, Professor DORN, Profcssor FLORiS DE LMUS and Sir Percy THOMIPSON, to be good enough to give the Secretary-General of the League of Nations. should he so request, an opinion on any questions relating to the use of this gift.
V.
POSSIBLITY OF TAXATION CONCLUDING MULTILATERAL CONVENTIONS FOR THE AVOIDANCE OF COUNTRIES OF DOUBLE TO BE IN
ON POINTS ON WHICH
A SUFFICIENT NUMBER
SEEM
AGREEMENT.
The Fiscal Committee has accepted the following proposals which it believes might be adopted by a considerable number of States if carefully formulated. The adoption of a multilateral convention on the proposed lines would not wholly prevent double taxation among the contracting States even on the classes of income enumerated, but it would materially encourage the movement to reduce double taxation by uniform law-a method which in important respects is obviously superior to the method of reducing double taxation through the instrumentality of bilateral conventions. The Fiscal Committee has appointed a Sub-Committee consisting of Dr. BOLAFFI, Mr. CAREY, M. CLAVIER and Dr. SINNINGIHE DAMSTL with instructions to submit at the next meeting of the Fiscal Committee a draft multilateral convention based upon the following general proposals and embodying such other measures to reduce international double taxation as are likely, in the opinion of the Sub-Committee, to secure the acquiescence of a considerable number of countries: Proposal i. - That the following classes of income shall be taxable only in the State of fiscal domicile of the recipient or creditor of such income: (a) Annuities; (b) Authors' royalties or rights; (c) Interest on (public ?) debt (except from mortgages) issued after a future date to be agreed on; (d) Wages of workers living on one side of a frontier and working on the other. Proposal 2. - That salaries of officials and public employees who are serving abroad and public pensions shall be taxable only in the State which pays such salaries or pensions. Proposal 3. - Immovable property (land and houses) shall be taxable only in the country in which they are situated. Proposal 4. - The profit derived by a company from the operation of industrial. commercial or agricultural undertakings shall not be taxable in a country other than that in which the real centre of management of the company is situated unless the company has one or more permanent establishments in such other country. 'Branches, mines and oilfields, fixed plants, factories, workshops, agencies, warehouses, offices and depots shall be regarded as permanent establishments. The fact that an undertaking has business dealings with a foreign country through a bona fide agent of independent statui (broker, commission agent, etc.) shall not be held to mean that the undertaking in question has a permanent establishment in that country. Nevertheless, income from maritime shipping and air navigation concerns shall be taxable only in the State in which the real centre of management is situated. The Sub-Committee will have to consider, in connection with this proposal: (a) Whether the term "company "should be defined. (b) Whether it would be desirable to add the following proposal: " Should the undertaking possess permanent establishments in two or more countries, each of those countries may tax the portion of the income produced in its territory. The competent administrations of the two contracting States shall come to an arrangement as to the basis for apportionment."
(4210)
-9(c) Whether it would be desirable also to add the following proposal " The fact that an undertaking has business dealings with a foreign country through a local company, the stock of which it owns in whole or in part, should not beheld to mean that the -undertaking in question has a permanent establishment in that country."
VI.
TAXATION OF FOREIGN MOTOR VEHICLES.
The draft Convention which had been prepared by the Fiscal Committee is being discussed by the Permanent Committee oil Road Traffic. The Fiscal Committee requested a Sub-Committee composed of Dr. SINNINGIIE DAMSTL (Chairman), Dr. BOLAFFI and M. CLAVIER to be good enough to study the conclusions that the Permanent Committee on Road Traffic might reach, and to discuss them, if necessary, with the representatives of that Committee.
VII.
CUSTOMS DUTIES AND FISCAL CHARGES APPLICABLE TO NEWSPAPERS.
The Fiscal Committee was informed that the Advisory and Technical Committee for Communications and Transit, at. its last session, held at Geneva from March loth to 15th, 1930, adopted the following resolution: " The Committee notes the results secured by the European Conference on the Transport of Newspapers and Periodicals and the resolution on that subject adopted by the Council at its session in January 1930, 1 and decides: " (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . " (b) To propose to the Fiscal Committee the formation of a joint committee of the Fiscal Committee and the Transit Committee, to consider the question raised in Chapter IV of the Final Act of the Conference (Customs and fiscal taxes applicable to newspapers). The joint committee will report to the Fiscal Committee and to the Transit Committee. The members of the joint committee appointed by the Transit Committee will be selected by the Chairman, who is requested to choose for that purpose one member of the Committee and two or three experts from persons concerned with the publication or the distribution of newspapers. The Fiscal Committee accepted the proposal to form a joint committee and invited M. CLAVIER (Chairman), M. BLAU, M. BORDUGE, Professor DORN and M. KNEPPO to represent it on this joint committee. VIII.
DRAFT RESOLUTION SUBMITTED BY SIR PERCY THOMPSON.
Sir Percy Thompson has submitted to the Fiscal Committee the following draft resolution: "That the prevalent view that an undesirable economic result, viz., the 'creation of an artificial barrier which impedes the free flow of capital into the channels in which it can be most usefully and profitably employed, is produced by double taxation is fallacious: that origin taxation is solely responsible for this undesirable economic result which would remain unaffected if all taxes based on residence were everywhere abolished and in consequence double taxation ceased to exist." After discussion, the Fiscal Committee has detided to adjoutn the decision on this question until its nexi session. I The
Council resolution. adopted in January i93o, is as follows:
The Council: Obscrving with satikfaction the results obtained by the European Conference on the Transport of Newspapers ani PrilicuIs. which met at Gencva from November 25th to 39th, 1929; " Noting that the Governments, Administrations and organisations concerned will take all necessary steps to en.hle the measurec reommended by the Conference to be carried into effect as soon as pomible: lrstructs the Advisory and Technical Committee for Communication and Tranoit to keep itlelf informed of the results obtained, to report on this question to the Council, and, with the assistance of the other technical organs of the League of Nations, to pursue the investigations recommended by the Conference."
(4211)
10 -
Appendix 1.
GREAT BRITAIN.
Clause 16 o/ Finance Bill, 1930. 16. - (i) Subject to the Provisions of this section if His Majesty in Council is pleased to declare: (a) That any profits or gains from the sale of goods arising directly or indirectly to a person resident in any foreign State or in any part of His Majesty's dominions outside the United Kingdom through an agency in the United Kingdom or to a person resident in the United Kingdom through an agency in any foreign State or in any pryt of His Majesty's dominions outside the United Kingdom are chargeable both to United Kingdom income-tax and to income-tax payable under the law in force in that foreign State or that part of His Majesty's dominions; and (b) That arrangements as specified in the declaration have been made with the Government concerned with a view to the granting of relief from such double taxation, then unless and until the declaration is revoked by His Majesty in Council, the arrangements specified therein shall, so far as they relate to the relief to be granted from United Kingdom income-tax, have effect as if enacted in this Act, but only if and so long as the arrangements, so far as they relate to the relief to be granted from the income-tax payable in the foreign State or in the part of His Majesty's dominions, have the effect of law in the foreign State or the part of His Majesty's dominions. Provided that no arrangements made under this section shall exempt from United Kingdom income-tax any profits or gains which either: (i) Arise from the sale of goods from a stock in the United Kingdom; or (ii) Accrue to a person resident in the United Kingdom; or (iii) Accrue to a person not resident in the United Kingdom directly or indirectly from the sale of goods effected in the United Kingdom through any branch or management in the United Kingdom or through any agency in the United Kingdom where the agent has and habitually exercises a general authority to negotiate and conclude contracts. (2) Any declaration made by His Majesty in Council under this section shall be laid before the Commons House of Parliament as soon as may be after it is made and, if an address is presented to His Majesty by that House, within twenty-one days on which that House has sat next after the declaration is laid before it, praying that the declaration may be revoked, His Majesty in Council may revoke the declaration and the arrangements specified in the declaration shall thereupon cease to have effect, but without prejudice to the validity of anything previously done thereunder or to the making of a new declaration. (3) The obligation as to secrecy imposed by any enactment with regard to income-tax shall not prevent the disclosure to any authorised officer of the foreign State or part of His Majesty's dominions mentioned in the declaration of such facts as may be necessary to enable relief to be duly g&ven in accordance with the arrangements specified in the declaration.
Appendix II. APPORTIONMENT OF PROFITS OR CAPITAL FROM ENTERPRISES OPERATING IN SEVERAL COUNTRIES.
Summary by Pro/essor Adams ol the Replies received to the Questionnaire. The replies to the questionnaire reveal great diversity of law and practice regarding most of the subjects to which the questions are addressed. Moreover, many of the replies are incomplete. In the case of such questions, it is difficult to make a satisfactory summary, and it is plain in general that an accurate comparison of law and practice can only be made by a group of experts who will devote their entire time to this subject for a period of a year or more. The principal significance of the questionnaire is the proof which it supplies of the need for systematic and continuous study. Nevertheless, on one or two points of importance, the replies reveal a close approach to uniformity of law and practice. It appears clear, for instance, that, in assessing the profits of a branch of a foreign company (and more particularly in assessing the profits of a subsidiary or filiale of a foreign holding company), a large majority of States avowedly seek to determine the profits of the branch separately and for that purpose pay regard only to the accounts of the branch itself, without reference to the accounts of the foreign company. In the absence of separate
(4212)
II
accounts, or where the separate accounting is unsatisfactory, various methods of approximation are widely used. But only in a small minority of States is preference given to the " method of apportionment " by which the inc me of the branch or subsidiary is computed as afraction of the entire income of the foreign corporation or holding company. The following summary is neither accurate nor complete. But, under some questions, it reveals uniformities which are real and significant and, under others, diversities of law and practice which are highly important. Question (a): By what general methods does the administration o[ your country arrive at the ascertaininent o/ the profits of undertakings operating in several countries? A. Undertakings domiciled I in one State with Branches in Foreign Countries.
Practically all States call for a full declaration of profits in such cases, and a large majority of States hold the entire income subject to taxation in some manner or degree. Nevertheless, the most significant aspect of the replies is their evidence of the grcwing extent to which some amelioration or reduction is granted in respect of profits earned abroad. 'I. A number of States practically exempt profits allocated to establishments located in " foreign countries (hereafter called foreign establishments ") - Bolivia, Danzig, Estonia, France, Hungary, Italy (for certain classes of undertakings), Japan (business-profits tax), Netherlands (as regards unincorporated undertakings), Spain (as regards the trade-licence tax), the United States of America (by deduction against its tax). z. An important group of States, by deduction or reduction of rate, exempt the greater part of the profits allocated to foreign establishments, reserving a minimum part for the home country Austria, Belgium, Greece (limited companies only), Netherlands (tax on distributed profits of corporations), Spain, Switzerland. 3. Canada, Germany, Great Britain, Greece (unincorporated undertakings), Japan (for income tax), Roumania, Poland, South Africa and Sweden, tax the entire profits as a general rule, but important deductions or offsets for profits taxed in certain other jurisdictions are given in Great Britain (Dominion taxes only), Canada and probably other States here mentioned. 4. The practice of exempting profits allocated to establishments located in countries with which the home country has a bilateral convention for the prevention of double taxation is apparently spreading. B. Local Branches of Foreign Undertakings.
This case is considered under question (b). Question (a) bis: By what general methods does the Administration of your country arrive at the ascertainnent of the Profits of trust and holding companies operating in several countries ? A. Where a Holding Company domiciled in one State controls one or more Fokcign Subsidiary Companies. 2 The replies indicate that, in a majority of the countries, no distinctive status is given to the holding company for purposes of taxation, and the dependent or affiliated corporation is taxed as an autonomous corporation. In such States, if the dividerids received by an ordin-ry corporation are taxable (e.g., Japan), the dividends received by-a holding company are taxable: if dividends are exempt to an ordinary corporation, they are exempt to the holding company (e.g., South Africa and the United States of America). In Austria, the Netherlands and Spain, a partial exemption is granted. A foreign subsidiary of a German holding company is taxed with the parent company if the two constitute an economic unit. B. WVherc a Subsidiary Corporqtion is controlled by a ForeignHolding Company.
This case is considered under question (c).

The term " domicile
"
has been used herein a generic sense, but it is understood that the definition of " domicile
dificra between various countries. 2 Many States dealt in their replies with the relation between the mother corporation and a domestic subsidiary, but this point is not of immediate concern to the Committee.
(4213)
12 -
Question (b):
What are the methods lor determining the income of branches of foreign business concernsdoing business in your country ? The method followed by most countries in the first instance is to base the assessment on the separate accounts of the branch which is taxable only on income derived within the taxing State. Belgium and Poland specifically require special accounts for the branch, and it is the practice in other countries for branches to keep separate accounts. If the special accounts of the branch establishment are inadequate or misleading, they may be corrected to reflect the true income, or various empirical methods may be employed to estimate the taxable profit. The principal methods employed are the following: (a) The accounts of the entire undertaking are demanded in order to determine the amount of profit allocable to the branch. This amount may he determined by an apportionment taking into account the assets, turnover, expenditure or number of employees of the branch as compared with the assets, turnover, expenditure, or number of employees of the entire undertaking. (b) The income of the branch may be determined by basing the assessment on a comparison with the earnings of local undertakings engaged in similar business, for example, by ascertaining the percentage of net profit to gross turnover of such undertakings (Belgium, France, Great Britain, etc.). The law of one country (Germany) provides that, when such method is employed, the assessment cannot be less than a minimum equal to the normal rate of interest on the capital invested in the local branch. (c) The income of the local establishment is estimated by reference to a certain extent on external indications, such as salaries of employees, rent paid for premises and other expenditure. (d) The income may be assessed in a lump sum which serves as the basis for taxation for several years (Germany). A very few countries base the tax in the first instance on a certain proportion of the total income of the foreign undertaking (Spain and a few Swiss cantons). Another country may assess the profits of the branch in that manner when it has no regular separate accounting and certain other prescribed methods are not applied (Germany). The law of another country provides for an apportionment corresponding to the ratio of assets, but ordinarily employs the separate accounting method, condemning the method of proportional allocation on the ground that there is no necessary relation between the local situation of a capital asset and the income earned in the area in which it is situated, and that it is unsatisfactory in practice and productive of anomalies (South Africa).
Question (c): Ditto for aviliated corporations. Practically all the replies state categorically that the local company, which is a subsidiary of a foreign corporation, is a separate legal entity and enjoys the same treatment as other national companies. It is therefore taxed on the basis of its own accounts. A number of replies mention measures that may be taken to assess the profits of a subsidiary company correctly when its accounts are inadequate or misleading, and notably the following: (a) A profit may be ascribed to the subsidiary company based on a comparison with the profits of other companies engaged in a similar business. In making such comparison, the law of one country (Belgium) authorises taking into account the capital invested, turnover, number of workers, rental of real estate, motor power employed and other relevant data. (b) Where the subsidiary is rendering services to the foreign parent, its profit may be fixed on a commission basis. (c) When the subsidiary and the foreign parent constitute a "single economic unit the subsidiary may be treated as a branch (Germany, Spain). (d) In order to prevent evasion or show true income, the fiscal authorities may allocate income as between the foreign parent company and the local subsidiary (United States of America). (e) Where the profits of a subsidiary are artificially concealed, a charge may be made upon the parent company based upon the true profits of the subsidiary (Great Britain and Spain). The question of allocation as between a foreign parent and a subsidiary corporation organised in the Netherlands or in Greece is evidently of secondary importance, as such corporations are not taxed until profits are distributed.
(4214)
13 Question (d): (d) In the case of (r) branches and (2) affiliated corporations: (i) Is the income of the branch or affiliated corporation determined separately ? or (ii) Is it determined as a fraction of the entire income of the company of which the taxpayer is a branch or to which it is affiliated ? or (iii) Has the Administration the option of following either method ? Answered under questions (a) and (b). Question (e): If the method (ii) is followed, what system is employed for checking the income of the mother-company ? In practically no reply is any regular system described for checking the income of the mothercompany. The balance-sheet and profit-and-loss account and other pertinent information may be requested from the parent company and carefully examined, but the difficulties of checking such information are admitted. Questions (f) and (g): (f) When the branch or affiliated corporation in your country operates at a profit, whereas the entire concern operatesat a loss, is any cognisance taken of the loss in determining the income of the branch or affiliated corporation ? (g) What is your practice if the branch or affiliated corporation in your country operates at a loss, whereas the entire enterprise realises a profit ? Practically all the countries which base the assessment of the branch on separate accounting answer categorically that no attention is paid to the profit or loss of the parent company in determining the liability of the branch. The branch is taxed in accordance with the showing of its own accounts, provided they are properly kept. One country (Spain) allocates to the branch a proportion of the profit or loss of the entire concern, because it treats the branch and the entire concern as a unit. Similarly, the Swiss cantons which tax on the proportional allocation basis, and the few other countries which exceptionally tax on that basis, declare that they take into account the profit or loss of the entire concern. Subsidiary companies are, according to the replies, always taxed independently of the foreign parent, except that Spain merges the subsidiary with the foreign parent for purposes of ascertaining tax liability, and the German law authorises the taxation of the subsidiary with the foreign parent when they form a single economic unit.
Question (h): When a company has its real centre of management in your country, but its other operations (for example, manufacture) in another country, is a fraction of the profits ascribed to the head office and, if so, how is that fraction determined ? Summarily stated: i. The largest number of responding States tax the entire profits in such a case - Bulgaria, Canada, Great Britain, Greece (except for limited companies), Germany, Japan (income tax), Poland, Poumania, South Africa (when sales are controlled in South Africa). 2. A smaller number attach minor importance to the real centre of management, and allocate profits primarily to the countries or establishments of manufacture and sale - Estonia, Danzig, France, Hungary, Japan (business profits tax), United States of America. 3. Other countries, in effect, ascribe a fraction of the profits to the head office: Austria (not less than one-tenth for limited companies and one-quarter for commercial partnerships or private companies), Belgium (rate reduced to one-quarter on profits realised and taxed abroad), Bolivia (less taxes paid abroad), Italy (when Article 9 of the Royal Decree of August s2th, 1927, is not applicable), Netherlands (taxable distributed profits accruing outside reduced by two-thirds),
(4215)
14 -
Spain (Spanish companies taxable in respect of not less than one-third of the profits), Switzerland (a minimum profit varying from 1o to 25 per cent).
Question (i): Vhen a company has its real centre of management in some othyc country than yours, but other operations (for example, manuelacture), in your country, is a tax imposed in your country and, if so, how is it assssed ? Practicallv all the answers to this question are in the affirmative, but in South Africa, " if an intermlediary stage in a series of business transactions which resulted, as a whole, in the production of income were carried out in the Union, no attempt would be made to assess for Union taxation a portion of the profit derived from transactions which, as a whole, were controlled from outside the Union ". The method of -ssessment is usually not stated in detail, but in a majority of States profits are determined on the basis of a separate accounting or balance-sheet, where available. Only two replies (from 'pain and Switzerland) state that a fraction or portion of the profits may be ascribed to the cer.tre of management situated in another country. In the Netherlands, "when the company has its real centre of management in a country other than the Netherlands, but its other operations are carried on ;n the Netherlands, the total profits are deemed to be realised in the Netherlands ". In Italy, the tax is assessed "on the industrial income-that is, on a part of the profits representing the difference between the cost of production and the sale price of wholesale merchants in the country
Question (): If a company, with its head office in one State, has a branch in your State which makes sales in a third State without having there a permanent establishment, are the profits derived from the sales in the third State ascribed to the branch or to the head office or partly to each ? In a large majority of the States, such profits are ascribed to the branch. For Great Britain, the answer depends "upon whether the trade in the third State is controlled by the branch. In Spain, such profits are always ascribed to the head office ". In Sweden, such profits would be exempt from Swedish taxes if manufacture did not take place in Sweden. Question (k): With regard to any of the above cases, is any special method of assessment followed where there are permanent establishmits in your country belongit;g to the following foreign enterprises, and, if so, what method ? (a) (b) (c) (d) (e) (f) (g) (h) Banks and banking coinpanies; Insurance companies; Railroad, molor-ontnibus and other transport companies; Power and light companies; Gas companies; Telegraph and telephone companies; Mining and extractive industries; Allother kinds o/ firms for which special methods would be necessary.
Most of the countries consulted apply the general rules contained in their law to the enterprises mentioneid under (k) with the possible exception of insurance companies. The special methods indicated by them for determining the income of these enterprises are only in many cases methods of checking or supplementing the ordinary accounts of the branch, which as a general rule continue to be the basis of assessment. InBolivia, a 40 per cent deduction is made on gross profits in respect of expenses; the remaining 6o per cent are regarded as net profits and are taxed. (a) Dauks. - The taxable profits, in relation to the total profits, of a bank in a country wlere the bank possesses agencies is determined by the ratio of expenditure on staff in that country to thw total expenditure on staff (agreements made by Austria with Hungary and Czechoslovakia, Free City of Danzig).
(4216)
15 -
In other countries-more particularly for the purpose of checking the accounts-the ratio is taken of the gross receipts obtained in the country to the total gross receipts (Germany, Danzig), or the ratio of local transactions to total transactions (Italy, Spain). In the Netherlands, the Administration has issued detailed rules for the calculation of the profits realised by a branch bank. These rules are to some extent associated with those relating to the apportionment of working capital. (b) Insurance companies. - The methods of assessment most generally adopted for the purpose of determining the share of the total profit falling to a specific country consists in taking the proportion of the premiums collected in that country to the total premiums collected by the company (Austria in the treaties of that country with Hungary and Czechoslovakia, Danzig, Finland, Germany, Italy, South Africa, Spain, Switzerland). Certain countries calculate the profits as a lump sum and apply for this purpose a coefficient to the amount of the premiums collected; thus, in the Netherlands, profits are as a general rule estimated at io per cent of the premiums collected in that country (companies may, however, if they so request, be assessed as laid down in the previous paragraph). In Sweden, the taxable income is also a Pcrcentage of the gross premiums collected: 5 per cent for marine insurance, 6 per cent for fire, 15 per cent for life insurance, so per cent for other branches of insurance. Other countries fix profits, not in proportion to the total profits of the company, but by comparison with national undertakings : the percentage of profits in relation to the amount of the premiums collected in the country must be the same. This is the principle applied in France (the method is, as a matter of fact, optional) and in Portugal. (c) Railroad and other transport companies. - The profits earned in a country may be assessed in relation to the total profits of the company, either by taking the mileage in the country (Danzig, Switzerland), or by reference to the comparative amount of the revenue obtained (Spain, Italy), or, on the other hand, to the expenditure incurred in the country (United States of America). In Bolivia, 45 per cent of gross profits are regarded as expenses, and 55 per cent are taxed. The Netherlands fix the taxable income of railways by applying a coefficient of the amounts collected in the Netherlands. In South Africa, the taxable profits of shipping companies is fixed at 5o per cent on freight for passengers, live-stock, mails and goods shipped in the Union. (f) Telegraph and telephone companies. - South Africa determines the income of submarine telegraph and wireless telegraph companies by taking 5 per cent of the amount payable in respect of all messages delivered for transmission from any office within the Union.
Question (1): Are any special methods of assessment employed in the following cases: i. Enterprisesmanufacturingor buying in another country and selling through a permanent establishment in your country: what is your method of determining the pro/it of the latter establishment ?
Apparently, all countries with an income tax impose it on profits derived from selling through a permanent establishment in their territory goods that have been manufactmed or bought in another country. The basis of assessment in most cases is evidently the net sales of " merchanting " profit realised within the country, allowing, in the case of goods manufactured in another country, a manufacturing profit to the latter. In some instances, however, where goods'are purchased in one country and sold in another, the entire profit is taxable in the country of sale (Great Britain, United States of America). South Africa usually accepts the Customs evaluation as the basis for determining the sales' profit. The Swiss cantons in most instances tax the excess realised over current market prices, or base the assessment on the profit realised by an independent Swiss firm. Greece allows a deduction from the net sales profit equal to 5 per cent for general expenditure of the head office. Austria has adopted arbitrary allocation fractions, being half-and-half where an undertaking buys in one State and sells in Austria or vice versa, and two-thirds of the profit for the State of manufacture and one-third for the State of sale.
2.
Enterprises manulacturing in your country and selling elsewhere: is a profit ascribed to the manufacturing establishment ?
The general rule seems to be that a certain profit should be ascribed to manufacturing in a given State, although the goods are exported and sold elsewhere. South African law goes farther and
7 095 0-62-vol. 4-
15
(4217)
- x6 declares the whole of the profits taxable if the control of the enterprise is in its territory. Austria allocates two-thirds to the country of the manufacture and one-third to the Country of sale. 3. Enterprises continuously buying i'i your country through a perma, ;nt establishment,but selling in anwther country: is any profit ascribed to the buying establishment ? Enterprises purchasin raw materials from other companies iu your country with a view to manufacturing and selling elsewhere: is the foreign enterprise deemed to be carrying on business in your country and taxable on a presumed profit ?
4.
The great majority of States declare categorically that they do not endeavour to allocate. a profit to !,uving establishments situated in their territory and do not try to tax a foreign concern which buys raw materials directly fron local enterprises. A few States, however, assimilate the buying establishment to an export house (Bulgaria, Portugal) or assess the buying establishment on the basis of a commission (e.g., the Netherlands, Spain). France and Germany hold such a foreign company taxable on profits derived through a permanent establishment for the purposes of the tax on in-dastrial and commercial profits. Austria also allots a fraction of the profit to a buying office and, where there is no buying office, it allots a fraction of the profits for tax purposes if the materials purchased are exported through the commercial travellers employed by the head of the undertaking, or the latter himself.
Question (m):
When a company has a debenture debt, is the charge on this debt ascribed solely to the real centre of management or is it distributedbetween the different permanent establishments ? In the latier case, what is the system of distribution ? Practically all countries recognise the rule of apportioning the interest charge on a debenture debt of the company to the various branches or sources as a part of the overhead or debt in the proportion that they are concerned, or in proportioi to capital employed (Italy, Sweden), to assets (Japan), to profits (Spain), or to income, receipts or some other factors (Germany), or to gross income (United States of America). Belgium regards such charges as attaching exclusively to the foreign central office responsible for the issue, unless a part of the loan nas been especially allocated for the requirements of the Belgian establishments. Where the head office is abroad, Portugal takes no account of debts. As Great Britain does not allow interest to be deducted in determining assessable profits, no question of apportionment arises.
Questions (o) and (p): (o) What are in this connection the chic diflculties of an international characterwhich the administrationin your country has experienced ? (p) Are there any particular suggestions or recommendations which you would like to communicate to the Fiscal Committee in this connection ? A considerable number of States, while not alleging that the international difficulties which they have experienced in connection with the taxation of undertakings operating in several countries are important, nevertheless mention the practical difficulties they have encountered and suggest the lines on which they think a solution might be found. One of the questions most often referred to is the difficulty of exactly determining the profits on manufactre anl the profits on sale. Denmark suggests meeting this difficulty either by al)plying a general coefficient to the business turnover or, preferably, by imposing t,.Xation only in the country in which the business operations yielding the profits were carried on (the effect of this would e to eliminate the country in which the head office is situated in all cases when neither the iimanufacture nor sale took place in that country, but the problems would still remain when an uifacture and sale took place in different countries). As regards balance-sheets separately drawn up by each establishment, Austria and Hungary indicate practical difficulties which may arise in this way (when, for example, one of the countries concerned objects to the balance-sheet in so far as it is concerned and desires to include profits which have already been taxed in another country), and they suggest that international agreements should lay down detailed and. uniform rules for the allocation of taxation. For example, Austria proposes conventional percentages of allocation. Other countries, such as the United States of
(4218)
17 America, consider the method of separate accounting " as decidedly preferable to any hard-andfast formula for allocation. Canada desircs that the principle of reciprocity should be established in regard to exemption; the United States of America, on much the same lines, recommends that the country of the head office should grant a credit or offset for taxes already paid in foreign countries. Switzerland asks that the Fiscal Committee should not adoot too wide a definition of the term .permanent establishment ". This would limit the number of cases to which the rules regarding the allocation of profits would apply and would improve political and commercial relations between the countries. Finally, Canada recommends the translation of foreign legislation on the taxation of the profits of industrial and commercial undertakings.
"
Appendix III. TAXATION OF AUTHORS' RIGHTS AND PATENTS. Summary by M. Clavier of the Replies received to the Questionnaire. Twenty-one count. ies replied to the questionnaire concerning the fiscal system applicable to: (i) authors' rights, and (2) periodic payments derived from patents. The following tables ' give a summary of the replies received by the Secretariat. We think it may be useful to analyse the data set out in the above tables, so as to obtain a general survey of certain points of special interest. I. AUTHORS' FEES.
Many countries have combined their replies to questions Nos. I and II. That is logical, because the manner in which income is taxed depends on the nature of the income. This being bornc'in mind, the replies or the main points may be grouped as follows: (i) Wnen the income from authors' rights is collected by the author himself, it is usually regarded as professional earnings. In Spain, however, it is treated as income derived from capital in the form of movable property. (2) When the ir'-ome is collected by the heirs or assigns (legatees, donees), it is regarded as: (a) Income derived from movable property: in Austria, Belgium, Germany, the Netherlands, Spain and Switzerland; (b) Income derived from the exercise of a profession: in Bulgaria, Czechoslovakia, Greece, Hungary, Italy, Roumania and Sweden. (3) When the income is collected by grantees, it is regarded as: (a) Income derived from the exercise of a profession: in Belgium, Bulgaria, France, Greece, Italy, Sweden and Switzerland (if derived habitually in the exercise of a profession); (b) Income derived from movable property: in Great Britain, Netherlands, Poland, Roumania, Spain and Switzerland (if enly derived from time to time). (4) When the income is collected by companies or other bodies specially instructed to collect it: In Belgium, the tax of 2 per cent on professionalearnings is levied at the source. This, however, is treated only as an instalment on the regular payments which will have to be made by the authors themselves subsequently, if they are domiciled or resident in the country. In Canada, the agent (trustee) or collecting company must declare the income, but the person on whose behalf it is collected pays the tax. In France, such income is taxed in the name of the benefliaries. This is also the case in Denmark. There seems to have been a misunderstanding concerning this question. Most countries have replied as though the question referred, not to companies entitled to collect income derived from authors' rights for and on account of the authors, but to companies exercising rights. acquired by themselves for their own benefit. This question has therefore been confused with the next concerning traners or grants. Sale or Grant of Authors' Rights. Division of income. Division between a number of years is the practice in Austria, Belgium and France. In other countries, the tax is levied as and when the income accrues, only if the sale is effected against periodical payments or payment by instalments. This is the case in Bolivia, Denmark, Finland, Great Britain, Italy, Poland, Roumania and Spain. . There is no division in Bulgaria, Czechoslovakia, Germany, Great Britain, Greece, Hungary, the Netherlands, Sweden and Switzerland. In Canada, no tax is levied in respect of the sale or grant of authors' rights, the transaction being regarded as equivalent to a sale of capital. I In these synoptic tables, the countries have been grouped in French alphabetical order-the role adopted by
the Secretariat with a view to convenience of discussion.
(4219)
-z8
Foreigners. In Austria and Germany, foreign authors only pay taxes if they have some permanent establishment or agent in the country. It Belgium, the 2 per cent tax on professional earnings deducted t source is final. No other taxes than this arc subsequently levied on /oreigu authors. It France, taxation is only leviable if the aulthor is domiciled or resident in the country. Ii Sweden, foreign authors are only liable to taxation if they have a fixed establishment in the rountry or collect income in tile form of royalties paid by a Swedish enterprise. fit Norway, foreigners are not taxed unless they rent a studio in whi,'h to work or premises for the exhibition, on payment of an entrance fee, of works of arts or for their sale. II.
No special comments. the case of authors' fees. PERIODICAL PAYMENT ON ACCOUNT OF PATENTS. The system is everywhere practically the same as that applied in
FISCAL SYSTEM APPLICABLE TO AUTHORS' Questions I and If. I.
RIGHTS.
What is the fiscal system applied to authors' rights when the latter are collected: (a) Directly by the author, his heirs or assigns (donees, legatees, etc.); (b) By grantees; (c) By companies or other bodies especially entrusted with the collection of such income ? IL According to circumstances, is such income regarded as derived:
(a) trom transferable securities; (b) From the exercise of any trade or professibn; (c) From any other claim or source ?
Replies. Germany. The tax is payableby the person or company for whose account the sums ire collected. The income maybe derived from a trade or industry or the exercise of an independent profession. Otherwise, the income is deemedto be derived from the lease or transfer of wticles or rights. As regards persons or companies Subject only to restricted taxation, the suis in question are liable to incoe tax and to the corporation tax, unks they have already been taxed as income derived from an industry exeried in Germany through a permanent establishment or represtative. Austria. Authors' rights are taxable in all cases, except in respect of foreigners who exploit their rights in Austria without maintaining a special establishment for tbat purpose. Income is deemed to be derived from undertakings for gain. except where the right is exercised indirectly under an assigniens for payment to a third person (publisier, heirs or lega. tees). In this latter case, it is regarded as the exploitation of trorking capital. Coni esi exploiting authors' rights are taxable in the sameway as under. takings engaging in a lucrative operation: The remuneration paid to the author for the assignment of his rights is deducted from the profits if it includes definite sums or a percentage of the gross receipts. If the rights are collected in the form of shares in the company, the deduction is not allowed. Belgium. 1. - Income collected directly by the author: professional earnings. Taxes payable: tax on professional earnings and super-tax. 2. - Income collected by the heirs or authors' assigns: use of a trans. ferable right (publication or reproduc. tion). Tax payable: movable property tax. 3. - Income collected bygrantees: this is liable to the professional ean. ings tax leviable on the person who collects them, less the amurtLation of the price of the grant (number of years remaining to run before the work becomespublic property). The grantor (author) is taxableon the proceeds from the grant, less the expenditure mentioned (see later: Division). 4. - Income collected by companies or bodies especially entrusted with the duty of collection. In order to avoid certain difficulties. the professional earnings tax is deducted at sourceat the rate of 2 percent of the amount of the income, less only the cost of collection. Deduction of tax is final as regards foreign authors. As regards authors domiciled or resident in Belgium, this payment only constitutes provisional taxation subject to subsequent adjustment. Canada. I (a) and (b). - Ii the autor or grantedis resident in Canada, he is taxable on the total income derived from all sources, and credit is given for taxes paid to foreign countries. I (). - While the agent (trustee) or company collecting the income must make a return, it is the person on whose behalf the income is collected who pays the tax. IL - The income from authors' rights is deemed to be received from carrying On business in Canada. "
Bolivia. Author's rights. being considered as intelliecual capito., are the exclusive property of the author, his heirs or ganteesas r.e the profits derived front their exploitation. Income derived from these rights is considered to be derived from the ereise o/a prolession. and is therefore taxed as professional earnings, (personal services).
Bulgaria. The authors thetselves are not liable to taxation on Profits (chedular tax). The profits of assigns and grantees ar taxable as comimiercial profits for the year in which they werecollected. All beneficiaries (including the authors themselves) are liable to the sspplennlary fax on total incom in respect of income collected.
(4220)
19 -
FISCAL SYSTEM APPLICABLE TO AUTHORS'
RIGHTS.
Replies to Questions I and II (continued).

Denmark. Authors' rights are subject to income tax ant-if they are assignedto the capital tax. The tax is levied on the person who collects the rights (authors or assigns). The tax is not deducted at source if the income froii the rights is coilected bycompanies. Itiscollected only 'tom the author. Nature of income. As regards the author: income derived from personal w Th. As regards the grantee: profit on the capital used for the purchase of the right.
Spain.
From the fiscal point of view. authors' rights are regarded as income from movable property. The rate of the tax is reduced when the income is collected by the children or widow. There is at present no definite caselaw on the matter.
Finland. There are no special legal provisions with regard to authors' rights. Income derived from those :ghts, and the rights themselves, are liable to income and capital tax. No distinction is made as regards the persons who receive the rights or the income derived from different sources.
France. i. - Income collected by the author himself, his heirs or assigns, is subject to the taxon profits derived
ron non-ciouseceial professions and
Great Britain. i. - When rights are collected by the author himself: an author resident in the United Kingdom is assessable to United Kingdom income tax. An author net resident in the United Kingdom is liable to bear United Kingdom income tax by deduction at the source from all royaltiesrelating to sale of books. etc., in the United Kingdom. a. - The same system applies when the rights are collected by grantees. A person transferring rights me assessable to income tax in respeet of the profits derived. i. - Hights collected Iy thcr anthee himself: income derived rIes the exercise of a profession or vocation. 2. - Rights collected by grntees or by authors not resident in the United Kingdom: the income is regarded as arising from the ownership of property. Profits from the purchase or 3.sale of authors' rights are regarded an derived from the carrying-on of a tr.sde or business.
to the general income tax, (if the beneficiaries are domiciled in France). a. - Income collected by companies or other bodies: tax levied on the
beneficiaries Na.e (,as profits from non-
commercial professions). Derived from the exercise of a profession or lucrative occupation. Note. - At the request of the personsconcernecd, the annual taxable profit may be determined by deducting from the average receipts for the previous five years the average amount of expenditure incurred during those same years. Taxpayers must adhere to this system for the following years.
of Income.
Greece Tax on authors' rights where the income does not exceed t5o.ooo drachma'e. Over that sum, the income is subject to the 8 per cent tax on the net income from liberal professions. In practice, however, authors are not taxed, since they are not, as a rule. very wealthy. As there are no special legal provisions, income collected by the heirs or assigns is taxable under the law concerning the taxation of net income (commercial transactions)-i.e., tax on authors' rights up to 1So,ooodrachmm and tax of so per cent on the remainder. Consequently: Income from a profession (i t the author where the taxable party is himself. (2) In all other cases, income from a commercial enterprise.
Nor-way. Income derived frons the cession of author'. rights or of rights in artistic property is regarded as having been earned by personal activities. taxable at the place It is therufore of residence of the owneror At the head offices of the company to which the rights have been transferred. Persons residing abroad are not taxed in Norway oss income of thi. kind, unless they rent in that country a studio in which to work, or premises for the exhibition, on payment of an entrance fee, of works of art or for their sale. The same rules apply when the rights are transferred to a company or commercial undertaking. National companies or companies en'aged in business within the country are alone taxable. If the company has its head offices in Norway. it is also taxed in respect of income acquired abroad by the exploitation or sale of rights.
Hungary. Income collected: (a) By the author: tax on personal profits in the place of his fiscal domicile; (b) By his heirs, etc.. or grantees: sane system; (o) By an institution set up forthe purpose: at the seat of the institutior" (is) By a company: at the place of its registered head offices. Nature of Income. As income derived from an enterprise if an institution has been set up or if the person concerned exercisen a profession in connection with this object. If no profession is exercised, the income is regarded as income " from another source " (but never as income from a claim).
Italy. Authors' rights are, subject to the tax on movable property: (a) As professional earnings in the name of the author, his heirs or assigns: (b) As income derived from as enterprise when the income is collected by a grantee. As" professional earnings when the income is collected in the name of the grantee, but on behalf of the author if the latter draws a fixed annual sum or percentage on turnover. sales, etc. If the author draws a percentage of the net profits, he is regardedas a partner, and a tax is levied on the whele of the profits. Consequently: professional earnings in the case of the author and his assigns and inoene from an enterprise in the case of a grantee exploiting the rights which he has acquired.
(4221)
20 -
FISCAL SYSTEM APPLICABLE TO AUTHORS' RIGHTS.
Replies to Questions I and II (continued).
Netherlands. An carved iniiie when the author himself collects the income or delegates certain rights to a publisher. lncote collected by heirs, donees, legatees or grantees: incoime from iovable property (capit.l sum) or rmii an occupation carried on at the peraoi's own place al residence (his assent to the performance). Cession in return for an annuity, There is at present no law concerning the classification of such antuities-ir.. whether they should he taxable as income from movahle property (the amount of the capital sum) or as earned income. If tie heirs, etc., ceded the right in return for an annuity. such income would probably he taxable as income from movable property (the amount of the capital sum).
Poland. As incore lax only when authors do not carry on their own business (such as printing, publishing, etc.): otherwise, they are liable to iotrto fax and to tA industrialtax. Authors are treated very generously in the matter of the amount of costs and expenditure to he deducted. Income collected by companies: this is dealt with under the fiscal regime applicable to commercial enterprises. Income collected: (a) Iy the author: professional earnings; (b) By heirs, assigns or grantees: income from dainut and other similar sources (capital); (e) ly companies or other bodnies: system applicable to commercial neteprises. Switzerland. Income collected: (a) fy the author: produt o his lbor,; (b) fly his heirs or assigns: the authors' works are regarded as traieia se srtritiri : this capital is thus liale to the tax on capital, and in certain cantons. to income tax; (c) Ily grantees: if they exploit the rights as a profession. the sums reeivei are liable to -oi,- tax (or to the tax on the product o laboor). In all case.. Iu tax on capital is payable in respect of the price paid. Consequently: (a) Tax on trano/rrable securities levied on heirs and assigns and on grantees who coticern themselves only occasionally with the exploitation of the rights; (b) Prolrssionat income: in the case of authors. companies and gran. tees collecting fees by way of business.
Rourniefa. Income collected: (a) Ity the author.hisheir, or ossigns: proetsiool earn lngs: (b) fy grietres : leans),r. able income; (c) 13y companies or othet olies: trasferable income accruing from the cession of rights in property. Income considered to he derived from movable property (capital) in the event of participation in the profits of the enterprise to which the rights are ceded.
Sweden. lI geseral. foreiters are only liable to taxation if they have a permanent est.ulishmoent in Swiden. or if they receive a royalty from a buttsiiess in Sweden. laci coll-ted y a profssional otlior is treated as inoime derived front earusng on a lutitie. Income coileeted by the heirs, etc., of a professional author: income derived irou ra iog o .t ine,. Grantees: if the inconie is collect.d in the fare of a royalty: irome fIa earryt.g en a it tir,, If the grantee is a publisher or theatre mtanager (a prof.sinal.l the income derived from exploiting the rights is reg.irded as ironie (root a bh.t.ti... The total amount paid for the rights is deducted at once, as expenses.
Czechoslovakia. Income collected (a) by the author or his heirs. if they exploit the rights as a profession: income tax and gentral profits tax. If the author carr, on this professin solely as a yocupation. the income is tat tasale. If the heir (legatee or donee) is a coopany, it is not iahble to income tax. but to the generol or special tax on prefila. For purposes of tans. tion. account is taken of the number of years the profession from which the income is derived has liu earried on. Cession against a singh- payment: Grantor (author): income tax. Grantee: income tax and general profits tax in respect of the income derived from the exercise ofthe right. If the grantee is a company, it is only liable to the general or special tax on profits.
Question Ill. Ilil. In the case of the sale or cession of altlhors' rights either against immediate payment of the actual price or in the form of securities or shares in an undertaking exploiting the authors' rights referr-d to, is the income from such sale or cession divided between several years for purposes of taxation ?
Replies.
Germany. li" the case of sale or cession. the proceis are only taxabi if the asnigned authors' rightformed part of a working capi. tal. In that cane the profit coristitutes a part of the working profit. Distribution over a number of years is not allowed.
Austria. In practice, the income is divided hetwen a numher of years equal to the years duelog which the author has exer. cised his activity.
Belgium. Divisios Swen a number of years equal to that for which the establishment of the instalmeets is authorised (together with the year of the cession regarded s the faa). Taxes payable: tax on profeasional earnings and supertax leviable on the grantor.
Bolivia. Profits derived front sala or ession of author's rights are regarded as taxable in. come in respect of all sums collected by the beneficiary or beneficiaries during ack year.
(4222)
21 -
Replies to Question III (continued).
Bulgaria. There is no diai. son.
Canada. - WhatSale or cession. ever the form of payment, the transaction is treated a% the sale of a capital asset. The moneysreceived are not taxable as income.
Denmark. Sales or cession.The profits are taxable in their entirety as income acquired at the time of sale and without distinction as to howthe price was paid (cash or shares), of shares, taxation is In the case levied as and when the profits
accrue.
Spain. The tax is payable in so far as the price of sale can be demanded by the author or his assigns. There is as yet no definite case-law on the subject.
Finland. Whether the tax on the income is payable in a lump sum or spread over several years depenss on the cs..ditions geverning the saleor cession.
France. Cession to a publisher for a lump sum or against a royalty fixed per year or per copy sold. Grantor: tax on income derived from noncanmercial professions and general incometax. rhe Council of State may, however, decide -as it has already done with respect to patentsthat this profit is not taxabl,. Grantee: liable in his capacity as publisher to the tax on industrial and commercial profits (and to the general income tax). Hungary. There is no division.
Great Britain. There is no division. Any receipts liable are regarded as entering into the income or profits of the year in which they are paid.
Greece. In caseof cession to a joint-stock company, the system of joint-stock companies applies. There is no division.
Italy. The tax is levied at the time of the cession on the basis of the actual or computed price. In some cases,there is an annual ta on the periodical payments. Poland. Roumania. Division accordCession: (a) Against immediate ingtoexistingcircasxstances. payment: the total income is taxed at the time of the cession; (b) Against periodical payments.: the incidence of the tax is at the time of such payments; (c) Payment in shares: the dividends are taxed at the time o their declaration.
Norway. The sale or cession against immediate payment in cash is a taxable transaction. In the caseof payment effected in any other manner, the income is ass-il at the selling value of the property at the time of cession. When payments are effected as and when salesor performances take place, or when payments are made in instalments. the income is held to he acquired on the date of eachpayment. No casts are known in which au. thor's rights or artistic property have been transferred in Norway in return for securities or shares in an undertaking. Sweden. Thereis no division. Taxation is levied at once.
Netherlands. Sale against immediate payment. Up to the pre. sent, the atministrative au. thorilies have never taxed the grantor, unless the latter operates the same under. taking. Thereis no division.
Switzerland. There is no division. The sum ibtained is in. cluded in the income of the year of payment.
Czechoslovakia. Cession against periodic payments. Grantor, theheir: income tax and tax on annuities. Grantee: as above. " It the heir cedesthe rights against immediate payment. the proceeds arce not taxed unless the saleoccura in connection with the operation of an undertaking for gain. There is xo division.
(4223)
22 -
FISCAL SYSTEM APPLICABLE TO PERIODICAL PAYMENTS
DERIVED FROM PATENTS.
Question IV. IV. Same questions as under I to III concerning income from patents, if the fiscal system applied to the latter differs from that applicable to authors' rights. Replies.
Austria and Germany. Same system, mulalis mutandis, us applied to authorn' rights. Belgium.
The amounts paid for the use or concession of a patent are liable to the tax on movable property. the proceeds therefrom are considered as income liable to the tax on professional earnings. Sale or cession. If the operation is directly or indirectly connected with the grantor's professional occupation, he is liable to tax in respect of the proceeds of the sale, less the price paid for acquiring the patent or its constitutive value (cost of research and study). 11 is distributed over several years: same system as applied to authors' rights. Income
Blolivia.
derived from
If the use of the concession is granted professionally.
patents is liable to the tax on capital investments.
industrial
If, however, the patent is not ex-
ploited on an industrial scale by the inventor, who merely receives an annual payment, ouch income is liable to the fax on pofessional earninp (personal services).'
Bulgaria.
Inventors armsubject to taxation as persmos exercising a liberal profession and their assigns as persons exercising a trade, with rispect to the year in which the profit was collected. Profits are taxable at source.
Canada, Denmark and Finland. Same system as for authors' rights.
Income from patents worked by an industrial under. taking is taxable as part of the net profits of the said undertaking. Where the person receiving such income is economi. cally independent of the undertaking, deduction is allowed, but not otherwise. Neither is it allowed in the case of a foreign branch.
France. An inventor oho sellshis patent is not liable to income tax (decision of the Council of State), even if the sale is made against annual or periodical payments. Grant of working licences: the income received is liable to the tax on profits derived from non-commercial professions and to the general income tax. This also applies to licences granted abroad, provided the beneficiary is domiciled in France. Grantee (generally a manufacturer): the profit is included in the working profits and is liable to the tax on industrial and commercial profits and to the general income tax. Comupaniso:same system as applies to authors' rights. Nature o/ income: derived either from the exploitation of an undertaking or lucrative occupation Distribution over several years: 0ee. Note to the table concerning authors' rights. Norway. Same system as applies to authors' rights. It should, however, be noted that payments misdo against the cession of rights in connection with patents are usually made in the form of an annual payment or in the form of sn industrial participation. T1the holder of a patent takes an active part in its exploitation, income is not considered to bc'derived therefrom until the person concerned has received his share in the profits of the undertaleig. In cases of cesson in return for an industrial particpation, profits are assessed on t- actal market value at the time of cession.
Great Britain. e. - (a) A patentee is liable to United Kingdom income tax in respect of all payments collected by him. Payments from British sources are received after tax has been deducted. In the case of a patentee not resident in the United Kingdom, the tax is deducted at the source from all royalties or periodical payments which he is entitled to receive from persons in the United Kingdom. (b) The same system applies when payments are collected by grantees. 11. - (a) Payments collected by patentees or by grantees: the income is regarded as arising from the ownership of property. (b) Profits derived from the pur. chase or sale of patents are regarded as derived from the carrying o of a trade or business. IIl. - There is no division. Any receipts liable are regarded as enter. ing into the income or profits of the year in which they are paid or payable.
Greece and Hungary. Same system as applied to authors' rights.
Italy. Same system applied to sathors' rights. Periodical payments are. however, always held to be income derived from industry where the inven. tion has involved the inventor in a considerable outlay of capital.
Netherlands, Poland, Roum an a and SwltAerland. Same system us applied to asthorn' rights.
Sweden. Same ruen us applied to au o r ighs , a oed to rights. However, auethors' income derived from exploiting a patent is almost without exception regarded as income derived from carrying on a business,
Czechoslovakia. Same as applied a yt em as a u system Payto authors' rights. meats for concessions are taxable even if the rights are exploited abroad, in so far as the grantor is resident in Czecheslovaklia.
(4224)
-l)istributed to the Council and the Members of the League.]
Official No. : C.
415. M. 171.
193t II. A.
Geneva, June 6th, i93z. LEAGUE OF NATIONS
FISCAL COMMITTEE
REPORT TO THE COUNCIL ON THE WORK OF THE THIRD SESSION OF THE COMMITTEE Held in Geneva fIont May 29111 to June 6th, 1931.
CONTENTS.
Introduction ....... 1.
..
.................................
Page 2
Examination of International Conventions recently concluded and Municipal Laws recently enacted for the Prevention of Double Taxation and Tax Evasion ........ .. .............................. . . .. I. Possibility of framing Plurilateral Conventions for the Avoidance of Double Taxation of Certain Categories of Income ....... ............... Ill. Fiscal Clauses to be embodied in the Draft Convention on the Treatment of Foreigners ....... .... .. ............................. IV. Enquiry into the Apportionment of Profits . .. ....... .............. V. VI. VfI. VII1. IX. X X1. XII. XIII. Fiscal Rgime applicable to Foreign Motor Vehicles ...... ............. Taxation of Instruments of International Commerce (Bills of Exchange, Promissory Notes, Cheques, Bills of Lading, etc.) ....... .. .................. Doiml,h, Taxation in regard to the Turnover Tax ....... ................ C1it.,:i-.. and Fiscal Duties on Newspapers and Periodicals ..... ........... luiwiphs enabling the Double Taxation of Authors' Rights and Patents to be avoided ..... .... .... .............................. l)efinition of the Term " Autonomous Agent . ........ .............. .............. ...... Draft Resolution proposed by Sir Percy Thompson ......
2 3 5 5 6 6 7 7 7 7 8 8 8
General Tables showing the Fiscal Systems of the Various Countries ...
Preparation of International Conventions concluded under the Auspices of the League of Nations ....... .... .........................
Appendices. t, Plrilateral Corvention for the Prevention of the Double Taxation of Certain Cat.,ories of Income: x. Report by the Special Sub-Committee to the Fiscal Committee 2. Draft Plurilateral Convention for the Prevention of the Double Taxation of Certain Categories of Income .... ......... II. II1.
S..N.
.. ,o
9 Io 13 5
Draft Plurilateral Convention 'A ", drawn up by the Committee .. Draft Plurilateral Convention 'B
(P.)93s (A.)A/S..Itp. -ufd/s.
.....
drawn up by the Committee ........

Series of League of Nations Publcatons 11. ECONOMIC AND FINANCIAL
1931. II. A. 22.
(4225)
-2
INTRODUCTION.
The Fiscal Committee has the honour to submit to the Council the following report on the work of its third session, held at Geneva from May 29th to June 6thI 9 31. The following members of the Committee were present: Professor Dr. Herbert DORN, Chairman, Professor Th. S. ADAMS, assisted by M. ALVORD and Mr. RYAN, M. BLAU,
Dr. Gino BOLAFFI, M. BoRDUGE.,
Professor Dr. FLORIS Dc LhsMus, assisted by Professor VINVALES, Dr. NIANTZAVINOS, assistcd by M. SBAROUNIS, Dr. SINNINGHE DAMST9, Sir Percy THoipsoN, K.B.E.. C.B. For the question o the plurilateral convention: Mr. W. D. CAREY, corresponding member of the Irish Free State. Representing the International Chamber o/ Commerce:
M. R. JULLIARD.
EXAMINATION OF INTERNATIONAL CONVENTIONS RECENTLY CONCLUDED AND MUNICIPAL LAWS RECENTLY ENACTED FOR THE PREVENTION OF DOUBLE TAXATION AND TAX EVASION.
On June i6th, 1930, France and Italy concluded a Convention for the avoidance of double taxation and the settlement of other fiscal questions (Collection ol Agreements, Volume III, page 24). This Convention is based on the division of taxes into impersonal and personal taxes, the former being attributed in principle to the country of origin and the latter to the country of doinicil. It contains the provisions of draft Convention Ia of 1928. more or less modified, but the imodifications do not appear to change the general tendency of Draft Ia. Article ii, however, while reserving to each State the right to tax capital invested in the other State by its nationals, requires them to deduct in advance from the tax that levied by the debtor's country under the general rule. Articles 16-ig are concerned with tax evasion; the two States undertake to exchange information regarding the application of taxes on income, in accordance with Draft III of 1928. With reference to assistance in the collection of taxes, the two States undertake to consider the possibility (Article 19, paragraph 2). A Convention of a general nature has lately (March 16th, 1931) been concluded bet%.,en Finland and Sweden. It concerns all direct taxes imposed on income (net or gross) or property. No distinction is drawn between impersonal and personal taxes. In principle the taxes referred to will be collected by the country of the taxpayer's domicil. The exceptions in favour of the country of origin correspond to those in Article 2, paragraph I (therefore not including income from mortgages), and Articles 5 and 7 of draft Convention Ia. Article io reserves to the country of domicil the right to graduate the tax on the basis of the total income, including income taxable in the other country. In principle the Convention applies only to the nationals of the two countries; but in any particular case the competent authorities may extend it to others, and more especially to nationals of countries which have concluded Conventions for the avoidance of double taxation with the two States in question (Final Protocol, paragraph I). Mention must next be made of a Convention, of May 16th, 1931, between France and Belgium. This Convention relates to direct impersonal taxes and to certain registration fees. As far as concerns impersonal taxes, the Convention is based on the ideas embodied in Article 2, paragraph i, and Articles 3, 4, 6, 7, 8 and 9 of draft Convention Ia of 1928. There is a special clause (Article 6) dealing with income from transferable securities, for which, in view of the peculiar provisions of the national legislation, a kind of deduction in advance is allowed. This is also the case in regard to the application of French law to Belgian companies liable for the tax on income derived from capital (Article 8). Article 13 deals with the reduction of registration fees due by a company on account of the registration of an establishment in the other country. Article 16 provides for mutual assistance in the collection of taxes, on the lines of draft Convention IV of 1928. In the matter of maritime shipping, agreements-all on the lines of Article 5, paragraph 4, of draft Convention Ia-have been concluded between Belgium and Denmark (August ilth, 1930, Collection, Volume III, page 32); Belgium and Ecuador (May 2nd, 1929, loc. cit., page 33); Belgium and Finland (August 9 th, 1930, loc. cit., page 34); Belgium and France (October 7th, 1929, lC. cit., page 35); Belgium and Iceland (August i1th, 1930, loc. cit., page 36) ; Belgium and Norway (]1)lV 22nd, 1930, loc. cit., page 37); Belgium and Sweden (July 22nd, 1930, loc. cit., page 3 8); Canada and Denmark (June 18th, 1929, Exchange of Notes, loc. cit.', page 42); France and Norway (June 2nd1, 193o, Exchange of Notes, loc. cit., page 52); France and the Netherlands (February 15th28th, 1930, Exchange of Notes, loc. cit., page 54); Canada and Norway (May 2nd, 1929, Exchange
(4226)
of Notes); Denmark and the Netherlands (November 8th, 1930); the Irish Free State and Norway (October 2Ist, 1930); the United States of America and Spain (April 16th, 193o, Exchange of Notes) Denmark and Finland (January I2th, 1931, Exchange of Notes); the United States of America and Greece (August i9th, 1929, Exchange of Notes); France and Greece (February 18th, 1929, Exchange of Notes). With regard to exemption from taxes on road traffic, mention should first be made of the International Convention concluded at Geneva in March 1931, which is dealt with in paragraph V of this report. Various agreements have also been concluded upon this subject-between Norway and the Netherlands (October 9 th, 193o) and between Belgium and the Netherlands (March 16th, 1931), both completely exempting foreign motor vehicles; between Denmark and the Netherlands (Collection, Volume Ill, page 76) and between Danzig and Germany (Collection, Volume III, page 76), these two providing only temporary exemption. In the matter of municipal laws we may first mention a Swedish Royal Decree of 1928 whereby His Majesty may conclude conventions, or issue, subject to reciprocity, unilateral regulations for the prevention of double taxation on income and property (Collection, Volume III, page 73); a Swedish Law of September 28th, 1928, relating to communal income taxes (Collection, Volume III, page 74); there is also the Netherlands Law of June 1 th, 1930 (Collection, Volume III, page 66), 4 whereby very wide powers are reserved to the Crown and the Minister of Finance to remedy double taxation either by treaty or by unilateral enactment, and (see Article 3) not necessarily on coi.Jition of reciprocity. This law repealed a law of 1920 (Collection, Volume I, page 201), which was based on the same principles but covered fewer taxes (for instance, it did not apply to succession duties). Lastly, there is a Yugoslav Law of February 8th, 1928, which exempts various classes of income (for instance, the income of companies) from income tax, when the taxpayer can prove that he pays a direct tax on the same ii,come in another country. The foregoing examinaLion shows that the evil of double taxation is continuing to diminish. It should be noted in particular that, in the sphere of maritime navigation, very favourable results have again been obtained. The Fiscal Committee expresses the hope that the idea of the necessity of international fiscal conventions once brought into existence will make increasing progress. The rapid and effective procedure which led to the International Convention of March 1931 on the taxation of foreign motor vehicles seems to it of happy augury in this respect.
If.
POSSIBILITY
FRAMING
PLURILATERAL CONVENTIONS OF CERTAIN
FOR THE AVOIDANCE
OF DOUBLE
TAXATION
CATEGORIES OF INCOME.
It the report on the proceedings of its previous session the Fiscal Committee laid down certain principles on which an endeavour might be made to obtain the approval of a large number of countries with a view to a plurilateral convention (document C.34o.M.I4o.i93o.II.Chapter V). It added, in order to make its point of view quite clear, that " the adoption of a plurilateral convention on the lines proposed would not completely prevent double taxation as between the contracting parties even in regard to the classes of income enumerated; but it would appreciably encourage the tendency to reduce double taxation by uniform legislation-a method which was obviously superior in important respects to that of decreasing double taxation by bilateral conventions ". The Fiscal Committee appointed a Sub-Committee, consisting of Dr. SINNINGHE DAMSTP (Chairman), Dr. BOLAFPI, Mr. CAREY and M. CLAVIER, to submit at the Committee's next session a draft plurilateral Convention based on the proposals mentioned above. The Sub-Committee drew up on this basis a draft, which is reproduced below in'Appendix I, at the same time as a report which indicates its attitude on the questions put to it by the Fiscal Committee. At its present session the Fiscal Committee resumed the examination of the questions raised at its second session and of the draft and report of its Sub-Committee. The Fiscal Committee unanimously agreed that the Sub-Committee's proposals, with the amendments made by the Committee (Draft A reproduced in Appendix II), might be taken as a basis for a plurilateral convention for the avoidance of double taxation as between certain countries; but it aLo noted that these proposals could not at present be accepted by other countries because the clauses of Draft A settled the position of both residents and non-residents, with the object of entirely preventing double taxation for both, so far as concerns the classes of income cofitemplated in he draI-an arrangement which would impose upon Governments, in respect of their own residents, obligations which they are not prepared to assume. An attempt was made to find another solution which would enable these countries to accede to a type of plurilateral convention which would settle the position of non-residents only, leavirg double taxation in existence to a certain extent. During'the session a draft Convention (Draft B, see Appendix III) was drawn up on these lines. The idea was also' expressed that the text of the Draft I a prepared by the Government experts in 1928, which his already permitted of the conclusion of numerous bilateral Conventions, might
(4227)
provide a useful basis for the elaboration of a plurilateral Convention between certain countries which may regard it as essential to make a distinction between impersonal and personal taxes. Both new proposals (Drafts A and B) were discussed in the Committee. In view of the outcome of the discussion, the Committee does not feel that it can reach a final decision at present. It seems necessary to reconsider whether there is any real possibility of an adequate number of accessions to either or both of these two types of convention. in so doing, the Committee had in mind the responsibility it would assume in recommending a type of plurilateral convention, having regard to all the difficulties that have come to light in the course of the development of the question in the Fiscal Committee. As long ago as 1922 four economists, M. Bruins, M. Einaudi, M. Seligman and Sir Josiah Stamp, were asked to investigate the possibility of a plurilateral convention in the following terms: " Can any general principles be formulated as the basis for an international convention to remove the evil consequences of double taxation, or should conventions be made between particular countries, limited to their own immediate requirements ? In the latter alternative, can such particular conventions be so framed as to be capable ultimately of being embodied in a general convention ? " (See document F.ag, Introduction.) In 1927 the-Committee of technical experts expressed its opinion on the question of a plurilateral convention. This opinion is embodied in their final report (document C.216.M.85.192 7 .II.) as follows: " A question discussed at great length by the Committee was, whether the Conventions should be collective, that is, signed by as many States as possible, or whether they should be merely bilateral. " It would certainly be desirable that the States should conclude collective conventions, or even a single convention embodying all the others. Nevertheless, the Committee did not feel justified in recommending the adoption of this course. In the matter of double taxation in particular, the fiscal systems of the various countries are so fundamentally different that it seems at present practically impossible to draft a collective convention, unless it were worded in such general terms as to be of no practical value. " For this reason, the Committee preferred to draw up standard bilateral conventions. If these texts are used by Governments in concluding such conventions, a certain measure of uniformity will be introduced'in international fiscal law and, at a later stage of the evolution of that law, a system of general conventions may be established which will make possible the unification and codification of the rules previously laid down." The same ideas are to be found in the report submitted by the General Meeting of Government Experts (document C.562.M.178.1928.lI). These were the conditions under which the experts succeeded in framing three different types of bilateral conventions. The Fiscal Committee has since taken cognisance of a resolution of the International Chamber of Commerce, emphasising the desirability of concluding a general or plurilateral convention for the avoidance of international double taxation, even if this convention had to be confined to certain special points. Notwithstanding the difficulties indicated above, the Fiscal Committee endeavoured to find a solution for the problem of a plurilateral convention. At the same time it realised the necessity of making a thorough examination, so as to remove, as far as possible, any remaining doubts and to permit of the framing of draft plurilateral conventions which should be'acceptable at all events to certain groups of countries. As regards the two drafts referred to above, the essential ideas of the first are to be found in the Sub-Committee's report reproduced in Appendix I. Certain changes have been made, however, in the Sub-Committec's draft, chiefly with the object of making it quite clear that the exemptions provided for in the convention are compulsory. With reference to the essential ideas of the second, the Committee desires to reproduce below the views of thbse of its members who proposed this draft. It is conceded by all that exemptions of the type provided for in Draft A are of a nature to avoid double taxation altogether. In form. Draft B is in the main intended to protect the residents of each of the contracting States from certain aspects of double taxation by enumerating and defining particular categories of income in respect of which these pers,Is are to be immune from taxation in the country of origin while leaving other categories of income unaffected by the convention. Nevertheless, its authors consider that this Draft B is of greater practical inportance and has a wider scope. The supporters of this draft consider that, when a country has, by signing a convention such as is found in that draft, secured for its residents relief from double taxation in regard to certain categories of income by limiting the right of foreign countries to tax its residents, that country will be more inclined to grant such relief to its own residents as will render them immune from double taxation in respect of other categories of income. Further, a preliminary condition of Draft B is agreement on the definite objects and on the limits of taxation at source or at origin, before deciding upon the exemption or relief measures necessary to be taken by any given country in order to protect its residents against all forms of double taxation.
(4228)
-5
Lastly, Draft B, in Article I, lays down in principle that the maximum relief granted to residents who are nationals shall also be granted to foreign residents where these are nationals of a contracting State. The Committee is of the opinion that the proposals contained in this report may be used in the following manner. A certain number of countries would be able to accept the first draft, others the second, others again Model Convention Ia of 1928. Even if the proposals led to no other result, it would b a step in the direction of avoiding double taxation. There is some hope, however, that certain countries will e able to sign two plurilateral conventions of different types simultaneously. In this way double taxation will be elimnated to an increasing extent, even though a single plurilateral convention may appear impracticable at present. In order to ascertain whether such possibilities exist, and how great they may be, the Fiscal Co.nmittee in forwarding th report and its appendices to ail the members of the Committee, requests them to state whether they can accept one of the drafts referred to above, or two drafts of different types, and, if not, .o offer observations supported by any amendments which might enable them to accept. Although the question does not appear to it sufficiently ripe to warrant Government consultation, the Committee proposes that the present report be communicated to Governments for information. III.
FISCAL CLAUSES TO BE INSERTED IN THE DRAFT CONVENTION ON TIHE TREATMENT
OF FOREIGNERS.
The Final Protocol of the First International Conference on the Treatment of Foreigners signed in Paris on December 5th, 1929, laying down the procedure for the preparation of the next Conference provides that, after having collected the observations and suggestions of Governments, the Secretariat shall ask the opinion of the advisory bodies of the League of Nations. The Fiscal Committee was thus called upon to give an opinion on the various questions coming within its ccmpetence. Of the fiscal clauses to be found in the draft discussed in 1929, the majority were of a general fiscal character (e.g., equality of treatment for foreigners and of the goods of the contracting parties), while others, such as those to be found in former Article 13 were designed to prevent double taxation. As regards the first-named category, the Fiscal Committee has appointed to examine the clauses in question a Sub-Committee composed of: M. BORDUGE, Chairman; M. BLAU, Dr. BOLAFFI. Professor FLORPS DE LiMUS, Sir Percy TnO.MPSON. This Sub-Committee will be asked to give, on behalf of the Fiscal Committee, the opinion mentioned in the aforesaid protocol. As regards the clauses designed to prevent double taxation, the Committee felt that they raised one of the most important questions that it had had to examine in connection with the framing of the plurilateral Convention- namely, the taxation of branches of foreign undertakings. The discussions which took place on this point showed, as already mentioned, that it was at present imprssihle to reach agreement in the matter. Such being the case, the Fiscal Committee thought that it would be inexpedient 'o insert in the future international Convention on the Treatment of Foreigners a clause similar to that of the old Article 13 of the Economic Committee's original draft. IV.
ENQUIRY INTO THE APPORTIONMENT OF PROFITS.
At its last session the Fiscal Committee nade certain recommendations concerning the employment of the fund of S9o,ooo from the Rockefeller Foundation. It trged, in particular, that this fund should be used in the first place for the study of the question of the apportionment of profits, and it appointed a St,;)-Committee to condut the enquiry to be undertaken for this purpose and to take the necessary executive action. The Sub-Committee entrusted this enqluiry to Dr. Mitchell B. Carroll, a former Legal Adviser to the Treasury Department at Washington, who had been connected for some years with the work of the Government expert, and the Fiscal Committee as assistant to Professor Adams. It was' decided that Mr. Carroll should carry out enquiries on the spot in different countries before formulating general conclusions. The enquiry was begun in the five following countries: France, Germany, Great Britain, Spain and the United States. In each of these countries a special report was drawn up under Mr. Carroll's direction by one or more assistant experts, usually selected from the fiscal administration of that country. These reports start with a general survey of the fiscal laws applicable to the profits from undertakings in the countries in question, and this is followed by more definite replies to a questionnaire drawn up by the Secretariat. Mr. Carroll has supplemented this work by a general report, in which he has endeavoured to indicate the pri.icipal rules of apportionment employed in those five countries; but he considered it impossible at this stage of the enquiry to reach final conclusions.
(4229)
The Sub-Committee decided that the five reports, which constitute an important contribution to the enquiries relating to double taxation, should be published together with Mr. Carroll's report, which would serve as an introduction. It was also decided that the enquiry should be extended to other European and oversea countries, so as to cover the countries of greatest economic importance, or those whose legislation in the matter of apportionment presents special characteristics. The other countries will also be asked to furnish detailed information. There is hence reason to hope that, before the Fiscal Committee's next session, Mr. .Carrol; will have collected the necessary data to enable him to formulate conclusions.
V.
FISCAL RfGIME APPL'CABLE TO FOREIGN MOTOR VEHICLES.
The 'Fiscal Committee has noted with satisfaction the results obtained in regard to double taxation by the European Conference on Road Traffic which was held in Geneva, from March 16th to 30th, 193r. The Convention on the Taxation of Foreign Vehicles, as adopted by the Conference and signed by numerous States, reproduces, almost as it stands, the text prepared with the co-operation of the Fiscal Committee. This Convention' applies to motor touring-vehicles, to the exclusion of hired vehicles and taxi-cabs, which were also covered by the original draft. For vehicles travelling in countries other than that in which they were registered, it provides an exemption of ninety days per annum in each of those countries. For this purpose, a fiscal permit is being created which, like the triptych and the Customs passbook, will become an essential document for the international circulation of vehicles. VI.
TAXATION OF INSTRUMENTS OF INTERNATIONAL COMMERCE (BILLS OF EXCUANGE,
PROMISSORY NOTES, CHEQUES, BILLS OF LADING, ETC.).
The International Conference for the Unification of Laws on Bills of Exchange, Promissory Notes and Cheques, which held its second session, devoted to the question of cheques, in March 193r informed the Fiscal Committee that the following recommendation had been submitted by the, International Chamber of Commerce: be made the subject of conventions to the elfect that taxes should be collected on those documents only " Promissory notes, bills of exchange, cheques and bills of lading should
in one country, either that of issue or that of performance (payment itn tiecase of bills of exchange and cheques, destination in the case of bills of lading). " Tle apportionment or allocation of charges on a flat basis might, in particular cases, also be considered. " T]lnv Conference fully approved this recomendation and added that, having been infornted that ccrtiin countries did not collect any tax on bills of exctange atd clteqtes, it considered that the gelsmr;1li-.ation of timls practice was highly desirable with a view to protmoting and increasing tle use of bills of exchange and clheqtues, and it adopted a recontendation to this effect. "Ilhe Fiscal Committee, being desirous of ascertaining whether fiscal charges (imposts, taxes, stamp duties, etc.) on tile international instruments of commerce mentioned above may, owing to the superposition of national charges, be to some extent att impediment to the free operation of comlnercial exchanges, decided to undertake the study of this problem. It accordingly drew tip a questionnaire, which will be sent by the Secretariat to all its regular and corresponding members. It also appointed a Sub-Committee, consisting of M. BLAU (Chairman), Professor ADAMS, M. liouou(;E, Professor FLOfd.s DithLfm s and M. MANTZAVINOS, to collate the replies to this questionnaire and submit a report to the Committee at its next session. The International Chamber of Cozmuerce will also be consulted.
VII.
I)OuBLE: TAXATION IN REGARD TO TilE TURNOVER TAX. :\t the general meeting of Government experts held at Geneva in 1928, the point was raised whiether iteasures designed to prevent double taxation should not also be extauded to the turnover
tax. A suggestion to that effect has since been made by the International Chamber of Commerce. A first exchange of views on this problem took place in the Fiscal Committee, which considered that it presented a different aspect according to whether the turnover tax was levied directly ott the
(4230)
income of the taxpayers or on the movement of goods or capital. The Committee derided to investigate the question and drew up for this purpose a questionnaire which will be sent by the Secretariat to all its regular and corresponding members. The Sub-Committee appointed to examine the question of the taxation of instruments of international commerce (bills of exchange, cheques, etc.), whose members have already been enumerated, has been asked to collate the replies to this questionnaire and submit a report to the Fiscal Committee at its next session. The International Chamber of Commerce will also be consulted. VIII. CUSTOMS AND FISCAL DUTIES ON NEWSPAPERS AND PERIODICALS. The Joint Committee on the question of Customs and Fiscal Duties on Newspapers and Periodicals, to which the Fiscal Committee had delegated several of its members, held a first meeting on June 3rd, 1931, under the Chairmanship of M. BLAU, who submitted a report to the Fiscal Committee. The Joint Committee found that the existing documentary material was inadequate and decided that the Secretariat of the Communications and Transit Organisation should send to the Governments, invited to the European Conference on the Transport of Newspapers and Periodicals held at Geneva from November 25th to 29th, 1929, a full and detailed questionnaire dealing with all duties, fees and taxes of every kind imposed on newspapers and periodicals. The sa..,e questionnaire will be sent by the Secretariat to the regular and corresponding members of t!.e Fiscal Committee, who are nationals of non-European countries, as well as to the Press associations, with the request that they furnish the Secretariat with all available information as to the actual position in their respective countries. On the basis of this information the Joint Committee will subsequently consider what measures it deems it expedient to propose. IX.
PRINCIPLES ENABLING THE DOUBLE TAXATION OF AUTIHORS' RIGITS AND PATENTS TO
BE AVOIDED.
The principles laid down in this matter by the Fiscal Committee at its second session were re-examined and did not give rise to any observation. They had in the meantime received approval from various quarters, notably the International Chamber of Commerce at its Washington Congress. The Fiscal Committee declared these principles adopted at second reading.
X.
DEFINITION OF THE TERM
" AUTONOMOUS AGENT
Tile Fiscal Committee had before it various observations, emanating in particular from the International Chamber of Commerce and the Hague Industrial Council, concerning the definition of the term " autonomous agent " as adopted by the Committee at second reading during its previouis ses.ion. These observations were examined first by a Sub-Committee consisting of'Dr. BOLAFFI (Chairman), M. MANTZAVINOS and Dr. SINNINGHE. D)AMSTI1', and then by the plenary meeting. As a result of this investigation, the Committee noted that, for special reasons, certain countries might be led to adopt provisions exempting, not only business done by an independent agent, but also business done by agents of other kinds and of limited powers. (See, for instance, the Treaty of July 25th, 1928, between Germany and Sweden.) Nevertheless, the Committee considered that this fact did not affect the definition of ' independent agent" given in its previous report and that there was no reason to modify it.
XT.
DRAI.T RESOLUTION PROPOSED BY Slit PERCY THOMPSON.
At the Fiscal Committee's second session a draft resolution was submitted by Sir Percy Thompson, the discussion of which was postponed until the present session. In the meantime Sir Percy Thompson had made certain changes in the wording of his resolution, the final text of which reads as follows: 'That the prevalent view that a certain economic result--viz., the creation of an artificial barrier which impedes the free flow of capital into the channels in which it can be most
(4231)
usefully and profitably employed-is produced by double taxation is fallacious; that origin taxation is solely responsible for this economic result which would remain unaffected if all taxes based on residence weie everywhere abolished and in consequence double taxation ceased to exist." The Committee noted the very interesting explanations furnished by Sir Percy Thompson. It considered that the question as expounded presented, in addition to a highly practical side, other aspects which fell rather within the field of theoretical economics. The Committee therefore thought it necessary that fuller preparation should be made for the discussion than was possible at the time. Sir Percy Thompson was accordingly requested to be good enough to submit to his colleagues a written statement setting forth the reasons which he had already given them verbally. to enable the menbers of the Committee to go more fully into the matter and be ready to discuss it at a later session. X,1.
GENERAL TABLES SHOWING THE FISCAL SYSTEMS OF THE VARIOUS COUNTRIES.
The Committee noted with interest the work done by the New York State Tax Commission and the Corporation Trust Company, which have published tables summarising the systems of taxation of the various countries. The rrmbers of the Committee signified their readiness to assist to the utmost of their ability in enlarging the scope of this work. As regards the details of the proposed co-operation, it would be desirable for the Corporation Trust Company to furnish the information required for the practical planning of the work. XIII.
PREPARATION OF INTERNATIONAL CONVENTIONS CONCLUDED UNDER THE AUSPIcEs
OF THE LEAGUE OF NATIONS. The Assembly resolution of October 3rd, 1930 (Sectiun IV), lays down the preparatory procedure to be followed in prinziple in the case of all general conventions to be negotiated under the auspices of the League. The Fiscal Committee, in common with the other technical organisations of the League, is invited to examine this procedure in order that the Assembly at is next session may judge whether any changes should be made in it. 'rhe Committee notes that, in the terms of the resolution itself, the rules of procedure which it lays down are open to modification and exceptions, particularly in cases where, in view of the nature of the questions for discussion or special circumstances, " the Assembly or the Council considers other methods to be more appropriate ". The Committee feels bound to insist on the importance of this reservation, which, from its point of view, constitutes an essential safeguard. It may sometimes be desirable to conclude within a short period international conventions for limited purposes, which do not require any lengthy procedure of consultation. The case of the Convention on the Fiscal Treatment of Foreign Motor Vehicles, which was signed after preparatory work of barely eighteen months, shows that expeditious procedure may have satisfactory results. The Fiscal Committee accordingly considers that the possibility should be left open for it to have recourse to such procedure in case of need.
Appendix I. PLURILATERAL CONVENTION FOR THE PREVENTION OF THE TAXATION OF CERTAIN CATEGORIES OF INCOME.
i. REPORT BY THE SPECIAL SUB-COMMITTEE TO THE FISCAL
DOUBLE
COMMITTEE.
The Sub-Committee appointed by the Fiscal Committee at its second session to draw up a draft plurilateral convention for the prevention of the double taxation of certain categories of income, to which it seems possible to secure the accession of a considerable number of countries, held two sessions, the first at The Hague on August 2tst and 22nd, 193o, and the second at Rome from February 24th to March 2nd, i93t. This Sub-Committee consisted of the following members: Dr. Gino BOLAFFI, Director and Chief of Division at the Ministry of Finance, Pome. Mr. W. D. CAREY, Revenue Commissioner at Dublin. M. Ch. CLAVIER, Director-General of Taxes at Brussels. Dr. SINNINGHE DAMSTf, Director-General of Taxes, The Hague.
(4232)
The Sub-Committee elected Dr. SINNINGII: DA.ISTE as Chairman. The Sub-Committee took as a base of its discussions the general proposals drawn up by the Fiscal Committee (d'cument C.34 o.M.a 4 o.q 3 o.II, V). After devoting its first session to a thorough examination of the principles contained in these proposals and drawing up a preliminary draft Convention, the Sub-Committee discussed at its second session the amended texts drawn up in the interval by M. Clavier and Mr. Carey. The title of the draft indicates that the aim of the plurilateral Convention is to prevent the double taxation of certa'.i categories of income, and the preamble adds that the Convention is based on the principle of reciprocity. Article I makes it clear that the Convention does not concern all taxable persons but only those having their fiscal domicile in one of the contracting States and deriving certain forms of income, specified in the Convention, in whole or in part from one or more other contracting States. By fiscal domicile the Convention underlands the place of a natural person's normal residence, in other words his permanent home. In the case of juristic persons the fiscal domicile is the place of their real centre of management. I Any special cases will be settled by the application of Article 17 in consideration of the facts and of the domestic legislation of each State. Although the terms of reference given to it by the Fiscal Committee were quite wide, the Sub-Committee thought it advisable to confine itself in the draft Convention to the categories of income referred to in the Fiscal Committee's proposals, with the exception that it added interest derived from mortgages. This income as well as that derived from immovable property is taxable only in the State in which such property is situated. Income derived from mortgages on ships is taxable only in the State in which the ships are registered. The Sub-Committee considered that the ships themselves could not be included in the immovable property referred to in Article 2. Article 4 is one of the most important in the Convention; it refers to the income of industrial, commcr-ial or agricultural enterprises which possess permanent establishments in two or more contracting States. The Fiscal Committee restricted its proposal No. 4 on this question to companies, leaving it to the Sub-Committee to define what was meant by a company. The Sub-Committee considered that this term should be interpreted as widely as possible and should apply, not only to joint-stock companies, but to legally constituted companies composed of persons having a legal status distinct from that of partners. On the other hand, Article 4 does not apply to natural persons. The text of Article 4 is based on previous drafts and on the principles laid down last May by the Fiscal Committee. Nevertheless, in order to obtain the accession of States which at present levy a tax on the whole of a company's profits, even if part of those profits is derived from permanent establishments situated abroad, the first paragraph of Article 4 was drafted in such a way as to recognise this practice, but subject to a clause (Article 15) permitting the company concerned to obtain a refund of that part of its contribution which constitutes a double taxation. The Fiscal Committee asked the Sub-Committee to consider whether it would be desirable to add to the article concerning companies the following proposal: "The fact that an undertaking has business dealings with a foreign country through a local company the stock of which it owns in whole or in part should not be held to mean that the undertaking in question has a permanent establishment in that country. " After discussion, the Sub-Committee considered that this addition might lead to considerable difficulties and decided to reject it. Article 5 reproduces the text previously adopted with regard to the income derived from maritime shipping or air navigation enterprises, except that it has been confined to companies with a view to concordance with Article 4, and that it has been stated that companies are taxa.le at the place of their real centre of management. As regards interest on public loans (Article 6), which is not taxable in the State of fiscal domicile of the creditors, the interest ft loans issued before the entry into force of the Convention has been left out of account, so as not to affect acquired rights. Articles 7, 8 and 9 refer respectively to: (a) the earnings of frontier workers; (b) authors' rights and income from patents; (c) life annuities, which are to be taxable only in the State of fiscal domicile of the beneficiaries. As regards authors' rights, it has been thought advisable for the kake of simplicity to condense the text adopted previously. In Articles io and ii rules have been laid down regarding the special rfgime applicable to: (a) the salaries of officials serving abroad; (b)public pensions. Both these sources of income will be taxable only in the State which pays them. The Sub-Committee thought that it would be well to insert in the Convention an article reproducing a clause in draft Convention I a referring to the personal tax on natural persons having a fiscal domicile in two or more contracting States. In such cases the tax will be apportioned in these States according to the length of stay in each country as compared with the total length of stay in all the countries concerned during the fiscal year. Relief will be conditional on the submission of a claim in the form and within the time-limits fixed. If necessary, the relief will be given by way of repayment, so that the contracting parties will not have to modify their national legislations. 'In conformity with the definition given by thetechnical experts (document F. 2ta, page 2).
73095 0-6
-vol.
4-
16
(4233)
10 -
and the total taxable income, so that the rate applied will be maintained. In other words the relief will be determ~ned by the application of a rule of three. It may not, however, exceed the amount of tax paid in the country of origin of the income. In this l-tter case the tax paid in the country of origin will simply be refunded. The method of refunding may also be followed in the first case mentioned above. Article 16 reproduces the terms of Article 13 of Draft la. Articles 17 ard follo.. ing refer to the arbitration clause. The Sub-Committee decided to submit to the Fiscal Committee without tuodification the articles unofficially drawn up by M1.Barandon, as the matter can more prolitablv le discussed from a technical point of view at Geneva where the services of the Legal Section of the Secretariat will be available. The Si'b-Committee considered that signatory States might have difficulties in introducing into their domestic legislation certain provisions of the Ctonvention for the Prevention of Double Taxation. Thus the question arose whether tht,, accession of the signatory States to all the articles of the Con,niion should bie cortptalsory or whether they should be left free to accede to specific articles only. The latter method would have the advantage of allowing a very wide Convention to be drawn ttp, embracing practically all cases of double taxation, and of making it easy for all countries to accede in principle to such a Conventiot. which despite reservations by the different countries on particular point;s would none the less remain an ideal to be aimed at by all. After careful consideration, however, the Sub-Connittoe thought such a Convention would call for ;..ntual sacrifices from the different countries and that, if left free to limit their accession, the majority would be tempted to avail themselves of this freedom with the result that the Convention would provisionally fail inits object. The Sub-tontit te therefore refused to adopt the principle ofan optional accession to the different articles of the Convention. It admitted of one exception, liowev'r. The discussions had shown that Attide t dealswith the relief granted by a country 5 in which the real centre of management of an itdutrial. cormmercial or agricultural company is situated in respect of profits earned by that cotip, y ina country in which it has a permanent establlisnuent. The discussion had shown that this .irtiel was regarded by most of the members as essential to the success of the Contvention. If. however, ainder present conditions certain couetries had serious difficulties in consenting to the sacrifices imposed on them by Article 15, it was thought that they should temporarily be given the option of postponing their accession to this article. The Fiscal Committee will have to judge whether the meaning of the word temporarily " should be further defined.t
Another method of apportioning the tax might be adopted, in particular, if the taxable person did not reside during the fiscal year in a country but has a fiscal domicile therein. Article iz is drafted on these lines. Articles 13 to 15 contain measures to avoid double taxation when the State of fiscal domicile levies an impersonal or personal tax on incomt- which under the Convention is taxable solely in the State of origin, or when the latter levies a tax on income which under the Convention is taxable only in the State of the taxpayer's fiscal domicile. In the former case the proportion of relief will he equal to the proportion between this income
2.
DRAFT PLURILATERAL CONVENTION t'ORTile. VRFVtxNrTION OF THE DOUBLE TAXATION OF CERTAIN CATE:R;oI.IES OF INCOME.
\Vith a view to preventing double taxation in the tmatter of direct impersonal or personal taxation levied ott certain categories of income, the I-igh Contracting Parties have, subject to recciprocity, agreed to tlhe following provisions: Article z. Taxable persons and entities having their fiscal dotticile iu the territory of one of the contracting States and deriving, in whole or in part, frot the territory of one or more of the other contracting States any of the forms of income to which this Cotvettion relates, shall, in so far as such income is concerned, lie accorded the special treatment derined in the following articles. For the purposes of the present Convention, the fiscal domicile of a natural person is the place of his normal residence, in other words, his permanent home, while the fiscal domicile of a juristic person is its real centre of management. Article z. Income from immovable property which corresponds to the actual or presumed rental value of .nlh property, and all other income derived front such property which cannot be regarded as in'oie derived from industrial, commercial or agricultural enterprises, shall be taxable only in the Statc in which the property is situate. Artide 3. Incoie derived from mortgages on the property referred to in Article -, shallbe taxable only in the State in which that property is situate. Mr. Carey considers t that Article za should be omitted from the draft Con'eotion and he does not accept the ofhiscolleagues set forth in this report with regard to that article.
vice
(4234)
Income derived f'nm mortgages sectired on ships shall be taxable only in tile State in which the ships are registered. Article 4. Without prejudice to the foregoing provisions, and subject to the application of Article 15, I a company (or other association having a legal existence of its own) operating one or more industrial, commercial or agricultural enterprises shall be taxable in respect of the income from such enterprises only in the State of its fiscal domicile, provided, however, that, if such company (or association) in one or more other countries one or more permanent establishments, that portion of the possesses income'derived from each State shall be taxable therein. The competent authorities of the countries concerned shall come to an agreement, if necessary, regarding the methods of apportionment. For the purposes of the present article, the following shall be regarded as permanent establishments: branches, mines and oilfields, fixed installations, factories, workshops, agencies, warehouses, offices and depots. The fact that a company (or association) has business dealings with a foreign country through an agent of gentinely independent status (broker, commission agent, etc.) shall not be held to mean that it has a permanent establishment in that country. Article 5. As an exception to the end of the first paragraph of Article 4,a company (or other association having a legal existence of its own) operating one or more maritime shipping or air navigation enterprises shall be taxable in respect of the income derived from such enterprises only at its real centre of management. Article 6. Income from public loans shall be taxable only in the State of the fiscal domicile of the creditors. This provision does not refer to income from loans issued prior to the entry into force of the present Convention. Articfle 7. The earnings of workers living on one side of a frontier and working on the other shall be taxable only in the State of those workers' fiscal domicile. Article 8. Authors' rights and income from patents shall be taxable only in the State of fiscal domicile of beneficiaries. If, however, they ar collected by persons to whom these rights have been assigne. for a consideration, or fall on any other grounds into the category of industrial or commercial income, they shall be taxable as such under the conditions laid down in Article 4. Article 9. Life annuities shall be taxable only in the State of fiscal domicile of the annuitants. Article o.
The salary of an official or public servant who is serving abroad shall be taxable only in the State liable for payment of such salary.
Article Ii.
A public pension shall be taxable only in the State liable for payment of such pension.
Article z2.
When a taxable natural person has a fiscal domicile in the territory of two or more of the contracting States, he may claim that the inpersonal or personal tax c.1 the income referred to in Articles 6 to 9 shall be apportioned according to the length of his stay in each as compared with the total length of his stay in all those counties during the financial year. The appropriate relief shall, when necessary, be given by way of repayment. The countries concerned may, if they think fit, adopt some method of apportioning the tax other than that indicated in the previous paragraph, in particular when the taxpayer has not resided during the fiscal year in a country in which he has a fiscal domicile. The claim referred to in the first paragraph must be presented in the form prescribed by the competent authorities of each country, accompanied by vouchers, within six months after the close of the financial year, provided, however, that the time allowed for making the claim shall not be less than six months from the date of the notification to the taxpayer of the latest assessment. Article 13. When the State of fiscal domicile of a recipieat of the income referred to in Articles 2, 3, 10 and i i has charged tax on any such income, the interested party may claim partial relief.
I Mr. Carey considers that Article is should be omitted from the draft Convention and, theretfore, dissents from theinclusion inArticle 4 of the words "and subject to the application of Article ia ".
(4235)
12 -
The proportion of this relief shall be equal to the proportion between this income and the total income chargeable, but it may not exceed the amount of the in the State of origin. The appropriate relief shall, where necessary, tax payable on that income be given by way of repayment. The last paragraph of Article 12 shall apply in'this case; the interested official documents certifying that the tax has been laid in the State in whichparty must produce the the ir-ome originates., Article 14. If the State of origin of the income referred to in Articles 6 to 9 income, the interested party may claim a refund, provided he proves has levied a tax on such that the income has been taxed in the Stat of his fiscal domicile. The last paragraph of Article 12 shall apply to claims under the present Article.' Article 15. If, in the case provided for at the end of the first paragraph of Article 4, the State of fiscal domicile of a company has levied a tax on the income of its permanent establishments situated in the territory of other contracting States, that company may claim partial relief from the tax. The last two paragraphs of Article 13, and also the second paragraph of Article 4, shall apply in this case. Article z6. As regards any special provisions which may be necessary for the application of the present Convention, more particularly in cases not expressly provided for, but Convention, the financial administrations of the contracting parties generally covered by the shall confer together, and shall take the necessary steps in accordance with the spirit of this Convention. Article Z7. Should a dispute arise between two or more of the contracting parties as to the interpretation or application of the provisions of the present Convention, and capable of settlement either direct between the parties or by should such dispute not prove arrangement, the parties may, if they are all agreed, submit their any other method of friendly dispute to such technical body as the Council of the League of Nations may appoint for the purpose. This body will give an opinion after hearing the parties and, if necessary, arranging a meeting between them. The opinion must be delivered within . . . months of the date on which the dispute has been referred to the said body. The High Contracting Parties may agree, prior to the opening of such procedure, to accept the opinion given by this body. Article z8. Should the parties to the dispute decide not to ask for the opinion mentioned in the previous articles, or should they fail to agree upon this course, or, again, should they not agree to accept the opinion, the disnute shall be submitted for decision to the Permanent Court of International Justice unless the parties agree, under the conditions hereinafter stipulated, to have recourse to an arbitral tribunal. Article z9. If, in the case provi,' d for in the previous article, the parties agree to have recourse to an arbitral tribunal, they shall draw up a special agreement determining the subject of the dispute, the arbitrators and the procedure to be followed. Article ao. If no agreement is reached between the parties as to tlhe special agreement referred to in the previous a. :icle, or if they fail to appoint arbitrators, each party to the dispute shall, after a previous
fternalive proposed by Mr. Carey: Article 13. - The exemption conferred by Articles 2. 3, to and is from the taxation of the country of the fiscal domicile of the recipient of the income may, if the competent authorities of that country see fit. be given by way of refund of tax, and the following provisions shall have effect in relation to any item of income to which these article refer: (a) The exemption of any such item of income from taxation in the country of domicile of the recipient shall not operate to reduce the rate of personal tax payable that country. (b) The country of domicile shall be-deemed to havein discharged its obligations under the said articles if it recoups the taxpayer to the extent of the full tax borne in the country of origin.
(c) The last paragraph of Article so shall apply to claims under the present article; must produce the official documents ,etilying that the tax hu been pid in the State in which the interested party the income originates.
I lternative proposed by Mr. Cosy:
Artlief 14. - The exemption conferred by Articles 6 to 9 from the taxation of the country In which the income arises may, if the competent authorities of that country see fit, be given by way of repayment. The last paragraph of Article in Shall apply to claims under the present Article. I Mr. Carey considers that this article should be omitted from the draft Convention.
(4236)
7 13 notice of . . . months, have the right to bring it direct before the Permanent Court of International Justice by means of a requisition. Article 21. Neither the opening of the procedure before the technical body referred to in Article 17 nor the opinion which it delivers shall in any case involve the suspension of the measures complained of; the same rule shall apply in the event of proceedings before an arbitral tribunal or the Permanent Court of International Justice unless the Court decides otherwise under Article 41 of its Statute.
TEXTS TO BE INSERTED IN THE PROTOCOL OF THE CONVENTION.
A. The adoption of the present Convention by two States which have previously concluded a bilateral Convention for the prevention of double taxation shall not involve the replacement or amendment of the provisions of that bilateral Convention so long as it remains in force. 13. Siace theadvantages of this Convention are accorded subject to reciprocity, they cannot be claimed from any contracting party, in virtue of the most-favoured-nation clause, by a State not a party to this Convention. C. In acceding to the present Convention, each of the High Contracting Parties shall have the right temporarily to reserve its accession to Article 15; in that case, the other High Contracting Parties shall not be bound to apply the provisions of Article 15 to taxpayers having their fiscal domicile in the country or countries which have made that reservation.
Appendix II. DRAFT PLURILATERAL CONVENTION "A" FOR THE PREVENTION OF THE DOUBLE TAXATION OF CERTAIN CATEGORIES OF INCOME. With a view to preventing double taxation in the matter of direct taxation levied on certain categories of income, the High Contracting Parties have, subject to reciprocity, agreed to the following provisions: Article r. Taxable persons and entities having their fiscal domicile in the territory of one of the contracting States and deriving, in whole or in part, from the territory of one or more of the other contracting States any of the forms of income to which this Convention relates, shall, in so far as such income is concerned, be accorded the special treatment defined in the following articles. For the purpose. oi the present Convention, the fiscal domicile of a natural person is considered to be the place of his normal residence, in other words, his permanent home, while the fiscal domicile of a juristir person is considered to be its real centre of management. Article 2. Income from immovable property which corresponds to the actual or presumed rental value of such property, and all other income derived from such property which cannot be regarded as income derived from industrial, commercial or agricultural enterprises, shall be taxable only in the State in which the property is situate. Article 3. Income derived from mortgages on the property referred to in Article 2 shall be taxable only in the State in which that property is situate. Income derived from mortgages secured on ships shall be taxable only in the State in which the ships are registered. Article 4. Vithout prejudice to the foregoing provisions, the income of industrial, commercial or agricultural enterprises shall only be taxable in the States in which they have permanent establishments, each of these States being authorised to tax the profit derived from the permanent establishments situated in its territory. Nevertheless, the present Convention does not affect the right the contracting States may have to tax the income derived by enterprises domiciled in their territory from activities carried on in the territory of non-contracting States. The competent authorities of the countries in which permanent establishments are situated shall come to an agreement, if necessary, regarding the methods of apportionment, so as to confine the taxation of each State to the profits earned in the territory of that State.
(4237)
14 -
For the purposes of the present article, the following shall be regarded as permanent establishments: real centres of management, branches, mines and oilfields, permanent installations, factoies, workshops, agencies, warehouses, offices and depots. The fact that an enterprise (or association) has business dealings with a foreign country through an agent of genuinely independent status (broker, commission agent, etc.) shall not be held to mean that it has a permanent establishment in that country. Article 5. As an exception to the first paragraph of Article 4, a maritime shipping or air navigation enterprise shall be taxable only at its real centre of management. Article 6. Income from public loans shall be taxable only in the State of the fiscal domicile of the creditors. This provision does not refer to income from loans issued prior to the entry into force of the present Convention. Article 7. The income of the liberal professions shall be taxable only in the States in which they are regularly exercised. Article 8. The earnings of workers living on one side of a frontier and working on the other shall be taxable only in the State of those workers' fiscal domicile. Article 9. Authors' rights and income from patents shall be taxable only in the State of fiscal domicile of the beneficiaries. If, however, they are collected by persons to whom these rights have been assigned for a consideration, or fall on any other grounds into the category of industrial or commercial income, they shall be taxable as such under the conditions laid down in Article 4. Article zo. Life annuities shall be taxable only in the State of fiscal domicile of the annuitants. Article ix. The salary of an official or public servant who is serving abroad shall be taxable only in the State liable for payment of such salary. The same applies to scholarships awarded for studies abroad. Article 12. A public pension shall be taxable only in the State liable for payment of such pension. Article 13. When a taxable natural person has a fiscal domicile in the territory of two or more of the contracting States, he may claim that the impersonal or personal tax on the income referred to in Articles 6 to io shall be apportioned according to the length of his stay in each as compared with the total length of his stay in all those countries during the financial year. The appropriate reli,.f shall be given either by way of exemption or by way of a rebate involving, if necessary, a refund. The countries concerned may, if they think fit, adopt some method of apportioning the tax otlwr than *hat indicated in the previous paragraph, in particular when the taxpayer has not resided during the fiscal year in a country in which he has a fiscal domicile. The claim referred to in the first paragraph must be presented in the form prescribed by the competent authorities of !ach country, accompanied by -vouchers, within six months after the close of the financial year, provided, however, that the time allowed for making the claim shall not be less than six months from the date of the notification to the taxpayer of the latest assessment. Article 14. The relief provided for in Articles 2, 3, Ix and x2 from the taxation of the country of the fiscal dom;Jle of the recipient of the income shall be given either by way of exemption or by way of a rebate involving, if necessary, a refund of tax, and the following provisions shall have effect in relation to any item of income to which these articles refer: (a) The exemption of any such item of income from taxation in the country of domicile of the recipient shall not operate to reduce the rate of personal tax payable in that country. (b) The country of domicile shall be deemed to have discharged its obligations under the said articles if it recoups the taxpayer to the extent of the full tax borne in the country of origin.
(4238)
15 -
(c) The rules laid down in the last paragraph of Article 13 shall apply to claims under the present article; the interested party must produce the official documents certifying that the tax has been paid in the State in which the income originates. Article j5. The relief resulting from the application of Article 4 shall be given either by way of exemption or by way of a rebate involving, if necessary, a refund of tax. The rules laid down in the second paragraph of Article 14 shall apply. Article 16. The relief provided for by Articles 6 to io from the taxation of the country in which the income arises shall be given either by way of exemption or by way of a rebate involving, if necessary, a refund of tax. The rules laid down in the last paragraph of Article 13 shall apply. Artidle Z7. As regards any special provisions which may be necessary for the application of the present Convention, more particularly in cases not expressly provided for, but generally covered by the Convention, the financial administrations of the High Contracting Parties shall confer together, and shall take the necessary steps in accordance with the spirit of this Convention. (Here follow the articles establishing an arbitral procedure. Committee's Draft, Appendix I B.) See Articles 17-21 of the Sub-
Appendix Il. DRAFT PLURILATERAL CONVENTION - B The High Contracting Parties have, subject to reciprocity, agreed to the following provisions: Article r. Each of the High Contracting Parties reserves the right to tax taxable persons and entities having their fiscal domicile in its territory in respect of the whole of their income irrespective of origin. Each of the High Contracting Parties undertakes, when applying the first paragraph of the present article, not to treat persons and entities of the nationality of one of the other High Contracting Parties less favourably than it treats its own nationals or the nationals of any foreign State. For the purposes of the present Convention the fiscal domicile of a natural person shall be taken to mean the place of his normal residence, in other words, his permanent home, and the fiscal domicile of a juristic person shall be taken to mean its real centre of management.
A rtice 2.
Each of the High Contracting Parties reserves the right to tax natural and juristic p,..sons not domicilied in its territory in respect of income which it regards as originating in that territory subject to the exceptions laid down in Article 3. Article 3.
4
%rticle 2 shall rnt apply to the following:
(a) Income from maritime or air navigation undertakings; (b) Income from industrial, commercial or agricultural undertakings not included tinder paragraph (a) of this article in so far as it is not derived from a permanent establishment situated in the country; (c) Income front public loans issued after the present Convention goes into effect prior to the entry into force of the present Convention; (d) The earnings of workers living on one side of the frontier and working on the other; (e) Authors' rights and income from patents. If, however, they are collected by persons to whom these rights have been assigned for a consideration, or fall on any other grounds into the category of industrial or commercial income, they shall be treated under the rule laid down in paragraph (b) above; (/) Life annuities.
(4239)
16 -
Article 4. Fo' the purposes of applying Article 3 (b) the following shall be regarded as permanent establishments: branches, mines and oilfields, plants, factories, workshops, agencies, warehouses, offices and depots. The fact that an undertaking has business dealings with a foreign country through an agent of genuinely independent status (broker, commission agent, etc.) shall not be held to mean that it has a permanent establishment in that country. The contracting parties undertake to instruct their competent authorities to come to an agreement, if necessary, regarding the methods of apportionment. A rticle 5. When a taxable natural person has a fiscal domicile in the territory of two or more of the contracting States, he may claim that the tax shall be apportioned according to the length of his stay in each as compared with the total length of his stay in all those countries during the financial year. The appropriate relief shall, when necessary, be given by way of repayment. The countries concerned may, if they think fit, adopt some method of apportioning the tax other than that indicated in the previous paragraph, in particular when the taxpayer has not resided during the fiscal year in a country in which he has a fiscal domicile. The claim referred to in the first paragraph must be presented in the form prescribed by the competent authorities of each country, accompanied by"vouchers, within six months after the close of the financial year, provided, however, that the time allowed for making the claim shall not be less than six months from the date of the notification to the taxpayer of the latest assessment. Artide 6. The High Contracting Parties reserve the right to apply the exceptions provided for in Article 3 by way of appropriate relief. For such case relief shall only be accorded on condition of its being established that the income in question has been taxed in the State of fiscal domicile. The last paragraph of Article 5 shall be applicable to the claim provided for in the present article.
Artide 7. As regards any special provisions which may be necessary for the application of the present Convention, more particularly in cases not expressly provided for, but generally covered by the Convention, the firancial administrations of the High Contracting Parties shall confer together and shall take the necessary steps in accordance with the spirit of this Convention.
(4240)
[Communicated to the Council and the Members of the League.]
Official No. :
C. 399. M. 204.
[F./Fiscal. 76.]
1933. I1.A.
Geneva, June 26th, 1933.
LEAGUE
OF
NATIONS
FISCAL
COMMITTEE
ON THE FOURTH SESSION
REPORT TO THE COUNCIL
OF THE COMMITTEE feld at Geneva from June 15th to 26th, 1933.
INTRODUCTION.
The Fiscal Committee has the honour to submit to the Council the following report on its fourth session held at Geneva from June 15th to 26th, 1933. The following members of the Committee were present M. Hans BLAU, Chairman, M11. Gino BOLAFFI, M. Marcel BOnDUOE, Professor Herbert DORN, M. J. H. R. SINNINGHE DAMSTIf, Sir Percy THoMiPsoN, K.B.E., (.B. Representing the Internalional Chamber of Commerce: .M. Robert JULLIARD. Several members - namely, M. Charles CLAVIER, Professor FLORES Or LI'.EiUS, and M. George MANTZAVJNOS - being retained in London for the Monetary and Econoniii Conference, were unable to attend the Committee's session. The Committee had before it the results of the enquiry undertaken three years ago, with the help of a grant from the Rockefeller Foundation, into the problem of the apportionment of profits of concerns operating in several countries. It examined the important documentation submitted by Mr. Mitchell B. Carroll, and discussed the draft Convention prepared by the Sub-Committee on Allocation at the session which it held in New York and Washington from March 17th to 30th, 1933, at the invitation of the American Section of the International Chamber of Commerce. The Committee learned with gratitude of the further grant of $50,000 which was offered by the Rockefeller Foundation on the initiative of the late Professor Adams, and accepted by the Council on May 22nd, 1933. This grant, which is available for a further period of three years, from July 1st, 1933, to June 30th, 1936, should enable the Committee to complete the task undertaken. 1.
ENQUIRY INTO TIE APPORTIONMENT OF PROFITS.
Mr. Carroll reported to the Committee on Lhe enquiry which he had conducted in a large number of countries on the lines indicated in the Committee's previous report. He personally visited Lwenty-seven countries, in order to study their legislation on the spot and to collaborate with the experts responsible for making special reports on each -ountry. In other countries, the corresponding members of the Committee drew up reports on the basis of a questionnaire prepared for their guidance. With their help, and the valuable assistance afforded to Mr. Carroll by the International Chamber of Commerce and its national committees, the survey was successfully completed. li consequence of this enquiry, twenty-seven reports have been drawn up on legislation and practice in connection with the. taxation of foreign and national enterprises. A special study has been made of the accounting aspects of the problem. Information has also been received from various countries on which reports have not been prepared. The five reports submitted to the Committee at its previous session have since been published ; the others will appear shortly. Series of League of Nations Publications II. ECONOMIC AND FINANCIAL 1933. II. A. 15.
S. d. N. 1.185
IF.), 080 (A.) 7133 - Imp. Oranchamp.
(4241)
-2Mr. Carroll has also summarised and compared, in a general study, the main features of the different national laws. By way of conclusion, he has endeavoured to extract the general rules followed in the majority of countries, on the basis of which an international agreement might be secured. The Committee highly appreciated the value of the studies submitted to it, and more particularly the remarkable scientific and practical work of co-ordination of Mr. Carroll. The Committee deemed the material contained in the report was by itself adequate to facilitate the conclusion of international agreements, and with that object in view it has endeavoured to formulate in a draft convention the essential provisions which such agreements might contain. II.
DRAFT CONVENTION ON THE ALLOCATION OF PROFITS.
1. The Sub-Committee submitted to the Committee recommendations covering the field of the allocation of profits in the form of a draft Convention, and indicated that those recommendations might either be embodied in international conventions or be introduced direct into the legislation of the different countries. After a thorough discussion of the text submitted to it, the Committee agreed upon the draft which is annexed hereto. The subject of this draft Convention is limited to the problem of the double taxation of industrial and commercial enterprises. The Committee did not attempt to do over again the work of its predecessors, nor to present a complete Convention on Double Taxation. It considered that the texts drawn up in 1928 by the General Meeting of Governmental Experts retain all their value. At that time, however, the question of the allocation of profits was deliberately left )pen. Indeed, Convention la contains, in Article 5 dealing with income from industrial, commercial and agricultural undertakings, a paragraph 3, which is reproduced textually in Conventions lb (Article 2 B) and Ic (Article 3), and reads as follows : " Should the undertaking possess permanent establishments in both contracting States, each of the two States shall tax the portion of the income produced in its territory. The competent administrations of the two Contracting States shall come to all arrangement as to the basis for apportionment." The most essential of these rules of allocation will be found in the new draft Convention. 2. In view of the diversity of national laws and the extreme complexity and variety of the individual cases that arise, the Committee thought iC advisable to prescribe only general principles. Mr. Carroll's very detailed report can be usefully consulted as a guide for the application of those principles to the complex cases that arc encountered in practice. The fundamental principle laid down is that, for tax purposes, permanent establishments must be treated in the same manner as independent enterprises operating under the same or similar conditions, with the corollary that the taxable income of such establishments is to be assessed on the basis of their separate accounts. In these circumstances, there was no need for the draft Convention to embody details as to the methods of accounting, which may legitimately vary with different enterprises. 3. Nor (lid the Committee consider it expedient to lay down in special articles hard and fast rules applicable to certain classes of international enterprises, such as transport, insurance, telegraph and telephone companies. It was of opinion that the general principle of separate accounts for establishments will enable all the special problems to be solved with the n e,.ssary flexibility. Nevertheless, the Committee considered it essential to devote an article to banking and financial enterprises, as the generally accepted rules for the allocation of the income of this class of enterprise derogate in certain essential points from the general provisions of the draft Coivention. It is not, however, the intention of the Committee that the formulation of the prc.ent draft Convention should preclude the later study of more detailed texts dealing in particular with the different classes of enterprises mentioned above and the use of various accounting methods. Mr. Carroll's report already affords a basis for these studies, which remain the task of the Sub-Committee. I. The Committee considers that the draft Con,'ention represents the first result of important studies bnd of a long and exhaustive preparatory work, and that it is of a nature to assure the making of considerable progress in the movement against the double taxation of international enterprises. The C .nmittee took cognisance of the urgent desire expressed by industrial and commercial circles, notably in the resolutions of various congresses of the International Chamber of Commerce, in favour of the conclusion of agreements for the abolition of double taxation. In view of it limited scope, and of the intentional restriction of its provisions to the fundamental rules, this draft by itself might, in the Committee's opinion, form the basis of a multilateral Convention. The Committee therefore proposes to the Council that it should be transmitted to Governments, with a request that they express their opinion thereof, make suggestions as to any amendments they consider desirable, and also state whether they would be prepared to enter into negotiations for the conclusion of a multilateral.' Convention on the basis of this text, subject to amendment on the lines which they would indicate. - If a certain number of States were prepared to adhere to such a Convention a substantial progress could be made, even if only those States would sign. In any case, States which are not in a position to accede to a multilateral Convention might of course utilise this draft as a model for bilateral conventions with other States.
(4242)
-3III.
EVOLUTION OF FISCAL SYSTEMS.
The Fiscal Committee considers that it should follow closely the evolution of fiscal systems, as this matter is of special importance in the present international economic situation. In addition to changes which are solely due to the difficulties resulting from the world depression, there are evident certain modifications in structure and to some extent a trend towards the simplification of existing systems. In so far as the changes in question represent a better adaptation of fiscal systems to the economic structure of the different States or to the needs of international relations, they are certainly deserving of study in order that attention may be drawn to ideas the general adoption of which would contribute towards the economic progress of the world. This also applies to changes representing technical improvements in legislation, the introduction of which into the laws of countries might be desirable. Moreover, it would be very advantageous if agreement could be reached on certain essential points of fiscal and juridical terminology, such as the concepts of gross income, net income, expenses, general overhead, etc., as has already been undertaken in regard to the concept of fiscal domicile. Such work is also necessary in view of the fact that, in practice, the obscurity of fiscal systems is largely responsible for the uncertainty felt by enterprises operating in several countries at the same time, and because many questions relating to double taxation might be settled more easily if there were a somewhat more general simplification of tax systems. The work carried out in connection with the allocation of profits has already shown, on one essential subject, the practical value of such a comparative co-ordinated study. In order to examine all these questions and to prepare a report for submission to it at one of its coming sessions, the Fiscal Committee has appointed a Sub-Committee consisting of M. DaRN (Chairman), M. BOLAFFI, M. BOnDUGE and M. SINNINOHE DAMSTA.
Annex. DRAFT CONVENTION

ADOPTI'D FOR TIlE ALLOCATION
or
BUSINESS
INCOME BETWEEN STATES FOR TIlE PURPOSES
CF TAXATION.
\iti a view to preventing the double taxation of the income of business enterprises, which restiits front contlicLing principles and methods of allocating taxable income, the Iligh Contracting Parties h. ie agreed to the following provisions
Arlicle1.1
An elerprise having its fiscal domicile in one of the contracting States shall not be taxalle in aintlicr contracting Stabe exccpt in respect of income d;rectly derived from sources within its h'rritory and, as such, allocable, in accordance with the articles of this Convention, to a ltvruanvot estailtlishment situate in such State. 1 i a loriianent establishtent of an enterprise in one State extcnds its activities into a semiuid Slate ill which the eiitrprise has no permanent establishment, the income derived from such nclivities shall be allocalted to the permanent establishment in the first State.
it If at lin c Slites thilld desire to a-,oid, by means of this Convention, tie douile loxolion resulting from li;I,ili y to ti,. State or ilset domicile in respect of its total net income, as well as to the otiier States in which
tie inecini, ,f loiaatnent eslabieiiaents is taxable, oneof the following clausesmay be added to Article I : ' TI', Sitta i ... rotl I doicile shall exempt team Its tax thi Income taxable in other contracting States in
'tr :l v Or: silt Iibe iirst iaraerpb of this article. slate .i, of fiscai domicile shall deduct fron its tax on ilie total nt income of the enterprise Lite leser of Lie
:l.......lnLs :
1, 11 f~ lting
ti nol tiii' i;Ii'
" (a) Sea iitr " (b)

itt;, ,
totiai act incoiric.*'
Tihl tx ino rsed by the other contiracting State on the Income taxable therein, in accordance with iitpi I iis artie, or : An oiount which repiresents the same proportion ot the tax payable on the total net income as the losoiie in tue other contracting States in accordance with tioefirst paragraph of this article bears to
&..ti ... ixxai on would be avoided and the present Convention would be ineffective It, as frequently in te oririlin ra nir navigation enterprises the States agreed to exempt Income from sources within I. air territory uo heli dcrivi by entirprises not having their liscal domicile therein.
(4243)
Article 2. For the purposes of this Convention, the term "business income" shall not include the following : (a) Income from immovable property; (b) Income from mortgages, from public funds, bonds (including mortgage bonds), loans, deposits and current accounts, except as provided in Article 4 (a) (1); (c'; Dividends and other income from shares in a corporation; (d) Rentals or royalties arising from leasing personal property or from any interest in such property, including rentals or royalties for the use of, or for the privilege of using, patenls, copyrights, secret processes and formulm, goodwill, trade marks, trade brands, franchises a'nd other like property, provided the enterprise is not engaged in dealing insuch property ; (e) Profit or loss from the casual purchase and sale of immovable or movable property. There shall be excluded with the above-mentioned items of income the related expenses (including general overhead) and charges. Such items of income shall be taxed separately or together with business income, in accordance with the law and the international agreements of the States concerned. Article 3. If an enterprise with its fiscal domicile in one contracting State has permanent cstahlishments in other contracting States, there shall be attributed to each permanent establishment the net business income which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities under the same or similar conditions. Such net income will, in principle, he determined on the basis of the separate accounts pertaining to such establishment. Subject to the provisions of this Convention, such income shall be taxed in accordance with the legislation and international agreements of the State in which such establishment is situated. The fiscal authorities of the contracting Slates shall, when necessary, in execution of the preceding paragraph, rectify the accounts produced, notably to correct errors or omissions, or to re-establish the prices or remunerations entered in the books at the value which would prevail between independent persons dealing at arm's length. If an establishment does not produce an accounting showing its own operations, or if the accounting produced does not correspond to the normal usages of the trade in the country where the establishment is situated, or if the rectifications provided for in the preceding paragraph cannot be effected, or if the taxpayer agrees, the fiscal authorities may determine empirically the business income by applying a percentage to the turnover of that establishment. This perentage is fixed in accordance with the nature of the transactions in which the establishment is engaged and by comparison with the results obtained by similar enterprises operating, in the country. If the methods of determination described in the preceding paragraphs are found to be inapplicable, the net business income of the permanent estahlishment may be determined by a comlputation based on the Lotal income derived by the enterprise from the activities in which such establishment has participated. This determination is made by applying to the total income coefficients based on a comparison of gross receipts, assets, number of hours worked or other appropriate factors, provided such factors be so selected as to ensure results approaching as closely as possible to those which would be reflected by a separate accounting. Article 4. When determining the net income of banking and financial enterprises in r.nnformity with the principles laid down in Article 3, there shall b'e applied, despite the provisions in Article 2, the following : (a) There shall be allocated to the State where a permanent establishment is situate notably the following items of gross income : (1) Interest or discounts derived by the establishment from deposits with other banks, current accounts and all forms of indebtedness, unless they are represented by bonds or secured by mortgages on immovable property, regardless of where the fiscal domicile of the debtor is situated. If such an establishment transfers a note, bill, cheque or certificate of indebtedness to another establishment, there shall be allocated to each establishment that part of the interest or discount which corresponds to the time during which such note, bill, cheque or certificate of indebtedness was included in its assets. Interest on loans represented by bonds or secured by mortgages on immovable property shall be allocated as provided in Article 2. (2) Profit or loss derived by such permanent establishment from buying and selling for its own account stocks, bonds, shares and other securities or foreign exchange, for spot or future delivery, even if these operations are effected through the agency of another establishment of the enterprise.
(4244)
-5(3) Profits or commissions derived by such establishment from participation or rendering services in underwriting or selling all or part of an issue of securities. (,4) Fees and commissions derived by a permanent establishment for rendering services. If such services consist in taking drafts or cheques for collection from a debtor in another State, the compensation shall be allocated to the State where is situate the establishment which takes the draft or cheque for collection. (b) Where one permanent establishment of the enterprise is in the position of a creditor or debtor in relation to another permanent establishment of the enterprise, the following provisions shall apply : (1) If a permanent establishment in one State (creditor establishment) supplies funds, whether in the form of an advance, loan, overdraft or otherwise, to a permanent establishment in a second State (debtor establishment), for tax purposes interest shall be deemed td accrue as income to the creditor establishment'and as a deduction from gross income to tLhe debtor establishment, and such interest shall be computed at the interbank rate for similar transactions in the country where is situate the creditor establishment. (2) Contrary to the provisions of the preceding paragraph, from the interest accruing as income to the creditor establishment and deductible from gross income by the debtor establishment there shall be excluded the interest corresponding to the permanent capital allotted to the debtor establishment whether in the form of advances, ans, overdrafts or otherwise. Arlicle 5. When an enterprise of one contracting State has a dominant participation in the management or capital of an enterprise of another contracting State, or when both enterprises are owned or controlled by the same interests, and as the result of such situation there exists, in their commercial or financial relations, conditions different from those which would have been made between independent enterprises, any item of profit or loss which should normally have appeared in the accounts of one enterprise, but which has been, in this manner, diverted to the other enterprise, shall be entered in the accounts of such former enterprise, subject to the rights of appeal allowed under the law of the State of such enterprise. Arlicle 6. Should a dispute arise between the contracting States as to the interpretation or application of the provisions of the present Convention, and should such dispute not be settled either directly between the States or by the employment of any other means of reaching agreement, the dispute may be submitted, with a view to an amicable settlement, to such technical body as the Council of the League of Nations may appoint for this purpose. This body will give an advisory opinion after hearing the parties and arranging a meeting between them if necessary. The contracting States may agree, prior to the opening of such procedure, to regard the advisory opinion given by the said body as linal. In the absence of such an agrec"nent, the opinion shll not he binding upon the contracting States unless it is accepted by both, and they shall be free, after resort to such procedure or in lieu thereof, to have recourse to any arbitral or judicial procedure which they may select, including reference to the Permanent Court of International Justice as regards any matters which are within the competence of that Court under its Statute. Neither the o!rn'ng of the procedure before the hcdy referred to above nor the opinion which it delivers in any cas involves the suspension of the measures complained of; the same rule shall apply in the event of proceedings being taken before the Permanent Court of International Justice, unless the Court decides otherwise under Article 41 of its Statute.
PnOTOCOL. At the moment of signing the present Convention, concluded on this day's date between ....... the undersigned plenipotentiaries have made the following declarations, which shall form an integral part of the said Convention : I. The taxes referred to in this Convention are For .... (b For .... (c) For ...... 2. (a) As used in this Convention, the term " enterprise " includes every form of undertaking, whether carried on by an individual, partnership, corporation or any other entity. (b) The term " fiscal domicile " for the purposes of this Convention means the place whcre an enterprise, as defined under (a) above, has its real centre of management. (a
(4245)
-6(c) The term "permanent establishment " includes real ccntrcs of management, branchcs, mines and oi|-wclls, plantations, factories, workshops, warehouses, offices, agencies. installations, an other fixed places of business, but does not include a subsidiary comnpany. Whel, the term " permanent establishment " is used with reference to a particular State, it includes all the permanent establishments, whatever their form, which are situate within such State. The fact that an enterprise w:th its fiscal domicile in one of the contracting States has business dealings in another contracting State through an agent of genuinely independent status (broker, commission agent, etc.) shall not be held to mean that it has a permanent establishment in the latter State. When a foreign enterprise regularly has business relations in a State through an agent established there who is authorised to act on its behalf, it shall be deemed to have a permanent establishment in that State. A permanent establishment shall therefore be deemed to exist when the agent established in the State : " (1) 'Is a duly accredited agent (fonda de pouvoir) who habitually enters into contracts for the enterprise for which he works; or (2) Is bound by an employment contract and habitually 'transacts commercial business on behalf of the enterprise in return for remuneration from the enterprise; or (3) Is habitually in possession, for the purpose of sale, of a depot or stock of goods belonging to the enterprise. As evidence of an employment contract under the terms of (2) above may be taken, moreover, the fact that the administrative expenses of the agent, in particular the rent of premises, are paid by the enterprise. A broker who places his services at the disposal of an enterprise in order to bring it into touch with customers does not in his own person constitute a permanent establishment of the enterprise, even if his work for the enterprise is to a certain extent continuous or is carried on at regular periods. Similarly, a commission agent (commissionnaire), who acts in his own name for one or more enterprises and receives a normal rate of commission, does not constitute a permanent establishment of any such enterprise. A permanent establishment shall not be deemed to exist in the case of commercial travellers not coming under any of the preceding categories.
COMMENTARY ON DRAFT CONVENTION.
Ad A ricle 1. - Article I limits the rights of the State in which a permanent establishment of an international enterprise is situatedI. That State may only tax the income directly derived from sources vithin its territory. This article does not, however, in any way restrict the rights of the State of the fiscal domicile of the enterprise, which is still free to tax the entire income thereof, including that porLiin derived from sot'ces outside the country. The double taxation which may still remaini will be avoided by the adoption of one of the provisions inserted in the additional note to Arll 1, unless the conclusion of a Convention of type la, Ib, or Ic of 1928 renders unnuc,'eary the adoption of such provision. .\d Arlcle 2. - Article 2 defines, for the purposes of the Convention, the business income of an -1t1erlprisp. This d(hinition is arrived at by excluding various items which will be taxed in aeordance with the law of the country, subject to the special conditions resulting from the conclusion o f internaLinnal agreements. An exception to these general rules is made in the case of banks and similar enterprises (see Article 4).. Ad A licle 3. - Under Article 3, the fiscal authorities must, in principle, treats permanent establishment situated in their territory as an independent enterprise. If the taxp.yer produces, in respect of that establishment, separate accounts in proper forin which show its relations with the international enterprise to be normal and adequately rellecl. them, the fiscal authorities will take those account as a basis for the assessment. If, ott the other hand, the relationship between the establishments has led to the granting of specially favourable terms to one or other of them, or has caused the accounts to give an inato'urate idea of the situation, the administration will make the necessary corrections. If the nature or importance of those corrections render such adjustment impossible in practice, the fiscal authorities will resort to another method of assessment and will tax the profits either on the basis of the turnover or by some other appropriate method. These metuods will also be applied when the taxpayer does not furnish appropriate accounLs or when he agrees to the usc of one of these methods. Article 3 does not expressly regulate the allocation of interest on debts, but it follows from the principles laid down in Article 3 that such interest will not be attributed to an establishment unless it refers to debts contracted by the permhnent establishment itself commensurately with its own needs as an independent enterprise. In the case of debts contracted by the international enterprise, a portion of the interest may be deducted from the dependent permanent establishment, provided that the money borrowed has been income of hue used for the particular requirements of that establishment, that the amount corresponds to whlat would have reasonably been required by an independent enterprise and that the interest charges have not been included in the prices and remunerations entered in the accounts.
(4246)
- 7Ad A rlicle 4. - The provisions of Article 3 apply, in general, to all enterprises, subject to the necessary adaptations. NwevrthLless, as regards banks, it was necessary to draw up special provisions differing in some respects from the general rules laid down in Article 2. Such is the purpose of Article .I, which includes in the net taxable interest on deposits and loans. Moreover, it prccludes the possibility of deductingincome interest on sums advanced to a permanent establishment in lieu of capital. As a matter of fact, this latter rule could normally apply also to enterprises other than banks. Ad Arlicle 5. - Articli 5 deals with subsidiaries which will be taxed as independent enterprises provided no pro'its or losses are transferred as a result of the relations alliliated companies. If such transfers are efficted, the administration will make between the the necessary adjustments in the balance-sheets. Ad Arlicle 6. - This article, which reproduces the provisions inserted in the model Conventions la, lb and le of 1928, provides a procedure of conciliation, and, if necessary, of arbitration, in the event -f difficlties arising between the contracting Statesas to the interpretation or application of the Convention.
(4247)
ICommunicated to the Council and the Members of the League.]
O/il
No.:
C I.2 52. M. F/[Fiscal. 83.] 124.
1935. II.A.
Geneva, June 17th, 1935.
LEAGUE OF NATIONS
FISCAL COMMITTEE
REPORT TO THE COUNCIL ON THE FIFTH SESSION
OF THE COMMITTEE Held at Geneva from June 121h to 17th, 1935.
INTRODUCTION.
The Fiscal Committee has the honour to submit to the Council the following report on its fifth session, held at Geneva from June 12th to 17th, 1935. The following members of the Committee were present G. BOLAFFI, Chairman, H. BLA', M. Bonut'n.E. Mitchell B. CARROLL, .1. G. NIANTZAVINOS, M. J. NAVARRO REVERTER Y GomsS, .M. R. PUTMIAN, M. M. M. Mr.
Mr. C. H. WAKELY.
Representing the International Chamber of Commerce: M. Robert JULLIARD.
EXAMINATION
OF THE
or Dou.
INTERNATIONAL CONVENTIONS FOR THE PREVENTION 1 .c TAXATION RECENTLY CONCLUDED.
1. The Committee is glad lo note that., since June 1931, the last occasion on which it carri d oul a ,,eneral examination of international Conventions for the prevention of double taxation, tIhere has been a constant extension of this network of Conventions. 2. TiIh prngresa achieved has been particularly remarkable in the field of direct taxes on income. l3hides a number of secondary agreemenL limited to particular taxes, ten general Convent ions have been concluded since July 1931. with the object mainly of avoiding double taxation in respect of taxes on income as a whole. These Conventions were concluled between I J1 Italy an Belgium, July I 1th, 1931 (2) Switzerland and Germany. .luly 15th, 1931 (with an additional agreement dated January 11th, 1934); (3) Austria and Poland, April 22nd, 1932; (4) France and the United States of America, April 27th, 1932; t) Sweden and Denmark, May 6th, 1932; (6) Hungary and Roumania, June 16th, 1932; (7) Rourmania and Yugoslavia. January 30th, 1933; " ) Belgium and Netherlands, February 21st, 1933; (9) France and Germany, November 9th, 1934; (10) Netherlands and Sweden, March 21st, 1935. Te atgreement.s and Conventions nmentoned below will be found in the " Colleclion of International A.erMnetLs and Internal Legal Provisions for the Prevention of Double Taxation and Fiscal Evasion ", Volumes I11, IV, V and VI (this latter volume is In preparaUon). Series of LUague of Nations Publications
S..I.N. 1.160 (F), 1.045(A), 7-15, Imp. Granchamp.
II. ECONOMIC AND FINANCIAL
73095 0-62-vol. 4-
17
(4249)
1935. II. A. 9.
All these Conventions, with certain differences of detail, apply the principles I'd down by the model Conventions drafted in 1928 by the general meeting of Government experts. 3. If to these ten Conventions concluded since July 1931 are added those concluded in 1930 and the first half of 1931 - namely, between Italy and France, June 16th, 1930; Finland and Sweden, March 16th, 1931 ; France and Belgium, May 16th, 1931 (all three are mentioned in the Committee's report for 1931), and the Convention between Belgium and the Grand-Duchy of Luxemburg, March 9th, 1931 (which had not yet been communicated to the Cnmiittlee at the time when that report was drafted), itwill be seen that, in all, fourteen gneral Conventions have been concluded in the five years which have elapsed since June 1930. In that period - a period covering a depression of exceptional intensity, during which every country showed a marked tendency to withdraw within itself and to increase its economic self-dependence - an economic war was waged in other fields by means of tariffs, prohibitions, etc. It is a remarkable fact that in the fiscal domain nothing of the kind occurred and that, on the contrary, there was a growing tendency towards the conclusion of general agreements denoting a clear intention to alleviate excessive taxation. 4. The progress achieved in recent years is due in part to the fact that the Conventions concluded Lend to have a cumulative effect. Thus, when two States have both concluded a convenLion with a third State, it often happens that they in their turn arrive at an agreement. The Conventions concluded on June 16th, 1930, between Italy and France and on May 16th, 1931. between France and Belgium were soon followed, on July l1th, 1931, by an agreement betw,.en Italy anid Belgium. Similarly, after Hungary had successively concluded Conventions with Yugoslavia on February 22nd, 1928, and with Roumania on June l6th, 1932, Roiniania and Yugoslavia in their turn concluded an agreement between themselves on January 30th, 1933. Moreover, when a new clause is embodied in a convention, it frequently constitutes a recognised precedent for subsequent agreements, and sometimes States which have not had the benefit of it ask for an amendment of their existing agreements. Thus the Convention of May 16th, 1931, between France and Belgium contains, in Article 8, a provision, relating to the taxation of companies, which did not exist in the agreement previously concluded between France and Italy on June 16th, 1930. On November 16th, 1931, a supplementary agreement was concluded between those two countries, inserting in their Convention an article (11 bis) reproducing the first two paragraphs of Article 8 of the Franco-Belgian Agreement. These general Conventions concluded in recent years are not as a rule confined to taxes on income. Several of them deal wiLh administrative assistance. The Convention beW-cn Germany and Switzerland covers death duies. These two questions had also been denll, with in the model Conventions drawn tip by the Government experts in 1928. Several of these Conventions, unlike the model Conventions of 1928, include a clause expressly recognising, in cases of double taxation. lie right of the taxpayer to appeal to the State of which he is a national. The clauses embodied in these agreements reproduce almost exactly the text of Article 14 of the Convention between Italy and France, dated June 16th, 1930 - namely : - If the measures taken by the financial authnrities of the contracting States have resulted in double taxation, the taxpayer affected may forward a protest to the State of which lie is a subj t; if the protest is admitted to he justified, the supreme financial authority of such State shall be authorised to arrange with the supreme financial authority ,f the other State to find a just, remedy for the double taxation. " 6. In addition to the wencral Convention between Germany and Switzerland, which, as Ira.o-ly mentioned, covers death duties as well as taxes on income, Conventions dealing sp,.,.ially with death duties were concluded between the Union of South Africa and Southern lh,,lesia, April 8th and 21st, 1932 ; Hungary and Houmania, June 16th, 1934, and Germany and Denmark, January 13th, 193,1. 7. Conventions specially intended to avoid double taxation in respect of import duties andi turnover and similar taxes were concluded between Belgium and France, June 18th, 193*2; France and Italy, October 3rd, 1932, ani France and the Grand-Duchy of Luxemburg, November 30th, 1933. 8. As regards maritime navigation, the principles laid down by the model Conventions of 192.q continue to be applied to an increasing extent. In this connection, reference may be male to the following new agreements - between Greece and Italy, January ILth, 16132 Italy and Canada, March 29th, 1932; the United Kingdom of Great Britain and Northern Ireland ani France, October 1st. 1932 ; Canada and France, October Ioth, 1932; the Netherlands and Japan, January 26th, 1933 ; the United States of America and the Irish Free State. January 9th, 1934, and Germany and Japan, July 25th, 193.1. To the Committee's knowledge, the principle of the taxation of profits on maritime navigati i in the State in which the real centre of management of the undertaking is situated is now applieur in at least sixty international agreements.
(4250).
-3-II.
DRAFT. CONVENTION ON THE ALLOCATION OF PROFITS OF INTERNATIONAL ENTERPRISES.
The draft Convention framed by the Committee at its last session was, in accordance with its request approved by the Council. communicated to Governments, which were invited to submit their observations.
A. Revision of the Draft Convention.
1. Thirty-three Governments replied, and the Committee devoted a considerable part of its time to the.study of these replies and to a further reading of the draft. This examination led to the conclusion that, as a whole, the text drawn up two years ago was well snited to secure the objects in view, and that there was no need to make any fundamental change in it, although certain States whose legislation is based on different principles are not at present in a position to adapt their legislation to the Convention. In the light, however, of certain of these observations and of suggestions made by certain of its members, the Committee decided to make the amendments and additions indicated below (a) The only important alteration is that regarding banking and financial enterprises.a uiesrceewm These Teeeterrises enter r* were e prewosycvrd usly covered byyAti Article 4. . "Business income", whi was defined, in the case of enterprises in general, in Article 2 by the exclusion of certain elements, was defined in Article 4, in the case of banking and financial enterprises, by a non-exhaustive enumeration of items. It seemed more logical to adopt the same procedure in both cases, and to define" business income " in the new text of Article II, both as regards enterprises in general and as regards banking and financial enterprises, by the exclusion of certain elements. A new Article IV, reproducing almost entirely the second half (b) of the former Article 4, deals with the allocation of profits in the case of banking and financial enterprises. (b) The reconsideration by the Committee of the question of banking and financial enterprises has led it to recognise that the rules laid down in the Convention were not readily applicable to mortgage banks nor to companies whose object is to hold real property. Th. Committee thought it preferable to indicate that the Convention should not apply to such enterprises. This is the object of the new Article VII. . (c) The Committee further considered the possibility of extending the Convention, over and above the special case of the banks, to other forms of international enterprises whose operations call for special treatment, such as maritime and air navigation enterprises and insurance undertakings. . (d) In the case of maritime and air navigation enterprises, the principle of tamng the enterprises at the place of its real centre of management, which was laid down in the 1928 Conventions, tends to become more and more general as a result of the bilateral treaties concluded. The Committee decided to embody this principle in a new Article V. (e) The case of insurance enterprises is more complicated, and the Committee did not c' nsider that it -. auld be well advised to attempt to prepare a definitive text at this stage for insertion in the draft Co.vention. 'It considered, however, in first reading, a special article for the case of those enterprises. 2. Annex I contains the new text ol the draft Convention; the special article concerning insurance enterprises will be found in Annex II. 3. A nmure thorough examination of the problem of insurance enter prises - as also of other questions which have been, or may be, raised in connection with the draft Convention e.g., the question of its future extension to property taxes - has been entrusted to a SubCommittee on the Allocation of Profits, consisting of M. Borduge (Chairman), M. Blau, Mr. Carroll, M.. Navarro Reverter y Gomis and Mr. Wakely.
B. Suggested Procedure.
1. The number of States that have pronounced definitely in favour of the conclusion of a multilateral convention does not appear sufficient to justify the Committee in recommending the Council to call an international conference on the subject. 2. Certain States have, however, declared themselves ready to sign a multilateral convention. It remains to be seen whether their attitude will be affected by the fact that they are few in number. The Committee has no doubt that, should any one of these States express the desire that a meeting should be arranged by the Council between such States as have expressed themselves ready to sign a multilateral convention, the Council would be prepared to take the necessary action. Such a procedure might help to advance matters. 3. The Committee is of the opinion, however, that progress is more likely to be achieved by means of bilateral agreements, and it is in this connection that it anticipates and hopes that the work it has done will prove of real value. The fact that relatively few countries are prepared to enter forthwith into negotiations for the purpose of concluding a multilateral convention is not, in general, due to any important disagreement with the Committee's draft
(4251)
- on I. w' inltrary, I lie principls containI in the draft, subject to what has been said above, have ,-,'n .,'n,-raltv approverl. Govrnnents consider, however, that bilateral agreements are lkely h, rove more approipriaLe. i. The Conni l.le,1 illy shares this vi,'w. It. believes that in such questions as this the in-..I atlle work L.thuL it, I cague ran perform is to claltoralc, after careful study and cniinco al ion wit h tiovernnninlns arid experts,a draft covintoi which Governments canl employ a-a nl,,I'l whii.n negolialing, trilahral tr-aties. 'The ixislencie of inoh't draft t rectics of l1cis kind las jcroc'd iof c'-al iie ii uh ciriuml.Aaries in helpinig Io sitse riany of ;,ie t echnical dilliculLk,. whic.lh aris,: in such tc,.c liatiurns. This proceduiire has Ihc: dual merit that, on the one hand, in .-i far as the nnidcl constitu.tes Itie basis of bilateral agriements, it creates autonatically a uniformity of icrarlice andi h-gislation, while, on Lhe r,thcr hand, inasmuch as it iay be modified in any bilaleral agrcenint reached, it is suiliciently elastic to be adatLect ti tre different conditions obLtaining iii different countries or pairs of countries. The
Commil.htee is strongly of opinion that thiis procedure is likely in ttie end to leaid t.o more
sati.,facLory results and to iave a wider in( more lasting effect than the convocation of at. international conference withi a view to concluding a multilateral convention, even though it may at first attracL less general attention and interest. It soggests to the Council therefore that the present draft Convention should be circulated Lo Governments for the purposes just indicated. 5. In this connection, the Committee would remark that five mrdel Conventins have been drafted under the auspices of the League prior to that now submitted, which have be,:n employed, according to the procedure just outlined, as the basis of bilateral Conventions. Whii in 1022, when there was set up the Committee of Technical Experts on Double Taxation (whose work has been continued since 1929 by the Fiscal Committee), only a very small number of Conventions on double taxation existed, there are at present approximately 1,t0, of which 60 have been signed since 1929. These simple figures are sufficient to show the influence exercised in this sphere by the meetings of experts convened by the League of Nations, and tile practical scope of the studies undertaken under its auspices. III.
COMPARISON OF FiSCAL SYSTEMS.
I. In its last report, the Comrmit Ie stated that, in accordance with its terms of reference, it. proposedI to undertake a study of tiscal systems. In cert sin count rir-s, important changes are in tir,s, a the Cmmitlee ,c,,nsiders. as stated in the repnrt incnt ioneil above, that a study tnI if l tiec clan,,fs woul allow it. to bring out certain principles the general adoption of which nihtl cotnlribIie to wards cronccric prrgress. It. thinks it possilhe tor derive from the ixpri,.n'c (i, ri-ent, viars lesso. as to the mnanner in which the different, cate,,rii's of taxes
have r:sstited tihe dl[ression and lave been adapted tto the new condiions ireciatid by the cthat,(gs ii ie errrcrloic ilnatiurn. In this .onn,'ct inn, the Secretariat has pr,,pard studies dealing with I.h tvrnii of fiscal revene in six countries. The Comniit.cc belicvvd thai the cc,.tiersl lessons which nav tie drawn frori qurl studies may prove fof very considtrable value L States wishing to modify tthir fiscal systems. It. therefore decided to contine and extend
its enquiries in this diret oh, and I.t)set ul ) a Silr-Cimmittee to co-operate wiLh tih. S:ecretariat in this task, consisting of M1.Mantzavinos (Chairman), M. Bolaffi, NI. Borduge, M. Navarro Reverter y Gorais and M. lutman. 2. Cerlain cbservations presented by the Governments regarding the draft t onvention on the Allocation of Profits have confirmed the Committee in the convicticn which it expresscd in its last report, that it would be very useful to define the meaning of certain essent ial terms sei with different shades of meaning in the various legislations in ordter to facilitate the understaniding, both by adminisLrations and by taxpayers, of the various fiscal syst,,eis and in ori.r to avoid all errir of interprttatinn as regards agreements. This ssrrk, which consisl.s in sLudyinv the evohtion of fiscal systems from the point of view (if adinistrative practie and of legal terminology, has been entrusted to a Sul,- olciLtee crnsistin of M. Blau (Chairman). .1. Bolaffi, Mr. Carroll, M. Sinninghe-Daiis' and Mr. Wakely. The Committee's first task would be to endeavour to define, in Lte light of their meaning in the legislation of different countries, certain essential terms which are commonly used in conventions dealing with fiscal matters and notably in the Convention on the Allocation of Business Income. The formulation of such definitions might further provide the norms which Governments could follow in drafting their legislation. The resulting uniformity would assist in reducing international double taxation.
(4252)
-5Annex I.
REVISED TEXT OF THE DRAFT CONVENTION FOR T1lE ALLO"ATION OF BUSINESS INCOME BETWEEN STATES FOR TIlE PURPOSES OF TAXATION. Being desirous to prevent the double taxation of the income of business enterprises, which results from conflicting principles and methods of allocating taxable income, the High Contraing Parties have agreed to the following provisions Article I.' I. An enternrise having its fiscal domicile in one of the contracting States shall not be taxable in another contracting State except in respect of income directly derived from sources within its territory and, as such, allocable, in accordance with the articles of this Convention, to a permanent establishment situate in such State. 2. If a permanent, establishment of an enterprise in one State extends its activities into a second State in whicn the enterprise has no permanent establishment, the income derived from such activities shall be allocated to the permanent establishment in the first State. Article II. 1. For the purposes of this Convent-ion, the term " business income " shall not include the following : (a) Income from immovable property; (b) Income from mortgages, from public funds, bonds (including mortgage bonds), loans, "eposits and current accounts; (c) Dividends and other income from shares in a corporation; (d) Rentals or royalties arising from leasing personal property or from a) insuch property, including rentals or royalties for the use of, or for the privileg patents, copyrights, secret processes and formulm, goodwill, trade marks, tra4 franchises and other like property, provided the enterprise is not engaged in such property ; (e) Profit or loss from the casual purchase and sale of immovable or movable property. 2. Notwithstanding the provisions of paragraph 1 above, the term " business income shall include, in so far as banking and financial enterprises are concerned, all items which, in conformity with the laws in force governing national enterprises, enter into the computation of profit and loss ; it shall not, however, include the following (a) Income from immovable property; (b) Income from mortgages. 3. There shall be excluded with the above-mentioned items of income the related expenses (including general overhead) and charges. 4. Such items of income shall be taxed separately or together with business income, in accordance with the law and the international agreements of the States concerned. Article I11. 1. If an enterprise with its fiscal domicile in one contracting State has permanent establishments in other contracting States, there shall be attributed to each permanent establishment the net business income which it might be expected to derive if it were an
If Ih; contracting Stntes should desire to avoid, by means of this Corvention, the double taxation resulting from liability to the Slate of fiscal domicilein respect of its total net income, as well as to the other States in which theincoute ofpernnaoent establishments is taxable, one of thefollowing clauses may be added to Article I :
" The State offiscal domicile shal exempt from its tax the income taxable in other contracting States in accordance withLi te first paragraph of this article." Or: The State of fiscal domicile shall deduct from Its tax on the total net income ofthe enterprise the lesser of the two folwo nong ainOunt: (o) The tax imposed by the other contracting State onthe income taxable therein, in accordance with the firat Iaragraph of this article, or : " (b) An amount which represents the same proportion of the tax payable on the total net income asthe
netinoeio taxable in the other contracting States in accordance with the first paragraph of this article bears to the total not income." Obviunly doubletaxation would be avoided and the present Convention would be ineffective if, as frequently in the ease of mnrit'me or air navigation enterprises, the States agreed to exempt income from sourceswithin their territory when derived by enterprises not having their fiscal domicile therein.
(4253)
-6independent enterprise engaged in the same or similar activities under the same or similar conditions. Such net income will, in principle, be determined on the basis of the separate accounts pertaining to such establishment. Subject to the provisions of this Convention, such income shall be taxed in accordance with the legislation and international agreements of the State in which such establishment is situated. 2. The fiscal authorities of the contracting States shall, when necessary, in execution of Ibe preceding paragraph, rectify the accounts produced, notably to correct errors or omissions, or Lo re-establish the prices or remunerations entered in the books at the value which would prevail between independent persons dealing at arm's length. 3. If an establishment does not produce an accounting showing its own operations, or if the accounting produced does not correspond to the normal usages of the trade in the country where the establishment is situated, or if the rectifications provided for in the preceding paragraph cannot be effected, or if the taxpayer agrees, the fiscal authorities may determine empirically the business income by applying a percentage to the turnover of that establishment. This percentage is fixed in accordance with the nature of the transactions in which the establishment is engaged and by comparison with the results obtained by similar enterprises operating in the country. 4. If the methods of determination described in the preceding paragraphs are found to be inapplicable, the net business income of the permanent establishment may be determined by a computation based on the total income derived by the enterprise from the a-tivities in which such establishment has participated. This determination is made by applying to the total income coefficients based on a comparison of gross receipts, assets, number of hours worked or other appropriate factors, provided such factors be so selected as to ensure results approaching as closely as possible to those which would be reflected by a separate accounting. Article IV. 1. The net income of banking and financial enterprises shall be determined in conformity with the principles laid down in Article III. 2. Where one permanent establishment of the enterprise is in the position of a creditor or debtor in relation to another permanent establishment of the enterprise, the following provisions shall apply : (a) If a permanent establishment in one State (creditor establishment) supplies funds, whether in the form of an advance, loan, overdraft, deposit, or otherwise, to a permanent establishment in a second State (debtor establishment), for tax purposes interest shall be deemed to accrue as income to the creditor establishment and as a deduction from gross income to the debtor establishment, and such interest shall be computed at the inter-bank rate for similar transactions in the currency used. (b) Contrary to the provisions of the preceding paragraph, from the interest accruing as income to the creditor establishment and deductible from gross income by the debtor establishment there shall be excluded the interest corresponding to the permanent capital allotted to the debtor establishment whether in the form of advances, loans, overdrafts, deposits, or otherwise. Article V. Income from maritime shipping and air navigation enterprises shall be taxable only in the State in which the real centre of management is situate. Article VI. When an enterprise of one contracting State has a dominant participation in the management or capital of an enterprise of another contracting State, or when both enterprises are owned or controlled by the same interests, and as the result of such situation there exists, in their commercial or financial relations, conditions different from those which would have been made between independent enterprises, any item of profit or loss which should normally have appeared in the accounts of one enterprise, but which has been, in this manner, diverted to the other enterprise, shall be entered in the accounts of such former enterprise, subject to the rights of appeal allowed under the law of the State of such enterprise. Article VII. The provisions of the present Convention shall not apply to mortgage banks or to companies the object of which is to hold real property. Article VIII. 1. Should a dispute arise between the contracting States as to the interpretation or application of the provisions of the present Convention, and should such dispute not be settled either directly between the States or by the employment of any other means of
(4254)
reaching agreement, the dispute may be submitted, with a view to an amicable settlement, to such technical body as the Council of the League of Nations may appoint for this purpose. This body will give an advisory opinion after hearing the parties and arranging a meeting between them if necessary. 2. The contracting States may agree, prior to the opening of such procedure, to regard the advisory opinion given by the said body as final. In the absence of such an agreement, tie opinion shall not be binding upon the contracting States unless it is accepted by both, and tlhey shall be free, after resort to such procedure or in lieu thereof, to have recourse to -'iy arbitral or judicial procedure which they may select, including reference to the Permanent Court of International Justice as regards any matters which are within the competence of that Court tinder its Statute. 3. " Neither the opening of the procedure before the body referred to above nor the opinion which it delivers in any case involves the suspension of the measures complained of; Lhe same rule shall apply in the event of proceedings being taken before the Permanent Court of International Justice, unless the Court decides otherwise under Article 41 of its Statute.
PROTOCOL.
At the moment of signing the present Convention, concluded on this day s date between the ....... undersigned plenipotentiaries have madi the following declarations, which shall form an integral part of the said Convention : 1. The taxes referred to in this Convention are (a) For ...... (b) For ...... (c) For ...... 2. (a) As used in this Convention, the term " enterprise " includes every form of undertaking, whether carried on by an individual, partnership, corporation or any other entity. (b) The term " fiscal domicile " for the purposes of this Convention means the place where an enterprise, as defined under (a) above, has its real centre of management. " permanent establishment " includes the real centre of management, (c) The term branches, mines and oil-wells, plantations, factories, workshops, warehouses, offices, agencies, installations, and other fixed places of business of an enterprise, but does not include a subsidiary company. When the term " permanent establishment " is used with reference to a particular State, it includes all the permanent establishments, whatever their form, which are situate within such State. Trhe fact that an enterprise with its fiscal domicile in one of the contracting States has business dealings in another contracting State through an agent of genuinely independent status (broker, commission agent, etc.) shall not be held to mean that it has a permanent establishment in the latter State. When a foreign enterprise regularly has business relations in a State through an agent established there who is authorised to act on its behalf, it shall be deemed to have a permanent establishment in that State. A permanent establishment shall for instance, be deemed to exist when the agent established in the State: ((ondd de pouvoir) who habitual[y enters into (1) Is a duly accredited agent which he works; or contrrcts for the enterprise for (2) Is bound by an employment contract and habitually transacts commercial business on blehalf of the enterprise in return for remuneration from the enterprise ; or (3) Is habitually in possession, for the purpose of sale, of a depot or stock of goods belonging to the enterprise. As evidence of an employment contract under the terms of (2) above may be taken, moreover, t~li fact that the administrative expenses of the agent, in particular the rent of l)remiss, ri paid by the enterprise. A lmder who places his services at the disposal of an enterprise in order to bring it into touich w ith customers does not in his own person constitute a permanent establishment of the ernterprise. even if his work for the enterprise is to a certain extent continuous or is carried -n t ,' rt!:ulr periods. Similarly, a commission agent (commissionnaire), who acts in his own nan fri or more enterprises and receives a normal rate of commission, does not constitute a i:rianenL cstatlishment of any such enterprise. A perimn:ent establishment shall not be deemed to exist in the ease of commercial travllrs not coming under any of the preceding categories.'
Methods of allocating Taxable i,. :, ttee, C.TJ9.Nl.i0l.l133.1I.A). Tito report by Mr. Carroll on the ,,f I-ome(" ("ra-tion of Foreign and National Enterprises", Vol. IV: C.425(b).M.217 (b).1933.11.AI might alsobe consulted.
,,in.,ltrne which refcrence colI usefully be made. (See Report to the Council on " the wrk of the Fourth Session
Th: lirit drert Consentin
elaborated by the Fiscal Committee on the allocation or
rofits was followed by
(4255)
-8
Annex II. ALLOCATION OF THE INCOME OF INSURANCE ENTERPRISES.

SPECIAL ARTICLE CONSIDESEIRE IN FIIIST READING BY THE FISCAL COMMITTEE.
Notwithstanding Articles II and III above, the following provision shall apply as regards the allocaLion of the income of insurance enterprises : When an insurance enterprise the fiscal domicile of which is situate in one of the citracting States possesses a permanent establishment in another contracting State, the latter State shall tax the permanent establishment situated on its territory of the same proportion of the total net income of the enterprise as the premiums on the basis paid to such establishment bear to the total premiums paid to the enterprise.
(4256)
Series ol Publications:I 9 36.II.A.2I.
Official No.: C. 4 50.M.2661,
9 36.II.A.
[F./Fiscal. 91.] WORK OF THE FISCAL COMMITTEE DURING ITS SIXTH SESSION,
HELD AT GENEVA FROM OCTOBER 15TH TO 21ST,
1936.
REPORT OF THE COMMITTEE, SUBMITTED TO THE COUNCIL ON JANUARY 1937.

INTRODUCTION.
22ND,
The Fiscal Committee has the, honour to submit to the Council the following report on its sixth session, held at Geneva from October 15th to 21st, 1936. The following members of the Committee were present: M. J. H. R. SINNINGHE DAMSTAi, Chairman, M. H. BLAU, M. M. BORDUGE, Mr. Mitchell B. CARROLL, accompanied by Mr. Eldon P. KING, M. G. MANTZAVINOS, M. R. PUTMAN, Mr. C. H. WAKELY. The meetings were also attended by: M. C. JIMENEZ CORREA, corresponding member of the Committee, M. Robert JULLIARD, representative of the International Chamber of Commerce.
I. TAX EVASION.
At its meeting on October ioth, 1936, the Assembly of the League of Nations adopted the following resolution: The Assembly, "Considering that efforts to reduce the obstacle to the international circulation of capital 'must not have the effect of increasing fiscal fraud; "Being of opinion that double taxation is both one of the causes of fiscal fraud and at the same time a serious obstacle to the development of international economic and financial relations; "And holding that only concerted action based on specific agreements for international co-operation can ensure the accurate assessment and equitable allocation of taxes: " Requests the Fiscal Committee to pursue vigorously its work for the avoidance of double taxation as far as possible, and also its work on the subject of international fiscal assistance, in order to promote practical arrangements calculated, as. far as possible, to put down fiscal fraud."
I See Official Journal, February 1936, page 134.
(4257)
At its present session, the Fiscal Committee at once proceeded to comply with this request. The present report contains an account of, and a commentary on, the first conclusions reached as a result of its 'Work.
i.
Previous Work o1 the Fiscal Committee in the Matterof FiscalEvasion.
The fiscal experts have met periodically for more than twelve years under the League's auspices for the purpose of studying rules liable to ensure greater justice in the taxation of individuals and legal entities engaged in activities in different countries. The problem submitted to the experts was twofold: to ensure that a taxpayer should not be doubly taxed by two States on account of the same capital or the same income, and to ensure that no taxpayer should take advantage of different systems of fiscal law to evade his obligations. Their work has been directed towards these two aims; and though, to judge from the records of the Fiscal Committee's meetings, it seems that the study of double taxation occupies the chief place, the investigation of methods of combating tax evasion has also not been neglected. The experts had to admit, however, that the practical application of their recommendations in regard to double taxation should precede the application of measures for the prevention of tax evasion, because the latter is, if not justified, at all events provoked in many cases, by double taxation. Being threatened by double taxation, the taxpayer tries to find a way of escape, and this motive too often leads him to resort to methods which, not only enable him to escape any excessive burden, but actually place him in a privileged position as compared with his fellow-taxpayers. To-day, the work of the Fiscal Committee in the field of double taxation has progressed sufficiently to enable the Committee to reconsider the problem of tax evasion. The different States are aware, thanks to the League, of the methods of preventing the unjust taxation of taxpayers; at all events, great progress has been made: while in 1923, when the League of Nations called together the first meeting of tax experts, very few conventions existed in the field of double taxation, more than a hundred and forty are now in force. Since taxpayers are now protected from unjust taxation, a higher standard of conscientiousness can be expected from them. Moreover, the States are in a position, prior to the application of measures to prevent tax evasion, to, conclude 'conventions for the abolition of double taxation; this would make it easier for the taxpayer to bear the burden resulting from the measures set forth hereunder. There is another and a very different consideration that justifies the fiscal experts in the circumspection they have shown regarding'tax evasion. Such evasion is practised mainly in respect (if income from movable capital, and the first paragraph of the resolution adopted by the League Assembly refers to this particular form of fraud, which is constantly increasing. For experts well acquainted with these questions, the problem of international tax evasion in respect of the income from movable capital is only one of the particular aspects of a more general problem-namely, the investigation of methods of preventing the frequent frauds that occur in the taxation of income from movable capital. The most ingenious solutions have been considered, and, technically speaking, the problem can be satisfactorily solved. But all the solutions available are open to the same objection-namely, that they disturb the circulation of capital, because they inevitably drive it to take refuge where it will be least heavily taxed. Accordingly, the various countries have hesitated to establish such control, as it would seriously affect their economic situation. Internal control is, if not inoperative, at all events very inadequate; and, in such circumstances, can international control be contemplated ? In point of fact, the two problems are interrelated. States hesitate to apply stricter internal control, because they fear that more lenient neighbouring States will benefit thereby and will drain off the main flow of capital. From the technical point of view, the principal States, realising these common dangers to which they are all liable, would have to adopt simultaneously similar methods of control for both national and international transactions. Is such simultaneous action possible ? The fiscal experts are not qualified to answer that question. They emphasise the difficulty of the problem here, in order to explain the reason for the concern with which they have endeavoured to-study it, as well as to show how serious the difficulty is. 2. The Problem raised by the Assembly. The Assembly resolution is worded in very general terms; yet it conveys the wish that the Committee should study, in particular, measures for combating tax evasion in respect of income from movable'capital. Even when thus circumscribed, the problem still remains a vast one; and the Committee, anxious to give its answer in the shortest possible time, has, for the present, confined its study to a particular kind of fraud which is very common and hence very disturbing. Subsequently, according to the manner in which its conclusions are received, the Committee will dtccide whether it will have to extend its work to the investigation of processes capable of eliminating otiher causes of tax evasion. The following study will therefore relate to one of the best-known methods of fraud: a. taxpayer, anxious, inter alia, to escape from some of the burdens to which he would be liable if lie collected the income from his movable capital in the country where he resides, haz recourse to a country where he knows that the tax is lower and that measures of supervision do not exist or are less severe. Certain technical explanations are necessary. As a rule, States tax at source income from "lovable capital invested in national enterprises, and also, as a rule, there may be said to be no means whereby the taxpayer can escape such taxation. But, in order not to give any advantage to investments elsewhere than in national enterprises, some States impose a "compensatory"
(4258)
tax, which is often very heavy, upon income from capital invested by their nationals in foreign enterprises. The collection of this compensatory tax is an easy matter if the income is paid in the territory of the State imposing the tax. It is much more uncertain, however, if interest is paid abroad in a State which is not concerned with the tax. Hence a first kind of tax evasion-namely, that practised by holders of foreign securities, who cash the income therefrom outside the country in which they reside. There is a second kind of evasion, in respect of the supplementary tax (general income tax, super-tax) leviable in the taxpayer's country of residence upon the whole of his income. If he collects the whole of his income in the country in which he resides, the taxation problem is an internal one, and the various legislations, more or less strict, can make their demands proportionate to their needs. But, if the taxpayer receives part of his income abroad, the State of residence is often powerless and must apply to foreign countries for help, in order to restore fiscal equality between its nationals. To find such means of assistance has been one of the tasks of the Fiscal Committee. 3. Opinion of the Fiscal Committee. Having considered this particular aspect of tax evasion-frauds in regard to the compensatory tax on income from foreign securities and frauds in regard to the supplementary tax-the Fiscal Committee is of opinion, subject to all the reservations in this report, that agreements based on the formula set forth below would, if generally accepted, lead to the desired result. " In each of the contracting States, rules shall be laid down that persons or companies who, in the course of their business, pay out income derived from movable capital must report every payment made to a person not resident in the State in which this payment is effected. The notice in question shall be given to this latter State, which shall transmit it to the State in which the recipient resides. " The term ' income derived from movable capital' shall, for the purpose of the present provisions, be taken to mean interest, dividends, and, in general, income from bonds, stock. and shares, and loans. The rule shall apply to every kind of payment, whether in cash or by transfer, cheque, or entry in a banking account. "For the purpose o the present provisions, persons not resident in a State shall be deemed to mean persons having their permanent home in another State."' 4. Advantages of the Proposal. Were the moreimportant States toadopt the Fiscal Committee's proposal, the frauds at present current in regard to the taxes with which we are now dealing would undoubtedly be considerably reduced, if not entirely eliminated. However incomplete the exchange of information, it is clear that, if the taxpayer knew that such a system was in force, he would be more careful and therefore more honest. Tax revenue would increase, and this would not apply merely to the revenue directly derived from the compensatory tax and supplementary tax, but also to that resulting from all taxes the assessment of which presupposes knowledge of the taxpayer's income. This rise in the yield of taxes, without any corresponding rise in rates, would increase the revenues of the contracting States and enable them to reduce taxation, thus lessening the attractions of other methods of evasion. This would meet the argument advanced in the Fiscal Committee and elsewhere that tax evasion is due to excessive rates of taxation and that its evils will continue until its attractions are lessened by a reduction in rates. 5. Disadvantages of the Proposal. One obvious drawback 'has already been pointed out in the report: it would appiar unreasonable for a State to request the assistance of neighbouring States in tightening up the collection of taxes on the income from movable capital while at the same time refraining, on excellent economic or financial grounds, from taking internal action to improve the yield of other taxes on the income from movable capital. To that, however, it may be replied that the convention is reciprocal, and that States are free to proceed with greater severity in regard to income derived from abroad. A second objection immediately presents itself: while the State can enforce certain obligations upon persons or companies who openly pay, in the course of business, the income from securities, it will be relatively impotent against concealed intermediaries who lend their names or their services to foreigners and thereby escape the general regulations. It is at once clear, however, that recourse to these intermediaries is extremely dangerous to the taxpayer, who; having no title that he can produce in court; lays himself open to losses from fraud or otherwise. A more serious objection is that of the danger resulting from the possibility that only a few States would adopt the methods recommended by the Fiscal Committee. If there are States that. have not signed the convention, to which the taxpayer can resort, all those who seek to evade payment
adopted in the report I It will be observed that the above phragraph is based upon the conception of residence of the Government Experts on Double Taxation and Tax Evasion of 1928 (document C. 5 62.M.578Ax928.1I.A) (see
Official Journal, January 1929, page 2o5).
(4259)
will rush to take refuge there. A factitious movement of capital will develop, having nothing to do with the free play of economic laws, and the existing evil will be in no degree diminished. If, therefore, the suggested action is to be effectual, it ought to be taken by a very large number fof States. In this connection, it may be observed that as long ago as 1925 the technical experts on double taxation and tax evasion pointed out that: "Unlike double taxation, in connection with which any problems arising between two States can be settled appropriately by means of bilateral conventions, the question of tax evasion can only be solved in .a satisfactory manner if the international agreements on this matter are adhered to by most of the States and if they are concluded simultaneously. Otherwise, the interests of the minority of States, which would alone have signec the conventions, might be seriously prejudiced." (Document F.212.) Such are the conclusions at which the Fiscal Committee has now arrived. It is not blind to their deficiencies and has, indeed, felt in duty bound to call attention to them. The importance and the difficulty of the problem would doubtless justify a more thorough examination. Before proceeding further with this question however, the Fiscal Committee thinks that the Council may consider it advisable to ascertain the prospects of reaching, if not a general agreement, at all events one that would extend to a considerable number of States; for, if limited to a small number of countries, the agreement may prove more dangerous than effective, and, whatever be the system recommended, the same danger is to be feared.
I.
EXAMINATION OF RECENTLY CONCLUDED INTERNATIONAL CONVENTIONS FOR THE AVOIDANCE OF DOUBLE TAXATION.'
I. Since the last session of the Committee (June 1935), only one Convention 2 has been concluded for the purpose of preventing double taxation in respect of all direct taxes; this is the Convention concluded on September 25th, 1935, between Germany and Finland. Apart from a few differences of detail, this Convention applies the principles laid down in the model Conventions drawn up by the meeting of Government experts in 1928. 2. Conventions for the purpose of preventing double taxation in respect of certain specified forms of income have been concluded: (a) Between the United. Kingdom and Finland, on February 21St, .1935; (b) Between the United Kingdom and the Netherlands, on June 6th, 1935. These two Conventions deal with three important points: (i) The reciprocal exemption from taxation of profits arising through an agency, the term "agency " connoting the relation of agent and principal, and not that of servant and master. (ii). The taxation of Profits arising from the sale of goods from a stock in the country. (iii) The purchasing of goods or material in one of the contracting countries by a person vho is resident in the other country, for sale or manufacture in another country, does involve taxation, notwithstanding that the purchase is effected through a branch not or management or agency. 3. New measures are to be noted in the conclusion of conventions relating to assistance in the collection of taxes, administrative assistance, and legal safeguards in regard to taxation. On these subjects, the following Conventions have been concluded: (a) Between Roumania and Czechoslovakia, on June 2oth, 1934; (b) Between Germany and Sweden, on May 14th, 1935; (c) Between Germany and Finland, on September 2Ist, 1935. These Conventions are based generally on the diafts prepared by the meeting of Government experts in 1928. 4. The two following Conventions have been concluded for the purpose of preventing double taxation in the matter of death duties: (a) Between Germany and Sweden, on May I 4 th, 1935; (b) Between Roumania and Czechoslovakia, on June 2oth, 1934. 5. A fair number of Conventions have also been concluded for the reciprocal exemption of maritime and air navigation enterprises and of motor and other vehicles.
The agreements and Conventions herein mentioned may be found in the" Collection of International Agreements ,nl internal Legal Provisions for the Prevention of Double Taxation and Fiscal Evasion ",Volumes VI and VII (the tItcr is in preparation). t For previous Conventions, see chiefly the Committee's last report (document C.252.M.r24,9 s.II.A).
3
(4260)
6. In its last report, the Committee drew attention to the large number of Conventions on double taxation that have been concluded since those model Conventions were drawn up by the general meeting of Government experts in 1928. The Committee has thought it desirable to undertake a comparative study of these Conventions, in order to bring to light the tendencies of international fiscal law and facilitate the conclusion of treaties on uniform lines. It has accordingly entrusted this task to its Technical Sub-Committee. 7. The Committee also notes with satisfaction that the fundamental clause in the. model Conventions of 1928 relating to the taxation of business enterprises has been used as a baSis for internal legal provisions. The United States, in the Revenue Act of June 22nd, 1936, has had in mind the principle that foreign enterprises are not taxable in respect of their business income except to the extent to which that income is attributable to a permanent establishment in United States territory. Consequently, foreigners and foreign companies are not taxable in the United States in respect of income arising from transactions in stocks and bonds and commodities usually dealt with on exchanges effected through a commission agent or broker resident in the United States. 8. The draft Convention for the Purpose of facilitating Commercial Propaganda, drawn up by the Government delegates assembled at Geneva on July 4 th, 2935,1 includes clauses concerning exemption from certain taxes. The following are exempt from Customs duties, and also from all duties and taxes which are payable at the time of, and by reason of, importation, subject to certain reservations: (a) Samples of goods of all kinds; (b) Catalogues, price-lists, and trade notices; (c) Printed matter and posters for propaganda, the essential purpose of which, is to induce the public to visit foreign countries or fairs, exhibitions, etc. Further, in Article 7, paragraph 3, it is stipulated that there shall be exemption from all taxes, duties or charges payable to any public authority whatsoever for persons engaged in industrial or business activities in the territory of any of the contracting parties who, either in person or by representatives or travellers, purchase goods in the territory of the other contracting parties either from merchants or in places where goods are on sale, or from producers, or who take orders from merchants and producers who trade in goods of the same kind. These exemptions, which manifestly tend to encourage trade, are not inconsistent with the principles laid down by the Fiscal Committee, especially since they are applicable only in the absence of any permanent establishment.
III.
ALLOCATION OF THE PROFITS AND PROPERTY OF INTERNATIONAL ENTERPRISES.
i. When it drew up the draft Convention for the.allocation of business income between States for the purposes of taxation, the Committee decided to reserve the question of the treatment applicable to insurance enterprises for further study. It has now reconsidered this question and has come to the conclusion that, as a general rule, the principles laid down in its last report 2 for the allocation of the profits of business enterprises could be applied to insurance enterprises. Where it might not be possible to tax a branch of a foreign insurance enterprise on the basis of its separate accounts, it would seem that the procedure most likely to lead to satisfactory results would be to take as a basis the proportion between the premiums paid in respect of the transactions of the branch concerned and the total amount of the premiums paid to the enterprise as a whole. With this object, the Committee proposes to add to Article III, paragraph 4, of the " Revised Text of the Draft Convention for the Allocation of Business Income ", which is embodied in its last report, the clause reproduced in Appendix I to this document.
2. The Committee has also considered the question of the allocation of the assets of enterprises having permanent establishments in several countries, for the purposes of taxes on property, capital, or increases of property. It has come to the conclusion that the principles laid down in its draft Convention for the allocation of business income could be applied in a general way to the property and capital of business enterprises. It has accordingly drafted the clauses reproduced in Appendix II to this document. Those clauses can either be incorporated, as an addition, in conventions for the allocation of business income, or be embodied in separate conventions. case of the draft Convention for the 3. In accordance with the procedure followed in the 2 allocation of business income, contained in its last report, the Committee proposes to the Council
.M.138.1935.II.B I Document C.2T 7
(seO
2 Document
Official journal. November 1935, page1247).
C.252.M.12
.934II.A.
(4261)
that the separate clauses it has just drawn up for the allocation of the profits of insurance enterprises, and for allocation for the purposes of taxes on property, capital, or increases of property, of the property and capital of international enterprises, should be communicated to Governments
for their observations. Their attention should, at the same time, be drawn to the fact that the clauses which the Fiscal Committee has just drafted can be used as a model for bilateral agreements or multilateral conventions.
IV.
EVOLUTION OF FISCAL SYSTEMS.
The results of various preliminary investigations into the behaviour of fiscal. systems during the depression have enabled the Committee to clearly define the problem and draw up a programme of work. 'The Committee proposes to make arrangements, through its members and correspondents, for reports to be drafted on the basis of a common scheme in various representative countries. This scheme has been worked out in detail by the Committee at its present session. The Committee isof opinion that the information on the man)ner in which fiscal systems have reacted to economic fluctuations which will thus be assembled will be of real value to fiscal and budgetary authorities. V.
TECHNICAL QUESTIONS.
I. The Committee has in the.past stressed the interest attaching to the definition of certain essential terms used, with various shades of meaning, in the different fiscal legislations. The first subject taken up by the Sub-Committee entrusted with this task was that of the concept of business income, which Ihas an important place in the Conventions for the prevention of double taxation. An enquiry into the various aspects of this question from the fiscal standpoint was carried out with the co-operation of national experts in the following thirteen countries: Austria, Belgium, the United Kingdom, Danzig, Denmark, France, Greece, Hungary, Italy, Netherlands, Sweden, Switzerland and the United States of America. On the basis of the information compiled, the Committee has already been able to clarify some aspects of the problem, but it appeared necessary to proceed further with the work undertaken before attempting to reach definite conclusions as to the manner in which business income should be treated from the fiscal point of view.
2. The collection of taxes has, in recent years, been a subject of concern for all fiscal administrations. It therefore appeared advisable that the Committee should consider this question on the basis of.the experience of different countries. This question was entrusted to the Technical Sub-Committee, which will report to the Committee next year. The study is intended to facilitate the drawing-up of general rules to enable rules to be laid down which, while helping the taxpayers to pay their fiscal debt, would ensure the effective collection of taxes.
3. During the present session, the attention of the Committee was also drawn to concepts of domicile and residence. It noted that divergences in these matters resulted in difficulties in
course of the negotiation and the application of conventions on double taxation'. The Committee therefore decided to undertake an examination of this question with a view to arriving at a definition of these concepts by a fairly early date, in respect of both individuals and legal entities.
VI.
CONSTITUTION,
PROCEDURE AND
PRACTICE OF COMMITTEES OF THE LEAGUE
OF NATIONS.
The Fiscal Committee has examined the Report on the Constitution, Procedure, and Practice of Committees of the League of Nations, which was adopted by the Council on January 24th, 1936.1 It finds that the general rules for Committees, contained in the report, involve no change in the statute of the Fiscal Committee as defined in the resolution adopted by the Council on December 14th, I928.2 Moreover, the procedure hitherto followed bytheCommittee is in conformity with those rules. The Committee has therefore no observations to make on the subject.
See Official Joumal, February 1936, page 1'29. a See Official Journal January 9ag, page So.
(4262)
-7-
Appendix I.
ALLOCATION OF INCOME OF INSURANCE ENTERPRISES. Proposed Addition to Article III, Paragraph4, of the Revised Draft Convention for the Allocation of Business Income between States for the Purposes of Taxation. In the case of insurance enterprises, and in particular those conducting the business of life assurance, such determination may be made by reference to the proportion between the premium received in respect of the permanent establishment and the total premiums received by
the enterprise.
Appendix II.
PRELIMINARY DRAFT CONVENTION FOR THE ALLOCATION OF PROPERTY AND CAPITAL BETWEEN STATES FOR THE PURPOSES OF TAXATION. Being desirous of preventing the double taxation of the property and capital of business enterprises which results from conflicting principles and methods of allocating taxable property and capital, the High Contracting Parties have agreed to the following provisions: Article I.' An enterprise having its fiscal domicile in one of the contracting States shall not be subject to taxes on property and capital in another contracting State except in respect of property situated and capital employed within its territory and, in the case of movable property and capital, allocable to a permanent establishment situated in such State. Article II. Contrary to the foregoing provisions, patents, trade-marks, copyrights and similar Intangible property shall be taxable only in the State where the real centre of management is situated. Article III. In principle, the property and capital of the permanent establishment concerned will be taxed on the basis of the separate accounts pertaining to such establishment, subject to the necessary rectifications.
I If the contracting States should desire to avoid, by means of this Convention, the double taxation resulting domicile in respect of its total taxable property or capital, as well as to the other from liability to the State of fiscal States inwhich the property or capital of permanent establishments is taxable, one of the following clauses may be added to Article I:
The State of fiscal domicile shall exempt from its tax the property or capital taxable in other contracting States in accordance with this article." Or: The State of fiscal domicile shall deduct from its tax on the total taxable property or capital of the enterprise the lesser of the two following amounts: " (a) The tax imposed by the other contracting State on the property or capital taxable therein, in accordance with this article; or (b) An amount which represents the same proportion of the tax payable on the total taxable property or capital as the taxable property or capital in the other contracting States in accordance with this article bears to the total taxable property or capital."
(4263)
"C,,mmunicatcd to the Council ar.d the Members of the League.]
Opiai No.:
C. 490. M. 331. 1937.II.A.

[F./Fiscal -oo.]
Geneva, October 16th, 1937. LEAGUE OF NATIONS
FISCAL
COMMITTEE
ON THE SEVENTH OF THE COMMITTEE
SESSION
Held at Geneva from October irth to x6th, '937.
INTRODUCTION.
The Fiscal Committee has the honour to submit to the Council the following report on its seventh session; held at Geneva from October sxth to x6th, 1937. The following members of the Committee were present: M. Georges A. MANTZAVINOS, Chairman,Deputy-Governor of the Bank of Greece, former Director-General of Public Accountancy and former Minister of Finance (Greek); M. Hans BLAU, Director of the- Federal Administration of Taxes (Swiss); M. Marcel BORDUGE, Director-General hors cadres at the Ministry of Finance (French); Mr. Mitchell B. CARROLL, Counsellor at Law, former Special Attorney, U. S. Treasury United States of America); accompanied by Mr. Eldon P. KING, Special Deputy Commissioner, Bureau of Internal Revenue, U. S. Treasury; Dr. Carl W. U. DR KUYLENSTIRRNA, Counsellor at the Cout *of Accounts (Swedish); M. Rodolphe PUTMAN, Director-General of the Administration of Direct Taxes (Belgian); Mr. Clifford H..WAKELY, Assistant Secretary to the Board of Inland Revenue (British). The meetings were also attended by the two following corresponding members of the Committee: Dr. Rudolf EGGER, Chief of Section at the Ministry of Finance, (Austrian); Mr. C. Fraser ELLIOr, K.C., Commissioner of Income Tax, (Canadian); and by M. Robert JULLIARD, former President of the Geneva Chamber of Commerce, rc')rcsentative of the International Chamber of Commerce.
I.
FISCAL EVASION.
At its session held in Geneva from October i5th to 21st, 1936, the Fiscal acting on the request of the Assembly of the League of Nations (seventeenth session), Committee, studied the methods of combating tax evasion in the matter of income from movable capital, and advocated a system based on the communication by States of returns of income from Capital within their rcspective territories received by norn-resident foreigners. The Committee drew attention to the advantages of such a system, but pointed out at the same time that it would be more dangerous than effective unless a large number of States participated. The Committee accordingly suggested that the Council should "ascertain the prospects of reaching, if not a general agreement, at all events one that would extend to a considerable number of States
ws - S-. so (F 5 ) 07o . Xmp. adg. . Series ofLea.ue of Ntons Publcaions
1I. ECONOMIC AND FINANCIAL
1937. II.A. 18.
73095 0-62-vol.
4-(18
(4265)
- 2Th Council acted on this suggestion and, in accordance with its resolution of January 22nd, 1937, the Secretary-General submitted the C'ommittee's report to sixty-one Member and non-member States of the League. leplies to this communication had been received from twenty-nine States by October 4th; at the same time, the Assembly showed the interest it took in the question by inviting the Fiscal Committee to study the " methods to be followed in order that a Conventinn-at least between a certain number of States-may be concluded at the earliest moment for the suppression of fiscal evasion, on the basis elaborated by the Fiscal Committee and submitted by the Council to the various States In compliance with this request, the Fiscal Committee met at Geneva from October I1th to '6th, 9.37, and again considered the problem of tax evasion. It was necessary, in the first place, to study the replies of the States to the communication of the Fiscal Committee's previous report to them by the Secretariat. Study of the replies showed that, without raising technical objections to the system advocated, the States were not, in general, prepared at present to conclude an agreement on the bases suggested by the Fiscal Committee. Though the replies of certain States suggested that they would be prepared to accept the Committee's conclusions, it has to be added that they at the same time made their sif'oature of any agreement dependent on the accession of a large number of States, and that this condition not being at present fulfilled, their approval of the Fiscal Committee's labours does not imply an undertaking to sign a Convention, participation in which would be limited to a few States only. The majority of Governments indicated that they would find difficulties in adhering to a convention such as that suggested and gave reasons for their attitude. These reasons exhibit at first sight considerable diversity. But closer study shows that they proceed from the same thought; the difficulty of modifying legislation in order to enable Governments to demand information from their nationals not needed for domestic purposes merely to suit the requirements of a foreign country. To these arguments it is easy to answer that the prevention of tax evasion benefits all States, and that States which to-day have no interest in such benefits may to-morrow be in a position when they would be glad of them. It may also be pointed out-as the Fiscal Committee has done more than once-that tax evasion does not merely mean depriving States of their legitimate resources, but also exerts an influence on movwments of capital. It reduces, therefore, not only the revenue of States, but also the supply of capital. 'I he Fiscal Committee cannot, however, shut its eyes to the fact that the force of these arguments is apparent only in times of financial stringency. The Committee fears that there is no chance at present of inducing States to alter their point of view or of persuading revenue authorities to change their methods in such a way as to render them compatible with international control. Does that mean that the upsiot of the consultation of States referred to is the conclusion that tax evasion in the case of m,,xable capital cannot at Present le suppriessed, and that nothing can be done to prevent it until public opinirn on the subject has devel,pid further under pressure of necessity ? '1 hat certainly was not the attitude adopted by the Assi mbly of the League when it requested the Fiscal Ci rmisittue to continue its laosirs, and did so in terms which would appear to rec mmend, not ati enquiry into measures with immediate effect, but rather a progressive approach to hitter conditions. It i, alrng the latter lines that the Fiscal Committee has proceeded. 1 lie Fiscal Committee is still of opinion that the solution discusscd at its previous session is the oiily compr)i letisierr(medy fer the situatioin. Since, however, there is insuperable opposition to such a solution, it belieses that it wuld be arpropriate to attempt obtaining some improvement by instituting exchanges of infoimatirn Ietw in the revenue authorities of the different countries on lines which are compatilil with the general maintenance of existing internal legislation. But the study of a partial solutin of this kind is very muih more difficult than anything previously attempted by the Committee. It presupp,,ses a comprehensive knowledge of the statutory provisions and administrative practice which enable the different States adequately to control their colluction of recinue. B, fore going farther, therefore, the Fiscal Committee requires the necessary infoirmation on the subject. With that object it has prepared the draft questionnaire printed below, which it suggests should he sent to all the States concerned. Part I of the questionnaire refers to the methods employed to combat tax evasion of an internal character. \Vhere States exercise a certain measure of control over their nationals in such a way as to place them in possession of information that might be useful to other States, all that is necessary is a " right of communication " to allow of some verification with very little disturbance of current practice. Even if such verification only applies to certain forms of revenue or to exceptional cases (such as deceaie of the tax-payer), it will represent an improvement on the present situation. Part II of the questionnaire relates to certain statutory provisions, regulations or merely administrative practices in certain States, the effect of which is to place non-resident foreigners and foreign-owned corporations in a more advantageous position in the matter of taxation than nationals of the States concerned.
Part I I I asks for information on agreements or arrangements already concluded in the matter
of tax evasion. The Fiscal Committee is in possession of documentary material in the case of Conventions already concluded and published; but the Conventions in question are often indefinitely worded, and information is desired as to their working and results. To sum up, the labours of the Fiscal Committee in the course of its present session have been diretted towards the study of a provisional system representing an improvement on present conditions, which does not involve excessive disturbance of existing legislation. But such study depends on the provision of certain information by the different States. The Committee would therefore be grateful if the Council would request governments to furnish replies to the questionnaire which follows.
(4266)
3--
Questionnaire.
What means do the law and regulations place at the disposal of the authorities for the asiessment of taxes and for the prevention of tax evasion of an internal character in the case of: (a) Income derived from movable capital, such as shares and the like, public securities, bonds, loans, deposits and current accounts; . (b) Movable capital (property taxes, succession duties and taxation of capital gains). The ieply to this question should cover the following points, the list of which is not exhaustive: (z) Returns required from the parties who derive the income or own capital, from. debtors and from individuals or legal entities through whom income is collected or paid or who hold capital for account of others; (2) Such special information as the authorities are entitled to require from the parties concerned or from third parties, together with their powers of investigation and checking; (3) Special requirements and procedures in particular cases to enable the authorities to assess taxation (e.g., opening of safes in case of decease); (4) Acts or practices prohibited, penalised or deemed to be null and Void for tax purposes (e.g., joint accounts). It would be desirable to state to what extent the provisions of the current law or regulations in the matter are.actually enforced, and to attach the text of such provisions to the reply. II. Is there any legislative or administritive practice the effect of which is to place non-resident * foreigners and/or foreign-owned corporations in a more advantageous position than nationals in the matter of taxation of income from movable capital and of such capital?
III.
What conventions or arrangements have been concluded with other States ior the exchange of information as regards income from movable capital and such capital ? I Do such conventions or arrangements give rise to difficulties in application ? If so, what 'difficulties ? What are the views of the contracting States on the effectiveness of such conventions or arrangements ?
IT. INTERNATIONAL CONVENTIONS RECENTLY CONCLUDED FOR THE
AVOIDANCE Or )OUBLE
TAXATION AND FOR THE SETTLEMENT OF OTHER QUESTIONS RELATING TO TAXES.
I. The Committee is glad to draw attention to the more liberal character which is developing in the international ru!es governing taxation. This is clear, not only from the relatively large number of Co':,entions, agreements and arrangements brought to the Committee's notice, since Uits session in October 1x36, but also, and above all, from a study of the provisions adopted. Some Conventions, while not going beyond the framework of the principles laid down in the model Conventions drawn up under the auspices of the League of Nations, arenoteworthy both for the comprehensive nature of the solutions admitted and for the effort made to throw light on various matters. Other agreements, though more modest in character; show that certain Governments are anxiou? to avoid double taxation, even in isolated cases: It should be. noted, finally, that sveral Conventions concluded between important countries reveal a marked tendency to extend the field of mutual assistance with a view to lessening tax evasion and ensuring the collection of taxes. 2. Conventions or arrangements which have a limited object are of a provisional character or prevent double taxation in certain Cases only: (a) Arrangement concluded on October 26th, 1936, between Czechoslovakia and Hungary, providing that railway undertakings operating in the territory of both States-shall be taxed only 'in the State in which their centre of management is situated and that they shall be taxed on the profits derived from the whole of the working of the railway. (b) Convention concluded on December 30th, 1936, between Canada and the United States of America, fixing a maximum of 5%, subject to reciprocity, for the rate of the tax levied in respect of income or dividends derived from sources situated within the territory of one of the States, on non-resident persons or legal entities domiciled in the other State.
(4267)
(c) Agreement of June 14th, 1937, between Norway and Sweden for the allocation as between the two States of the taxable profits of the "Luossavaara Kiirunavaara" company. This company operates in Sweden and exports the major part of its output through a Norwegian port. (d) Decree of July i5th , 1937, amending the Decree of July 2 th, 1926, for the abolition of 9 double taxation in regard to direct taxes as between the Free City of Danzig and the German Reich. (e) Decree of March 6th, 1936, for the provisional avoidance of double taxation in the case of direct taxes as between the German Reich and Poland. (/) Convention of August 27th, 1936, between the United Kingdom of Great Britain and Northern Ireland and the Netherlands, providing for reciprocal exemption from certain taxes on profits, gains and dividends made or distributed by air transport undertakings, and also on property used by those undertakings. (g) Convention of April 9th, 1935, between France and the United Kingdom for the avoidance of double taxation on profits derived from the business of air transport. (h) Convention of September 17th, 1936, between the United Kingdom of Great and Northern Ireland and Greece, providing for reciprocal exemption from income tax Britain in respect of gains and profits earned directly or indirectly through the agency of a representative, unless gains or profits are derived from the sale of goods forming part of a stock existing within such the country or unless the representative has been given general powers to negotiate and conclude contracts and habitually makes use of those powers. (i) Convention of January 28th, 1936, between the United States of America and Belgium for the prevention of double taxation on profits accruing from the business of shipping. Y) Convention of September 8th, 1937, between Iceland and Sweden empowering the tax authorities of the two States to conclude, on the basis of certain agreed principles, arrangements to avoid double taxation of certain kinds of income and property. Most of these Conventions are similar in all their provisions to earlier Conventions on the same subjects. 3. Conventions for the avoidance in a more general way of double taxation in respect of direct taxes concluded between: (a) The German Reich and the Republic of Finland, September 25th, 1935; (b) Hungary and Sweden, June 1 7 th, 1936; (c) France and Sweden, December 2 th, 1936; 4 (d) The German Reich and Roumania, February 8th, 1937. Some of these Conventions, and more particularly the Convention concluded between France and Sweden on December 24th, 1936, deserve special mention because of their wide scope and also because of the detailed way in which they provide, as fully as possible, for the exchange of information of a fiscal character with a view to ensuring the better application Article 18, for instance, specifies in detail the information which the authorities of of taxes. the two contracting States will communicate to each other. Attention should, however, be drawn to the restrictions embodied in Article 21 of this Convention, which are mentioned under It will be interesting to see how far these restrictions are invoked by either contracting 5 below. State in connection with the practical application of the Convention. 4. Conventions for the avoidance of double taxation, especially in respect of succession duties concluded between: (a) Hungary and Sweden, November 20th, 1936; (b) France and Sweden, December 24th, 1936; (c) Czechoslovakia and Hungary, October 26th, 1936. 5. Conventions which deal particularly with administrative assistance and collection in respect of direct taxes. Such Conventions were concluded between: (a) The German Reich -and the Republic of Finland, September 25th, 1935; (b) The German Reich and Roumania on February 8th, 1937. These Conventions, like the Convention concluded between France and Sweden on December 24 th, 1936, contain serious restrictions in regard to assistance. Thus, administrative and judicial assistance may be refused in a number of cases at the discretion of the State to application is made: for example, where there is danger of its sovereignty or security which being prejudiced, where professional or commercial secrecy would be violated and where there is no legislation enabling the applicant State to ask for the same information from its own nationals. Attention should be directed also to the detailed practical arrangements made in regard to.collection with the object of obviating the difficulties arising from exchange instability and restrictions on the movement of foreign currency. The Convention of September 25th, 1935, between the German Reich and the Republic of Finland, in fact, provides that the debt shall always be collected in the currency of the State to which application is made. The amount of the debt will thus be converted into that currency when the application is received and the sums
(4268)
-5rr,!',:,A will be placed at the disposal of the other State in the currency of the State to which .;,+!:tati,,n is made.
6. The following Conventions relate only to the avoidance of double taxation as regards nvtor vehicles: fa) Convention of December 1 7 th, x936, between Belgium and Norway; (b) Convention of November 6th, 1935, between Liechtenstein and the Netherlands; (c) Convention of November zith, 1935, between Czechoslovakia and the Netherlands; (d) Convention of January 22nd, 1936, between Denmark and the Netherlands.
III. BEHAVIOUR OF TAX SYsTEMs. As the Committee stated in its preceding report, it adopted, at its last session, a scheme of work relating to the evolution of tax systems. Thanks to the funds placed by the Rockefeller Fundation at the disposal of the League of Nations for the work of the Committee, it has been i,,siible to have studies made by economists on the behaviour of tax systems in fodrteen countries -,.,cted as representative of the different types of national economy-viz., the Argentine, Austria, lw,.hum, the United Kingdom, Bulgaria, Estonia, France, Greece, Hungary, the Netherlands, Ni:w Zealand, Peru, Poland and Sweden. The Committee is glad to note that the revenue authoritis of these countries have extended the greatest facilities to the authors of the various studies and that, in a. number of countries, statistics which were formerly scattered have been brought together as a result of the enquiry and may now be of the greatest service. From these studies which bear on the behaviour of fiscal systems during the last decade a number of interesting conclusions may be drawn, more particularly as to the relationship between Ihe economic structure of the various countries and their tax systems, the way in which the different types of taxes react to the ascending and descending phases of the economic cycle, the manner in which long term economic trends affect tax revenue and the fiscal policies which have been followed in various countries during the depression. The Committee considered how the results of this enquiry could be presented to the Governments in order that they might avail themselves of them to .the greatest possible extent in any reforms they might be contemplating in their tax systems and in any measures for the purpose of adapting their public finance systems to economic fluctuations. It felt that the real significance of the results of the enquiry would emerge only if they were co-ordinated in a comparative survey which might, in its opinion, be drawn up by the Secretariat of the League of Nations on the basis of the studies furnished by the experts who collaborated in the enquiry. At the same time, the questions dealt with being very largely economic in character, the Committee thinks it desirable that a small group of economists might with advantage be convened by the Council, in order to draw the scientific conclusions resulting from the information collected during the enquiry and to report thereon to the Council. The Committee also considers it would be of interest to publish the general survey prepared by the Secretariat and the report which would be drawn up by the meeting of economists just mentioned. The results of this work may enable the Fiscal Committee to put forward certain considerations or recommendations concerning the economic, financial or administrative factors which affect the yield from taxation, the tax policies that should be followed during the different phases of economic cycles, having regard to the connection between the expenditure and revenue of the States, the stimulating or crippling influence the various taxes may have on the national economy and. lastly, the statistics concerning taxation that should be kept, in order that the administrations may determine the effects of the different taxes on the national economy and establish budget estimates on reliable bases. Further, the Fiscal Committee is of opinion that, in view of the very diverse aspects of the problems thus raised by the enquiry, it would be desirable for it to be in a position to benefit by th' collaboration, not only of economists, but also of budget experts. For that reason it suggests that when it comes, at its next session, to draw practical conclusions from the work undertaken, it sl ould nave the advantage of the external assistance that would be furnished by the participation il its work of economists and experts on public finance selected chiefly from the countries covered by the enquiry.
IV.
SPECIAL QUESTIONS.
I. The Committee continued the work on the concept of business income begun at'its last .'ssion, the main object of this work being to elucidate various questions which arise when ,',vcntions to avoid double taxation are being negotiated. The Committee felt it would beof interest to submit the results of its studies on this subject in the form of a comparative survey of ,he thirteen representative legislations examined. It has, therefore, asked the Secretariat to prepare a draft for consideration at the next session.
(4269)
-62. In iLs last report, the Committee suggested that a study of methods of collecting taxes would be useful. It has now drawn up a plan for this work; in conformity with this plan, a number of its members and corresponding members will prepare studies along comparable lines on the legislation and administrative practice in their respective countries concerning the collection of direct taxes and death duties.
The Committee hopes in this way to be able to collect material to enable Governments to benefit from the experience of other countries and, if necesadry, to introduce in their own legislation or administrative practice improvements capable of bringing about a more punctual payment of taxes and, at the same time, causing the least possible disturbance to business. 3. The Committee has taken note of various studies dealing with Conventions concluded between 1921 and 1936 for the purpose of preventing double taxation in respect of income and property taxes. The discussion of these studies led it to the conclusion that detailed consideration of the similarities and differences between Conventions concluded in recent years as compared with the drafts prepared by the " General Meeting of Government Experts on Double Taxation and Fiscal Evasion" in 1928 would be desirable. The Committee will resume its examination of this question at its next session on the basis of a study to be prepared by the Secretariat.
(4270)
" x mmunicated to the Council znd the Members of the League]
Opruwial No.:
C. 384. M. 229. i 938.1I.A.

[F./Fiscal io4. ]
Geneva, Ocbtob i.
'9 A
'
LEAGUE OF NATIONS
FISCAL COMMITTEE
-REPORT TO THE COUNCIL ON THE WORK OF THE'EIGHTH
SESSION OF TH9 COMMITTEE

Held at Geneva from October x7th to 2oth.. 938,
INTRODUCTION
The Fiscal Committed has the honour to submit to the Council the following report on the work of its eighth session, held at Geneva from October 17th to 20th, 1938. The following'members of the Committee were present: Mr. Mitchell B. CARROLL, Chairman, Counsellor at Law, former Special Attorney, U.S. Treasury (American); M.Hans BLAU, Director of the Federal Administration of Taxes (Swiss) M.Marcel BORDUGE, Director-General hors cadres at the Ministry of Finance (French); P. JIMNEZ, C., Director7 General of the Administration of Direct Taxes M. Carlos I(Peruvian);
Dr. Carl W. U. DE KUYLENSTIERNA, Counsellor at the Court of Accounts (Swedish)'; M.Georges"A. MANrtzAViNos, Deputy-Governor of the Bank of Greece,, former
'Director-General of Public Accountancy and former Minister of Finance (Greek); M. Rodolphe PUTMAN, Director-General of the Administration of Direct Taxes'(Belgian); Mr.,Clifford H. WAKELY, Assistant Secretary to the Board of Inland Revenue (British). I.
FISCAL EVASI6
I. The Fiscal Committee has once again considered the problem of fiscal evasion in the matter of income from mnovable capital. At its meeting on October 9th, 1936, the Assembly of the League ef Nati6ns asked'the Committee to study measures calculated to suppress such evasion, and the C.n-mittee, in compliance with that request, advocated at its sixth session a system 'for the ' .,hange of information which, if adopted by a large number of countries, seemed likely to prove effective. At the Committee's request, the Council then asked the Members of the League and non-member StateS whether they were prepared, in so far as they were concerned, to' approve a gefieral 'convention providing for such a system. The replies were not,- however, encouraging and the Committee was asked by the Assembly to resume the discussion of the question at its qventh session in- October 1937. . 2. 'No techttical' objections were made to the Committee's proposal, but Governments .htn'ed reluctance to change their domestic legislation merely to meet the.requirements of foreign admirnistrations, ahd they were unwilling to ask their nationals-to supply information not needed for domestic purposes. It then appeared to the Committee that if acomplete solution: of the of control, a system for the problem. had been prevented: by the refusal-to set up new measures exchange of information might perhaps be instituted with the help of existing forms of control which, without entirely putting an end tofiscal evasion, would yet be an improvement over the As 'the, formulation',of, such a system -would require, detailed knowledge of pn'ent'situation,. ---.. 4. .,o . .. '4: " s. . ;:x Im....,
ut..
'11. 4
-iLague
e-. N.,ions
Pubilcitions
ECONOMIC- AND FINANCIAL...
f ;
938. II.A.21
(4271)
2-
laws and administrative practices, the Council, acting on a suggestion contained in the Committee's report, agreed that the necessary information should he collected and had a questionnaire sent out to the various Governments. 3. The replies to the questionnaire received from thirty-three Governments were communicated to the Fiscal Committee, which examined them at its eighth session. It appeared that divergent methods of control were employed in the various countries and that the methods were for the most part the result of a slow adaptation of the laws and regulations to circumstances: gaps in the taxation system had been closed and the administrations had shown great ingenuity in combating evasion in every form. But the efforts of the various administrations were of so special, a character that it appeared to be difficult to employ the methods used in one country in other countries, and it was clear that any proposal for a general scheme would have been received with serious hesitation. 4. However, an examination of the replies to the questionnaire shows that the administrations are not without information and might usefully help each other. "But owing to the variety of the methods of control, the exchange of information will possess a very different interest in different cases. Hence each case has to be dealt with individually, and for the problem of fiscal evasion, as for the problem of double taxation, bilateral conventions are the only possibility as they can be adapted to circumstances and the nature of the results aimed at. 5. In short, the Fiscal Committee, while once more affirming that the suppression of fiscal evasion should preferably be attained by a far-reaching modification of existing legislations, in particular by the adoption of the recommendations of its sixth session: Is of the opinion: That it would be advisable to communicate to the various States the replies to the questionnaire attached to the report on the seventh session; That this communication would enable each State to know what measures of control are at the disposal of the administrations of other countries for the purpose of combating fiscal evasion: That States might advantageously use that knowledge to negotiate the conclusion of bilateral treaties which, without necessitating far-reaching reforms in domestic legislation, would nevertheless permit of the organisation of effective measures of control, it being clearly understood that the States, sole judges of the advisability of concluding such agreements, would be in a position to weigh their advantages and disadvantages.
It.
PRINCIPLES OF TAXATION
1. The Committee took note of the resolution adopted by the Assembly on September 2 9th, 1938 (.-inetcenth ordinary session), inviting it: To study and advise upon the principles on which fiscal legislation dealing with the main categories of taxes, such as income tax, land taxes, turnover taxes, etc., should be based."
2. The Committee's discussions regarding the practical action to be taken on the Assembly's recommendation showed that, in the terms in which it is stated, the problem embraces a considerable field and involves very serious difficulties. 3. The tax system of the various countries has, indeed, been created piece by piece according to the needs of the day and along the lines which appeared to offer the least difficulty from the purely administrative point of view and which were, at' the same time, the least likely to cause conflict with public opinion and accepted ideas. Contemporary tax systems are therefore the outcome of historical developments, economic and social considerations and administrative possibilities. 4. In such circumstances, a detailed comparative study of the different tax systems would scarcely be likely to yield conclusions of value to States which might desire to modify or improve their fiscal legislation. The Committee therefore agreed to confine itself, at least for the time being, to the technical administrative aspect of the problem, which, in itself, is sufficiently comprehensive. 5. To give effect to the Assembly's recommendation, the Committee must primarily concentrate upon collecting the results of the practical experience of its members regarding the technical organisation and practical working of the chief categories of taxes, naturally without losing sight of the effects which such taxes are liable to exert on the economic and social development of different countries (agricultural. industrial, creditor, debtor, etc.). 6. In other words, the Committee took the view that its contribution to the work of the League's Economic and Financial Organisation must deal primarily with the possible technical methods of applying the main types of taxes. The enquiries would bear more particularly on the selection of sources of tax revenue, adminsitrative methods for determining the bases of taxation, methods of collection, taxpayers' safeguards and right of appeal and, in general, on the manner in which the authorities responsible for the assessment and collection of taxes should be organised. hi the course of this enquiry, the Committee would naturally have regard, as far as possible, to ways and means of adapting its conclusions to the various types of national economy. 7. The Committee would also take into consideration the principles to be introduced into national laws with a view toeliminating extra-territorial taxation and to avoiding double taxation.
(4272)
8. To be in a position to submit practical suggestions on these matters at the earliest p ssible date, the Fiscal Committee has set up a Sub-Committee consisting of some of its members to study, with the assistance of 'ie Secretariat, the various problems involved. At the same time, the Committee ventures to draw the Council's attention to the fact that the Sub-Committee may find it necessary to seek outside assistance, more particularly from those of its corresponding members with special experience of some of the subjects which it may be found necessary to study in the course of the enquiry and from economists whos, views on the economic or social effects o:certain forms of taxation might be of value. 9. The Committee desires to add that circumstances may arise which might make it seem desirable to the Z:_cretariat to send an expert to certain countries to study the economic, financial and adminis;rative conditions of these countries on the spot, and to discuss the particular difficulties and problems that present themselves to those responsible for their fiscal.policy. In the light of such information and of the information conveyed, personally, it may be hoped, by the corresponding Members of these countries, the Fiscal Committee anticipates that it may be in the position to submit evidence of practical value drawn from the experience of a number of countries.
Ill.
INTERNATIONAL
CONVENTIONS
RECENTLY CONCLUDED
FOR THE
AVOIDANCE
OF DOUBLE
TAXATION AND FOR THE SETTLEMENT OF OTHER QUESTIONS
RELATING TO TAXATION
z. The Fiscal Committee is glad to record that, since its last session, it has able to take note of a number of Conventions, ratified or not, for the settlement between States of difficulties arising from double taxation as well as from other measures relating to taxation. These Conventions are in general based on the principles worked out at Geneva since 1923, and attention continues to be paid to the terms in which these principles are promulgated. 2. Of Conventions dealing with the problem of double taxation on the broadest lines, mention may be made of the following: Convention of October 1 3 th, 1937, signed by France and Switzerland, for the Avoidance of Double Taxation in the Case of Direct Taxes; Protocol of October 2nd, 1937, supplementing the Treaty between Germany and Hungary, concerning Double Taxation in the Case of Direct Taxes. 3. Of Agreements relating to international. traffic, mention may be made of the following:
Agreement of November roth, 1937, between Germany and the United Kingdom, concerning Exemption from Income Tax on Profits derived from Air Transport Undertakings; Exchange of Notes of March 31st, 1938, between the United States of America and Sweden, constituting an Arrangement for the Avoidance of Double Taxation of Maritime Shipping Profits. 4. Of Agreements relating to succession duties, mention may be made of the Convention of February 24 th, 1936, between Czechoslovakia and Yugoslavia, for the Avoidance of Double Taxation in the Case of these Duties. 5. Other Conventions of a more specialised character are: Agreement of September 17th, 1936, betweon the United Kingdom and Greece, for the Purpose of regulating the Taxation of Profits earned through Agencies; Agreement of February 2nd, 1938, between Poland and the Free City of Danzig, for the Avoidance of Double Taxation in the Case of Bills of Exchange.
IV.
SPECIAL QUESTIONS
I. At its last session, the Committee drew up a scheme of work for the study of methods 1:collecting direct taxes and succession duties. It has now examined memoranda on the laws and -ilministrative practices in this field in some ten countries. These studies it regards as forming very '. deable material, and it therefore thinks it desirable that the Secretariat should bring them to the 1a0tice of its corresponding members in the various countries. 2. The work undertaken by the Committee since its sixth session on the determination of 'usiness income for purposes of taxation is to some extent linked with various problems involved it the study of the principles of taxation, to which reference has been made in the previous chapter. .ccordingly, the Committee has thought it desirable not to pursue separately its work on the t,,acept of business income, but to use the iesults already obtained in that field for the new and More extensive investigation it is undertaking.
(4273)
[Communicated to the Council and the Members of the League.)
Official No.: C.
(F./Fiscal 120.]
181. M. 110.
1939 .
I .A -
Geneva, June 21St, 1939. LEAGUE OF NATIONS
FISCAL
COMMITTEE
ON THE WORK OF THE NINTH
SESSION OF THE COMMITTEE Held at Geneva from June 12th to 21st, 1939.
INTRODUCTION
The Fiscal Committee has the honour to submit to the Council the following report on the work of its ninth session, held at Geneva from June 12th to 21st. 1939. The following members of the Committee were present: Mr. Mitchell B. CARROLL (Chairman), Counsellor at Law, former Special Attorney, U.S. Treasury (American); M. Rodolphe PUTMAN (Vice-Chairman), Director-General of the Administration of Direct Taxes (Belgian); M. Hans BLAU, former Director of the Federal Administration of Taxes (Swiss); M. Marcel BORDUGE, Director-General hors cadres at the Ministry of Finance (French); Dr. Carl W. U. DE KUYLENSTIERNA, Counsellor at the Court of Accounts (Swedish); M. Georges A. MANTZAVINOS, Deputy-Governor of the Bank of Greece, former DirectorGeneral of Public Accountancy and former Minister of Finance (Greek); Dr. J. H. R. SINNINGHE-DAMSTE, Member of the Supreme Court (Dutch). The following correspondent members of the Committee and experts were also resent:
M. W. ADAMKIFWICZ, Chief of Section at the Ministry of Finance (Polish); Dr. Mahmoud Azui, Director at the Ministry of Finance, accompanied by Dr. Mohamed Ali RIFFAAT, of the Ministry of Finance (Egyptians); M. Geore. CARANFIL, Director of the Economic Department of the Ministry for Foreign Affairs (RoL.nanian); M. Pedro Cosio, former Minister of Finance (Uruguayan); M. Alfred EHIN, Vice-Director of Tax Department (Estonian); Dr. Alexander KNEPPO, Chief of Section at the Ministry of Finance (Hungarian); Dr. Dugan LETITZA, former Minister of Finance, President of the Finance Committee of the Senate (Yugoslav); M. Oviedo SCHIOPETTO, Economic Adviser at the Argentine Embassy in Paris (Argentine); M. Fcrnando Esvitvou DA SILVA, Deputy-Governor of the'Bank of Portugal, Professor of Public Finance at the University of Lisbon (Portuguese); M. Luciano WIECHERS, Advisor to the Bank of Mexico and the Ministry of Finance (Mexican); and M. Robert JULLIARD, former Chairman of the Chamber of Commerce in Geneva, representing the International Chamber of Commerce. The work of the Committee was presided over by the Vice-Chairman; M. PUTMAN, from June 12th to 1 9 th and by the Chairman, Mr.. Mitchell B. CARROLL, on June 20th and 21st.
0~3- -
505N.
-. 85 (F.) -. 7- (A.). 6139. p. K-Mg.
Series of League of Nations Publications
II. ECONOMIC AND FINANCIAL 1939. II.A. 13.
(4275)
-2
I.
TECHNICAL PRINCIPLES OF TAXATION
At its last session, the Fiscal Committee had considered the action to be taken on the resolution adopted by the Assembly on September 29th, 1938, inviting it to study the principles on which fiscal legislation dealing with the main categories of taxes should be based. It decided to begin its work by dealing with taxes on income, and it instructed the Secretariat to prepare studies on the question to serve as a basis for the Committee's discussions. The Committee has taken note with great interest of the Secretariat's work. It regards that work carried out according to a new method as being not only of theoretical value in itself, but alko as constituting a body of basic rules of which legislators and administrators in a number of countries might take immediate advantage. The Committee feels, accordingly, that these studies prepared by the Secretariat should be published as soon as possible in order that they may be brought to the notice of Governments. The Committee considers it desirable, furthermore, to formulate at this stage the principal practical rules which appear to be essential in the administration of taxes on income. In framing its conclusions, the Committee has had chiefly in mind the requirements of States in Which the question arises of the reform or introduction of a tax on income of a general or special application. It has also had in mind the primordial necessity of adapting the fiscal system to the economic, social and geographical conditions peculiar to each country. The Committee would be grateful if the Council would ask Governments to communicate their observations on the conclusions of the present report. The Committee would thus be enabled if necessary to complete and amplify those conclusions at its next session. The Committee's findings are as follows: i. Taxes ol Local A uthorities. As the taxes of local authorities are additional to State taxes, the aggregate of local and national taxes should not exceed the capacity of payment of the various categories of taxpayers. Local authorities require a system of taxation complying with the following four desiderata: Stability of yield; As .wide an assessment as possible, so as to reach all the inhabitants, with the exception of the poorer classes; Simplicity of method of taxation; Proportiomality of taxation or, in cases in which it is necessary to allow exceptions to this principle, very slight progressivity. Three different systems are at present in use: Systei o/ conmmon linds. - Under this system, the State apportions as among the local authori. is part of the taxes it has levied. This method of procedure gives rise to manifold difficulties, since the rul.s of allocation, however carefully devised, are rarely equitable and involve general complaints. The system of common funds should therefore be avoided as far as possible. 'Idditional percentages. - The system of additional percentages (centimes additionnels) under which the State taxes are taken as a basis for the levying of taxes by local authorities, is also open to criticism. It is inequitable because it imposes the bulk of the tax on categories of taxpayers whose real income can be determined exactly and places in a privileged position those categories which are taxed on a " presumptive income " (revenut Iorlaitaire) or enjoy generous basic exemptions. Fiscal justice, however, prescribes that mathematical coefficients shall not be applied to certain categories when this is not feasible for the rest of the taxpayers. This system, which is practicable within the framework of the State to the extent warranted by the general compensations that ensue, is hardly possible within the jurisdiction of a given local authority. Nevertheless, recourse to the system of additional percentages will be in keeping with the requirements of a sound local fiscal system provided that the following conditions are fulfilled: 'hat the State taxes produce a stable yield and are assessed on a sufficiently wide basis ; That the basic exemptions applicable to State taxes are ignored. The system can be applied more particularly in larger localities, at all events as a principal source of income, the balance required being derived from special local taxes. Systemm ol special local taxes. - This system, under which a certain number of taxes are made over to the local authorities, may be used either to supplement a system based on additional percentages, or as the sole means of revenue. It enables the fiscal requirements of local authorities to be met, subject to the following conditions: The local taxes must be assessed on a " normal" or "presumptive" a wide basis for assessment; income, offering
(4276)
-3They must apply according to the same method to all the inhabitants (owners, manufacturers, tradesmen, artisans, farmers, employees, rentiers); They must not entail any basic abatement. A system of this kind ensures a stable yield and does not involve inequitable discrimination as between different categories of taxpayers. In practice, it generally involves the relinquishment either wholly or in part of the land tax to the local authorities and the institution of "presumptive "assessment for categories other than owners, the basic rules for assessment remaining the same for all the inhabitants. Generally speaking, when a country adopts a system of local taxes, the powers of the local authorities will have to be regulated by the competent central authority, and their administration will have to he specially supervised by that authority.
When dealing with the question of the taxes of local authorities, the Committee's attention was directed to t~he case of " Special Funds" supported by means of independent resources, fiscal or otherwise. The Committee is of opinion that recourse to funds of this kind should be avoided as far as possible. Such methods are indeed contrary to the principle of budgetary unity and generally lie outside the scope of the audit regulations applicable to public expenditure and revenue.
2.
Organic Structure ol the State Inome Taxation.
Taxation of income may take the following four forms: A single income tax; A single income tax with surtax; Schedqlar taxes on income, and general income tax; Schedular taxes on income. The Committee is of opinion that the general taxor supplemes ary tax on total income should be confined as far as possible to medium and large incomes, owing to the assessment difficulty which arises when it is applied on too general a basis. For countries introducing an income tax in their legislation, particularly agricultural countries, the first stage must be to adopt a system of schedular taxes. That is a condition to ensure the soundness of the scheme. Then, as economic development and the practice of taxing income become better established, it will be time to introduce a system of taxation of the aggregate inicomc within the limits mentioned in the foregoing paragraph. The tax may be: Proportional: This will be the rule for real taxes. The question of knowing in what conditions these taxes may have a degressive tariff is reserved for later study. Progressive: Tn;s w".l be the rule for taxes on aggregate income. The tariff must remain fiscal. The system of a sliding scale according to classes of income is the best form. It implies the application of an ascending rate for hij ter classes of income: within the same class of income every taxpayer pays the same tax. The rates of taxation may admit of diftrentiation so as to discriminate between income from capital, income from labour, income from capital and labour. Frm a strictly fiscal point of view, differentiation is justifiable. It embodies the idea that earned income shall be taxd on the basis of the real amount, whereas other income is often only taxed on the basis of a." normal" or "presumptive " income whose arhount is less than the real amount, resulting in a kind of de facto surtax on income taxed on the basis of the actual amount.' Flexibility ot the system of income taxation. - Every system should be so devised as to permit of an increase in the yield in case of need by means of a modification of rates and exemptions. Exemptions. - A distietion should be made between basic exemptions and reductions on account of family charges. Basic exemptions have the effect of considerably reducing th taxable matter to which the tax applies. They should therefore not be granted except in so far as this may be necessitated by social requirements. I Dosbte ta xati j " , mayresmut m the awtx U e u emXei, appeas to ematat. both b mloa and comples problem. Asmembe s of the Committee were unable to agre ana solution. the Committee decided to ieeme li qasalnationa% its next session.
(4277)
-4-
Reductions on account of family charges should be-allowed on grounds of equity. But by reason of the object for which they are designed, they should not play a very important part until there are a certain number of children.
0 * S
On the Basis of Return.
3.
Methods of Assessment.
The method of declarations subject to control should be employed whenever it is possible to determine the amount of the real income. In order to prevent taxpayers taxed on their real income from being subjected as compared with taxpayers taxed on a " normal" income to a de facto surtax, it is desirable to make provision in their favour either for a lower rate of taxation or for disregarding part of the income, for example a fixed proportion of xo% or 2o%. The system of declaration subject to control may be combined as a supplementary means of
control with measures instituting a minimum tax according to the external signs of income.
Control by means of the schedule of assumed incomes according to external signs constitutes a system whose application is very delicate. It may indeed be unjust 'and may adversely affect the yield of the tax. It should accordingly be accompanied by the following provisions: A taxpayer taxed according to external signs should be given the possibility before taxation of proving that his real income was lower than the assumed income; All the necessary means of control should be employed to reveal the income actually received by' Che taxpayer and to avoid any lowering of the yield; It will be necessary to rsake a judicious choice of the factors to be taken into consideration with a view to determining indirectly and as a s:bsidiary measure the taxpayer's taxable capacity. Generally speaking, Oie following factors may be taken to serve as a common measure: rental value, furniture, servants, motor-cars. It will be necessary to exclude as too particular in their application factors such as insurance premiums and expenditure relating to sickness, accidents,. birth, education.
"Presumptive " Assessment.
This method should be employed when it is not possible to determine exactly the amount of the real income: the administration and the taxpayer will not have to discuss the actual figure of the income taxed. This figure will be assessed on a large collection of indices and will be binding on both parties.
Application of Jhe Two Foregoing Systems (assessment on the basis of returns, " rsuimptives" assessment) considered in relation to the Various Types of National Economy.
" Presumptive " assessment-like that of minimum assessments on external signs-may usefully be employed in the following cases: During the first few years after the enforcement of the income taxation; In countries which are primarily agricultural; For certain categories of income which it is particularly difficult to determine (income from professions, income of aliens).
Special Case of the Professions.
Apart from the foregoing methods irtended to indicate the guiding principles to be followed, it may be usefu" in determining the real income to make provision for a certain number of special I easures of control: The taxpayer should keep a counterfoil book, account books or registers; Checking of judicial records, information supplied by companies, nursing-home accounts, etc.; Cross-checking of information derived from various sources; Control in regard to the professions by a small number of specialised officials. In order that these measures may be as efficacious as possible they may be accompanied by the following provisions: Professional secrecy should not be valid as against the tax authorities. This provision is not open to any real objection, particularly if the control is exercised by a small number of s e d officials. It is quite easy in point of fact to arrange for officials who are specialised in the control of professions to take a special oath before a high .jurisdiction which will afford taxpayers the necessary guarantees. Taxpayers required to file tax returns should be allowed to deduct from their income the whole or part of sums paid on account of fees.
Taxpayers' Appeals.
It is desirable to institute a body to examine claims, consisting of Before assessment. taxpayers and including an adequate number of representatives of the various occupational groups. which would examine, during the procedure. of taxation, pomplaints submitted by ta payers:
(4278)
-5-.
Recourse to this body would be optional for the taxpayer, but its findings would have the effect of transferring the onus of proof to the taxpayer. Conversely, the burden of proof would devolve on the administration if the latter refused to accept the decisions of this body for the examination of claims. Alter assessment. - The- competent jurisdiction for taxpayers' appeals varies according to the institutions in each country. It is, however, iml irtant to lay down the principle that this jurisdiction, whether judicial or administrative, must be of a specialised character. Examples: " fiscal chambers" within the framework of the ordinary law courts; "board of tax appeals" within the framework t. the administrative organisation.
-* *
4. Collection. For the purpose of collection convenient to both the administration and the taxpayers, the following conditions should be fulfilled: Unity o/ Administration o/ Assessment and Collection. The agent responsible for assessment and the-agent responsible for collection should form part of the same administidtion. Deduction at Source. This method is advantageous from the point of view both of the assessment of the tax and of its collection. Date oj Collection. The tax should, as far as possible, be paid during the budgetary year to which it belongsi.e., the year in wl3ch the income is received, in the case of deduction at source, and in the year following that in which the income was received, where it is collected on the basis of assessment lists. . In this latter case collection can be accelerated by various means: issue of provisional assessment lists, issue of several lists, adjustment of the financial year, payment of quarterly instalments before the final assessment. Sanctions. The normal sanction, if payments are not made within the legal time-limits, is to charge interest on arrears, at the rate charged for advances by the Central Bank. Certain countries have also provided for additional measures-such as an increase in the tax, imprisonment for debt. etc. As against the interest on arrears which taxpayers may be asked to pay, they should be allowed a discount for payments in advance and interest on refunds.
* *
SFormal Charater a/ the Legislation. Clearness and simplicity in the law. - The law should be readily understandable by everyone and there should thus be a single co-ordinated text, instead of a large number of texts. Instead of inconsistent and obscure provisions, there should be a clear text, comprising, in particular, complite definitions of the essential concepts (income, profit, deductions). Publicity. - The taxpayer should be able to obtain the texts of laws and regulations easily and cheaply. Simpliflcation o/ /ormalities. - Individuals should not be obliged to devote a large part of their time to applying or interpreting provisions. Their obligations should therefore be carefully defined; the formalities required should be reduced to a minimum, especially as regards returns (returns of the taxpayers themselves, of third parties); third parties who act as agents of the administration-especially in cases of deduction at source-should not be placed in the necessity of interpreting the law. Assessment and collection statistics. - In the interest of the administration and of the taxpayer alike, periodical statistics should be published showing clearly the yield of the taxes and its their taxable matter. From this point of view, a standard form of presentation of the results in the various countries is highly desirable. The Fiscal Committee recommends that special attention should be paid to this question.
* S
As the Committee has already stated, it proposes to continue the examination of the various questions dealt with in the present part of its report at its next session; so as to be able, if necemary,
(4279)
to develop and define more closely its conclusions. It will then devote special attention to questions arising in connection with local taxes, the concept of taxable income, the taxation of companies. It considers that, while completing its work relating to taxes on income, the Secretariat might also prepare, for the Committee's use, various preliminary studies on the principles to be applied in the matter of consumption duties. These studies should deal, in particular, with the main considerations to be borne in mind in selecting the articles to be taxed, the form and amount of the duties, the method of assessment and collection.*
At the request of the Egyptian expert, who took part in this work, the Fiscal Committee was happy to give, at one of its meetings, its opinion on certain questions of a general character.which have arisen in Egypt by reason of the recent introduction of the Income-tax Law.
II.
FISCAL POLICY AND ECONOMIC FLUCTUATIONS

I. NATURE OF THE PROBLEM
During the t period of depression which started in 1929, Governments were faced with an increase in socis and other expenditure and a decrease in receipts. Each Government, acting' separately, endeavoured to solve the serious fiscal problems resulting from this situation. Treasury means, economies, increase of existing taxes, introduction of new taxes, loans -such were the measures to which Governments had recourse in a varying degree. No two countries acted in quite the same manner, especially as these measures relating to public finance were combined with other economic and monetary measures. But all Governments, without any exception, were confronted with serious difficulties aggravated by their new character. It was accordingly decided to examine the fiscal policies, which should be followed in view of the existence of economic fluctuations, with the object of endeavouring to set forth certain leading considerations which Governments might take into account when they are again faced with similar difficulties due to variations in economic activities. In other words, it appeared desirable to ascertain the effect of economic fluctuations on fiscal receipts so as to be able to make certain practical recommendations regarding the permanent general organisation of fiscal systems and the temporary measures which might be taken at the various stages of the economic cycle. The Committee considers, however, that the practical recommendations it is in a position to make at the present time must be regarded as both provisional and limited, Fiscal policy is only one aspect of the general administration of public finances and State economy. These questions are, in fact, on the agenda of another body working under the auspices of the League-namely, the Delegation for the Study of Measures for the Prevention or Mitigation of Economic Depressions. When the Delegation has published the results of its work, the Committee proposes to resume the examination of the questions discussed in this report with a view to making its conclusions more specific and, if appropriate, supplementing them.
2.
HIsToRY OF THE WORK
'he work in connection with the problem which was thus brought before the Fiscal Committee in October 1936 began with an Lnquiry into the structure and behaviour, over the period 928-z935, of the tax systems of thirteen countries represent'-tive of the different types of national economy -namely. the Argenti-e, Austria, Belgium, the United Kingdom. Bulgaria, Estonia, France, Greece, the Netherlands, New Zealand, Peru, Poland and Sweden. The enquiry was carried out by the Secretariat with the collaboration of a number of experts from the countries concerned. A wr'lth of statistical data was thus'assembled bearing, not only on the behaviour of the yield of the different taxes, but also on the behaviour of their taxable matter considered in its various aspects. In passing, the Committee would point out that these investigations showed clearly the very serious gaps that exist in the tax statistics of the different countries, and the scattered nature and lack of homogeneity of such statistics. This is a point to wl'h the Committee will revert at the end of the present part of its report. When the data weie assembled, the Committee requested the Secretariat to co-ordinate them in a general survey. It suggested further that the Council should invite a small'group of economists to report on the scientific conclusions arising out of this enquiry. The Council approved this programme, and the Committee of Economists met at Geneva from November 28th to December 3rd. 1938, and afterwards continued by correspondence the work it had undertaken and which is not yet finally'concluded. The provisional text c the report of this Committee of Economists was. communicated to the Fiscal Committee at its present session, together with the survey prepared by the Secretariat. On the basis of this information, the Committee made a number o observations of a general character as to the behaviour of the various types of taxes in relation to economic fluctuations,
(4280)
7and arrived at certain practical conclusions. Chapters 3 and 4 of this part of the report. These observations and conclusions are given in
3. General Factors.
BEHAVIOUR OF YIELD OF TAXATION
The Committee now proposes to set out briefly for each tax the characteristics of its variationE in relation to economic fluctuations from the twofold standpoint of amplitude and rapidity. In this connection, it should be noted that the determining factors of the behaviour of the revenue from each tax are five in.number, namely: s. Taxable matter. - For example, the income, property, transactions, consumption, imports or exports on which the various taxes are levied. z. Method of assessment. - In this connection, a distinction must be made, for example, in the case of taxes on income, between taxes assessed on actual income and taxes assessed on "presumptive " or assumed income (impdts forfaitaires); or, in the case of indirect taxes, between specific duties and ad valorem duties. 3. Tariff. - Revenue from a fixed tax fluctuates less than that from a proportional tax and the yield from a progressive or graduated tax fluctuates more widely than that from a proportional tax. 4. Procedure in assessment and collection. - Assessment and collection of a tax may be made either simultaneously with the appearance of the fact which gives rise to the fiscal obligation, or at a later stage. Thus, certain taxes on income aTe collected by deduction at source and others on the basis of returns made by the taxpayers. In the latter case, variations in the tax yield will show a lag in relation to variations in taxable matter which is not found in the former case. 5. Capacity to pay. The taxpayer's capacity to pay may, especially in the case of presumptive " taxes, vary differently from the bases of assessment. As a consequence, "in a period of depression,-actual receipts may fall proportionally more than the taxes assessed. Some rather striking differences are found in the variations in the yield of the same tax according to, first, its weight and, secondly, the economic, financial and social structure of the countries in which it is applied. Generally, the yield from a given tax during a period of depression will be steadier if the country has attained a degree of development such that the country disposes of fairly considerable' savings reserves which are likely, in one way or another, to be employed in a way which dampens the effects of the depression. This observation applies particularly to consumption duties, but is also generally valid for the collection of all.taxes. Taxes on Income. Seen from a general viewpoint, statistics show that, regarded as a system, taxes on income are extremely sensitive to economic fluctuations. Indeed, an essential feature of taxes on income is that they are designed to affect each individual taxpayer (whether a physical person or legal entity) according to his particular taxable capacity. As a general rule, variations in taxable capacity run broadly parallel to fluctuations in business activity. This concordance is, however, affected by various technical peculiarities inherent in the various taxes of this class according to their particular type. These peculiarities relate, as mentioned in the general indications above, to, methods of assessment of the taxable matter, to the tariff and to procedure in assessment and collection. Distribution o/the burden ol taxes on income. - Usually, the burden of taxes on income is unequally distributed over the various types of income. In this connection, the general impression conveyed by a st~itistical examination of the structure of the various systems of taxes on income studied in the course of the present enquiry is that, independently of the income level of each individual taxpayer, the tax burden is, as a result of tariff differentiatibns, superposition of taxes (State taxes and local taxes) distributed over the various forms of income in the following approximate orde:" of decreasing importance: income from real property, industrial and commercial profits, dividends, bond and loan interest, salaries and wages, agricultural income. It is easy to see that this distribution does not correspond to the relative importance of the different types of income, both in industrial and in agricultural countries. Methods of assessment. - As regards methods of assessment, a distinction is made between taxes on actual income on the one hand and "presumptive" taxes on assumed or " normal " income on the other hand. Taxes assessed on actual income-that is, by means of an income-tax return subject to verification-are naturally far more influenced by variations in income than " presumptive" taxes, which are assessed generally either on the basis of calculations valid for several years or on the basis of external signs which are generally subject to little change. These methods of "presumptive" assessment are applied, mainly to income from real property, to certain industrial and commercial profits-more particularly the profits of small enterprises and artisans-and to agricultural income.
73095 0-62-vol. 4-
19
(4281)
-8As regards income fr'm real property, especially buildings, the fixed estimates have only a partial effect on the behaviour of the tax as compared with the behaviour of the taxable matter, as, in most countries, income from real property is one of the steadiest. On the other hand" presumptive " taxes on trade and industry are likely to produce a revenue much steadier than the profits which bear the taxes. It will, however, be noted that some of the factors which serve as a basis for the ' presumptive " assessment of the assumed profits from trade and industry, such as gross receipts, "number of employees an4 raw materials used, are likely to vary with business conditions. Presumptive assessment is, or has been, also employed for taxes on the professions or co.nplementary taxes on total income. Generally speaking, presumptive assessment by its very .nature, eliminates any perceptible relationship between annual variations in tax receipts and variations in income taxed. As regards taxes assessed on actual income, some of the differences in their behaviour may be attributable to the underlying conception of income. Many differences are to be found in the various national tax laws regarding the items which ought to be included when calculating gross income and the items which should be deducted to obtain r.et income. These differences relate, inter alia, to what is generally known as capital gains, which are much more sensitive to variations in business activity than other sections of income. As regards deductions, factors likely to have an influence on variations in taxable income include the rules relating to the stability or variability of the allowances for depreciationof assets and to the carrying forward of losses. (The result of the latter is that, in a period of expansion, taxable profits increase less rapidly than actual profits.) The taxation ol companies. - The rules relating to the treatment of income from companies require special comment. If such income is taxed as business income when it is realised by the company, the yield from the tax will vary more widely during the various phases of business fluctuations than if the company income is taxed at the time of its distribution in the form of dividends. Indeed, while profits realised by companies depend essentially on business fluctuations, companies tend as a rule to equalise their distribution of dividends by means of reserve funds in suich a way. that their dividend distributions have a certain stability. As regards rating, taxes on income are either proportional or progressive.' The progressiveness of the tax on income is obtained in two ways: (x) indirectly, in proportional 'tax, by means of family exemptions which favour low incomes more than high incomes; (2) directly, by means of a scale which increases according to the size of the income. These two forms of progressiveness are very often combined. Real or schedular taxes on the different varieties of income are generally proportional. The progressive system, on the other hand, is mainly applied to personal taxes. It should be noted, however, that a progressive rate is often applied in the case of certain schedular taxes, in particular taxes on wages and salaries and those on industrial and commercial profits. In the case of progressive taxes-unlike that of proportional taxes-these variations in yield are necessarily greater than those of the incomes taxed. In point of fact, when one comes to consider the range of distribution of incomes by classes, it will be found that, at a time of depression,* the incomes tend to concentrate in the lower levels, whereas the contrary tends to occur in periods of prosperity. This phenomenon, in conjunction with the progressive nature of the tariff, amplifies the effects of variations in income on the yield of tax. In general, the extent of the variations in receipts from progressive taxes will depend on the degree of progre~siveness and on the level of the basic exemptions. In this connection, it should be noted that, by their very origin, average incomes consisting mainly of the salaries and wages of specialised workmen or employees for whom the risk of being unemployed is relatively small, are more stable than high incomes which include a larger proportion of industrial and commercial profits. That is specially the case in industrial countries. Procedure in assessment and collection. - A lag may occur in the variations in the yield from taxes on income as related to the income which bears their burden and consequently in relation to business fluctuations, owing to the methods of assessment and collection. In a number of countries, taxes on wages and salaries, interest on securities, dividends and sometimes even rents, are collected at source. In such cases, variations in fiscal receipts and those in the income taxed may be held to coincide from an annual viewpoint. In the case of most taxes on income, however, there is generally a lag of a year or even more between the realisation of the income taxed and the collection of the tax, owing to the time required. for assessment and collection. That lag is also affected by the number of instalments in which Tariff. -
Degremsaive taxes have nearly the snme charsetersttcs rim the point of view of behavioe as pnopeive taxes.
(4282)
-9the tax must be paid; it is less in systems where the tax is collected quarterly than in countries where it is only paid yearly or half-yearly. A comparison may be made Taxes on income in the various types of national economy. between the behaviour of receipts from taxes on income in industrial countries on the one hand and in agriculural countries on the other. A common characteristic of the fiscal systems in industrial countries is the large place occupied by taxes on income. In such countries, the latter rarely represent less than 25% of the fiscal receipts of the State. Their importance is still greater if total taxation is considered and the revenue of local authorities, which is mainly raised by direct taxation, is included. In such cases, taxes on income may account for approximately half the total tax receipts of the State and the local authorities. In countries which are agricultural or producers of raw materials, taxes on income, although sometimes very numerous, give a low yield, often consisting mostly in the produce of the land tax and occupational tax. In industrial countries, taxes on income have to a marked degree the characteristics which cause their yield to vary as greatly, or even more than, the national income: assessment of the taxable matter at its actual amount, basic exemptions, which are sometimes very high, and marked progressiveness effectively operating. The extent of the variations due to these characteristics is, however, to some degree modified by the relatively large proportion of the receipts from taxation of income from real estate on bases which vary little. In agricultural countries, on the contrary, taxes on income have characteristics of a kind to ensure by taxable means a constancy of yield: " presumptive " taxation, assessments valid for several years and the relatively smaller practical application of progressiveness. In most of them, however, variations of the actual yield from direct taxes in relation to fluctuations in national income were, during the last depression, equal to, if not greater than; the variations of taxes of the same group in industrial countries, owing to the difficulty of collecting the taxes. in such countries at a time of depression. Property Tax. In a number of industrial countries, income tax is completed by a tax on property. That tax is periodical in character and is generally met from income. It is thus distinct from capital levies, which are exceptional measures; its object is to discriminate between unearned and earned income. This tax is generally, to a certain extent, progressive, being made so both by basic exemptions and an increasing scale. As a rule, however, its progressiveness is less marked than that of the tax on total income. The taxable matter on which this tax is levied consists in the main of immovable property, securities and business investments. Fluctuations in the value of such assets are not necessarily parallel, but they tend to react in the same sense to fluctuations in economic activity. Consequently, the property-tax is also one of those the fluttuations of which are relatively parallel to ctuations in the national income. Death Duties. The relative size of receipts from death duties in relation to total tax receipts is generally greater in countries where average individual wealth is higher than in other countries. The behaviour of revenue from death duties shows a number of deviations from the economic fluctuations, and it can be regarded as markedly irregular. In point of fact, factors independent of economic fluctuations cause variations each year both in the number and relative size of successions. This irregularity in the:annual amount and composition of successions tends to be less noticeable as the general economic fluctuations become more marked. The annual variations in the value of successions are greater and more irregular in the higherclasses than in the lower. This phenomenon is due to the following two reasons: ever smaller percentage (i) As individual successions increase in size, they include a.n of property the value of which is little affected by the economic fluctuations, such as furniture, cash, savings deposits, insurance policies and an ever larger percentage of assets varying in value, such as industrial and commercial investments, company shares, etc.; (2) As the value of successions. increases, their number diminishes, so that the law of averages no longer applies as effectively. Consequently, the annual divergencies in the number and size of successions are more marked. Thus, whereas, in the case of income tax, progressiveness merely serves to accentuate the sensitivine.s of the yield of taxation in relation to economic fluctuations, the progressiveness which generally characterises death duties leads to a marked irregularity in the yield of such duties, as it magnifies the casual variations occurring from year to year, particularly in the case of large successions. The differentiation of the death duties according to the degree of relationship existing between the principal and the heirs does not appear to be the cause of marked differences
(4283)
I0 -
in the annual yield, as heirs usually form a very circumscribed and fairly homogeneous group. Finally, a certain irregularity in the behaviour of death duties is due to various delays in' the payment of the duties, which may, furthermore, be spread over a fairly long period.
Stamp and Registration Duties. The duties which are classified in the various legislations as " stamp duties" or "stamp and registration duties " include duties which vary a great deal in their scope and rates. Their payment is effected by means of the cancellation of stamps, the use of stamped paper, or by a special declaration at the time of such transactions as the following: sale of real estate, granting of mortgage loans, incorporation, issue of securities, stock-exchange operations, payments, cheques or bills, and legal and administrative formalities. Such duties may be purely fiscal or of a compensatory character. Most of the yield of stamp and registration duties is derived from transactions in real estate and securities. Current private and commercial transactions are only of secondary importance, and administrative fees constitute only a negligible part of such receipts. Stamp and registration duties, which thus correspond mainly to capital transactions, must be expected to show a high degree of sensitiviness to economic fluctuations. This does not, however, mean that their variations must always synchronise exactly with general economic fluctuations: the burden of these duties is unequally distributed among the various capital transactions according to the fiscal system in force, and variations in some of these transactions may outdistance the general business trend, owing, inter alia, to certain economic previsions, while others tend to lag.
Turnover Tax. In many countries, the terms " turnover tax ", ' tax on sales ", or " tax on production now includes taxes intended to be levied proportionately on most transactions in commodities and current services. Such taxes are regardscI, according to the country, either as a general consumption duty-i.e., as - tax on expenses, or a- a " presumptive " tax on business income assessed on the basis of gross receipts. With the excuption of lump-sum payments authorised in the case of small industrialists, tradesmen and artisans, and of exemptions granted for economic, social and even technical reasons, such as exemptions benefiting exports, commodities of prime necessity and various products on which special consumption duties are levied, the turnover tax is usually paid at the time of the transaction either by means of a stamp on the invoice or when filing monthly returns. Owing to its dual character of a tax assessed on prices and of a tax paid at a very short interval of time after the transactions giving rise to it, the turnover tax is rightly regarded as an excellent economic barometer, provided, of course, no change occurs in its rates. In other words, its yield normally displays a particularly marked parallelism with economic fluctuations, according to its differential rates. It may, however, be more or less affected by the variations in the volume of the exchange of producers' goods, durable consumption goods and goods of current consumption respectively.
Consumption Duties. Consumption duties chiefly consist of special taxes levied at the time of production, distribution or sale to the consumer of certain commodities consumed on a large scale and of certain services. The main consumption taxes are those on tobacco, alcohol, beer, sugar, wine and other beverages, petrol, salt and matches. This class of tax also includes taxes levied on other forms of expenditure such as games, betting, entertainments and transport. As they are easily levied, their relative importance is greater in agricultural countries than in industrial countries, whose tax system is generally more developed. As regards the factors influencing the yield of consumption duties, it must be noted in the first place that, quite apart from periodical variations in economic activity, various technical economic and social developments-such as the appearance of new products, technical improvements, changes in the distribution of income, new requirements, and changes in habits-exercise a more or less durable and profound influence, which tends to modify the system of prices and the forms of consumption. Hence the use of certain commodities has a general tendency to increase, while, in the case of others, the tendency is declining, and, for others again, neither tendency predom.,iates and the use of such commodities remains comparatively stationary. Accordingly, from the point of view of the ,eaction of demand to economic fluctuations, taxable commodities may be classified in three categories: (x) Commodities the demand for which reacts equally to downward and upward economic fluctuations. These are commodities the use of which does not vary to any appreciable extent, such as salt, for e ample.
(4284)
(2) Commodities the demand for which is more sensitive to downward than to upward movements. These are commodities the use of which tends to shrink, such as alcohol in a number of countries. (3) Commodities the demand for which is visibly more sensitive to upward than to downward movements in the economic situation. These are commodities the use of which shows a tendency to increase, such as motor spirit, for example. Variations in the demand for various taxable commodities' due to economic fluctuations have a different effect on the yield of the taxes imposed on them according to the manner ih which such taxes are levied. In this connection, regard should be had, on the one hand, to the method of assessment and, on the other, to the stage at which the tax is levied. Needless to say, when taxes are calculated according to the quantities (specific duties), their yield is likely to be more stable than if they are calculated according to the price of the commodities in question (ad valorem duties). But the yield of a specific duty tends to vary like that of an ad valorem duty when it is progressive or there is a differentiation intended to correspond to some extent to the value of the different qualities of the commodity to which the tax applies. Again, the yield of an ad valorem duty tends to behave like that of a specific duty when it is levied on products sold in fixed quantities and at fixed prices, as in the case of cigarettes. Specific duties and ad valorem duties may be progressive in character-that is to say, they may be so contrived as to impose a relatively heavier tax on the higher qualities of a given commodity than on the inferior qualities having regard to their relative values. This factor will tend to increase the variations in the yield of taxes in the course of economic fluctuations, provided the producers or distributors do not fix the prices of the different qualities of the article in question in such a way that the distribution of the fiscal burden which each of those qualities would normally have to bear is actually modified. The second technical factor which modifies the effects of variations in the demand for the article taxed on the yield of the tax in question concerns the stage at which the duty is levied. By this is meant the stage in the process of production and distribution at which the tax on the commodity is paid. In point of fact, the variations both from the point of view of price and from that of quantity differ for one and the same commodity according to whether it is taxed at the time of manufacture, wholesale, or retail sale. Generally speaking, the yield of the duties based on the cor~nodities handed over to the retailer or on the retail price will vary to a lesser extent and less rapidly Llian duties based on wholesale prices or assessed on production or wholesalers' purchases. Consumption duties are less sensitive to economic fluctuations than the turnover tax, by' reason of the fact that, unlike the latter, which is applicable to most trading transactions, they are based largely on commodities or articles of which there is a large consumption and for which the demand is fairly inelastic and of the further fact that they are often of a specific character. Customs Duties. Customs duties are of two types: import duties and export duties. The revenue derived from the latter is worthy of notice only in certain countries which produce raw materials. The behaviour of revenue from import duties depends, on the one hand, on the movements of the different imports and, on the other, on whether the duties are specific or ad valorem. Three aims determine in various degrees the structure of import duties: revenue, protect certain industries and contribute to the maintenance of the balance of payments. This last-named objective is of considerable importance in the structure of the Customs duties of debtor countries which seek, on account of their debtor position, to discourage imports of what are regarded as superfluous goods, even if there is no direct competition with national production. The distribution of Customs charges as between the different goods and the tariffs applicable to the latter varies according to the importance attached to one or other of the three aims just referred to. But it may be rather safely said that revenue from import duties is derived almost exclusively from the taxation of manufactured articles, foodstuffs, and also-principally in certain industrial countries-from motor spirit. The behaviour of imports has been too much influenced by the restrictive measures adopted during the last period of economic depression for it to be possible to determine what is the normal behaviour of Customs receipts in relation to the economic situation. Furthermore, the foreign trade of each country changes as its national economy develops. Nevertheless, it would seem that, so far as specific duties are concerned, Customs revenue is likely to exhibit marked stability or, in other words, to remain relatively independent of econdmic variations in industrial countries. In these countries, in fact, a large proportion of dutiable imports consists t.! foodstuffs with an inelastic demand. But in the case of ad valorem duties, the receipts are always highly sensitive to economic fluctuations, in view of the wide variations in the wholesale prices of foodstuffs. The export duties imp. sed in certain agricultural or raw-material-producing countries are likely to be highly sensitive to economic fluctuations, in view of the wide variations, from the point of view both -of prices and quantities, in exports of raw materials according to fluctuations m economic activity.
(4285)
",
Fiscal Measures adopted during the Depression Period. During the years 1929-1935, hardly any country escaped the necessity for increasing fiscal charges. The data submitted to the Committee by the Secretariat show that, in most of the countries studied, fiscal receipts as a whole varied in the same sense as national income. The falling-off in fiscal receipts during the depression period was, however, usually less marked, although for a time more rapid, than that of national income. The upward movement which began in 1932/33 was more pronounced in the case of tax receipts than of national income. In certain countries, tax receipts reached or exceeded their 1929 level before 1935. In two countries, the United Kingdom and Sweden, they were maintained, throughout the depression, at a level higher than in 929.. The measures taken by the various countries to increase or maintain the yield of taxes during the depression period varied widely. In fact, the length, depth and other aspects of the depression itself varied according to the economic and social structure of the different countries. In combating it, Governments employed various monetary, commercial, financial and economic measures. The pre-existing distribution and weight of the tax burden and the method of administering taxes left to theGovernments of the individual countries studied a field of action very unequal and widely different. In most countries, however, the increase of tax burdens affected mainly the portion of the. national income which went to consumption rather than the portion which financed investments although the latter were of course indirectly to some extent affected. On the one hand, consumption and Customs duties were increased considerably in nearly every -country. In most cases, the object of the increases in Customs duties was of an economic, rather than a fiscal nature. Most countries with a system of taxes on income providing for firly high basic allowances reduced them or taxed average and small incomes by increasing the rate of existing taxes, or by establishing new taxes. On the other hand, the increase desired-or better obtained-by taxes falling more especially on business and taxpayers with large incomes was less general and less marked. Stamp and registration duties and death duties were comparatively little used as additional resources. The influence of the commercial policy of the various Governments on the behaviour of fiscal receipts should be noted. Countries which, at the onset of the depression period possessed a moderate tariff, ivere able to obtain a very appreciable increase in fiscal receipts by raising Customs duties and establishing new ones for fiscal or protectionist reasons. On the other hand, in the majority of countries which already possessed a protectionist or a very high tariff, the increase in duties and other restrictions on imports led to a very considerable falling-off in Customs receipts. For instance, in Poland, the yield of import duties was, in 1934, s 9 % of the 1929 figure -i.e., a decline of 81%. This shows that;, when the depression began, the free-trade countries possessed a reserve of taxation in the form of Customs duties of which protectionist countries were deprived. It -should be noted, however, that, generally speaking, this type of reserve no longer exists. in view of the general increase in Customs duties at the present time. Hence Customs receipts can no longer be regarded as a means by which Governments might effectively prevent a considerable deficit in their future budgets. 3. FISCAL POLICIES
Fiscal Systems and Budgetary Equilibrium. It may be taken as granted that the constitution of a fiscal system whose yield would always remain constant is impossible. In other words, in the absence of changes in the rate, fiscal receipts are necessarily bound to fluctuate as a whole, according to changes in economic activity. A relative stability of fiscal receipts can no doubt be achieved by having special recourse to a number of taxes with a constant yield-namely, land taxes, presumptive and indiciary taxes on income, and consumption duties on commodities with a rigid demand. But the fiscal system cannot be excessively developed in this direction no more than in another without causing economic and social disturbances. These forms of taxation, which have little relation to actual taxable capacity, should remain fairly moderate if they are to be endurable. Moreover, for reasons of equity and productivity, the taxation system should constitute an organic whole. It is, therefore, impossible to eliminate certain taxes the yield of which may vary widely according to changes in economic activity, such as progressive income tax and schedular taxes on the income from securities. The Fiscal Committee is not called upon to discuss problems relating to public expenditure. But it considers that there can be no sound fiscal policy without the sound administration of public expenditure. In this connection, the Committee awaits with interest the conclusions of the Delegation for the Study of Measures for the Prevention or Mitigation of Economic Depressions, which will doubtless enable it to clarify its own conclusions, which, until then, will continue to be provisional and limited. From the purely fiscal point of view, it would be desirable that the tax burden should always correspond to taxable capacity. This principle implies that tax burdens should be reduced during the period of depression and increased during the period of expansion, so that their. pressure remains, as nearly as possible, constant, or is even somewhat reducel during the period of depression . and somewhat increased during the period of expansion.
(4286)
Assuming, however, that public expenditure remains constant during the various phases of economic fluctuations, a system of this kind would result in the creation of deficits during periods of depression and surpluses during periods of prosperity. The following problem therefore arisesnamely, should the administration of the public finances be directed so as to utilise the surpluses from favourable years to compensate the deficits from unfavourable years, tax revenue fluctuating freely, or should it endeavour to balance public revenue and expenditure in the same year? From the fiscal point of view, it is generally easy to frame the tax system so that its yield fluctuates in accordance with economic variations, in such a manner that, during a period of depression, there is an automatic reduction in tax burdens and, during a period of expansion, an automatic increase. A policy of this kind would permit the development of the most equitable, the least restrictive forms of taxation, provided regard is had to the conditions peculiar to each country and administrative possibilities. It would further permit tax legislation to be established on a more permanent and better co-ordinated basis and, though it would not eliminate them entirely, would be likely to render tax changes less frequent and less extensive. In connection with such a policy, however, financial and political problems arise. The financial problems relate particularly to the method of constitution and use of the reserves provided by the surpluses from favourable years, to the amount to which they should be allowed to. accumulate, and to the effect they would be likely to have on the money market when they wereestablished and when they were released. Political problems would also arise, the settlement of which would require a very high degree of firmness and foresight on the part of those responsible for public finances. From the psychological point of view, indeed, it may be feared that the existence of such reserves during a period of prosperity might encourage the exertion of pressure for an increase in public expenditure, a development which would be directly opposed to the final aim of such reserve policy. It may also be feared that, if such a system were applied during a period of depression, it might encourage excessive borrowing and have an unfavourable influence on the money market and interest rates. But, whatever the system on which public finances are managed, the responsibilities of thosa who have the duty to manage them are always very serious. In this connection, stress should be laid on the necessity for continuity in the financial policy of State. Changesin Taxalion. Whether budgetary equilibrium is provided by equalising expenditure and tax revenue in a given year or whether the system of flexible or compensatory balancing is adopted, the question arises as to what fiscal measures are to be taken during the various phases of economic fluctuations. Such measures may have five different purposes: (i) . Increase the tax yield during the period of depression, either because certain forms of State expenditure, such as interest on public debt, are relatively irreducible, or to meet social expenditure arising out of the unemployment or poverty of certain sections of the population; (2) Reduce the yield from taxation during a period of prosperity, thus returning the budget surpluses to private economy: France and Belgium did so in 1929 or 1930 before the depression developed in their territories; (3) Stimulate during a depression those forms of investment and consumption likely to assist a revival; (4) . Promote equity in taxation matters, especially during a depression, by giving relief to those sections of the population and of business which are most severely affected; (5) Check, during the period of economic expansion, certain excessive forms of speculation or investment which might threaten to bring about desequilibria liable to lead to a crisis. Generally speaking, when it is a question of increasing the tax yield during a period of business recession, the Governments have restricted liberty of action. They had generally recourse to the most produdtive forms of tax and were unable to give much weight to considerations of equity and convenience. . It would be natural for the State to make a special endeavour to reach those taxpayers least affected by the depression and that the tax measures introduced should be designed to bring back into the economic circuit all cash or bank balances lying idle as a result of the general economic' insecurity and uncertainty. Idle savings are of two kinds: private savings and companies' reserves. These two forms of savings represent a very limited taxable matter. It is therefore impossible for their taxation to provide a heavy yield. Furthermore, the taxation of private savings is rarely possible. The taxation of companies' reserves may be easy; but this form of saving is one of those which, once the process of liquidation which follows the crisis is ended, are most likely to be rapidly re-invested in equipment and other capital goods. Company reserves may therefore be regarde during the period of depression, as a latent factor of revival which it is highly undesirable to diminish. Persons least affected by an economic depression generally belong to three classes: houseowners, holders of fixed income securities (provided the debtors honour their obligations), and employees and skilled workmen who are least exposed to unemployment. During the period of depression, it is generally inadvisable to apply any special increase to taxes on income from real property, not only because such income is, in most countries, overtaxed,
(4287)
14 but also because a step of that kind rhight check new building. A tendency has even been noted, in most countries, to grant certain taxation exemptions in connection with income and transfer duties where new building is concerned. Income from loans, bonds and other securities producing a fixed income, represents a very limited amount of taxable matter. Finally, there remain, the relatively high salaries and wages. These may be hit directly b' means of sp,:zihl taxes or by the lowering of basic exemptions, or, again, by certain consumption duties. ". The increase ,fconsumption duties is sometimes an unavoidable necessity. Three considerations should, however, be borne in mind in this connection: (i) Such increases must, if they are to be productive, be made on articles with an inelastic demand; (2) They must affect a limited number of articles only, if high administrative costs and inconvenience to a large number of persons are to be avoided; (3) The effects which increases in such duties may have on the standard of living of certain classes of the population must be borne in mind. Increases in stamp and registration duties will generally prove unproductive and may easily have a restrictive effect on capital transactions, which are essential to recovery. Finally, an increase in the turnover tax, which in periods of contraction may have to be borne by the industrialists and business mhenthemselves, is likely to have a restrictive effect on enterprise. Death duties, even in the wealth countries, may hardly be made to give additional recepts on which the Treasury might rely owing to the irregular and generally unimportant yield of this form of taxation. Finally, an increase in the higher rates of income tax will often prove impracticable owing to their present high level. Consequently, the Committee is of the opinion that the greatest caution should be exercised in the matter of an increase in the rates of taxation in order to balance the budget in this way. The relative disadvantages of an increase in taxation and of short- and medium-term loans should be very carefully weighed. At the same time, it is important to aote that, in certain countries, the fiscal system may show certain organic gaps, so that the State revenue is insufficient to cope with its constant burdens, though this fact may not be evident, owing to the use of various successive expedients or to the general disorganisation in the public finances. In these circumstances, it is imperative for the State to put the public finances on .a sound and durable basis by making the requisite fiscal innovations and at the same time the necessary revisions in expenditure. It is true that this point refers to a situation which is not peculiar to economic depressions, but the difficulties inherent 'to the depression make it even more desirable that a fiscal policy corresponding to the economic and financial position of each country should be adopted. If the principle of the annual balancing of the State finances is observed, the question may arise, in periods of p.asperity, of diminishing the rates of taxation when the yield of the latter is in excess of State requirements. In this respect, it should be noted that certain taxes, particularly those affecting stockexchange transactions and the ifccme of persons who are most likely to engage in speculative transactions, may act as a check on certain excesses during such periods. Furthermore, the burden of consumption taxes and Customs duties may in effect be much more easily borne than during a period of depression. Consequently, the State must weigh the relative advantages of maintaining taxes at their existing levels in order to reduce the public debt or, on the contrary, of reducing the fiscai burden. Taxation as a Means of Action on Economic Fluctuations. In various countries, it has been thought that fiscal measures might act as a stimulus on factors encouraging an economic revival in periods of depression and as a check to certain speculative excesses in periods of prosperity. With regard to fiscal measures tending to stimulate recovery in periods of depression, it should bc noted that abatements and exemptions may have a favourable effect on economic developments only because certain taxes had a restrictive effect as a result of the exaggeration of their rates. Among restrictive taxes, one of the most important is the fiscal surcharge on immovable property, particularly on buildings. It is obvious that, if the income from'immovable property were not generally taxed in a manner which was disproportionate to other income, building activity and the general extension of industrial and commercial undertakings would not be impeded. The same'is true in a number of countries of the taxes on transfers of real estate. There are in addition, according to the country, a whole series of other stamp and registration duties which, owing to their high rates or to the complications which their payment involves, exercise a restrictive effect on general economic activity which may be more severely felt in periods of depression than in periods of prosperity. Finally, "presumptive" taxes applying to industrial .and commercial enterprises may have particularly harmful consequences in periods of depression. When they are payable independently of their realisation of profits or before such profits have been made, they tend to
(4288)
'5
-.
prevent the setting-up of new undertakings, and may contribute to the disappearance of old undertakings. Furthermore, when such taxes are assessed according to the number of employees or the amount of raw materials utilised, they may be a direct cause of unemployment and of restrictions in purchases, particularly in periods of depression. Some think that excesses due to prosperity might be checked by two types of taxes-taxes on capital profits and stamp and registration duties on the issue of securities and on transactions connected therewith. Theoretically, the creation of a new tax levied on "capital gains" may have the effect during a period of prosperity of counteracting an excessive rise in the value of stock-exchange securities and of. real estate subject to speculation. But it would certainly be wrong to regard this tax as likely to have such an effect to an appreciable extent when it forms an integral part of the fiscal system. This tax, be i noted, is one that it is very difficult to apply. S~amp duties and registra' ;on duties on stock-exchange transactions and the issue of securities undoubtedly have a restrictive effect during periods of prosperity, but they cannot discriminate between sound and ur.desirable transactions unless special precautions are taken. While the Committee is of opinion that taxation is, generally speaking, a somewhat imperfect instrument for correcting economic fluctuations, it considers that taxatioh may exert a specially restrictive influence in times of depression. It thinks that certain measures might be taken to encourage undertakings to constitute reserves during periods of prosperity which could then be re-invested in the form of real assets during a period of depression. Other adjustments might be considered in regard to ambrtisation so that undertakings could bring their equipment and installations more up to date, especially during periods of depression. Generally speaking, however, such measures though very beneficent in themselves, will only produce a limited effect.
4.
CONCLUDING REMARKS
The Main Lines oj Fiscal Policy. The Fiscal Committee has confined itself to examining the question under considerationthat is to say, the orientation of fiscal policy in relation to economic fluctuations. The problem was thus of a dual nature: the repercussion of economic fluctuations on yield of taxes; the repercussion of the burden of taxes on economic fluctuations. The Committee, had however, to take, at the same time, account of the following considerations, which relate to general finance and should, in its opinion, always limit the scope of any rules that may be laid down in the matter of taxation: (a) Every fiscal policy is part of the financial policy as a whole which should be so designed as to ensure real budgetary equi:ibrium: it is governed by the necessities of that policy and is influenced by the consequences attaching to it. (b) Confidence, which is the first factor in financial and fiscal success, has an important part to play in neutralising the effects of economic variations on the yield of taxation. If public confidence can be won by sound and clear financial administration, this will alwaysand particularly at times of depression-be an excellent means of restricting the unfavourable effe-ts of the economic situat;on. (c) The collection of t;-xes will be greatly facilitated if the taxpayer feels that the State's efforts are constantly directed towards a " revision " of public expenditure. This " expression is preferab'- to reduction " of public expenditure, since the object in view must be not simply quantitative reductions but qualitative improvements. The policy of a revision of public expenditure is particularly desirable because certain expenditure can hardly be cut down at times of depression and 'here will even be a tendency for certain items to increase (e.g., social assistance). Considerations other than those related to general finance will also tend, on what is essentially shifting ground, to restrict the scope of any general rules that might be laid down on the subject under revew: (a) It is importnt to consider, in the first place, the conditions peculiar to each country: Decisions based on an exhaustive study of the circumstances and eminently realistic in character must never be superseded by any mere notion of system for its own sake. The. greatest caution is necessary in fiscal matters. (b) The conditions for the application of fiscal systems will often be found to be more important than the actuai intrinsic value of those systems. Behaviour o/ Fiscal Receipts and Repercussions o/ Taxes. The behaviour of fiscal revenue is determined by a certain number of general factors: taxable matter, method of assessment, tariff, bases of assessment and methods of collection, taxpaying capacity. The examination of those factors in any country and at any tie will determine any useful conclusions that may be reached. There are three of these factors in particular which it is essential to take into account: taxpaying capacity, method of assessment, tariff. The question of the method of assessing taxable matter cannot be considered purely from the angle of strict fiscal technique. It is too closely bound up with social realities (public opinion,
(4289)
x6 -
national preferences, civic education, etc.), to allow such factors to be ignored. An understanding attitude on the part of the fiscal authorities will in this case be the best way of ensuring satisfactory ,receipts. The rate of the tax plays an essential part in fiscal policy. The level of taxation will largely decide the latter's double behaviour-i.e., in relation to the fiscal authorities and national economy. Thorough studies should be carried out to determine by successive approximations the taxpaying capacity which is the basis of taxation.' In this connection, it should not be forgotten that systems which appear to be the best organised are liable to break down if attention is not paid to that factor. Chapter 2 of the present part of the Committee's report is a summary of the valuable study carried out with a view to examining in each particular case the degree of sensitiveness of taxes in relation to economic fluctuations. It is obviously advisable not to neglect the provisions which in the various fiscal systems ensure greater stability of the taxes. But it is also necessary that the taxation should remaifi clear and simple-i.e., that it should be easily understood by the taxpayer and capable of being quickly and easily collected. Certain essential conclusions are to be drawn from Chapter 2 of the present part of the Committee's report. In applying them to each country, however, account must be taken of national conditions. A concrete study is always preferable to any a priori doctrine. In the long run, it is commonsense which tells. Every fundamental change in the fiscal system involves dangers both for the State and the general economic system unless the probable reactions have been studied in advance. Such dangers are greater during economic depressions than at other times. The question of budgetary reserves, the establishment of which appears desirable, raises financial problems which it would obviously be advisable to study more closely. The tax system always has an influence on the economic development of a country. Similarly, the maintenance of as sound as possible an economic position cannot fail to have a favourable effect on the national finances. Consequently, the Fiscal Committee would hope that the system of taxes could be such that the burden of taxation does not increase at times of economic depression. . In agricultural countries and, in general, in countries where savings are small, it is particularly necessary for the fiscal system to be as elastic and moderate as possible, so that the burden of taxation should correspond closely to variations in income. In view of the specially unstable character of the economic system in agricultural countries, the establishment of budgetary reserves during periods of prosperity appears even more advisable there than elsewhere. Fiscal Statistics. The Committee considers that there would b- great practical advantage in the establishment of a spedal department of fiscal statistics in the ministry of finance of the various countries which would work on common bases. They would render a particularly valuable service if they showed the variations in the yield and in the taxable matter of the taxes levied by the central and by local authorities. Needless to say, such statistics would sometimes not allow of direct comparison, owing to differences in the economic structure of various countries, their fiscal organisation and even monetary variations, etc., but they will give some extremely useful approximations.
III.
REVIEW OF FISCAL LEGISLATIONS
At the last session of the Fiscal Committee, it was suggested that it might be of interest to ask the regular and corresponding members, who belong to forty-seven countries, to supply statements describing the fiscal measures adopted each year in their respective countries in order to enable the different national tax administrations to benefit by the experience obtained in other countries and thus to introduce improvements in their own fiscal legislation, should they thinkfit to carry out reforms. The Secretariat accordingly requested members of the Committee to prepare memoranda on the recent fiscal measures adopted in their countries. The Committee thus had before it a wealth of material which revealed a marked similarity in the fiscal problems arising in thedifferent countries. The Committee regards the results of this experiment as conclusive. It recomrn-nds the institution of a systematic exchange of information-through a co-operation between the regular and corresponding members and the Secretariat-concerning the legislative and administrative measures of a general character adopted in fiscal matters in the different countries. The Committee considers it most desirable, with this object, that theregular andcorresponding members should forward to the Secretariat periodical statements describing any changes that have occurred in the leslation or regulations relating to direct and indirect taxes, national and local, explaining also the reasons for these changes and the scope to be attributed to them. At the same time, the regular and corresponding members, in co-operation with the administrationsof their respective countries, would forward the .texts of any laws and regulations' introduced. The Secretariat would thus be in a position to pass on informattion systematically to the fiscal authorities ir. the different countries.
(4290)
17 -
IV.
RECENTLY-CONCLUDED INTERNATIONAL CONVENTIONS FOR THE PREVENTION OF DOUBLE TAXATION AND THE SETTLEMENT OF OTHER FISCAL QUESTIONS
i. Since its October 1938 session, the Fiscal Committee has had brought to its notice a number of international agreements on taxation which give rise to the following observations. 2. Mention must be made of the following Conventions' which have been concluded on the
subject of double taxation: (a) Convention between Denmark and Finland, signed on December 2nd, 1937. This Convention is on the whole based on the principles drawn up by the League since 1923, particularly as regards income from real property (Article 3), enterprises (Article 4), maritime and aerial navigation (Article 5). In cases not expressly provided for, the tax shall be levied by the State of the creditor's domicile (Article 6,paragraph z). As an exception to this rule, the deduction at source of taxes on income from securities is still permitted, so that, for income of this type, double taxatinn is still possible (Article 6, paragraph 2; see also Item 7 (b) of the Final Protocol). The same applies to income from mortgages (Item 7 (a) of the Final Protocol). As regards property tax, the Convention follows the same principles (Article 8). (b) Agreement between the Union of South Africa and Southern Rhodesia (Januaryzoth, 1939). The method used in that Agreement to prevent double taxation resulting is rather dissimilar to the formulz recommended by the Fiscal Committee. It is nearer to the " Method of Division of the Rate of Tax " (see Method No. 3 in the" Report of the Committee of Economists on Double Taxation and Fiscal Evasion" of 1923, document F.212). . The Agreement provides that, when income is subject to taxation both within the Union and within Southern Rhodesia, an abatement will be granted equal to the amount of the lower tax. This abatement will be apportioned proportionately to the amount of the two taxes. For instance, if the Union of South Africa collects a tax of zoo and Southern Rhodesia ;. tax of 8o, the. will be 8o, of which hc o '00 +btmn 8ilb0oo the abatement % will be granted by the Union of South Africa ana
~ ~ ~ ~ ~ ~
oo80+ 8o % by Southern Rhodesia.
(c) Exchange of Notes dated April 4th, 1939, between France and Roumania. The object of this exchange of Notes is provisionally to suspend all measures of execution against French or Roumanian business enterprises carrying on their activities in Roumania and in France respectively. These notes have been exchanged in connection with negotiations for the conclusion of an agreement for the prevention of double taxation of business enterprises. (d) Convention between France and Sweden, dated December 24 th, 1936, mentioned on page 4 of the Fiscal Committee's report on the work of its seventh session (document C. 4 9 o.M. 3 33 .19 37 . II.A). This Convention has been completed by an additional agreement of May 5th, 1939, providing for the insertion of an Article 9(a) whereby the holder of stocks or shares of a company, living in one of the contracting States, shall, where such company is subjected in the other contracting State to a tax on dividends, enjoy taxation relief to the extent of 5% of such dividends.
(e) Arrangement between the Ministries o/Finance and the Interior of Denmarh on the one hand and the Ministry of Finance of Germany on the other hand, dated December z6th, 1938, lor the prevention of double taxation in respect of taxes on income and property. This arrangement is based on Article x of the Provisional Arrangement between the States concerned, dated February 14th, 1928. It is based on the Committee's principles, except for certain Kinds of income and property (mortgages for example) which will be dealt with by each State in accordance with its own laws (Articles is and 14. paragraph 2). (f) Convention between Hungary and Roumania, dated October 28th, Z937, /orthe prevention of double taxation in the matter of direct taxes. . This Convention, which replaces that of June 16th, 1932, conforms, with a few unimportant exceptions (see, for example, annuities mentioned in Article 8), to the Committee's principles. It siould, moreover, be not d that the problem of the double taxation of income from securities has been, very largely settled by the provisions of Article 9, whereby the State of domicile shall in principle be authirised to levy such taxation except in cases where the other State taxes such income within its territory by deduction at source.
(g) Convention between te United States of America and Sweden, dated March 23rd, 1939. This Convention, with its fairly broad provisions, covers all taxes on income and property
and is moreover based on the Geneva principles. The following special features may, however,
be mentioned:
These conventions will be reproduced in Volume VII ofthe" Collection of International Agreements and Internal Legal Provisions for thePrevention of Double Taxation and FcW Evaston " to appear in the beginning of t940. The q . "" volumes of the "Collection ". older conventions towhich reference Ismade may be found in the eertlier
(4291)
Article III prevents the concealment of income through the medium of a subsidiary company within the meaning of Article 4 of the Convention between France and the United States of America: Interest from. mortgages is not assimilated to income from real property (Article V); Tax on dividends collected, in principle, in the country of the creditor, may also be collected in the country of the debtor company, provided it does not exceed io% of the amount of dividends (Article VII); Each of the two countries shall grant a reduction on the amount of its income tax equivalent to the amount of tax deducted at source in the other country (Article XIV, paragraph (b) (2)).
(h) Convention between. Denmark and Iceland, dated January 24th, z 9 3 9 , regarding double taxation in the matter ol taxes on income and on Property.
This Convention replaces the agreements of August zith, ag7,andJuly zxth, 193i, and relaies only to individuals. In the event of simultaneous taxation due to the fact that the taxpayer is, reqard, d as permanently resident in both countries, he shall benefit from a reduction of tax in each (Article x). In the case of taxation in the country of origin of real property and of enterprise taxes shall only be levied in the country of origin, and not in the country fdomicile (Article 4). there has not been time to study the texts, it is suggested that they be considered at a later session.
3. Arrangements regarding taxation of maritime and air transport enterprises. (i) Conventions between Italy and Roumania and between Belgium and Germany. As, however,
(a) Denmark and the Netherlands have exchanged notes (registered on August 24th, 1938) regarding the taxation of air transport enterprises, in pursuance of which taxes are only levied in the country in which the operating headquarters is situated. (b). Attention should also be drawn to the agreement between Greece and Yugoslavia dated November 13th, 1934, which provides for complete exemption in both contracting States of sea transport enterprises conducted in either country by a company or individual belonging to, or a national of, the other. Article 4 gives this agreement retroactive effect as from 1923.
4. Arrangements relating to fiscal evasion.
The following should be mentioned:

(a) Convention between Hungary and Roumania, dated October 26th, 1937, regarding administrativeassistance, including the recovery o/ taxes.
This Convention replaces those of June 16th, 1932, on the same subject. The provisions are similar to those generally found in this connection. It should be noted, however, that under Article 13, paragraph 3, claims which would make it necessary to seek information from persons not connected with the case may be rejected if the country making the request is not-under the terms of its own legislation-empowered to obtain such information.
(b) Convention between Germany and Italy regarding administrative and legal assistance in the matter o/ taxation, signed at Rome on June 9th, 1938.
Except for a few unimportant divergencies, this Convention is identical with that between Germany and Czecho-Slovakia. (c) The Convention between the United States of America and Sweden referred to above (paragraph 2, g) contains (Articles XV-XIX) regulations governing the exchange of information (in the widest sense) and legal assistance in the collection of taxes.
* C
Thus the numerous Conventions and agreements on double taxation and administrative assistance concluded since 1921 are still increased. This movement and the results obtained have been described by a member of the Committee in a memorandum I which has been published by the Secretariat and whose interest the Committee is pleased to mention.
I Mitchell B. CARRoLL: " Prevention of International Double Taxation and Flacal Evuion ,rogress under the League of Nations ". Geneva.t939 Two Decades of
(4292)
19 -
V. THE INFLUENCE OF TAXATION ON THE STANDARD OF LIVING At its last session, the Assembly requested the Economic and Financial Organisation to study the question of the influence of taxation on the standard of living. The Fiscal Committee took note with interest of a memorandum by the Secretariat dealing with the relation between consumption taxes and standards of nutrition. This memorandum shows the necessity of adequate statistics on demand, supply, prices., of the various commodities and income distribution for the determination of the effects of taxation on the standard of living. The Committee feels therefore that it would be most desirable that, in the various countries, particularly in those where the standard of living is low or where internal taxes and Customs duties on articles of consumption are heavy, systematic investigations should be carried out in order to assemble the necessary data. While the problem of the effects of taxation on the standard of living varies from country to country, the Committee hopes that the investigations which may be undertaken by Governments or by private institutions will enable conclusions of general interest to be drown.
(4293)
LEAGUE OF NATIONS
FISCAL COMMITTEE REPORT ON THE WORK OF THE TENTH SESSION OF THE COMMITTEE
LEAGUE OF NATIONS
GENEVA 1946
.(4295)
PUBLICATIONS OF THE LEAGUE OF NATIONS
Report of the Delegation on Economic Depressions:

Part I. 118 pages.
THE TRANSITION
(Ser. L.o.N. P. 1943.II.A.3.)
FROM WAR
4/6 6/$1.00 $1.50
TO PEACE ECONOMY
Paper covers Cloth-bound
This first part of the report constitutes a study of the methods and measures, both domestic and international, by which as smooth as possible a transition from war to peace economy may be achieved and a disastrous post-war depression avoided through the maintenance of production and employment.
PART II. - ECONOMIC STABILITY IN THE POST-WAR WORLD The Conditions of Prosperity after the Transition
from War to Peace

341 pages (Ser. L.o.N. P. 1945.II.A.2.) Paper covers Cloth-bound 10/12/6 $2.50 $3.00
This second part of the report is concerned with the longer-term problem of securing economic stability and the fullest use of productive resources once these resources have been readapted to peace-time requirements. It is divided into two sections; the first gives a general description of the nature and mechanics of depressions; the second, which ends with a chapter of conclusions, is concerned with policies for securing a high and stable level of employment.
STATISTICAL YEAR-BOOK OF THE LEAGUE OF NATIONS 1942/44

Seventeenth Issue
(Ser. L.o.N. P. 1945.II.A.5) 315 pages. In wrappers Cloth-bound 10/12/6 $2.50 $3.50
A new issue, considerably enlarged, of this standard work of reference, which is a compendium of the most important demographic, social, economic and financial statistics of all the countries of the world. The wealth of information assembled, notwithstanding exceptional difficulties, makes this a unique publication. In general, the figures given are brought up to the end of 1943. In many cases, they even go up to the end of 1944.
PUBLICATIONS DEPARTMENT, LEAGUE OF NATIONS, GENEVA

73095 0-62-vol. 420
(4297)
[Communicated to the Council

and the Members of the League.]
Official No. : C. 37. M. 37. 1946.II.A.
Geneva, April 25th, 1946.
LEAGUE OF NATIONS
FISCAL COMMITTEE REPORT ON THE WORK OF THE TENTH SESSION OF THE COMMITTEE
Held in London from March 20th to 26th, 1946.
(4299)
PUBLICATIONS OF THE ECONOMIC, FINANCIAL AND TRANSIT DEPARTMENT
MONTHLY
BULLETIN
OF
STATISTICS. OF TlE LEAGUE OF NATIONS.
STATISTICAL WORLD
YEAR-BOOK
ECONOMIC
SURVEY,
1942/44.
AND THE SOVIET UNION.
THE FUTURE POPULATION OF EUROPE Projections 1940-1970.

ECONOMIC DEMOGRAPHY OF EASTERN
Population
AND
SOUTHERN
EUROPE.
MONEY AND
BANKING,
1942/44.
WAR TO PEACE
THE TRANSITION FROM
ECONOMY.
Report by the Delegation
on Economic Depressions.
Part I.
ECONOMIC STABILITY IN TlE POST-WAR WORLD.
The Conditions of Prosperity

Report by the Delegation on Report by the Economic
after the Transition from War to Peace.
Economic Depressions.
COMMERCIAL
RELIEF
Part II.
POST-WAR WORLD.
LOANS,
POLICY IN THE
AND
and Financial Committees.

DELIVERIES OVERSEAS RELIEF
1919-1923.
AND HOW THEY WERE DURING MET. THE EUROPE
EUROPE'S
NEEDS,
1919-1920,
IN
AGRICULTURAL
PRODUCTION AND TIlE
CONTINENTAL
1914-
1918
TIIE
WAR
RECONSTRUCTION
PERIOD.
INTERNATIONAL
LEAGUE PERIOD. COMMERCIAL AND
CURRENCY
NATIONS
EXPERIENCE.
Lessons of the Inter-war Period.

SCHEMES IN THE INTER-WAR
OF
RECONSTRUCTION
POLICY
IN
THE INTER-WAR
PERIOD:
INTERNATIONAL
PROPOSALS
NATIONAL
POLICIES. THEIR CAUSES AND AND NATURE. ECONOMIES. KINGDOM,
QUANTITATIVE TRADE
TRADE CONTROLS: BETWEEN IN
RELATIONS
FREE-MARKET
CONTROLLED
ECONOMIC FLUCTUATIONS
THE
UNITED STATES AND THE UNITED
1918-1922.
EUROPE'S TRADE.
THE NETWORK OF WORLD TRADE.

INDUSTRIALIZATION WAR-TIME FOOD AND FOREIGN TRADE. RATIONING AND AND CONSUMPTION.
RATIONING BILATERAL
SUPPLY,
1943/44.
FOR THE PREVENTION OF INTERNATIONAL EVASION.
MODEL
CONVENTIONS AND
DOUBLE
TAXATION
FISCAL
Second Regional Tax ConETC., RELATING TO
ference, Mexico, D.F., July 1943.

LIST OF MULTILATERAL CONVENTIONS, AGREEMENTS, COMMUNICATIONS QUESTIONS.
TRANSPORT PROBLEMS WHICH AROSE FROM THE WAR OF

WORK OF OF RESTORATION UNDERTAKEN IN THIS NATIONS.
1914-1918
BY THE
AND THE
LEAGUE
FIELD
Series of League of Nations Publcations
II. ECONOMIC AND FINANCIAL
1946. II.A. 4.
(4300)
TABLE OF CONTENTS
Page
I. II. III.
INTRODUCTION ......
...
............... . ON
. .
5
.
MODEL BILATERAL TAX CONVENTIONS SUGGESTIONS FOR FUTURE WORK
6
8
TAX
PROBLEMS .........
................
Annex A:
MODEL BILATERAL TAX CONVENTIONS:
1. Prevention of the Double Taxation of Income: ........... .... Mexico Draft .. .... London Draft ............. 2. Prevention of the Double Taxation of Successions: ........... Mexico Draft ..... ... .......... London Draft .. Reciprocal Administrative Assistance for the Assessment and Collection of Direct Taxes: .... Mexico Draft ............. .......... ... London Draft ..
SUGGESTED STUDIES DOUBLE IN THE FIELD .
. .
16 17
44 45
3.
58 59 77
Annex B:
OF .
INTERNATIONAL
TAXATION
4675 -
S.d.N. 1.000 (F.) 2.000 (A.) 4146 Imp. Kundig, Genive.
(4301)
Report on the Work of the Tenth Session

of the
Fiscal Committee of the League of Nations
I.
INTRODUCTION
The Fiscal Committee held its tenth session in London
from March 20th to 26th, 1946.

The following were present:
M. 'Rodolphe PUTMAN, Honorary Secretary-General, Director-General of Taxes, Ministry of Finance of Belgium, Chairman; Mr. Mitchell B. CARROLL, Counsellor-at-Law, former Special Attorney, United States Treasury; Mr. Herbert P.
FALES,
Second Secretary, American Embassy, London;
M. Jacob Stein
BERGH-JACOBSEN,
Financial Secretary, Norwegian
Embassy, London, representing M. Christen Urbye, Director, Ministry of Finance of Norway; Mr. C. Fraser ELLIOTT, K.C., C.M.G., Revenue (Taxation) of Canada; Deputy Minister of National
M. A. M. Escnas, Counsellor, and M. Eric BARnEY, First Secretary, Swiss Legation, London, replacing M. Hans Blau, former Director of Federal Taxes, deceased; M. Bj6rn Gustaf PRYTZ, Envoy Extraordinary and Minister Plenipotentiary of Sweden, London, representing Dr. Carl W. U. de Kuylenstierna, Judge of the Supreme Administrative Court of Sweden; M. Armando SERVIN, Technical Adviser, Ministry of Finance, Mexico, replacing M. Carlos P. Jimenez, former Director of Taxation, Peru, deceased; Dr. J. H. R. SINNINGHE DAMSTE, Judge of the Supreme Court of the Netherlands, former Director-General of Taxes; Sir Clifford WAKELY, Deputy Chairman, and Mr. Robert WILLIS, Assistant Secretary, Board of Inland Revenue of the United Kingdom. The International Chamber of Commerce was represented by Mr. J. P. DAviEs and Mr. M. T. MENZIES, of the Double Taxation Sub-Committee of the British National Committee.
(4303)
The Committee wishes to express its appreciation to the British Government for the hospitality and the facilities it enjoyed during the stay of its members in the United Kingdom and wishes to put on record its gratification at having been able to hold its last meeting in London. It desires also to pay tribute to the memory of the two members it lost since its last meeting, Hans BIAu, of Switzerland, and Carlos P. JIMENEZ, of Peru, who, while pursuing distinguished careers as civil servants in -their own countries, made most valuable contributions to the work of the Committee and won the affection and respect of all their colleagues. The Fiscal Committee expresses its grateful recognition to its secretary, M. Paul DEPERON, for the enlightened and wholehearted collaboration he has given it, since 1931, with the utmost understanding and competence.
II.
MODEL BILATERAL TAX CONVENTIONS
During the last session which the Committee held before the war, in June 1939, it was suggested that a revision should be undertaken of the model bilateral conventions on tax matters which had been prepared in 1928 by the General Meeting of Government Experts on Double Taxation and Fiscal Evasion 1. These models had proved of the greatest value in facilitating the negotiation of tax treaties, and the Committee stated in 1935 that: " The existence of model draft treaties of this kind has proved of real use in such circumstances in helping to solve many of the technical difficulties which arise in such negotiations. This procedure has the dual merit that, on the one hand, in so far as the model constitutes the basis of bilateral agreements, it creates automatically a uniformity of practice and legislation, while, on the other hand, inasmuch as it may be modified in any bilateral agreement
1 League of Nations document C.562.M178.1928.II. Double Taxation and Fiscal Evasion: Report presented by the General Meeting of Government Experts on Double Taxation and Tax Evasion.
.(4304)
reached, it is sufficiently elastic to be adapted to the different conditions obtaining in different countries or pairs of countries." 1 The numerous tax treaties which were concluded during the decade which preceded the war contained, however, various improvements on the 1928 Model Conventions. The Fiscal Committee, for its part, had been able to carry further the work initiated by the General Meeting of Government Experts. Moreover, new trends and new problems had appeared in the fields of international trade and investment. Consequently, it seemed desirable to prepare new model conventions that would reflect the technical progress achieved since 1928 and codify the views and recommendations that had been expressed by the Fiscal Committee in the course of its various sessions. 2 This work of revision and codification was undertaken by a Sub-Committee which met at The Hague in April 1940, and was continued by two Regional Tax Conferences which were held, under the auspices of the Fiscal Committee, in Mexico City in June 1940 and July 1943. The Committee has now studied the result of this work. 3 It wishes to express its agreement with most of the conclusions which were reached by the experts who met in Mexico City in 1943 and is of opinion that the Model Conventions prepared by those experts represent a definite improvement on the 1928 Model Conventions. Nevertheless, since the membership of the Mexico City and London meetings differed considerably, it is natural that the participants in the London meeting held, on various points, different views from those which
Fiscal Committee: 1 League of Nations document C.252.MA241A935.II.A. Report to the Council on the Fifth Session of the Committee. Geneva, June 1935. 8 See, in particular, League of Nations document C.252.M.124.A935.I.A. Report to the Council on the Fifth Session of the Committee, pages 5 et seq. Revised text of the draft Convention for the allocation of business income between States for the purposes of taxation. 8 League of Nations document C.2.M.2.1945.II.A. Fiscal Committee: Model Bilateral Conventions for the Prevention of InternationalDouble Taxation and Fiscal Evasion. Second Regional Tax Conference, Mexico, D.F., July 1943. Geneva, 1945.
(4305)
inspired the Model Conventions prepared in Mexico. The general structure of the Model Conventions drafted at the present session is similar to that of the Mexico models. A certain number of changes have been made in the wording, and some articles have been suppressed because they contained provisions already implied in other clauses. On other points, new articles have been inserted to make use of certain innovations contained in conventions, such as those between the United Kingdom and the United States, concluded since the 1943 meeting. Virtually, the only clauses where there is an effective divergence between the views of the 1943 Mexico meeting and those of the 1946 London meeting are those relating to the taxation of interest, dividends, royalties, annuities and pensions. The Committee is aware of the fact that the provisions contained in the 1943 Model Conventions may appear more attractive to some States-in Latin America, for instance-than those which it has agreed during its present session. The two texts are therefore given on opposite pages in Annex A. The Model Conventions, as they now stand, can afford guidance to negotiators of tax treaties. The Committee thinks that the work done both in Mexico and in London could be usefully reviewed and developed by a balanced group of tax administrators and experts from both capital-importing and capital-exporting countries and from economically-advanced and less-advanced countries, when the League work on international tax problems is taken over by the United Nations. A commentary on the new Model Conventions will be published separately in the near future, in accordance with the procedure followed in connection with the 1943 Mexico Model Conventions.
III.
SUGGESTIONS FOR FUTURE WORK ON TAX PROBLEMS
The Fiscal Committee is gratified to note the recommendation of the Preparatory Commission of the United Nations set forth in paragraph 34 of the Report of that Commission in regard to the desirability of establishing a Fiscal Commission
(4306)
of the Social and Economic Council. This recommendation reads as follows: " Fiscal Commission. "34. This Commission would make studies and advise the Council on matters related to: " (a) International taxation problems; " (b) Exchange of information among States on the techniques of Government finance and on their social and economic effects; " (c) Fiscal techniques to assist the prevention of depressions or inflation; and " (d) Such functions of the Fiscal Committee of the League of Nations as the United Nations may decide to assume." (a) International Tax Problems.
These tax problems may in the main be considered under the following headings: 1. 2. 3. 4. Double taxation of income, estates and successions, property and capital, etc.; Extra-territorial taxes; Discriminatory and special taxes on foreigners and on capital invested abroad; Special taxes on international transactions, such as taxes on the purchase of foreign exchange and remittances abroad; Taxes on international communications and transport; Mutual assistance between national tax administrations in connection with the assessment and collection of taxes, including the prevention of fiscal evasion.
5. 6.
The tax experts who have met under the auspices of the League of Nations since 1923 have considered most of these problems in their major aspects and the Model Conventions which they drafted have exercised an influence as previously indicated, especially in the field of the prevention of inter-
(4307)
national double taxation and fiscal evasion, by facilitating the conclusion of numerous bilateral tax treaties. Much remains to be done, however, especially on account of the constant increase of tax burdens and also with a view to assisting the desired revival of international trade and investment. Indeed, efforts to remove these obstacles on international economic intercourse which result from tariffs, preferences and other restrictive trade practices can be largely frustrated through the operation of tax laws. The Committee therefore desires to emphasise its belief that further studies should be made with a view to solving these tax problems in the interest of world rehabilitation. Further comment on some of the details of the questions which arise in this connection appears in Annex B. The importance of international tax problems is illustrated by the fact that, since the beginning of the 'twenties, well over sixty general treaties have been concluded for the prevention of double taxation and that nearly 250 special agreements on various international tax matters were signed, not counting the treaties of friendship and establishment, the commercial treaties and other international instruments that contain incidental clauses on tax matters. The Committee wishes to draw attention to the fact that, among the topics relating more especially to the prevention of international double taxation, there are two which seem to require prompt consideration. In the first place, it is desirable to arrive at a comprehensive set of rules regarding the determination and allocation of taxable income in the case of business enterprises carrying on their activities in more than one country. The provisions suggested by the Fiscal Committee for that purpose embody principles that are generally recognised as sound. These principles may, however, require some elaboration as regards the manner in which they should be applied to the various types of enterprises. In the second place, there persists a difference of opinion between capitalimporting and. capital-exporting countries as regards the taxation of interest and dividends. Such divergencies might be more easily reconciled in the negotiation of tax treaties if studies were undertaken of the various legal, administrative and economic aspects of this problem.
(4308)
The structure and incidence of a country's tax system have a direct influence on the capacity and willingness of domestic concerns to do business abroad as well as on the ability of the country to attract foreign capital and enterprises. It would be difficult to remove the obstacles which taxation may oppose to international trade and investment without determining the manner in which the different types of taxes, considered separately and together, can be adapted to the social and economic conditions of the various countries. (b) Exchange of Information among States on the Techniques of Government Finance and on Their Social and Economic Effects.
The Fiscal Committee recalls that work of this type was begun under its auspices and is pleased to think that this task may be effectively continued under the Fiscal Commission. The establishment of a repository of the texts of tax treaties, whether or not ratified, as well as regulations and decisions relative thereto, and a clearing-house betwpen tax administrations of information not only in regard to treaties but also including national tax laws and regulations, will be of value to countries in the improvement of their tax systems. This collection and distribution of information might usefully cover all forms of taxation, direct and indirect, national and local. The work could consist of periodical surveys and digests of treaties, laws and regulations, possibly complemented by statistical data, and of special studies on particular tax problems. International digests and bibliographies of both official and unofficial publications on tax matters might also be useful to national revenue authorities and to the Fiscal Commission. (c) Fiscal Techniques to assist the Prevention of Depressions or Inflation. During the years immediately preceding World War II, the Fiscal Committee was engaged in a study of the relations between fiscal policy, structure of tax systems, yield of taxes and economic fluctuations. The conditions of economic stability and development no doubt belong to the field of the
(4309)
general economist. Nevertheless, it may be found convenient that a committee of tax administrators and experts should study the practical effects of tax legislation and administration from the point of view of Government revenue and business activity. Moreover, the tax requlrements of the development of economically-less-advanced countries call for special study. (d) Such Functions of the Fiscal Committee of the League of Nations as the United Nations may decide to assume.
During the first years of its existence, the Fiscal Committee concentrated its attention on the problems of international double taxation and prevention of fiscal evasion in the matter of income and other direct taxes. In this connection, it carried out detailed studies concerning the determination and allocation or apportionment for tax purposes of the income of enterprises doing business in more than one country. At the same time, it considered the international problems which arose with respect to the taxation of motor vehicles, bills of exchange, promissory notes, cheques and similar documents, of newspapers and periodicals, and double taxation in regard to turnover taxes. Later, it was engaged in studies on fiscal policy and economic fluctuations, on the sensitiveness of the yield of taxes to the business cycle and on the technical problems of direct taxation. These latter studies, in particular, proved of definite value to countries in Latin America and other parts of the world which were contemplating the modernisation of their tax systems. The Secretariat published, under the supervision of the Fiscal Committee, a Collection of International Treaties and Internal Measures for the Prevention of Double Taxation and Fiscal Evasion and a series of volumes on the Taxation of Foreign and National Enterprises which included descriptions of the income tax systems of over thirty countries in so far as they affected enterprises engaged in international business. Comparative studies were prepared for the mutual information of national tax administrations on questions such as taxable income, fiscal domicile and residence, tax administration, methods of tax assessment and collection, legal protection of taxpayers.
(4310)
The Committee co-operated with other League committees on matters of common interest, for instance, with the Economic Committee in 1929 with respect to the treatment of foreigners. In 1945, a Joint Committee of members of the Economic, Financial and Fiscal Committees was set up to study the "Conditions of Private. Foreign Investment ". The report of that Joint Committee is soon to be published. It is an attempt to formulate certain standards of conduct which should inspire the various interests concerned in capitalreceiving and capital-exporting countries so as to bring about a revival of private foreign investment. The Fiscal Committee was also represented by one of its members for several years at the meetings of the Financial Committee, who took part in the discussions of that Committee in an advisory capacity. The various forms of activity of the Fiscal Committee which might usefully be continued by the Fiscal Commission and its secretariat may be summarised as follows: 1. Consultation: To hold or arrange periodical meetings, general or regional, enabling tax administrators and experts to carry out the various objectives enumerated above, to discuss problems where exchange of views may be of value and to promote mutual understanding through direct contacts; 2. Advice: On request, and on its own initiative, to formulate proposals or recommendations on tax matters to the Social and Economic Council or other international agencies and Governments; 3. Assistance: To arrange, when required, for advice or technical help through its members, the secretariat or other experts, to particular national tax authorities; 4. Research: To carry out enquiries into the legal, administrative, technical, economic, statistical, accounting and other aspects of the tax problems coming up before the Commission; 5. Information: To issue periodical and special publications presenting particularly to international and
(4311)
national authorities infbrmation concerning tax treaties, legislation, administration and practice; 6. Liaison: In addition to the official relationships inherent in the functions enumerated above, to maintain relations with such non-official organisations as business, professional and academic associations, international and national, in so far as they study tax problems.
[Annex A of this document (pp. 15-76), which contains the text of the Mexico and London Model Tax Conventions, has not been reproduced here, since the texts of both those conventions, along with the commentary thereon, appear in the document entitled "London and Mexico Model Tax Conventions-Commentary and Text (Document C.88.M.88. 1946.II.A.), all of which is printed below, beginning at page 4319.]
(4312)
ANNEX B SUGGESTED STUDIES IN THE FIELD OF INTERNATIONAL TAX PROBLEMS
A number of tax problems might be well considered under the general heading of " Trade Barriers ". Experience has shown during the inter-war period that various taxes have a definite restrictive effect on international trade. These include, in addition to the whole problem of double taxation through income and similar taxes and through death duties, the following: (1) Taxes directly inhibitory to the flow of capital such as: (a) (b) Exchange taxes on capital transfers both into and out of a country; Exchange taxes on income transfers such as payments of interest, dividends, royalties, annuities, etc., from one country to another country; Exchange and other taxes such as admittance taxes on persons travelling for business or other purposes and on the amounts taken into or out of a country by such travellers;
(c)
(2)
Taxes on amounts earned or presumed to have been earned within a given country by business visitors normally resident in other countries and the onerous clearance requirements for tax purposes before visitors can leave the country; Taxes on earnings attributed to occasional transactions within a country by a person with his fiscal domicile in another country;
(3)
73095 0-62-vol. 4-
21
(4313)
(4)
Extra-territorial taxation by a country of a foreign enterprise with an establishment in that country, on foreign earnings or property arbitrarily ascribed to the establishment within the taxing country; Refusal by a country to permit a foreign enterprise to deduct from the earnings of a branch establishment within the country's territory, expenses incurred by the enterprise abroad in connection wvith that establishment; Restrictions in the country where a foreign enterprise has a branch establishment on deductions for business expenses, depreciation and depletion that are normally allowed in the country where the foreign enterprise has its fiscal domicile; Discriminatory taxation of foreign individuals and companies through the imposition of different or higher rates than those imposed on nationals or domestic companies or the denial of certain allowances and deductions enjoyed by the latter; Presumptive or empirical tax assessments on foreign individuals and companies.
(5)
(6)
(7)
(8)
In general, the tax and related obstructions on commercial activities from one country to another have been set forth in the Report of the League of Nations Joint Committee on Conditions of Private Foreign Investment. It is suggested that this work be submitted to the Fiscal Commission of the United Nations for study in connection with the above subjects. A question that has arisen from time to time is that of the application of the most-favoured-nation clause in connection with tax treaties. In the past, the view has been that such treaties are contingent upon mutual concessions on a bilateral basis. Consequently, such treaties would not come within the ordinary field of application of the clause. Nevertheless, in view of the close inter-relation between tax treaties and commercial treaties, it might be desirable to examine again whether tax treaties should not be so formulated
(4314)
as to permit the application of the most-favoured-nation clause. Obviously, as tax treaties become more and more standardised through adherence to the models prepared by the League of Nations Fiscal Committee, and possibly in future years by the Fiscal Commission of the United Nations, the extension of the clause to tax matters may become more and more practicable. In general, it is becoming increasingly evident that the conclusion by an increasing number of States of bilateral treaties along the lines of the Model Conventions of London and Mexico constitutes the most adequate means of removing the existing serious tax obstructions to the international flow of capital and foreign trade.
(4315)
LEAGUE OF NATIONS PUBLICATIONS ON
DOUBLE TAXATION AND TAX EVASION
Double Taxation and Tax Evasion. Report and Resolutions submitted by the Technical Experts to the Financial Committee of the League of Nations. 1925. 45 p. 1/6 $0.40 Report presented by the Committee of Technical Experts on Double Taxation and Tax Evasion. (927.11.40) 33 p. 1/3 $0.30 Report presented by the General Meeting of Government Experts on Double Taxation and Tax Evasion. (1928.11.49) 39 p. 1/6 $0.40 Double Taxation and Fiscal Evasion. Collection of International Agreements and Internal Legal Provisions for the Prevention of Double Taxation and Fiscal Evasion: Volume I. (1928.11.45) 278 p. Volume II. (1929.II.34) 53 p. Volume III. (1930.11.50) 110 p. Volume IV. (1931.II.A.29) 72 p. Volume V. (1933.II.A.29) 136 p. Volume VI. (1936.II.A.10) 119 p. Taxation of Foreign and National Enterprises: Volume I: France, Germany, Spain, the United Kingdom and the United States of America. (1932.I1.A.3) 275 p. 10/- $2.50 Volume II: Austria, Belgium, Czechoslovakia, Free City of Danzig, Greece, Hungary, Italy, Latvia, Luxemburg, Netherlands, Roumania and Switzerland. (1933.II.A.18) 467 p. 12/- $3.00 Volume III: British India, Canada, Japan, Mexico, Netherlands East Indies, Union of South Africa, States of Massachusetts, of New York and of Wisconsin. (1933.II.A.19) 254 p. 7/6 $2.00 Volume IV: Methods of allocating Taxable Income, by Mitchell B. Carroll. (1933.II.A.20) 219 p. 6/- $1.50 Volume V: Allocation Accounting for the Taxable Income of Industrial Enterprises, by Ralph C. Jones. (1933.1I.A.21) 78 1. 2/6 $0.60 Model Bilateral Conventions for the Prevention of International Double Taxation and Fiscal Evasion. Second Regional Tax Conference, Mexico, D.F., July 1943. (1945.II.A.3) 85 p. 3/6 $1.00 10,'- $2.50 1/6 $0.40 3/- $0.75 2/- $0.50 4/- $1.00 3/6 $0.90
(4316)

GUATEMALA. - Goubaud & Cia., ARGENTINE. - Libreria ((El Ateneo, Ltda.. Sucesor, Guatemala. M. Pedro Garcia, 340-344t, calle Florida, Buenos-Aires. Peter Halldorsson, ICELAND. Reykjavik. AUSTRALIA. - H. A. Goddard Pty., Ltd., 225a, Geoige Street, Sydney. INDIA. - The Book Company, Ltd., College Square, 4/4A, Calcutta. BELGIUM. - Agence et Messageries League of Nations, New Delhi Office, de la Presse, S.A., 14-22, rue du 8, Curzon Road, New Delhi 1. Persil, Brussels. - Eason & Son, Ltd., IRELAND. calle Hermanos, Arn6 BOLIVIA. 40-41, Lower O'Connell Street, Illimani, Nos. 10-20, La Paz. Dublin. BRAZIL. - F. Briguiet & Cia., Rua - Librairie J. SchumLUXEMBURG. do Ouvidor, 109, Rio de Jqnciro. mer, pl. Guillaume, Luxemburg. CANADA. - United Nations Society - N. V. Martinus in Canada, 124, Wellington Street, NETHERLANDS. Nijhoff's Boekhandel en UitgeversOttawa. Mij., Lange Voorhout 9, The CHILE. - Libreria y Editorial NasHague. cimento, Calle San Antonio, 240, NORWAY. - Olaf Norli, UniversiSantiago. tetsgaten, 24, Oslo. CHINA. - Commercial Press, Ltd., - Leo Blumstein, BookPALESTINE. Sales Office, 211, Honan Road, seller 35, Allenby Road, Tel-Aviv. Shanghai. The Palestine Educational Co., Libreria Voluntad, COLOMBIA. Messrs. B. Y. & W. A. Said, Jaffa S.A., Calle 12 Nos. 7-39, Apartado Road, 98 & 100, P.O.B. 84, postal No. 2555, Bogota. Jerusalem. CUBA. - La Casa Belga, Rend de PANAMA. - Isidro A. Beluche, AparSmedt, O'Reilly, 455, Havana. tado 755, Avenida Norte, No. 49, Panama. Librairie CZECHOSLOVAKIA. Libreria Bosch, Ronda F. Topic, 9, Narodni Trida, Pra- SPAIN. Universidad, 11, Barcelona. gue I. SWEDEN. - Aktiebolaget C.E. Fritzes DENMARK. - Librairie internatioKgl. Hofbokhandel, Fredsgatan, nale Einar Munksgaard, Norre2, Stockholm. gade 6,Copenhagen. ECUADOR.- Victor Janer, Guayaquil. SWITZERLAND. - Librairie Payot & Cie, Geneva, Lausanne, Vevey, EGYPT. - Libr. J. Cattan & Co., Montreux, Neuchdtel, Berne, Basle. 118, rue Emad El Dine, B.P. Hans Raunhardt, Buchhandlung, 2167, Cairo. Kirchgasse, 17, Zurich I. G. M.'s Book Shop, 116, Sharia - Librairie Hachette, sucTURKEY. Cairo. Mohamed Bey Farid, cursale de Turquie, 469, av. de Akateeminen KirjaFINLAND. postale Boite l'Ind6pendance, kauppa, Keskuskatu, 2, Helsinki. 2219, Istanbul. Editions A. Pedone, FRANCE. UNION OF SOUTH AFRICA. - Maskew Miller, Ltd., 29, Adderley 13, rue Soufflot, Paris (VC). Street, Cape Town. GREAT BRITAIN, NORTHERN IREUNITED STATES OF AMERICA. LAND AND THE CROWN COLOColumbia University Press, InterNIES. - George Allen & Unwin, national Documents Service, 2960, Ltd., 40, Museum Street, London, Broadway, New York, N. Y. W.C.1. URUGUAY. - a Casa A. Barreiro y GREECE. - Librairie internationale Ramos)), S. A., 25 de Mayo Esq. Eleftheroudakis ), place de la J. C. Gomez, Montevideo. Constitution, Athens.
For other countries, apply:
Publications Department of the League of Nations, Geneva (Switzerland).
(4317)
FISCAL COMMITTEE
LONDON AND MEXICO MODEL TAX CONVENTIONS
Commentary and Text
LEAGUE OF NATIONS
GENEVA 1946
(4319)
Official No.: C. 88. M.88.1946. II.A.
Geneva, November 1946.
LEAGUE OF NATIONS
FISCAL COMMITTEE LONDON AND MEXICO MODEL TAX CONVENTIONS
Commentary and Text
(4321)
NOTE
The cost of printing this document, which was prepared by the Secretariat of the League of Nations, was borne by the United Nations.
Series of League of Nations Publications I[. ECONOMIC AND FINANCIAL 1946. II.A.7.
(4322)
TABLE OF CONTENTS
Page
Foreword . . . . . . . . . . . . . . . . . . . . . . . . 5
I.
COMMENTARY
ON THE MODEL BILATERAL CONVENTION ON THE PREVENTION OF THE DOUBLE TAXATION OF INCOME AND PROPERTY:
Introduction ....... Ad Article I. II. III. IV.

V.
.......................
Object and Scope of the Model Convention .... Income from Real Property ........... . .......... Income from Mortgages .. ........... Income from Business .....
Income from International Navigation .
.
10 12 13 13
22
..
VI. VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII. XVIII. XX.
Remuneration from Personal Services and Pri............ vate Employment ...... ... Civil Service Salaries and Pensions ...... ... ................ Dividends ..... ... ............. Interest on Debts ... Royalties from Real Estate, Patents and Copy... ................. rights ..... Private Pensions and Life Annuities ....... .... ............... Capital Gains .... Taxation Rights of the Country of " Fiscal
Domicile " . ..............
23 24 24 26 26 28 28
29
Fiscal Domicile in Two Countries ...... Taxes on Property and Wealth ....... Equality of Treatment ............. Taxpayers' Rights of Appeal ......... General Preservation of Taxpayers' Rights Ratification and Duration of the Convention
. ... ... ..
.
30 31 31 31 32
32
XIX. Relations between Tax Administrations
. .
32
II.
COMMENTARY ON THE MODEL BILATERAL CONVENTION FOR THE PREVENTION OF THE DOUBLE TAXATION OF ESTATES AND SUCCESSIONS:
General Structure of the Model Convention ......
...
34,
Ad Article I. Object and Scope of the Model Convention ............... II. Real Property .......
4704 1.725 (A.) 12/46 Imp. Kundig, Genive.
36 38
(4323)
Ad Article
III. IV. V. VI. VII. VIII. Business Establishments .. .......... ... Personal Property .... ............. ... Deduction of Debts ... ............ ... Domicile Taxation ... ............. .... Inter-Administrative Co-operation ...... ... Ratification and Duration of the Convention .
Page 38 39 40 42 43 43
III.
COMMENTARY ON THE MODEL BILATERAL CONVENTION FOR THE ESTABLISHMENT OF RECIPROCAL ADMINISTRATIVE ASSISTANCE FOR THE ASSESSMENT AND COLLECTION OF TAXES ON INCOME, PROPERTY, ESTATES AND SUCCESSIONS:
Introduction .......
...................
44
Ad Article I. Object and Scope of the Model Convention

II. Information to be Supplied on Request .
.
45
49
..
III. Exchange of readily available Information . . IV. Assistance in Tax Collection . ........ . V. General Safeguards ... ............ .
VI. Safeguards of Administrative Secrecy . ...
.
51 52 54
54
VII. Application of the Convention .......... ... VIII. Ratification and Duration of the Convention
55 55
Annex: TEXT OF THE MODEL BILATERAL TAX CONVENTIONS:
1.
Prevention of the Double Taxation of Income and Property:
Mexico Draft .... London Draft .... 2.
.............. ..............
... ...
58 59
Prevention of the Double Taxation of Estates and Successions: Mexico Draft .... .............. ... London Draft .... .............. ... Reciprocal Administrative Assistance for Assessment and Collection of Taxes on come, Property, Estates and Successions: Mexico Draft .... .............. London Draft ..... .............. the In... ...
86 87
3.
100 101
(4324)
FOREWORD
In the report 1 on the work of its tenth session held- in London in March 1946, the Fiscal Committee of the League of Nations expressed itself as follows: " During the last session which the Committee held before the war, in June 1939, it was suggested that a revision should be undertaken of the model bilateral conventions on tax matters which had of Government been prepared in 1928 by the General Meeting 2 Experts on Double Taxation and Fiscal Evasion. " These models had proved of the greatest value in facilitating the negotiation of tax treaties, and the Committee stated in 1935 that: ,' The existence of model draft treaties of this kind has proved of real use in such circumstances in helping to solve many of the technical difficulties which arise in such negotiations. This procedure has the dual merit that, on the one hand, in so far as the model constitutes the basis of bilateral agreements, it creates automatically a uniformity of practice and legislation, while, on the other hand, inasmuch as it may be modified in any bilateral agreement reached, it is sufficiently elastic to be adapted to the different conditions obtaining in different countries or pairs of countries.' 3 " The numerous tax treaties which were concluded during the decade which preceded the war contained, however, various improvements on the 1928 Model Conventions. The Fiscal Committee, for its part, had been able to carry further the work initiated by the General Meeting of Government Experts. Moreover, new trends and new problems had appeared in the fields of international trade and investment. Consequently, it seemed desirable to prepare new model conventions that would reflect the technical progress achieved since 1928 and codify the views and recommendations that had been 4 of its various sessions. expressed by the Fiscal Committee in the course Fiscal Committee-1 League of Nations document C.37.M.37.1946.II.A.: Report on the Work of the Tenth Session of the Committee held in Londonfrom March 20th to March 26th, 1946. 2 League of Nations document C.562.M.178.1928.II: Double Taxation and Fiscal Evasion-Report presented by the General Meeting of Government Experts on Double Taxation and Tax Evasion. Committee3 League of Nations document C.252.M.124.1935.II.A: Fiscal Report to the Council on the Work of the Fifth Session of the Committee. Geneva, June 1935. 4 See, in particular, League of Nations document C.252.M.124.1935.II.A: Fiscal Committee-Report to the Council on the Work of the Fifth Session of the Committee, pages 5 et seq. Revised text of the draft Convention for the allocation of business income between States for the purpose of taxation.
(4325)
FOREWORD
" This work of revision and codification was undertaken by a Sub-Committee which met at The Hague in April 1940, and was continued by two Regional Tax Conferences which were held under the auspices of the Fiscal Committee, in Mexico City in June 1940 and July 1943. " The Committee has now studied the result of this work. 1 It wishes to express its agreement with most of the conclusions which were reached by the experts who met in Mexico City in 1943 and is of the opinion that the Model Conventions prepared by those experts represent a definite improvement on the 1928 Model Conventions. Nevertheless, since the membership of the Mexico City and London meetings differed considerably, it is natural that the participants in the London meeting held, on various points, different views from those which inspired the Model Conventions prepared in Mexico. The general structure of the Model Conventions drafted at the present session is similar to that of the Mexico models. A certain number of changes have been made in the wording, and some articles have been suppressed because they contained provisions already implied in other clauses. On other points, new articles have been inserted to make use of certain innovations contained in conventions, such as those between the United Kingdom and the United States, concluded since the 1943 meeting. Virtually, the only clauses where there is an effective divergence between the views of the 1943 Mexico meeting and those of the 1946 London meeting are those relating to the taxation of interest, dividends, royalties, annuities and pensions. The Committee is aware of the fact that the provisions contained in the 1943 Model Conventions may appear more attractive to some States-in Latin America for instance-than those which it has agreed during its present session. The two texts are therefore given on opposite pages in Annex A. The Model Conventions, as they now stand, can afford guidance to negotiators of tax treaties. The Committee thinks that the work done both in Mexico and in London could be usefully reviewed and developed by a balanced group of tax administrators and experts from both capital-importing and capitalexporting countries and from economically-advanced and lessadvanced countries, when the League work on international tax problems is taken over by the United Nations. A commentary on the new Model Conventions will be published separately in the near future, in accordance with the procedure followed in connection with the 1943 Mexico Model Conventions." The present document is intended to furnish the commentary thus requested by the Fiscal Committee. It has been prepared by the Secretariat and should not be taken as a I League of Nations document C.2.M.2.1945.II.A: Fiscal Committee-Model BilateralConventionsfor the Prevention of InternationalDouble Taxation and Fiscal Evasion. Second Regional Tax Conference, Mexico, D.F., July 1943. Geneva, 1945.
(4326)
FOREWORD
statement in all its parts of the views of the Committee. It is merely intended to provide a working instrument in the study of the texts prepared by the Committee. The Model Conventions which are going to be considered and are reproduced in the Annex refer respectively to the following subject-matters: (a) (b) (c) Prevention of the double taxation of income and property; Prevention of the double taxation of estates and successions; Reciprocal administrative assistance for the assessment and collection of taxes on income, property, estates and successions.
The Model Conventions on the Prevention of Double Taxation are also intended to avoid extra-territorial and discriminatory taxation of foreigners. International double or multiple taxation arises when the taxes of two or more countries overlap in such a manner that persons liable to tax in more than one country bear a higher tax burden than if they were subject to one tax jurisdiction only. The additional burden so incurred must, of course, be due not merely to differences in tax rates for the countries concerned, but to the fact that two or more jurisdictions concurrently impose taxes having the same bases and incidence without regard to the claims of the other tax jurisdictions.
(4827)
COMMENTARY
I. COMMENTARY ON THE MODEL BILATERAL CONVENTION ON THE PREVENTION OF THE DOUBLE TAXATION OF INCOME AND PROPERTY
INTRODUCTION
The cases of international double taxation that may arise in connection with taxes on income and property fall into three classes. The first and most important category includes the cases due to the co-existence of personal and impersonal tax liability. Tax liability is said to be personal when it is based on the personal status of the taxpayer himself---e.g., his nationality, domicile, residence. Impersonal tax liability exists when a country taxes income earned or received within its territory regardless of the personal status of the recipient. Any person who is taxable in one country on account of his personal status and who receives income from another country or holds property therein is exposed to such double taxation. This result can be avoided only if one or both of the jurisdictions concerned limit their fiscal claims or allow a credit against their tax on account of the foreign tax. Under a second, category come the cases of double taxation due to the fact that countries apply different criteria as regards personal tax liability, or define differently the bases of such liability. Taxpayers whose personal allegiance is divided between two or more countries or is doubtful may be subject to double taxation of this kind, as, for instance: nationals of one country having their domicile or residence in another, persons with a domicile or residence in two different countries, persons simultaneously regarded by two tax jurisdictions as domiciled or resident in their respective territories. A third kind of international double taxation of income and property includes the cases where two or more countries/ regard a given kind of income or property as taxable in their / respective territories because they apply different tests of impersonal tax liability. Double taxation of this kind may
(4328)
INCOME AND
PROPERTY
occur, for instance, when the assets or activities that produce a given income are located or carried out in more than one country, or when the income is collected elsewhere than in the country where it is earned or from which it is due. According to the proposals embodied in the Mexico and London Model Conventions, double taxation of income and property is prevented by two sets of clauses which are mutually complementary. In the first place, a definition is given of the conditions under which each kind of income as characterised by the type of property or activity from which it is derived may be taxed in a country according to the criterion of impersonal tax liability. In the second place, it is provided that taxes so paid are to be deducted from, or credited against, the tax due by the taxpayer in the country where he has his residence or " fiscal domicile ". Both in the Mexico and London drafts, Article I of the Model Convention on income and property taxes defines the general object and scope of the instruments. Articles II to XII indicate the conditions under which the various kinds of income, as defined by their economic source, may be taxed in a country when the beneficiary has his residence or " fiscal domicile " in the other country. In the Mexico draft, these articles follow the principle that income may be taxed in a country when it has its source therein: i.e., when it results from property or activities located in that country. This principle is also admitted in the London draft, but it is modified as regards interest, dividends, royalties, annuities and private pensions. In both drafts, Articles XIII and XIV refer to taxation in the country of permanent residence or fiscal domicile. In the London draft, a new Article XV has been inserted to cover taxes on property, capital and wealth. Discriminatory taxation is dealt with in Article XV of the Mexico draft and Article XVI of the London draft, which have the same wording. Protection of taxpayers' rights is the special subject of Article XVI of the Mexico draft and Articles XVII and XVIII of the London draft. Finally, the last two articles of both drafts refer to the implementation and duration of the convention. In both drafts, the Model Convention is followed by a Protocol containing definitions of such phrases as " fiscal
78095 0-62-vol. 4-
22
(4329)
COMMENTARY
domicile ", " permanent establishment " and rules of procedure on such matters as the allocation of business profits. The articles of the Protocol will be considered in the commentary which follows together with the articles of the Model Convention to which they respectively refer. Henceforth, separate reference to the Mexico or London drafts will be made only when they differ. Moreover, when an article is referred to, it should be taken as an article of the Model Convention and when reference is made to an article of the Protocol, it will be explicitly stated. Ad Article I.-OBJECT
AND SCOPE OF THE MODEL CONVENTION
According to Article I, the Convention is to apply to all natural and juridical persons who have their " fiscal domicile " in one of the contracting States and, at the same time, derive income which is taxable in the territory of the other State. Further, Article XV of the London draft extends the application of the Convention to "taxes on property, capital or
increment of wealth ".
The question of defining and determining "fiscal domicile" is dealt with in Article II of the Protocol. This seemed desirable because national tax laws and practices differ in those respects. According to Article II of the Protocol, the phrase " fiscal domicile " signifies, in the case of individuals, the place where a person has his normal residence or permanent home. This definition is that used in the earlier model conventions drafted by the Fiscal Committee. It is, however, added that, in case the taxpayer has several residences, his fiscal domicile will be his main residence, which will be determined in the light of the duration, regularity, frequency of his stays, the place where the family of the taxpayer is usually present, the proximity to the place where the party concerned carries on his occupation. Accordingly, in determining the "fiscal domicile " of an individual, reference would have to be made not only to the mere possession or availability of a dwelling but also the family, social and economic connections binding a person to a given place. The wording of paragraph 4 of Article II of the Protocol differs in the Mexico and London drafts. According to the Mexico formula, the fiscal domicile of a partnership, company
(4330)
INCOME AND
PROPERTY
or other similar entity would be situated in the country under the laws of which it was organised. According to the London formula, the fiscal domicile of such entities would be the country in which their real centre of management is situated. In favour of the Mexico definition, it was stated that it agreed better with American legal systems. For its part, the London definition is that contained in the earlier work of the Fiscal Committee and it appears in most tax treaties concluded between European countries. The Convention is intended to apply to all taxpayers in the contracting States, whether nationals or foreigners, provided they have their " fiscal domicile " in one of the two contracting States. Indeed, since foreigners with their fiscal domicile in a country are generally subject therein to a general tax liability on their total income from domestic and foreign sources, it is legitimate that they should enjoy the double-taxation relief provided by the Convention. Nationals of the contracting States who have their " fiscal domicile " in a third State do not come under the provisions of the Convention, since most countries do not tax their nationals having their fiscal domicile abroad, except, of course, on the income they derive from their country. The status of such persons would have to be considered by tax treaty negotiators when one or both of the States concerned bases personal liability to income tax on nationality as well as on "fiscal domicile " The Convention is intended to apply to all ordinary and special taxes on individual and corporate income, whatever may be their denomination and method of assessment. In the London draft, its provisions extend also to taxes on property, capital and wealth to which a reference is made in Article XV of that draft. The structure of Article I is such as to enable tax negotiators to indicate, through an enumeration, the taxes to which the Convention should apply. Such an enumeration might include, in addition to national taxes levied by the central or federal Government, taxes levied by political subdivisions and local authorities such as the States of a federation, provinces and municipalities. Paragraph 2 of Article I of the Convention contains a provision which is intended to assure the automatic adaptation
(4331)
COMMENTARY
of the Convention to changes in the taxes of the contracting States. It does so by providing for the extension of the provisions of the Convention to taxes or increases of taxes introduced after the signature of the instrument, provided such new levies rest upon substantially the same bases as the taxes enumerated in the convention. It is moreover specified in Article XIX of the London draft that " ... in the event of substantial changes of tax laws of either of the contracting States, the competent authorities of the two contracting States shall confer together and take the measures required in accordance with the spirit of the Convention ". Ad Article
I.-INCOME FROM REAL PROPERTY
In both the Mexico and London versions, the Model Convention follows the generally accepted principle that income from real property is taxable in the country where the real property is situated. In this context, income from real property means the income that results directly from the ownership or possession of real property, as such income and property are defined in the country where the latter is situated, according to Article III of the Protocol. The income in question is mainly represented by the rent received from a tenant and also the rental value of the property when it is occupied by the owner or possessor personally, in case this rental value is subject to income tax or to a substitute form of taxation under the laws of the country concerned. It may be noted that "royalties from immovable property or in respect of the operation of a mine, a quarry or other natural resource " are mentioned separately in Article X. That article, however, follows the same principle as is contained in Article II, and states that such royalties are taxable in the country where the property in respect of which they are due is situated. Profits resulting from the sale and exchange of real property are governed by Article XII, but this article applies the same principle as in Article II and provides for the taxation of such profits in the country where the property concerned is situated. Income derived from the exploitation of lands, buildings, and sub-soil as a part of a business, including mining, forestry and agriculture, does not come within the purview of Article II, but of Article IV, concerning business income.
(4332)
INCOME AND PROPERTY
Ad Article III.-INCOME
FROM MORTGAGES
The effect of Article III, paragraph 1, is to make the rule governing the income from real property apply also to taxation of income from mortgages on such property. This rule would, however, not apply to those so-called mortgage bonds which are not guaranteed by any specific real property and which are issued by credit institutions in order to finance the loans they grant on mortgages drawn up in their names. Such bonds would come rather under the provisions of Article IX, which applies to income from movable capital in general, in the Mexico draft, and to interest on debts in the London draft. By analogy with the above-mentioned rule on income from mortgages on real property, the second paragraph of Article III provides that income from mortgages on sea and air vessels is taxable in the country of registry, since such vessels are generally regarded as being legally situated in that country. Ad Article IV.-INCOME
FROM BUSINESS
Both in the London and Mexico drafts, " income from any industrial, commercial or agricultural enterprise and from any other gainful occupation " is governed by Article IV of the Model Convention and Articles IV to VIII of the Protocol. Such income is mainly represented by business profits and this phrase shall be used for brevity's sake. The first question which arises in international tax practice concerning business profits is the following: What are the facts which render an enterprise liable to taxation on its profits in a foreign country ? This question is dealt with in paragraphs 1 and 2 of Article IV in both drafts. According to the Mexico version, an enterprise will be liable to tax on its profits in a foreign country if it has carried out its business or activities in that country provided such activities did not merely take the form of isolated or occasional transactions. On the other hand, the London draft requires that an enterprise should have a " permanent establishment " in a country to become subject to the income-tax laws of that country. It was argued in favour of the criterion contained in the Mexico draft that, if an enterprise were to be taxable on its profits in a foreign country only if it had a permanent establish-
(4333)
COMMENTARY
ment in that country, some countries would lose revenue. Moreover, certain forms of fiscal evasion might be encouraged. Indeed, some enterprises might seek to avoid taxation in a country by carrying out their business in that country without maintaining a permanent establishment therein or by concealing the existence of such an establishment. However, when the Fiscal Committee considered in London the Mexico draft, it referred to the fact that the criterion of the " permanent establishment " more or less as defined by the Committee in its earlier work 1, was contained in nearly all double-taxation treaties relating to business income. On that occasion, it was stated that the use of this criterion was not in itself apt to facilitate fiscal evasion since, in virtue of Article XIII of the Model Tax Convention, the total tax liability of an enterprise remains, as a rule, the same, no matter in what proportion its income is divided between its own country and the foreign country where it may do business. Further, it was recalled that the detection of enterprises concealing their business from the tax authorities was essentially a matter for internal tax administration. Finally, past experience was said to show that it is extremely difficult to tax foreign enterprises efficiently and equitably when they do not possess a permanent establishment in a country. The phrase " permanent establishment " is defined in Article V, paragraph 1, of the Protocol. Two conditions are required in order for an enterprise to be considered as possessing a " permanent establishment " in a country: it must have some "fixed place " of business in the country; and that place of business must have a productive character-i.e., contribute to business earnings. There are establishments which fulfil only the first condition. These should therefore not give rise to income-tax liability in the country where they are situated. This class includes establishments which do not directly contribute to business earnings, such as research laboratories, experimental plants, information bureaux, storehouses, purchasing offices, advertising displays and showrooms where no goods are sold. To
I See, in particular, League of Nations document C.252.M.124.1935.II.A: Fiscal Committee-Report to the Council on the Work of the Fifth Session of the Committee. Geneva, June 1935.
(4334)
INCOME AND PROPERTY
apply income tax on an assumed profit in the case of such establishments would easily lead to arbitrary or extra-territorial taxation. The case of purchasing offices deserves special mention and various tax treaties contain specific provisions in their connection. From a general point of view, it is sometimes argued that, when goods are bought in a country, the profits should be divided between the two functions of purchase and sale just as they are divided between manufacture and sale. It is added that to exempt purchasing establishments of foreign enterprises would constitute a discrimination against domestic exporters. On the other hand, it has been pointed out that the act of purchasing in itself yields no profits. Indeed, unlike producing, converting, processing, manufacturing, sorting, preserving, assembling, packing and transporting, a purchase adds no value to the thing bought. Consequently, it seems that the taxation of a so-called purchasing profit by the country where the purchasing establishment is situated, except perhaps when income is attributed to a purchasing establishment on a commission basis-i.e., as if that establishment were an independent agent working for a foreign firmwould give an extra-territorial scope to its income tax. Though the Mexico and London drafts do not contain any explicit rule about the income-tax treatment of such establishments, it may be mentioned that an earlier unpublished draft stipulated that the " mere purchase of goods by an establishment in one country for the supply of selling or processing establishments in the other country " could not be regarded as a basis for income-tax liability in the country where the purchase was made. It seemed understood that this rule would apply only if the purchasing establishment which the enterprise concerned maintained in that country confined its activities to purchasing only, and rendered no other services such as sorting, grading, or packing goods to the enterprise to which it belonged. The Mexico and London Model Conventions have taken over from the earlier work of the Fiscal Committee the provisions which allow a distinction to be made between dealings through an autonomous agent and dealings through a permanent establishment or branch. According to Article V,
(4335)
COMMENTARY
paragraph 3, of the Protocol, a foreign enterprise is not, in principle, liable to income tax in a country if its operations in that country are exclusively carried out through a broker, commission agent, or other agent of a genuinely independent status in that country. An agent, however, will not be considered as independent, according to Article V, paragraph 4, of the Protocol, and the enterprise for which he acts will be liable to income tax in the country where he is established in cases such as the following: the agent habitually acts in the name of the enterprise concerned as a duly accredited agent and enters into contracts on its behalf; the agent is a sa]aried employee of the enterprise and habitually transacts business on its account; the agent habitually holds, for the purpose of sale, a stock of goods that belong to the enterprise. Article V, paragraph 5, of the Protocol adds that, when the office and business expenses of the agent-in particular, the rent of the premises used by him when working for the enterprise concerned-are paid by that enterprise, this fact will be regarded as proof of a contract of employment, indicating that the enterprise possesses an establishment in the country. According to the above-mentioned provisions, there seem to be consequently four distinct criteria according to which a foreign enterprise may be deemed to have an establishment in the country where it deals through an agent: (a) (b) (c) (d) Power of the local agent to bind the enterprise; Existence of a contract of employment with a local agent; Maintenance in the country of a stock of goods under the control of an agent for sales in that country; Payment of the rent of the premises used by the agent and of his office expenses.
Any of these four conditions is sufficient to render an enterprise liable to income tax in its own name in the country where an agent operates, provided that the condition which is fulfilled corresponds to a permanent state of things or an habitual practice. On the other hand, paragraphs 6 and 7 of Article V of the Protocol stipulate that foreign enterprises doing business in a
(4336)
INCOME AND
PROPERTY
country through brokers and commissioned agents of a genuinely independent status, or through commercial travellers visiting customers or suppliers in a country, should not be liable to income tax in that country. Paragraph 8 of Article V of the Protocol refers to subsidiary companies. It states that a subsidiary cannot be regarded as a permanent establishment of the parent enterprise. This provision has two main effects. In the first place, the country where the subsidiary is situated is not entitled to tax the parent company except, of course, on the dividends which the parent company may receive from its subsidiary, in accordance with the provisions of Article IX of the Mexico draft and Article VIII, paragraph 2, of the London Model Convention, to which reference is made on page 25. Secondly, in taxing the parent company, the authorities of the country in which such company is situated may not take into account the actual profits made by the subsidiary company in the other country, but only the dividends and other income paid by the subsidiary to the parent company. These rules follow the principle that a subsidiary constitutes a distinct legal entity and should therefore be taxed separately. At the same time, Article VII of the Protocol indicates the criteria according to which the correctness of the mutual relations between parent and subsidiary companies can be checked so as to avoid abuses resulting in the diversion of profits or losses from one company to the other. While paragraphs 1 and 2 of Article IV of the Model Convention and the complementary provisions in Article V of the Protocol, which have been considered above, define the conditions under which an enterprise may be subject to income tax in a foreign country, paragraphs 3 and 4 of Article IV of the Model Convention and Article VI of the Protocol refer to the method of determining the share of its total profits on which an enterprise may be taxed in a foreign country when it possesses an establishment in that country. The main principle regarding allocation of profits is that the profits on which a branch or permanent establishment of a foreign enterprise may be taxed in the country where such establishment is situated cannot exceed the earnings that are
2
(4337)
COMMENTARY
the direct result of the activities of the establishment concerned or the yield of the assets pertaining to it. Concerning the method of application of this principle, section A of paragraph 1 of Article VI of the Protocol states that "there shall be attributed to each permanent establishment the net business income which it might be expected to derive if it were an independent enterprise engaged in the same or similar activities, under the same or similar conditions ". This method of determining or allocating the profits attributable to a permanent establishment is known as the method of separate accounting. Its intended result is that each establishment or branch is taxed as if it constituted a distinct independent enterprise and the profits of the establishment are assessed independently of the results of the business done elsewhere by the enterprise to which it belongs. This method implies as a rule that records and accounts are kept for each establishment on the same basis as in the case of an independent enterprise engaged under similar conditions in the same line of business. The purpose of these accounts is to express dealings made with other establishments of the enterprise as if those dealings were with other firms unconnected with the establishment and were conducted in accordance with the market conditions relevant to such dealings. The use of the method of separate accounting as the fundamental procedure for the determination of the profits attributable to each country in which an enterprise has an establishment is intended to serve four purposes: first, by treating a branch establishment not as part of an enterprise but as a self-contained unit and thus generally avoiding reference to results or data outside the country concerned, it gives the taxation of branch establishments a strictly territorial scope not extending beyond the boundaries of the countries concerned; secondly, the method helps to enforce the principle of equality of treatment of foreigners by placing, in principle, branches of foreign enterprises on the same footing as similar establishments of domestic enterprises as regards the computation of receipts and expenses, which, once they have been allocated or apportioned by separate accounting, are to. be treated in accordance with the tax laws of the country to which they have been attributed; thirdly, the use of separate
(4338)
INCOME AND
PROPERTY
accounting as a basis for the assessment of income tax conforms to the usual practice among concerns engaged in international business of keeping separate accounts for each of their establishments; finally, separate accounting serves the revenue interests of the country concerned, since, when it is properly applied and supervised, it prevents the concealment of profits or their diversion from one country to another. In this connection, Article VI, paragraph 1., section B, of the Protocol specifically foresees the possibility of a rectification by the fiscal authorities concerned of the " accounts produced, especially in order to correct errors or omissions, or to re-establish the prices or remunerations entered in the books at the value which would prevail between independent persons dealing at arm's length ". A rectification made in the accounts of an establishment situated in one country should not, however, result in double taxation of the enterprise concerned. A rectification made in one country may therefore call for a corresponding adjustment in the accounts of the establishment in the other country with which the dealings to which the rectification referred have been effected. This matter is dealt with in the second sentence of the above-mentioned section B of paragraph 1 of Article VI of the Protocol. The assessment of the profits of a permanent establishment according to the method of separate accounting implies that, when required, the necessary data are made 'available by the enterprise concerned to the tax authorities, and that the records of the establishment conform to certain standards of completeness and accuracy. When such conditions are not fulfilled, the assessment must be made on a presumptive basis. It is to this question that Article VI, paragraph 1, section C, of the Protocol refers. There it is provided that, if the establishment does not produce an accounting, or the accounting produced is deficient and the deficiencies cannot be remedied, or if the tax authorities and the taxpayer agree, the profits of the establishment involved may be determined by applying a certain percentage to its gross receipts. The object of the procedure remains, however, to treat the establishment of the foreign enterprise according to the same standards as a similar domestic concern engaged in the same line of business. It is therefore suggested that the percentage should be fixed by comparison with the
(4339)
COMMENTARY
conditions and the results of similar enterprises operating in the country. Moreover, it is specified that, when the activities of a permanent establishment resemble those of a commission agent or broker, the income may be determined on the basis of the customary commission received for such services. It may be noted that this " commission basis " may, when appropriate, be used by establishments keeping regular accounts and entitled to be assessed according to the method of separate accounting. Section D of paragraph 1 of Article VI of the Protocol deals with the cases where neither the method of separate accounting nor the method of a percentage of gross receipts Such a situation arises when a comparison is applicable. between the nature of the activities and the conditions of operation of the establishment of the foreign enterprise cannot be made with those of full-fledged domestic enterprises. It is provided that, in this case, the method of fractional apportionment may be applied. Under this method, the earnings of each establishment are computed as a proportion of the entire profits of the enterprise to which the establishment belongs, on the basis of the general balance-sheet and profit-and-loss account Such fractional apportionment may be of the enterprise. unlimited or limited. In the first case, it takes as its startingpoint the total income derived by the enterprise as a whole from all sources. In the second case, reference is made only to that part of the total profits of the enterprise which is derived from transactions in which a part has been taken by the establishment whose share in the total profits is to be determined. It is to this second form of fractional apportionment that recourse may be had according to the Protocol. The share of the total profits from joint transactions that is attributable to the establishment concerned is to be determined by dividing these profits according to the ratio that exists between certain factors pertaining to the establishment concerned and the total of the same factors for the entire enterprise. Examples of the factors that may enter into the apportionment formulm are plant and equipment, circulating capital, payrolls, cost of operation, physical output, turnover. It is understood that the selection and the weighting of the different factors that it may appear appropriate to use will
(4340)
INCOME AND
PROPERTY
differ according to the type of enterprise. It is, however, provided that the formule of apportionment should be " so selected as to ensure results approaching, as closely as possible, those which would be reflected by a separate accounting ". Though the method of fractional apportionment is mentioned by the Model Convention only in the third place, after the methods of separate accounting and percentage of turnover, this does not mean that the partial use of fractional apportionment is excluded when, as is generally desirable, branch establishments are taxed according to the method of separate accounting. There are, indeed, in most enterprises with two or more establishments certain items of expenses that must necessarily be apportioned in order to achieve the object of separate accounting, which is to place branches of foreign enterprises on the same footing as domestic concerns. An application of this idea is found in paragraph 2 of Article VI. of the Protocol, which provides that, in the determination of the net income of a permanent establishment according to separate accounting, a share of the general expenses of the head office of the enterprise may be charged to the establishment. The object of paragraph 3 of Article VI of the Protocol is to state explicitly certain corollaries of the method of separate accounting as applied to banking and financial enterprises. Thus it says that the interest on the permanent capital allotted to a branch cannot be deducted from the income of that branch in the country where it is situated even if the capital takes the form of an advance, loan, overdraft or deposit. On the other hand, when such items do not represent the permanent capital of the establishment concerned, the corresponding interest may be deducted from the gross income of the debtor establishment and treated as a receipt of the creditor establishment. In view of their special conditions of operation, insurance companies represent one of the forms of enterprise which call for particular rules in the allocation of their profits between their various establishments. It has seemed desirable, therefore, to specify in Article VI, paragraph 4, of the Protocol that, where required, the taxable income of the branch of an
(4341)
COMMENTARY
insurance company may be determined either by the method of percentage on gross receipts or by fractional apportionment. In the first case, coefficients established by reference to corresponding national enterprises in the country concerned would be applied to the gross premiums resulting from the activity of the branch concerned. In the second case, the income of the branch in question would be determined by applying, either to the total net income of the concern as a whole, or merely to that part of the total operating and investment income of the enterprise as a whole which corresponds to the kind of activities in which the branch in question is engaged, the ratio existing between the gross premiums received by the establishment and the total gross premiums received by the enterprise in connection with the same kind of business. Ad Article
V.
-
INCOME
FROM
INTERNATIONAL
NAVIGATION
The effect of Article V is to make income from international maritime and air transport taxable only in the country where the vessel is registered provided the owner or operator has his fiscal domicile in that country. The difference in wording of that article in the Mexico and London drafts is due to the fact that an attempt has been made to state this rule more precisely in the latter draft. The rule in question is contained in numerous special and general tax treaties. It is intended to facilitate the operation of international transport enterprises. It also avoids the numerous difficulties which experience has shown to be involved in the taxation of profits from international navigation outside the home-country of the operating enterprise. For its part, inland water transport is not affected by Article V and remains, like rail and road transport, subject to the provisions of Article IV, which applies to business income in general. The provisions of that article remain applicable also to the income that a maritime or air transport enterprise might derive from services other than actual maritime or air transport-e.g., warehousing charges, insurance commissions and travel agency fees.
(4342)
INCOME AND PROPERTY
Ad Article
VI.-REMUNERATION
FROM PERSONAL SERVICES
AND PRIVATE EMPLOYMENT
Article VI of the London draft reproduces Article VII of the Mexico draft 1 and it is intended to cover the earnings from all private employments and professions. It does not apply, however, to private pensions, which are dealt with separately in Article XI, or to other forms of earned income which are mentioned in other articles such as Articles IV, V, VI and VIII. The first paragraph of Article VI lays down the general principle that remuneration for labour and personal services, as understood in this context, is taxable only in the country where the services are rendered. According to paragraphs 2 and 3 of that article, however, a person having his fiscal domicile in one of the contracting States will be considered as having rendered services in the other contracting State only if the period or periods during which he has stayed in the other country exceed 183 days. This modification of the rule of taxing the remuneration for personal services in the country where the corresponding services are rendered is intended to facilitate the operations of enterprises engaged in international trade and the movement of workers across national borders. Paragraphs 4 and 5 deal specifically with independent professions and embody rules similar to those of paragraphs 2 and 3 of Article IV relating to the taxation of business income according to the criterion of permanent establishment. According to paragraph 4, the country where the earnings from professional services are to be taxed is determined not by the actual place where the services are rendered but by the place where the taxpayer concerned has a permanent establishment in which or from which he renders his services. Paragraph 5 relates to the person who has offices in both contracting States. In this case, the taxpayer will be taxable in each State only I The change in numeration is due to the elimination of the article of the Mexico draft relative to " directors' percentages, attendance fees and other special remuneration paid to directors, managers and auditors of companies ". In so far as the avoidance of international double taxation was concerned, it was stated that these items did not appear to call for special rules and could be conveniently covered by the general provisions of the article relative to the remuneration from personal services and private employment.
(4343)
COMMENTARY
to the extent that the income he receives results from services rendered in or from the office situated in that State. Ad Article VII. CIVIL SERVICE SALARIES AND PENSIONS
The provisions contained in Article VI of the Mexico draft concerning civil service salaries and pensions have been reworded in Article VII of the London draft so as to be at once more comprehensive and precise. The effect of the article as it now stands is to exempt from income tax in a country remuneration from personal services rendered in that country when the following conditions are fulfilled: (a) The paying authority must be the Government, a political subdivision or a governmental agency of one of the contracting States; The payee must be a national of the above-mentioned State; The payment must be in respect of the performance of diplomatic, consular or other governmental functions; Such functions must fall within the normal field of governmental duties and must not be connected with the carrying-on of a trade or a business on behalf of the paying authority.
(b) (c)
(d)
Contracting States may find it convenient to specify the officials or functions that are to be covered by this rule, which is not intended to restrict any tax immunity or privilege granted to diplomatic or consular agents under international usage or treaties. Ad Article
VIII.-DIVIDENDS
In the Mexico draft, dividends and interest were covered together under the phrase " income from movable capital " in Article IX of the Convention, which was completed by a definition in Article IX of the Protocol. In the London draft, Articles VIII and IX, which deal separately with dividends and interest, have taken the place
(4344)
INCOME AND PROPERTY
of Article IX of the Mexico draft. According to this article, dividends were to be taxed in the country where the capital from which they were derived was invested-i.e., put into productive use. The result was that in most cases dividends would have been taxable in the same country as the business profits from which they were paid out. According to Article VIII, paragraph 1, of the London draft, dividends are taxable in the country where the distributing entity has its fiscal domicile or, according to the provisions of Article II, paragraph 4, of the Protocol, its " real centre of management ". Therefore, in the case of a company having a branch establishment in a foreign country, the profits earned by the company will be taxable, in whole or in part, in that country according to the provisions of Article IV, which applies to business profits as such. But the dividends, or the profits the company itself distributes, will be taxable exclusively in the country of its fiscal domicile, subject, of course, to the provisions of Article XIII which apply to the taxation of the income as a whole of the person receiving the dividends. The principle laid down in paragraph 1 of the present article is reasserted in paragraph 3 of that article, which refers also to " undistributed profits ". This reference is justified by the fact that, when distribution of dividends falls below a certain limit, the legislation of certain countries provides for a sp.cial tax on " undistributed profits ". It remains permissible, however, for countries which tax the earnings made by companies and similar entities through profits or corporation taxes, to apply such taxes under the rules of Articles IV and XIII. Paragraph 2 of the present article is intended to avoid the special cases of double or multiple taxation which may occur when the income distributed by a company is derived from dividends received from subsidiaries or related companies, etc. It was thought that an equitable and convenient manner of avoiding such double taxation was to exempt inter-company dividend distributions when the recipient company had a dominant participation in the management or capital of the paying company, so that the dividends tax is collected once only on the final distribution of dividends.
78095 0-62-voi. 4-
28
(4345)
COMMENTARY
Ad Article
IX.-INTEREST ON DEBTS
According to the provisions of the London draft, interest on all kinds of indebtedness is to be taxed, in principle, exclusively in the State where the creditor has his fiscal domicile. This is the opposite of the rule contained in Article IX of the Mexico draft. Indeed, it was considered that, especially as regards interest, the country from which capital originated had a prior right to tax such interest wherever the capital was invested. Nevertheless, it was conceded that the State of the debtor could tax such interest in the same way as if it were paid to nationals or residents by means of deduction or withholding at source. At the same time, it was thought that this withholding tax should not exceed a certain percentage to be fixed by agreement. Both as regards dividends and interest, it should be noted that the treatment of income from movable capital is one of the most complex questions that arise in connection with the prevention of international double taxation. In this matter, there is an opposition of interests between capital-exporting countries and capital-importing countries. The revenue interests of the former are best served by taxation of income from capital at the home of the creditor or beneficiary; those of the latter countries by taxation at the home of the debtor or, rather, the place where the investment is used. The practical solution of the problem depends, in most cases, on the extent to which each of the contracting States is willing to limit its right of taxation in order to facilitate international investment. In this connection, it is advisable that regard should be had not only to the incidence of a tax on the income from imported capital, and the immediate effects of such measures on public revenue, but also to the consequences, economic and fiscal, entailed by the economic development, trade and increase of income which in both countries may follow the capital movements in question. Ad Article
X.-ROYALTIES AND FROM REAL ESTATE, PATENTS
COPYRIGHTS
In the same way as other income from real property, which is governed by Article II of the Model Convention, royalties
(4346)
INCOME AND
PROPERTY
received by a person, as owner or possessor of real property in consideration of the right to use or exploit natural deposits and resources situated on the surface or in the subsoil of his property, such as mines, quarries, wells, springs, waterfalls, forests, are taxable in the country where the property is situated. In so far as a distinction between income governed by Article II and Article X respectively is required, for instance, in connection with computation of taxable income or application of tax rates, reference should be made to the provisions of Article III of the Protocol. The second paragraph of Article X refers to royalties from scientific, industrial and commercial property, such as patents, secret processes and formulw, trade-marks and trade-names. The Mexico Convention, applying the principle of immediate economic origin, placed them under a single rule according to which the royalties are taxable in the country where the patent or other similar right to which they correspond is exploited. As a result, the returns of patents and similar rights always remained taxable in the country where the rights were used, whether the proprietor exploited them himself or through a lessee. Following a similar line of reasoning to that which inspired the new wording of Articles VIII and IX of the London draft, royalties from patents and similar rights are made taxable in the new version of paragraph 2 of the article under consideration exclusively in the country to which the grantor belongs. A restriction to that principle is, however, made by the new paragraph 3 in case the concession has taken place between inter-related enterprises. In that case, the royalties become taxable in the country where the rights are exploited subject to deduction of " all expenses and charges including depreciation relative to such rights ". The fourth paragraph of Article X in the London draft is identical with the third paragraph of the Mexico version. Copyright royalties from artistic and scientific productions, wherever earned, remain exclusively taxable in the country where the recipient has his fiscal domicile or permanent establishment. The specific purpose of this rule is to facilitate cultural exchanges.
(4347)
COMMENTARY
Ad Article
XI.-PRIVATE
PENSIONS
AND
LIFE ANNUITIES
The Mexico draft made private pensions and life annuities taxable according to the principle of taxation by origin in the country where the debtor has his fiscal domicile. This was in line with the rule adopted in Article IX of that draft as regards income from movable capital. In the London draft, private pensions and life annuities are made taxable in the country of fiscal domicile of the creditor, as in the case of interest from debts. In both drafts, Article X of the Protocol contains a special provision relating to the taxation of allowances of students and apprentices from one country who are staying in the other for their studies or training. These remittances are made exempt from taxation in the country where the beneficiaries are studying.
Ad Article XII.-CAPITAL GAINS
The first paragraph of Article XII in the London draft reproduces the provisions already contained in the Mexico draft. It stipulates that gains derived from the sale or exchange of real property are taxable only in the State in which the property is situated. As in the case of taxation of income from real property covered by Article II of the Model Convention, the clauses of Articles II and III of the Protocol would apply as regards matters of definition. The second paragraph of Article XII in its London wording extends the provisions of Articles IV and V as regards the taxation of the gains derived from the sale or exchange of assets other than real property appertaining to a business enterprise. In other words, such gains would be taxable in the country where the income of the property which has been disposed of would itself be taxable. The third paragraph states that gains derived from any other capital assets not covered in the preceding paragraphs should be taxed in the country of the fiscal domicile of the recipient. It is, of course, understood that the clauses referred to above apply only to the extent that the internal tax legislation of a country provides for the taxation of such capital gains.
(4348)
INCOME AND
PROPERTY
Ad
Article XIII.-TAXATION
RIGHTS
OF
THE
COUNTRY
OF " FISCAL DOMICILE "
Except for a slight change in wording which affects only the last section of the English text, the provisions of Article XIII are the same in the London and Mexico drafts. This article reserves to the country where the taxpayer has his fiscal domicile the right to tax the taxpayer's entire income even when it is taxable, in part or as a whole, in the other country. From the tax due in the country of " fiscal domicile " a deduction has to be made, however, on account of the taxes )aid in the other country in accordance with the preceding articles of the Model Convention. The simplest manner of determining this deduction would be to take the actual amount of tax paid in the other country. Regard is to be had, however, not only to the interests of the taxpayer but also to those of the State in which he has his fiscal domicile. Article XIII admits, therefore, that, from the tax due in the country of " fiscal domicile ", the taxes due in the other country should be deducted only to the extent that they do not exceed that proportion of the tax effectively due in the country of domicile which corresponds to the proportion of the income taxable in the other country in relation to the entire income of the taxpayer. It may be noted that the above-mentioned limit of deduction will operate in the country of " fiscal domicile " only when the tax schedule in the other country is so high that the effective percentage of tax in respect of the part of income taxable in its territory exceeds the tax percentage which in the country of " fiscal domicile " corresponds to the total income of the taxpayer. In bilateral treaties, it may be found advantageous to combine with the clauses of Article XIII provisions fixing or limiting the rate of tax applicable to the income derived from a country by a taxpayer having his " fiscal domicile " in the other country. Such fixed or ceiling tax rates might, in particular, be contemplated in connection with income from capital and this is provided for in paragraph 3 of Article IX of the London draft. A special question arises in connection with dividends paid to a person by a company in the country other than that
(4349)
COMMENTARY
in which he has his " fiscal domicile ". Depending on the system followed by that country in respect of the taxation of corporate income, the tax borne by such dividends may take different forms-e.g., the form of a tax paid by the distributing company in its own name or that of a tax on corporate earnings. Therefore, to enable the taxpayer in receipt of dividends so taxed in the country of their origin to obtain, in connection with such dividends, the deduction provided by Article XIII, it may be desirable to stipulate that taxes which a company is required to withhold from dividends it distributes or to pay on such dividends shall be considered as having been paid by the shareholder for the purpose of this article. Taxable years and tax collection dates differ from country to country. This should be considered when determining, in tax treaties, the taxes which may be deducted or offset against one another according to Article XIII. Ad Article XIV.-FIsCAL
DOMICILE IN
Two
COUNTRIES
Article XIV 1 relates to the case of taxpayers who, as the result of the construction given to the articles of the Convention by the national tax administration or of the internal legislation of the contracting parties, might be regarded as having a " fiscal domicile " in each of the two countries concerned. It also applies to taxpayers who move from one country to another in the course of a taxable year. In its present wording, the article implies that income tax is collected in the year following that in which the income was earned. It provides that the tax pertaining to the country of " fiscal domicile " under Article XIII shall be divided between the contracting States in proportion to the period of stay during the taxable year, or according to some other proportion to be agreed upon by the competent authorities. In connection with this article, there arises the same question as was mentioned in the final paragraph of the commentary to Article XIII concerning differences in taxable years.
1 Due to an editorial error, the order of the present article and the following article has been inverted in the original text of the London draft contained in the Fiscal Committee's Report on the Work of the Tenth Session of the Committee. This error is rectified in the text reproduced in the Annex.
(4350)
INCOME AND PROPERTY
Ad Article XV.-TAXES ON PROPERTY AND WEALTH

This article, which was not included in the Mexico version, was drafted at the London meeting in order to take care of the cases of double taxation which may arise in connection with the taxes on property, capital and increment of wealth which a number of European countries apply as a complement to income taxes or have introduced as special war or post-war measures. The principle laid down in this article is that property, capital and increment of wealth may be taxed in a country only if that country would have the right to tax, according to the preceding provisions of the Model Convention, the income originating from the assets in question. Ad Article XVI.-EQUALITY
OF TREATMENT
The purpose of Article XVI is to prevent discriminatory treatment in one country of taxpayers having their " fiscal domicile " in the other country whether or not they are nationals of that country. It specifically debars either of the contracting States from subjecting taxpayers having their fiscal domicile in the other State to higher or other taxes than those applicable in respect of the same income to taxpayers who have their fiscal domicile in the former State or are nationals of that State. There is no doubt that these provisions are also intended to apply, mutatis mutandis, to the taxes on property, capital or increment of wealth mentioned in Article XV, though this is not specifically stated in the Model Convention.
Ad Article XVII.-TAXPAYERS' RIGHTs OF APPEAL

The special procedures of appeal provided for in Article XVII are intended not to replace but to supplement the procedures of tax appeal established by the tax legislation of the contracting States. The taxpayer who, in spite of the provisions of the Convention, has suffered double taxation has the option of filing his appeal with the tax authorities of the country of which he is a national or of the country where he has his fiscal domicile; for it seems legitimate that he should be able to obtain the protection in tax matters of one or the other
(4351)
COMMENTARY
State according to the circumstances. It should, moreover, be noted that the procedure contemplated is not a judicial procedure, but a direct consultation between the tax administrations involved.
Ad Article XVIII.-GENERAL
PRESERVATION OF TAXPAYERS'
RIGHTS
It may happen that the internal legislation of a country party to a double-taxation treaty grants certain benefits to taxpayers in the form of exemptions, deductions, credits, allowances, rights of appeal, etc., which are more advantageous or more convenient to the parties concerned than the provisions of the Model Convention. It is the object of the new Article XVIII of the London draft to specify that such benefits are not impaired by the provisions of the Convention. Ad Article
XIX.-RELATIONS ADMINISTRATIONS BETWEEN TAX
The object of Article XIX of the London draft, which, except for an additional clause, follows the wording of Article XVII of the Mexico draft, is to entitle the tax administrations of the contracting States to correspond directly with one another and to co-operate in the application of the Convention, without necessarily having to resort to diplomatic channels. It also enables them to agree on administrative provisions which, while not expressly provided for in the Convention, are in accordance with its spirit and may be required to give it full effect. The addition to which reference has just been made is intended to permit tax administrations to adapt the provisions of the Convention in the event of " substantial changes in the tax laws " without having resort to the formal conclusion of a new convention. Ad Article
XX.-RATIFICATION AND DURATION
OF THE CONVENTION
The final article of the Convention deals with the procedure of ratification. It refers also to the entry into force of the
(4352)
INCOME AND PROPERTY
Convention and to its duration. In this connection, an initial period of three years is suggested, as such a period seems to be generally desirable in order to give sufficient trial to the system of preventing double taxation which is embodied in the Model Convention. A question which tax negotiators may have to consider in fixing the dates of entry into force of the Convention is that of the possible differences in fiscal years. In many conventions that have been concluded in the past, their date of entry into force has been fixed independently of the actual date of ratification. Quite a few of them have been made retroactively applicable to tax claims relative to previous tax years that are outstanding at the time of the signature of the convention and which would not have arisen if the facts motivating such claims had taken place after the entry into force of the convention.
(4353)
COMMENTARY
II.
COMMENTARY ON THE MODEL BILATERAL CONVENTION FOR THE PREVENTION OF THE DOUBLE TAXATION OF ESTATES AND SUCCESSIONS
GENERAL STRUCTURE
OF THE MODEL CONVENTION
There is an analogy between the forms of double taxation that may occur through duties on estates and successions and through taxes on income and property. As in the case of income tax, liability to estate and succession duties may indeed have a personal or an impersonal basis. In other words, an estate may be held liable to duty in a country on account of the nationality or domicile of the deceased and, at the same time, be taxed in another country on account of the situation of property belonging to the estate. Double taxation of an estate may also occur because it is taxable in one country on account of the nationality of the deceased and in another country on account of his domicile. In this connection, there may be, furthermore, differences as to the determination of the nationality or the domicile of the deceased. An estate will also be exposed to double taxation when two or more countries regard a given property as subject to duty in their respective territories because they employ different criteria regarding impersonal tax liability. One country may, for instance, take into account the physical location of the property, while the other refers to the legal situs of such property, and there may be divergencies as to the determination of such situs. Consequently, there is a noticeable parallelism between the Model Convention on estates and succession duties and the Model Convention concerning income and property taxes, both in the Mexico and London drafts.
(4354)
ESTATES
AND
SUCCESSIONS
The field of application of the Model Convention on estates and successions is defined in Article I. Articles II to IV refer to the taxation of estates according to situs. Article II deals especially with real property and its appurtenances, Article III with personal property related to a business enterprise and Article IV with other kinds of personal property. Article V regulates the allocation of debts between the two countries concerned in order to determine the net value of the estate taxable in each country. Taxation in the country of domicile of the deceased is governed by Article VI, which, in a manner analogous to Article XIII of the Model Convention on income and property taxes, provides that the country of domicile of a deceased person, while entitled to tax the entire value of the estate involved no matter where the property is situated, should grant a deduction from its taxes on account of the taxes paid in the country where a part of the estate is taxable in accordance with any of the provisions of Articles II to V. In the London draft, however, real property is excluded from taxation in the country of domicile. Article VII refers to the continuous co-operation which should be maintained between tax administrations for the purposes of the application of the Convention, and Article VIII refers to the entry into force, duration and termination of the Convention. The Convention is followed by a Protocol containing rules intended to facilitate the settlement of questions arising in connection with the determination of domicile of a deceased person and the taxable situs of the various kinds of property. In this respect the London draft is more complete than the Mexico draft and contains specific indications as to the determination of the situs of personal property for the purposes of estate duties. According to the method followed in the commentary on the Model Bilateral Convention for the Prevention of Double Taxation of Income and Property, the provisions of the Protocol to the present Model Convention will be dealt with in conjunction with the articles of the main Convention to which they refer.
(4355)
COMMENTARY
Ad Article
I.-OBJECT AND
SCOPE OF THE MODEL
CONVENTION
The wording of Article I in the London draft is simpler and briefer than in the Mexico draft. But it is clear in both drafts that the provisions of the Model Conventions are to apply to the estates of persons domiciled at the time of their death in either one of the contracting States, whether or not they were nationals of that State or of the other State. The estate of a foreigner is indeed generally subject in that country to the same tax liability as the estate of a national. It seems therefore appropriate that relief from international double taxation of an estate should be granted, irrespective of the nationality of the deceased, when he was domiciled at the time of his death in either one of the contracting States. In the present Model Convention, " domicile " is defined somewhat differently from what it is in the Model Convention for the Prevention of the Double Taxation of Income and Property. In that text, it may be recalled, the " fiscal domicile " of the individual is " the place where the individual has his normal residence, the term ' residence' being understood to mean permanent home ".1 According to Article I of the Protocol of the Model Convention on estate and succession duties, " the domicile of a person at the time of his death is the place where he then had his permanent residence with the manifest intention of retaining it ". Although the wording of this definition of " domicile " differs slightly from that of the definition given by the General Meeting of Government Experts on Double Taxation in their model bilateral convention on succession duties, their comments on the matter still apply to the new definition. They stated that: " It is clear that the conception of domicile appropriate to a duty which is levied once and for all on the occasion of death must imply a greater degree of permanence than the conception on which an annual tax such as the income tax is based. It is unlikely that any
State would claim the right to levy a death duty on the whole property of a deceased person on the ground that at the time of his death he was temporarily resident within its borders if his permanent
1 Model Bilateral Convention for the Prevention of the Double Taxation of Income and Property. Protocol, Article II, paragraph 1.
(4356)
ESTATES AND SUCCESSIONS
home and true economic allegiance lay elsewhere. But when it is sought to define the precise character and degree of permanence of the residence which should exist in order to justify a claim to tax on the ground of domicile, wide divergencies of view are found to exist in the different legal systems of the various countries of the world. In these circumstances, it has not been found possible to do more than frame a definition which seems to command the greatest common measure of agreement in the various codes of law ".1 The second paragraph of Article I of the Protocol covers the case of deceased persons who at the time of their death had no domicile as defined above and were nationals of both contracting States. In such cases, it shall be presumed that the deceased " had his domicile in the country in which his family, social and economic interests were centred ". Though there is no provision in the present text concerning deceased persons who had no " domicile " as defined above but were nationals of only one of the contracting States, it may be presumed that it was intended that in such cases the deceased would be considered as having his domicile in the country of which he is a national, in accordance with the rule contained in the model convention of 1928.2 The taxes to which the Model Convention should apply include duties based on the total value of the estate of a deceased person irrespective of the manner in which such estate is divided and distributed among heirs or legatees, and duties assessed on the value of the share accruing to each heir or legatee and computed with reference not only to the value of that share but also to the degree of relationship between the deceased and the successor concerned. Article I of the Model Convention is drawn up in such a way as to enable the negotiators using the Model Convention to enumerate the duties to which they desire that the Convention should apply. In this connection, it would have to be determined in the case of each bilateral treaty whether it should or should not apply also to gifts inter vivos, as such gifts are taken into account in certain countries in the computation of death duties, subject to certain conditions relating to
1 Report of the General Meeting of Government Experts on Double Taxation and Fiscal Evasion, Geneva, 1928. League of Nations document C.562.M.178. 1928.I, pages 23-24. 2 Ibid., page 22.
(4357)
COMMENTARY
their amount and to their proximity in time to the decease of the donor. A similar question may arise with respect to the judicial and administrative fees collected in connection with the distribution of an estate. The Protocol contains a clause-Article VIII in the Mexico draft and VII in the London draft-which in varying forms is found in a number of conventions concerning death duties. It safeguards the tax immunities that are granted or may be granted to diplomats and similar public officials, and protects the right of the country of which the above-mentioned officials are nationals to tax upon their decease the property which they leave in the other contracting State, subject to the general rules of international law and of internal law of the two countries concerned. Ad Article II.-REAL PROPERTY Article II of the Model Convention merely conforms to the rule contained in all national legislation and bilateral agreements according to which real property, personal property accessory thereto, and rights relating to, or secured by, real property are subject to the estate and succession duties and similar taxes in the country where the property is situated, irrespective of the domicile or nationality of the deceased. Article II of the Protocol, which states that it is the law of the State in which the property is situated that should determine whether it is real or personal, also follows a generally accepted practice. Ad Article III.-BUSNESS
ESTABLISHMENTS
The provisions of Article III have been drawn up in the light of the bilateral conventions concluded during the interwar period. Most, if not all, of these conventions stipulate that commercial, mining and agricultural establishments are subject to estate and succession duties in the country where they are situated. This rule applies not only to the tangible property which materially represents the business establishment but also to all assets which pertain to the business carried on in such establishment, since such business property
(4358)
ESTATES AND
SUCCESSIONS
constitutes an accounting unit which should be taxed as a whole. In conformity with these principles, Article III contains two rules which relate respectively to the case where an enterprise which is part of a taxable estate has a permanent establishment in one country only and the case where it has one or more establishments in each of the contracting States. In the first case, the entire property pertaining to the permanent establishment is taxable in the country where the establishment is situated. In the second case, each country is entitled to tax the property of the enterprise to the extent to which such property belongs or relates to the establishment or establishments situated in that country. The problem of allocation which this procedure entails is to be solved according to Article IV of the Protocol, by means of the criteria and accounting rules contained in Articles IV, V and VI of the Protocol of the Model Convention for the Prevention of the Double Taxation of Income and Property which define, among other things, the phrase " permanent establishment", and indicate the accounting rules to be followed in the allocation of the assets and liabilities of such establishments. Ad Article IV.--PERSONAL PROPERTY Article IV of the Convention, relative to personal property not covered by Articles II and III, has to be read in conjunction with Article V of the Protocol. This article of the Convention entitles the country where property is situated at the time of death of the deceased to apply its estate and succession duties to such property. In the Mexico draft, the article in question included certain clauses which were, in fact, a duplication of the more detailed provisions of Article VI relative to the taxing right of the country of domicile. Moreover, the Mexico draft gave no specific indications as to the criteria according to which situation of property was to be determined for estate and succession duty purposes. This gap is now filled by the detailed provisions of Article V of the Protocol of the London draft. It should be noted that the rules suggested in Mexico and in London concerning personal property constitute a departure from the general trend of the treaties concerning
(4359)
COMMENTARY
death duties which were concluded up to the war recently ended. In this connection, it was proposed at the Mexico Conference that the present article of the Model Convention should be worded as follows: " All other property to which Articles II and III do not apply shall be exclusively taxed in the country of the fiscal domicile of the deceased." It was argued in support of that suggestion that it was by no means generally admitted in private international law that, for purposes of successions, the law of situation of the property should apply in so far as personal property is concerned; in this respect, many jurisdictions refer to the law of domicile. It was observed that none of the bilateral conventions that had been concluded for the prevention of double taxation concerning death duties provided for the taxation of property other than real estate and business enterprises and their appurtenances in the country of situation. Attention was also drawn to the fact that exclusive taxation of property other than that covered by Articles II and III in the country of domicile of the deceased might prove more convenient both for the heirs and for the tax administrations concerned. Ad Article
V.-DEDUCTION OF DEBTS
Since death duties are generally assessed on the net value of the taxable estate, it is desirable therefore to indicate in what manner and proportion debts should be deducted from the property taxable in each of the contracting States. Such is the purpose of Article V of the Model Convention. Two main kinds of debt may be distinguished for this purpose: (a) Special debts which are secured by or relate to specific property, such as debts guaranteed by a mortgage or a lien; (b) General debts which are not especially guaranteed by, and are not otherwise manifestly connected with, any particular asset of the deceased.
(4360)
ESTATES
AND
SUCCESSIONS
As regards the first kind of debt, the conventions concluded during the 'twenties and 'thirties have stipulated that they were deductible from the real estate or the industrial and commercial establishments to which they were related. The fairness of such provisions is obvious. Section A of the article under consideration is worded to that effect. It may happen that such special debts exceed the value of the property from which they should be primarily deducted. Section B prescribes that the amount of such excess should be deducted from the value of the other property which the deceased may have held in the same country at the time of his death. In the normal course of events it may, indeed, be presumed that the debt has a greater degree of connection with the property situated in the same country as the original guarantee than with property situated elsewhere. Only when the amount of the special debt involved exceeds the value of all the property left by the deceased in the country where the original guarantee is situated, may the debt be deducted from property situated in the other country, according to Section C. As regards general debts, it seems logical, as suggested in Section D, that they should be deducted proportionately to the value-net or gross according to the terms of the agreement which would have to be reached in that connection -of the property left by the deceased in each country, in view of the present wording of Articles II, III and IV. If Article IV had been drafted in such a way as to give to the State of domicile the exclusive right of taxing property not covered by Articles II and III, then the rule as regards the deduction of general debts might have been the following: "A general debt without specific guarantee shall be deducted from the property taxable in the country of domicile of the deceased in accordance with Article IV. If such a debt exceeds the value of the property taxable in the country of the domicile of the deceased, the excess shall be deducted from the value of the property in the other country." Article V of the Model Convention is completed by Articles VI and VII of the Protocol in the London draft. The
73095 0-62-vol. 4-24
(4361)
COMMENTARY
effect of these provisions is that, once the debts of an estate have been allocated between the two contracting States according to the provisions of Article V of the Convention, the question of whether a debt so allocated is to be deducted from the property in the country concerned will depend on the general provisions which the legislation of that country contains as to the conditions under which a debt may be deducted from the value of an estate for tax purposes. In the Mexico draft, there was a special rule embodied in Article VII of the Protocol concerning the deduction of debts from inalienable property. This rule, which had been taken from certain relatively old treaties between Central European countries, was left out in the London draft because it had little practical significance. Ad Article VI.--DOMICITE TAXATION Article VI in the Mexico draft stipulates that, while the country of domicile is entitled to impose its duties on the entire estate of the deceased, it should deduct from the tax so assessed the amount of tax due in the other country, under Articles II, III and IV, provided that the amount of this tax does not exceed a certain proportion of its own tax. This proportion is determined by computing the ratio which the tax of the country of domicile that corresponds to the property taxable in the country of situation according to Articles II to IV bears to the total tax which would have been due if the entire estate had been taxable in the country of domicile of the deceased. This method of preventing double taxation through death duties corresponds to that provided in Article XIII of the Model Convention for the Prevention of the Double Taxation of Income and Property. The general principle and the wording of this article are the same in the London draft as in the Mexico draft except that the country of domicile is no longer entitled to take into account real property taxable in the country of situation according to Article II in determining its tax on the total estate. It seems to follow that the country of domicile is not expected to grant a deduction from, or credit against, its tax on the total estate on account of the taxes paid in the country
(4362)
ESTATES
AND
SUCCESSIONS
of situation under Article II. In other words, according to the London draft, the application of estate and succession duties on real property is made quite independent of the taxation of the entire estate in the country of fiscal domicile of the deceased. Ad Article
VII.-INTER-ADMINISTRATIVE CO-OPERATION
As in the matter of income taxes, the prevention of double taxation through death duties cannot be assured merely through provisions which each administration would apply separately and interpret independently. Article VII of the present Model Convention reproduces, therefore, the provisions of Article XVII of the Model Convention on income and property taxes which relate to inter-administrative consultation and co-operation. Ad Article
VIII.-RATIFICATION AND DURATION
OF TIE CONVENTION
The wording of Article VIII of this Model Convention is the same as that of Article XVIII of the Model Convention on income and property taxes and the same considerations apply in both cases.
(4363)
COMMENTARY
III. COMMENTARY ON THE MODEL BILATERAL CONVENTION FOR THE ESTABLISHMENT OF RECIPROCAL ADMINISTRATIVE ASSISTANCE FOR THE ASSESSMENT AND COLLECTION OF TAXES ON INCOME, PROPERTY, ESTATES AND SUCCESSIONS
INTRODUCTION
Following the precedents of the General Meeting of Government Experts on Double Taxation and Fiscal Evasion of 1928, it appeared desirable at the Mexico and London meetings to complement the model conventions on the prevention of double taxation with a Model Convention on Reciprocal Administrative Assistance in tax matters. Nevertheless, while the Government Experts drafted two separate model conventions dealing respectively with assessment of taxes and with collection of taxes, both subjects are now treated in a single instrument. Indeed, the kind of cooperation which is required for reciprocal assistance between administrations for the assessment and for the collection of taxes is substantially the same in both fields. Consequently, many formal provisions are valid in both cases. At the same time, if tax negotiators desire to restrict administrative cooperation to matters of assessment, as is not infrequently done in bilateral agreements, it is simple to eliminate from the Model Convention the provisions which find an application only as regards the collection of taxes. The object of the Model Convention is indicated in its Article I, which provides that co-operation between tax administrations for the assessment and collection of taxes should be limited to taxes in connection with which double taxation has been or is being avoided and this article makes the provisions of the Convention subject to reciprocity. Article II lays down the bases upon which tax administrations would be entitled to correspond in connection with exchange of information. Article III relates to certain kinds of easily available data for which the procedure of exchange of informa-
(4364)
RECIPROCAL ADMINISTRATIVE ASSISTANCE
tion is simplified in the Mexico draft and made automatic in the London draft. Collection of taxes is dealt with in Article IV. Article V indicates certain cases where a request for information or for assistance in tax collection may be rejected at the discretion of the authorities receiving the request. The rules as to the secrecy to be maintained by the officials of one administration in connection with information received from the administration of the other country are contained in Article VI. Article VII deals with the measures which the tax administrations of the contracting States may take in consultation to carry out and interpret the Convention, and Article VIII refers to the entry into force, duration and termination of the agreement. A detailed Protocol contains provisions concerning the following matters: designation of the authorities entitled to correspond with one another for the application of the Convention; manner in which the existence of reciprocity will be ascertained in the case of the various types of requests; form in which requests may be made and the documents that should accompany them; action to be taken by an administration receiving a request for assistance; form which should govern legal and judicial acts performed in compliance with the Convention; rules applying to collection, handling, transfer of funds, and settlement of accounts between the two administrations.
Ad Article I.-OBJECT
AND SCOPE OF THE MODEL
CONVENTION
According to the initial clauses of Article I, the object of the Model Convention on Reciprocal Administrative Assistance is that " of assuring, in the interest of Governments and taxpayers, an effective and fair application of the taxes to which apply the Conventions for the Prevention of the Double Taxation of Income, Property, Estates and Successions ". It is indeed the duty of revenue authorities to see that each taxpayer should pay the taxes for which he has been assessed according to the laws of the country under the jurisdiction of which he comes. Failure to collect such taxes is indeed susceptible of impairing the services which the Government
(4365)
COMMENTARY
should render to the public or bringing about an increase of the taxes borne by non-delinquent taxpayers. Bilateral arrangements between tax administrations for the prevention of fiscal evasion have, on various occasions, met with suspicion. Various reasons may explain this distrust. There may have been a certain background of opposition to direct taxation, or at least to certain of its forms, and to an increase of the investigating powers of revenue authorities. Another factor was an unwillingness to place the facilities of the national tax administration at the disposal of foreign authorities and still more to introduce new tax practices in order to suit the requirements of foreign Governments. In certain instances, there was a fear that the existence of too close a system of tax supervision and control would induce capital to prefer countries where its tax treatment was less strict or less burdensome. Moreover, the feeling was sometimes manifested that the proposals which ostensibly related to the prevention of fiscal evasion constituted in reality an attempt to interfere with the freedom of capital movements. These objections have not, however, prevented some thirty-odd bilateral conventions on reciprocal assistance between tax administrations from being concluded by some fifteen countries, mostly European, during the inter-war period, and it is clear that, in so far as they exist, the dangers mentioned above may be avoided through appropriate provisions. It is but legitimate that reciprocal assistance between tax administrations should exist only as regards taxes concerning which double taxation is avoided, or at least mitigated, This is clearly stipulated in between the two countries. Article I, which makes the Convention on reciprocal administrative assistance a complement to the Conventions on the prevention of double taxation through income taxes and death duties. It is also stated in Article I that assistance must be reciprocal. To exist, such reciprocity requires that the tax legislation and organisation of each of the contracting States are such that the powers of the respective national administrations to obtain information and to enforce revenue claims are substantially the same, except for mere formal differences
(4366)
RECIPROCAL ADMINISTRATIVE
ASSISTANCE
in procedure. Article II of the Protocol indicates the manner in which the existence of reciprocity should be ascertained in each case. Reciprocity means also that the State that receives a request for assistance from the other State should in principle exert the same diligence in carrying out such request as if it were acting on its own behalf. The provisions of Article I of the Model Convention are completed in this respect by those of Article VII of the Protocol in the Mexico draft, V in the London draft, concerning the duties of the tax authorities of a country with regard to requests for assistance from the corresponding authorities of the other country. The fact that there is an arrangement for tax assistance with another country should not give to any national tax administration greater powers of investigation and tax enforcement against its own taxpayers than those which are conferred Such extension upon it by its own domestic legislation. might, indeed, indirectly violate the guarantees granted to At the same time, an the taxpayers by that legislation. agreement for reciprocal tax assistance should not imply for any administration the obligation to take any measure that is repugnant to its national legislation or its established practices. It is therefore stipulated in Article I, in addition to the general requirement of reciprocity, that the information that may be furnished under the Convention will be " such information in matters of taxation as the competent authorities of each State have at their disposal or are in a position to obtain under their own laws ...... Mention may also be made, in this connection, of Article V of the Model Convention, which stipulates, among other things, that requests for information may be denied if they involve the obligation to obtain or supply information which is not procurable under the legislation of the State applied to or under that of the applying State, or if they imply administrative or judicial action incompatible with the legislation and practices of either contracting State. Reference should also be made, however, to Article X of the Protocol, which admits as an exception to or modification of the principles which have just been outlined that " any special forms of assistance not being incompatible with the
(4367)
COMMENTARY
laws of the State applied to may be adopted at the request of the applying State ". In order to complete the enumeration of the general conditions under which reciprocal assistance may be granted in tax matters, it may be well to mention at this juncture certain other provisions contained in Article V of the Convention, which is in effect a complement of Article I. In addition to the requirements which Article I imposes, as mentioned above, regarding reciprocity and compatibility of the requests for assistance, and the action taken thereon, with the legislation and practice of both contracting States, in Article V it is provided that administrative assistance should never entail for either administration the necessity for taking measures that might imply the violation of a professional, industrial or trade secret. This matter of administrative secrecy is also dealt with in Article VI of the Model Convention. It may not be thought desirable that an agreement for reciprocal administrative tax assistance should result in a State's abandoning its citizens who are taxable in another country entirely to the discretion of a foreign tax administration and, moreover, putting itself under the obligation to carry out at the request of such an administration measures that may not be in harmony with domestic customs. Such a danger is already reduced by the article of the Model Convention for the Prevention of the Double Taxation of Income and Property which relates to equality of treatment (Mexico draft, Article XV; London draft, Article XVI). Moreover, Article V gives the authorities of the State applied to the right in various cases to refuse at their discretion to give effect to a request for tax assistance when it relates to one of its nationals. The safeguarding of the rights of domestic creditors in the State which receives a request for assistance as regards collection of taxes may also have to be taken into account. It is for this reason that the Protocol (Article XI, Mexico draft, Article IX, London draft) provides that "revenue claims for collection shall not receive preference over either public or private claims in the State applied to" whatever may be the priority given to such revenue claims in the country by which the request for assistance in collection is made.
(4368)
RECIPROCAL ADMINISTRATIVE
ASSISTANCE
Ad Article
!!.-INFORMATION
TO BE SUPPLIED ON REQUEST
The object of Article II is to enable the competent authorities of the contracting States to correspond directly as regards the information they may need from one another in connection with the taxes to which the Convention applies, as such taxes are defined in Article I of the present Model Convention and by the initial articles of the Model Conventions on the prevention of double taxation through income taxes and death duties. The compliance with such requests is of course subject to the general conditions which have been reviewed above in the comment on Article I. As to the rules that apply specifically to the subject-matter of Article II, it may be noted that, according to Article I of the Protocol, the competent authorities that are entitled to correspond in this connection are " the highest tax authorities of each of the contracting States or the duly authorised representatives of such authorities ". Such requests should be formulated in the official language of the applicant State. They should specify the authority making the request, the name and address and nationality of the person to whom the request relates, the taxation in respect of which it is made, according to the Protocol (paragraph 1 of Article IV, Mexico draft; Article III, London draft). They should be accompanied by a declaration by the competent authorities who make the application, officially confirming that any similar request would be complied with in accordance with the laws of the applicant State, according to Article II of the Protocol, unless the information falls within the scope of Article III of the Convention, in which case reciprocity will be presumed to exist without any specific declaration to that effect. The information that may be applied for under this article may be in the hands of the administration to which the request is directed or it may have to be secured from an outside source. This source may be the party concerned himself or persons who, as a result of their relations with the taxpayer, can give information about his affairs, or resort may have to be made to experts or witnesses. In all such cases, the authorities
4'
(4369)
COMMENTARY
receiving a request, provided that the request is allowable under Articles I and V of the Model Convention, must exert diligence in complying with the request (Article XIII of the Protocol in the Mexico draft, XI in the London draft), must advise the applicant authority as to the action taken on the request (Article XIII of the Protocol in the Mexico draft, XI in the London draft) and, if the request cannot be complied with, must state the reasons why, transmitting all the relevant information that is in their possession and that they may communicate (Article XIV of the Protocol in the Mexico draft). This latter provision was eliminated as redundant in the London draft. If compliance with a request requires a formal procedure such as legal service of documents, the provisions of Article IV, paragraph 2, of the Protocol apply. Accordingly, the authority making a request has to indicate "the address of the recipient and the nature and purpose of the document for service " The form of service is itself governed by Articles VI and VII of the Protocol in the Mexico draft, IV and V in the London draft, which provide that the authorities receiving a request for the service of a document " may limit their action in connection with the service of the document to merely handing it to the recipient, if the latter is willing to receive it " and that, "if the competent authorities of the applicant State so desire, the document may be served in the form prescribed in similar cases by the internal law of the State applied to ". It may also be noted that Article X of the Protocol in the Mexico draft, VIII in the London draft, stipulates that "assistance procedure shall be in the form for which the laws of the State applied to provide .... Any special forms of assistance not being incompatible with the laws of the State applied to may be adopted at the request of the applying State ". As regards the expenses which may be involved by requests for assistance, reference should be made to Article XVIII of the Protocol in the Mexico draft, XV in the London draft, which provides that, in principle, assistance is to be gratuitous, except with regard " to emoluments paid to witnesses, experts, agents of execution and to legal and judicial fees incurred in connection with the service of a document or the enforcement
(4370)
of a revenue claim. The revenue authorities shall notify one another as required of the probable amount of such costs, fees or charges ". Ad Article III.-EXCHANGE OF READILY AVAILABLE
INFORMATION
An increasing number of tax agreements provides for the automatic exchange between national revenue authorities at the end of each year of information on payments of rents, dividends, interest, royalties, annuities, salaries, pensions, on bank accounts and deposits, and on inventories of estates. These data are indeed frequently collected by tax administrations in the ordinary course of their business and they can conveniently transmit them to the authorities of another country when they concern a foreign taxpayer. It is the object of Article III of the London draft to provide for such exchange of information. Though the formula now embodied in the London draft was submitted to the Mexico meeting, it appeared at that time that an automatic exchange of information between tax authorities would work satisfactorily only in the case of countries having a very-well-established tax system and administration. It was therefore not deemed desirable to provide for such a procedure in the Model Convention as prepared in Mexico. Nevertheless, even in the Mexico draft there remains a distinction between the information generally included under Article II and the four kinds of data specifically mentioned in Article III. Indeed, a request for information under Article II may be rejected by the administration receiving such a request on any of the grounds mentioned in Article V. On the other hand, these limitations do not apply to the information specifically mentioned in Article III, since the reservations and safeguards contained in Article V do not seem to be called for in the case of such information. Moreover, reciprocity is presumed to exist as regards information covered by Article III, without any special declaration to that effect in the case of each individual request.
(4371)
COMMENTARY
Ad Article IV.-ASSISTANCE IN TAX COLLECTION The main rules governing the assistance which the tax administration of one State may render to that of the other State as regards tax collection are contained in Article IV. The provisions of this article are of course subject to the reciprocity requirements of Article I of the Convention and Article II of the Protocol and to the general safeguards of Article V (in particular, Sections B and D) of the Model Convention. Assistance as regards collection may, in principle, be asked only as regards revenue claims which are definitely due, though paragraph 4 of Article IV contemplates the possibility of measures of conservancy in connection with revenue claims not definitely due. Under the general rule requests for collection assistance "shall be accompanied by such documents as are required by the laws of the applying State to establish that the taxes are definitely due " (paragraph 3 of Article IV of the Model Convention) and that requirement will be satisfied " by a copy or official extract of the final decision or order by the competent authorities concerning the revenue claim in question and by a statement from the competent authorities to the effect that the revenue claim is final " (Article VIII of the Protocol in the Mexico draft, VI in the London draft). The claims for which collection assistance may be requested include in addition to the principal of the tax, the " interest, costs, additions to taxes, and fines not being of a penal character, according to the laws of the State applied to " (Article IV of the Convention, paragraph 1). Nevertheless, requests for assistance should only be made when the amount involved justifies such procedure and when the State concerned cannot collect it by its own means (Article IX of the Protocol in the Mexico draft, VII in the London draft). The provisions mentioned in the last two paragraphs of the comment to Article II, as regards the form of service of documents, rules of procedure (including forms of representation) and the refund of expenses, apply when requests for collection assistance involve legal action or judicial proceedings. In such cases, however, requests for the service of documents should
(4372)
indicate, in addition to the information required for collection purposes: "the amount of principal due and interest due and the date from which such interest begins to run; in the case of fiscal penalties, the nature and amount of such penalties; and any other information of a nature to facilitate or accelerate collection " (Article IV of the Protocol, paragraph 3). To safeguard the interests of domestic creditors in the State applied to, Article XI of the Protocol in the Mexico draft, IX in the London draft, provides that " revenue claims for collection shall not receive preference over either public or private claims in the State applied to ". According to Article XVI of the Protocol in the Mexico draft, XIII in the London draft, " collection shall always take place in the currency of the State applied to ". To that effect, the amount for collection will be converted by the authorities of the State applied to into their own currency at the last exchange rate quoted on the appropriate market. These provisions presuppose, of course, a certain stability of exchange rates, and special arrangements might have to be considered in the case where either or both of the countries concerned have a highly fluctuating currency. Article XV of the Protocol in the Mexico draft, XII in the London draft, provides that " the State applied to shall be responsible to the applying State for the sums collected on the latter's behalf... " and Article XVII of the Protocol in the Mexico draft, XIV in the London draft, stipulates that the amount so collected shall be paid over to the account of the central bank of the applying State with the central bank of the State applied to after deduction of the costs that may be due as indicated in the last paragraph of the comment to Article II. According to Article XIX of the Protocol in the Mexico draft, XVI in the London draft, the Convention does not apply to measures of conservancy in respect to taxes that have not yet been assessed. However, as regards taxes that have been assessed, but are not definitely due, the tax authorities concerned may request the corresponding authorities of the other State " to take such measures of conservancy as are authorised by the revenue laws of the State interested ", subject, of course, to the general requirements of reciprocity contained in Article I of the Convention, Articles II and XII
(4373)
(last sentence) of the Protocol in the Mexico draft, II and X in the London draft, and the safeguards contained in Article V of the Convention. Ad Article
V.-GENERAL SAFEGUARDS
Reference has been made in connection with all the preceding articles of the Model Convention to Article V, since its clauses are key provisions which delimit the practical scope of the system of reciprocal administrative assistance contemplated in the Model Convention. According to this article, any request for information or for assistance with regard to collection is allowable only if it entails action that is compatible with the legislation of both contracting States. It safeguards also professional, industrial and trade secrecy, and it gives the authorities receiving a request for information or for assistance the right to decline to comply with such a request when it relates to a taxpayer who is one of their nationals or when compliance may endanger the security or sovereign rights of the State applied to. It should, however, be noted that the reservations of Article V do not apply to the information mentioned under Article III of the Convention, as in ordinary practice such information is readily available and does not involve probing into the intimate affairs of a person or into governmental secrets. Ad Article
VI.--SAFEGUARDS SECRECY OF ADMINISTRATIVE
Reciprocal assistance between tax administrations is possible only if each administration is assured that the other administration will treat with proper confidence the information which may have to be communicated to it in the course of their co-operation. At the same time, the respect of such secrecy by the officials of a country is a matter of national jurisdiction. It is therefore provided in Article VI that information communicated under the provisions of the Convention shall be kept secret by the authorities receiving it " in the same way and to the same extent as is done in the State that
(4374)
supplies it ". Sanctions for the violation of such secrecy by an official of the State that has received information shall, however, be governed by the administrative and penal laws of that State.
Ad Article VII.-APPLICATION OF THE CONVENTION

The object of Article VII is intended to furnish the basis for continuous co-operation between the tax authorities concerned as regards the interpretation and application of the Convention and the adoption of special measures in order to enforce the Convention, or to complete it with respect to doubtful cases or matters not expressly provided for. It may be of interest to note that the second sentence of this article enables the contracting States, when signing a convention for reciprocal administrative assistance in tax matters, to agree formally only on the essential provisions of the agreement and to dispense as they see fit with the detailed provisions contained in the Protocol and those of the Model Convention which appear secondary or superfluous in view of the kind of relations that are likely to develop between the tax authorities in the contracting States. Indeed, the second sentence of that article stipulates that, " with respect to the provisions of this Convention relating to exchange of information, service of documents and mutual assistance in the collection of taxes, ... such authorities may, by common agreement, prescribe rules concerning matters of procedure, forms of application and reply, conversion of currency, disposition of amounts collected, minimum amounts subject to collection and related matters ". Article XX of the Protocol in the Mexico draft was left out in the London draft because it appeared to go beyond the general scope of the Convention. Ad Article
VIII.-RATIFICATION AND DURATION OF THE CONVENTION
The provisions of Article VIII of the Model Convention are identical with those of the final articles of the Model Conventions on double taxation through income taxes and death
(4375)
duties. It is, of course, clear that the entry into force and duration of the Convention on reciprocal assistance between tax administrations should coincide with that of the Convention or Conventions for the prevention of double taxation in respect of the taxes to which the Convention on administrative assistance applies.
(4376)
ANNEX
TEXT OF THE MODEL BILATERAL TAX CONVENTIONS
73095 0-62-vol. 4-
25
(4377)
1. MODEL BILATERAL CONVENTION FOR THE PREVENTION OF THE DOUBLE TAXATION OF INCOME
Mexico Draft.
Article I. 1. The present Convention is designed to prevent double taxation in the case of the taxpayers of the contracting States, whether nationals or not, as regards the following taxes: A. With reference to State A: . .................................. 2. ................................ 3 . ................. ............ ..... B. With reference to State B: 1. .......... ........... ..... ...... 2 . .......................... ........ 3. ................................ 2. It is mutually agreed that the present Convention shall apply also to any other tax, or increase of tax, imposed by either contracting State subsequent to the date of signature of this Convention upon substantially the same bases as the taxes enumerated in the preceding paragraph of this Article. Article II. Income from real property shall be taxable only in the State in which the property is situated. Article 11I. 1. Income from mortgages on real property shall be taxable only in the State where the property is situated. 2. Income from mortgages on sea and/or air vessels shall be taxable only in the State where such vessels are registered.
(4378)
59
1.
MODEL BILATERAL CONVENTION FOR THE PREVENTION OF THE DOUBLE TAXATION OF INCOME AND PROPERTY London Draft.
Article I. 1. The present Convention is designed to prevent double taxation in the case of the taxpayers of the contracting Stotes, whether nationals or not, as regards the following taxc . A. With reference to State A: 1. ................................... 2 ................................. 3 ................................... With reference to State B: 1................................. ...... .......................... 2 . .. 3 ...................................
B.
2. It is mutually agreed that the present Convention shall apply also to any other tax, or increase of tax, imposed by either contracting State subsequent to the date of signature of this Convention upon substantially the same bases as the taxes enumerated in the preceding paragraph of this Article. Article II. Income from real property shall be taxable in the State in which the property is situated. Article III. 1. Income from mortgages on real property shall be taxable in the State where the property is situated. 2. Income from mortgages on sea and/or air vessels shall be taxable in the State where such vessels are registered.
(4379)
MEXICO DRAFT
INCOME
Article IV.
1. Income from any industrial, commercial or agricultural business and from any other gainful activity shall be taxable only in the State where the business or activity is carried out. 2. If an enterprise or an individual in one of the contracting States extends its or his activities to the other State, through isolated or occasional transactions, without possessing in that State a permanent establishment, the income derived from such activities shall be taxable only in the first State. 3. If an enterprise has a permanent establishment in each of the contracting States, each State shall tax that part of the income which is produced in its territory. 4. As regards agricultural and mining raw materials and other natural materials and products, the income which results from prices prevailing between independent persons or conforming to world market quotations shall be regarded as realised in the State in which such materials or products have been produced. Article V. Income which an enterprise of one of the contracting States derives from the operation of ships or aircraft registered in such State is taxable only in that State. Article VI. 1. Directors' percentages, attendance fees and other special remuneration paid to directors, managers and auditors of companies are taxable only in the State where the fiscal domicile of the enterprise is situated. 2. If, however, such remuneration is paid for services rendered in a permanent establishment situated in the other contracting State, it shall be taxable only in that State. Article VII. 1. Compensation for labour or personal services shall be taxable only in the contracting State in which such services are rendered.
(4380)
LONDON
DRAFT -
INCOME
Article IV.
1. Income derived from any industrial, commercial or agricultural enterprise and from any other gainful occupation shall be taxable in the State where the taxpayer has a permanent establishment. 2. If an enterprise in one State extends its activities to the other State without possessing a permanent establishment therein, the income derived from such activities shall be taxable only in the first State. 3. If an enterprise has a permanent establishment in each of the contracting States, each State shall tax only that part of the income which is produced in its territory.
Article V. Income which an enterprise in one of the contracting States derives from the operation of ships or aircraft engaged in international transport is taxable only in the State in which the enterprise has its fiscal domicile.
Article VI.
1. Remuneration for labour or personal services shall be taxable in the contracting State in which such services are rendered.
(4381)
MEXICO DRAFT
INCOME
2. A person having his fiscal domicile in one contracting State shall, however, be exempt from taxation in the other contracting State in respect of such compensation if he is temporarily present within the latter State for a period or periods not exceeding a total of one hundred and eighty-three days during the calendar year, and shall remain taxable in the first State. 3. If the person remains in the second State more than one hundred and eighty-three days, he shall be taxable therein in respect of compensation he earned during his stay there, but shall not be taxable in respect of su~h compensation in the first State. 4. Income derived by an accountant, an architect, a doctor, an engineer, a lawyer or other person engaged in the practice of a liberal profession shall be taxable only in the contracting State in which the person has a permanent establishment at, or from, which he renders services. 5. If any such person has a permanent establishment in both contracting States, he shall be taxable in each State only on the income received for services rendered therein.
Article VIII. 1. Salaries, wages and other remuneration paid by one of the contracting States, or by public bodies, institutions or services depending on it, to its nationals carrying out public functions in the other State shall be taxable only in the first State, provided that these functions are included within the normal field of activity of the State, as this field is defined by international usage. 2. Public pensions shall be taxable only in the State of the debtor entity.
Article IX. Income from movable capital shall be taxable only in the contracting State where such capital is invested.
(4382)
LONDON
DRAFT -
INCOME
2. A person having his fiscal domicile in one contracting State shall, however, be exempt from taxation in the other contracting State in respect of such remuneration if he is temporarily present within the latter State for a period or periods not exceeding a total of one hundred and eighty-three days during the taxable year, and shall remain taxable in the first State. 3. If a person remains in the second State more than one hundred and eighty-three days, he shall be taxable therein in respect of the remuneration he earned during his stay there, but shall not be taxable in respect of such remuneration in the first State. 4. Income derived by an accountant, an, architect, an engineer, a lawyer, a physician or other person engaged on his own account in the practice of a profession shall be taxable in the contracting State in which the person has a permanent establishment at, or from, which he renders services. 5. If any person described in the preceding paragraph has a permanent establishment in both contracting States, he shall be taxable in each State only on the income for services rendered therein.
Article VII. Salaries, wages, pensions and other remuneration paid by the Government, political subdivisions and governmental agencies of one of the contracting States to nationals of such State in respect of the performance of diplomatic, consular or other governmental functions in the other State, shall be taxable only in the first State, provided that these functions are included within the normal field of governmental functions and are not connected with the carrying on of a trade or business on behalf of the State, its subdivisions and its agencies. A rticle VIII. 1. Dividends and other income from shares in a company and shares of profits accruing to limited liability partners in
(4383)
MEXICO DRAFT -
INCOME
Article X.
1. Royalties from immovable property or in respect of the operation of a mine, a quarry, or other natural resource shall be taxable only in the contracting State in which such property, mine, quarry, or other natural resource is situated. 2. Royalties and amounts received as a consideration for the right to use a patent, a secret process or formula, a trademark or other analogous right shall be taxable only in the State where such right is exploited.
(4384)
LONDON DRAFT -
INCOME
a limited liability partnership shall be taxable only in the contracting State where the company or limited liability partnership has its fiscal domicile. 2. Notwithstanding the provisions of paragraph 1, dividends paid by a company which has its fiscal domicile in one contracting State to a company which has its fiscal domicile in the other contracting State and 6as a dominant participation in the management or capital of the company paying the dividends shall be exempt from tax in the former State. 3. Dividends paid by, or undistributed profits of, a company which has its fiscal domicile in one contracting State shall not be subjected to any tax by the other contracting State by reason of the fact that the dividends or undistributed profits represent, in whole or in part, income derived from the territory of that other State. Article IX. 1. Interest on bonds, securities, notes, debentures or on any other form of indebtedness shall be taxable only in the State where the creditor has his fiscal domicile. 2. The State of the debtor is, however, entitled to tax such interest by means of deduction or withholding at source. 3. The tax withheld at source under paragraph 2 of this Article shall in no case exceed... % of the taxed interest. Article X. 1. Royalties from immovable property or in respect of the operation of a mine, a quarry or other natural resource shall be taxable only in the contracting State in which such property, mine, quarry or other natural resource is situated. 2. Royalties derived from one of the contracting States by an individual, corporation or other entity of the other contracting State in consideration for the right to use a patent, a secret process or formula, a trade-mark or other analogous right, shall not be taxable in the former State. 3. If, however, royalties are paid by an enterprise of one contracting State to another enterprise of the other contract-
(4385)
MEXICO DRAFT -
INCOME
3. Royalties derived from one of the contracting States by an individual, corporation or other entity of the other contracting State, in consideration for the right to use a musical, artistic, literary, scientific or other cultural work or publication shall not be taxable in the former State. Article XI. Private pensions and life annuities shall be taxable only in the State where the debtor has his fiscal domicile. Article XII. Gains derived from the sale or exchange of real property shall be taxable only in the State in which the property is situated.
Article XIII. The State where the taxpayer has his fiscal domicile shall retain the right to tax the entire income of the taxpayer whether derived from its territory or from that of the other contracting State, but shall deduct from its tax on such entire
(4386)
LONDON DRAFT --
INCOME
ing State which has a dominant participation in its management or capital, or vice versa, or when both enterprises are owned. or controlled by the same interests, the royalties shall be subject to taxation in the State where the right in consideration of which they are paid is exploited, subject to deduction from the gross amount of such royalties of all expenses and charges, including depreciation, relative to such rights and royalties. 4. Royalties derived from one of the contracting States by an individual, corporation or other entity of the other contracting State, in consideration for the right to use an artistic, scientific or other cultural work or publication shall not be taxable in the former State. Article XI. Private pensions and life annuities shall be taxable only in the State where the recipient has his fiscal domicile. Article XII. 1. Gains derived from the sale or exchange of real property shall be taxable only in the country in which the property is situated. 2. Gains derived from the sale or exchange of assets other than real property, appertaining to an industrial, commercial or agricultural enterprise or to any other independent occupation, shall be taxable according to the provisions of Articles IV and V. 3. Gains derived from the sale or exchange of any capital assets other than those mentioned in the preceding paragraphs of the present Article shall be taxable only in the State where the recipient has his fiscal domicile. Article XIII. The State where the taxpayer has his fiscal domicile shall retain the right to tax the entire income of the taxpayer whether derived from its territory or from that of the other contracting State, but shall deduct from its tax on such entire
(4387)
MEXICO DRAFT -
INCOME
income the lesser of the two following amounts: A. The tax collected by the latter contracting State on the income which is taxable in its territory according to the preceding Articles; The amount which represents the same proportion in comparison with the total tax on the income that is taxable in both States as the income taxable in the other State in comparison with the total income. Article XIV. In the case of a taxpayer with a fiscal domicile in both contracting States, the tax, the collection of which under this Convention depends on fiscal domicile, shall be imposed in each of the contracting States in proportion to the period of stay during the preceding year or according to a proportion to be agreed by the competent administrations.
B.
Article XV. A taxpayer having his fiscal domicile in one of the contracting States shall not be subject in the other contracting State, in respect of income he derives from that State, to higher or other taxes than the taxes applicable in respect of the same income to a taxpayer having his fiscal domicile in the latter State, or having the nationality of that State. Article XVI. 1. When a taxpayer shows proof that the action of the tax administration of one of the contracting States has resulted in double taxation, he shall be entitled to lodge a claim with the tax administration of the State in which he has his fiscal domicile or of which he is a national.
(4388)
LONDON DRAFT -
INCOME
income the lesser of the following amounts: A. The tax collected by the other contracting State on the income which is taxable in its territory according to the preceding Articles; The amount which represents the same proportion of the tax of the State of fiscal domicile on the entire net income of the taxpayer as the net income taxable in the other State bears to the entire net income. Article XIV. In the case of a taxpayer with a fiscal domicile in both contracting States, the tax, the collection of which under this Convention depends on fiscal domicile, shall be imposed in each of the contracting States in proportion to the period of stay during the taxable year or according to a proportion to be agreed by the competent administrations. Article XV. The provisions of the preceding Articles shall be applicable, mutatis mutandis, to taxes on property, capital or increment of wealth whether such taxes are permanent or are levied once only. Article XVI. A taxpayer having his fiscal domicile in one of the contracting States shall not be subject in the other contracting State, in respect of income he derives from that State, to higher or other taxes than the taxes applicable in respect of the same income to a taxpayer having his fiscal domicile in the latter State, or having the nationality of that State. Article XVII. 1. When a taxpayer shows proof that the action of the tax administration of one of the contracting States has resulted in double taxation, he shall be entitled to lodge a claim with the tax administration of the State in which he has his fiscal domicile or of which he is a national.
B.
(4389)
MEXICO DRAFT
INCOME
2. Should the claim be admitted, the competent tax administration of that State shall consult directly with the competent authority of the other State, with a view to reaching an agreement for an equitable avoidance of double taxation.
Article XVII. As regards any special provisions which may be necessary for the application of the present Convention, more particularly in cases not expressly provided for, the competent authorities of the two contracting States may confer together and take the measures required in accordance with the spirit of this Convention.
Article XVIII. 1. This Convention and the accompanying Protocol, which shall be considered to be an integral part of the Convention, shall be ratified and the instruments of ratification shall be exchanged at ............................... as soon as possible. 2. This Convention and Protocol shall become effective on the first day of January 19... They shall continue effective for a period of three years from that date and indefinitely after that period. They may, however, be terminated by either of the contracting States at the end of the three-year period or at any time thereafter, provided that at least six months prior notice of termination has been given, the termination to become effective on the first day of January following the expiration of the six-month period. Done in duplicate, at .............. this ............ day of ................. ,19.
(4390)
LONDON DRAFT
INCOME
2. Should the claim be admitted, the competent tax administration of that State shall consult directly with the competent authority of the other State, with a view to reaching an agreement for an equitable avoidance of double taxation. Article XVIII. The provisions of the present Convention shall not be construed to restrict in any manner any exemption, deduction, credit, allowance, advantage and right of administrative or judicial appeal accorded to a taxpayer by the laws of either of the contracting States. Article XIX. As regards any special provisions which may be necessary for the application of the present Convention, more particularly in cases not expressly provided for, and in the event of substantial changes in the tax laws of either of the contracting States, the competent authorities of the two contracting States shall confer together and take the measures required in accordance with the spirit of the present Convention. Article XX. 1. This Convention and the accompanying Protocol, which shall be considered to be an integral part of the Convention, shall be ratified and the instruments of ratification shall as soon be exchanged at ............................... as possible. 2. This Convention and Protocol shall become effective on the first day of January 19... They shall continue effective for a period of three years from that date and indefinitely after that period. They may, however, be terminated by either of the contracting States at the end of the three-year period or at any time thereafter, provided that at least six months prior notice of termination has been given, the termination to become effective on the first day of January following the expiration of the six-month period. this ............. Done in duplicate, at ............. 19. day of ...............
(4391)
MEXICO DRAFT -
INCOME
PROTOCOL On proceeding to sign the Convention for the Prevention of Double Taxation of Income concluded this day between ...................... an d ........................ the undersigned Plenipotentiaries have agreed the following provisions, which shall form an integral part of the said Convention. Article I. The terms " taxpayer of a contracting State " and " enterprise of a contracting State" mean a taxpayer or an enterprise whose fiscal domicile is in the said State. Article II. 1. For the purpose of the foregoing Convention, the term "fiscal domicile " means, in the case of an individual or of an enterprise belonging to an individual, the place where the individual has his normal residence, the term " residence being understood to mean permanent home. 2. Should a taxpayer possess a residence in both the contracting States, the competent administration shall determine, by common agreement, the place of his main residence, which shall be considered as his fiscal domicile. In order to determine, as between several residences, the main residence, the competent administration will take into account elements such as the duration, regularity, frequency of stays, the place where the family of the taxpayer is usually present, the proximity to the place where the party concerned carries out his occupation. 3. In the case of a taxpayer having a residence in both of the contracting States of which either can be considered as his main residence, Article XVII of the Convention shall apply. 4. The fiscal domicile of partnerships, companies and other legal entities or de facto bodies shall be the State under the laws of which they were constituted.
(4392)
LONDON
DRAFT
INCOME
PROTOCOL On proceeding to sign the Convention for the Prevention of Double Taxation of Income concluded this day between th e an d ...................... ........................ following the agreed undersigned Plenipotentiaries have provisions, which shall form an integral part of the said Convention. Article I. The terms " taxpayer of a contracting State " and " enterprise of a contracting State " mean a taxpayer or an enterprise whose fiscal domicile is in the said State. Article II. 1. For the purpose of the foregoing Convention, the term "fiscal domicile " means, in the case of an individual or of an enterprise belonging to an individual, the place where the individual has his normal residence, the term " residence being understood to mean permanent home. 2. Should a taxpayer possess a residence in both the contracting States, the competent administration shall determine, by common agreement, the place of his main residence, which shall be considered as his fiscal domicile. In order to determine, as between several residences, the main residence, the competent administration will take into account elements such as the duration, regularity, frequency of stays, the place where the family of the taxpayer is usually present, the proximity to the place where the party concerned carries out his occupation. 3. In the case of a taxpayer having a residence in both of the contracting States of which either can be considered as his main residence, Article XIX of the Convention shall apply. 4. The fiscal domicile of a partnership, company and any other legal entity or de facto body shall be the State in which its real centre of management is situated.
73095 0-62-vol. 4-26
(4393)
MEXICO DRAFT -
INCOME
Article III.
Differences which arise concerning the nature of real property shall be settled in accordance with the legislation of the territory where the property is situated. Article IV. The term " enterprise " includes any kind of enterprise whether it belongs to an individual, a partnership, a company or any other legal entity or de facto body. Article V. 1. The term " permanent establishment " includes head offices, branches, mines and oil-wells, plantations, factories, workshops, warehouses, offices, agencies, installations, professional premises and other fixed places of business having a productive character. 2. A building site (chantier de construction) constitutes a " permanent establishment" when it is destined to be used for a year at least or has been in existence for a year. 3. The fact that an enterprise established in one of the contracting States has business dealings in another contracting State through an agent of genuinely independent status (broker, commission agent, etc.) shall not be held to mean that the enterprise has a permanent establishment in the latter State. 4. When an enterprise of one of the contracting States regularly has business relations in the other State through an agent established there who is authorised to act on its behalf, it shall be deemed to have a permanent establishment in that State. A permanent establishment shall, for instance, be deemed to exist when the agent: A. Is a duly accredited agent (fondd de pouvoir) and habitually enters into contracts for the enterprise for which he works; or
(4394)
LONDON
DRAFT -
INCOME
Article III. Differences which arise concerning the nature of real property shall be settled in accordance with the legislation of the territory where the property is situated. Article IV. The term " enterprise " includes any kind of enterprise whether it belongs to an individual, a partnership, a company or any other legal entity or de facto body. Article V. 1. The term " permanent establishment " includes head offices, branches, mines and oil-wells, plantations, factories, workshops, warehouses, offices, agencies, installations, professional premises and other fixed places of business having a productive character. 2. A building site (chantier de construction) constitutes a C permanent establishment " when it is destined to be used for a year at least or has been in existence for a year. 3. The fact that an enterprise established in one of the contracting States has business dealings in another contracting State through an agent of genuinely independent status (broker, commission agent, etc.) shall not be held to mean that the enterprise has a permanent establishment in the latter State. 4. When an enterprise of one of the contracting States regularly has business relations in the other State through an agent established there who is authorised to act on its behalf, it shall be deemed to have a permanent establishment in that State. A permanent establishment shall, for instance, be deemed to exist when the agent: A. Is a duly accredited agent (fondj de pouvoir) and habitually enters into contracts for the enterprise for which he works; or
(4395)
MEXICO DRAFT -
INCOME
B.
Is bound by an employment .ontract and habitually transacts business on behalf of the enterprise in return for remuneration from the enterprise; or Is habitually in possession, for the purpose of sale, of a depot or stock of goods belonging to the enterprise.
C.
5. As evidence of an employment contract under the terms of B above may be taken, moreover, the fact that the administrative expenses of the agent, in particular the rent of premises, are paid by the eiiterprise. 6. The fact that a broker places his services at the disposal of an enterprise in order to bring it into touch with customers does not in itself imply the existence of a permanent establishment for the enterprise, even if his work for the enterprise is, to a certain extent, continuous or is carried on at regular periods, and even if the goods sold have been temporarily placed in a warehouse. Similarly, the fact that a commission agent (comrnissionnaire) acts in his own name for one or more enterprises and receives a normal rate of commission does not constitute a permanent establishment for any such enterprise, even if the goods sold have been temporarily placed in a warehouse. 7. A permanent establishment shall not be deemed to exist in the case of commercial travellers not coming under any of the preceding categories. 8. The fact that a parent company, the fiscal domicile of which is one of the contracting States, has a subsidiary in the other State does not mean that the parent company has a permanent establishment in that State, regardless of the fiscal obligations of the subsidiary toward the State in which it is situated.
Article VI. The allocation of the income of the enterprises mentioned in Article IV of the Convention shall be effected in the following manner: 1. In respect of industrial, commercial and agricultural enterprises in general and for other independent activities:
(4396)
LONDON DRAFT -
INCOME
B.
Is bound by an employment contract and habitually transacts business on behalf of the enterprise in return for remuneration from the enterprise; or
Is habitually in possession, for the purpose of sale, of a depot or stock of goods belonging to the enterprise. 5. As evidence of an employment contract under the terms of B above may be taken, moreover, the fact that the administrative expenses of the agent, in particular the rent of premises, are paid by the enterprise. C. 6. The fact that a broker places his services at the disposal of an enterprise in order to bring it into touch with customers does not in itself imply the existence of a permanent establishment for the enterprise, even if his work for the enterprise is, to a certain extent, continuous or is carried on at regular periods, and even if the goods sold have been temporarily placed in a warehouse. Similarly, the fact that a commission agent (commissionnaire)acts in his own name for one or more enterprises and receives a normal rate of commission does not constitute a permanent establishment for any such enterprise, even if the goods sold have been temporarily placed in a warehouse. 7. A permanent establishment shall not be deemed to exist in the case of commercial travellers not coming under any of the preceding categories. 8. The fact that a parent company, the fiscal domicile of which is one of the contracting States, has a subsidiary in the other State does not mean that the parent company has a permanent establishment in that State, regardless of the fiscal obligations of the subsidiary toward the State in which it is situated.
Article VI. The allocation of the income of the enterprises mentioned in Article IV of the Convention shall be effected in the following manner: 1. In respect of industrial, commercial and agricultural enterprises in general and for other independent activities:
(4397)
MEXICO DRAFT -
INCOME
A.
If an enterprise with its fiscal domicile in one contracting State has a permanent establishment in the other contracting State, there shall be attributed to each permanent establishment the net business income which it might be expected to derive, if it were an independent enterprise engaged in the same or similar activities, under the same or similar conditions. Such net income will, in principle, be determined on the basis of the separate accounts pertaining to such establishment. According to the provisions of the Convention, such income shall be taxed in accordance with the legislation and agreements of the State in which such establishment is situated. The fiscal authorities of the contracting States shall, when necessary, in execution of the preceding section, rectify the accounts produced, especially to correct errors or omissions, or to re-establish the prices or remunerations entered in the books at the value which would prevail between independent persons deialing at arm's length. If the accounts of the permanent establishment in one contracting State are rectified as a result of such verification, a corresponding rectification shall be made in the accounts of the establishment in the other contracting State with which the dealings in question have been effected. If an establishment does not produce an accounting showing its own operations, or if the accounting produced does not correspond to the normal usages of the trade in the country where the establishment is situated, or if the rectifications provided for in the preceding section cannot be effected, or if the taxpayer agrees, the fiscal authorities may determine, in a presumptive manner, the business income by applying a percentage to the gross receipts of that establishment. This percentage is fixed in accordance with the nature of the transactions in which the establishment is engaged and by comparison with the results obtained by similar enterprises operating in the country. Where the activities of the permanent
B.
C.
(4398)
LONDON DRAFT -
INCOME
A.
If an enterprise with its fiscal domicile in one contracting State has a permanent establishment in the other contracting State, there shall be attributed to each permanent establishment the net business income which it might be expected to derive, if it were an independent enterprise engaged in the same or similar activities, under the same or similar conditions. Such net income will, in principle, be determined on the basis of the separate accounts pertaining to such establishment. According to the provisions of the Convention, such income shall be taxed in accordance with the legislation and agreements of the State in which such establishment is situated. The fiscal authorities of the contracting States shall, when necessary, in execution of the preceding section, rectify the accounts produced, especially to correct errors or omissions, or to re-establish the prices or remunerations entered in the books at the value which would prevail between independent persons dealing at arm's length. If the accounts of the permanent establishment in one contracting State are rectified as a result of such verification, a corresponding rectification shall be made in the accounts of the establishment in the other contracting State with which the dealings in question have been effected. If an establishment does not produce an accounting showing its own operations, or if the accounting produced does not correspond to the normal usages of the trade in the country where the establishment is situated, or if the rectifications provided for in the preceding section cannot be effected, or if the taxpayer agrees, the fiscal authorities may determine, in a presumptive manner, the business income by applying a percentage to the gross receipts of that establishment. This percentage is fixed in accordance with the nature of the transactions in which the establishment is engaged and by comparison with the results obtained by similar enterprises operating in the country. Where the activities of the permanent establishment are in
B.
C.
(4399)
MEXICO DRAFT -
INCOME
establishment are in the nature of those of a genuinely independent commission agent or broker, the income may be determined on the basis of the customary commission received for such services. D. If the methods of determination described in the preceding sections are found to be inapplicable, the net business income of the permanent establishment may be determined by a computation based on the total income derived by the enterprise from the activities in which such establishment has participated. This determination is made by applying to the total income coefficients based on a comparison of gross receipts, assets, number of hours worked or other appropriate factors, provided such factors are so selected as to ensure results approaching as closely as possible those which would be reflected by a separate accounting.
2. In determining the net income on the basis of the separate accounting of a permanent establishment, a properly apportioned part of the general expenses of the head office of the enterprise may be deducted. 3. In respect of banking and financial enterprises, the allocation of the income shall be effected in conformity with the principles laid down in paragraph 1 of the present Article, provided that, when a permanent establishment of the enterprise is in the position of a creditor or debtor in relation to another permanent establishment of the enterprise, the following provisions shall apply: A. If a permanent establishment in one State (creditor establishment) supplies funds, whether in the form of an advance, loan, overdraft, deposit, or otherwise, to a permanent establishment in the second State (debtor establishment), interest shall be deemed to accrue as income to the creditor establishment and as a deduction from gross income to the debtor establishment for tax purposes, and it shall be computed at the inter-bank rate for similar transactions in the currency used;
(4400)
LONDON
DRAFT -
INCOME
the nature of those of a genuinely independent commission agent or broker, the income may be determined on the basis of the customary commission received for such services. D. If the methods of determination described in the preceding sections are found to be inapplicable, the net business income of the permanent establishment may be determined by a computation based on the total income derived by the enterprise from the activities in which such establishment has participated. This determination is made by applying to the total income coefficients based on a comparison of gross receipts, assets, number of hours worked or other appropriate factors, provided such factors are so selected as to ensure results approaching as closely as possible those which would be reflected by a separate accounting.
2. In determining the net income on the basis of the separate accounting of a permanent establishment, a properly apportioned part of the general expenses of the head office of the enterprise may be deducted. 3. In respect of banking and financial enterprises, the allocation of the income shall be effected in conformity with the principles laid down in paragraph 1 of the present Article, provided that, when a permanent establishment of the enterprise is in the position of a creditor or debtor in relation to another permanent establishment of the enterprise, the following provisions shall apply: A. If a permanent establishment in one State (creditor establishment) supplies funds, whether in the form of an advance, loan, overdraft, deposit, or otherwise, to a permanent establishment in the second State (debtor establishment), intereot shall be deemed to accrue as income to the creditor establishment and as a deduction from gross income to the debtor establishment for tax purposes, and it shall be computed at the inter-bank rate for similar transactions in the currency used;
(4401)
MEXICO DRAFT
INCOME
B.
The interest corresponding to the permanent capital allotted to the debtor establishment, whether in the form of an advance, loan, overdraft, deposit or otherwise, shall be, however, excluded from the interest accruing as income to the creditor establishment and deductible from gross income by the debtor establishment.
4. The net income of insurance enterprises shall be determined in conformity with the principles laid down in paragraph 1 of the present Article. If, however, these principles are not applicable in a given case, the net taxable income of a permanent establishment belonging to an insurance enterprise may be assessed, either by applying, to the gross premiums received as a result of the activity of the permanent establishment, coefficients computed on the basis of the total income of a representative national enterprise of the particular category of insurance concerned, or by apportioning the income according to the ratio existing between the gross premiums relating to the permanent establishment and the total gross premiums received by the enterprise. 5. In cases where the foregoing rules do not result in a fair allocation of income, the competent authorities may consult to agree upon a method that will prevent double taxation. Article VII. When an enterprise of one contracting State has a dominant participation in the management or capital of an enterprise of another contracting State, or when both enterprises are owned or controlled by the same interests, and, as the result of such situation, there exist in their commercial or financial relations conditions different from those which would have existed between independent enterprises, any item of profit or loss which should normally have appeared in the accounts of one enterprise, but which has been, in this manner, diverted to the other enterprise, shall be entered in the accounts of such former enterprise, subject to the rights of appeal allowed under the laws of the State of such enterprise.
(4402)
LONDON DRAFT -
INCOME
B.
The interest corresponding to the permanent capital allotted to the debtor establishment, whether in the form of an advance, loan, overdraft, deposit or otherwise, shall be, however, excluded from the interest accruing as income to the creditor establishment and deductible from gross income by the debtor establishment.
4. The net income of insurance enterprises shall be determined in conformity with the principles laid down in paragraph 1 of the present Article. If, however, these principles are not applicable in a given case, the net taxable income of a permanent establishment belonging to an insurance enterprise may be assessed, either by applying, to the gross premiums received as a result of the activity of the permanent establishment, coefficients computed on the basis of the total income of a representative national enterprise of the particular category of insurance concerned, or by apportioning the income according to the ratio existing between the gross premiums relating to the permanent establishment and the total gross premiums received by the enterprise. 5. In cases where the foregoing rules do not result in a fair allocation of income, the competent authorities may consult to agree upon a method that will prevent double taxation. Article VII. When an enterprise of one contracting State has a dominant participation in the management or capital of an enterprise of another contracting State, or when both enterprises are owned or controlled by the same interests, and, as the result of such situation, there exist in their commercial or financial relations conditions different from those which would have existed between independent enterprises, any item of profit or loss which should normally have appeared in the accounts of one enterprise, but which has been, in this manner, diverted to the other enterprise, shall be entered in the accounts of such former enterprise.
(4403)
MEXICO DRAFT -
INCOME
Article VIII. The provisions of Article IV of the Convention shall not apply to pedlars, inland shipping, touring shows and other similar occupations, which shall be taxable in accordance with the legislation of the country where these occupations are carried on and concerning which the competent administrations may, if necessary, agree special provisions. Article IX. For the purposes of Article IX of the Convention, the term " income from movable capital" includes income from public funds, obligations, loans, deposits, whether fixed or on current account, income from shares and similar participations in companies, as well as income from sleeping partner shares or shares of partners having no powers of management or personal liability in partnerships. Article X. Students and apprentices from one contracting State residing in the other contracting State exclusively for the purpose of study or for acquiring business experience shall not be taxable by the latter State in respect of remittances received by them from within the former State for the purpose of their maintenance or studies.
(4404)
LONDON
DRAFT
INCOME
Article VIII. The provisions of Article IV of the Convention shall not apply to pedlars, inland shipping, touring shows and other similar occupations, which shall be taxable in accordance with the legislation of the country where these occupations are carried on and concerning which the competent administrations may, if necessary, agree special provisions.
Article IX. Students and apprentices from one contracting State residing in the other contracting State exclusively for the purpose of study or for acquiring business experience shall not be taxable by the latter State in respect of. remittances received by them from within the former State for the purpose of their maintenance or studies.
(4405)
2. MODEL BILATERAL CONVENTION FOR THE PREVENTION OF THE DOUBLE TAXATION OF SUCCESSIONS Mexico Draft.
Article I. 1. The present Convention, the purpose of which is to prevent the double taxation of successions, applies to all duties and taxes levied, by reason of death, on the estate, or on the transfer of, or the succession to, the estate, of a person who, at the time of his death, had his domicile in one of the two contracting States, whether or not he was a national of that State or the other State, and on the part of such estate that accrues to each heir or legatee. 2. A. The duties and taxes to which this Article refers are: In the case of State A: S. .............. ................... 2 . .................................. 3 . ............. ..................... B. In the case of State B: 1. ...... ............................ 2. .................. ................ 3 .................................. Article II. Real property, personal property accessory thereto and rights relating to, or secured by, real property which are included in the estate of a person who, at the time of his death, had his domicile in one of the two contracting States shall be subject to the duties and taxes described in Article I only in the State in which such property is situated.
(4406)
2. MODEL BILATERAL CONVENTION FOR THE PREVENTION OF THE DOUBLE TAXATION OF ESTATES AND SUCCESSIONS
London Draft.
Article
I.
The present Convention, the purpose of which is to prevent the double taxation of estates and successions, applies to the following duties and taxes: A. In the case of State A: 1 .................................. 2 . ................. ................. 3 .................................. B. In the case of State B: 1. .................................. 2 ................................. 3. .... ........... .................
Article II. Real property, personal property accessory thereto and rights relating to, or secured by, real property which are included in the estate of a person who, at the time of his death, had his domicile in one of the two contracting States shall be subject to the duties and taxes described in Article I only in the State in which such property is situated.
(4407)
88
MEXICO DRAFT -
Article III. Property appertaining to a commercial, industrial, mining, agricultural or other enterprise, including a maritime or an air navigation enterprise, left by a person who, at the time of his death, had his domicile in one of the contracting States shall be subject to the duties and taxes described in Article I in accordance with the following rules: A. If the enterprise has a permanent establishment in one of the two States, the property shall be taxable only in that State; If the enterprise has a permanent establishment in both States, the property shall be taxable in each State to the extent to which such property belongs or relates to the establishment situated in that State. Article IV. If a person who, at the time of his death, had his domicile in one of the contracting States leaves in the other contracting State property to which Articles II and III do not apply, the former State may apply the duties and taxes described in Article I of the present Convention to the entire estate, subject to the provisions of Article VI, and the latter State may apply such duties and taxes to the property situated in its territory, but only according to the rate which corresponds to the value of the latter property, without taking into account the property situated in the territory of the other State. Article V. For the purposes of determining the net value of the property subject to the duties and taxes to which this Convention refers, the debts of the deceased shall be deducted according to the following rules: A. A debt secured by, or relating to, property to which Articles II and III apply shall be deducted from the value of the specific property by which it is secured, or to which it relates;
B.
(448)
LONDON
DRAFT -
ESTATES AND
SUCCESSIONS
Article III. Property appertaining to a commercial, industrial, mining, agricultural or other enterprise, including a maritime or an air navigation enterprise, left by a person who, at the time of his death, had his domicile in one of the contracting States shall be subject to the duties and taxes described in Article I in accordance with the following rules: A. If the enterprise has a permanent establishment in one of the two States, the property shall be taxable only in that State; If the enterprise has a permanent establishment in both States, the property shall be taxable in each State to the extent to which such property belongs or relates to the establishment situated in that State. Article IV. Personal property not coming within the purview of the provisions of Articles II and III left by a person who, at the time of his death, had his fiscal domicile in one of the contracting States, shall be subject to the duties and taxes described in Article I only in the State in which such property was situated at the time of death.
B.
Article V. For the purposes of determining the net value of the property subject to the duties and taxes to which this Convention refers, the debts of the deceased shall be deducted according to the following rules: A. A debt secured by, or relating to, property to which Articles II and III apply shall be deducted from the value of the specific property by which it is secured, or to which it relates;
73095 O-62-vol. 4-
27
(4409)
90
MEXICO DRAFT -
B.
If a debt to which rule A applies exceeds the value of the property by which it is secured or to which it relates, it shall be deducted from the value of the other property left by.the deceased in the same country;
C.
If a debt to which rule A applies exceeds also the value of the property situated in the same country, the excess shall be deducted from the value of the property left by the deceased in the other country; D. A general debt without specific guarantee will be deducted proportionately to the value of the property left by the deceased in each country.
Article VI. The State in which the deceased, at the time of his death, had his domicile shall retain the right to tax the entire estate, whether situated in its territory or that of the other contracting State, but shall deduct from the duties and taxes it applies to the entire estate the lesser of the two following amounts: A. The sum of the duties and taxes levied by the other contracting State on the property which is taxable in its territory according to the preceding Articles; The sum which represents the same proportion in comparison with the duties and taxes due in the State of domicile as the property taxable in the other State in comparison with the entire taxable estate of the deceased.
B.
Article VII. As regards any special provisions which may be necessary for the application of the present Convention, more particularly in cases not expressly provided for, the competent authorities of the two contracting States may confer together and take the measures required in accordance with the spirit of this Convention.
(4410)
LONDON DRAFT
B.
C.
If a debt to which rule A applies exceeds the value of the property by which it is secured or to which it relates, it shall be deducted from the value of the other property left by the deceased in the same country; If a debt to which rule A applies exceeds also the value of the property situated in the same country, the excess shall be deducted from the value of the property left by the deceased in the other country; A general debt without specific guarantee will be deducted proportionately to the value of the property left by the deceased in each country. Article VI.
D.
The State in which the deceased, at the time of his death, had his domicile shall retain the right to tax the entire estate, whether situated in its territory or that of the other contracting State, excluding property described in Article II, but shall deduct from the duties and taxes it applies to the entire estate the lesser of the two following amounts: A. The sum of the duties and taxes collected by the other contracting State on the property which is taxable in its territory according to the preceding Articles; The amount which represents the same proportion of the duties and taxes of the State of domicile on the entire taxable estate of the deceased, as the net property taxable in the other State bears to the entire net estate. Article VII. As regards any special provisions which may be necessary for the application of the present Convention, more particularly in cases not expressly provided for, the competent authorities of the two contracting States may confer together and take the measures required in accordance with the spirit of this Convention.
B.
(4411)
MEXICO DRAFT
Article VIII.
1. This Convention and the accompanying Protocol, which shall be considered to be an integral part of the Convention, shall be ratified and the instruments of ratification shall be exchanged at ..................... as soon as possible. 2. This Convention and Protocol shall become effective on the first day of January 19... They shall continue effective for a period of three years from that date and indefinitely after that period. They may, however, be terminated by either of the contracting States at the end of the three-year period or at any time thereafter, provided that at least six months prior notice of termination has been given, the termination to become effective on the first day of January following the expiration of the six-month period. Done in duplicate, at ............. this .............. day of .................................. 19 ...
PROTOCOL On proceeding to sign the Convention concluded this day between the contracting States regarding the Prevention of the Double Taxation of Successions, the undersigned Plenipotentiaries have made the following joint declaration, which shall form an integral part of the said Convention. Article I. 1. For the purposes of the foregoing Convention, the domicile of a person, at the time of his death, is the place where he then had his permanent residence with the manifest intention of retaining it. 2. If the deceased, at the time of his death, had no such domicile and was a national of both contracting States, he shall be regarded as having had his domicile in the country in which his family, social and economic interests were centred.
(4412)
LONDON DRAFT
Article VIII.
1. This Convention and the accompanying Protocol, which shall be considered to be an integral part of the Convention, shall be ratified and the instruments of ratification shall be as soon as possible. exchanged at .............. 2. This Convention and Protocol shall become effective on the first day of January 19... They shall continue effective for a period of three years from that date and indefinitely after that period. They may, however, be terminated by either of the contracting States at the end of the three-year period or at any time thereafter, provided that at least six months prior notice of termination has been given, the termination to become effective on the first day of January following the expiration of the six-month period. Done in duplicate, at ............. 19... day of ...................... this ..............
PROTOCOL On proceeding to sign the Convention concluded this day between the contracting States regarding the Prevention of the Double Taxation of Successions, the undersigned Plenipotentiaries have made the following joint declaration, which shall form an integral part of the said Convention. Article I. 1. For the purposes of the foregoing Convention, the domicile of a person, at the time of his death, is the place where he then had his permanent residence with the manifest intention of retaining it. 2. If the deceased, at the time of his death, had no such domicile and was a national of both contracting States, he shall be regarded as having had his domicile in the country in which his family, social and economic interests were centred.
(4413)
94
MEXICO DRAFT -
Article II. The question whether property is to be regarded as real or personal shall be settled in accordance with the laws of the State in which the property is situated. Article III. The situation of personal property accessory to real property and of rights relating to, or secured by, real property shall be determined in accordance with the laws of the State in which the real property concerned is situated. Article IV. 1. The expression " commercial, industrial, mining, agricultural or other enterprise, including a maritime or an air navigation enterprise " and the expression " permanent establishment " have the same meaning for the purposes of the foregoing Convention as in Articles IV and V of the Protocol of the Model Bilateral Convention for the Prevention of the Double Taxation of Income. 2. In the case of an enterprise with a permanent establishment in each of the two contracting States, the apportionment of the assets and liabilities will be achieved through the application, by analogy, of the rules concerning the allocation of income that are expressed in Article VI of the Protocol of the Model Bilateral Convention for the Prevention of Double Taxation of Income. Article V. For the purpose of Article IV of the foregoing Convention, personal property hereinbelow mentioned shall be deemed to be situated: A. At the place where the property is situated, in the case of: (a) ................................ (b) ........ ..... .... .... ... ...... ... ... (c) ...... ..... .... .... ..... ...........
(4414)
LONDON DRAFT -
Article II.
The question whether property is to be regarded as real or personal shall be settled in accordance with the laws of the State in which the property is situated. Article III. The situation of personal property accessory to real property and of rights relating to, or secured by, real property shall be determined in accordance with the laws of the State in which the real property concerned is situated. Article IV. 1. The expression " commercial, industrial, mining, agricultural or other enterprise, including a maritime or an air navigation enterprise " and the expression "permanent establishment " have the same meaning for the purposes of the foregoing Convention as in Articles IV and V of the Protocol of the Model Bilateral Convention for the Prevention of the Double Taxation of Income. 2. In the case of an enterprise with a permanent establishment in each of the two contracting States, the apportionment of the assets and liabilities will be achieved through the application, by analogy, of the rules concerning the allocation of income that are expressed in Article VI of the Protocol of the Model Bilateral Convention for the Prevention of Double Taxation of Income. Article V. The situation of personal property to which the provisions IV of the Convention apply shall be determined in Article of accordance with the following rules: A. Rights or interests (otherwise than by way of security) in or over tangible movable property other than such property for which specific provision is hereinafter made shall be deemed to be situated at the place where such property was physically located at the time of death;
(4415)
96 B.
MEXICO DRAFT
C.
At the place where the property is registered for transfer purposes, as in the case of: (a) ................................... (b) ... ... .... .... .. .... ... .... .. ... ... (c) ...... .... ... .... ... ... ... ... ... ... At the domicile of the debtor, in the case of property transferable only by notification to the debtor or endorsement, as in the case of: (a) .... .... ... ... .... ... .... ... ... .... (b) ... .... .... .... .. .... ... ... ... .. ... (C) ...................................
(4416)
LONDON
DRAFT -
B.
Rights or interests (other than by way of security) in or over bank or currency notes, other forms of currency, negotiable bills of exchange and negotiable promissory notes shall be deemed to be situated at the place where such notes, currency or documents are located at the time of death; Rights or interests (otherwise than by way of security) in or over property described under A and B above which are in transit at the time of death shall be deemed to be located at the place of destination; Debts secured or unsecured, other than the forms of indebtedness for which specific provision is made herein, shall be deemed to be situated at the place where the deceased had his domicile at the time of death; Shares and similar interests and participations in a company or limited liability partnership shall be deemed to be situated in the territory of the State in which or under the laws of which the corporation or partnership was organised; Sums payable under an insurance policy on the life of the deceased shall be deemed to be situated at the place where the deceased had his domicile at the time of death; Ships and aircraft and shares in the property thereof shall be deemed to be situated at the place where the ship or aircraft was registered at the time of the death of the deceased: Goodwill as a business or professional asset shall be deemed to be situated at the place where the business or profession to which it appertains was carried on at the time of death; Patents, trade-marks, designs shall be deemed to be situated at the place where they were registered at the time of death;
C.
D.
E.
F.
G.
H.
I.
(4417)
98
MEXICO DRAFT -
Article VI.
The question whether a debt which is deductible according to Article V of the foregoing Convention is to be regarded as a bona fide debt shall be settled in accordance with the laws of the State in which such debt would be deducted. Article VII. A debt shall not be deducted from the value of inalienable property unless such property has been made inalienable by the will of the deceased. Article VIII. The foregoing Convention shall not affect such immunities as are at present, or may hereafter be, accorded to diplomatic, consular or foreign Government officials in virtue of the general rules of international law or the internal legislation of either of the contracting States. Where, by reason of such immunities, the estates left by such officials are not subject to the duties and taxes to which the present Convention applies in the State in which they exercise their functions, the State which they serve shall be entitled to levy such duties and taxes.
(4418)
LONDON
DRAFT -
ESTATES AND
SUCCESSIONS
J.
Copyrights, franchises and rights or licences to use any copyrighted material, patent, trade-mark or design shall be deemed to be situated at the place where such rights were exercisable at the time of death; Rights or causes of action ex delicto shall be deemed to be situated at the place where such rights or causes of action arose; Judgment debts shall be deemed to be situated at the place where the judgment is recorded. Article VI.
K.
L.
The question whether a debt which is deductible according to Article V of the foregoing Convention is to be regarded as a bona fide debt shall be settled in accordance with the laws of the State in which such debt would be deducted.
Article VII. The foregoing Convention shall not affect such immunities as are at present, or may hereafter be, accorded to diplomatic, consular or foreign Government officials in virtue of the general rules of international law or the internal legislation of either of the contracting States. Where, by reason of such immunities, the estates left by such officials are not subject to the duties and taxes to which the present Convention applies in the State in which they exercise their functions, the State which they serve shall be entitled to levy such duties and taxes.
(4419)
3. MODEL BILATERAL CONVENTION FOR THE ESTABLISHMENT OF RECIPROCAL ADMINISTRATIVE ASSISTANCE FOR THE ASSESSMENT AND COLLECTION OF DIRECT TAXES
Mexico Draft.
Article I. With a view of assuring, in the interest of Governments and taxpayers, an effective and fair application of the taxes to which apply the Conventions for the Prevention of Double Taxation of Income and Successions, concluded this day by the contracting States, each of the contracting States undertakes, subject to reciprocity, to furnish on special request such information in matters of taxation as the competent authorities of each State have at their disposal or are in a position to obtain under their own laws and as may be of use to the competent authorities of the other State in the assessment of the above-mentioned taxes and to lend assistance to the competent authorities of the other State in the collection of such taxes. Article II. The competent authorities of each of the contracting States shall be entitled to obtain through direct correspondence, from the competent authorities of the other contracting State, information concerning particular cases that is necessary for the assessment of the taxes to which the present Convention relates.
(4420)
3. MODEL BILATERAL CONVENTION FOR THE ESTABLISHMENT OF RECIPROCAL ADMINISTRATIVE ASSISTANCE FOR THE ASSESSMENT AND COLLECTION OF TAXES ON INCOME, PROPERTY, ESTATES AND SUCCESSIONS
London Draft.
Article I. With a view of assuring, in the interest of Governments and taxpayers, an effective and fair application of the taxes to which apply the Conventions for the Prevention of Double Taxation of Income and Estates and Successions, concluded this day by the contracting States, each of the contracting States undertakes, subject to reciprocity, to furnish on special request such information in matters of taxation as the competent authorities of each State have at their disposal or are in a position to obtain under their own revenue laws and as may be of use to the competent authorities of the other State in the assessment of the above-mentioned taxes and to lend assistance to the competent authorities of the other State in the collection of such taxes. Article II. The competent authorities of each of the contracting States shall be entitled to obtain through direct. correspondence, from the competent authorities of the other contracting State, information concerning particular cases that is necessary for the assessment of the taxes to which the present Convention relates.
(4421)
102
MEXICO DRAFT -
ADMINISTRATIVE ASSISTANCE
Article III. In accordance with the preceding Article, the competent authorities of each contracting State shall transmit, in concrete cases on special request, to the competent authorities of the other State: A. The name and address of any individual, partnership, corporation or other entity having an address in the territory of the other State and deriving from sources within the territory of the former State rents, dividends, interests, royalties, income from trusts, wages, salaries, pensions, annuities or other fixed or determinable periodical income, indicating the amount of such receipts in the case of each addressee; An extract of the inventories received by the competent authorities in the case of property passing on the decease of persons that had an address in the territory of the other State or the nationality of that State; Any particulars which the competent authorities may obtain from banks, insurance companies, or other financial institutions concerning assets and claims belonging to persons having an address in the territory of the other State; Any particulars which the competent authorities may obtain from inventories in the case of property passing on death concerning debts contracted to, or property passing to, persons having an address in the territory of the other State.
B.
C.
D.
Article IV. 1. The competent authorities of each of the contracting States shall be entitled to obtain, through direct correspondence, the assistance and support of the competent authorities of the other contracting State for the collection of the taxes to which the present Convention relates together with interest, costs, additions to taxes, and fines not being of a penal
(4422)
LONDON DRAFT -
ADMINISTRATIVE
ASSISTANCE
103
Article III.
In accordance with the preceding Article, the competent authorities of each contracting State shall transmit, in the ordinary course as soon as possible after the expiration of each calendar (or fiscal) year, to the competent authorities of the other State: A. The name and address of any individual, partnership, corporation or other entity having an address in the territory of the other State and deriving from sources within the territory of the former State rents, dividends, interest, royalties, income from trusts, wages, salaries, pensions, annuities or other fixed or determinable periodical income, indicating the amount of such receipts in the case of each addressee; An extract of the inventories received by the competent authorities in the case of property passing on the decease of persons that had an address in the territory of the other State or the nationality of that State; Any particulars which the competent authorities may obtain from banks, insurance companies, or other financial institutions concerning assets and claims belonging to persons having an address in the territory of the other State; Any particulars which the competent authorities may obtain from inventories in the case of property passing on death concerning debts contracted to, or property passing to, persons having an address in the territory of the other State. Article IV. 1. The competent authorities of each of the contracting States shall be entitled to obtain, through direct correspondence, the assistance and support of the competent authorities of the other contracting State for the collection of the taxes to which the present Convention relates together with interest, costs, additions to taxes, and fines not being
B.
C.
D.
(4423)
104
MEXICO DRAFT -
character, according to the laws of the State applied to, in the case of taxes that are definitely due according to the laws of the applying State. 2. In the case of a request for the enforcement of a tax, revenue claims of each of the contracting States which have been finally determined shall be accepted for enforcement by the other contracting State and collected in that State in accordance with the laws applicable to the enforcement and collection of its own taxes. 3. The request shall be accompanied by such documents as are required by the laws of the applying State to establish that the taxes are definitely due. 4. If a revenue claim is not definitely due, the State applied to may, on the request of the other contracting State, take such measures of conservancy as are authorised by the revenue laws of the former State.
Article V. Special requests for information and/or assistance for the enforcement of taxes under Articles II and IV of the present Convention may be refused in the following cases: A. If they involve the obligation to obtain or supply information which is not procurable under the legislation of the State applied to or that of the applying State; If they imply administrative or judicial action incompatible with the legislation and practice of either contracting State; If compliance involves violation of a professional, industrial or trade secret; If the request relates to a taxpayer who is a national of the State applied to; If, in the opinion of the State applied to, compliance with the request may compromise its security or sovereign rights.
B.
C. D. E.
(4424)
LONDON
DRAFT -
105
of a penal character, according to the laws of the State applied to, in the case of taxes that are definitely due according to the laws of the applying State. 2. In the case of a request for the enforcement of a tax, revenue claims of each of the contracting States which have been finally determined shall be accepted for enforcement by the other contracting State and collected in that State in accordance with the laws applicable to the enforcement and collection of its own taxes. 3. The request shall be accompanied by such documents as are required by the laws of the applying State to establish that the taxes are definitely due. 4. If a revenue claim is not definitely due, the State applied to may, on the request of the other contracting State, take such measures of conservancy as are authorised by the revenue laws of the former State for the enforcement of its own taxes. Article V. Special requests for information and/or assistance for the enforcement of taxes under Articles II and IV of the present Convention may be refused in the following cases: A. If they involve the obligation to obtain or supply information which is not procurable under the legislation of the State applied to or that of the applying State; If they imply administrative or judicial action incompatible with the legislation and practice of either contracting State : If compliance involves violation of a professional, industrial or trade secret; If the request relates to a taxpayer who is a national of the State applied to; If, in the opinion of the State applied to, compliance with the request may compromise its security or sovereign rights.
B.
C. D. E.
73095 0-62-voL 4-
28
(4425)
106
MEXICO DRAFT -
Article VI.
When the competent authorities of one of the contracting States have requested from the authorities of the other State information to which this Convention applies, they shall observe secrecy as regards such information, in the same way and to the same extent as is done in the State that supplies it, and the competent authorities of the former State shall apply to its officials the administrative and penal sanctions that correspond, under its own laws, to the violation of such secrecy. Article VII. The competent authorities of the two contracting States may prescribe regulations necessary to interpret and carry out the provisions of this Convention. With respect to the provisions of this Convention relating to exchange of information, service of documents and mutual assistance in the collection of taxes, such authorities may, by common agreement, prescribe rules concerning matters of procedure, forms of application and reply, conversion of currency, disposition of amounts collected, minimum amounts subject to collection and related matters. Article VIII. 1. This Convention and the accompanying Protocol, which shall be considered to be an integral part of the Convention, shall be ratified and the instruments of ratification shall be exchanged at ...................... as soon as possible. 2. This Convention and Protocol shall become effective on the first day of January 19... They shall continue effective for a period of three years from that date and indefinitely after that period. They may, however, be terminated by either of the contracting States at the end of the three-year period or at any time thereafter, provided that at least six months prior notice of termination has been given, the termination to become effective on the first day of January following the expiration of the six-month period. Done in duplicate, at ........................... ............ day of ............. 19... this
(4426)
LONDON
DRAFT -
107
Article VI.
When the competent authorities of one of the contracting States have requested from the authorities of the other State information to which this Convention applies, they shall observe secrecy as regards such information, in the same way and to the same extent as is done in the State that supplies it, and the competent authorities of the former State shall apply to its officials the administrative and penal sanctions that correspond, under its own laws, to the violation of such secrecy. Article VII. The competent authorities of the two contracting States may prescribe regulations necessary to interpret and carry out the provisions of this Convention. With respect to the provisions of this Convention relating to exchange of information, service of documents and mutual assistance in the collection of taxes and evidence of reciprocity, such authorities may, by common agreement, prescribe rules concerning matters of procedure, forms of application and reply, conversion of currency, disposition of amounts collected, minimum amounts subject to collection and related matters. Article VIII. 1. This Convention and the accompanying Protocol, which shall be considered to be an integral part of the Convention, shall be ratified and the instruments of ratification shall be as soon as possible. exchanged at ...................... become 'effective shall 2. This Convention and Protocol on the first day of January 19... They shall continue effective for a period of three years from that date and indefinitely after that period. They may, however, be terminated by either of the contracting States at the end of the three-year period or at any time thereafter, provided that at least six months prior notice of termination has been given, the termination to become effective on the first day of January following the expiration of the six-month period. this .............. Done in duplicate, at ............. 19... day of ....................
(4427)
108
MEXICO DRAFT
ADMINISTRATIVE
ASSISTANCE
PROTOCOL On proceeding to sign the Convention concluded this day for the Establishment of Reciprocal Administrative Assistance for the Assessment and Collection of Direct Taxes, the undersigned Plenipotentiaries, duly authorised by their respective Governments for the purpose, have made the following joint declaration, which shall form an integral part of the said Convention. Article I. As used in the foregoing Convention, the term "competent authorities " means the highest tax authorities of each of the contracting States or the duly authorised representatives of such authorities. Article II. Reciprocity is deemed to exist as regards requests under Article III of the foregoing Convention. In the matter of other requests, reciprocity shall be deemed to exist when the request is accompanied by a declaration by the competent authorities who make the application, officially confirming that any similar request would be complied with in accordance with the laws of the applicant State. Article III. Information communicated under Article II shall be in the official language of the State by which they are communicated. Article IV. 1. Special requests for information shall specify: the authority making the request; the name, address and nationallty of the person to whom the request relates; the taxation in respect of which the request is made and period or date in respect of which it is imposed.
(4428)
LONDON
DRAFT -
ADMINISTRATIVE
ASSISTANCE
109
PROTOCOL On proceeding to sign the Convention concluded this day for the Establishment of Reciprocal Administrative Assistance for the Assessment and Collection of Taxes on Income, Property, Estates and Successions, the undersigned Plenipotentiaries, duly authorised by their respective Governments for the purpose, have made the following joint declaration, which shall form an integral part of the said Convention. Article I. As used in the foregoing Convention, the term "competent authorities " means the highest tax authorities of each of the contracting States or the duly authorised representatives of such authorities. Article II. Reciprocity is deemed to exist as regards requests under Article III of the foregoing Convention. In the matter of other requests, reciprocity shall be deemed to exist when the request is accompanied by a declaration by the competent authorities who make the application, officially confirming that any similar request would be complied with in accordance with the laws of the applicant State.
Article III. 1. Special requests for information shall specify: the authority making the request; the name, address and nationality of the person to whom the request relates; the taxation in respect of which the request is made and period or date in respect of which it is imposed.
(4429)
110
MEXICO DRAFT -
2. Requests for the service of documents shall specify, in addition to the particulars mentioned in the first paragraph of this Article: the address of the recipient; and the nature and purpose of the document for service. 3. Requests concerning the collection of taxes shall indicate, in addition to the information mentioned in the first paragraph of this Article: the amount of principal due and interest due and the date from which such interest begins to run; in the case of fiscal penalties, the nature and amount of such penalties; and any other information of a nature to facilitate or accelerate collection. Article V. Requests to which Article IV refers shall be formulated in the official language of the applicant State and accompanied by a translation in the official language of the State applied to. Article VI. The competent authorities of the State to which a request for the service of documents is made may limit their action in connection with the service of the document to merely handing it to the recipient, if the latter is willing to receive it. Article VII. If the competent authorities of the applicant State so desire, the document may be served in the form prescribed in similar cases by the internal law of the State applied to. Article VIII. Requests for collection must be accompanied by a copy or official extract of the final decision or order by the competent authorities concerning the revenue claim in question and by a statement from the competent authorities to the effect that the revenue claim is final.
(4430)
LONDON DRAFT -
111
2. Requests for the service of documents shall specify, in addition to the particulars mentioned in the first paragraph of this Article: the address of the recipient; and the nature and purpose of the document for service. 3. Requests concerning the collection of taxes shall indicate, in addition to the information mentioned in the first paragraph of this Article: the amount of principal due and interest due and the date from which such interest begins to run; in the case of fiscal penalties, the nature and amount of such penalties; and any other information of a nature to facilitate or accelerate collection.
Article IV. The competent authorities of the State to which a request for the service of documents is made may limit their action in connection with the service of the document to merely handing it to the recipient, if the latter is willing to receive it. Article V. If the competent authorities of the applicant State so desire, the document may be served in the form prescribed in similar cases by the internal law of the State applied to. Article VI. Requests for collection must be accompanied by a copy or official extract of the final decision or order by the competent authorities concerning the revenue claim in question and by a statement from the competent authorities to the effect that the revenue claim is final.
(4431)
112
MEXICO DRAFT -
Article IX.
No request for assistance for the collection of taxes shall be formulated when: A. B. There is a presumption that the amount due is in fact recoverable in the interested State; The amount due is less than ...................... Article X. Assistance procedure shall be in the form for which the laws of the State applied to provide, as stipulated in the Convention. Nevertheless, any special forms of assistance not being incompatible with the laws of the State applied to may be adopted at the request of the applying State. Article XI. Revenue claims for collection shall not receive preference over either public or private claims in the State applied to. Article XII. The authorities of the State applied to shall take all such steps and employ all such means of action as they would be bound to take and employ in similar cases, when their own interests are involved, provided that no means of action shall be employed to which there is no corresponding means of action under the law of the applicant State. In doubtful cases, the competent authorities of the applicant State must certify that their national legislation empowers them to comply with a similar request from the State applied to. Article XIII. The competent authorities of the State applied to shall inform, without delay, the competent authorities of the applicant State as to the action taken on the request, whether such action is complete or incomplete.
(4432)
LONDON DRAFT
113
Article VII.
No request for assistance for the collection of taxes shall be formulated when: A. B. There is a presumption that the amount due is in fact recoverable in the interested State; The amount due is less than ................. Article VIII. Assistance procedure shall be in the form for which the laws of the State applied to provide, as stipulated in the Convention. Nevertheless, any special forms of assistance not being incompatible with the laws of the State applied to may be adopted at the request of the applying State. Article IX. Revenue claims for collection shall not receive preference over either public or private claims in the State applied to. Article X. The authorities of the State applied to shall take all such steps and employ all such means of action as they would be bound to take and employ in similar cases, when their own interests are involved, provided that no means of action shall be employed to which there is no corresponding means of action under the law of the applicant State. In doubtful cases, the competent authorities of the applicant State must certify that their national legislation empowers them to comply with a similar request from the State applied to. Article XI. The competent authorities of the State applied to shall inform, without delay, the competent authorities of the applicant State as to the action taken on the request, whether such action is complete or incomplete.
8
(4433)
114
MEXICO DRAFT -
ADMINISTRATIVE
ASSISTANCE
Article XIV.
If a request cannot be complied with, the competent authorities of the State applied to shall advise the competent authorities of the applicant State of the reasons which prevent complying with the request, and shall transmit to such authorities all information which may have a bearing on the case. Article XV. The State applied to shall be responsible to the applying State for the sums collected on the latter's behalf by its officials or agents. Article XVI. Collection shall always take place in the currency of the State applied to. To that effect, the competent authorities of the State applied to shall convert the amount for collection into their own currency at the last rate quoted between the two contracting States. Article XVII. Amounts collected by the competent authorities of one State on behalf of the competent authorities of the other State shall be paid over immediately, after deduction of the costs under Article XVIII below, to the account of the Central Bank of the applying State with the Central Bank of the State applied to. Article XVIII. No fees or costs shall be charged for action taken on requests for assistance. This provision shall, however, not apply, in the absence of any agreement to the contrary, to emoluments paid to witnesses, experts, agents of execution and to legal and judicial fees incurred in connection with the service of a document or the enforcement of a revenue claim. The revenue authorities shall notify each other as required of the probable amount of such costs, fees or charges. When relating to the collection of a revenue claim, the amount of such costs, fees and
(4434)
LONDON
DRAFT -
Article XII.
The State applied to shall be responsible to the applying State for the sums collected on the latter's behalf by its officials or agents. Article XIII. Collection shall always take place in the currency of the State applied to. To that effect, the competent authorities of the State applied to shall convert the amount for collection into their own currency at the rate of exchange prevailing at the date that the request is received. Article XIV. Amounts collected by the competent authorities of one State on behalf of the competent authorities of the other State shall be paid over immediately, after deduction of the costs under Article XV below, to the account of the Central Bank of the applicant State with the Central Bank of the State applied to. Article XV. No fees or costs shall be charged for action taken on requests for assistance. This provision shall, however, not apply, in the absence of any agreement to the contrary, to emoluments paid to witnesses, experts, agents of execution and to legal and judicial fees incurred in connection with the service of a document or the enforcement of a revenue claim. The revenue authorities shall notify each other as required of the probable amount of such costs, fees or charges. When relating to the collection of a revenue claim, the amount of
(4435)
116
MEXICO DRAFT
ADMINISTRATIVE
ASSISTANCE
charges shall be retained from the amount collected by the competent authorities of the State applied to. Article XIX. The Convention shall not apply to measures of conservancy in respect to taxes that have not yet been assessed. Article XX. Over and above the measures of assistance for which the Convention provides, the competent revenue authorities of the two contracting States may concert together for the exchange of information other than that for which provision is made and also for the purpose of the assessment of the taxes to which the Convention relates.
(4436)
LONDON DRAFT
117
such costs, fees and charges shall be retained from the amount collected by the competent authorities of the State applied to. Article XVI. The Convention shall not apply to measures of conservancy in respect to taxes that have not yet been assessed.
(4437)
PUBLICATIONS OF THE LEAGUE OF NATIONS
PUBLIC FINANCE AND FISCAL PROBLEMS 1. Double Taxation and Tax Evasion.
Prevention of International Double Taxation and Fiscal Evasion, by Mitchell B. Carroll. (1939.II.A.8). 53 pp. General survey of the work done under the auspices of the League of Nations since 1920, with particular emphasis on the work of the Fiscal Committee since 1929. Double Taxation and Tax Evasion. Report and Resolutions submitted by the Technical Experts to the Financial Committee of the League of Nations. 1925. 45 pp. . Report presented by the Committee of Technical Experts on Double Taxation and Tax Evasion. (1927.JI.40). 33 pp. 1/6; $0.40
1/6; $0.40 1/3; $0.30
Report presented by the General Meeting of Government Experts on Double Taxation and Tax Evasion. (1928. 1/6; $0.40 ................. 11.49). 39 pp ....... In October 1928 a Conference of representatives of twenty-seven Governments gave its approval to six draft bilateral conventions designed to enable States to prevent or, at least, greatly to diminish double taxation and tax evasion. These draft conventions have since served as models for the large majority of the actual conventions which have been concluded between Governments. Collection of International Agreements and Internal Legal Provisions for the Prevention of Double Taxation and Fiscal Evasion (prepared by the Economic and -Financial Section of the Secretariat of the League of Nations in accordance with the Council Resolution of Septem10/-; $2.50 ber 15th, 1927). (1928.11.45). 278 pp........... SUPPLEMENT No. i TO (OR VOLUME II OF) THE COLLECTION
OF INTERNATIONAL AGREEMENTS AND INTERNAL LEGAL PROVISIONS FOR THE PREVENTION OF DOUBLE TAXATION
...... AND FISCAL EVASION (1929.11.34). 53 pp ... ........... VOLUME III. (1930.11.50). 110 pp....
VOLUME IV. (1931.II.A.29). 72 pp .......... VOLUME V. (1933.II.A.29). 136 pp. ........... .... ...
1/6; $0.40 3/-; $0.75 2/-; $0.50 4/-; $1.00
(4438)
Taxation of Foreign and National Enterprises: A study of the tax systems and the methods of allocation of the profits of enterprises operating in more than one country. Volume I. FRANCE, GERMANY, SPAIN, the UNITED KINGDOM and the UNITED STATES OF AMERICA. (1932. II.A.3). 275 pp...... .................. 10/-; $2.50 Volume II. AUSTRIA, BELGIUM, CZECHOSLOVAKIA, FREE
CITY OF DANZIG, GREECE, HUNGARY, ITALY, LATVIA, LUXEMBURG, NETHERLANDS, ROUMANIA and SWITZERLAND. (1933.II.A.18). 467 pp ............... Volume III. BRITISH INDIA, CANADA, JAPAN, STATES
.12/-;
MEXICO,
$3.00
WISCONSIN. (1933.II.A.19). 254 pp ........... ... Volume IV. METHODS OF ALLOCATING TAXABLE INCOME, by Mitchell B. Carroll, LL.B., Lic. Droit (Paris), D. Jur. (Bonn), former Special Attorney, United States of America Treasury Department, Director of the Study of the Allocation of Income. (1933.II.A.20). 219 pp..... .. Volume V. ALLOCATION ACCOUNTING FOR THE TAXABLE INCOME OF INDUSTRIAL ENTERPRISES, by Ralph C. Jones. (1933.II.A.21). 78 pp ......... ..............
NETHERLANDS EAST INDIES, UNION OF SOUTH AFRICA, OF MASSACHUSETTS, of NEW YORK and of
7/6; $2.00
6/-; $1.50 26; $0.60
Fiscal Committee: Model Bilateral Conventions for the Prevention of International Double Taxation and Fiscal Evasion: Second Regional Tax Conference, Mexico, D. F. (July 1943) (1945.II.A.3). 86 pp ...... . . . 3/6; $1.00 Fiscal Committee: Report on the Work of the Tenth Session of the Committee (London, March 20th to 26th, 1946). (1946.II.A.4). 79 pp ..... ................
2/6; $0.60
2. Analytical Studies.
Public Finance, 1928-1935-1937. (1936.II.A.1). Published in the form of a series of sixty-two monographs. Complete ....... ................... .. 15/-; $3.75 Single monographs ....... .............. 1/-; $0.25 Facts and figures concerning the public finances in sixty-one countries. Similar studies were published in 1922,
1923, 1927 and 1929 under the title:
Memorandum on Public Finance. The last: MEMORANDUM ON PUBLIC FINANCE (1926-1928). (1929.II.50). 274 pp...................... .10/-;
$2.50
Publications Department, Palais des Nations, Geneva (Switzerland)
(4439)
SECTION 2 ORGANISATION FOR EUROPEAN ECONOMIC COOPERATION (OEEC)
73095 0-62-vol. 4-
29
(4441)
CONTENTS OF SECTION 2
1. 1st Report of the Fiscal Committee of the OEEC on the Elimination of Double Taxation (September, 1958) -----------------------2. 2d Report of the Fiscal Committee of the OEEC on the Elimination of Double Taxation (July, 1959) ----------------------------3. 3d Report of the Fiscal Committee of the OEEC on the Elimination of Double Taxation (August, 1960) --------------------------4. 4th Report of the Fiscal Committee of the OEEC on the Elimination of Double Taxation (August, 1961) ---------------------------
(4445) (4511) (4565) (4619)
(4443)
REPORT OF THE FI$C4'l COMMI1ME OF THE 0.Ut
-Ml
IPSATRMt
FOA
PEA40
ON*
(4445)
The elimination of double taxation
REPORT OF THE
FISCAL
COMMITTEE OF THE O.E.E.C.
PUBLISHED BY THE ORGANISATION FOR EUROPEAN ECONOMIC CO-OPERATION 2, RUE ANDR-PASCAL. PARIS-16*
(4447)
The Organisation for European Economic Co-operation comprises the following Member countries: Austria, Belgium, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey and the United Kingdom. The Organisation came into being with the signing of the Convention for European Economic Cooperation on 16th April 1948, when Member Governments pledged themselves "to combine their economic strength, to join together to make the fullest collective use of their individual capacities and potentialities, to increase their production, develop and modernise their industrial and agricultural equipment, expand their commerce, reduce progressively barriers to trade among themselves, promote full employment and restore or maintain the stability of their economies and general confidence in their national currencies". Representatives of each of the Member countries meet daily at the O.E.E.C. headquarters, Chdteau de la Muette, Paris, to discus their economic problems and work out common solutions. The United States and Canada participate in all the work of the Organisation as Associate Members. Spain participates, as a full Member and on an equal footing with the Member countries, in the work of the agricultural bodies of the Organisation and is associated in its other activities. Yugoslavia is represented by an observer and like Spain also participates in the work of the European Productivity Agency.
Published in September 1958
(4448)
SUMMARY
PART I
I.
II. III. IV.
V.
INTRODUCTION ............................................ POSITION OF THE PROBLEM ................................. AIM OF THE COMMITTEE'S WORK .........................
FIRST RESULTS OF THE COMMITTEE'S WORK ...............
9
11
15
19
CONCLUSIONS ............................................
23
Appendix Recommendation of the Council concerning the elimination of double taxation ........................................ Annex I. II. III. IV. Article on taxes which should be covered by double taxation conventions .......................................... Article on permanent establishment ..................... Article on fiscal domicile .............................. Article on tax discrimination on grounds of nationality or other similar grounds ............................... PART If
COMMENTS ON THE ARTICLES ....................................
27
31 33 35 37
39
(4449)
PART I
REPORT OF THE FISCAL COMMITTEE OF THE O.E.E.C. CONCERNING THE ELIMINATION OF DOUBLE TAXATION
(4451)
INTRODUCTION
After its second year of existence the Fiscal Committee, which 1. was set up by Resolution of the Council C(56)49(Final) of 16th March 1956 to study fiscal questions relating to double taxation and other fiscal questions of a similar technical nature, is in a position to report to the Council its findings on some of the questions in respect of which it was instructed to make concrete proposals to the Council. As it stated in its Interim Report C(57)145 of 3rd July, 1957, 2. the Fiscal Committee could not, in the space of two years, deal with all the questions in its terms of reference, in view of the extent and complexity of the problems involved. The above Resolution of the Council did not lay down any time-table or deadline for this purpose, but merely provided that the Council would review the work of the Committee before 1st July, 1958, in order to determine whether or not the Committee should continue in being. Accordingly, the Fiscal Committee submits the present Report, 3. which not only summarises its work up to date, but also proposes that the Council should adopt forthwith certain concrete recommendations which may facilitate the abolition of double taxation between the Member countries. The Report also sets out the programme of work which the Fiscal Committee proposes to follow if the Council decides to maintain it after 1st July, 1958.
(4453)
II
POSITION OF THE PROBLEM
It may usefully be recalled, by way of preamble, that it was not 4 until comparatively recent times that countries sought to settle the problems of double taxation: that is, the concurrent imposition of tax on the same subject matter by two States, by means of bilateral agreements. As a result in particular of the work begun in 1920 by the League of Nations, which led to the drafting in 1928 of Model Bilateral Conventions for the avoidance of double taxation, a network of agreements was created principally between the European countries during the inter-war period. The work of the League of Nations finally resulted in the Model Conventions of Mexico (1943) and London (1946) which have served as a pattern for most of the bilateral Conventions signed or revised since the end of the last war. The majority of the Member countries are now parties to bilateral Conventions, as a result of which a great advance has been made in eliminating double taxation. But much still remains to be done. A number of countries have 5. not yet concluded Conventions between themselves or have concluded Conventions covering certain fields of taxation only. Cases of double taxation still therefore remain which are being rendered more difficult by the extension of taxation and more acute by the steadily increasing development of economic relations between the Member countries and the increasing interdependence of their economies. These same factors, moreover, are continually giving rise to new cases for which solutions must be found. Bilateral Conventions cannot, in general, provide a solution in cases involving a third State. Another point is that as between the current bilateral Conventions, 6. the rules to be applied for avoiding double taxation are still by no means uniform. Thus, in the fifty Conventions or so already being applied between the Member countries of the O.E.E.C., identical problems are subjected to different and more or less satisfactory solutions. Even in regard to questions for which the countries concerned originally intended to adopt similar rules, divergencies are very often to be found. It is a fact that in many cases the Conventions cannot be clearly interpreted and this makes them difficult to understand, except by experts. As a 11
(4455)
result, it is impossible for a taxpayer to ascertain exactly what tax liabilities he incurs by engaging in economic activities in other countries. Manufacturers, businessmen and financial circles have thus a feeling of insecurity which does not encourage the development of intra-European economic relations. Then there are the administrative complications for the taxpayer and for the national authorities due to the diversity in the existing regulations: these too must not be underestimated. 7. Although, when compared with the efforts being made to free the economic relations between the Member countries of the O.E.E.C. from the obstacles created by quantitative import restrictions, by Customs tariffs and by restrictions on invisible transactions and transfers and on capital movements, an improvement with regard to double taxation is of less importance, the need for progress in this field is also essential. This is all the more justified as the obstacles represented by double taxation are not, in general, the result of any deliberate intention. Their effect is simply that a person doing business or investing in more than one State is arbitrarily given less favourable treatment than a person who does business or investing in one State alone. 8. From a technical point of view, these obstacles could of course be abolished by harmonising the taxation laws of the Member countries. But such a harmonisation, which would imply in certain cases a prior harmonisation of public and commercial laws, is not a necessary condition in order to obtain a substantial improvement. To remove a great many of the taxation obstacles to the expansion of intra-European trade, payments and investments, the first step consists in applying a less ambitious programme which would be confined to solving taxation problems having an international aspect and, in particular, to delimiting taxation powers uniformly between the Member countries. 9. It should also be noted that, from the taxation point of view, the great advantages that would result from the adoption of common rules can be secured without the Member countries suffering any appreciable loss. For the restrictions placed on their respective taxing powers would merely entail readjustments which would be limited to certain extensions or reductions, and any losses of budget revenue which might be incurred by a State on account of the elimination of double taxation would find their justification in the economic advantages that this elimination would entail.
12
(4456)
FOR
NETWORK OF GENERAL BILATERAL CONVENTIONS THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO INCOME AND PROPERTY TAXES BETWEEN MEMBER AND ASSOCIATED COUNTRIES as at 1st July 1958
a REPORTING COUNTRIES
4 1
z
4 4 -
W 3 a m
0I
0 4
N IN
................... ........ ......... ........ ..... :....
............ .....
AUSTRIA BELGIUM
DENM ARK
NO , [N. N
_
.. N
... . . .. . .....
-i......... .... ....
N.... ...
S
FRANCE GERMANY
GREECE ICELAND IRELAND ITALY
. .
NN
PORTUGAL
SWEDEN SWITZERLANDS
TURKEY
~
N N
UNIT. KINGDOM
.. .
CAD A
Convention in force
Negotiations proceeding for the revision of the Convention in force
New Convention signed to replace Convention at present in force
Convention under negotiation
Convention signed but not yet in force
73095 0-62-vol. 4-
-30
.-
(4457)
III
AIM OF THE COMMITTEE'S WORK
10. Basing itself on the considerations set out in the foregoing paragraphs, the Fiscal Committee has directed its studies to the establishment of a uniform line of conduct acceptable, to all the Member countries with respect to all the questions usually dealt with in double taxation Conventions. It has been principally concerned hitherto with
the prevention of double taxation with respect to taxes on income and profits. 11. The Committee has reached agreement on the first four questions
which it brought under study:
a) listing and definition of taxes on income and capital (including taxes on estates and inheritances) which should be covered
b) by double taxation agreements; concept of permanent establishment;
c) concept of fiscal domicile; d) tax discrimination on grounds of nationality or similar grounds. The Articles giving concrete expression to the agreement reached are analysed in Chapter IV below and are attached -as Annexes to the present report. 12. Seven other questions are now being studied by the Fiscal Committee : a) taxation of income of shipping, inland waterways transport and air transport enterprises and of their crews; b) taxation of remuneration in respect of dependent and independent personal services; c) taxation of income from immovable property; d) direct taxation of royalties; e) definition and apportionment of profits between the head office of an enterprise, its permanent establishments and its subsidiaries; f) taxation of interests g) taxation of dividends.
(4459)
On the first four questions the studies are already well advanced and there is reason to hope that unanimous agreement may be reached during the coming sessions of the Committee. 13. Once the study of the various questions relating to taxation of income and profits are completed, the Fiscal Committee will proceed with the examination of the problems concerning taxation of capital. In conjunction with the study of these matters, it will also study the technical methods of avoiding double taxation (e.g. the exemption method and the tax credit method). In accordance with its terms of reference, it further proposes to study the problems of double taxation in connection with estates and inheritances as well as with indirect taxes. 14. The task entrusted to the Committee is necessarily a long-term work and concrete results can only be obtained gradually. On various questions, final agreement depends on the solutions to be adopted for connected problems. The Fiscal Committee proposes to establish a series of articles which, taken together, will finally cover all the problems which the bilateral double taxation Conventions are designed to solve and will thus constitute a Model Bilateral Convention acceptable to all Member countries. It would then be possible to envisage going further towards harmonisation by replacing the existing bilateral Conventions between the Member countries of the O.E.E.C. by a single Multilateral Convention. It is naturally impossible, at this stage, to foresee how long it will take to implement such a Convention. 15. In the Committee's opinion, a Multilateral Convention would not prevent Member countries which felt a need for more detailed provisions, owing to the existence of particular conditions, from implementing them in the form of protocols, for example. Such might be the case for adjacent countries wishing to settle the position of frontier workers or itinerant merchants. 16. The Fiscal Committee wishes to recall here that the International Chamber of Commerce, at its 15th Congress in Tokyo in May 1955, adopted a Resolution inviting the O.E.E.C. to undertake an investigation of the possibility of concluding, between the Member countries, a Multilateral Convention which would have the great advantage of securing uniformity of principles and practice in double taxation matters in a vast area of world trade. 17. The Fiscal Committee is fully aware of the many difficulties which must be overcome before co-ordination can be established and maintained in the complex field of international taxation relations. It considers it important, however, to stress not only that its members are convinced of the need for greater co-ordination but that during its studies there has been considerable identity of views over the solutions to be adopted. The Fiscal Committee therefore considers that very substantial results can be obtained in the next years. 16
(4460)
Another consideration is that the application of common rules 18. by the Member countries of the O.E.E.C. may, because of their position in the world economy, be an inducement to other countries to adopt the same rules. The Fiscal Committee wishes to express its appreciation of the fact that Representatives of the United States have attended its meetings from the beginning and have taken part in its discussions. 19. The Fiscal Committee feels that it would be advantageous if specific provisions, as and when agreed by the Committee, were implemented in the existing bilateral Conventions and in those to be concluded subsequently. In this way, the Conventions would be gradually co-ordinated and the adoption of a single Multilateral Convention between the Member countries considerably facilitated. 20. This co-ordination would have many advantages: the application of common rules by the Member countries in questions of double taxation would provide more stability than can be guaranteed by the existing bilateral Conventions which are negotiated or revised independently of one another. Such rules would in particular give more certainty to Member countries' residents doing business in other European countries and to investors, and this would be bound to have a favourable effect on the development of visible and invisible trade and intra-European investment. If this development is to be ensured, the risk of losses which may result from modification of the tax treatment to which residents of other countries are subjected must as far as possible be avoided. Common rules would also simplify the work of the taxation authorities of the Member countries. To achieve these results, close and constant collaboration on a 21. suitable multilateral basis must be maintained between the Member countries. A satisfactory solution, cannot be obtained from purely bilateral discussions. In addition, in view of the many problems which continually arise when bilateral Conventions are being concluded or revised, the Committee wishes to point out how useful it is for Member countries' officials responsible for double taxation questions and experts in the subject to meet from time to time in the O.E.E.C. to clarify and solve these problems together. 22. The Fiscal Committee considers that the best and most practical way to co-ordinate gradually the bilateral Conventions and to prepare the way for a Multilateral Convention would be to submit to the Council, as common views are reached on questions forming a whole, Articles which would be embodied in a recommendation with a view to their implementation by Member countries. 23. The Fiscal Committee has been encouraged to follow this line of approach because, in a number of bilateral Conventions recently negotiated or revised between Member countries, certain of the Articles proposed by the Committee have been mutually adopted by the negotiators. For example, the Article on permanent establishmenth as been 17
(4461)
adopted in the bilateral Conventions negotiated by Germany with France, the Netherlands, Sweden, Denmark, Norway and Luxembourg. Various Articles prepared by the Fiscal Committee have also been adopted in the Convention recently negotiated between the Netherlands and Austria.
18 J4462)
IV
FIRST RESULTS OF THE COMMITTEE'S WORK
As mentioned in paragraph 11 above, the Fiscal Committee 24. has already reached agreement on four important questions connected with the taxation of income and profits which often cause difficulty when Conventions have to be negotiated or existing Conventions revised or interpreted. With regard to each of these questions, the Fiscal Committee has adopted a new standard text for the respective Article in the double taxation Conventions. For each Article it has prepared a detailed Commentary. The four Articles and the corresponding Commentaries are given in Part II of this Report. The present chapter therefore will be limited to defining the purpose of each Article and the advantages of the text proposed for it. A.
LISTING AND DEFINITION OF TAXES ON INCOME AND CAPITAL (INCLUDING TAXES ON ESTATES AND INHERITANCES) COVERED BY DOUBLE TAXATION AGREEMENTS WHICH SHOULD BE
25. This Article which appears at the beginning of Conventions concerning taxes on income and capital and Conventions concerning estates and inheritances, defines the field of application of the Conventions. The intention in the text given in Annex I is to render the terminology and nomenclature relating to the taxes covered by each Convention acceptable and precise, to ensure identification of the taxes covered by the Convention, to widen the Convention's field of application as much as possible by including taxes imposed by political subdivisions or local authorities and to avoid the necessity of concluding new Conventions whenever changes are made in the taxation laws of the Contracting States. The provisions of the Article are framed as simply and as clearly as possible, and in a similar manner for the two classes of taxes involved, i.e. taxes on income and capital and taxes on estates and inheritances. B.
CONCEPT OF PERMANENT ESTABLISHMENT
26. The Conventions for the avoidance of double taxation on income and capital concluded between the Member countries accept the prin19
(4463)
ciple that industrial and commercial profits accruing to an enterprise of one of the Contracting States cannot be subject to tax in the other Contracting State unless the enterprise carries on a trade or business in that other State through a permanent establishment situated therein. If the enterprise carries on a trade or business in the other State, tax on the profits it earns can be charged in that other State, but only on so much of them as is attributable to the permanent establishment. What is involved here therefore is an essential concept for which 27. it would be very advantageous if the Member countries adopted a common definition in their double taxation Conventions. Although, in this respect, the existing Conventions to some extent take as their pattern the Article on permanent establishment of the Mexico and London Model Conventions, nevertheless, differences, which are sometimes very considerable, are to be found in the definitions adopted, and it even occurs that the same country accepts different conceptions in the various agreements which it has entered into. The Article given in Annex II proposes a standard text which 28. clarifies and simplifies the existing situation; it takes into consideration the current factors in the problem and is based on liberal criteria. Its adoption would therefore have a favourable influence on the development of economic relations between the Member countries. It would make matters much more convenient for taxpayers and would give them much greater certainty; it would also make the work of the national taxation authorities much easier. In view of the importance of this question, a particularly detailed Commentary has been prepared.
C. CONCEPT OF FISCAL DOMICILE
The concept of fiscal domicile is another essential concept in 29. double taxation Conventions because it serves to determine the individuals and legal persons contemplated in the Conventions and, in addition, when there is a conflict of domicile, to determine the Contracting State which should have the right to tax. In view of the considerable differences between the concepts applied by Member countries in their internal law, unanimous agreement on the concept of domicile in double taxation Conventions is indispensable. The purpose of the Article given in Annex III is to determine 30. clearly the fiscal domicile of individuals and legal persons. The Article begins by defining, under the expression "resident of a State", the individuals or legal persons who, under the national law of that State, are liable to taxation therein by reason of the various personal connections they may have with that State. The Article then establishes the successive criteria that have to be applied where an individual is considered to be a resident of more than one State. As regards legal persons, partnerships and associations not possessing legal personality, the Article indicates that in cases of conflict of domicile the State of residence is the State in which the place of effective management is situated. 20 .(4464)
D.
TAX DISCRIMINATION GROUNDS
ON
GROUNDS
OF NATIONALITY
OR SIMILAR
Although this question has no connection with problems of 31. double taxation, nevertheless, in a number of double taxation Conventions, it is the subject of special provisions designed to prevent discriminatory treatment, in the form of other or more burdensome taxation, from being applied in one of the two States to taxpayers possessing the nationality of the other State. Similar provisions are to be found in a number of other Conventions: commercial Conventions, Conventions on employment, Conventions on establishment and Conventions of friendship. The European Convention on Establishment of 13th December, 1955, concluded under the auspices of the Council of Europe and signed by 14 Member countries of the O.E.E.C., also contains in its Article 21 a provision forbidding discrimination based on nationality, but it only applies to individuals and up to now has only been ratified by one country. To this question can be linked the question of the taxation of stateless persons. Ten Member countries of the O.E.E.C. signed the Convention of 28th September, 1954, to improve the conditions of stateless persons, Article 29 of which provides that such persons must be given the treatment accorded to nationals. The Article given in Annex IV contains a provision on reci32. procal taxation treatment of nationals. Although tax discrimination on grounds of nationality is an exception in the Member countries of the O.E.E.C., nevertheless it is important that Member countries' adhesion to the principle of no discrimination for nationality reasons should be clearly embodied in the texts of their double taxation Conventions in view, particularly, of the force of example that this can have for their relations with third countries. The Article also contains a provision that a permanent estab33. lisnment owned by an enterprise of one of the Contracting States in the other State must not be less favourably taxed by that other State than enterprises of the latter. This provision on non-discrimination as regards permanent establishments, which is found less frequently in the existing Conventions than the provision on reciprocal taxation treatment of nationals, will give firms greater security in expanding their international business. Lastly, the Article contains a provision which so far has only rarely been adopted in existing Conventions: this concerns the taxation treatment of enterprises under the control of residents of the other Contracting State.
21
(4465)
CONCLUSIONS
THE FISCAL COMMITTEE'S PROPOSALS TO THE COUNCIL 34. In conclusion, the Fiscal Committee proposes that the Articles annexed to this Report should be embodied in a Recommendation of the Council to the Member countries inviting them to adopt these texts when revising existing Conventions or signing new Conventions between them. 35. It is also proposed that the countries should notify to the Organisation any such new or revised bilateral Conventions in which the Articles have been adopted, or if this has not been possible the reasons for not doing so. 36. The Fiscal Committee would be instructed to examine these notifications and to report to the Council on the measures taken in application of the Recommendation and on the measures which might be taken to facilitate its implementation in one or more specific countries. 37. Lastly, the Fiscal Committee expresses the hope that the Council will confirm its present mandate. The Committee considers that it will be in a position to submit to the Council before 1st July, 1961 a draft Convention for the avoidance of double taxation with respect to taxes on income and capital as well as concrete proposals concerning its implementation. The Committee considers that it will also be in a position to submit on this date to the Council a report on the progress of its work concerning the problems of double taxation with respect to taxes on estates and inheritances and to indirect taxes. In the meantime, the Fiscal Committee will submit to the Council further proposals or draft recommendations on subjects falling within the scope of its mandate. 38. The Fiscal Committee is fully aware that the elimination of double taxation only constitutes a first step and that the question of co-ordination and harmonisation of fiscal policies between Member 23
.(4467)
countries will become increasingly important as European economic co-operation becomes closer. While considering that it is necessary to keep for the present to the. mandate which it was given the Fiscal Committee wishes to be kept informed of the work of O.E.E.C. which may have a bearing on fiscal questions or may influence the work undertaken by the Committee.
24
(4468)
APPENDIX
(4469)
RECOMMENDATION OF THE COUNCIL CONCERNING THE ELIMINATION OF DOUBLE TAXATION

Adopted by the Council at its 414th Meeting on 11th July, 1958 The Council Having regard to Article 13(c) of the Convention for European Economic Co-operation of 16th April, 1948; Having regard to the Recommendation of the Council of 25th February, 1955, concerning Double Taxation [C(55)37(Final)]; Having regard to the Resolution of the Council of 16th March, 1956, creating a Fiscal Committee [C(56)49(Final)]; Having regard to the Report of the Fiscal Committee of 28th May, 1958, and, in particular, to Annexes I to IV to that Report [C(58)1 18]; Considering that, in spite of the progress made in eliminating double taxation through the conclusion of bilateral Conventions between most of the Member countries, these Conventions do not afford uniform solutions to identical problems and that, moreover, certain Member countries have not concluded between them bilateral Conventions for the avoidance of double taxation or have concluded Conventions relating to certain fields only; Considering also that the increasing interdependence of the economies of the Member countries and the extension of taxation give rise to new cases of double taxation for which common solutions must be found; I. RECOMMENDS TO THE GOVERNMENTS OF THE MEMBER COUNTRIES that they should adopt in bilateral Conventions concluded between them for the avoidance of double taxation, either when revising existing or when concluding new Conventions, the provisions set out in the Annexes to this Recommendation. TI.
DECIDES:
1. Member countries shall, without delay, notify to the Organisation all new or revised bilateral Conventions for the avoidance of double taxation which they conclude between them. 27
(4471)
2. Member countries shall at the same time indicate to the Organisation the provisions in the Annex to this Recommendation which have been adopted in these Conventions, or the reasons why such provisions have not been adopted in the said Conventions. the Fiscal Committee: I. To report each year to the Council on measures taken by Member countries to implement the Recommendation under paragraph I; 2. To make proposals to the Council, if need be, on measures which ought to be taken in order to facilitate the implementation of that Recommendation in one or more Member countries; 3. To submit to the Council Draft Recommendations as and when agreement is reached within the Committee on questions within the scope of the mandate given by the Resolution of the Council of 16th March, 1956, referred to above. 4. To submit to the Council before 1st July, 1961, a Draft Convention for the avoidance of double taxation with respect to taxes on income and capital as well as concrete proposals for the implementation of that Convention; and 5. To report at the same time to the Council on the progress of the work relating to problems of double taxation with respect to taxes on estates and inheritances and to indirect taxes within the scope of the mandate given by the Resolution of the Council of 16th March, 1956, referred to above.
INSTRUCTS
III.
28 (4472)
ANNEX
73095 0-62-vol. 4-
31
(4473)
I
ARTICLE ON TAXES WHICH SHOULD BE COVERED BY DOUBLE TAXATION CONVENTIONS
A.
TAxEs ON INCOME AND CAPITAL
This Convention shall apply to taxes on income and capital 1. imposed on behalf of each Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied. There shall be regarded as taxes on income and capital all taxes 2. imposed on total income, on total capital, or on the elements of income or of capital, including taxes on profits derived from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation. The existing taxes to which this Convention shall apply are, 3. in particular: a) In the case of State A : ................................. b). In the case of State B: .................................. This Convention shall also apply to any identical or substantially 4. similar taxes which are subsequently imposed in addition to, or in place of the existing taxes. At the end of each year, the competent authorities of the Contracting States shall notify to each other any changes which
have been made in their respective taxation laws.
The competent authorities of the Contracting States shall by 5. mutual agreement resolve any doubts which arise as to the taxes to which this Convention ought to apply.
B.
TAXES ON ESTATES AND INHERITANCES
This Convention shall apply to taxes on estates and inheritances 1. imposed on behalf of each Contracting State or of its political subdivisions or local authorities, irrespective of the manner in which they are levied. 2. There shall be regarded as taxes on estates and inheritances all 31
(4475)
taxes imposed on the occasion of death in the form of tax on the corpus of the estate, of tax on inheritances, of transfer duties, or of taxes on donations mortis causa. 3. The existing taxes to which this Convention shall apply are, in particular: a) In the case of State A : ................................. b) In the case of State B : .................................. 4. This Convention shall also apply to any identical or substantially similar taxes which are subsequently imposed in addition to, or in place of the existing taxes. At the end of each year, the competent authorities of the Contracting States shall notify to each other any changes which have been made in their respective taxation laws. 5. The competent authorities of the Contracting States shall by mutual agreement resolve any doubts which arise as to the taxes to which this Convention ought to apply.
32
(4476)
II
ARTICLE ON PERMANENT ESTABLISHMENT The term "permanent establishment" means a fixed place of 1. business in which the business of the enterprise is wholly or partly carried on. 2. A a) b) c) d) e) f) g) permanent establishment shall include especially: a place of management; a branch; an office; a factory; a workshop; a mine, quarry or other place of extraction of natural resources; a building site or construction or assembly project which exists for more than twelve months.
The term "permanent establishment" shall not be deemed to 3. include: a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise. d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or for collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for similar activities which have a preparatory or auxiliary character, for the enterprise. A person acting in a Contracting State on behalf of an enterprise 4. of the other Contracting State - other than an agent of an independent status to whom paragraph 5 applies - shall be deemed to be a permanent establishment in the first-mentioned State if he has, and habitually 33
(4477)
exercises in that State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise. 5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. 6. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.
*
prise carried on by a resident of the Contracting State concerned.
NoTE : The expression "enterprise of a Contracting State " means an enter-
34 (4478)
III
ARTICLE ON FISCAL DOMICILE For the purposes of this Convention, the term "resident" of a 1. Contracting State means any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other similar criterion. Where by reason of the provisions of the preceding paragraph 2. an individual is a resident of both Contracting States, then this case shall be solved in accordance with the following rules: a) He shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him. If he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting States with which his personal and economic relations are closest (centre of vital interests); b) If the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode; c) If he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national; d) If he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall determine the question by mutual agreement. Where by reason of the provisions of paragraph 1 a legal person 3. is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated. The same provision shall apply to partnerships and associations which are not legal persons under the national laws by which they are governed.
35
(4479)
IV
ARTICLE ON TAX DISCRIMINATION ON GROUNDS OF NATIONALITY OR OTHER SIMILAR GROUNDS 1. The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. 2. The term "nationals" means: a) all individuals possessing the nationality of a Contracting State; b) all legal persons, partnerships and associations deriving their status as such from the law in force in a Contracting State. to or to be
3. Stateless persons shall not be subjected in a Contracting State any taxation or any requirement connected therewith which is other more burdensome than the taxation and connected requirements which nationals of that State in the same circumstances are or may subjected.
4. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents. 5. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises
of that first-mentioned State are or may be subjected.

37
(4481)
In this Article the term "taxation" means taxes of every kind 6. and description.
NoTE : The expression" enterprise of a Contracting State" means an enterprise carried on by a resident of the Contracting State concerned.
38 (4482)
PART I
COMMENTS ON THE ARTICLES
(4483)
SUMMARY
Annex A. Annex B. Annex C. Annex D. Commentary on the Article on taxes which should be covered by Double Taxation Conventions .......................... Commentary on the Article on permanent establishment ..... Commentary on the Article on fiscal domicile ............... Commentary on the Article on tax discrimination on grounds of nationality or other similar grounds .....................
41 45 55 59
(4484)
ANNEX A COMMENTARY ON THE ARTICLE ON TAXES WHICH SHOULD BE COVERED BY DOUBLE TAXATION CONVENTIONS 1. The Article is intended to make the terminology and nomenclature relating to the taxes covered by each Convention more acceptable and precise, to ensure identification of the Contracting States' taxes covered by the Conventions, to widen as much as possible the field of application of the Conventions - by including in them as far as possible, and in harmony with the internal legislation of the Contracting States, the taxes imposed by their political subdivisions or local authorities - and to avoid the necessity of concluding new Conventions whenever the Contracting States' taxation legislation is modified, by means of the periodical exchange of lists and through a procedure for mutual consultation. 2. The clauses are framed as simply and comprehensibly as possible and in a similar manner for taxes on income and capital and taxes on estates and inheritances. For each of the two categories of taxes the Article is divided into five paragraphs. Paragraph 1 3. This paragraph defines the subject of the Convention: on the one hand, taxes on income and capital-the term "direct taxes" which is far too imprecise has therefore been omitted-and, on the other, taxes on estates and inheritances. It is immaterial on behalf of which authorities such taxes are imposed; it may be the State itself or its political subdivisions or local authorities (constituent States, regions, provinces, "d6partements", Cantons, districts, "arrondissements", circles ["Kreise"], municipalities or groups of municipalities, etc.). The method of levying the taxes is equally immaterial: by direct assessment or by deduction at the source, in the form of surtaxes or surcharges, or as additional taxes ["centimes additionels"], etc. Paragraph2 4. This paragraph explains taxes on income and capitil and taxes on estates and inheritances. 41
(4485)
5. Taxes on income and capital comprise taxes on total income and on each element of income, on total capital and on each element of capital. They also include taxes on profits derived from the alienation of movable or immovable property, i.e. in particular capital profits and profits on real property, as well as taxes on capital appreciation. Finally, the definition extends to taxes on the total amounts of wages or salaries paid by undertakings ("payroll taxes": in Germany, "Lohnsummensteuer"; in France the "versement forfaitaire A la charge des employeurs"). 6. Taxes on estates and inheritances include all taxes imposed on the occasion of death in the form of tax on the corpus of the estate, tax on inheritances, transfer duties, and taxes on donations mortis causa. The definition does not extend to taxes on gifts inter vivos, as this point is not yet absolutely clear and should first be studied in more detail.
7. Clearly a State possessing taxing powers - and it alone - may
levy the taxes imposed by its legislation together with any duties or charges accessory to them: increases, costs, interest, etc. It has not been considered necessary to specify this in the Article, as it is obvious that in the levying of the tax the accessory duties or charges depend on the same rule as the principal duty. The Article does not mention "ordinary taxes" or "extraordinary 8. taxes". Normally, it might be considered justifiable to include extraordinary taxes in a draft Convention, but experience has shown that such taxes are generally imposed in very special circumstances. In addition, it would be difficult to define them. They may be extraordinary for various reasons; their imposition, the manner in which they are levied, their rates, their objects, etc. This being so, it seems preferable not to include extraordinary taxes in the Article. -But, as it is' not intended to exclude extraordinary taxes from all the Conventions, ordinary taxes have not been mentioned either. The Contracting States are thus free to restrict the Convention's field of application to ordinary taxes, to extend it to extraordinary taxes, or even to establish special provisions. Paragraph3 9. This paragraph lists the taxes in force at the time of signature of the Convention. The list is not exhaustive. It serves to illustrate the preceding paragraphs of the Article. In principle, however, it will be a full list of the taxes imposed in each State at the time of signature and covered by the Convention. Paragraph 4 10. This paragraph provides, since the list of taxes in paragraph 3 is purely declaratory, that the Convention is also to apply to all identical or substantially similar taxes which are subsequently imposed in addition to, or in place of the existing taxes. This provision is necessary 42
(4486)
to prevent the Convention from becoming inoperative in the event of one of the States modifying its taxation legislation. Each State undertakes to notify to the other any amendments 11. made to its taxation legislation, by communication to it at the end of each year, when necessary, a list of new or substituted taxes imposed during that year. Paragraph 5 This paragraph deals with the procedure for mutual consultation. 12. It is drafted fairly widely to enable the States to consult together whenever they think fit. Normally such procedure may be initiated whenever doubt arises as to the field of application of the Convention in regard to taxes. Doubts may also arise as to the interpretation of one or other of the preceding paragraphs of the Article, in particular paragraph 2, or any other question concerning taxes imposed additionally or substituted.
43
(4487)
ANNEX B COMMENTARY ON THE ARTICLE ON PERMANENT ESTABLISHMENT

INTRODUCTION
The permanent establishment Article is the result of a good 1. deal of discussion and much careful thought and consideration. During the drafting of the Article a number of proposals and suggestions were made which for good reason were finally rejected. In view of this, the Commentary does not restrict itself to giving the reasons for, and putting a gloss on, the proposals now contained in the Article. It also mentions the reasons for the rejection or omission of a number of the more important proposals that were not ultimately adopted, since these omissions are themselves of some significance and the reasons for them may be of interest. Paragraph 1 For the sake of clarity, it is preferable to have a general definition 2. of the concept of "permanent establishment" which is set out in a separate paragraph and not one which is almost hidden in a fist of a number of agreed examples, as is the case in Article V, paragraph I, of the Mexico and London Drafts of the Model Tax Convention published by the League of Nations. For this reason, the Article begins in paragraph 1 by attempting a general definition of "permanent establishment". This general definition attempts to bring out the essential characteristic of a "permanent establishment", viz. that it has a distinct situs, a "fixed place of business". It could perhaps be argued that in the terms of the general defini3. tion some mention should also be made of the other characteristic of a permanent establishment to which some importance is attached in the Commentary on the Mexico and London Drafts, namely that, in the words of that Commentary, the establishment "must have a productive character-i.e. contribute to business earnings". In the present permanent establishment Article this course has not been taken. Within the framework of a well run business organisation it is surely axiomatic to assume that each part contributes to the productivity of the whole. It does not, of course, follow in every case that because in the wider 45
73095 0-62-vol. 4-
32
(4-48)
context of the whole organisation a particular establishment has a "productive character" it is consequently an establishment to which profits can properly be attributed for the purpose of tax in a particular territory (see the Commentary on paragraph 3). 4. The criterion of "productive character" having been rejected, it would have been possible as an alternative to add to the general definition as it is now drafted in paragraph 1 of the Article the criterion of "profitability". This course was not taken mainly because the concept of profitability did not seem wholly relevant. There seemed to be three possible ways of distinguishing such a concept. First, it would be possible to add at the end of the general definition as it now stands in paragraph 1, the words "and through which profits are made or realised" or some similar formula. But this is clearly uns:-.isfactory because a permanent establishment which makes profits one year may not do so the next and it would be a most unfortunate result if, because of fluctuations in profitability, certain business activities were deemed to constitute a permanent establishment in one year and not in the next. To some extent this difficulty could be surmounted by taking the second course and adopting a formula on the lines "and through which, taking one year with another, profits are made or realised", but this is by no means a complete answer to the problem, because even a branch establishment which year after year itself makes a loss may nevertheless, in the context of the whole enterprise of which it is a part, "contribute to business earnings" in the sense that the League of Nations' Commentary seems to have meant. The third course is to draft an addition to the general definition in a manner which pays no regard to the question whether the establishment does or does not make distinguishable profits and to adopt the formula "...in which the business of the enterprise is wholly or partly carried on with the intention of realising profits". In many respects this third course could perhaps be regarded as the most satisfactory of the three, because it ignores what may be the actual accounting results of the enterprise and attempts to define its inherent profitability. But as will be seen, it is based upon a test not of fact but of motive and this is clearly an insuperable objection. To import a motive test into a set of rules intended to define with precision the taxation liabilities of individuals and companies is wholly undesirable and this third attempt at a definition of "profitability" is obviously unacceptable on that ground alone. 5. The general definition in paragraph 1 has, therefore, been drafted in its present form because it is the one which gives the greatest clarity and which promises to be the easiest to administer. There follows in paragraph 2 a list of prima facie examples of permanent establishments. In paragraph 3 there is provided a list of specific exceptions which, although they involve "a fixed place of business" should be excepted from the general rule in order to foster international trade or for convenience of administration. It is not, of course, suggested that the list in paragraph 2 is exhaustive. The last words of paragraph 3 (e) 46
(4490).
also provide a generalised exception to the general definition laid down in paragraph 1. These words have the effect of restricting to some extent the effect of paragraph 1 and go some way to meeting criticism that the scope of the general definition is too wide. 6. During the drafting of the permanent establishment Article a good deal of consideration was given to the question whether it should contain some special provision for itinerant merchants, pedlars and watermen. After careful consideration it was decided that in such cases there should only be deemed to be a permanent establishment if there is a fixed place of business. Itinerants of this kind are, in general, subject to tax in the country of residence. A special provision to deal with these people seems unnecessary because their income will, in general, be small and it is likely to be most difficult to tax them in any country except the one in which they reside. Moreover, any loss of tax which a country may suffer through giving up its right to tax itinerants from other countries is likely to be more or less compensated by the fact that it will have the sole right to tax itinerants residing within its own borders. It may be, of course, that countries with common frontiers will regard this problem as of sufficient importance to merit some special provision.
Paragraph2
7. This paragraph contains a list, by no means exhaustive, of examples each of which can be regarded a priori as constituting a "permanent establishment". In the many bilateral Conventions concluded between Member countries of O.E.E.C. there can, of course, be found other examples which, because of their importance in relation to the domestic taxation law of one or both of the contracting parties, have an equally strong claim to be included in this paragraph. In drafting this paragraph there were, however, three possible courses. First, there could have been compiled a composite paragraph which would necessarily have been of considerable length and would in effect have consolidated and brought together all the particular instances of permanent establishments which Member countries have found it convenient to include in their Conventions with one another. Secondly, there could have been drawn up a paragraph of medium length, selecting some of the more usual examples from existing bilateral Conventions and rejecting others, giving reasons for the choice. Finally, it would have been possible to take the minimum list of those examples common to, and agreed between Member countries. The method finally selected was to a considerable degree dictated by the nature of the task with which the draftsmen of the Article were faced. The main purpose of preparing a new permanent establishment Article was to delimit with some degree of precision the common ground between Member countries, in other words to compile an Article which Member countries would be able to accept with a minimum of discussion. With this purpose in mind it would have been a singularly useless exercise to pursue the first of 47 (4491)
the courses outlined above; the resulting Article would have been of inordinate length and many of its examples would have been completely inapplicable to the circumstances of a large number of Member countries.' Similarly with the second course; to select from the many Conventions which exist examples worthy of inclusion would have been somewhat invidious and, unless the selection had been based on anextre mely precise and detailed knowledge of the domestic law of each Member country-in the nature of things a most difficult test to satisfy-would have',been scarcely less than impertinent. Moreover, the resulting Article would have suffered from many of the defects inherent in the first of the courses mentioned above; some of its examples would have been inapplicable to the circumstances of many Member countries. 8. It is, therefore, the third course which has been taken. Basing itself on Article V of the Mexico and London Drafts, the Article attempts to comprise a list of examples which represent common ground on which Member countries will be able to agree. There has been included in paragraph 2 most of the examples given in sub-paragraph I of Article V of the Mexico and London Drafts; there is, however, one addition and there are one or two exceptions. There has been added "place of management"; it is considered that this example should be specially mentioned since a "place of management" need not necessarily be an "office". On the other hand, it did not seem necessary to include "head office". In so far as this term is not covered, like "professional premises" which has also been omitted, by the general term "office" it seemed that the "head office" of an organisation would normally be a "place of management". "Installations" has also been left out as being a term so general as to be virtually meaningless. The terms "building site or construction or assembly project" cover constructional activities such as excavating or dredging. The provision that a building site or assembly project shall only be deemed to be a permanent establishment if it exists for more than twelve months is not intended to prevent a country from raising a tax assessment before a year has expired if it appears that the site or project is likely to last for more than twelve months. The period of twelve months may, of course, fall, in part, into more than one fiscal year. 9. During the drafting of the Article it was proposed that the term "warehouse" should be included as a separate item in paragraph 2. This example has been traditionally included in similar Articles as sufficiently important to merit particular mention. The purpose of including the term was, of course, to cover those warehouses in which the business of letting storage space or other facilities to third parties was carried on. The insertion of the term was not intended to treat as a permanent establishment a warehouse controlled by an enterprise, but used only for the storage, etc., of its own goods. It was, however, suggested that to insert the term would cause confusion and that the term "warehouse" in paragraph 2 read together with (a) and (b) of paragraph 3 would be misleading. It was accordingly decided not to 48
(4492)
include the term "warehouse" in paragraph 2. A warehouse in which the business of letting facilities for storage, etc. to third parties is carri2d on will be a permanent establishment under the general definition of paragraph I even though it is not specifically mentioned in the list of examples in paragraph 2. Paragraph 3, however, makes it clear that a warehouse is not a permanent establishment if it is used by the enterprise which controls it merely for the purpose of storage, etc. Paragraph 3 This paragraph contains, first, a number of examples of forms of 10. business activity which should not be treated as constituting permanent establishments even though the activity is carried on in a "fixed place of business" and, secondly, in the last few words of sub-paragraph (e), a generalised exception to the rule laid down in paragraph I that a "fixed place of business in which the business of the enterprise is wholly or partly carried on" shall be regarded a priori as a permanent establishment. The exceptions listed in sub-paragraphs (a) to (e) do not require 11. much detailed comment. The first two and the fourth are common in the bilateral Conventions concluded between Member countries. Paragraph 3 (a) of the Article relates only to the case in which an enterprise acquires the use of facilities for storing, displaying or delivering its own goods or merchandise. Paragraphs 3 (b) relates to the stock of merchandise itself and provides that the stock shall not be treated as a permanent establishment if it is maintained for the purpose of storage. display or delivery. Paragraph 3 (c) covers the case in which a stock of goods or merchandise belonging to one enterprise is processed by a second enterprise in another territory on behalf of, or for the account of the first-mentioned enterprise. The reference to the collection of information in paragraph 3 (d) is intended to cover the case of the newspaper bureau which has no purpose other than to act as one of many "tentacles" of the parent body; to exempt such a bureau is no more than an extension of the concept of "mere purchase". Comment is perhaps called for on the examples mentioned in 12. paragraph 3 (e). It is recognised that a place of business the function of which is solely that of advertising, or the supply of information, or of scientific research may well contribute to the productivity of its parent enterprise. To assume so is once more axiomatic. But the services it performs for its parent enterprise are so far antecedent to the actual realisation of profits by its parent body that no profits can properly be allocated to it; accordingly it does not constitute a taxable It should, of course, be emphasised that exemption should be unit. given only so long as the place of business completely satisfies the conditions laid down. If, for example, the research establishment were to concern itself with manufacture, then exemption would be forfeited. The last words of sub-paragraph (e), "or for similar activities 49
(4493)
which have a preparatory or auxiliary character for the enterprise" require a special explanation of their own. The purpose of these words is twofold. In the first place, since it would be unreasonable to seek to claim that the list of examples quoted in paragraph 3 is, or in the nature of things could hope to be exhaustive, the last words of subparagraph (e) are intended to cover any further examples (such as the organisation maintained solely for the purposes of servicing a patent or "know-how" contract) which are not listed among the exceptions in paragraph 3 but are nevertheless within the spirit of them. The words in question are, therefore, intended to make it unnecessary to attempt to produce an exhaustive list of exceptions which, even if it were comprehensive, would inevitably be of inordinate length and undesirable rigidity. In the second place, the words extend the principle underlying the examples in sub-paragraph (e) to provide a generalised exception to the general definition in paragraph 1. To a considerable degree they delimit that definition and exclude from its rather wide scope a number of forms of business organisation which, although they are oarried on in a fixed place of business, should not be treated as taxable units. To put the matter. in another way, the last words of sub-paragraph (e) refine the general definition in paragraph I and, when read with that paragraph, provide a more selective test by which to determine what constitutes a properly taxable permanent establishment. In view of the examples given, the reference to "similar activities" cannot lead to an arbitrary extension of the exemption set out in paragraph 3 (e). It will, of course, be the responsibility of the enterprise to prove that the activities in question are of a preparatory or auxiliary character within the framework of the whole activities of the enterprise. If, for example, the results of the research carried on in a laboratory are not only used by the enterprise but are also sold to a third party, tile paragraph would cease to apply. Alternatively, it would be possible for countries to include in bilateral agreements a provision that, where the results of the laboratory's research are used partly by the enterprise and in part are sold to third parties, the charge to tax on the permanent establishment should be limited to the profits arising from the sales to third parties. Such a provision would be analoguous to the provisions relating to "mere purchase" in a number of Conventions.
Paragraph 4 :
DEPENDENT AGENTS AND EMPLOYEES
13. Whilst in paragraph 3 certain exceptions are made to the general definition in paragraph 1, it seems necessary in conformity with the international practice hitherto followed to treat certain groups of persons as permanent establishments on account of the nature of their business activities, even though the enterprise may not have a "fixed place of business". 14. Persons who may be deemed to be permanent establishments must be strictly limited to those who are dependent, both from the legal and economic points of view, upon the enterprise for which they carry 50
(4494)
on business dealings (Report of the Fiscal Committee of the League of Nations, 1928, page 12). Where an enterprise has business dealings with an independent agent, this cannot be held to mean that the enterprise itself carries on a business in the other State. In such a case, there are two separate enterprises. Having thus excluded the independent agents from the term 15. "permanent establishments", it would likewise not be in the interest of international economic relations to treat all dependent agents as being permanent establishments. Treatment as a permanent establishment should be limited to dependent agents of those enterprises which, in view of the scope of their agent's authority or of the nature of their agent's business dealings, take part to a particular extent in business activities in the other State. Therefore, the Article proceeds on the basis that only persons having the authority to conclude contracts shall be treated as permanent establishments. The term "general authority" which has been commonly used in bilateral Conventions has been abandoned and replaced simply by the term "authority". In practice, it seems unlikely that any dependent agents have a completely unfettered authority to conclude contracts. In all cases the authority must be to some extent circumscribed. For administrative reasons, it seems advisable to avoid the difficulties which would inevitably arise if the question whether or not the dependent agent is a permanent establishment had to be decided by reference to the precise extent of his authority. When the agent has sufficient authority to bind the enterprise by concluding contracts, the extent of the enterprise's participation in the business activity of the other country is such that the agent should be deemed to be a permanent establishment. The use of the term "permanent establishment" in relation to a person, presupposes, of course, that that person makes use of his authority repeatedly and not merely in isolated cases. During the drafting of the Article, it was at one stage suggested 16. that one of the tests that should be used to determine whether or not an agent to be regarded as a permanent establishment should be the availability in the country in which the agent operates, and at the disposal of the agent, of a stock of goods or merchandise belonging to the enterprise. This, is, of course, a criterion commonly employed in bilateral Conventions for the avoidance of double taxation. For a number of reasons, this suggestion was not pursued and in its present form paragraph 4 of the Article is founded on the view that the only real criterion is the nature of the authority entrusted to the agent; in brief, whether or not he has, and habitually exercises, an authority to conclude contracts in the name of the enterprise. Since the maintenance of a place of business exclusively for the 17. purchase of goods or merchandise is not to constitute a permanent establishment (cf. paragraph 3 of the Article), a person should not be deemed to be a permanent establishment merely because he has an 51
(4495)
authority to conclude contracts which is strictly limited to contracts covering the purchase of goods or merchandise. 18. Under paragraph 4 of the proposal, only one category of dependent agents, who meet specific conditions, is deemed to be permanent establishments. All independent agents and the remaining dependent ones are deemed not to be permanent establishments. Mention should be made of the fact that the Mexico and London Drafts (Article V, paragraph 4, of the Protocol) and a number of Conventions, do not enumerate exhaustively such dependent agents as are deemed to be permanent establishments, but merely give examples. In the interest of preventing differences of interpretation and of furthering international economic relations, it appeared advisable to define, as exhaustively as possible, the cases where agents are deemed to be "permanent establishments". Paragraph 5 :
INDEPENDENT AGENTS
19. Where the enterprise carries on business dealings through an agent of an independent status, it cannot be taxed in the other Contracting State (cf. the reasons given in paragraph 14 above). Corresponding provisions are included in the Mexico and London Drafts (Article V, paragraph 5, of the Protocol) and in numerous other Conventions for the avoidance of double taxation. In the Mexico and London Drafts and in the Conventions, brokers and commission agents are stated to be agents of an independent status. Similarly, business dealings carried on with the co-operation of any other independent person carrying on a trade or business (e.g. a forwarding agent) do not constitute a permanent establishment. Such independent agents must, however, be acting in the ordinary course of their business. Where, for example, a commission agent not only sells the goods or merchandise of the enterprise in his own name but also habitually acts, in relation to that enterprise, as a permanent agent having an authority to conclude contracts, he would be deemed in respect of this particular activity to be a permanent establishment since he is thus acting outside the ordinary course of his own trade or business (namely that of a commission agent). 20. Although it stands to reason that agents of an independent status, representing as they do a separate enterprise, cannot constitute a permanent establishment of the foreign enterprise where they are acting in the ordinary course of their business (cf. paragraph 14 of the Commentary), paragraph 5 is retained in the draft for the sake of clarity and emphasis especially since a similar provision is contained in nearly all of the double taxation agreements so far concluded. Paragraph 6 :
SUBSIDIARY COMPANIES
21. The Mexico and London Drafts (Article V, paragraph 8, of the Protocol) and numerous Conventions for the avoidance of double 52
(4496)
taxation, provide that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. This follow, from the principle that, for the purpose of taxation, such a subsidiary company constitutes an independent legal entity. Even the fact that the trade or business carried on by the subsidiary company is managed by the parent company does not constitute the subsidiary company a permanent establishment of the parent company. 22. Where, however, the subsidiary company, on behalf of its parent company, carries on an activity within the provisions of paragraph 4, that subsidiary company is deemed to be a permanent establishment of the parent company. Where, for example, the subsidiary company, on the strength of an authority, concludes contracts of sale in the name of the parent company, the subsidiary company will be treated as a permanent establishment of the parent company (but only in respect of such activities). The parent company is subject to tax on so much of the profits accruing from such sales as is attributable to that permanent establishment. This does not affect the separate taxation of the subsidiary company's own profits. 23. For the same reasons, a parent company should not be treated as constituting a permanent establishment of its subsidiary unless it fulfils the conditions set out in paragraph 4 of the Article. The same rules should apply to two or more subsidiaries of the same company.
53
(4497)
ANNEX C COMMENTARY ON THE ARTICLE

ON FISCAL DOMICILE
1.
GENERAL COMMENTS
1. The concept of domicile has various functions and is of importance in three cases: a) in determining a Convention's field of application with respect to physical and legal persons; b) in solving cases where double taxation arises in consequence of a double domicile; c) in solving cases where double taxation arises as a consequence
of conflict between domicile and source.
2. The Article is intended only to solve the conflict between two domiciles. For further elucidation of the Article some general comments are made below referring to the two typical cases of conflict, i.e. between two domiciles and between domicile and source. In both cases the conflict arises because, under their internal legislation, one or both Contracting States claim that the person concerned has his domicile in their territories. 3. Generally the' national 'legislations of the various States impose a more comprehensive liability to tax-"full tax liability"-on account of the taxpayer's personal attachment to the State concerned (the State of "domicile"). This liability to tax is not imposed only on persons who are "domiciled" in a State in the sense in which "domicile" is usually taken in-the legislations (civil law). The cases of full liability to tax are extended to comprise also, for instance, persons who stay continually, or maybe only for a certain period, in the territory of the State. Some legislations impose full liability to tax on individuals who perform services on board ships which have their home port in the State. 4. The Conventions for the avoidance of double taxation do not concern themselves with testing the national rules of law of the Contracting States laying down the cases in which a person is to be treated fiscally as "domiciled" and, consequently, is "fully liable to taxation" in that State.. The Conventions do not lay down standards which the national rules of law on "domicile" have to fulfil in order that claims 55
(4499)
for full tax liability can be accepted between the Contracting States. In this respect the States take their stand entirely on the national legislations. This manifests itself quite clearly in the cases where there is no 5. conflict at all between two domiciles, but where the conflict exists only between domicile and source. But the same view applies in conflicts between two domiciles. The special point in these cases is only that no sdiution of the conflict can be arrived at by reference to the concept of domicile adopted in the national laws of the States concerned. In these cases special provisions must be established in the Convention to determine which of the two concepts of domicile is to be given preference. An example will elucidate the case: An individual has his permanent home in State A, where his wife and children live. He has had a stay of more than six months in State B and according to the legislation of the latter State he is-in consequence of the length of the stay-taxed as being domiciled in that State. Thus, both States claim that he is fully liable to tax. This conflict has to be solved by the Convention. 6. In this particular case the Article under paragraph 2 gives prefer7. ence to the claim of State A. This does not, however, imply that the Article lays down special rules on "domicile" and that the national rules of law of State B are ignored because they are incompatible with such rules. The fact is quite simply that in the case of such a conflict a choice must necessarily be made between the two claims, and it is on this point that the Article proposes special rules. What is stated above gives the general background of the Article. 8. Special comments are made below. 2. Paragraph 1 The Conventions usually refer to the State of "domicile" in several 9. Articles. It was felt that, for terminological reasons, it would be useful if a "shorthand expression" could be used in all cases where the State of "domicile" is mentioned. In the Article it is suggested to use the expression "resident". This term is used in Conventions concluded by the United Kingdom and by the United States of America. In the Convention between the United Kingdom and France the expression "un r6sident" is used in the French text. Paragraph 1 provides a definition of the expression "resident 10. of State" for the purposes of the Convention. The proposed definition refers to the concept of residence adopted in the national laws (ef. General Comments). As criteria for the taxation as a resident the definition mentions: "Domicile, residence, place of management or any
SPECIAL COMMENTS ON THE ARTICLE
56 (4500)
other similar criterion". As far as individuals are concerned, the definition aims at covering the various forms of personal attachment to a State which, in the national fiscal legislations, form the basis of a more comprehensive taxation (full liability to tax). Paragraph 2 11. This paragraph relates to the case where, under the provision of paragraph 1, an individual is subject to tax as a resident in both Contracting States. 12. To solve this conflict special rules must be established which give the attachment t6 one State a preference over the attachment to the other State. As far as possible, the "preference criterion" must be of such a nature that there can be no question but that the person concerned will satisfy it in one State only, and at the same time it must reflect such an attachment that it is felt to be natural that the right to tax devolves upon that particular State. 13. It is proposed to give preference to the Contracting State in which the individual has a permanent home available to him. This is in accordance with the usual provisions in double taxation Conventions, and this criterion will frequently be sufficient to solve the conflict, e.g. where the individual has a permanent home in one Contracting State and has only made a stay of some length in the other Contracting State. 14. If the individual has a permanent home in both Contracting States, the preference, according to the proposal, shall belong to the State with which his personal and economic re!ations are closest, this being understood as the centre of vital interests. 15. In the cases where the residence cannot be determined by reference to the above mentioned provisions, the Article proposes as subsidiary criteria, first, habitual abode, and then nationality. 16. If the individual is a national of both Contracting States or of none of them, the question shall be solved by mutual agreement between the States concerned. Such cases occur but rarely, and it might be possible to do without a special provision as to them if a general rule -such as is to be found in several Conventions-were included in the Convention to the effect that the competent authorities of the States shall endeavour to come to an agreement for the purpose of preventing double taxation in cases not otherwise provided for by the Convention as well as in cases where the interpretation or the application of the Convention gives rise to difficulties or doubts. Paragraph3 17. This paragraph concerns legal persons as well as partnerships and associations which under the national laws by which they are governed are not legal persons. It may be rare in practice for acompany, 57 (4501)
etc., to be subject to tax as a resident in more than one State, but it is, of course, possible if, for instance, one State attaches importance to the registration and the other State to the place of effective management. So, in the case of companies, etc., also, special rules as to the preference must"be established. 18. It would not be natural to attach importance to a purely formal criterion like registration which is used but rarely in double taxation Conventions. Generally, these attach importance to the place where the company is actually managed, but the formulation of this criterion varies from one Convention to another. 19. The formulation of the preference criterion in the case of legal persons, etc., was considered in connection with the question of the taxation of income of shipping, inland waterways transport and air transport enterprises. A study of the existing bilateral agreements for the avoidance of double taxation on such income has shown that a number of Conventions accord the taxing power to the State in which the "place of management" of the enterprise is situated; other Conventions attach importance to its "place of effective management", others again to "the fiscal domicile" of the operator. The Conventions concluded by the United Kingdom in recent years provide, as regards corporate bodies, that a company shall be regarded as resident in the State in which "its business is managed and controlled". In this connection it has been made clear on the United Kingdom side that this expression means the "effective management" of the enterprise. 20. As a result of these considerations it is proposed to adopt as a preference criterion in the case of legal persons and of partnerships and associations without legal personality, the "place of effective management".
58
(4502).
ANNEX D COMMENTARY ON THE ARTICLE ON TAX DISCRIMINATION ON GROUNDS OF NATIONALITY OR OTHER SIMILAR GROUNDS Paragraph I 1. This paragraph establishes the principle that for purposes of taxation discrimination on the grounds of nationality is forbidden, and that, subject to reciprocity, the nationals of a Contracting State may not be less favourably treated in the other Contracting State than nationals of the latter State in the same circumstances. 2. The expression "in the same circumstances" which appears in the text refers to taxpayers (individuals, legal persons, partnerships and associations) placed, from the point of view of the application of the ordinary taxation law and regulations, in substantially similar circumstances both in law and in fact. Consequently if one of the Contracting States, in giving relief 3. from taxation on account of family responsibilities, distinguishes between its own nationals according to whether they reside in its territory or not, that State cannot be obliged to give nationals of the other State who do not reside in its territory the same treatment as it gives its resident nationals but it undertakes to extend to them the same treatment as is available to its non-resident nationals. Likewise, the provisions of paragraph I are not to be construed as 4. obliging a State which accords special taxation privileges to its own public bodies or services as such, to extend the same privileges to the public bodies and services of the other State. 5. Neither are they to be construed as obliging a State which accords special taxation privileges to private institutions not for profit whose activities are performed for purposes of public benefit, which are specific to that State, to extend the same privileges to similar institutions whose activities are not for its benefit. 6. To take the first of these two cases, if a State accords immunity from taxation to its own public bodies and services this, is justified because the former are integral parts of the State and at no time can their cir59
(4503)
cumstances be comparable to those of the public bodies and services of the other State. Nevertheless, this reservation is not intended to apply to State corporations carrying on gainful undertakings. To the extent that these can be regarded as being on the same footing as private industrial and commercial undertakings, the provisions of paragraph I willapply to them. 7. As for the second case, if a State accords taxation privileges to certain private institutions not for profit, this is clearly justified by the very nature of these institutions' activities and by the benefit which that State and its nationals will derive from those activities. 8. Furthermore, paragraph 1 of the Article has been deliberately framed in a negative form. By providing that the nationals of one Contracting State may not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which nationals of the other Contracting State in the same circumstances are or may be subjected, this paragraph probably has the same mandatory force as if it enjoined the Contracting States to accord the same treatment to their respective nationals. But since the principal object of this clause is to forbid discrimination in one State against the nationals of the other, there is nothing to prevent the first State from granting, for special reasons of its own, certain concessions or facilities to foreigners which are not available to its own nationals. As it is worded, paragraph 1 of the Article would not prohibit this should the case ever arise. 9. Subject to the foregoing observations, the words "...shall not be subjected... to any taxation or any requirement connected therewith which is other or more burdensome..." mean that when a tax is imposed on nationals and foreigners in the same circumstances, it must be in the same form for both, its basis of charge and method of assessment must be the same, its rate must be the same, and, finally, the formalities connected with the taxation (returns, payment, prescribed times, etc.) must not be more onerous for foreigners than for nationals. Paragraph 2 10. The purpose of paragraph 2 is more to specify the content of the expression "nationals" used in paragraph I than to define it. Strictly speaking, by merely stipulating in a customary formula that this expression applies to all individuals possessing the nationality of one of the Contracting States, the paragraph seems to beg the question; but it has not been judged necessary here to introduce into the text of the Article any considerations on the signification of the concept of nationality, any more than it seemed indispensable to make any special comment here on the meaning and application of the word. Obviously, in determining, in relation to individuals, what is meant by "the natio-
60 (S4504)
nals of a Contracting State", reference must be made to the sense in which the term is usually employed and each State's particular rules on the acquisition or loss of nationality. 11. But paragraph 2 is more specific as to legal persons, partnerships and associations. By declaring that all legal persons, partnerships and associations deriving their status as such from the law in force in a Contracting State are considered to be nationals for the purposes of paragraph I of the Article, the provision disposes of a difficulty which often arises in determining the nationality of companies. In defining the nationality of companies, certain States have regard less to the law which governs the company than to the origin of the capital with which the company was formed or the nationality of the individuals or legal persons controlling it. No ambiguity need be apprehended therefore. 12. Moreover, in view of the legal relationship created between the company and the State under whose law it is constituted, which from certain points of view is closely akin to the relationship of nationality in the case on individuals, it seems justifiable not to deal with legal persons, partnerships and associations in a special provision, but to bring them under the same term with individuals. Paragraph 3 13. On 28th September, 1954, a number of States concluded a Convention relating to the status of stateless persons, under Article 29 of which stateless persons must be accorded national treatment. The signatories of the Convention include several O.E.E.C. Member countries. Such a provision, however, is mainly suitable for insertion in a multilateral Convention. Paragraph 4 14. Strictly speaking, the type of discrimination which this paragraph is designed to end is discrimination based not on nationality, but on the actual situs of an enterprise. It therefore affects without distinction, and irrespective of their nationality, all residents of a Contracting State who have permanent establishments in the other Contracting State. In this connection, while it is true that most Conventions for the avoidance of double taxation lay down the principle that, for the purpose of charging tax, a permanent establishment of an enterprise of a Contracting State in the other Contracting State must be regarded as an independent enterprise and treated as such, nevertheless the other State does not always extend to the permanent establishment the full benefit of the treatment it applies to its own enterprises. Thus, the permanent establishment may not be allowed the same depreciation facilities, or a proportion of the principal enterprise's overheads is not always allowed to be attributed to the permanent establishment, or any 61
73095 0-62-vol. 4-
33 ..
_. (4505)
losses incurred by the permanent establishment are not allowed to be set off. The purpose of paragraph 4 is to put an end to these differences in treatment by stipulating that a permanent establishment which an enterprise of a Contracting State has in the other Contracting State must not be less favourably taxed by that other Contracting State than enterprises of that State carrying on the same activities. 15. This provision does not mean, however, that a Contracting
State must give an individual residing in the other Contracting State,

in connection with the taxation for which he is liable in the first Contrac-
ting State in respect of 4 permanent establishment owned by him therein,

any personal allowances, reliefs and reductions on account of civil status or family responsibilities which it gives to its own residents. This reservation, moreover, is expressly contained i.. the text of the
Article.
16. Furthermore, it seems indispensable to specify that the wording of the first sub-paragraph of paragraph 4 must be interpreted in the sense that it does not constitute discrimination to tax non-resident persons, for reasons of practical convenience, differently from resident persons so long as this does not result in more burdensome taxation for the former than for the latter. In the negative form in which the provision has been framed it is the result alone that counts, it being permissible to adapt the taxation to the particular circumstances in which it is levied. Finally, with regard to the use of' the word "enterprise" in the 17. first sub-paragraph of paragraph 4, the question was raised whether it would not be better to use the word "entrepreneur" instead which had the merit of designating both individuals and legal persons and of thus being applicable where it is not the enterprise itself that is taxed but the individual carrying on the enterprise. The word "enterprise" was finally selected, it being understood that the choice between the two terms might depend on the terminology used in the Convention in which the provision is to appear. Paragraph5 18. Paragraph 5 forbids a State to give different treatment to two enterprises residing on its territory, the capital of one of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State. This provision, and the discrimination which it puts an end to, relates to the taxation only of enterprises and not of the persons owning or controlling their capital. Its object therefore is to ensure equal treatment for taxpayers residing in the same State, and not to subject foreign capital, in the hands of the partners or shareholders, to identical treatment to that applied to domestic capital. Paragraph 5 has no connection with nationality as defined in paragraph 2 and in no way does it purport to introduce into the Article a new concept of "nationality of capital". 62 (4506)
Paragraph6 19. This paragraph states that the word "taxation" used in the preceding paragraphs of the Article means taxes of every kind and description levied by, or on behalf of the State, its political subdivisions or local authorities. It does not call for any special comment.
FROM THE CATALOGUE
THE INFLUENCE OF SALES TAXES ON PRODUCTIVITY (Dec. 1957) 276 pages (demy Ovo) $3.50 Is900 FF
PRIVATE UNITED STATES INVESTMENTS IN EUROPE AND OVERSEAS TERRITORIES (Dec. 1954) 140 pages (demy Ovo) $1.25 5,-
400 FF
COMPARATIVE NATIONAL PRODUCTS AND PRICE LEVELS A study of Western Europe and the United States, by Milton Gilbert and Associates (Jan.1958). 170 pages (demy Ova) $3.50 24/1.200 FF
INTERNATIONAL TRADE AND PAYMENTS AND NATIONAL ACCOUNTS Glossary and Definitions : English-French, French-English (July 19SE). 138 pages (crown 4to) $2.25 12/6 750 FF
TERMS USED IN
. CODE OF LIBERALISATION New edition brought up to date Ist May 1958 (July 1958) 140 pages (crown 4to). Bilingual edition $1.00 Si-
300 FF
A DECADE OF CO-OPERATION : Achievements and Perspectives (April 1958) IO pages (demy Ova) $2.00 1i-
700 FF
STATISTICS
NATIONAL PRODUCT AND EXPENDITURE 1938 and 1947 to 1955 (June 1957) 212 pages (crown 4to) 52.50 14'-
OF
'No. 2: 760 FF
THE O.E,.C. AND THE COMMON MARKET Why Europe needs an economic union of seventeen countries, by Marc Ouin (April 19583) 32 pages (demy 8vo) $0.25 I'S 100 FF
UNION i SEVENTH ANNUAL REPORT OF THE MANAGING BOARD (September 19S7) N pages (damy Ova) $1.$8 ;400 FP
EUROPEAN PAYMENTS
(4508)
O.E.E.C. SALES AGENTS

ARGENTINA Editorial Sudamericana S.A., Alsina 500. BUENOS AIRES AUSTRIA Gerold & Co., Graben 31. VIENNA I Sub-Agent : GRAZ : Buchhandlung Jos. A. Kienrich. Sockstrasse 6 BELGIUM N.Y. Standaard-Boekhandel, Huidevelterssiraat 57. ANTWERP Librairie des Sciences (R. Stoops) 76-78, Coudenberg, BRUSSELS Librairie de Ia Bourse. 3. passage de Ia Bourse. CHARLEROI Librairie Paul Gothier, 3-5, rue Bonne-Fortune, LItGE Maison du Livre, Grand'Rue 52. MONS BRAZIL Livroria Agir Editora, Rua Mexico 98-B, RIO DE JANEIRO CANADA The Ryerson Press, 299 Queen Street W., TORONTO CABA Li Cosa Belga. O'Reilly 455. HAVANA DENMARK Einar Munksgaard Faring. Norregade 6, COPENHAGEN FINLAND Akateeminen Kiriakauppa. Keskuskatu 2, HELSINKI FRANCE Presses Universitaire de France, 17, rue Soufflot. PARIS-S' GERMANY Deutscher Bundes Veilag, G.mb.H., Bundeshaus. Schliessfach 137. BONN GREECE Librairie Kauffman, 21, rue du Stade. ATHENS ICELAND Innkaupasamband B6ksala h.f. REYKJAVIK. P.O. Box 888 INDIA International Book House Ltd., 9 Ash Lane. Mahatma Gandhi Road, BOMBAY I Oxford Book and Stationery Co. NEW DELHI Scindia House 17 Park Street CALCUTTA IRELAND Eason & Son, 40-41 Lower O'Connell Street, DUBLIN ISRAEL Blumstein's Bookstores Ltd., 35 Allenby Road. TEL AVIV ITALY Libreria Commissionaria Sonsoni. Via Gino Capponi 26, FLORENCE Via Sardegna 14, ROME Corso Cavour 93. BARI P.EM.., Via Verdi, MILAN JAPAN Maruzen Company Ltd.. 6 Tori Nichome Nihonbashi, TOKYO LUXEMBOURG Librairie Paul Bruck. 33. Grand'Rue, LUXEMBOURG THE NETHERLANDS Wholesale agent : Meulenhoff & Co. N.V. Importeurs, Beulingstraat 2, AMSTERDAM Principal retailer : W.P. Van Stockum & Zoon. Buitenhof 36. THE HAGUE NORWAY A'S Bokhiornet. Stortingsplass 7, OSLO PAKISTAN Mirza Book Agency, 9-A Shah Alam Market. LAHORE PORTUGAL Livraria Portugal, Rua do.Carmo 70," LISBON SOUTH AFRICA Van Schaik's Book Store Ltd., Church Street, PRETORIA SPAIN Mundi Prensa, Lagasca 38, MADRID SWEDEN Fritzes, Kungl. Hovbokhandel. Fredsgatan 2, STOCKHOLM 16 SWITZERLAND Librairie Poyot. 40. rue du March6, GENEVA and at Lausanne. Neuchalel. Vevey. Montreux. Berne, Basic and ZUrich. TURKEY Librairie Hachette, 469 IsiklaI Caddesi. Beyoglu, ISTANBUL UNITED KINGDOM AND CROWN COLONIES H.M. Stationery Office, P.O. Box 569, LONDON S.E.I. Branches at : EDINBURGH 2 : 13O Castle Street BIRMINGHAM 3 : 2 Edmund Street BRISTOL I : Tower Lane MANCHESTER 2 : 39 King Street 109 St. Mary Street CARDIFF BELFAST 80 Chichester Street UNITED STATES OF AMERICA O.E.E.C. Mission, Publications Office, SUITE 1223 1346 Connecticut Ave, N.W WASHINGTON 6, D.C. YUGOSLAVIA Jugoslovensko Knjiga Morsala Tito 23, P.O.B. 36, BEOGRAD
Orders and inquiries from countries where sales agents have not yet been appointed may be sent to O.E.E.C.. Distribution and Sales Service. 33, rue de Fronqueville. Paris-16-
(4509)
(4511)

JULY 1959
2nd REPORT BY THE FISCAL COMMITTEE OFTHE OEEC
PUBLISHED BY THE ORGANISATION FOR EUROPEAN ECONOMIC CO-OPERATION 2, RUE ANDRI-PASCAL, PARIS-16e
(4513)
The Organisation for European Economic Co-operation comprises the following Member countries: Austria, Belgium, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey and the United Kingdom. The Organisation came into being with the signing of the Convention for European Economic Cooperation on 16th April 1948, when Member Governments pledged themselves "to combine their economic strength, to join together to make the fullest collective use of their individual capacities and potentialities, to increase their production, develop and modernise their industrial and agricultural equipment, expand their commerce, reduce progressively barriers to trade among themselves, promote full employment and restore or maintain the stability of their economies and general confidence in their national currencies". Representatives of each of the Member countries meet daily at the O.E.E.C. headquarters,Chdteau de la Muette, Paris, to discuss their economic problems and work out common solutions. The United States and Canada participatein all the work of the Organisationas Associate Members.. Spain participates, as a full Member and on an equal footing with the Member countries, in the work of the agriculturalbodies of the Organisationand is associated in its other activities. Yugoslavia is represented by an observer and like Spain also participatesin the work of the European Productivity Agency.
This document has been circulated within the O.E.E.C. under the symbol C(59) 147. It follows on the first Report of the Fiscal Committee of the O.E.E.C. which was published under the same title in September 1958.
Published in July 1959
(4514)
SUMMARY I. Introduction .................................... II. Implementation of the Council Recommendation of llth July 1958. A. Bilateral Conventions concluded since July 1958 B. Bilateral negotiations in progress ............. C. General remarks ............................ III. Further results of the Committee's work A. Results since May 1958, and work in hand ...... B. Objects and scope of the proposed new Articles .. IV. Conclusions : Proposals by the Committee to the C ouncil ........................................ Annexes 1. Texts of the Articles Annex A. Article on the taxation of income of shipping, inland waterways transport and air trans....................... port (Article V) Annex B. Article on the taxation of income in respect of independent and dependent personal services (Articles VI to XII) ................ Annex C. Article on the taxation of income from immovable property (Article XIII) .......... Annex D. Article on the taxation of capital (Article XIV) 2. Commentaries on the Articles Annex Annex Annex Annex E. F. G. H. Commentary Commentary Commentary Commentary on Article V ............... on Articles VI to XII ........ on Article XIII .............. on Article XIV ............. 35 39 43 45 25 7
9 11 11 15 16 21
27 29 31
Appendix Recommendation concerning the avoidance of double taxation adopted by the Council of 0. E. E. C. on 3rd July 1959 49
(4515)
INTRODUCTION 1. In its first Report to the Council in May 1958 the Fiscal Committee submitted proposals to promote the abolition of double taxation between the Member countries. These proposals were embodied in a Recommendation of the Council of I1th July 1958. In this Recommendation, the Council further instructed the Fiscal Committee to submit to it by 1st July 1961, a draft Convention for the avoidance of double taxation with respect to taxes on income and on capital, together with concrete proposals for the implementation of such a Convention. The Council also instructed the Fiscal Committee to put forward in the meantime new draft Articles as and when agreement was reached on the different matters covered by its mandate. Finally, the Council required the Committee to report to it annually on the measures taken by the Member countries to carry out the Recommendation of llth July 1958. 2. As to this latter point, it could hardly be expected that spectacular results would be obtained after only a little more than a year. The actual results, which are described in Chapter H of this Report, may therefore be regarded as all the more encouraging. At the close of its third year of work, the Fiscal Committee 3. is now in a position to submit to the Council a new set of ten Articles for insertion in the bilateral Conventions on double taxation. These Articles follow on the four Articles contained in last year's report. Their object is to delimit taxation powers uniformly between the Member countries in a certain number of cases where liability to tax arises. They are dealt with in Chapter III of this Report, in which chapter the Fiscal Committee has also felt it would be useful to give a brief account of the studies now in progress. 4. In the conclusions of this Report, the Fiscal Committee submits to the Council, as it did in its previous report for the first series of Articles, certain concrete proposals concerning the implementation of the ten new Articles which are designed to permit further progress in the abolition of double taxation between Member countries.
.7 (4517)
IMPLEMENTATION OF THE COUNCIL RECOMMENDATION OF 11th JULY 1958 CONCERNING THE ELIMINATION OF DOUBLE TAXATION In its Recommendation of 11th July 1958, the Council 5. recommended that the Governments of the Member countries, when revising existing bilateral Conventions between them for the avoidance of double taxation or when concluding new Conventions between them, should adopt four Articles concerning respectively: a) the list and definition of taxes covered by the Convention (Article I); b) the definition of permanent establishment (Article II); c) the definition of fiscal domicile (Article III); d) tax discrimination on grounds of nationality or other similar grounds (Article IV). Bilateral Conventions A. concluded since 11th July 1958
6.
double taxation Conventions and one Additional Protocol have The Fiscal Combeen signed between Member countries. mittee is informed that the first, second and fourth of the
Between 1lth July 1958 and 21st July 1959, eightnew general
Articles mentioned in paragraph 5 have been adopted for all practical purposes in seven of these nine agreements, and the The information submitted to the Comthird in six of them. its accompanying notes.
mittee in this respect is summarised hereunder in Table 1 and The Fiscal Committee considers that these results are 7. satisfactory especially as the Council only made its Recommendation a little more than a year ago. Another point which should be remembered is that, in several cases, the agreements signed after l1th July 1958, had already been initialled for some time and that in any case it would have been very difficult to recommence the negotiations on the new bases proposed, as some of them had been proceeding for some time already.
9
(4519)
Table
1
ARTICLES I IlI IV
SIGNATORY COUNTRIES
DATE OF SIGNING
Denmark-Sweden(&) .... Germany-Luxembourg(b)
21. 23.
7.58 8. 58
x x
-
x x
+
x x
-
x
+
-
France-Italy(c) ........
Germany-Norway(d) .... Germany-Switzerland(e) . Germany-Sweden( f) .... Austria-Sweden (g) ..... Germany-France (i ) ....
N.B.
-
29. 10. 58 18. 11.58 20.

17.
+ +
+
3.59
4 . 59
o
+
o
+
o
+
14.
5.59 6.59
x -
Germany-Netherlands (h) 16.
x
+
+
+
21. 7.59
The sign "+" indicates that the Article has been embodied in its entirety. - The sign "x indicates that the Article has not been wholly embodied in the proposed form, but that the text adopted keeps the essential provisions of the Article. - The sign " -, indicates that the Article has not been embodied or that the adopted text differs essentially from the Article. - The sign "o " indicates that this Protocol does not deal with the question covered by the Article.
NOTES TO TABLE 1 a) The Convention between Denmark and Sweden. signed on 21st July 1958. and brought into force on 2nd December 1958. has crowned the efforts of the three Scandinavian countries to harmonize the double taxation Conventions between them. This Convention, which was negotiated in 1957, supersedes the Convention of 27th October 1953, and is drafted in practically identical terms to the Conventions already concluded by Norway with Denmark and Sweden. For this reason the four Articles mentioned in paragraph 5 have not been reproduced textuallybut the corresponding provisions of the Convention are identical in substance. b) The Convention between Germany and Luxembourg of 23rd August 1958 was the first to be signed between these two counties. Negotiations were begun some years ago and, as the agreement was initialled prior to the Recommendation of the Council. the provisions concerning the taxes covered and fiscal domicile differ in wording from the Articles proposed by the Fiscal Committee, although their purport is the same. On the other hand, the Article on tax discrimination on grounds of nationality has been included. although the place of one paragraph has been changed. Likewise, the Article onpermanent establishment has been incorporated, except for the provision on building sites. which has been altered to take into account Luxembourg's special position in regard to Germany. c) The Convention between France and Italy of 29th October 1958. replaces the Convention of 16th June 1930. It was not possible to embody the Articles proposed by the Fiscal Committee, ai the agreement had already been initialled on 21th June 1956. i.e. more than two years prior to the Recommendation of the Council.
10
(4520)
B.
Bilateral
negociations
in
progress
8. Seventeen bilateral negotiations are now proceeding between the Member countries; seven of these are to revise or complete general Conventions already in force, and the other ten to conclude new general Conventions between Member countries which have not up to now signed any agreement with one another (see Table 2). Information reaching the Fiscal Committee shows that in a number of cases the negociators have already adopted the Articles proposed by the Committee. Thus in these seventeen negotiations, the Article on permanent establishment has already been adopted in eleven cases, the Article on the taxes to be covered by the Convention in ten cases, the Article on fiscal domicile in nine cases, and the Article on tax discrimination on grounds of nationality in eight cases. 9. As in this case also certain agreements were already initialled before the Recommendation of the Council of July 1958 and cannot, therefore, be easily modified, and, as in a number of cases the discussions are still in their initial stages, these first results can be regarded as encouraging.
C.
General
remarks
10. These indirect results of the work of the Fiscal Committee, as well as the direct results which are dealt with in the following chapter, are largely due to the fact that the Committee is composed of civil servants responsible in each Member country
d) The Convention between Germany and Norway of 18th November 1958 was the first to be signed between these two countries. It is also the first in which the four Articles proposed by the Fiscal Committee have been fully incorporated. e) The Additional Protocol between Germany and Switzerland of 20th March 1959, embodies the Article on tax discrimination on grounds of nationality. This Protocol is a sequence to the Protocol of 9th September 1957, which already dealt with the questions covered in the other three Articles proposed by the Fiscal Committee and included provisions which were very similar in substance. f) The Convention between Germany and Sweden of 17th April 1959. embodies the four Articles proposed by the Fiscal Committee. This Convention supersedes the Convention of 25th April 1928. g) The Convention between Austria and Sweden of 14th May 1959. embodies the first three Articles proposed by the Fiscal Committee, but it was not thought necessary to include the whole of the Article on tax discrimination on grounds of nationality. h) The Convention between Germany and the Netherlands of 16th June 1959. was negociated in 1956. For this reason, it was not possible to incorporate all the four Articles proposed by the Fiscal Committee. The Article on permanent establishment was, however, embodied in full and the main provisions of the Article concerning the taxes covered were adopted. i) The Convention between Germany and France of 21st July 1959. embodies the four Articles proposed by the Fiscal Committee. This Convention replaces the Convention signed on 9th October 1934, but never ratified.
11
73095 O-62-vol. 4-
34
(4521)
Table 2
NETWORKOF BILATERAL GENERAL CONVENTIONS FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO INCOME AND PROPERTY TAXES BETWEENMEMBERAND ASSOCIATED .. t 21th J.ly1959 COUNTRIES
Convention inforce A New Convention signed Ioreplace theConvention at present in force

Conventions concluded
Negotiation proceeding forthe revision oftheConvention in force

Convention signed but notyet in force
Convention undernegotiation
(4522)
for the negotiation and the day-to-day administration of double taxation Conventions. The Committee is in a way a forum where problems which arise can be discussed thoroughly and constantly on a multilateral basis. The Articles for a Convention proposed by the Committee will simplify and thereby shorten bilateral negotiations. The fact that they have been unanimously agreed also constitutes a guarantee for those Member countries which have not yet entered into any Conventions, and this should facilitate the starting of negotiations with their European partners. 11. These Articles were favourably received by various international non-governmental organisations which have for long been concerned with the problems of double taxation. Thus, in a Statement adopted at its 17th Congress at Washington in April 1959, the International Chamber of Commerce considered that these Articles "constitute a valuable step forward in the technique of double taxation previously proposed by the League of Nations in its Model Conventions. The I. C. C. strongly supports the recommendation of the 0. E. E. C. Council in favour of the early introduction of these Articles into bilateral Conventions for the avoidance of double taxation, whether in the case of new Conventions or of the revision of existing Conventions. The I. C. C. believes that countries outside the 0. E. E. C. might well also profit by the valuable work of the 0. E. E. C. Committee and adopt the same provisions in their bilateral treaties". 12. It should be noted that the network of general double taxation Conventions between Member countries was substantially widened in recent years (see Table 2). The number of such Conventions, afterbeing forty on lstJune 1953 and fortyeight on 1 1th July 1958, is now fifty-one. For various practical reasons more rapid progress cannot be expected. It should also be observed that the existing Conventions already bind Member countries which have the highest national income and cover a very large part, if not the larger part, of incomes of all descriptions which might be taxed in two Member countries. 13. It remains nevertheless necessary to revise those Conventions which are no longer in keeping with the present circumstances and to complete the network of existing Conventions in order to eliminate double taxation between all Member countries. Such was the aim of the Recommendation adopted by the Council of O.E.E.C. on 25th February 1955. The Fiscal Committee considers that Member countries should pursue their efforts in this direction. Indeed the Articles which it proposes can only be applied so far as existing Conventions are revised or new Conventions concluded. Moreover, the common rules established by the Fiscal Committee for the avoidance of double taxation will become increasingly effective as they are extended to an increasing number of Conventions. 13
(4523)
14. As stated by the Fiscal Committee in its First Report, the Articles for a Convention which it then proposed, like those contained in the present Report and those now in course of preparation,have a dual aim. First, in the short term, their inclusion in existing bilateral Conventions between the Member countries as they come to be revised, or in future Conventions to be concluded between them, should lead to the progressive harmonization of these Conventions and to a more effectual avoidance of double taxation. Secondly, in the long term, all the Articles adopted by the Committee taken together will in the end constitute a general Convention, the adoption of which would finally establish uniformity of principle and method with a view to the abolition of double taxation on income and capital between Member countries. It is clear that the harmonization which will by then have been progressively established between the bilateral Conventions will largely facilitate the adoption of a multilateral Convention between Member countries.
14
(4524)
III
FURTHER RESULTS OF THE FISCAL COMMITTEE'S WORK A. Results since May and work in hand 1958,
15. Since its last Report to the Council, the Fiscal Committee has agreed upon four new groups of subjects, namely: a) taxation of income from shipping, inland waterways transport and air transport; b) taxation of income in respect of independent and dependent personal services; c) taxation of income from immovable property; d) taxation of capital. The Fiscal Committee has unanimously adopted a uniform text for those Articles in double taxation Conventions which relate to these subjects, together with a Commentary to illustrate and interpret the Articles. These texts are annexed to the present Report. The present chapter, therefore, will merely state the objects of each of the ten Articles and explain why the proposed wording was chosen. As these Articles follow on the four Articles in the Committee' s First Report, they are numbered V to XIV. 16. The Fiscal Committee is pursuing the drafting of Articles on the six last groups of subjects which remain,in order to complete the Convention for the avoidance of double taxation with respect to taxes on income and capital, which the Council instructed it to establish, namely: i) ii) iii) iv) taxation of royalties; taxation of dividends; taxation of interest; technical methods of avoiding double taxation (exemption method and tax credit method); v) the definition and allocation of profits between the head office of an enterprise, its permanent establishments and its subsidiaries; vi) structure and general provisions of the Convention (definition of the personal and territorial scope of the Convention, provisions concerning mutual 15
(4525)
consultation procedure; clauses relating to the entry into force and denunciation of the Convention, etc. ). 17. The first three questions often constitute the hard core of the negotiations for the conclusion of a double taxation Convention. The adoption of common solutions therefore presents rather delicate problems, as ways have to be found of reconciling the sometimes conflicting interests of certain countries. On these questions, and on the fourth also, the establishment of uniform rules is made more complicated by the great disparity between national laws and regulations which has led Member countries to adopt very different solutions in the bilateral Conventions hitherto concluded between them. However, work is sufficiently advanced on all six questions mentioned above for the Fiscal Committee to hope that a solution on most of them will be reached during 1960. of B. the Objects and scope proposed new Articles
18. The ten new Articles proposed are designed to settle conflicts as regards taxing powers which may arise between the Member States in relation to the four groups of subjects mentioned in paragraph 15. The Fiscal Committee has sought to settle and co-ordinate the principles, definitions and methods in order to establish, in a liberal spirit, uniform solutions which are acceptable to all the Member countries and correspond to the existing conditions of the problems in question. The Committee is unanimous in considering that the insertion of these Articles in the double taxation Conventions between the Member countries would make an effective contribution to the elimination of some of the outstanding difficulties. It would, in no small measure, clarify and safeguard the position of the taxpayers concerned, thereby providing a valuable stimulus to intra-European economic activities. Furthermore, it would appreciably simplify the application of the Conventions by the national authorities concerned. In the Committee's view, the implementation of these Articles would only entail limited readjustments of taxation revenue, one way or another, and whatever reductions of revenue might occur would be largely justified by the various advantages just described. 19. As stated in paragraph 16, the Committee is still studying the question of the technical methods of avoiding double taxation, i.e. the exemption method and the tax credit method,and has therefore not taken any final view on this matter. It wishes to stress that this question is in no way prejudged by the wording of the ten Articles proposed for inclusion in bilateral Conventions. The Committee will make proposals in due time for inclusion in the draft Convention to be submitted to the Council by July 1961. In the meantime, for the sake of clarity and in order to facilitate the implementation of the Articles in existing Conventions, the Fiscal Committee has used the expression "shall be taxable only" wherever the State of residence is given the exclusive right to tax and the expression "may be taxed" 16
(4526)
wherever the State of source is given a right to tax. This means that when the State of residence is not given the exclusive right to tax under the Articles, it must take account, in accordance with such provisions as may be contained in its bilateral Conventions, of the right to tax of the State of source. Until the Fiscal Committee is in a position, as a result of its present studies, to make concrete proposals as regards these technical methods, the ten Articles proposed by the Committee must be applied according to the methods currently in force. a) Article on the taxation of income from shipping, waterways transport and air transport inland
20. By the nature of their business, shipping, inland waterways transport and air transport enterprises are more exposed than most other industrial and commercial enterprises to the danger of multiple taxation on their income, as they are liable to be taxed simultaneously in their own countries and in the other countries where they receive payment for the carriage of passengers or goods or where their activities are exercised. To avoid double taxation, many special Conventions concerning the taxation of these enterprises have been signed or special clauses inserted into general double taxation Conventions. As it would be very difficult to determine what proportion of the profits of a shipping or air transport enterprise is attributable to each of the countries concerned, most Conventions provide that income from the international business of shipping or air transport is to be taxed only in the State in which the enterprise concerned is established. 21. However, the almost universal acceptance of this principle does not necessarily mean that there is uniformity in the texts. A great many Conventions give the right to tax the income to the State in which the "place of effective management" of the enterprise is situated. Others give it to the State in which the enterprise has its "fiscal domicile". In certain cases the ships or aircraft must also be registered in the State concerned. Although these differences do not give rise to any great difficulties in practice, it is desirable for the Member countries to adopt a common rule. This would greatly facilitate the application of the Conventions between Member countries in the field of shipping and air transport, which is much to be desired in view of the present expansion of these activities. 22. Article V in Annex A reserves the right to tax the income from the operation of ships and aircraft in international traffic and of boats engaged in inland waterways transport to the Contracting State in which the enterprise's place of effective management is situated. This rule is in conformity with the taxing rule proposed in relation to the operation of ships and aircraft by the League of Nations (Article V of the London Model Convention and Article II, paragraph 4, of the Protocol) and by the International Chamber of Commerce in a Resolution of its Council of 28th October 1954. 17
(4527)
23. After consideringthe special position of Greece in relation to shipping, the Fiscal Committee unanimously proposes that those provisions of the Article which deal with income from the operation of ships in international traffic shall not apply to Greece. The provisions as to the income from the operation of aircraft in international traffic or of boats engaged in inland waterways transport would, however, be applicable to Greece. b) Articles on the taxation of income in respect of independent and dependent personal services
24. The purpose of Articles VI to XII in Annex B is to settle cases of double taxation of income from personal services, for a salary or wages or for remuneration not in the nature of a salary or wages, when, for example, the recipient of the income resides in one State and performs the services in another. Generally speaking, the existing Conventions have abandoned the principle that the right to tax is that of the State in which the recipient of the income is resident, and have given the right to the State in which the personal services are performed. The latter rule, moreover, was adopted in the Model Conventions established by the League of Nations (Article VII of the Mexico Model Convention and Article VI of the London Model Convention). 25. Despite the almost universal adoption of the above principle, however, there are in some cases appreciable dissimilarities in regard to its application, particularly in regard to professional services. Consequently, the Fiscal Committee found it necessary to standardize the rules applying respectively to income from professional services and to remuneration from employment in the form of salaries, wages or the like (including pensions), and to make special provisions for certain particular cases such as remuneration and pensions paid by a State, remuneration of members of company boards, or income of public entertainers. 26. Under Article VI, income from professional services is subjected to a similar taxing rule to that for income from industrial and commercial enterprises, the concept of a "fixed base" for the performance of the services being adopted in place of the concept of the "permanent establishment" used in the case of an enterprise. Article VII establishes, in paragraph 1, the general rule applicable to remuneration in respect of employment for a salary or wages, namely, taxation in the State where the services are performed. To this rule there are only two exceptions: one in the particular case of employments of short duration abroad - this exception is designed in particular to facilitate the international movement of qualified personnel (Article VII, second paragraph) - the other in the case of certain governmental functions (Article VIII). Paragraph 3 of Article VII aims at defining the application of the rule to the remuneration of crews of ships and aircraft in international traffic and of boats engaged in inland waterways transport. It provides 18
(4528)
that such remuneration may be taxed in the Contracting State in which the place of effective management of the enterprise is situated. In countries where wages and salaries are taxed at the source this procedure enables tax to be levied easily and speedily and permits of proper tax inspection. A special exception having been made for Greece in connection with the taxation of income from the operation of ships in international traffic (see paragraph 23), a similar exception is made in regard to the taxation of remuneration of crews of such ships. 27. The object of Article IX is to define the application of the above rules in the case of members of company boards. As regards pensions, Article X gives the right to tax to the State of the recipient's residence, except in the case of pensions paid in respect of certain governmental functions, in which case the pensions, like the remuneration, are taxable in the State paying the pension or remuneration. Article XI covers the particular case of public entertainers - whether performing for a salary or wages or on their own account - who are taxable in the State in which their activities as such are exercised. Article XII settles the special cases of payments received by students and business apprentices for their maintenance, education or training, and exempts such payments from taxation in the State visited. c) Article on the taxation of income from immovable property
28. The purpose of the Article XIII in Annex C is to settle the double taxation which arises, for example, when a taxpayer resides in one State and draws an income from immovable property situated in another State, and as a result is taxed both by the first State on his total income and by the second State on the income from the property in its territory. All the existing double taxation Conventions provide that in such case the right to tax belongs to the State in which the immovable property is situated, as do the Mexico and London Model Conventions (Article II). 29. Starting from this commonly accepted principle, the Fiscal Committee has proceeded to specify its field of application and to standardize its operation, which in some cases gives rise to certain difficulties. Thus, the Article stipulates that the definition of immovable property is to be the definition laid down in the laws of the State in which the property is situated, which helps to remove difficulties of interpretation. However, the Article specifically mentions those properties and rights which must in every case be regarded as immovable property and states that ships, boats and aircraft are not regarded as such. The Article goes on to state that the rule applies both to income from immovable property - irrespective of the form of exploitation - and to profits accruing from the alienation of immovable property. 19
(4529)
d)
Article on the taxation of capital
30. As taxes on capital generally supplement the taxation of income, it would seem natural to reserve the right to levy taxes on capital to the State which is entitled to tax the income from the capital. Thus the London Model Convention provides that its rules as to the taxation of income are to apply, mutatis mutandis, to taxes on capital (Article XV). However, it is not possible to refer in the double taxation Conventions purely and simply to the rules relating to the taxation of the income, for not all classes of income are subject to taxation exclusively in one State. 31. Article XIV in Annex D is designed to remove this difficulty. It first states the rule that immovable property may be taxed in the State in which it is situated. It also provides that, subject to the above rule, assets forming part of the business property employed in a permanent establishment and assets pertaining to a fixed base used for the performance of professional services may be taxed in the State in which the permanent establishment or fixed base is situated. It then provides that ships and aircraft in international traffic, boats engaged in inland waterways transport and assets other than immovable property pertaining to the operation of such ships, aircraft and boats, shall be taxable only in the State in which the place of effective management of the enterprise is situated, by analogy with the rule adopted in Article V for the income from the operation of such ships, aircraft and boats. Lastly, the Article provides that all other elements of capital of a resident of a Contracting State are taxable only in that State. 32. A special exception having been made for Greece in connection with the taxation of income from the operation of ships in international traffic to take into account Greece's special situation in relation to shipping (see paragraph 23), a similar exception has been made in regard to the taxation of the capital of the enterprises in question.
20
(4530)
IV
CONCLUSIONS The Fiscal Committee proposes, as it did for the Articles 33. contained in its first Report, that the ten Articles annexed to the present Report should be the subject of a Recommendation of the Council in which Member countries would be invited to adopt these Articles when they revised existing Conventions or concluded new Conventions between themselves. It also proposes that the Member countries should notify 34. to the Organisation all new or revised bilateral Conventions in which these Articles have been adopted or, where these Articles have not been so adopted, the reasons for the omission. The Fiscal Committee, on the basis of such notifications, would report to the Council on the measures taken by Member countries to implement the Recommendation and on any measures which ought to be taken in order to facilitate its implementation. The Fiscal Committee considers that the adoption of the 35. ten new Articles in the bilateral double taxation Conventions between Member countries, in conjunction with the adoption of ensure the four Articles recommended in 1958, would substantial progress towards the desired harmonization of these Conventions.
21
(4531)
ANNEXES
1.
TEXTS OF THE ARTICLES
(4533)
Annex A
ARTICLE ON THE TAXATION OF INCOME FROM SHIPPING, INLAND WATERWAYS TRANSPORT AND AIR TRANSPORT Article V
1. Income from the operation of ships or aircraft in international traffic shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 2. Income from the operation of boats engaged in inland waterways transport shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 3. If the place of effective management of a shipping enterprise or of an inland waterways transport enterprise is aboard a ship or boat, then it shall be deemed to be situated in the Contracting State in which the home harbour of the ship or boat is situated, or, if there is no such home harbour, in the Contracting State of which the operator of the ship or boat is a resident.
25
(4535)
Annex
ARTICLES ON THE TAXATION OF INCOME IN RESPECT OF INDEPENDENT AND DEPENDENT PERSONAL SERVICES
Article
VI
Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable only in that State unless he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities. If he has such a fixed base, such part of that income as is attributable to that base may be taxed in that other State. Article VII
1. Subject to the provisions of Articles VIII, IX and X, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. Notwithstanding the provisions of paragraph 1 above, 2. remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned, and b) the remuneration is paid by, or on behalf of an employer who is not a resident of the other State, and c) the remuneration is not deducted from the profits of a permanent establishment or a fixed base which the employer has in the other State. 3. Notwithstanding the preceding provisions of this Article, remuneration for personal services performed aboard a ship or 27
73095 0-62-vol. 4-
35
(4537)
aircraft in international traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the Contracting State in which the place of effective management of the enterprise is situated. Article VIII
1. Remuneration, including pensions, paid by or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to any individual in respect of services rendered to that State or subdivision or local authority thereof in the discharge of functions of a governmental nature may be taxed in that State. 2. The provisions of Articles VII, IX and X shall apply to remuneration and pensions in respect of services rendered in connection with any trade or business carried on by one of the Contracting States or a political subdivision or a local authority thereof. Article IX
Directors' fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may be taxed in that other State. Article X
Subject to the provisions of paragraph 1 of Article VIII, pensions and other similar remuneration paid in consideration of past employment shall be taxable only in the Contracting State of which the recipient is a resident. Article XI
Notwithstanding anything contained in this Convention, income derived by public entertainers, such as theatre, motion picture, radio or television artistes, and musicians, and by athletes, from their personal activities as such may be taxed in the Contracting State in which these activities are exercised. Article XII
Payments which a student or business apprentice from one of the Contracting States who is present in the other Contracting State solely for the purpose of his education or training receives for the purpose of his maintenance, education or training, shall not be *axed in that other State, provided that such payments are made to him from sources outside that other State. 28
(4538)
Annex C
ARTICLE ON THE TAXATION OF INCOME FROM IMMOVABLE PROPERTY Article XIII 1. Income from immovable property may be taxed in the Contracting State in which such property is situated. The term "immovable property" shall be defined in 2. accordance with the laws of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, livestock and equipment of agricultural and forestry enterprises, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of mineral deposits, sources and other natural resources; ships, boats and aircraft shall not be regarded as immovable property. The provisions of paragraphs 1 and 2 above shall apply to 3. income derived from the direct use, or from the letting of immovable property or the use in any other form of such property, including income from agricultural or forestry enterprises. They shall likewise apply to profits from the alienation of immovable property. 4. The provisions of paragraphs I to 3 above shall also apply to the income from immovable property of any enterprises other than agricultural or forestry enterprises and to income from immovable property used for the performance of professional services.
29
(4539)
Annex D
ARTICLE ON THE TAXATION OF CAPITAL Article XIV
1. Capital represented by immovable property, as defined in paragraph 2 of Article XIII, may be taxed in the Contracting State in which such property is situated. 2. Subject to the provisions of paragraph 1 above, capital represented by assets forming part of the business property employed in a permanent establishment of an enterprise, or by assets pertaining to a fixed base used for the performance of professional services, may be taxed in the Contracting State in which the permanent establishment or fixed base is situated. 3. Ships and aircraft operated in international traffic and boats engaged in inland waterways transport and assets other than immovable property pertaining to the operation of such ships, aircraft and boats, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 4. All other elements of capital of a resident of a Contracting State shall be taxable only in that State.
31
(4541)
2.
COMMENTARIES ON THE ARTICLES
(4543)
Annex
COMMENTARY ON ARTICLE V ON THE TAXATION OF INCOME FROM SHIPPING, INLAND WATERWAYS TRANSPORT AND AIR TRANSPORT Paragraph 1 1. The object of paragraph 1 concerning income from the operation of ships or aircraft in international traffic is to secure that such income will be taxed in one State alone. Operation in international traffic means any operation of ships or aircraft which extends over more than one country, whatever the number of places of call in a particular country. The provision is based on the principle that the taxing power shall be left to the Contracting State in which the place of effective management of the enterprise is situated. This makes it unnecessary to devise detailed rules, e. g. for defining the income covered, this being rather a question of application for which general principles of interpretation must be taken into account. It seems useful, however, to give a few examples and comments to clarify the question. 2. The income covered consists in the first place of the profits obtained by the enterprise from the carriage of passengers or cargo. With this definition, however, the provision would be unduly restrictive, in view of the development of shipping and air transport, and for practical considerations also. The provision therefore covers other classes of income as well, i.e. those which by reason of their nature or their close relationship with the income directly obtained from transport may all be placed in a single category. Some of these classes of income are mentioned in the following paragraphs. 3. Income obtained by leasing a ship or an aircraft on charter fully equipped, manned and supplied must be treated like the profits from the carriage of passengers or cargo. Otherwise, a great deal of business of shipping or air transport would not come within the scope of the provision. The Article does not, however, apply to income from a bare boat charter, in respect of which the ordinary rules for taxing commercial and industrial business shall continue to apply. 35
(4545)
4. Shipping and air transport enterprises - particularly the latter - often engage in additional activities more or less closely connected with the direct operation of ships and aircraft. Although it would be out of the question to list here all the auxiliary activities which could properly be brought under the provision, nevertheless a few examples may usefully be given. 5. The provision covers, inter alia, the following activities: a) the sale of passage tickets on behalf of other enterprises; b) the operation of a bus service connecting a town with its airport; c) advertising and commercial propaganda. 6. On the other hand, the provision does not cover a clearly separate activity, such as the keeping of a hotel as a separate business. The income from such an establishment is in any case easily determinable. In certain cases, however, circumstances are such that the provision must apply even to a hotel business, e. g. the keeping of a hotel for no other purpose than to provide transit passengers with night accommodation, the cost of such a service being included in the price of the passage ticket. In such a case, the hotel is simply a kind of waiting room. There is another activity which is excluded from the field 7. a shipbuilding yard of application of the provision, namely operated in one country by a shipping enterprise having its place of effective management in another country. 8. Investment income of shipping, inland waterways or air transport enterprises (income from stocks, bonds and shares; interest) is to be subjected to the treatment ordinarily applied to this class of income in general. 9. Since the Second World War, various forms of international co-operation have come into existence, particularly in In this field international co-operation is air transport. secured through pooling agreements or other Conventions of a similar kind which lay down certain rules for apportioning the receipts (or profits) from the joint business. 10. Generally speaking, participation in a pool, in a joint business or in an international operating agency does not appear to offer any special difficulties. If the provision recommended is applicable to any enterprise engaged in shipping, inland waterways transport or air transport, it follows that it must also extend to profits obtained through the type of co-operation described above; indeed, such an interpretation results directly from the text of the provision. 36
(4546)
Paragraph 2 11. The object of this paragraph is to apply the same treatment to transport on rivers, canals and lakes as to shipping and air transport in international traffic. The provision applies not only to inland waterways transport between two or more countries, but also to inland waterways transport carried on by an enterprise of one country between two points in another country. 12. The provision does not prevent specific taxation problems which may arise in connection with inland waterways transport, in particular between adjacent countries, from being settled specially by bilateral agreement. Case of enterprises in shipping, inland air transport not exclusively waterways transport engaged or
13. If follows from the wording of paragraphs 1 and 2 of the Article that enterprises not exclusively engaged in shipping, inland waterways transport or air transport nevertheless come within the provisions of these paragraphs as regards income arising to them from the operation of ships, boats or aircraft belonging to them. 14. If such an enterprise possesses in a foreign country permanent establishments exclusively concerned with the operation of its ships or aircraft, there is no reason to treat such establishments differently from the permanent establishments of enterprises engaged exclusively in shipping, inland waterways or air transport. 15. Nor does any difficulty arise in applying the provisions of paragraphs 1 and 2 if the enterprise possesses in another State a permanent establishment which is not exclusively engaged in shipping, inland waterways transport or air transport. For if its goods are carried in its own ships to a permanent establishment belonging to it in a foreign country, it is right to say that none of the profit obtained by the enterprise through acting as its own carrier can properly be attributed to the permanent establishment. The same must be true even if the permanent establishment maintains installations for operating the ships or aircraft (e.g. consignment wharves) or incurs other costs in connection with the carriage of the enterprise's goods (e.g. staff costs). In this case, the permanent establishment's expenditure in respect of the operation of the ships, boats or aircraft should be attributed not to the permanent establishment but to the enterprise itself, since none of the profit obtained through the carrying benefits the permanent establishment. 16. In cases - which are probably purely theoretical - where the enterprise' s ships or aircraft are operated by a permanent establishment which is not the place of effective management of the whole enterprise (e. g. ships or aircraft put into service by 37
(4547)
the permanent establishment and figuring on its balance sheet), then the effective management for the purposes of paragraphs 1 and 2 must be considered, as regards the operation of the ships or aircraft, as being in the Contracting State in which the permanent establishment is situated. Paragraph 3 17. This paragraph deals with the particular case where the place of effective management of the enterprise is aboard a ship or a boat. In this case tax will only be charged by the State where the home harbour of the ship or boat is situated. It is provided that if the home harbour cannot be determined, tax will only be charged by the Contracting State of which the operator of the ship or boat is a resident.
38
(4548)
Annex
COMMENTARY CONCERNING ARTICLES VI TO XII ON THE TAXATION OF INCOME IN RESPECT OF INDEPENDENT AND DEPENDENT PERSONAL SERVICES Article VI
1. Article VI is concerned with what are commonly known as professional services and with other independent activities of a similar character. This excludes industrial and commercial activities and also professional services performed in employment, e. g. a physician serving as a medical officer in a factory. It should, however, be observed that the Article does not concern performances by public entertainers and athletes working on their own account, all public entertainers coming under a special Article covering their activities whether independent or not (Article XI). 2. The provisions of Article VI are similar to those customarily adopted for income from industrial or commercial activities. Nevertheless it was thought that the concept of permanent establishment should be reserved for commercial and industrial activities. The term "fixed base", which is to be found in various Conventions, has therefore been used. It has not been thought appropriate to try to define it, but it would cover, for instance, a physician's consulting room or the office of an architect or a lawyer. A person performing professional services would probably not as a rule have premises of this kind in any other State than that of his residence. But if there is in another State a centre of activity of a fixed or permanent character, then that State should be entitled to tax the person's activities. Article VII
3. The first paragraph of Article VII establishes the general rule as to the taxation of income from employment (other than pensions), namely, that such income is taxable in the State where the employment is actually exercised. One consequence of this would be that a resident of a Contracting State who 39
(4549)
derived remuneration, in respect of an employment, from sources in the other State could not be taxed in that other State in respect of that remuneration merely because the results of his work were exploited in that other State. 4. The general rule is subject to exception only in the case of pensions (Article X) and of remuneration and pensions in respect of certain governmental functions (Article VIII). Remuneration of members of boards of directors of companies is the object of a special provision (Article IX). 5. The second paragraph of Article VII contains, however, a general exception to the rule in paragraph 1. This exception, which concerns employment of short duration abroad, is mainly intended to facilitate the international movement of qualified personnel, as in the case of firms which sell capital goods and are responsible for installing and assembling them abroad. The three conditions prescribed in this paragraph must be satisfied concurrently for the remuneration to qualify for the exemption. The exemption is limited to the 183-day period which is stipulated in the Mexico and London Model Conventions of the League of Nations. The employer paying the remuneration must not be a resident of the State in which the employment is exercised. Furthermore, should the employer have in that State a permanent establishment (or a fixed base if he performs professional services or independent activities of a similar character), the exemption is given only on condition that the remuneration is not deducted in calculating the profits which are taxable in that State. It should be noted that, under the provisions of Article XI, the exemption does not apply to remuneration of public entertainers and athletes. 6. The object of the third paragraph of Article VII is to apply to the remuneration of crews of ships or aircraft in international traffic, or of boats engaged in inland waterways transport, a rule which follows up to a certain extent the rule applied to the income from shipping, inland waterways transport and air transport - that is, to tax them in the Contracting State in which the place of effective management of the enterprise concerned is situated. This provision assumes that the internal law of that State allows itto tax the remuneration of a person in the service of the enterprise concerned, irrespective of his fiscal domicile. Article VIII
7. Article VIII applies to remuneration in respect of governmental functions. The similar provisions which are frequently found in bilateral Tax Agreements were originally framed in order to conform with the rules of international courtesy and mutual respect between sovereign States (Cf. Mexico Model Convention, Commentary ad Article VIII). They were therefore rather limited in scope. The first paragraph of Article VIII lays down a general principle, the scope of which may be 40
(4550)
determined by the Contracting States by means of special provisions. It should be observed that the Article is not intended to restrict the operation of any rules originating from international law in the case of diplomatic and consular missions, but deals with cases not covered by such rules. 8. It should be noted that the term "remuneration" used in Article VIII covers wages and salaries and pensions, to the exclusion of any other payments. The provisions of the Article apply to remuneration paid not only by a State but also by its political subdivisions and local authorities (member States, cantons, municipalities, etc... ). Paragraph 1 of the Article does not apply if the services are performed in connection with trade or business carried on by the State, or one of its political subdivisions or local authorities, paying the remuneration. In such cases, the ordinary rule applies (Article VII for wages and salaries, Article IX for directors' fees and similar payments and Article X for pensions). Article IX
9. Article IX relates to remuneration received by a resident of a Contracting State, whether an individual or a legal person, inthe capacityof a member of a board of directors of a company Since it which is a resident of the other Contracting State. might sometimes be difficult to ascertain where the services are performed, the provision treats the services as performed in the country of residence of the company. Article X
According to the rule stipulated in Article X, pensions in 10. respect of private employment are taxable only in the country of residence of the recipient. The provision also covers widows' and orphans' pensions and other similar payments such as annuities paid in respect of past employment. It also applies to pensions in respect of services rendered to a State or a political subdivision or local authority thereof which are not covered by the provision of paragraph 1 of Article VIII. Article XI
The provisions of Article XI relate to public entertainers 11. and athletes and stipulate that they may be taxed in the State in which the activities are performed, whether these are of an This provision is independent or of a dependent nature. an exception, in the first case, to the rule laid down in Article VI, in the second case, to the rule laid down in paragraph 2 of Article VII. By this provision the practical difficulties are avoided 12. which often arise in taxing public entertainers and athletes 41
(4551)
performing abroad. Certain Conventions, however, provide for certain exceptions such as those contained in paragraph 2 of Article VII. Moreover, too strict provisions might in certain cases impede cultural exchanges. In order to overcome this disadvantage, the States concerned may, by common agreement, limit the application of Article XI to independent activities by adding its provisions to those of Article VI relating to professional services and other independent activities of a similar character. In such case, public entertainers and athletes performing for a salary or wages would automatically come withinArticle VII and thus be entitled to the exemptions provided for in paragraph 2 of that Article. Article XII
13. The rule established in Article XII concerns certain payments received by students or business apprentices for the purpose of their maintenance, education or training. The exemption provided for is already fairly well established in existing bilateral Conventions. All such payments received from sources outside the State in which the student or business apprentice concerned is staying shall be exempted from tax in that State. General Remarks
14. No special provision has been made regarding remuneration derived by visiting professors or students employed with a view to their acquiring practical experience. Most current Conventions contain rules of some kind or other concerning such cases, the main purpose of which is to facilitate cultural relations by providing for a limited tax exemption. Sometimes, tax exemption is already provided under national taxation laws. The absence of specific rules should not be interpreted as constituting an obstacle to the inclusion of such rules in bilateral agreements whenever this is felt desirable. It should be noted that no special rule regarding the taxa15. tion of income of frontier workers is included as it would be more suitable for the problems created by local conditions to be solved directly between the countries concerned.
42
(4552)
Annex
COMMENTARY CONCERNING ARTICLE XIII ON THE TAXATION OF INCOME FROM IMMOVABLE PROPERTY
1. All Double Taxation Conventions in force give the right to tax income from immovable property to the State of source, that is, the State in which the property producing such income is situated. This uniform practice in the Conventions is due to the fact that there is always a very close economic connection between the source of the income and the State of source. The rule laid down in paragraph 1 of the Article is in conformity with this practice. 2. Defining the concept of immovable property by reference to the laws of the State of situs, as is provided in paragraph 2, will help to avoid difficulties of interpretation over the question whether an asset or a right is to be regarded as immovable property or not. The Article, however, specifically mentions the assets and rights which must always be regarded as immovable property. In fact such assets and rights are already treated as immovable property according to the laws or the taxation rules of most Member countries of the' 0. E. E. C. Conversely, the Article stipulates that ships, boats and aircraft shall never be considered as immovable property. No special provision has been made as regards income from indebtedness secured by immovable property, as the question is to be settled under the Article on the taxation of interest. 3. As indicated in paragraph 3 of the Article, the general rule applies irrespective of the form of exploitation of the immovable property and also operates in the cases of the alienation of immovable property. 4. Paragraphs 3 and 4 also make it clear that the provisions of the Article apply not only to income from agricultural and forestry enterprises but also to income from immovable property of industrial, commercial and other enterprises as well as to income from immovable property used for the performance of professional services. 43
73095 O-62-vol. 4-
36
(4553)
5. It should be noted in this connection that the right to tax of the State of source has priority over other rights to tax and applies also where, in the case of a business undertaking or of non-industrial and non-commercial activities, income is only indirectly derived from immovable property. This does not prevent income from immovable property, when derived through a permanent establishment, from being treated as income of a business enterprise, but secures that income from immovable property will be taxed in the State in which the property is situated also in the case where such property is not part of a permanent establishment situated in that State. It should further be noted that the provisions of the Article do not prejudge the application of national laws as regards the manner in which income from immovable property is to be taxed.
44
(4554)
Annex
COMMENTARY CONCERNING ARTICLE XIV ON THE TAXATION OF CAPITAL
The Article deals only with taxes on capital, to the ex1. clusion of taxes on estates and inheritances and on donations and of transfer duties. Taxes on capital to which the Article applies will be indicated in the Article concerning taxes which are covered by the Convention. Taxes 2. taxation of capital can entitled to possible to taxation of exclusively on capital generally constitute supplementary income from real property. Consequently, taxes on be levied, in principle, only by the State which is tax the income from the capital. However, it is not refer purely and simply to the rules relating to the the income, for not all income is subject to taxation in one State.
3. The Article, therefore, enumerates first property and assets which maybe taxed in the State in which they are situated. To this category belong immovable property, as defined in the Article on the taxation of income from immovable property, and assets, other than immovable property, forming part of the business property employed in a permanent establishment of an enterprise, or pertaining to a fixed base used for the performance of professional services (paragraphs 1 and 2). 4. Ships and aircraft operated in international traffic and boats engaged in inland waterways transport and assets, other than immovable property, pertaining to the operation of such ships, aircraft and boats are taxable only in the State in which the effective place of management of the enterprise is situated (paragraph 3). This rule is based on the provisions of the Article on taxation of income from shipping, inland waterways transport and air transport. Immovable property pertaining to the operation of ships, aircraft and boats, may be taxed in the State in which they are situated, in accordance with the rule laid down in paragraph 1. As regards other elements of capital than those listed in 5. paragraphs I to 3, the Article provides that they are taxable 45
(4555)
only in the State of which the person to whom they belong is a resident (paragraph 4). 6. If, following the application of paragraph 4 to elements of movable property under usufruct, double taxation subsists because of the disparity between national laws, the States concerned may resort to the mutual agreement procedure or settle the question by means of bilateral negotiations.
46
(4556)
APPENDIX
(4557)
RECOMMENDATION OF THE COUNCIL OF O. E. E. C. CONCERNING THE AVOIDANCE OF DOUBLE TAXATION
(Adopted by the Council at its 443rd Meeting,

on 3rd July 1959. Spain adhered to this Recommendation.)
The Council Having regard to Article 13(c) of the Convention for European Economic Co-operation of 16th April 1948 ; Having regard to the Recommendation of the Council of 25th February 1955, concerning Double Taxation [C(55)37(Final)]; Having regard to the Resolution of the Council of 16th March 1956, creating a Fiscal Committee [C(56)49(Final)] ; Having regard to the Report of the Fiscal Committee of 28th May 1958 [C(58)118] ; Having regard to the Recommendation of the Council of 11th July 1958, concerning the Elimination of Double Taxation [C(58)118(Final)] ; Having regard to the Report of the Fiscal Committee of 18th June 1959, and, in particular, to paragraphs 13, 14, 33, 34 and 35, and to the Annexes to that Report LC(59147]
I.
RECOMMENDS TO THE GOVERNMENTS OF THE MEMBER COUNTRIES :
To pursue their efforts to conclude bilateral double 1. taxation Conventions with those of their European partners with whom they have not yet entered into such agreements, and to revise those of the existing Conventions which may no longer be in keeping with the present circumstances. To adopt, either when concluding new Conventions or 2. when revising existing Conventions, the provisions set out in the Annex to this Recommendation, as interpreted by the 49
(4559)
Commentaries contained in the Reports of the Fiscal Committee of 28th May 1958 and 18th June 1959 referred to above. However, in view of her particular situation in relation to shipping, Greece will retain her freedom of action with regard to those provisions in the Annex to this Recommendation which relate, respectively, to income from the operation of ships in international traffic, to remuneration of crews of such ships and to capital represented by ships in international traffic and by assets, other than immovable property, pertaining to the operation of such ships. II. DECIDES : shall, without delay, notify to the
Member countries Organisation :
(a) the text of any new or revised bilateral Convention for the avoidance of double taxation which they conclude between them ; (b) those provisions in the Annex to this Recommendation which have been adopted in any such Convention, or the reasons why provisions in the Annex to this Recommendation have not been adopted in the said Convention. Ill. INSTRUCTS THE FISCAL COMMITTEE
1. To report to the Council before 1st July of each year on measures taken by Member countries to implement the Recommendation in Section I. 2. To make proposals to the Council, if need be, on measures which ought to be taken in order to facilitate the implementation of that Recommendation. 3. To submit to the Council, for adoption, recommendations as and when agreement is reached by the Committee on questions within the terms of the mandate given by the Resolution of the Council of 16th March 1956, referred to above. 4. To submit to the Council before 1st July 1961, a Draft Convention for the avoidance of double taxation with respect to taxes on income and capital as well as concrete proposals for the implementation of that Convention. 5. To report at the same time to the Council on the progress of the work relating to problems of double taxation with respect to taxes on estates and inheritances and to indirect taxes within the terms of the mandate given by the Resolution of the Council of 16th March 1956, referred to above. 50
(4560)
IV.
DECIDES :
The Recommendations of the Council of 25th February 1955, and of 11th July 1958, referred to above, are hereby repealed.
to
Note concerning the Annex the Council Recommendation
The Annex to the Recommendation of the Council of 3rd July 1959, consists of the text of the following articles : I on taxes which should be covered by Double Taxation Conventions. Article II on permanent establishment. Article III on fiscal domicile. Article IV on tax discrimination on grounds of nationality or other similar grounds. Article V on the taxation of income from shipping, inland waterways transport and air transport. Articles VI to XII on the taxation of income in respect of independent and dependent personal services. Article XIm on the taxation of income from immovable property. Article XIV on the taxation of capital. The texts of Articles I to IV are to be found on pages 31 to 38 of the first Report of the Fiscal Committee published by O.E.E.C. in September 1958, under the title "The elimination of double taxation". This Report also contains Commentaries on these Articles on pages 41 to 63. The texts of Articles V-to XIV are to be found on pages 25 to 31 of the present Report which also contains Commentaries on these Articles on pages 35 to 46. Article
51 (4561)
FROM THE CATALOGUE
THE ELIMINATION OF DOUBLE TAXATION First Report of the Fiscal Committee of the 0. E. E. C. (September 1958) 300 Fr. fr. 5/$1.00 64 pages (demy 8vo) THE EFFECTS OF DIFFERENTIAL TAX TREATMENT OF CORPORATE AND NON-CORPORATE ENTERPRISES, by Cesare Cosciani (February 1959) E.P.A. Project No. 314 13/$2.25 158 pages (crown 4to) THE INFLUENCE OF SALES TAXES ON PRODUCTIVITY, by Ch. Campet (December 1957) E.P.A. Project No. 315 18/$3.50 276 pages (demy 8vo)
900 Fr. fr.
900 Fr.fr.
TERMS USED IN INTERNATIONAL TRADE AND PAYMENTS AND NATIONAL ACCOUNTS Glossary and Definitions : English-French, French-English (August 1958) 750 Fr. fr. 12/6 $2.25 146 pages (crown4to) LIBERALISATION OF EUROPE' S DOLLAR TRADE Second Report (June 1957) 9/$1.50 182 pages (demy 8vo) A STANDARDIZED SYSTEM OF NATIONAL ACCOUNTS 1958 Edition (January 1959) 6/6 $1.25 104 pages (demy 8vo) STATISTICS OF NATIONAL PRODUCT AND EXPENDITURE No. 2 : 1938 and 1947 to 1955 (June 1957) 14/$2.50 212 pages (crown 4to)
450 Fr. fr.
400 Fr.fr.
500 Fr. fr.
A COMPARISON OF NATIONAL OUTPUT AND PRODUCTIVITY OF THE UNITED KINGDOM AND THE UNITED STATES, by Deborah Paige and Gottfried Bombach (June 1959) 1,400 Fr. fr. 21/$3.50 246 pages (crown 4to) EUROPEAN PAYMENTS UNION Final Report of the Managing Board (July 1959) $1.25 92 pages (demy 8vo)
7/6
500 Fr. fr.
EUROPEAN MONETARY AGREEMENT (August 1955) 4/$0.75 56 pages (crown 4to)
200 Fr. fr.
DIRECTIVES FOR THE APPLICATION OF THE EUROPEAN MONETARY AGREEMENT (February 1959) 150 Fr. fr. 2/6 $0.50 24 pages (crown 4to) THE WORK OF THE ORGANISATION FOR EUROPEAN ECONOMIC CO-OPERATION A Report by the Secretary-General (April 1959) $1.00 114 pages (demy 8vo)
7/-
450 Fr. fr.
(4562)

ARGENTINA
Editorial Sudamericano S.A., Alsinao SO, BUENOS AIRES AUSTRIA Gerald & Co., Graben 31, VIENNA I Sub-Agent : GRAZ : Buchhandlung Jos. A. Kienreich, Sackstrasse 6 BELGIUM N.V. Standaard-Boekhandel, Huidevettersstraat 57, ANTWERP Librairie des Sciences (R. Stoops) 76-78. Coudenberg, BRUSSELS Librairie de Ia Bourse, 3, passage de la Bourse, CHARLEROI Librairie Paul Gothier, 3-S, rue Bonne-Fortune. LI:GE Moison du Livre. Grand'Rue 52. MONS BRAZIL Livraria Agir Edit~ra, Rua Mexico 98-B, RIO DE JANEIRO CANADA The Ryerson Press. 299 Queen Street W., TORONTO CUBA La Casa Belgo, O'Reilly 455. HAVANA DENMARK Einar Munksgaard Forlag, Norregode 6, COPENHAGEN FINLAND Akateeminen Kirjakauppo, Keskuskatu 2, HELSINKI FRANCE Presses Universitaires rue Soufflot. PARIS-S" GERMANY Deutscher BundesVerlag. G.m.b.H.. Bundeshaus, Schliessfach 137, BONN und in den massgebenden Buchhandlungen Deutschlands GREECE Librairie Kauffman, 21, rue du Stade, ATHENS ICELAND Innkaupasamband B6ksala h.f. REYKJAVIK. P.O. Box 888 INDIA International Book House Ltd.. 9 Ash Lane. Mahatma Gandhi Road, BOMBAY I Oxford Book and Stationery Co. : NEW DELHI : Scindia House CALCUTTA : 17 Park Street de France. 17, IRELAND Eason & Son, 40-41 Lower O'Connell Street, DUBLIN ISRAEL Blumstein's Bookstores Ltd., 35 Allenby Road, TEL AVIV ITALY Libreria Commissionaria Sansoni. Via Gino Capponi 26, FLORENCE Via D. A. Azuni IS/A, ROME Corso Cavour 93, BARI P.E.M., Via Verdi, MILAN JAPAN Maruzen Company Ltd., 6 Tort Nichome Nihonboshi, TOKYO LUXEMBOURG Librairie Paul Bruck, 33. Grand'Rue, LUXEMBOURG MOROCCO (Kingdom of) B.E.P.I., 8 rue Michaux-Bellaire, RABAT THE NETHERLANDS Wholescale agent : Meulenhoff & Co. N.V. Importeurs. Beulingstraot 2, AMSTERDAM Principal retailer: W. P. Van Stockum & Zoon, Buitenhof 36, THE HAGUE NORWAY A/S Bokhjornet, Lille Grensen 7. OSLO PAKISTAN Mirza Book Agency. 9-A Shah Alam Market, LAHORE PORTUGAL Livroria Portugal, Rua do Carmo 70. LISBON SOUTH AFRICA Van Schaik's Book Store Ltd., Church Street, PRETORIA SPAIN Mundi Prensa. Castell6 37. MADRID SWEDEN Fritzes. Kungl. Hovbokhandel. Fredsgatan 2, STOCKHOLM 16 SWITZERLAND Librairie Payot. 40, rue du Marchi. GENEVA and at Lausanne, Neuchatel. Vevey. Montreux. Berne. Basle and Zurich. TURKEY Librairie Hachette, 469 Istiklal Caddesi. Beyoglu, ISTANBUL UNITED KINGDOM AND CROWN COLONIES H.M. Stationery Office, P.O. Box 569, LONDON S.E.I. Branches at : EDINBURGH 2 : 13a Castle Street BIRMINGHAM 3 : 2 Edmund Street BRISTOL I : Tower Lane MANCHESTER 2 : 39 King Street CARDIFF : 109 St. Mary Street BELFAST : 80 Chichester Street UNITED STATES OF AMERICA O.E.E.C. Mission. Publications Office. SUITE 1223 1346 Connecticut Ave, N.W WASHINGTON 6. D.C. YUGOSLAVIA Jugoslovenska Knjiga. Marsala Tita 23. P.O.B. 36, BELGRADE
Orders and inquiries trom countries where sales agents have not yet been appointed may be sent to: O.E.E.C., Distribution and Sales Service, 33, rue de Fronqueville, Paris-16'
(4563)
The elim.i-nation .01 double,'--tCo"tion
THIRID REPORT
(4565)
THIRD REPORT OF THE FISCAL COMMITTEE
1960
PUBLISHED BY THE ORGANISATION FOR EUROPEAN ECONOMIC CO-OPERATION
(4567)
The Organisationfor European Economic Co-operation comprises the following Member countries: Austria, Belgium, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey and the United Kingdom. The Organisation came into being with the signing of the Convention for European Economic Co-operation on 16th April 1948, when Member Governments pledged themselves " to combine their economic strength, to join together to make the fullest collective use of their individual capacities and potentialities, to increase their production, develop and modernise their industrial and agriculturalequipment, expand their commerce, reduce progressively barriers to trade among themselves, promote full employment and restore or maintain the stability of their economies and general confidence in their national currencies". Representatives of each of the Member countries meet daily at the 0. E.E.C. headquarters, Chdteau de la Muette, Paris, to discuss their economic problems and work out common solutions. The United States and Canada participate in all the work of the Organisation as Associate Members. Yugoslavia is represented by an observer. Since 1957, she has taken part fully in the work of the O.E.E.C. European Productivity Agency. Moreover, since July 1959, she has participated on an equal footing with Member countries in the Organisation'swork on agriculture and foodi.
This document has been circulated within the O.E.E.C. under the symbol C(60)157
Published in August 1960
(4568)
SUMMARY
I. II.
INTRODUCTION ............................................
7 3rd
JULY,
IMPLEMENTATION OF THE COUNCIL RECOMMENDATION OF
1959 .................................................. A. Bilateral Conventions concluded since July 1959 .......... B. Bilateral negotiations in progress ......................... C. G eneral rem arks ....................................... 1II.
FURTHER RESULTS OF THE COMMITTEE'S WORK .................
9 9 10 12
15
A. B.
IV .
Results since July 1959, and work in hand ................ Objects and scope of the proposed new Articles ............
15 16
19
CONCLUSIONS ..............................................
Proposals by the Committee to the Council ................... A NNEXES

1.
19
Annex A. Articles on the allocation of profits to permanent establishments and associated enterprises (Articles XV and XVI).. Annex B. Article on the taxation of income not expressly mentioned in the Convention (Article XVII) ...................... Annex C. Article on the personal scope of the Convention (Article XVIII) .............................. Annex D. Article on the territorial extension of the Convention (Article XIX ) ........................................... 2.
23 25 27 29
Annex Annex Annex Annex
E. F. G. H.
Commentary Commentary Commentary Commentary
on on on on
Articles XV and XVI .................. Article XVII ......................... Article XVIII ........................ Article XIX .......................... APPENDIX
33 43 45 47
Recommendation of the Council of O.E.E.C. of 19th July, 1960, amending the Recommendation concerning the avoidance of double taxation of 3rd July, 1959 ....................................... 5
51
73095 0-62-vol. 4-
37
(4569)
INTRODUCTION
In its two earlier reports, of May 1958 and July 1959, the Fiscal Com1. mittee submitted to the Council a set of Articles to be inserted in the double taxation CoNventions between the Member countries of the O.E.E.C., with a view to the progressive co-ordination of these Conventions and the more effectual avoidance of double taxation. The proposals made by the Committee in these two earlier reports were embodied by the Council in its last Recommendation of 3rd July, 1959, concerning the avoidance of double taxation. In that Recommendation, the Council instructed the Fiscal Committee in particular to report to it before 1st July of each year on the measures taken by the Member countries, first, to conclude bilateral double taxation Conventions with those of their European partners with whom they have not yet entered into such agreements or to revise those of the existing Conventions which may no longer be in keeping with present circumstances, and, secondly, to adopt in those Conventions the Articles proposed by the Fiscal Committee. The Council also instructed the Fiscal Committee to submit to it new draft Articles as and when agreement should be reached by the Committee on the other questions remaining to be examined in connection with the draft Convention for the avoidance of double taxation with respect to taxes on income and capital, which it had been instructed to submit to the Council by 1st July, 1961. In accordance with these directives, the purpose of the present report 2. is to inform the Council of the measures taken by the Member countries in application of the Recommendation of 3rd July, 1959, and to submit a further set of five Articles on which the Fiscal Committee has reached agreement since then. Thus, by the end of its fourth year of work, the Fiscal Committee has been able to draft in all a set of nineteen Articles constituting the foundations of the draft Convention which it was appointed to prepare. The Fiscal Committee has also thought it useful to give in this report a brief description of the work now in hand, the termination of which will make it possible to complete the draft Convention. As it has already done in its two earlier reports, the Fiscal Committee 3. submits to the Council in the conclusions of the present report concrete proposals concerning the implementation of the five new Articles. These proposals, by facilitating the introduction of bilateral Conventions in a standard form should make for further progress in the co-ordination of the bilateral Conventions and the abolition of double taxation and should pave the way to the adoption at a later stage of a multilateral Convention between the Member countries of the O.E.E.C. 7
(4571)
IMPLEMENTATION OF THE RECOMMENDATION OF THE COUNCIL OF 3rd JULY, 1959, CONCERNING THE AVOIDANCE OF DOUBLE TAXATION
In its Recommendation of 3rd July, 1959, the Council recommended 4. that the Governments of the Member countries, when revising existing or concluding new double taxation Conventions between themselves, should adopt fourteen Articles, concerning respectively: a) the listing and definition of the taxes covered by the Convention (Article I); b) the definition of permanent establishment (Article II); c) the definition of fiscal domicile (Article III); d) tax discrimination on grounds of nationality or similar grounds (Article IV); e) the taxation of income from shipping, inland waterways transport and air transport (Article V); f) the taxation of income in respect of independent and dependent personal services (Articles VI to XII); g) the taxation of income from immovable property (Article XIII); h) the taxation of capital (Article XIV). A. BILATERAL CONVENTIONS CONCLUDED SINCE 21st JULY, 1959 In its previous report, the Fiscal Committee stated that eight new 5. Conventions and an Additional Protocol had been concluded between l1th July, 1958, and 21st July, 1959. This fairly large number represented the culmination of the efforts made by a number of Member countries during the previous years to modernise and enlarge their network of bilateral Conventions with their European partners. Between 21st July, 1959, and 21st July, 1960, four general Conventions for the avoidance of double taxation of income and capital were concluded between Member countries. One of these supersedes an existing Convention; the other three are completely new Conventions. Consequently, the number of general Conventions between Member countries of the O.E.E.C. on 21st July, 1960, is fifty-four, as against thirty-nine on 25th February, 1955, the date on which the Council first recommended that Member countries should pursue their efforts to prevent double taxation by concluding bilateral agreements between themselves. 9
(4573)
6. The information received by the Fiscal Committee about the four new Conventions and the manner in which the fourteen Articles in the Council Recommendation of 3rd July, 1959, have been incorporated is summarised in the following Table 1 and the accompanying Notes.
TABLE I SIGNATORY DATE OF COUNRIE SIGING
ARTICLES PROPOSED BY THE FISCAL COMMITTEE
11 111
IV
V VI
VII Val
IX
XI XII
XIII XIV
Austria-France
Ireland-Sweden
8.10.59
6.11.59
x
x
x
+
x
-
x
x
x
x
x
+
x
+
x
x
x
+
x
+
x
+
x
+
x
+
Austria-Norway
Italy-United King-
25.2.60 4.7.60
x + x + x
x
-
dom ..........
x x - x
x - xx
x x
x x x
N.B. The sign + indicates that the Article has been embodied in its entirety. The sign x indicates that the Article has not been wholly embodied in the proposed form, but that the text adopted keeps the essential provisions of the Article. The sign - indicates that the Article has not been embodied or that the adopted text differs essentially from the Article.
NOTES agreement of May 1951. It is to be noted that this Convention was initialled on 17th July, 1956, so that the Articles proposed by the Fiscal Committee in 1958 and 1959 could be incorporated. The Convention, however, conforms in fundamental purport with those Articles. In the Convention, each Article applied both to taxes on income and to taxes on capital; there is, therefore, no Article similar to the Article XIV proposed by the Fiscal Committee, which deals specifially with the taxation of capital.
b) The Convention between Ireland and Sweden signed on 6th November, 1959, is the first a) The Convention between Austria and France signed on 8th October, 1959, supersedes an
Convention concluded between these two countries. The Fiscal Committee is informed by the Delegations concerned that of the fourteen Articles in the Council Recommendation thirteen have been adopted with practically no change in the new Convention. Only the Article on fiscal domiciles has not been adopted, owing to special circumstances connected with Irish taxation laws.
c) The Convention between Austria and Norway signed on 25th February, 1960, is the first Convention concluded between these two countries. As this Convention was initialled on 3rd May, 1958, it was not possible to incorporate the Articles proposed by the Fiscal Committee after that date, with the exception of two which the Fiscal Committee had previously agreed. The Conven-
tion, however, conforms in fundamental purport with the other Articles proposed.
d)
first Convention concluded between these two countries. It was initialled on 21st April, 1956, i.e. some two years before the First Report of the Fiscal Committee was published but contains several articles broadly similar to those adopted by the Fiscal Committee.
The Convention between Italy and the United Kingdom signed on 4th July, 1960, is the
B. BILATERAL NEGOTIATIONS IN PROGRESS 7. At the present time, bilateral negotiations are proceeding between Member countries in eighteen cases, eight for the revision of general Conventions already in force and ten for the conclusion of new general Conventions between Member countries which are not yet bound by such agreements (see Table 2). According to information received by the Fiscal Committee concerning the eleven negotiations which are the most advanced, the 10 (4574)
TABLE
NETWORK OF BILATERAL GENERAL CONVENTIONS FOR THE AVOIDANCE OF DOUBLE TAXATION WITH RESPECT TO INCOME AND PROPERTY TAXES BETWEEN MEMBER AND ASSOCIATED COUNTRIES 2. as at 21st July1960
-.
5_
z 0
r <
0
REPORTING COUNTRIES
0 Z
"
114 <
,
o
SWEDEN KINGDOM UNITED FRGERMANY
N
N
S
S
N .5 S N :
N S S
N
.
.
N S S
NN
N
FRANCE
NETHERLANDS
DENMARK NORWAY SWITZERLAND
AUSTRIA
S,: N S N
N S N N N
:N :
.*.:i
N
S. N
ITALY BELGIUM
LUXEMBOURG
S
..
S N
.
N N.: N
N
N N N
S
N
GREECE
N
S
IRELAND
ICELAND
SPAIN PORTUGAL TURKEY
CANADA
N N
N
USA.
.. ,o 1:ui'11 19 F 1 8 1 8 [F 12 F21111
1321
1-
E
H
Convention in force
New Convention signed to replace the Convention at presont in force
FI
Negotiotions proceeding for the revision of the Convention in force
-1 Convention signed but not yetin force

[
IConventions
concluded
(4575)
Articles in the Council Recommendation of 3rd July, 1959, have practically all been adopted by the negotiators either word for word or in their fundamental purport. In eight of these eleven cases, a draft Convention has already been initialled. With regard to the other seven negotiations, the continuance of negotiations in three cases now depends on the final result of the work in progress in the Committee; in the four other cases, negotiations are still in the preliminary stage. Thus, the results to date can be regarded as encouraging.
C. GENERAL REMARKS 8. The fact that Member countries in very different situations have to a very large extent adopted the proposed Articles clearly shows that these Articles can offer successful solutions to current problems of double taxation and that they answer a real need to co-ordinate the existing Conventions. Moreover, the adoption of these Articles has in certain cases made the bilateral negotiations much easier and consequently has led to speedier agreement. Thus, the results obtained confirm the usefulness of the task entrusted to the Committee by the Council. It should further be noted that some of these Articles have also been adopted in Conventions recently concluded by Member countries with Associated or third countries. For example, the Article on the permanent establishment has been adopted in full in the Double Taxation Convention between Sweden and Israel signed on 22nd December, 1959, and in the Draft Supplementary Convention between Sweden and the United States initialled in January 1960. The Articles on the permanent establishment, on non-discrimination in the field of taxation and on taxation of dependent personal service of the Double Taxation Convention between Switzerland and Pakistan signed on 30th December, 1959, are also based on the Articles proposed by the Fiscal Committee. In the recent negotiation between Franceand Israel, it was decided to take as a basis the series of Articles established by the Fiscal Committee. In recent negotiations between Austria and the United Arab Republic, the Articles on fiscal domicile, permanent establishment, non-discrimination and remuneration of governmental functions were embodied in the Draft Convention, while other Articles proposed by the Fiscal Committee were also taken into consideration. 9. The Fiscal Committee would point out that further progress is needed before double taxation between all Member countries of the O.E.E.C. can finally be eliminated. As Table 2 shows, a number of Member countries either have not yet concluded any or have concluded only a few bilateral Conventions. Furthermore, the effective co-ordination of [the bilateral Conventions between the Member countries on the basis of jointly established principles, definitions and methods is only just beginning. Until the completion of the draft Convention now being prepared by the Fiscal Committee paves the way for the adoption of a multilateral Convention between all Member countries, the bilateral Conventions can only be co-ordinated as existing Conventions are revised or new ones concluded. The Fiscal Committee therefore considers that the Member countries should pursue their efforts towards revising those Conventions which are no longer in keeping with present circumstances and concluding new ones on the basis of the Arti12 (4576)
cles it has already submitted to the Council and of those it submits in the present report. The common rules established by the Fiscal Committee will be of more help in the abolition of double taxation as they are made to apply to more Conventions. And it will be all the easier to adopt a multilateral Convention later if the bilateral Conventions have already been coordinated in the meantime.
13 (4577)
III
FURTHER RESULTS OF THE FISCAL COMMITTEE'S WORK
A. RESULTS SINCE JULY 1959, AND WORK IN HAND Since its last report to the Council, the Fiscal Committee has agreed 10. upon five new Articles concerning: a) the allocation of profits to permanent establishments and associated enterprises (Articles XV and XVI); b) the taxation of income not expressly mentioned in the Convention (Article XVII); c) the personal scope of the Convention (Article XVIII); d) the territorial extension of the Convention (Article XIX). These Articles and the accompanying Commentaries are annexed to this report; the present Chapter, therefore, will be confined to a brief description of the objects of the five Articles. These Articles, which follow on the fourteen Articles already proposed by the Fiscal Committee, are numbered from XV to XIX merely for convenience and not as an indication of logical order. The Fiscal Committee is now proceeding with the drafting of Articles 11. on the last groups of questions remaining to be studied to complete the draft Convention with respect to taxes on income and capital which it was instructed by the Council to prepare, namely: i) the taxation of royalties, dividends and interest; ii) technical methods of avoiding double taxation (exemption method and tax credit method); ii) the structure and general provisions of the Convention (definition of the terms employed; mutual agreement procedure; entry into force and termination of the Convention, etc.). On the first of these groups of questions, the Fiscal Committee has 12. detailed studies in which it has reviewed the problems involved made already in the search for common solutions. With respect to taxation of royalties, dividends and interests, there are very great dissimilarities in the Member countries' laws and rules and between the solutions adopted in the existing bilateral Conventions. A search for common rules is particularly difficult, therefore, but the Fiscal Committee nevertheless hopes to find a solution on these questions, which are fairly closely related. It is on this task that it intends to concentrate in the coming months. 15
(4579)
13. As regards technical methods of avoiding double taxation, the Fiscal Committee's studies are now sufficiently advanced for it to be possible to formulate concrete proposals at an early date. After a thorough study of the various forms that can be taken by the two methods most commonly employed (exemption of foreign income, credit against tax for foreign taxes), the Fiscal Committee has recognised that, in present circumstances, it would be fruitless to try to impose one single method. It considers that double taxation can be successfully countered by restricting the use of the methods to two clearly defined principal forms, based respectively on exemption and on the tax credit. But the elaboration of final solutions depends to a certain extent on those which will be adopted in relation to the three questions referred to in the foregoing paragraph. 14. The structure and general provisions of the Convention will be studied by the Fiscal Committee as soon as the preceding questions have been settled, so as to complete the set of Articles which will form the basis of the draft Convention with respect to taxes on income and capital. 15. The Fiscal Committee has not lost sight of the fact that the preparation of that draft Convention is only the first of the tasks entrusted to it by the Council and that by its terms of reference it must subsequently submit proposals on the abolition of double taxation with respect to taxes on estates and inheritances and indirect taxes. Studies are already in hand with regard to taxes on estates and inheritances. The Fiscal Committee will take up the question of indirect taxes when the draft Convention concerning taxes on income and capital has been completed. B. OBJECTS AND SCOPE OF THE PROPOSED NEW ARTICLES 16. The five new Articles proposed in this report of the Fiscal Committee are quite different in character. The first two, which concern the allocation of profits to permanent establishments and to associated enterprises respectively, follow on the Article on the concept of permanent establishment which the Committee presented in its first report. The third Article, about income not expressly mentioned in the Convention, contains a rule delimiting the taxing powers of the two Contracting States. The fourth and fifth Articles, concerning respectively the personal and the territorial scope of the Convention, consist of provisions identical in character with the general clauses to be found in most international agreements.
a) ARTICLES CONCERNING THE ALLOCATION OF PROFITS ESTABLISHMENTS AND ASSOCIATED ENTERPRISES TO PERMANENT
17. When an enterprise of a Contracting State carries on business in the other Contracting State, the profits it thereby makes can be taxed by both
States. To avoid this double of the permanent establishment tax an enterprise of the other establishment in its territory. establishment" (Article II).
taxation, the Conventions use the criterion and recognise the rule that a State may not State unless the enterprise has a permanent Accordingly, in its first report, the Fiscal
Committee established a common definition for the expression " permanent
However, the permanent establishment defi. 16 (4580)
nition does not in itself provide the means of avoiding double taxation of industrial and commercial profits. So the definition of permanent establishment must be followed up with a set of rules allocating the right to tax to the State where a permanent establishment is situated and stating how the taxable profits of permanent establishments are to be calculated. This is the object of the provisions of Article XV. Rules are also needed for calculating the profits of an enterprise of a Contracting State dealing with an enterprise of the other Contracting State, where one enterprise controls the other or both enterprises are under common control. This is the object of the provisions of Article XVI. The two Articles are given in Annex A. The rules proposed by the Fiscal Committee in these Articles are not 18. an innovation. Most of the existing double taxation agreements contain solutions based on the Mexico and London Model Conventions of the League of Nations, and are thus to some extent uniform. The Fiscal Committee considered that the principles underlying those solutions are still valid. It has, therefore, readopted them, formulating them as clearly as possible and defining their practical application on a basis which is acceptable to all Member countries. The Fiscal Committee has not entered in detail into all the problems which can arise when an enterprise in one country makes profits in another, or attempted to draw up precise rules for each individual case. Indeed, this would not have been possible in the relatively restricted scope of an Article in a Convention, in view of the very many forms that international business assumes nowadays. Moreover, the settlement of any special cases which may arise should not~give rise to serious difficulties when satisfactory general directives have been established and agreed by all States concerned. Article XV prescribes the permanent establishment test for deter19. mining which State has the right to tax industrial or commercial profits, and formulates the basic principle which must govern the calculation of the profits of the permanent establishment, namely, that the permanent establishment must be regarded as an enterprise distinct and separate from the head office. It settles the question of the expenses that must be allowed as a deduction from the permanent establishment's profits and deals with cases where the profits may be determined otherwise than on the separate enterprise principle. Finally, it endeavours to guarantee permanency of the methods used to calculate the profits. Article XVI deals with the case of enterprises of a Contracting State 20. under the control of enterprises of the other Contracting State, are which and of enterprises under common control. It thus applies, for example, to the case of a subsidiary of a foreign company. The Article provides that, in calculating the taxable profits, the taxation authorities may rewrite the accounts of such enterprises if, as a result of their special relationship, those accounts do not disclose the true profits which are properly taxable in the country concerned on the separate enterprise principle. In view of the importance to the taxpayers concerned and the natio21. nal taxation authorities of the problems dealt with in Article XV and Article XVI, the Fiscal Committee has prepared an especially detailed Commentary by way of illustration and interpretation. 17 (4581)
b)
ARTICLE CONCERNING THE TAXATION OF INCOME NOT EXPRESSLY MENTIONED IN THE CONVENTION
22. The double taxation Conventions have separate Articles only for the principal types of income in respect of which detailed rules are needed for avoidance of double taxation. So, in numerous Conventions, income not expressly mentioned is dealt with in a special Article which regulates the Contracting States' taxing power in respect of all such income in order to prevent double taxation. In most cases, the right to tax is given to the State of which the recipient of the income is a resident, because that State is normally entitled to tax its residents' total income. Article XVII in Annex B in this report follows the same rule and formulates it in a form acceptable to all the Member countries. c)
ARTICLE CONCERNING THE PERSONAL SCOPE OF THE CONVENTION
23. The purpose of Article XVIII in Annex C to this report is to define the persons to whom the Convention applies. For practical reasons, the Fiscal Committee thought it best to state that the Convention shall apply to persons who are residents of one or both of the Contracting States. d)
ARTICLE CONCERNING THE TERRITORIAL EXTENSION OF THE CONVENTION
24. A double taxation Convention must necessarily state to what territories it applies. In certain cases moreover, it is useful to have a provision making it possible to extend the application of the Convention to other territories. Such a provision is of value to States which have territories overseas or are responsible for the international relations of other States or territories. The purpose of Article XIX in Annex D to the present report is to specify when and how such extension can be effected.
18 (4582)
IV
CONCLUSIONS
The Fiscal Committee, as it has done for the Articles contained in its 25. previous reports, proposes that the five Articles annexed to the present report should be the subject of a Recommendation of the Council, in-which Member countries would be invited to adopt these Articles when they revise existing Conventions or conclude new Conventions between themselves. It also proposes that the Member countries should continue to notify 26. to the Organisation all new or revised bilateral Conventions concluded between them in which these Articles or the Articles previously drafted have been adopted, or, where they have not been so adopted, the reasons for the omission. The Fiscal Committee, on the basis of such notifications, would report to the Council on the measures taken by Member countries to implement the Recommendation and on any measures which ought to be taken in order to facilitate its implementation. The Fiscal Committee considers that the adoption of the five new 27. Articles in the bilateral double taxation Conventions between Member countries, in conjunction with the adoption of the preceding fourteen Articles, would mark an important step forward towards the co-ordination of the Conventions and would make for a more effective avoidance of double taxation. As such progress will only be possible in so far as the old Conventions which are no longer in keeping with present circumstances are revised and new ones concluded, the Fiscal Committee proposes that the Council should recommend that Member countries pursue their efforts to that end.
19
(4583)
ANNEXES
1. TEXTS OF THE ARTICLES
73095 0--62-vol. 4-
38
(4585)
ANNEX
ARTICLES ON THE ALLOCATION OF PROFITS TO PERMANENT ESTABLISHMENTS AND ASSOCIATED ENTERPRISES
Article XV 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, tax may be imposed in the other State on the profits of the enterprise but only on so much of them as is attributable to that permanent establishment. 2. Where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing quite independently with the enterprise of which it is a permanent establishment. 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere. 4. In so far as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 of this Article shall preclude such Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this Article. 5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 6. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year bv year unless there is good and sufficient reason to the contrary. 23
(4587)
Article XVI Where a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
Nora.
The expression "enterprise of a Contracting State"
means an enterprise
carried on by a resident of the Contracting State concerned. 24
(4588)
ANNEX B
ARTICLE CONCERNING INCOME NOT EXPRESSLY MENTIONED IN THE CONVENTION Article XVII The items of income not expressly mentioned in the foregoing Articles of the Convention shall be taxable only in the Contracting State of which the recipient is a resident.
25 (4589)
ANNEX C
ARTICLE CONCERNING THE PERSONAL SCOPE OF THE CONVENTION Article XVIII This Convention applies to persons who are residents of one or both of the Contracting States.
27 (4591)
ANNEX D ARTICLE CONCERNING THE TERRITORIAL EXTENSION OF THE CONVENTION Article XIX I. This Convention may be extended, either in its entirety or with any necessary modifications, to any part of the territory of the Contracting State A or of the Contracting State B which is not specifically mentioned in Article ... ,1 or to any State or territory for whose international relations the Contracting State A or the Contracting State B is responsible, which imposes taxes substantially similar in character to those to which this Convention applies. Any such extension shall take effect from such date and subject to such modifications and conditions (including conditions as to termination) as may be specified and agreed between the Contracting States in notes to be exchanged through diplomatic channels or in any other manner in accordance with their constitutional procedure. 2. Unless otherwise agreed by both Contracting States, the termination of this Convention by one of the Contracting States under Article ... shall also terminate the application of this Convention to any State or territory to which it has been extended under this Article.
I.
A definition of the term
"
Contracting State" especially in a geographical sense
will be given in an Article on definitions.
29 (4593)
2.
(4595)
ANNEX E COMMENTARY ON THE ARTICLES CONCERNING THE ALLOCATION OF PROFITS TO PERMANENT ESTABLISHMENTS AND ASSOCIATED ENTERPRISES
GENERAL INTRODUCTION
1. The two Articles contained in Annex I to this Report are in many respects a continuation of, and a corollary to, the Article on the definition of the concept of permanent establishment already adopted (Annex II of the Fiscal Committee's First Report). The permanent establishment criterion is commonly used in international double taxation agreements to determine whether a particular kind of income shall or shall not be taxed in the country from which it originates but the criterion does not of itself provide a complete solution to the problem of the double taxation of business profits; in order to prevent such double taxation it is necessary to supplement the definition of permanent establishment by adding to it an agreed set of rules by reference to which the profits made by the permanent establishment, or by an enterprise trading with a foreign member of the same group of enterprises, are to be calculated. To put the matter in a slightly different way, when an enterprise of a Contracting State carries on business in the other Contracting State the authorities of that second State have to ask themselves two questions before they levy tax on the profits of the enterprise: the first question is whether the entreprise has a permanent establishment in their country; if the answer is in the affirmative the second question is what, if any, are the profits on which that permanent establishment should pay tax. It is with the rules to be used in determining the answer to this second question that Article XV is concerned. It may also be necessary to have rules for ascertaining the profits ofan enterprise of a Contracting State which is trading with an enterprise of the other Contracting State when both enterprises are members of the same group of enterprises or are under the same effective control. This problem is dealt with in Article XVI. It should perhaps be said at this point that neither Article is strikingly 2. novel or particularly detailed. The question of what criteria should be used in attributing profits to a permanent establishment, and of how to allocate profits from transactions between enterprises under common control, has had to be dealt with in a large number of European double taxation Conventions concluded since the war, and it is fair to say that the solutions adopted have generally conformed to a standard pattern. It is generally recognised that the essential principles on which this standard pattern is based are well founded, and it has been thought sufficient to restate them with some slight 33
(4597)
amendments and modifications primarily aimed at producing greater clarity. The two Articles incorporate a number of directives. They do not, nor in the nature of things could they be expected to, lay down a series of precise rules for dealing with every kind of problem that may arise when an enterprise of one State makes profits in another. Modern commerce organises itself in an infinite variety of ways, and it would be quite impossible within the fairly narrow limits of an Article in a double taxation Convention to specify an exhaustive set of rules for dealing with every kind of problem that may arise. If there is agreement on general lines that, however, is a matter of relatively minor importance. Special cases may require special consideration, but it should not be difficult to find an appropriate solution if the problem is approached within the framework of satisfactory rules based on agreed principles. Article XV Paragraph 1 This paragraph is concerned with two questions. First, it restates 3. the generally accepted principle of double taxation agreements that an enterprise of one State shall not be taxed in the other State unless it carries on business in that other State through a permanent establishment situated therein. It is hardly necessary to argue here the merits of this principle. It is perhaps sufficient to say that it has come to be accepted in international fiscal matters that until an enterprise of one State sets up a permanent establishment in another State it should not properly be regarded as participating in the economic life of that other State to such an extent that it comes within the jurisdiction of that other State's taxing rights. It should perhaps be noted that it has not been sought to deal in the present Article with the scope of the expression " profits ". This matter will be considered later by the Fiscal Committee. The second and more important point is that it is laid down - in the 4. sentence - that when an enterprise carries on business through a permanent establishment in another State that State may tax the profits of the enterprise but only so much of them as is attributable to the permanent establishment; in other words that the right to tax does not extend to profits that the enterprise may derive from that State otherwise than through the permanent establisment. This is a question on which there may be differences of view. Some countries have taken the view that when a foreign enterprise has set up a permanent establishment within their territory it has brought itself within their fiscal jurisdiction to such a degree that they can properly tax all profits that the enterprise derives from their territory, whether the profits come from the permanent establishment or from other activities in that territory. But it is thought that it is preferable to adopt the principle contained in the second sentence of paragraph 1, namely that the test that business profits should not be taxed unless there is a permanent establishment is one that should properly be applied not to the enterprise itself but to its profits. To put the matter another way, the principle laid down in the second sentence of paragraph 1 is based on the view that in taxing the profits that a foreign enterprise derives from a particular country, the fiscal authorities of that country should look at the separate sources of profit that the enterprise 34 (4598)
derives from their country and should apply to each the permanent establishment test. This is of course without prejudice to other Articles. 5. On this matter, naturally, there is room for differences of view, and since it is an important question - not perhaps so much within the O.E.E.C. as in relation to countries outside the Organisation, some of whom tend to cast their tax net rather wide --it may be useful to set out the arguments for each point of view. 6. Apart from the background question of fiscal jurisdiction, the main argument commonly put forward against the solution advocated above is that there is a risk that it might facilitate avoidance of tax. This solution, the argument runs, might leave it open to an enterprise to set up in a particular country a permanent establishment which made no profits, was never intended to make profits, but existed solely to supervise a trade, perhaps of an extensive nature, that the enterprise carried on in that country through independent agents and the like. Moreover, the argument goes, although the whole of this trade might be directed and arranged by the permanent establishment, it might be difficult in practice to prove that that was the case. If the rates of tax are higher in that country than they are in the country in which the head office is situated, then the enterprise has a strong incentive to see that it pays as little tax as possible in the other territory; the main criticism of the solution advocated above is that it might conceivably provide the enterprise with a means of ensuring that result. 7. Apart again from the question of the proper extent of fiscal jurisdiction, the main argument in favour of this solution is that it is conducive to simple and efficient administration, and that it is more closely adapted to the way in which business is commonly transacted. The organisation of modern business is highly complex. In O.E.E.C. countries, there are a considerable number of companies each of which is engaged in a wide diversity of activities and is carrying on business extensively throughout Europe. Current trends of political thought in Europe seem likely to make such companies even more common in future than they are at present. It may be that such a company may have set up a permanent establishment in a second country and may be transacting a considerable amount of business through that permanent establishment in one particular kind of manufacture; that a different part of the same company may be selling quite different goods or manufactures in that second country through independent agents; and that the company may have perfectly genuine reasons for taking this course - reasons based, for example, either on the historical pattern of its business or on commercial convenience. Is it desirable that the fiscal authorities of the country should go so far as to insist on trying to search out the profit element of each of the transactions carried on through independent agents, with a view to aggregating that profit with the profits of the permanent establishment? Such an Article might interfere seriously with ordinary commercial processes, and so be out of keeping with the long-term aims that the Committee has set itself. 8. It is no doubt true that evasion of tax could be practised by undisclosed channelling of profits away from a permanent establishment and that this may sometimes need to be watched, but it is necessary in considering this point to preserve a sense of proportion and to bear in mind what is said above. It is not, of course, sought in any way to sanction any such malpractice, 35 (4599)
or to shelter any concern thus evading tax from the consequences that would follow from detection by the fiscal authorities concerned. It is fully recognised that Contracting States should be free to use all methods at their disposal to fight fiscal evasion. 9. For the reasons given above, it is thought that the argument that the solution advocated might lead to increased avoidance of tax by foreign enterprises should not be given undue weight. Much more importance is attached to the desirability of interfering as little as possible with existing business organisation and of refraining from inflicting demands for information on foreign enterprises which are unnecessarily onerous. Paragraph 2 10. This paragraph contains'the central directive on which the allocation of profits to a permanent establishment is intended to be based. The paragraph incorporates the view, which is generally contained in bilateral agreements that have been concluded since the war, that the profits to be attributed to a permanent establishment are those which that permanent establishment would have made if, instead of dealing with its head office, it had been dealing with an entirely separate enterprise under conditions and at prices prevailing in the ordinary market. Normally, this would be the same profit that one would expect to be reached by the ordinary processes of good business accountancy. In the great majority of cases, therefore, trading accounts of the permanent establishment - which are commonly available if only because a well-run business organisation is normally concerned to know what is the profitability of its various branches - will be used by the taxation authorities concerned to ascertain the profit properly attributable to that establishment. Exceptionally, there may be no separate accounts -see paragraphs 2125 below. But where there are such accounts they will naturally form the starting point for any processes of adjustment in case adjustment is required to produce the amount of properly attributable profits. It should perhaps be emphasized that the directive contained in paragraph 2 is no justification for tax administrations to construct hypothetical profit figures in vacuo; it is always necessary to start with the real facts of the situation as they appear from the business records of the permanent establishment and to adjust as may be shown to be necessary the profit figures which those facts produce. 11. Even where a permanent establishment is able to produce proper accounts which purport to show the profits arising from its activities, it may still be necessary for the taxation authorities of the country concerned to rectify those accounts, in accordance with the general directive laid down in paragraph 2. Adjustment of this kind may be necessary, for example, because goods have been invoiced from the head office to the permanent establishment at prices which are not consistent with this directive, and profits have thus been diverted from the permanent establishment to the head office, or vice versa. 12. In such cases, it will usually be appropriate to substitute for the prices used ordinary market prices for the same or similar goods supplied on the same or similar conditions. (Clearly the price at which goods can be bought on open market terms varies with the quantity required and the period over which they will be supplied; such factors would have to be taken into account 36 (4600)
in deciding the open market price to be used.) It is perhaps only necessary to mention at this point that there may sometimes be perfectly good commercial reasons for an enterprise invoicing its goods at prices less than those prevailing in the ordinary market; this may, for example, be a perfectly normal commercial method of establishing a competitive position in a new market and should not then be taken as evidence of an attempt to divert profits from one country to another. Difficulties may also occur in the case of proprietary goods produced by an enterprise, all of which are sold through its permanent establishments; if in such circumstances there is no open market price and it is thought that the figures in the accounts are unsatisfactory it may be necessary to calculate the permanent establishment's profits by other methods, for example, by applying an average ratio of gross profit to the turnover of the permanent establishment and then deducting from the figure so obtained the proper amount of expenses incurred. Clearly many special problems of this kind may arise in individual cases but the general rule should always be that the profits attributed to a permanent establishment should be based on that establishment's accounts in so far as accounts are available which represent the real facts of the situation. If available accounts do not represent the real facts then new accounts will have to be constructed, or the original ones re-written, and for this purpose the figures to be used will be those prevailing in the open market. Paragraph 3 This paragraph clarifies, in relation to the expenses of a permanent 13. establishment, the general directive laid down in paragraph 2. It is valuable to include paragraph 3 if only for the sake of removing doubts. The paragraph specifically recognises that in calculating the profits of a permanent establishment allowance is to be made for expenses, wherever incurred, that were incurred for the purposes of the permanent establishment. Clearly in some cases it will be necessary to estimate or to calculate by conventional means the amount of expenses to be taken into account. In the case, for example, of general administrative expenses incurred at the head office of the enterprise it may be appropriate to take into account a proportionate part based on the ratio that the permanent establishment's turnover (or perhaps gross profits) bears to that of the enterprise as a whole. Subject to this, it is considered that the amount of expenses to be taken into account as incurred for the purposes of the permanent establishment should be the actual amount so incurred. Apart from what may be regarded as ordinary expenses, there are 14. some classes of payment between permanent establishments and head offices which give rise to special problems, and it is convenient to deal with them at this point. The next five paragraphs discuss three specific cases of this kind and give solutions for them. It should not, of course, be inferred that it is only in relation to the three classes of payments mentioned in these paragraphs that problems may arise; there may well be payments of other kinds to which similar considerations apply. The first of these cases relates to interest, royalties and other similar 15. payments made by a permanent establishment to its head office in return for money loaned, or patent rights conceded, by the latter to the permanent 37
73095 0-62-vol. 439
(4601)
establishment. In such a case, it is considered that the payments should not be allowed as deductions in computing the permanent establishment's taxable profits. (Equally, such payments made to a permanent establishment by the head office shQuld be excluded from the computation of the permanent establishment's taxable profits.) It is, however, recognised that special considerations apply to payments of interest made by different parts of a financial enterprise (e.g. a bank) to each other on advances, etc., (as distinct from capital allotted to them), in view of the fact that making and receiving advances is narrowly related to the ordinary business of such enterprises. Furthermore, if an enterprise makes payments of interest, etc., to a third party and these payments in part relate to the activities of the permanent establishment, then a proportionate part of them should naturally be taken into account in calculating the permanent establishment's profits in so far as they can properly be regarded as expenses incurred for the purposes of the permanent establishment. 16. The second case relates to the performance of ancillary services by a permanent establishment on behalf of its head office (or vice versa). Consider, for example, the case of a large company with a varied business, part of which it carries on in another country through a permanent establishment. In addition, that permanent establishment advertises on behalf of its head office goods which that enterprise produces but which the permanent establishment itself does not handle. Clearly, in calculating for tax purposes the profits of the permanent establishment, the profits should be increased by the amount of the expense it has incurred on behalf of the head office (unless, of course, such an adjustment has already been made in drawing up the accounts of the permanent establishment). But if the permanent establishment and its head office were entirely separate and independent, the permanent establishment would ordinarily carry out services for the head office only if it were paid a commission as well as reimbursed the actual expenses incurred. It is, therefore, necessary to decide whether the calculation should be made on the basis of account being taken not only of any expenses borne by a permanent establishment by reason of services performed for the head office but also of a notional commission increasing the profits of the permanent establishment. 17. After careful consideration of this question, it is thought that in such circumstances the profits of the permanent establishment should not be increased by the addition of a " commission" figure. While, on one view, to include a commission figure in the profits of every permanent establishment that has performed services otherwise than for its own purposes could be looked at in theory as a consequential application of the fiction of separate enterprise, it would inevitably be found exceedingly cumbersome in practice. There .would be scope for lengthy argument about, and usually no concrete basis for determining, the percentage to be used in calculating the amount of notional commission. In the great majority of cases the accounts of the permanent establishment would doubtless take account of the actual expenses incurred; in other words they would not normally include any credit for commission. If as a general rule the " separate enterprise " test were to be applied to services performed by a permanent establishment on behalf of its head office and a notional " commission" profit were to be included in the profits of the permanent establishment, it would, therefore, be necessary in the great majority of cases first to settle how the " commission " element 38 (4602)
was to be calculated and then to re-write the accounts of the permanent establishment. Considerations of practical administration weigh heavily against such a course. Therefore no " commission" element should in such cases be included in the profits of the permanent establishment. Similarly, in the converse case (where the head office undertakes services on behalf of the permanent establishment) no " commission" element should be deducted in determining the profits of the permanent establishment. The third case is related to the question whether any part of the total 18. profits of an enterprise should be deemed to arise from the exercise of good management. Consider the case of a company that has its head office in one country but carries on all its business through a permanent establishment situated in another country. In the extreme case it might well be that only the directors' meetings were held at the head office and that all other activities of the company, apart from purely formal legal activities, were carried on in the permanent establishment. In such a case there is something to be said for the view that at least part of the profits of the whole enterprise arose from the skilful management and business acumen of the directors and that part of the profits of the enterprise ought, therefore, to be attributed to the country in which the head office was situated. If the company had been managed by a managing agency, then that agency would doubtless have charged a fee for its services and the fee might well have been a simple percentage participation in the profits of the enterprise. But, once again, whatever the theoretical merits of such a course, practical considerations weigh heavily against it. In the kind of case quoted the expenses of management would, of course, be set against the profits of the permanent establishment in accordance with the provisions of paragraph 3, but when the matter is looked at as a whole it is thought that it would not be right to go further by deducting and taking into account some notional figure for " profits of management ". In general, therefore, no account should be taken in determining taxable profits of the permanent establishment of any notional figure as " profits of management ". It may be, of course, that countries where it has been customary to 19. allocate some proportion of the total profits of an enterprise to the head office of the enterprise to represent the profits of good management will wish to continue to make such an allocation. Nothing in the recommendation made is designed to prevent this. Nevertheless it follows from what is said in paragraph 18 that a country in which a permanent establishment is situated is in no way required to deduct when calculating the profits attributable to that permanent establishment an amount intended to represent a proportionate part of the profits of management attributable to the head office. It might well be that if the country in which the head office of an enter20. prise is situated allocates to the head office some percentage of the profits of the enterprise in respect of good management, while the country in which the permanent establishment is situated does not, the resulting total of the amounts charged to tax in the two countries would be greater than it should be. In any such case the country in which the head office of the enterprise is situated should take the initiative in arranging for such adjustments to be made in computing the taxation liability in that country as may be necessary to ensure that any double taxation is eliminated. 39 (4603)
Paragraphs2 and 3 21. It is usually found that there are, or there can be constructed, adequate accounts for each part or section of an enterprise so that profits and expenses, adjusted as may be necessary, can be allocated to a particular part of the enterprise with a considerable degree of precision. This method of allocation is, it is thought, to be preferred in general wherever it is reasonably practicable to adopt it. There are, however, circumstances in which this may not be the case, and paragraphs 2 and 3 are in no way intended to imply that other methods cannot properly be adopted where appropriate in order to arrive at the profits of a permanent establishment on a "separate enterprise" footing. It may well be, for example, that profits of insurance enterprises can most conveniently be ascertained by special methods of computation, e.g. by applying appropriate coefficients to gross premiums received from policy holders in the country concerned. Again, in the case of a relatively undeveloped enterprise operating on both sides of a land frontier, there may be no proper accounts for the permanent establishment nor means of constructing them. There may, too, be other cases where the affairs of the permanent establishment are so closely bound up with those of the head office that it would be impossible to disentangle them on any strict basis of branch accounts. Where it has been customary in such cases to estimate the arm's length profit of a permanent establishment by reference to suitable criteria, it may well be reasonable that that method should continue to be followed, notwithstanding that the estimate thus made may not achieve-as high a degree of accurate measurement of the profit as adequate accourts. Even where such a course has not been customary, it may, exceptionally, be necessary for practical reasons to estimate the arm's length profits. Paragraph 4 22. It has in some cases been the practice to determine the profits to be attributed to a permanent establishment not on the basis of separate accounts or by making an estimate of arm's length profit, but simply by apportioning the total profits of the enterprise by reference to various formulae. Such a method differs from those envisaged in paragraph 2, since it contemplates not an attribution of profits on a separate enterprise footing, but an apportionment of total profits: and indeed it might produce a result in figures which would differ from that which would.be arrived at by a computation base,' on separate accounts. Paragraph 4 makes it clear that such a method may continue to be employed by a Contracting State if it has been customary in that State to adopt it, even though the figure arrived at may at times differ to some extent from that which would be obtained from separate accounts, provided that the result can fairly be said to be in accordance with the principles embodied in the Article. It is considered, however, that a method of allocation which is based on apportioning total profits is generally not as appropriate as a method which has regard only to the activities of the permanent establishment, and should be used only where, exceptionally, it has as a matter of history been customary in the past and is accepted in the country concerned both by the taxation authorities and taxpayers generally there as being satisfactory. 23. It would not, it is thought, be appropriate within the framework of this commentary to attempt to discuss at length the many various methods 40 (4604)
involving apportionment of total profits that have been adopted in particular fields for allocating profits. These methods have been well documented in treatises on international taxation. It may, however, not be out of place to summarise briefly some of the main types and to lay down some very general directive for their use. The essential character of a method involving apportionment of total 24. profits is that a proportionate part of the profits of the whole enterprise is allocated to a part thereof, all parts of the enterprise being assumed to have contributed on the basis of the criterion or criteria adopted to the profitability of the whole. The difference between one such method and another arises for the most part from the varying criteria used to determine what is the correct proportion of the total profits. It is fair to say that the criteria commonly used can be grouped into three main categories, namely those which are based on the receipts of the enterprise, its expenses or its capital structure. The first category covers allocation methods based on turnover or on commission, the second on wages and the third on the propoltion of the total working capital of the enterprise allocated to each branch or part. It is not, of course, possible to say in vacuo that any of these methods is intrinsically more accurate than the others; the appropriateness of any particular method will depend on the circumstances to which it is applied. In some enterprises, such as those providing services or producing proprietary articles with a high profit margin, net profits will depend very much on turnover. For insurance enterprises it may be appropriate to make an apportionment of total income by reference to premiums received from policy holders in each of the countries concerned. In the case of an enterprise manufacturing goods with a high cost raw material or labour content profits may be found to be related more closely to expenses. In the case of banking and financial concerns the proportion of total working capital may be the most relevant criterion. It is considered that the general aim of any method involving apportionment of total profits ought to be to produce figures of taxable profit that approximate as closely as possible to the figures that would have been produced on a separate accounts basis, and that it would not be desirable to attempt in this connection to lay down any specific directive other than that it should be the responsibility of the taxation authority, in consultation with the authorities of other countries concerned, to use the method which in the light of all the known facts seems most likely to produce that result. The use of any method which allocates to a part of an enterprise a 25. proportion of the total profits of the whole does, of course, raise the question of the method to be used in computing the total profits of the enterprise. This may well be a matter which will be treated differently under the laws of different countries. This is not a problem which it would seem practicable to attempt to resolve by laying down any rigid rule. It is scarcely to be expected that it would be accepted that the profits to be apportioned should be the profits as they are computed under the laws of one particular country; each country concerned would have to be given the right to compute the profits according to the provisions of its own law. Paragraph 5 In paragraph 3 of the Article defining the concept of permanent 26. establishment there are listed a number of examples of activities which, even 41 (4605)
though carried on at a fixed place of business, are not to be deemed to be included in the term " permanent establishment ". In considering rules for the allocation of profits to a permanent establishment the most important of these examples is the activity mentioned in paragraph 5 of the present Article, i.e. the purchasing office. 27. This present paragraph is not, of course, concerned with the organisation established solely for purchasing; such an organisation is not a permanent establishment and the profits allocation provisions of this Article would not therefore come into play. The paragraph is concerned with a permanent establishment which although carrying on other business also carries on purchasing for its head office. In such a case the paragraph provides that the profits of the permanent establishment shall not be increased by adding to them a notional figure for profits from purchasing. It follows, of course, that any expenses that arise from the purchasing activities will also be excluded in calculating the taxable profits of the permanent establishment. Paragraph 6 28. This paragraph is intended to lay down clearly that a method of allocation once used should not be changed merely because in a particular year some other method produces more favourable results. One of the purposes of a double taxation Convention is to give an enterprise of a Contracting State some degree of certainty about the tax treatment that will be accorded to its permanent establishment in the other Contracting State as well as to the part of it in its home State which is dealing with the permanent establishment; for this reason, paragraph 6 gives an assurance of continuous and consistent tax treatment. Article XVI 29. This Article deals with associated enterprises (parent and subsidiary companies and companies under common control) and provides that in such cases the taxation authorities of a particular country may for the purpose of calculating tax liabilities re-write the accounts of the enterprises if as a result of the special relations between the enterprises the accounts do not show the true taxable profits arising in that country. It is evidently appropriate that rectification should be sanctioned in such circumstances, and the Article seems to call for very little comment. It should perhaps be mentioned that the provisions of the Article apply only if special conditions have been made or imposed between the two enterprises. No re-writing of the accounts of associated enterprises is authorised if the transactions between such enterprises have taken place on normal open market commercial terms.
42 (4606)
ANNEX F
COMMENTARY ON ARTICLE XVII CONCERNING INCOME NOT EXPRESSLY MENTIONED IN THE CONVENTION The aim of the provision, which appears in the same or similar form in 1. most Conventions for the avoidance of double taxation, is to provide a general rule relating to items of income not expressly mentioned in the preceding provisions of a Convention for the avoidance of double taxation. The application of the Article is not limited to income which is subject 2. to tax in the State of which the recipient is a resident. It may be, however, that certain Contracting States will wish when entering into bilateral Conventions to limit the scope of the Article to such income. Without prejudice to the solution that would be applied should such a question arise in relation to other Articles, it should be made clear, by way of provisional comment at this stage, that it is not sought to preclude any Contracting States from modifying this particular Article in this way in bilateral Conventions if they so desire.
43
(4607)
ANNEX G
COMMENTARY ON ARTICLE XVIII CONCERNING THE PERSONAL SCOPE OF THE CONVENTION Whereas older Conventions in general were applicable to "citizens" of the Contracting States, recent Conventions usually apply to " residents" of one or both of the Contracting States, without distinction of nationality. Some Conventions are of even wider scope inasmuch as they apply more generally to " taxpayers" of the Contracting States; they are, therefore, also applicable to persons, who, although not residing in either State, are nevertheless liable to tax on part of their income or capital in each of them. The Convention is intended to be applied between Member countries of the O.E.E.C., and it has been deemed preferable for practical reasons to provide that the Convention is to apply to persons who are residents of one or both of the Contracting States. It is recalled that the meaning of the term " resident" is defined in Article III concerning fiscal domicile.
45 (4609)
ANNEX H COMMENTARY ON ARTICLE XIX CONCERNING THE TERRITORIAL EXTENSION OF THE CONVENTION Double taxation Conventions must necessarily state to what territories 1. they apply. Some of them also provide that their provisions may be extended to other territories, and define when and how this may be done. A clause of this kind is of particular value to States which have territories oversea or are responsible for the international relations of other States or territories, especially as it recognises that the extension may be effected by an exchange of diplomatic notes. The Article, which provides that the extension may also be effected in any other manner in accordance with the constitutional procedure of the States, is drafted in a form acceptable from the constitutional point of view to all Member countries affected by the provision in question. The only prior condition for the extension of a Convention to any States or territories is that they must impose taxes substantially similar in character to those to which the Convention applies. The Article provides that the Convention may be extended either in 2. its entirety or with any necessary modifications, that the extension takes effect from such date and subject to such conditions as may be agreed between the Contracting States, and, finally, that the termination of the Convention automatically terminates its application to any States or territories to which it has been extended, unless otherwise agreed by the Contracting States.
47 (4611)
APPENDIX
(4613)
APPENDIX RECOMMENDATION OF THE COUNCIL OF O.E.E.C. AMENDING THE RECOMMENDATION OF THE COUNCIL CONCERNING THE AVOIDANCE OF DOUBLE TAXATION (adopted by the Council at its 475th Meeting on 19th July, 1960)
THE COUNCIL
Having regard to Article 13(c) of the Convention for European Economic Co-operation of 16th April, 1948; Having regard to the Recommendation of the Council of 3rd July, 1959, concerning the Avoidance of Double Taxation (hereinafter called the "Recommendation of the Council ") [C(59)147(Final)]; Having regard to the Report-of the Fiscal Committee of 13th July, 1960, and, in particular, paragraphs 9, 25, 26 and 27 of, and the Annexes to, that Report [C(60)157];
DECIDES:
The first sub-paragraph of paragraph 2 of Section I of the Recommen1. dation of the Council shall be amended and shall read as follows: "2. To adopt, either when concluding new Conventions or when revising existing Conventions, the provisions set out in the Annex to this Recommendation, as interpreted by the Commentaries contained in the Reports of the Fiscal Committee of 28th May, 1958, 18th June, 1959, and 13th July, 1960." The Annex to the Recommendation of the Council shall be amended 2. and completed as it 1is amended and completed by the provisions set out in the attached Annex.
1. The Annex contains the text of Articles XV to XIX which are to be found on pages 23-29 of the present Report.
51 (4615)
FROM THE CATALOGUE

EUROPE AND THE WORLD ECONOMY Eleventh annual Report of the O.E.E.C. (April 1960) 139 pages (demy 8vo) 90. $ 1,50 N F 6.00 Sw.fr. 6.00 DM S.10
ECONOMIC CONDITIONS IN MEMBER AND ASSOCIATED COUNTRIES OF THE O.E.E.C. 1959-1960 Country chapter Issued in connection with the O.E.E.C.'sI I th Annual Economic Review : Austria. I.L.E.U. Canada. Federal Republic of Germany. France. Greece. Ireland. Italy. Netherlands. Norway Portugal. Sweden. Switzerland. United Kingdom. United States Each booklet 2 5.6d. $ 0.50 N F 1.70 Sw.fr. 1.70 DM 1.50
72 pages (demy Ova)
EUROPEAN MONETARY AGREEMENT First annual report - Financial year 1959 (May 1960) 5 e. $ 0.75 N 3.00
Sw.fr. 3.00
DM 2.60
CODE OF LIBERALISATION OF CAPITAL MOVEMENTS New edition brought up to date Ist June 1960 (June 1960) 56 pages (crown 4 te) S m. $ 0.75 N F 3.00 Sw.fr. 3.00
DM 2.60
CODE OF LIBERALISATION Brought up to date at lIt August 1959 Out of print A new edition brought up to date will be published before the end of the year 1960
GUIDE TO LEGISLATION ON RESTRICTIVE BUSINESS PRACTICES IN EUROPE AND NORTH AMERICA (January 1960) Vol. I. - 304 pages (demy 8ev) Vol. I1. - 400 pages (demy Sva) The two volumes 3.1Os. S 12.00 NF 48.00 Sw.fr. 48.00
DM 41.00
THE INFLUENCE
OF SALES TAXES ON PRODUCTIVITY (December 1957) E.P.A. Project No. 315 180. S 3.50
by Ch. Compel
276 pages (demy 8vo)
N F 9.00
Sw.fr. 9.00
DM 7.70
THE EFFECTS OF DIFFERENTIAL TAX TREATMENT OF CORPORATE AND NON-CORPORATE ENTERPRISES, by Cesare Cosciani (February 1959) E.P.A. Project No. 314 158 pages (crown 4to) 13 s. S 2.25 N F 9.00 Sw.fr. 9.00 D M 7.70 THE SUPPLY OF CAPITAL FUNDS FOR INDUSTRIAL
DEVELOPMENT
IN EUROPE
Resources, Structure, Methods (January 1957) 240 pages (demy Ove) E.P.A. Project No. 292 12 s. $ 2.00 N F 6.00 Sw fr. 6.00 DM 3.10 DM 5.10
Supplement I. Belgique, France, Gr6ce, Italie (May 1957) 250 pages (crown 4to) 129. $ 2.00 N F 6.00 Sw.fr. 6.00 In French only Supplement II. Austria, Germany, United States (June 1957) 126 pages (crown 4to) 6s. $ 1.00 NF 3.00 Sw.fr. 3.00 Supplement III. Sweden, Norway, United Kingdom (April 1957) 122 pages (crown 41o) 6.. $ 1.00 NF 3.00 Sw.fr. 3.00
DM 2.60
DM 2.68
(4616)

ARGENTINA Editorial Sudamericana S.A., Aiing 5C, BUENOS AIRES AUSTRIA Gerald & Co., Graben 31, VIENNA I Sub-Agent: GRAZ: Buchhondlung Jas. A. Klenrelch, SackstroMe 6 *ELGIUM N.V. Standaord-Boekhandel. Huldeventersstraot 57, ANTWERP Librairie des Sciences (R. Stoops) 76-78. Coudenberg. BRUSSELS Librairle de Io Bourse, 3. passage do Is Bourse, CHARLEROI Ligrairie Paul Gothier, 3-S. rue Bonne-Fortune, LIEGE Maison du Livre, Grand'Rue 52. MONS BRAZIL Livraria Agir Edit6ro, Rua Mexico 98-B, RIO DE JANEIRO CANADA Queen's Printer OTTAWA Prepayment of all orders required CUBA La C o Belga. O'Reilly 455, HAVANA DENMARK Ejnar Munksgaord Forlog, Narregode 6, COPENHAGEN FINLAND Akateeminen Kirakouppo, Keskuskatu 2, HELSINKI FRANCE Presses Universlitires de France, 17, rue Soufflot PARIS-5S GERMANY Deutscher Bundesverlag, G.m.b.H., Bundeshous, Schliessfoch 137, BONN und in den masgebenden Buchhandlungen Deutichlands GREECE Librairie Kouffman, 21. rue du Stode, ATHENS ICELAND Innkaupasamband B6ksala h.f. REYKJAVIK, P.O. Box 888 INDIA International Book House Ltd.. 9 Ash Lone, Mahatma Gandhi Rood, BOMBAY I Oxford Book and Stationery Co.: NEW DELHI: Scindia House CALCUTTA: 17 Park Street IRELAND Eason & Son, 40-41 Lower O'Connell Street, DUBLIN ISRAEL Blumstein's Bookstores Ltd., 35 Allenby Road and 48, Nohlath Benjamin St., TEL AVIV ITALY Librerla Commissionaria Sansoni, Via Gino Capponi 26, FLORENCE Via D.A. Azuni IS/A. ROME Corso Cavour 93, BARI P.E.M.. Via Verdi 6, MILAN JAPAN Maruzen Company Ltd., 6 Tori Nichome Nihonboshi, TOKYO LUXEMBOURG Librairie Paul Bruck, 33, Grand'Rue, LUXEMBOURG MOROCCO (Kingdom of) B.E.P.I., 8, rue Michoux-Bellaire, RABAT THE NETHERLANDS Wholesale agent: Meulenhoff & Co, N.V. Importeurs, Beulingstraat 2. AMSTERDAM Principal retailer: W.P. Van Stockum & Zoon, Bultenhof 36, THE HAGUE NORWAY AiS Bokhjornet. Lille Grensen 7, OSLO PAKISTAN Mirzo Book Agency, 9-A Shah Alom Market. LAHORE PORTUGAL Llvrorla Portugal. Rua do Carmo 70. LISBON SOUTH AFRICA Van Schaik's Book Store Ltd., Church Street, PRETORIA SPAIN Mundl Prenso. CosltII6 37, MADRID SWEDEN Fritzes, Kungl. Hovbokhandel, Fredsgatan 2. STOCKHOLM 16 SWITZERLAND Libralrie Payor, 40, rue du March6, GENEVA and at Lausanne, Nouchdtel, Vevey. Montreux, Berne. Baste and ZUrich. TURKEY Llbrairio Hachette, 469 Istiklal Coddesi, Beyoglu. ISTANBUL UNITED KINGDOM AND CROWN COLONIES H.M. Stationery Office, P.O. Box 569, LONDON S.E.I. Branches of: EDINBURGH 2: 13a Castle Street BIRMINGHAM 3: 2 Edmund Street BRISTOL I: Tower Lane MANCHESTER 2: 39 King Street CARDIFF: 109 St. Mary Street BELFAST: 80 Chichester Street UNITED STATES OF AMERICA O.E.E.C. Mission, Publications Office, SUITE 1223 1346 Connecticut Ave. N.W. WASHINGTON 6. D.C. YUGOSLAVIA Jugoslovenska Kniiga, Marsala Tita 23, P.O.B. 36. BELGRADE
Orders and Inquiries from countries where soles agents have not yet been appointed may be sent to: O.E.E.C.. Distribution and Sales Service, 33 rue de Franqueville. Paris-168
73095 0-62-vol. 4-
46170 (4617)
."1,
,-j1 :.!.-:
LCOMMITTE
(4619)
FOURTH REPORT
OF THE FISCAL COMMITTEE
1961
PUBLISHED BY THE ORGANISATION FOR EUROPEAN ECONOMIC CO-OPERATION
(4621)
The Organisation for European Economic Co-operation comprises the following Member countries : Austria, Belgium, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey and the United Kingdom. The Organisation came into being with the signing of the Convention for European Economic Co-operation on 16th April 1948, when Member Governments pledged themselves e to combine their economic strength, to join together to make the fullest collective use of their individual capacities and potentialities, to increase their production, develop and modernise their industrial and agricultural equipment, expand their commerce, reduce progressively barriers to trade among themselves, promote full employment and restore or maintain the stability of their economies and general confidence in their nationalcurrencies :. Representatives of each of the Member countries meet daily at the O.E.E.C. headquarters,Chfiteau de la Muette, Paris, to discuss their economic problems and work out common solutions. The United States and Canada participate in all the work of the Organisation as Associate Members. Yugoslavia is represented by an observer. Since 1957, she has taken part fully in the work of the O.E.E.C. European Productivity Agency. Moreover, since July 1959, she has participated on an equal footing with Member countries in the Organisation's work on agriculture and food.
This document has been circulated within the O.E.E.C.
under the symbol C(61)97
Published in August 1961
(4622)
SUMMARY
I.
II.
INTRODUCTION ........................................
IMPLEMENTATION OF THE RECOMMENDATION OF THE COUNCIL
7 9 9 10 10 13 13 16 17
19
OF 3rd JULY, 1959 ................................
A. Bilateral Conventions concluded since July 1960 ........ B. Bilateral negotiations proceeding ...................... C. General remarks .................................. III.
FURTHER RESULTS OF THE COMMITTEE'S WORK .............
A. B. C.
IV.
General remarks on of dividends, interest General remarks on avoidance of double General remarks on agreement procedure
PROCEEDING
the Articles concerning the taxation and royalties .................... the Articles concerning methods for taxation ........................ the Article concerning the mutual ...............................
A VIEW TO COMPLETING THE
WORK
WITH
CONVENTION V.
.....................................
CONCLUSIONS .........................................
21
ANNEXES
1.
Annex A.
Annex B. Annex C.
Annex D Annex E.
2.
Article on the Taxation of Interest (Article XXI) ....... Article on the Taxation of Royalties (Article XXII) .....
Articles on the Methods for Avoidance of Double
Article on the Taxation of Dividends (Article XX) ......
25
27 29 31
33
Taxation (Articles XXIII and XXIV) ................

Article on Mutual Agreement Procedure (Article XXV)..
Annex F. Commentary on Article XX ........................ Annex G. Commentary on Article XXI ....................... Annex H. Commentary on Article XXII ......................
Annex 1. Commentaries on Articles XXIII and XXIV ..........
37 51 61
67
Annex J.
Commentary on Article XXV ......................
79
APPENDIX Recommendation of the Council of O.E.E.C. of 7th July, 1960, amending the Recommendation of the Council concerning the avoidance of double taxation of 3rd July, 1959 .............. 5 (4623)
81
INTRODUCTION
1. When the Fiscal Committee submitted its first report to the Council of the O.E.E.C. in 1958, the Council instructed it to present by 1st July, 1961, a draft Convention for the avoidance of double taxation of income and capital, together with concrete proposals for the implementation of such a Convention. Accordingly, in its reports to the Council in July 1959 and July 1960, the Fiscal Committee submitted a number of Articles which, in addition to those it had already submitted in its first report, were intended to form the bases of the future Convention. But the most important and most difficult question, that of the taxation of dividends, interest and royalties, still remained to be settled. For, although agreement on the various questions covered by the first three reports had been reached with relative ease, it was found that the drafting of the Articles concerning dividends, interest and royalties was a particularly long and arduous task. This was not surprising for, as the Fiscal Committee had stressed 2. in its last two reports, in the case of dividends, interest and royalties, the divergences between the economic interests of the States and also between their legislations are particularly marked and are the chief source of difficulty in the negotiation of bilateral Conventions on double taxation. The existing Conventions thus provide a large number of different solutions and none of those proposed in the existing model Conventions have been accepted unanimously. For the Fiscal Committee, therefore, this question was the chief obstacle to be overcome before a draft Convention acceptable to all the Member countries of the O.E.C.E. could be established. 3., The agreement finally reached in the Fiscal Committee on a common solution to this problem thus marks both a success and a definite step forward, in spite of the fact that a few reservations have been entered by certain countries on the solution adopted. In the present report, the Fiscal Committee is in a position to submit three Articles concerning the taxation of dividends, interest and royalties respectively; it may be said that these Articles are the keystone of the structure progressively built up by the Committee during the five years of its existence. Three other Articles are added concerning methods for avoidance of double taxation and the establishment of a mutual agreement procedure, on which the Fiscal Committee has also reached agreement; thus twenty-five Articles have been established so far. 7
(4625)
4. As, during the last twelve months, the Fiscal Committee has had to concentrate on solving the questions of major importance referred to above, the time limit allotted to it in 1958 has not been long enough to allow it to establish a complete draft Convention. Certain definitions and terminal clauses have still to be drafted and proposals formulated for implementing the Convention. But although it has not been possible to complete every detail of the draft Convention, most of its components, including the most important, are now in place and already give a fairly accurate idea of the whole. The Fiscal Committee considers that given more time it will be able to bring its work to a satisfactory conclusion, as the most serious obstacles have now been overcome. 5. In accordance with its mandate, the Fiscal Committee in the present report reviews the measures taken by the Member countries since its previous report to implement the Recommendations of the Council on the avoidance of double taxation. This review is followed by a brief description of the objects and scope of the six new Articles on which agreement has been reached and an account of the work that still remains to be done to complete the mandate. Finally, in the conclusions to this report, concrete proposals are submitted to the Council concerning the implementation of the new Articles and the continuation of the work.
(4626)
II
IMPLEMENTATION OF THE RECOMMENDATION OF THE COUNCIL OF 3rd JULY, 1959, CONCERNING THE AVOIDANCE OF DOUBLE TAXATION 6. The Council, in its Recommendation of 3rd July, 1959, amended by that of 19th July, 1960, invited the Governments of the Member countries when revising existing or concluding new double taxation Conventions between themselves, to adopt nineteen Articles, concerning respectively: a) the listing and detiition of the taxes covered by the Convention (Article I); b) the definition of permanent establishment (Article II); c) the definition of fiscal domicile (Article III); d) tax discrimination on grounds of nationality or similar grounds (Article IV); e) the taxation of income from shipping, inland waterways transport and air transport (Article V); f) the taxation of income in respect of independent and dependent personal services (Articles VI to XI1); g) the taxation of income from immovable property (Article XIII); h) the taxation of capital (Article (XIV); i) the allocation of profits to permanent establishments and associated enterprises (Articles XV and XVI); I) the taxation of income not expressly mentioned in the Convention (Article XVII); k) the personal scope of the Convention (Article XVIII); l) the territorial extension of the Convention (Article XIX). A. BILATERAL CONVENTIONS CONCLUDED SINCE 21st JULY, 1960 7. Since the last report of the Committee in July 1960, a further Convention has been concluded between Member countries of the O.E.E.C. This is the Convention between the United Kingdom and Sweden, signed on 28th July, 1960, superseding that of 30th March, 1949. The new Convention entered into force on 14th February, 1961. According to information received from these two countries, of the nineteen Articles mentioned in the preceding paragraph, six, namely Articles II, VI, XI, XII,
9
(4627)
XIII and XVI, have been incorporated in full, while the essential provisions of the other Articles have also been adopted, with the exception of those of Article XVIII, which were superfluous in view of the general presentation of the Convention. B. BILATERAL NEGOTIATIONS PROCEEDING
8. Twenty-one bilateral negotiations are now proceeding between Member countries, seven for the revision of general Conventions already in force, and fourteen for the conclusion of new general Conventions between Member countries not yet bound by such agreements (see Table). In nine cases, the negotiators have already initialled a draft Convention, and in two others the negotiations are virtually completed. The Member countries concerned have given the Fiscal Committee to understand that, in these various cases, the Articles proposed by the Fiscal Committee have practically all been adopted by the negotiators, either in extenso or in their main provisions. C. GENERAL REMARKS 9. The progress recorded in the two earlier periods was not maintained in the last twelve months. Thus only one Convention was signed, as against eight between July 1958 and July 1959 and four between July 1959 and July 1960. Similarly, only three negotiations were opened, as compared with five in each of the two earlier periods. In so far as the conclusion of some of the negotiations proceeding depended on the outcome of its work on dividends, interest and royalties, the Fiscal Committee considers that the results obtained, as described in this report, will facilitate agreement. 10. It was also noted that a number of Conventions, some of which were signed more than two years ago, have not yet entered into force, because one or both of the Contracting States had not yet ratified them. In certain cases, there are good reasons for this. In general, Member countries should endeavour to reduce as far as possible the time before the exchange of ratifications in the case of Conventions already signed and to accelerate the signature of draft Conventions already initialled, in order not to deprive the taxpayers of the benefits of the Convention, particularly in cases where there is no Convention between the countries concerned and it is thus urgent to settle existing cases of double taxation. 11. The Fiscal Committee has noted with satisfaction that a number of the Articles which it has so far proposed have been adopted in Conventions recently concluded between Member countries and third countries. Thus in the Convention between the United Kingdom and Pakistan signed on 24th April, 1961, Article XVI was embodied in its entirety, while the essential provisions of Articles 1, 11, IV, V, VII, VIII, X, XI, XII, XV and XIX were also incorporated. In the Draft Convention between Austria and Japan initialled on 6th May, 1961, eight of the Articles of the Fiscal Committee were embodied wholly or in part. In the Draft Convention between Italy and the United Arab 10 (4628)
NETWORK OF BILATERAL GENERAL CONVENTIONS FOR THE AVOIDANCE OR DOUBLE TAXATION WITH RESPECT TO INCOME AND PROPERTY TAXES BETWEEN MEMBER AND ASSOCIATED COUNTRIES as at 7th July, 1961
z Z
2 0
REPORTING 0 COUNTRIES
0,
0
0 ,
L
SWEDEN UNITEDKINGDOM GERMANY FRANCE NETHERLANDS DENMARK NORWAY SWITZERLAND AUSTRIA ITALY BELGIUM LUXEMBOURG GREECE IRELAND ICELAND
0,0,
I I
I I I I I I I
1 N 1-
SPAIN
PORTUGAL TURKEY
CANADA 12 12 1211111
"N N7
1-1
918 18 18 17 7 6 1 1 8 1
U A
Convention in force
W
E
New Convention signed to replace the Convention at present in force Convnt is Negotiations proceeding for the revision of the Convention in force concluded
W
F
Convention signed but not yet in force
(4629)
Republic initialled on 25th May, 1961, the essential provision of nine The of the Articles of the Fiscal Committee were also incorporated. Articles proposed by the Fiscal Committee were also taken into consideration in recent negotiations between France and Lebanon, Germany and Israel, and Italy and Israel. The Articles so far established by the Fiscal Committee have 12. been welcomed by certain international organisations concerned with questions of double taxation. Thus, in a Resolution adopted at its XIVth Congress at Basle in September 1960, the International Fiscal Association c ...notes with satisfaction the three reports published in 1958, 1959 and 1960 by the Fiscal Committee of the Organisation for European Economic Co-operation which recommend the inclusion of model clauses in future Conventions between the Member States of that Organisation; invites the Fiscal Committee of O.E.E.C. - or Organisation for Economic Co-operation and Development which is likely to succeed it - to continue its work and expresses the conviction that States will be influenced by the work of O.E.C.D. when concluding new Conventions
or revising existing ones; ... :.
13. The co-ordination of bilateral Convention on double taxation is proceeding satisfactorily, although the process is necessarily rather slow. By the progressive harmonisation of principles, definitions, rules and methods and the constant growth of the network of Conventions, taxpayers will be guaranteed more stable taxation treatment and double taxation will be eliminated more effectively. This will also have a favourable effect on the international movement of goods, services, capital and persons. 14. It should also be mentioned here that the development of the Fiscal ;Committee's work, particularly with regard to dividends, interest and royalties, has given Member countries an opportunity to compare the effect of their legislations. Such a comparison should promote, on certain special but essential points, a desirable harmonisation of these legislations which will simplify the solution of double taxation problems and facilitate a more complete elimination of double taxation.
12 (4630)
III
FURTHER RESULTS OF THE COMMITTEE'S WORK
15. Since its last report to the Council in July 1960, the Fiscal Committee has agreed upon six new Articles, concerning respectively: a) the taxation of dividends (Article XX); b) the taxation of interest (Article XXI); c) the taxation of royalties (Article XXII); d) methods for avoidance of double taxation (Articles XXIII and
XXIV);
e) a mutual agreement procedure (Article XXV). These six Articles are annexed to the present report and are accompanied by commentaries intended to illustrate and interpret them. This Chapter will, therefore, merely indicate briefly the objects and scope of each Article. These Articles, which follow on the nineteen already proposed by the Fiscal Committee, have been numbered from XX to XXV simply for greater convenience of reference. A. GENERAL REMARKS ON THE ARTICLES CONCERNING THE TAXATION OF DIVIDENDS, INTEREST AND ROYALTIES
16. As stated in the Introduction, the establishment of common rules for the avoidance of double taxation with respect to taxes on dividends, interest and royalties was a matter of major difficulty because of the divergences between the economic interests of Member countries, the very great dissimilarity in their tax laws and regulations, the differences in their theoretical concept of the question and also between the solutions adopted in practice in the bilateral Conventions on double taxation. These difficulties had already been brought out generally at the commencement of the League of Nations' studies on double taxation after the first world war, particularly in the report prepared in 1923 by the group of four economists appointed by the Financial Committee of the League of Nations in 1921. These difficulties explain why rather different solutions were proposed for this problem in the various Model Conventions established by the League of Nations in 1928, 1943 and 1946. In fact, the clauses in regard to which the Mexico Model Convention of 1943 and the London Model Convention of 1946 differ most are those concerning the taxation of dividends, interest and royalties. 17. It is not surprising, therefore, that it is also on these questions 13 (4631)
that the fifty-four bilateral Conventions in force between the Member countries of the O.E.E.C. differ most. In view of the difficulty of adjusting systems and reconciling frequently dissimilar interests, the search for a compromise on the question of dividends, interest and royalties has always been the crucial point for negotiations, and the solutions adopted have varied substantially according to the countries concerned. Thus at this present time there are a great many rules on the question which often differ greatly, whose interpretation sometimes gives rise to difficulties and which do not always provide an effective remedy for double taxation. In certain cases, therefore, the position of the taxpayer and the tax authorities responsible for applying the Conventions is greatly complicated. The harmonisation of rules on the matter between the Member 18. countries was, therefore, both a necessary and a most complicated task. The problems connected with the taxation of dividends, interest and royalties have been the subject of separate and thorough studies by the Fiscal Committee over the last three years. The problem was to formulate a rule attributing the right to tax which would be generally accepted. It was soon apparent that the three questions were closely related and that, royalties have been the subject of separate and thorough studies by the State of residence and advocates of taxation by the State of source, an overall compromise would have to be found. Agreement was finally reached on the solution which gives an 19. exclusive right to tax as regards royalties to the State of the recipient's residence, and divides the right to tax as regards dividends and interest between the State of the recipient's residence and the State of source. For this purpose, a right to levy a tax at a restricted rate is given to the State of source, which tax the State of residence must take into account in computing its own tax so as to avoid double taxation. Thus the Article concerning dividends provides that the rate of the tax imposed by the State of which the company paying the dividends is a resident shall not exceed 15 per cent of the gross amount of the dividends in the general case, and 5 per cent in the case of companies with certain holdings in the Likewise, the Article on interest company distributing the dividends. provides that the rate of the tax imposed by the State in which the interest arises shall not exceed 10 per cent of the amount of the interest. This 'formula is designed to secure to countries wishing to do so the possibility of imposing a tax at the source at the maximum rate provided, and also where the two States so agree, to make it possible to reduce that rate by bilateral negotiations, and even to provide for a nil rate, which amounts in fact to exclusive taxation by the State of residence. These rules as to the right to tax are a balanced arrangement based 20. on reciprocal concessions, which the Fiscal Committee regards as equitable. They have the advantage of being simple and easy to apply in practice. Their adoption by the Member countries in their bilateral Conventions would be a definite step forward since it would both afford a settlement of particularly difficult questions and make it possible to harmonise these Conventions on points where they show the greatest differences. The compromise solution explained above is accompanied by a 21. special agreement with respect to royalties. The Article concerning 14 (4632)
royalties gives no right to tax to the State in which they arise. However, four countries, namely Spain, Greece, Luxembourg and Portugal, informed the Fiscal Committee that they were not in a position to relinquish all tax at the source, but were prepared to restrict it to 5 per cent on the gross amount of the royalties. In view of these countries' special situation, and as part of the general compromise, the other countries have declared that they are prepared, in bilateral Conventions and subject to reciprocity, to concede to them a right to levy a tax at the source of 5 per cent. Since this agreement derogates from the provisions of the Article and is in the form of a reciprocal undertaking, the Fiscal Committee considers that it should be specially mentioned in a Recommendation of the Council. The Fiscal Committee considers that the general compromise 22. explained in the above paragraphs reconciles in a satisfactory manner the divergent interests of the Member countries with respect to the three problems in question. As regards dividends, however, there still remains one difficulty due to the differences in the Member countries' legislation. This problem is dealt with in detail in the commentary on Article XX (see Annex F, paragraphs 43 to 52). The Fiscal Committee recognised that the Article on the taxation of dividends, which has been elaborated in conformity with the legislation of most of the Member countries, might not provide a final solution in relations with some countries which have a special taxation system of their own. In this particular case, the Article should be accompanied by clauses negotiated directly by the two contracting parties. The Fiscal Committee considers that this situation does not detract from the value of the Article as a common rule. Such rule should prove to be of assistance in finding a solution in keeping with the special character of these countries' taxation systems. On certain points reservations to the compromise solution have 23. been made by a few Member countries. These reservations are given in the Commentaries on the Articles to which they relate; consequently, it is not necessary to give here a technical explanation of their object or The more important of them relate to the Article on the motives. taxation of dividends. The three articles relating to the taxation of dividends, interest and 24. royalties respectively are given in Annexes A, B, and C to this report. They are presented in almost similar form and, as far as possible, with identical wording. Each Article states, first, the rule as to which State has the right to tax; these rules have been explained in the above paragraphs. It then defines the income to which it applies, so as to The obviate any difficulty of interpretation in practical application. Article on royalties contains, in addition, a rule as to which State has the right to tax in the case of profits from the alienation of rights or property in respect of which royalties are paid. The three Articles then contain a clause making an exception to the taxing rule in cases where the recipient of the dividends, interest or royalties, being a resident of a Contracting State, has in the other Contracting State a permanent establishment with which the holding on which the divendends are paid, the indebtedness on which the interest is paid or the property or right in respect of which the royalties are paid, is effectively connected. In this case, the income in question is to be taxable in the Contracting State 15
73095 O-62-vol. 41
(4633)
in which the permanent establishment is situated. The Article on dividends ends with a special provision the purpose of which is to prevent the extraterritorial taxation of dividends and the taxation of non-resident companies in respect of their undistributed profits. The Article concerning interest contains a special provision the object of which is to define the source of the interest for the purposes of the Article. Finally, both the Article on interest and that on royalties have an identical safeguard clause to deal with cases of abuse as regards the rate of interest or the amount of the royalty. B. GENERAL REMARKS ON THE ARTICLES CONCERNING METHODS FOR AVOIDANCE OF DOUBLE TAXATION
25. The rules as to the States' right to tax which are to be found in the Articles of double taxation Conventions are not, of course, in themselves sufficient to avoid double taxation. Where, according to the Convention, the State of source retains the right to tax certain items of income (e.g. income from immovable property or profits of a permanent establishment) or where the right to tax is shared between the State of residence and the State of source (in the case of dividends and interest) the State of residence must take the necessary measures to avoid double taxation. 26. The methods most commonly used for this purpose may be reduced to two main types: the exemption method and the tax credit method. By the first method, the State responsible for preventing the double taxation leaves the income or capital in question out of account in computing the total income or capital which it is going to tax; by the second method, such State takes such income or capital into account, but deducts from the total tax which it would otherwise charge the tax paid in the other State on the income or capital in question. Each of these methods has its variants the purposes and consequences of which are illustrated by worked examples in the commentaries in Annex I to this report. The two methods may also be combined. 27. As stated in its previous report, the Fiscal Committee recognised that in the present situation it would be fruitless to try to impose one method only. It considered that double taxation can be effectively countered by either method, but the mode of applying them should be restricted to one clearly defined type in each case. Accordingly it has drawn up two Articles which are given in Annex D to this report. Each Article is so drafted that it can apply both to the taxation of income and to the taxation of capital where necessary. 28. Article XXIII is intended for Conventions between countries which generally use the exemption method, and Article XXIV for Conventions between countries which use the tax credit method. In Conventions between countries which each use a different method, both Articles must be included, the country to which each Article applies being specified in that Article. 29. Article XXIII, in its first paragraph, is based on the method which may be called 4 exemption with progression i, whereby the income 16 (4634)
or capital in question, although left out of account in determining the total income or capital, is nevertheless taken into account in determining the rate of tax to be applied to the remainder of the income or capital. Article XXIV is based on what may be called the e ordinary credit method 3, whereby the deduction which the State concerned allows against the tax which it would otherwise charge is the amount of tax paid in the other State limited so as not to exceed so much of the tax in the first mentioned State as relates to the income or capital in respect of which a right to tax is given to the other State. Where the right to tax is shared between the two Contracting States, as in tie case of the Articles proposed for dividends and interest, the State of residence cannot be expected to use the exemption method, because that would amount to its relinquishing the tax to which it is entitled. To settle this particular case, Article XXIII provides, in its second paragraph, that a country which normally uses the exemption method must use the ordinary credit method. C. GENERAL REMARKS ON THE ARTICLE CONCERNING THE MUTUAL AGREEMENT PROCEDURE
30. The purpose of Article XXV in Annex E to this report is to provide a procedure for consultation and agreement between the Contracting States and to define the cases to which the procedure applies and the conditions under which it is used. The rules in the first two paragraphs of the Article relate to the procedure to be applied to deal with taxation which is not in accordance with the Convention, apart from the remedies provided by the taxation laws of the Contracting States. The Article then provides a mutual agreement procedure to resolve problems which may arise out of the interpretation or application of the Convention and to find a solution in cases of double taxation not provided for by the Convention. The Article finally states that an exchange of opinions may take place through a Commission consisting of representatives of the competent authorities of the two States. 31. In the commentary in Annex J, the Fiscal Committee has stated that, in examining a particular case, the Commission could allow the taxpayer to make representations in writing or orally. The Fiscal Committee has also suggested that where special difficulties of interpretation arise with respect to the Articles which it has established, the competent authorities could call upon the Fiscal Committee to give an opinion on the correct understanding of the provisions, in question. It has pointed out that such a procedure would make a valuable contribution to arriving at a desirable uniformity in the application of the Articles. Finally, it has indicated that in the future, when a multilateral Convention may have been agreed upon, it might be useful to consider more precise rules on such an international consultative procedure.
17 (4635)
IV
WORK PROCEEDING WITH A VIEW TO COMPLETING THE CONVENTION As already stated at the beginning of this report, the Fiscal 32. Committee has not had sufficient time to present to the Council by 1st July, 1961, a full draft Convention for the avoidance of double taxation with respect to taxes on income and capital, as required by its terms of reference. For this to be done, there are still certain Articles which must be adopted for which drafts have already been prepared. These Articles relate to, inter alia: a) the taxation of capital gains; b) the definitions of the terms employed in the Convention; c) exchanges of information between competent authorities; d) diplomatic and consular privileges; e) entry into force and denunciation of the Convention. In addition, the Fiscal Committee will also have to consider certain other questions such as the structure of the Convention.
r
When this work has been completed, it will be necessary to put 33. the Convention into proper legal form on the basis of the Articles already drawn up and of those now remaining to be drawn up. Finally, by the Committee's terms of reference it must, when it submits the Convention to the Council, also submit concrete proposals concerning The Fiscal Committee its implementation by the Member countries. what conditions, a under and whether, particular, in consider, to will have multilateral Convention would be possible between all or certain Member countries. Furthermore, the Fiscal Committee has noted that the Organisation 34. for European Economic Co-operation will shortly be reconstituted, with the participation of the United States and Canada, as the Organisation for Economic Co-operation and Development, which will have a Fiscal Committee to continue the activities of the type now undertaken by the O.E.E.C. and to deal with such other functions in this field as the Council of the O.E.C.D. may decide to assign to it. It has also noted that the Recommendations relating to the avoidance of double taxation already adopted by the Council of the O.E.E.C. will be maintained and that they will apply thenceforward to the United States and Canada. These two countries will therefore directly participate in the final phase of the work of establishing a Convention with respect to taxes on income and capital. 19
(4637)
In this respect certain new problems may have to be examined and resolved. 35. The Fiscal Committee asks in the circumstances that it should be given two more years in order to complete the draft Convention and submit it to the Council. 36. The mandate of the Fiscal Committee of the O.E.E.C. also provided that it would report to the Council by 1st July, 1961, on the progress of its work on problems of double taxation with respect to taxes on estates and inheritances and indirect taxes. A study has been in progress since last year on the question of double taxation of estates and inheritances, and the Fiscal Committee hopes shortly to be able to examine the first results of this study. In this field, the aim of the Fiscal Committee is to establish, as in the case of income and capital, a draft Convention for the avoidance of double taxation. As regards double taxation with respect to indirect taxes, the Fiscal Committee proposes to take this matter up when current work has been completed.
20 (4638)
CONCLUSIONS
In conclusion, the Fiscal Committee, as it has done for the 37. Articles in its three previous reports, proposes that the Council should recommend the Member countries to adopt the six Articles annexed to this Report in the Conventions applicable between them, either on the revision of existing Conventions or on the conclusion of new Conventions. It also proposes that the agreement reached with respect to royalties between Spain, Greece, Luxembourg and Portugal, on the one hand, and the other Member countries, on the other, should be incorporated in the Recommendation to be made by the Council. Finally, the Fiscal Committee proposes that it should be allowed up to 1st July, 1963, to submit a draft Convention for the avoidance of double taxation with respect to taxes on income and capital, together with concrete proposals for the implementation of such a Convention. To this effect, it submits to the Council a draft Recommendation in the Appendix to the present Report. The Fiscal Committee considers that the six new Articles in 38. addition to the nineteen which the Council has already recommended for adoption, constitute a solid basis on which the bilateral Conventions between Member countries should be harmonised as quickly as possible. The common rules formulated by the Fiscal Committee will help to develop the network of the Conventions more rapidly and to prevent double taxation more effectively. Thanks to the uniformity of the solutions adopted and the stability they will afford when generally applied, it will be possible to reduce considerably the fiscal obstacles to the movements of goods, services, capital and persons between the Member countries.
21
(4639)
ANNEXES
1. TEXTS OF THE ARTICLES
(4641)
ANNEX A ARTICLE ON THE TAXATION OF DIVIDENDS Article XX 1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State. 2. However, the Contracting State of which the company paying the dividends is a resident has the right to tax such dividends according to its own law, but the rate of the tax which it charges may not exceed: a) 5 per cent of the gross amount of the dividends if the recipient is a company (excluding partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends; b) in all other cases, 15 per cent of the gross amount of the dividends. The competent authorities of the two States shall by mutual agreement settle the mode of application of this limitation. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid. 3. The term c dividends ) as used in this Article means income from shares, t jouissance 3 shares or c jouissance rights, mining shares, founder's shares or other rights, not being debt claims, participating in profits, as well as income from other corporate rights assimilated to income from shares by the taxation law of the State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the recipient of the dividends, being a resident of a Contracting State, has in the other Contracting State, of which the company paying the dividends is a resident, a permanent establishment with which the holding by virtue of which the dividends are paid is effectively connected. In such a case, Article XV concerning the allocation of profits to permanent establishments shall apply. 5. Where a company which is a resident of a Contracting State receives profits or income from the other Contracting State, such other State may not levy any tax on the dividends paid by the company to persons who are not residents of that other State, or subject the company's undistributed profits to a tax on undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State. 25
(4643)
ANNEX B ARTICLE ON THE TAXATION OF INTEREST Article XXI Interest arising in a Contracting State and paid to a resident of the 1. other Contracting State may be taxed in that other State. However, the Contracting State in which interest arises has the 2. right to tax such interest according to its own law, but the rate of the tax which it charges may not exceed 10 per cent of the amount of the interest. The competent authorities of the two States shall by mutual agreement settle the mode of application of this limitation. The term c interest as used in this Article means income from 3. Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt claims of every kind, as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises. The provisions of paragraphs 1 and 2 shall not apply if the recipient 4. of the interest, being a resident of a Contracting State, has in the other Contracting State in which the interest arises a permanent establishment with which the debt claim from which the interest arises is effectively connected. In such a case, Article XV concerning the allocation of profits to permanent establishments shall apply. Interest shall be deemed to arise in a Contracting State when the 5. payer is that State itself, or a political subdivision, a local authority or a resident of that State. Where, however, the- person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment for the requirements of which the loan on which the interest is paid was effected, and such interest is borne by such permanent establishment, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment is situated. Where, owing to a special relationship between the payer and the 6. recipient or between both of them and some other person, the amount of the interest paid, having regard to the debt claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the Contracting States' own laws, due regard being had to the other provisions of this Convention. 27
(4645)
ANNEX C ARTICLE ON THE TAXATION OF ROYALTIES Article XXII Royalties arising in a Contracting State and paid to a resident 1. of the other Contracting State shall be taxable only in that other State. The term e royalties i as used in this Article means payments of 2. any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Profits from the alienation of any rights or property mentioned in 3. paragraph 2 shall be taxable only in the Contracting State of which the alienator is a resident. The provisions of paragraphs 1 and 3 shall not apply if the 4. recipient of the royalties, or the profits, being a resident of a Contracting State, has in the other Contracting State in which the royalties arise a permanent establishment with which the right or property giving rise to the royalties is effectively connected. In such a case, Article XV concerning the allocation of profits to permanent establishments shall apply. Where, owing to a special relationship between the payer and the 5. recipient or between both of them and some other person, the amount of the royalties paid, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the Contracting States' own laws, due regard being had to the other provisions of this Convention.
29
(4647)
ANNEX D ARTICLES ON THE METHODS FOR AVOIDANCE OF DOUBLE TAXATION Article XXIII 1. Where a person being a resident of a Contracting State derives income from or owns capital in the other Contracting State and that income or capital, in accordance with the provisions of this Convention, may be taxed in that other Contracting State, the first-mentioned State shall, subject to the provisions of paragraph 2 of this Article, exempt such income or capital from tax but may, in calculating tax on the remaining income or capital of that person, apply the rate of tax which would have been applicable if the exempted income or capital had not been so exempted. 2. Where a person being a resident of a Contracting State derives income from the other Contracting State and that income, in accordance with the provisions of Articles XX and XXI of this Convention, may be taxed in that other Contracting State, the first-mentioned State shall allow as a deduction from the tax on the income of that person an amount equal to the tax paid in that other Contracting State. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is appropriate to the income derived from that other Contracting State. Article XXIV Where a person being a resident of a Contracting State derives income from or owns capital in the other Contracting State and that income or capital, in accordance with the provisions of this Convention, may be taxed in that other Contracting State, the first-mentioned State shall allow: a) as a deduction from the tax on the income of that person, an amount equal to the income tax paid in that other Contracting State; b) as a deduction from the tax on the capital of that person, an amount equal to the capital tax paid in that other Contracting State. The deduction in either case shall not, however, exceed that part of the income tax or capital tax, respectively, as computed before the deduction is given, which is appropriate, as the case may be, to the income derived from or the capital owned in that other Contracting State. 31
73095 0-62-vol. 4-42
(4649)
ANNEX E
ARTICLE ON MUTUAL AGREEMENT PROCEDURE Article XXV 1. Where a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of those states, present his case to the competent authority of the Contracting State of which he is a resident. 2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at an appropriate solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation not in accordance with this Convention. 3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of this Convention. They may also consult together for the elimination of double taxation in cases not provided for in this Convention. 4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. When it seems advisable in order to reach agreement to have an oral exchange of opinions, such exchange may take place through a Commission consisting of representatives of the competent authorities of the Contracting States.
33
(4651)
2. COMMENTARIES ON THE ARTICLES
(4653)
ANNEX F
COMMENTARY ON ARTICLE XX CONCERNING THE TAXATION OF DIVIDENDS I. A.

THE PROBLEMS PRELIMINARY REMARKS
1. By 4 dividends , is generally meant the distributions of profits to the shareholders or members by companies limited by shares1 , limited partnerships with share capital 2, limited liability companies3 or other joint stock companies 4. Under the laws of all European countries, such joint stock companies are legal entities with a separate juridical personality distinct from all their shareholders or members. On this point, they differ from partnerships in so far as the latter do not have juridical personality in most countries. 2. The profits of a business carried on by a partnership are the partners' profits derived from their own exertions: for them they are industrial or commercial profits. So the partner is ordinarily taxed personally on his share of the partnership capital and partnership profits. 3. The position is different for the shareholder; he is not a trader and the company's profits are not his; so they cannot be attributed to him. He is personally taxable only on those profits which are distributed by the company (apart from the provisions in certain countries' laws relating to the taxation of undistributed profits in special cases). From the shareholders' standpoint, dividends are income from the capital which they have made available to the company as its shareholders. B.
TAXATION OF COMPANIES LIMITED BY SHARES AND OF DIVIDENDS
4. The results of an enquiry made into the taxation of dividends are summarised in the table on page 39. a) 5.
2. 3. 4.
Taxation of resident companies 1. Taxation of the company's profits The taxes In all the States, companies are taxed on their profits.
c Soci&ts anonymes b. q Soci6tis en commandite par actions z. 4: Soci6t6s h responsabilit6 limit6e s-. c Soci6t6 de capitaux ,.
37
(4655)
paid by companies are generally of a particular kind, that is, they are distinct from those paid by individuals. 6. In most of the States a company's total profits taxed uniforly. In taxing a company's profits, four States make a distinction according to whether the profits are distributed or not : - Denmark: the information given in the table is based on a new tax law concerning taxation of companies, which will come into force for the taxation year 1962-63. According to the legislation now in force distributed and distributable profits are taxed more heavily than the other part of the profits. Apart from this, the information given in the table also covers the rules now in force, except that the figure in column 9 is now 50 per cent. - Belgium: on distributed profits the company is not liable to the << taxe professionnelle >, but to special taxes, the <<Contribution nationale de crise > (20 per cent) and the < Taxe mobili~re> (30 per cent). - Germany: the rate of the company tax for distributed profits is lower than that for undistributed profits (15 per cent instead of 51 per cent). - Greece: profits distributed by the company are not taxed at all. - Netherlands: the Government has introduced a Bill which proposes a rate on distributed profits of 28 per cent, while the rate on undistributed profits would remain at 43 per cent. 2. Taxation of the company's capital and reserves
7. Seven States - Germany, Austria, Spain (until 31st December, 1961), Italy, Luxembourg, Norway and Switzerland - tax the capital and reserves of companies limited by shares. b) Taxation of shareholdersof a resident company 1. Taxes at the source
8. Many States impose taxes at the source on dividends from resident companies. In most cases such taxes are borne by all the shareholders (Germany, Austria, Spain, France, Luxembourg, the Netherlands, Portugal. Switzerland, Turkey); but in some cases the tax at the source is only payable by non-resident shareholders (Norway, Sweden) or non-resident alien shareholders (United States). Three States do not charge a tax at the source on dividends but make the company distributing the dividends pay taxes on its profits, leaving it the right to recover tax by deduction from dividends paid out of those profits to shareholders: e.g. the United Kingdom and the Republic of Ireland as regards their income taxes, and Belgium as regards the ,taxe mobili~re 3. Denmark does not tax nonresident shareholders at all. 2. Taxation of resident shareholders
9. In all the States dividends paid by resident companies are included in the taxable income of a resident shareholder, in some of the States as to their net amount, in the others as to their gross amount. Tax levied
(4656)
SHINVaNo3F 01VlaIOH HO)! 12CLVHLu 'IVIINH1CaHOiO
II I xxlxl I [xl I [xxl

xl [IIxlIxI.-xx
xx x x x xz x x
Sa xVoL
o OlXaaHX
SaCXVIL HNODIZI 90
aOuflOS OH.LV li XVILI
I~ I .
I
'ix0ll
ICIxiS
' og
0, , ob
saxVj
HHlO
I II
g o go
Ixs IIl
1 0-o 1o o o
aaHaoOS HHL
LV XVi
x ,cl xz
c o
-.
4) (V)
aimoq
O
00
xx.'xxl
I I I lx!
N 0
0.
SaVLaWOI
xx~xxxxxxZ" lx xxxx
xxzxxl
0 z
ISNIVO
,o
H! o
[xl
xl
Kx
I
0 bo
p!
q ,
oo,
x x x xxxxxS
.
x xx xxx
xz l
aouinos aill .v XV.L
z
0
(1'S
I I I II x
I II I I I I I
vtot
[x
xxxxx [xxxxxxxxx
S.............
.........
. .... C. .
E9
39
(4657)
at the source by the same State is generally credited against the general income tax. Exceptions to this rule are: Spain as regards its dividends tax ), and Switzerland as regards its c coupon tax i. 10. Some States give certain relief to resident shareholders: In the United Kingdom and the Republic of Ireland, the income tax paid by the company on its profits also counts as the shareholder's tax on its dividends he receives. The shareholder is entitled to have the personal allowances and reliefs he may claim taken into account in calculating his income tax on the dividends. This can result in a part of the tax paid by the company on its profits being refunded to the shareholder. The gross amount of the dividend is included in the shareholder's total income for the purposes of the surtax. In certain States the recipient is not further liable on his dividends to tax already charged on the profits of the company paying the dividends. Thus in the United Kingdom and the Republic of Ireland, the profits tax is not charged again; the same holds good in Italy for the e imposta sul reddito di ricchezza mobile 3. In Belgium, dividends on which the distributing company has already paid the < taxe mobili~re ;o at the time of distribution, that is at the source, are not liable again to that tax in the hands of the shareholder. In addition, if they form part of the profits liable either to the taxe professionnelle > (profits of undertakings carried on by individuals undistributed profits of companies, profits distributed to active partners by partnerships of individuals) or to the taxe mobili~re 2 or the contribution nationale de crise > (profits distributed to shareholders of companies or to sleeping partners in partnerships of individuals), they are not brought into charge for the purposes of those taxes. In most of the States the law gives preferential treatment, in one form or another, to holding companies. In Norway, companies are not taxed on dividends paid by resident companies. Taxation of non-resident shareholders
3.
11. In six States non-resident individuals who are shareholders of resident companies are liable to a graduated tax on total income: The United Kingdom and the Republic of Ireland (surtax), Greece (income tax), Italy (q imposta complementare 2), the United States in the case of a non-resident alien shareholder whose income from United States sources exceeds $15,400, and Spain if the income from Spanish sources exceeds 100,000 pesetas per year. In Greece, non-resident companies which are shareholders of resident companies are liable to a flat rate tax. c) Taxation of resident shareholders in respect of dividends from a non-resident company
12. Dividends paid to a shareholder resident in a State by a nonresident company are subject in that State to the general taxes on income and profits. The following peculiarities should be mentioned: 40 (4658)
In Italy,' individuals, as a rule, are taxed on foreign dividends only if these are remitted to Italy (: goduto in Italia s). Italy charges the c imposta sul reddito di ricchezza mobile z, on certain foreign dividends only. Dividends received by companies are included in their taxable income for the purposes of the Italian Company tax (4 imposta sulle societA '); - Spain has, in addition, a tax at the source. It is charged on only so much of the dividends as corresponds to the proportion that the profits made in Spain bear to the total profits; furthermore, it is charged on the dividends from foreign sources actually paid in Spain; - Belgium reduces the rate of the c taxe mobili~re : to 12 per cent; - The United States and the United Kingdom give credit for foreign taxes against their own income taxes. Germany and Denmark only give credit for the tax charged on the dividends; - Portugal levies, in addition, a tax at the source on dividends actually paid in Portugal. 13. In some States the preferential treatment given to holding companies in respect of dividends arising in such States does not apply to dividends received from foreign companies. II. A.
SOLUTIONS
WORK OF THE INTERNATIONAL ORGANISATIONS
14. In this matter of dividends, differences between taxation laws and conflicts of interests have an inhibiting effect that is not apparent in any other part of international fiscal law. Many States feel unable to relinquish the right to tax dividends paid by resident companies to nonresident shareholders, either because their taxation systems are based on the principle of territoriality, or because they fear that to do so would mean a loss of tax revenue. 15. The League of Nations took up the general problems of international double taxation at a comparatively early date. A commission of four economists stated, in a report dated 5th April, 1923, that the right to tax movable property (including shares in companies and debt claims) should belong to the State of the taxpayer's residence. A second committee of seven taxation experts, in a report dated 7th February, 1925, formulated other proposals which the General Meeting of Government Experts on Double Taxation adopted in its report of 31st October, 1928, but not without modifying them on certain points and adding two further proposals, so that the proposals of the League of Nations in 1928 consisted of the following variants: Variant A: Imposition of impersonal taxes by the State in which the enterprise has its effective place of management, and imposition of personal taxes exclusively in the State of the shareholder's residence; Variant B: Taxation exclusively in the State of the shareholder's residence; Variant C: Taxation in the State of the shareholder's residence, 41 (4659)
with a reservation in favour of taxes charged at the source in the other State; it is recommended to the Contracting States that they should avoid or mitigate any resulting double taxation by arrangements for the full or part refund of the taxes levied in the State of source, or for giving credit for the taxes charged at the source against the taxes imposed in the State of the shareholder's residence. 16. From 1929 to 1939 no further solutions to the problem of dividend taxation were devised by the Fiscal Committee of the League of Nations. On the other hand, the drafts prepared at later conferences, in Mexico in 1943 and in London in 1946, contain provisions which differ essentially from the proposals contained in the 1928 draft. The Mexico and London drafts give the right to tax dividends to the State in which the capital is invested or in which the company has its fiscal domicile. It is only where a company has a c dominant participation . in the management or capital of the company paying the dividends that the London draft allows an exemption in the country where that company has its fiscal domicile. The London and Mexico Model Conventions have not been adopted by the European States. B.
THE CONVENTIONS CONCLUDED BY THE EUROPEAN STATES
17. The Conventions for the avoidance of double taxation concluded between the Member countries of the O.E.E.C. contain the following solutions: a) In a first category of Conventions, dividends are taxable only in the State of the recipient's residence (Convention between France and Sweden of 1936-1950). b) Other Conventions provide for dividends to be taxed in the State of the recipient's residence; but they contain an unlimited reservation in favour of taxes charged at the source in the other State (Conventions concluded by Germany with Sweden in 1928 and with France in 1934). c) In a third category, the right to tax dividends is conferred on the State of the recipient's residence; a reservation is made in favour of taxes imposed at the source in the other State, but such taxes are not to be levied, or must be refunded fully or in part if the shareholder satisfies certain conditions (Conventions concluded by Switzerland with Sweden in 1948, with the Netherlands in 1951, with Austria in 1953, and with France in 1953). d) In a last category, both States may tax dividends. But the State of the shareholder's residence undertakes to give credit for the tax levied in the State of source (which tax may or may not be limited to a certain rate) against its own taxes on the same income (Conventions concluded between Germany and Austria in 1954, between Sweden and Norway in 1947, between France and Norway in 1953, and by Italy with the United States in 1955, with Sweden in 1956, with France in 1958, and with the United Kingdom in 1960). 42 (4660)
C.
SOLUTION RECOMMENDED
BY THE COMMITTEE
18. The solution recommended by the Committee is not new. It takes into account the work of the international organisations and the Conventions concluded up to now. The Committee has submitted a text which should be acceptable to the great majority of the Member countries of the O.E.E.C. 19. The Article states that dividends shall be taxable in the State of the shareholder's residence, but it confers a limited concurrent right to tax on the State of source. 20. The Article deals with the relationship between itself and the provisions of the Article concerning the allocation of profits to permanent establishments, and it defines the term < dividends >,. 21. The Committee has confined itself to settling principles. Particular questions, in particular the manner in which the State of source must reduce its taxes, are not dealt with. Nor is the manner in which allowance is to be made for the peculiarities of certain countries' laws. There are too many possible solutions, so that it appears impossible to find a single foimula which can satisfy all the States. There is still vast scope for bilaieral negotiations without subtracting from the value of the proposed provisions. III. Paragraph1 22. The first paragraph of the Article does not prescribe the principle of taxation of dividends exclusively in the State of the recipient's residence or exclusively in the State of which the company paying the dividends is a resident. 23. Taxation of dividends exclusively in the State of source is not acceptable as a general rule. Furthermore, there are some States which do not have taxation of dividends at the source, while, as a general rule, all the States tax residents in respect of dividends they receive from non-resident companies. 24. On the other hand, taxation of dividends exclusively in the State of the recipient's residence is not feasible as a general rule. It would be more in keeping with the nature of dividends, which are investment income, but it would be unrealistic to suppose that there is any prospect of its being agreed that all taxation of dividends at the source should be relinquished. 25. For this reason, the first paragraph states simply that dividends may be taxed in the State of the recipient's residence. Paragraph 2 26. Paragraph 2 reserves a right to tax to the State of source of the dividends, i.e. to the State of which the company paying the dividends 43 (4661)
COMMENTARY ON THE PROVISIONS OF THE ARTICLE
is a resident; this right to tax, however, is limited considerably. The rate of tax is limited to 15 per cent, which appears to be a reasonable maximum figure. A higher rate could hardly be justified since the State of source can already tax the company's profits. 27. On the other hand, a lower rate of 5 per cent is expressly provided in respect of dividends paid by subsidiary companies. If a company of one of the States owns directly a holding of at least 25 per cent in a company of the other State, it is reasonable that payments of profits by the subsidiary to the foreign parent company should be taxed less heavily, to facilitate international investment and to avoid recurrent taxation. The realisation of the latter intention depends, of course, on the fiscal treatment provided for parent companies in their State of residence. Some laws and Conventions already contain similar provisions. If a partnership is treated as a body corporate under the national law applying to it, the two Contracting States may agree to modify paragraph 2 (a) in a way to give the benefits of the reduced rate provided for parent companies also to such partnerships. 28. The tax rates fixed by the Article for the tax in the State of source are maximum rates. The States may agree, in bilateral negotiations, on lower rates or even on taxation exclusively in the State of the recipient's residence. The reduction of rates provided for in paragraph 2 refers solely to the taxation of dividends and not to the taxation of the profits of the company paying the dividends. 29. The two Contracting States may also, in bilateral negotiations, agree to a holding percentage lower than that fixed in the Article. 30. Paragraph 2 says nothing about the mode of taxation. Each State is free to apply its own laws. The State of source may levy, not only taxes at the source, but also taxes charged by direct assessment. 31. Paragraph 2 does not settle procedural questions. Each State should be able to use the procedure provided in its own law. It can either forthwith limit its tax to the rates given in the Article or tax in full and make a repayment. 32. It has not been determined whether a relief in a State of source should be given only where the recipient is subject to tax in respect of the dividends in the State of residence. The formula chosen may be supplemented accordingly by bilateral agreement. 33. The Article says nothing on how the State of the recipient's residence should make allowance for the taxation in the State of source. This question is considered in the Articles XXIII and XXIV concerning methods of avoiding double taxation in the State of residence. 34. Attention is drawn generally to the following case: the recipient of the dividends arising in a Contracting State is a company resident in the other Contracting State; all or part of its capital is held by shareholders resident outside that other State; its practice is not to distribute its profits in the form of dividends; and it enjoys preferential taxation treatment (c private investment company i, c base company ')). The question may arise whether in the case of such a company it is 44 (4662)
justifiable to allow in the State of source of the dividends the restriction of tax which is provided in paragraph 2 of the Article. It may be appropriate, when bilateral negotiations are being conducted, to agree upon special exceptions to the taxing rule laid down in this Article, in order to define the treatment applicable to such companies. Paragraph3 35. In view of the great differences between the laws of the Member countries of the O.E.E.C., it is impossible to define 4 dividends x' fully and exhaustively. Consequently, the definition merely mentions examples which are to be found in the majority of the Member countries' laws and which, in any case, are not treated differently in them. The enumeration is followed up by a general clause. It is open to the Contracting States, through bilateral negotiations, to make allowance for the peculiarities of their laws and to agree to bring other distributions of profits within the Article. 36. The Article relates, basically, to distributions of profits the title to which is constituted by shares, that is holdings in a company limited by shares (e Socint6 anonyme 3.). The Article assimilates to shares all securities issued by companies limited by shares which carry a right to participate in the profits without being debt claims; such are, for example, jouissance i shares or i jouissance rights, founders' shares or other r rights participating in profits. On the other hand, debt claims participating in profits do not come into this category. Likewise, interest on convertible debentures is not dividend. 37. The laws of many of the States put participations in a c Socint6 responsabilit6 limitre : (limited liability companies) on the same footing as shares. Again, distributions of profits by co-operative societies are generally regarded as dividends. 38. Distributions of profits by partnerships of individuals are not dividends. French law, however, makes an exception to this principle in the case of distributions to the limited partners by c Socint~s en commandite simple z (limited partnerships without share capital). 39. Payments regarded as dividends may include not only distributions of profits by annual resolutions of general meetings of shareholders, but also other benefits in money or money's worth, such as bonus shares, bonuses, profits on a liquidation and disguised distributions of profits. The reliefs provided in the Article apply so long as the State of which the paying company is a resident taxes such benefits as dividends. Paragraph 4 40. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of source and in the State of the recipient's residence when the recipient possesses a permanent establishment in the former State. Paragraph 4 of the Article is not based on such a conception which is sometimes referred to as c the 45 (4663)
force of attraction of the permanent establishment ;>. It does not stipulate that dividends arising to a resident of a Contracting State from a source situated in the territory of the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may happen to possess in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the dividends are taxable as part of the profits of the permanent establishment there owned by the recipient residing in the other State, if they are paid in respect of holdings forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment. In that case, paragraph 4 relieves the State of source of the dividends from any limitations under the Article. The foregoing explanations accord with those in the Commentaries on Article XV on the allocation of profits to permanent establishments. Paragraph5 41. The Article deals only with dividends paid by a company resident in one of the States to a resident of the other State. Certain States, however, tax not only dividends paid by companies resident in them but even distributions by non-resident companies of profits arising in them. Each State, of course, is entitled to tax profits arising in it which are made by non-resident companies, to the extent provided in the Convention (in particular in the Article concerning the allocation of profits to permanent establishments). The shareholders of such companies should not be taxed as well at any rate unless they are resident in the State and so naturally subject to its fiscal sovereignty. 42. Paragraph 5 adopts a provision already contained in a number of Conventions. It rules out extraterritorial taxation of dividends and further provides that non-resident companies are not to be subjected to special taxes on undistributed profits.
IV. SPECIAL POSITION OF CERTAIN COUNTRIES DUE TO PECULIARITIES OF THE NATIONAL TAX LAWS
A.
GENERAL
43. Certain laws seek to avoid or mitigate economic double taxation, that is the simultaneous taxation of the company's profits in its hands and of the distributed profits in the hands of the shareholder. In principle, there are two ways of achieving this: - the shareholder is not taxed in respect of the dividends paid to him by the company, the company having already been taxed in respect of the profits distributed; the tax paid by the company is allowed to be recovered from the shareholder (Belgium: see B below; United Kingdom, Ireland: see C below); the shareholder pays the bulk or the whole of the tax on the profits distributed, while in respect of those same profits the company either pays a considerably reduced tax or is even 46
(4664)
exempted from tax (Germany, Greece and proposed legislation in the Netherlands: see D below). 44. In the first case, the tax is paid by the company and is then regarded as borne by the shareholder; such treatment of the tax confers a dual character on it. The tax falls on the company's profits but enters into the computation of the shareholder's tax liability as well. This dual character becomes particularly apparent when the tax is charged only on the profits distributed (as in Belgium). The above observation still applies even in the case where, besides the tax paid by the company and then regarded as borne by the shareholder, the recipient of the dividend, if an individual, has to pay other taxes (United Kingdom and Republic of Ireland: surtax; Belgium: c imp6t compl6mentaire personnel i). 45. In the second case, the taxation in question comes within the Article on the taxation of dividends. However, the reduction of such tax as provided in the present Article would cause difficulties for Germany, the Netherlands and Greece, owing to the peculiarities of their national tax laws. B.
BELGIUM
46. Belgium considers that the combined incidence of the e taxe mobilibre 2 (30 per cent) and the e contribution nationale de crise : (20 per cent) on distributed profits of companies corresponds to the company tax (corporation tax, c Korperschaftsteuer b) which, in other countries, falls on the company's total profits, both distributed and undistributed. Apart from the e taxe mobilibre i. and the e contribution nationale de crise :., the effective incidence of which is scarcely more than 40 per cent (maximum 45 per cent), Belgium imposes on dividends no scheduled tax to be borne by the shareholders; thus there is no i economic double taxation. 47. Consequently, Belgium feels justified in asking the other States to reduce their tax at the source on dividends, without offering a corresponding reduction of the t taxe mobili~re i or c contribution nationale de crise 3, which taxes, as stated above, together constitute the taxation of the company. 48. In the absence of any obvious counterpart, Belgium is prepared to offer various concessions in the light of the respective laws of the Contracting States and on the basis of reciprocal sacrifices to be accepted within the framework of a balanced Convention (cf. Belgium's Conventions with the United Kingdom, Sweden, Finland and the United States).
C. UNITED KINGDOM, IRELAND
49. The United Kingdom and Ireland could not envisage the repayment to non-resident shareholders of the tax charged on the company, with a view to reducing the tax indirectly borne by them to the amount provided for in the Article. In bilateral Conventions the United Kingdom and the Republic of Ireland commonly give up surtax payable by non-resident shareholders. The United Kingdom and the Republic of Ireland are further prepared to give non-resident individuals the relief provided in 47
73095 0-62-vol. 4--43
(4665)
Section 227 of the United Kingdom's Income Tax Act, 1952, and Section 8 of the Republic of Ireland's Finance Act, 1935, respectively (c proportionate personal allowances ). Non-resident bodies corporate which are shareholders of companies resident in the United Kingdom or in Ireland cannot, however, obtain relief in respect of taxes indirectly borne by them. D.
GERMANY, GREECE AND THE NETHERLANDS
50. The solution proposed in paragraph 2 of the Article is based on the hypothesis that the purpose of a double taxation Convention is not to prevent the economic double taxation that occurs when a State taxes not only in the hands of the company its total industrial or commercial profits, but also, in addition, the profits distributed as dividends in the hands of the shareholder. If a State mitigates or abolishes such double taxation by charging on the company only a very low tax or no tax at all in respect of the part of profits to be distributed (because it fully taxes the profit distribution in the hands of resident shareholders), it must have the right to tax at a higher rate than those mentioned in paragraph 2 the dividends received by a non-resident shareholder. The imposition of a higher tax at the source would thus be compensation for the fact that the distributed profits have not been taxed, or have been taxed at a reduced rate, in the hands of the company. In this case, it may also be necessary to charge a higher tax at the source than those mentioned in paragraph 2 in order to ensuie that non-resident shareholders (or certain categories of shareholders, e.g. non-resident parent companies) are not in a more favourable tax position than resident shareholders. A number of States which have concluded Conventions with these countries have taken this peculiarity in their laws into account. E.
APPRECIATION OF THE POSITION
51. Different views may be taken as to the exact nature of taxes (in Belgium, the United Kingdom and Ireland) which, though not levied directly on the shareholder, are regarded as borne by him. Whatever these views may be, however, States negotiating double taxation Conventions with Belgium, the United Kingdom or Ireland should have the opportunity to decide, in each particular case, whether they are prepared to reduce their own taxes to the rate specified in the present Article, taking into account the other concessions which these three countries can offer. 52. With regard to the position in Germany, Greece and the Netherlands, the Committee considers that a final settlement should be reached through bilateral negotiations. V.
RESERVATIONS CONCERNING CERTAIN PROVISIONS OF THE ARTICLE
Paragraph2, sub-paragraph(a) (Holdings) 53. The Netherlands has entered a reservation respecting the rate of 5 per cent, since it considers that transfers of profits within a group of enterprises should be entirely exempted from tax at the source. 48 (4666)
54. Spain and Italy have a reservation concerning the percentage envisaged for the holding (25 per cent). They can only agree to a rate of tax of 5 per cent for a direct holding of at least 51 per cent. 55. Portugal has a reservation regarding the rate of tax of 5 per cent. It can only accept in the Article itself a rate of 10 per cent, but might consider reducing this percentage in bilateral negotiations. 56. France wishes to retain its freedom of judgment, both as regards the limit on the tax and the determination of the minimum percentage for the holding. 57. Germany enters a reservation concerning the application of subparagraph (a) in certain cases where it does not seem necessary to reduce its tax at the source below 15 per cent in order to avoid substantial recurrent taxation. 58. Belgium has a reservation on sub-paragraph (a) because, as regards the treatment of subsidiaries, it has not up to now made any special concession in the case of holdings of less than 90 per cent. Belgium's Conventions with the United Kingdom and Sweden contain a special (fairly complicated) solution for the benefit of subsidiaries controlled as to at least 90 per cent; where a British or Swedish company owns at least 90 per cent of the share capital of a Belgian company, the total charge to the e taxe mobili~re i and the c contribution nationale de crise 3 in respect of the dividends distributed to the parent company is restricted to a sum equal to the additional e taxe professionnelle 3 which would have been payable had there been no distribution of dividends. This solution, which is based on the assimilation of a subsidiary to a permanent establishment, cannot logically be envisaged unless the foreign company owns a very large majority of the capital of the Belgian company. Paragraph2, sub-paragraphs(a) and (b) 59. Turkey cannot accept a rate of tax which is lower than 20 per cent.
Paragraph4 60. Italy reserves the right to subject dividends to the taxes imposed by its law whenever the recipient thereof has a permanent establishment in Italy, even if the holding on which the dividends are paid is not effectively connected with such permanent establishment. Paragraph5 61. France cannot adhere without a reservation to the provisions of this paragraph owing to the structure of its fiscal law which provides that permanent establishments in France of foreign companies are to be taxed under the same conditions as French companies.
49 (4667)
ANNEX G
COMMENTARY ON ARTICLE XXI CONCERNING THE TAXATION OF INTEREST

I.
PRELIMINARY REMARKS
A.
DEFINITION OF INTEREST FOR THE PURPOSES OF THIS REPORT
c Interest s is generally taken to mean remuneration on money lent, 1. being remuneration coming within the category of < income from movable capital i (c revenus de capitaux mobiliers i). Such remuneration includes, in particular, interest on and all other income - to which certain taxation laws assimilate prizes and redemption premiums - from: bonds or debentures, whether or not secured on immovable property and whether or not carrying a right to participate in profits, which are negotiable securities just as company shares are, being issued in representation of collective loans, offered to the public in equal fractions and ordinarily redeemable at long term or by drawing lots, and quoted on a Stock Exchange or capable of being so quoted;
government securities;
indebtedness or debt claims of every kind (whether secured by mortgage, preferential or unsecured); notes of indebtedness, deposits, security lodged in money and other rights which can be assimilated to debt claims or loans.
B.
INTERNATIONAL DOUBLE TAXATION OF INTEREST
Unlike dividends, interest does not suffer economic double taxation, 2. that is, it is not taken both in the hands of the debtor and in the hands of the creditor. Unless it is provided to the contrary by the contract, payment of the tax charged on interest falls on the recipient. If it happens that the debtor undertakes to bear any tax chargeable at the source, this is as though he had agreed to pay his creditor additional interest corresponding to such tax. Subject to the remarks made later (paragraph 16), the debtor may nevertheless show the interest paid and any tax so borne in his enterprise's general expense. But, like dividends, interest on bonds or debentures or loans 3. usually attracts tax charged by deduction at the source when the interest is paid. This method is, in fact, commonly used for practical reasons, as the tax charged at the source can constitute an advance of the tax payable by the recipient in respect of his total income or profits. If in such a case the recipient is a resident of the country which practises 51
(4669)
deduction at the source, any double taxation he suffers is remedied by internal measures. But the position is different if he is a resident of another country: he is then liable to be taxed twice on the interest, first by the State of source and then by the State in which he resides. It is clear that this double charge of tax can reduce considerably the interest on the money lent and so hamper the movement of capital and the development of international investment. C. How
CAN DOUBLE TAXATION OF INTEREST BE AVOIDED?
4. There is no point in re-opening doctrinal arguments on the respective merits of taxing interest in the State of source or in the State of the recipient's residence, according to whether the tax is impersonal or personal; or in considering whether the theoretically ideal solution would not be for the right to tax to be the privilege of the State of the creditor's residence, on the principle that movable property is intimately associated with the person of its owner and that tax on the income that it produces should properly be borne by the owner. Very detailed studies were made on this subject in the League of Nations. These resulted in the elaboration of different, not to say conflicting, proposals as to the taxation of interest. 5. The fact is that countries which export capital and countries in which it is invested have apparently opposed interests. The former are naturally inclined to advocate that income from exported capital should be taxed in the State of the recipient's residence, and the latter in the State of source of the income. 6. Although the State in which the capital is invested may be entitled to tax income paid as interest on capital coming from another State, on the ground that the income results from the use of such capital and has its source in its territory, it would be exorbitant for it to claim that it alone had the right to tax it. The State exporting the capital can no less justifiably maintain that if the payment of the interest on the capital is made possible by the use of the capital, it is also, and primarily, due to the very existence of the capital, so that it too is justified in calling upon the owners of the capital - the recipients of the interest - to participate in the public expenses, by reason of their possession of such income. 7. Thus it is clear that both solutions - that which would give an exclusive right to tax to the country of source of the interest and that which would reserve it to the country of the creditor's residence - are too rigid. D.
SOLUTIONS ADOPTED IN THE BILATERAL CONVENTIONS ALREADY CONCLUDED FOR THE PURPOSE OF AVOIDING DOUBLE TAXATION
8. In the Conventions concluded between them, the European States and the United States of America have adopted various methods for avoiding double taxation of interest. 9. Sometimes taxation is reserved exclusively to the State of source (cf. Convention concluded in 1957, between Italy and the Netherlands, Art. 8), or to the State of the recipient's residence (cf. Denmark-Nether52 (4670)
lands, 1957, Art. 10; France-Norway, 1953, Art. 9; Denmark-France, 1957, Arts. 8 and 9; France-Netherlands, 1949, and Additional Agreement of 1952, Arts. 8 and 9; France-Sweden, 1936, and Additional Agreement of 1950, Arts. 8 and 9; Netherlands-Sweden, 1952, Art. 10); Sometimes taxation is shared between the State of the recipient's residence and the State of source (cf. Denmark-Switzerland, 1957, Arts. 2 and 9; Norway-Switzerland, 1956, Arts. 2 and 9; France-Switzerland, 1953, Art. 10; United States-France, 1956, Art 6 A (new) of the Convention of 1939, and Art. 14). In other cases the tax in the State of source is to be levied at the 10. ordinary rate and credit given for it against the tax payable in the State of the recipient's residence (cf. Belgium-France, 1931, Art. 6; Italy-Sweden, 1956, Art. 9; France-Saar, Franco-German Treaty of 1956, Annex 4, Art. 12). Finally, special treatment is applied to income from indebtedness 11. secured by mortgage of immovable property, the taxation of which is often reserved to the State of the mortgaged property's situs (France-Germany, 1934, Art. 8; Netherlands-United Kingdom, 1948, Art. 8; NetherlandsSwitzerland, 1951, Art. 3).
E.
SOLUTION ADOPTED BY THE FISCAL COMMITTEE
The Fiscal Committee's discussions first of all showed that all the 12. Member countries of the O.E.E.C. tax interest arising abroad to their residents, two-thirds of them tax interest arising in their territories to non-residents and one-third do not tax interest at the source at all. The discussions further showed that a formula reserving the 13. exclusive taxation of interest to one State, whether the State of the recipient's residence or the State of source, could not be sure of receiving general approval. Some countries stated that their preference was for taxation in the State of residence, others for taxation in the State of source. A number of countries which practise taxation at the source considered that they would be able to give up the right to tax at the source if certain conditions were concurrently present; but they at once made it clear that they could not be bound by a text which left them no discretion in this respect. The Fiscal Committee therefore has been obliged to turn towards 14. a compromise solution, first laying down the principle that interest shall be taxed in the State of residence - particularly as this is the practice in the generality of the Member states - but leaving the State of source the right to impose a tax if its laws so provide, it being implicit in this right that the State of source is free to give up all taxation on interest paid to non-residents. Its exercise of this right will however be limited by a ceiling which its tax cannot exceed but, it goes without saying, the Contracting States can agree to adopt an even lower rate of taxation in the State of source. The sacrifice that the latter would accept in such conditions will be matched by a similar sacrifice for the State of residence, since it will have to take into account the tax levied in the State of source in order to prevent the double taxation that the interest would suffer if the State of residence imposed on itself no restriction in 53 (4671)
the exercise of its right (on this subject see Articles XXIII and XXIV on methods of avoiding double taxation in the State of residence of the recipient of the income). 15. Views were divided on the determination of the ceiling of the tax levied in the State of source. A very large majority, however, was found for a rate of 10 per cent, though it was pointed out that the assent of certain States would be conditional on the settlement, under terms which they would consider acceptable, of the taxation treatment of royalties and dividends. These reservations are referred to in Part III of this commentary.
F.
DEDUCTIBILITY OF INTEREST FOR THE PURPOSES OF THE PAYER'S TAX
16. Certain countries do not allow interest paid to be deducted for the purposes of the payer's tax unless the recipient also resides in the same State or is taxable in that State. Otherwise they forbid the deduction. The Fiscal Committee considers it desirable that the deduction in question should also be allowed in cases where the interest is paid by a resident of a Contracting State to a resident of the other State, the case of fraud being, of course, reserved; it considers that the deduction should not be forbidden simply because the tax payable by the recipient of such interest is reduced in the State of source in application of the proposed Article. Any other method of procedure might cancel out the beneficial effects of the measures taken to avoid double taxation. II. Paragraph1 17. This paragraph lays down the principle that interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in the latter. In doing so, it does not stipulate an exclusive right to tax in favour of the State of residence, but simply repeats the rule deriving from the generality of tax laws which include the right to tax income of this kind in the State of the recipient's residence. Paragraph2 18. Paragraph 2 reserves a right to tax interest to the State in which the interest arises; but it limits the exercise of that right by determining a ceiling for the tax, which may not exceed 10 per cent. This rate may be considered a reasonable maximum if it is remembered that the State of source is already entitled to tax profits or income produced on its territory by investments financed out of borrowed capital. The Fiscal Committee considers that the two Contracting States may agree through bilateral negotiations upon a lower tax or even on exclusive taxation in the State of the recipient's residence (see on this point the reservation entered by Italy which is recorded in Section III). 19. Paragraph 2 of the Article lays down nothing about the mode of taxation in the State of source. It therefore leaves that State free 54 (4672)
COMMENTARY ON THE ARTICLE
to apply its own law and, in particular, to levy the tax either by deduction at source or by individual assessment. It does not specify whether the relief in the State of source should 20. be conditional upon the interest being subject to tax in the State of residence. It has already been stated that taxation in the State of residence is the general rule. There is, however, nothing to prevent the formula proposed in paragraph 2 from being supplemented in this respect by means of bilateral negotiations. Moreover, the Article contains no provisions concerning any 21. obligation on the State of the recipient's residence to take account of the tax in the State of source of the interest. This question is dealt with in Articles XXIII and XXIV concerning methods of avoiding double taxation in the former State. Attention is drawn generally to the following case: the recipient 22. of interest arising in a Contracting State is a company resident in the other Contracting State; all or part of its capital is held by shareholders resident outside that other State ; its practice is not to distribute its profits in the form of dividends; and it enjoys preferential taxation treatment (e private investment company , i base company 3). The question may arise whether, in the case of such a company, it is justifiable to allow in the State of source the restriction of tax which is provided in paragraph 2 of the Article. It may be appropriate, when bilateral negotiations are being conducted, to agree upon special exceptions to the taxing rule laid down in this Article, in order to define the treatment applicable to such companies. Paragraph 3 This paragraph specifies the meaning to be attached to the term 23. z interest 2 for the application of the taxation treatment defined by the Article. In particular, the term designates income from bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt claims of all kinds, including mortgages. Bonds or debentures which participate in profits are nonetheless regarded as loan securities if the contract of issue by its general character constitutes evidence of a loan at interest. It is also recognised that mortgage interest comes within the category of income from movable capital (c revenus de capitaux mobiliers 2.), although certain countries assimilate it to income from immovable capital. 24. In any case, the Article does not give a complete and exhaustive list of the various kinds of interest. Such a list might not be fully in harmony with the various States' laws, which may differ among themselves in their interpretation of the concept of interest. It therefore seems preferable to include in a general formula all income which is assimilated by those laws to remuneration on money lent. This applies in particular to interest derived from cash deposits and security lodged in money. 25. Finally, the question arose whether annuities ought to be assimilated to interest; it was decided that they ought not to be. On the one hand, annuities granted in consideration of past employment are 55 (4673)
referred to in Article X and are subject to the rules governing pensions. On the other hand, although it is true that instalments of purchased annuities include an interest element on the purchase capital as well as return of capital, such instalments thus constituting c fruits civils . which accrue from day to day, it would be difficult for many countries to make a distinction between the element representing income from capital and the element representing a return of capital in order merely to tax the income element under the same category as income from movable capital. Taxation laws often contain special provisions classifying annuities in the category of salaries, wages and pensions, and taxing them accordingly. Paragraph4 26. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of source and, in the State of the recipient's residence when the recipient possesses a permanent establishment in the former State. Paragraph 4 of the Article is not based on such a conception which is sometimes referred to as c the force of attraction of the permanent establishment ,. It does not stipulate that interest arising to a resident of a Contracting State from a source situated in the territory of the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may happen to possess in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the interest is taxable as part of the profits of the permanent establishment there owned by the recipient residing in the other State, if it is paid in respect of debt claims forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment. In that case, paragraph 4 relieves the State of source of the interest from any limitation under the Article. The foregoing explanations accord with those in the Commentaries on Article XV on the allocation of profits to permanent establishments. Paragraph 5 27. This paragraph lays down the principle that the State of source of the interest is the State in which the payer of the interest is the State in which the payer of the interest resides, who may, moreover, be that State itself or one of its political subdivisions. It provides, however, for an exception to this rule in the case of interest-bearing loans which have an obvious economic link with a permanent establishment owned in the other Contracting State by the payer of the interest. If the loan was contracted for the requirements of that establishment and the interest is borne by the latter, the paragraph in question determines that the source of the interest is in the Contracting State in which the permanent establishment is situated, leaving aside the place of residence of the owner of the permanent establishment, even where he resides in a third State. 28. Paragraph 5 provides no solution for the case, which it excludes 56 (4674)
from its provisions, where both the recipient and the payer are indeed residents of the Contracting States, but the loan was borrowed for the requirements of a permanent establishment owned by the payer in a third State and the interest is borne by that establishment. As paragraph 5 of the Article now stands, therefore, only its first sentence will apply in such a case. The interest will be deemed to arise in the Contracting State where the payer resides, and not in the third State in whose territory is situated the permanent establishment for the account of which the loan was effected and by which the interest is payable. Thus the interest will be taxed both in the Contracting State where the payer resides and in the Contracting State where the recipient resides. But, although double taxation whill be avoided between these two States by the arrangements provided in the Article, it will not be avoided between them and the third State if the latter taxes the interest on the loan at the source when it is borne by the permanent establishment in its territory. 29. It has not, however, been considered possible to refer to such a case in a bilateral Convention and provide for it a solution consisting, for example, in obliging the Contracting State of the payer's residence to relinquish its tax at the source in favour of the third State in which is situated the permanent establishment for the account of which the loan was effected and by which the interest is borne. The risk of double taxation just referred to can only be fully avoided through a bilateral fiscal Convention containing a similar provision to that in paragraph 5 of the proposed Article, between the Contracting State where the payer of the interest resides and the third State in which the permanent establishment paying the interest is situated, or through a multilateral Convention containing such a provision. Moreover, in the case - not settled in paragraph 5 of the 30. Article - where whichever of the two Contracting States is that of the payer's residence and the third State in which is situated the permanent establishment for the account of which the loan is effected and by which the interest is borne, together claim the right to tax the interest at the source, there would be nothing to prevent those two States - together with, where appropriate, the State of the recipient's residence - from concerting measures to avoid the double taxation that would result from such claims. The proper remedy, it must be said again, would be the establishment between these different States of bilateral Conventions, or a multilateral Convention, containing a provision similar to that in paragraph 5 of the Article. 31. It goes without saying that if two Contracting States agree in bilateral negotiations to reserve to the State where the recipient of the income resides the exclusive right to tax such income, then ipso facto there is no value in inserting in the fiscal Convention which fixes their relations that provision in paragraph 5 of the Article which defines the State of source of such income. But it is equally obvious that double taxation would not be fully avoided in such a case if the payer of the interest owned, in a third State which charged its tax at the source on the interest, a permanent establishment for the account of which the loan had been borrowed and which bore the interest payable on them. The case would then be just the same as is contemplated in paragraph 28 to 30 above. 57 (4675)
Paragraph6 32. The purpose of this paragraph is to restrict the operation of the provisions concerning the taxation of interest in cases where, owing to a special relationship between the payer and the recipient or between both of them and some other person, the amount of the interest paid exceeds the amount which would have been agreed upon by the payer and the recipient had they stipulated at arm's length. It provides that in such a case the provisions of the Article apply only to that last-mentioned amount and that the excess part of the interest shall remain taxable according to the laws of the two Contracting States, due regard being had to the other provisions of the Convention. 33. It is clear from the text that for this clause to apply, the interest held excessive must be due to a special relationship between the payer and the recipient or between either of them and some other person. There may be cited as examples cases where interest is paid to an individual or legal person who directly or indirectly controls the payer, or who is directly or indirectly controlled by him or is subordinate to a group having common interests with him. These examples, moreover, are similar or analogous to the cases contemplated by Article XVI regarding industrial and commercial profits. 34. On the other hand, the concept of special relationship also covers relationship by blood or marriage and, in general, any community of interests as distinct from the legal relationship giving rise to the payment of the interest. 35. With regard to the taxation treatment to be applied to the excess part of the interest, the exact nature of such excess will need to be ascertained according to the circumstances of each case, in order to determine the category of income in which it should be classified for the purposes of applying the provisions of the tax laws of the States concerned and the provisions of the Convention for the avoidance of double taxation. 36. It goes without saying that should the principles and rules of their respective laws oblige the two Contracting States to apply differept Articles of the Convention for the purpose of taxing the excess, it will be necessary to resort to the mutual agreement procedure provided by the Convention in order to resolve the difficulty. 11.
RESERVATIONS ON THE ARTICLE ON TAXATION OF INTEREST
Paragraphs1 and 2 37. In view of the special structure of its taxation system, Italy is unable to accept paragraphs 1 and 2 of the Article in so far as it applies to that country. However, in its bilateral conventions for the avoidance of double taxation, Italy could possibly agree to the non-application of the progressive complementary tax on total income (o:imposta complementare progressiva sul reddito complessivo 2,) to interest arising from Italian sources to persons resident in the other Contracting State and, where such interest is not exempt from the tax on income from movable property (c imposta 58 (4676)
sui redditi di ricchezza mobile ,,), of the tax on bonds and debentures (c imposta sulle obbligazioni 3) as well. Paragraph2 38. Turkey cannot accept a rate of tax which is lower than 20 per cent.
Paragraph 4 Italy reserves the right to subject interest to the taxes imposed 39. by its law whenever the recipient thereof has a permanent establishment in Italy, even if the indebtedness in respect of which the interest is paid is not effectively connected with such permanent establishment.
59 (4677)
ANNEX H
COMMENTARY ON ARTICLE XXII CONCERNING TAXATION OF ROYALTIES
I.
A.
PRELIMINARY REMARKS
GENERAL OBSERVATIONS
In principle, royalties in respect of licences to use patents and 1. similar property and similar payments are income to the recipient from a letting. The letting may be granted in connection with an industrial or commercial enterprise (e.g. the use of literary copyright granted by a publisher) or an independent profession (e.g. use of a patent granted by the inventor) or quite independently of any activity of the grantor (e.g. use of a patent granted by the inventor's heirs). The Model Conventions drawn up by the Fiscal Committee of the 2. League of Nations in 1928 did not contain any specific rules about the taxation of such royalties and similar payments. These could thus only be taxed in the State in which the grantor resided, unless they were obtained in connection with a permanent establishment maintained by the grantor in the other State, the concept of c permanent establishment) including here a fixed place of business used for the performance of professional services. The Model Convention drafted in Mexico in 1943 by the Fiscal 3. Committee of the League of Nations does contain a special provision on the taxation of royalties and similar payments (Article X). In this Model Convention, a distinction was made between royalties and amounts received as a consideration for the right to use: a) a patent, a secret process or formula, a trade mark or other analogous right; and b) a musical, artistic, literary, scientific or other cultural work. In case (a), the royalties and other payments were only taxable 4. in the State where the right was used, etc. In case (b), the right to tax in this case the rested solely with the State of which the grantor were obtained royalties the unless resident, a was grantor of the work in connection with a permanent establishment maintained by the grantor in the other State, the concept of c permanent establishment ) here again including a fixed place of business used for the performance of professional services. 5. On this question of the taxation of patent royalties and similar 61
(4679)
payments, the Model Convention drafted in London in 1946 by the Fiscal Committee of the League of Nations shows the following departure from the Mexico text: a) As regards both the rights mentioned in paragraph 3(a) and those mentioned in paragraph 3(b), the right to tax always rests with the State of residence of the grantor; and b) Where and enterprise of one of the Contracting States pays royalties to an enterprise of the other Contracting State and there is a particularly close economic connection between the two enterprises, then the royalties can be subjected to tax in the State where the rights in question are used. 6. A study of more recent Conventions has revealed that the principles in the London draft have been adopted by most O.E.E.C. countries. a) The right to tax patent royalties and similar payments is conferred in principle, therefore, on the State of the grantor's residence; b) Where patent royalties and similar payments are derived in connection with a permanent establishment situated in one of the States and forming part of an industrial or commercial enterprise carried on in the other State by the grantor, or are derived in connection with professional services performed by the grantor in one of the States and the grantor is a resident of the other State, then they are treated in accordance with the rules applicable under the Convention to income from an industrial or commercial enterprise or to income from the performance of professional services, respectively. 7. In addition to the rules in the London Model Convention drawn up by the League of Nations, more recent Conventions between O.E.E.C. countries contain special provisions regarding: a) rents in respect of cinematograph films. In most Conventions, these are treated like patent royalties and other similar payments; in some cases, however, they are considered as industrial or commercial income; b) payments for the use of scientific or industrial equipment. These are treated like patent royalties and the like; c) royalties representing more than an adequate consideration. In this case, the royalty stipulated differs from the amount that would normally be agreed in the same circumstances, this being a device to prevent income from being taxed by a particular State. The State in which the rights are used has the right to tax so much of the royalty or other payment as exceeds an adequate consideration. S. In the light of the above considerations, the Fiscal Committee has prepared the Article on the direct taxation of patent royalties and similar payments.
B.
DEDUCTIBILITY OF ROYALTIES FOR THE PURPOSES OF THE PAYER'S TAX
9. Certain countries do not allow royalties paid to be deducted for the purposes of the payer's tax unless the recipient also resides in the same 62 (4680)
State or is taxable in that State. In any other case they forbid the deduction. The Fiscal Committee considers it desirable that the deduction in question should also be allowed in cases where the royalties are paid by a resident of a Contracting State to a resident of the other State, the case of fraud being, of course, reserved; it considers that the deduction should not be forbidden simply because the tax payable by the recipient of such royalties is not levied in the State of source in application of the proposed Article. Any other method of procedure might cancel out the beneficial effects of the measures taken to avoid double taxation.
II.
COMMENTARY ON THE DRAFT ARTICLE
Paragraph1 The first paragraph follows the Model Conventions drafted in 10. London in 1946 by the Fiscal Committee of the League of Nations and the solutions adopted in many Conventions between O.E.E.C. countries, in adopting the principle of exclusive taxation of royalties in the State of the recipient's residence. The 'only exception to this principle is that made in the cases dealt with by paragraph 4. Paragraph 1 does not state whether or not exemptions in the 11. State of source must be conditional upon the royalties being subject to tax in the State of residence. This question can be determined either way by bilateral negotiations. Attention is drawn generally to the following case: the recipient 12. of royalties arising in a Contracting State is a company resident in the other Contracting State; all or part of its capital is held by shareholders resident outside that other State; its practice is not to distribute its profits in the form of dividends; and it enjoys preferential taxation treatment (c private investment company s, c base company i). The question may arise in the case of such a company whether it is justifiable to allow in the State of source the tax exemption which is provided by the Article. It may be appropriate, when bilateral negotiations are being conducted, to agree upon special exceptions to the taxing rule laid down in this Article, in order to define the treatment applicable to such companies. Paragraph2 Paragraph 2 contains a definition of the term e royalties 3. These 13. relate, in general, to rights or property constituting the different forms of literary and artistic property, the elements of industrial and commercial property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement 14. to, use rights of the kind mentioned, whether or not they have been, or are required to be, registered in a public register. The definition covers both payments made under a licence and 15. compensation which a person would be obliged to pay for fraudulently copying or infringing the right. 63
73095 0-62-vol. 444
(4681)
16. In accordance with the prevailing practice in the Conventions between O.E.E.C. countries, rents in respect of cinematograph films are also treated as royalties, whether such films are exhibited in cinemas or on the television. 17. It may, however, be agreed through bilateral negotiations that rents in respect of cinematograph films shall be treated as industrial and commercial profits and, in consequence, subjected to the provisions of Articles II, XV and XVI. 18. It is working of governed by property and further pointed out that variable or fixed payments for the mineral deposits, sources or other natural resources are Article XIII on the taxation of income from immovable do not, therefore, fall within the present Article.
Paragraph3 19. Paragraph 3 extends the rule in paragraph 1 to profits from the sale of rights and property covered by the Article. It is stipulated that this provision applies to the sale of all rights and property listed in paragraph 2. Paragraph 4 20. Certain States consider that dividends, interest and royalties arising from sources in their territory and payable to individuals or legal persons who are residents of other States fall outside the scope of the arrangement made to prevent them from being taxed both in the State of source and in the State of the recipient's residence when the recipient possesses a permanent establishment in the former State. Paragraph 4 of the Article is not based on such a conception which is sometimes referred to as c the force of attraction of the permanent establishment : . It does not stipulate that royalties arising to a resident of a Contracting State from a source situated in the territory of the other State must, by a kind of legal presumption, or fiction even, be related to a permanent establishment which that resident may happen to possess in the latter State, so that the said State would not be obliged to limit its taxation in such a case. The paragraph merely provides that in the State of source the royalties are taxable as part of the profits of the permanent establishment there owned by the recipient residing in the other State, if they are paid in respect of rights or property forming part of the assets of the permanent establishment or otherwise effectively connected with that establishment. In that case, paragraph 4 relieves the State of source of the royalties from any limitations under the Article. The foregoing explanations accord with those in the Commentaries on Article XV on the allocation of profits to permanent establishments. Paragraph5 21. The purpose of the clause in paragraph 5 is to restrict the operation of the provisions concerning the taxation of royalties in cases where, owing to a special relationship between the payer and the recipient or between both of them and some other person, the amount of the royalties paid 64 (4682)
exceeds the amount which would have been agreed upon by the payer and the recipient had they stipulated at arm's length. It provides that in such a case the provisions of the Article apply only to that last-mentioned amount and that the excess part of the royalty shall remain taxable according to the laws of the two Contracting States, due regard being had to the other provisions of the Convention. 22. It is clear from the text that for this clause to apply the payment held excessive must be due to a special relationship between the payer and the recipient or between both of them and some other person. There may be cited as examples cases where royalties are paid to an individual or legal person who directly or indirectly controls the payer, or who is directly or indirectly controlled by him or is subordinate to a group having common interests with him. These examples, moreover, are similar or analogous to the cases contemplated by Article XVI regarding industrial and commercial profits. 23. On the other hand, the concept of special relationship also covers relationship by blood or marriage and, in general, any community of interests as distinct from the legal relationship giving rise to the payment of the royalty. 24. With regard to the taxation treatment to be applied to the excess part of the royalty, the exact nature of such excess will need to be ascertained according to the circumstances of each case, in order to determine the category of income in which it should be classified for the purposes of applying the provisions of the tax laws of the States concerned and the provisions of the Convention for the avoidance of double taxation. It goes without saying that should the principles and rules of 25. their respective laws oblige the two Contracting States to apply different Articles of the Convention for the purpose of taxing the excess, it will be necessary to resort to the mutual agreement procedure provided by the Convention in order to resolve the difficulty. III.
SPECIAL DEROGATION IN FAVOUR OF CERTAIN COUNTRIES
26. The following Member countries, Greece, Luxembourg, Portugal and Spain consider that they are unable to relinquish all taxation at the source as regards royalties arising in their territories and paid to residents of another State. They are prepared, however, to limit their tax at the source on such royalties to a maximum of 5 per cent of the gross amount of the royalties. 27. The other Member countries, for their part, declare that they are prepared to allow such States, by bilateral Conventions and subject to reciprocity, a limited right to tax as described above. 28. Whenever use is made of the above derogation in a bilateral Convention, the Contracting States are recommended to model the special clause giving a limited right to tax to the State of source on the formulas employed in paragraphs 1 and 2 of the Article on the taxation of interest. In such a case it will also be necessary to define the State of source. For 65 (4683)
this purpose, the formula employed in paragraph 5 of the Article on the taxation of interest will serve as a model.
IV.
ARTICLE RESERVATIONS CONCERNING THE ON THE TAXATION OF ROYALTIES
Paragraph 1 29. Austria is unable to accept a provision which would preclude it, in bilateral Conventions for the avoidance of double taxation, from stipulating a clause conferring on it the right to tax royalties at a rate up to 10 per cent. 30. Turkey cannot accept a rate of tax which is lower than 20 per cent.
Paragraph4 31. Italy reserves the right to subject royalties and profits from the alienation of rights or property giving rise to royalties to the taxes imposed by its law whenever the recipient thereof has a permanent establishment in Italy, even if the rights or property in respect of which the royalties are paid is not effectively connected with such permanent establishment.
66 (4684)
ANNEX I
COMMENTARIES ON ARTICLES XXIII AND XXIV CONCERNING THE METHODS FOR AVOIDANCE OF DOUBLE TAXATION
I. A.
GENERAL OBSERVATIONS
THE SCOPE OF THE ARTICLES
The Articles deal with the so-called juridical double taxation, where 1. the same income or capital is taxable in the hands of the same person by more than one State. This case has to be distinguished especially from the so-called 2. economic double taxation, i.e. a taxation of the same income or capital in the hands of two different persons both chargeable to tax. If two States wish to solve problems of economic double taxation, they must do so in bilateral negotiations. 3. International juridical double taxation may arise in three cases: a) where each of two States under its domestic taxation law treats the same person as having his residence within its territory; b) where each of two States imposes tax on the same income or capital (limited tax liability in both States), e.g. where a permanent establishment in one State derives income from immovable property in another State, and neither State is the State of residence of the owner of the permanent establishment; c) where a person who has his residence in one State derives income from or owns capital in another State and both States impose tax on that income or capital.
The Articles do not deal with the first two cases. The conflict in 4. case (a) may be solved in accordance with Article III contained in the Annex to the Report published by the Fiscal Committee of O.E.E.C. in September 1958. The conflict in case (b) is outside the scope of the Convention, as this is confined by Article XVIII contained in the Annex to the Report published by the Fiscal Committee in August 1960 to persons who are residents of one or both of the Contracting States. It can, however, be settled by applying the mutual agreement procedure. The conflict in case (c) may be solved by a renunciation either 5. State of residence or by the State of source. In this connection the by it is to be noted that, in a number of special Articles approved by the 67
(4685)
Committee, the allocation of the right to tax has been given either to the State of residence or to the State of source. 6. In the case where the State of source renounces its right to tax, the relevant Article states that the income and capital in question t shall be taxable only i in the other State. Accordingly, no question of double taxation arises here. 7. In the case where the State of source does not renounce its right to tax, i.e. where the relevant Article approved by the Committee states that the income or capital e may be taxed 3 in the State of source, the understanding of the Committee is that the State of residence must give relief so as to avoid double taxation. Therefore, in the Articles submitted, the prior right of taxation in the State of source is implied, and the State of residence is left to provide the means by which double taxation is to be avoided. B.
DESCRIPTION OF METHODS FOR AVOIDANCE OF DOUBLE TAXATION
8. A study of Convention concluded between Member States of O.E.E.C. shows that two leading principles are followed for the avoidance of double taxation. For purposes of simplicity only income tax is referred to in what follows, but the principles apply similarly to capital tax. 1. The exemption system 9. This system implies that the State to which the Convention has not given the right to tax a certain income shall leave out that income when determining the amount which is chargeable to income tax in that State. 10. The exemption system is found in two different forms: The income in question may be left out altogether, so that the State concerned is not entitled to take that income into consideration when determining the rate of tax to be imposed on the rest of the income. Hereinafter this method is referred to as e full exemption i. b) The income in question is left out, but the State concerned retains the right to take that income into consideration when determining the rate of tax to be imposed on the rest of the income. Hereinafter this method is referred to as c exemption with progression i. a)
11. Where the exemption system is adopted in Conventions, and the State of residence is not given the right to tax, it normally follows the form described under (b). 2. The credit system
12. The adoption of this system implies that the State applying it imposes tax on the basis of the taxpayer's total income including the income from another State, and then allows a deduction from its own tax for tax paid in that other State. 68 (4686)
The credit system is found in different forms: a) The deduction given by the State of residence may be restricted so that the deduction does not exceed that part of its own tax appropriate to the income from the other State. Hereinafter this method is referred to as 4 ordinary credit v. b) In some forms of the credit system the State of residence allows a deduction of the total amount of tax paid in the State of source. Hereinafter this method is referred to as - full credit 3. c) Further variations of the credit system are possible, e.g. where the State of residence limits the deduction to an amount not exceeding the tax which it would itself have imposed on that income if the taxpayer had no other income. Fundamentally the difference between the exemption system and 14. the credit system is that the exemption system looks at income, the credit system at tax on income. 13. C.
THE FUNCTIONS AND EFFECTS OF THE METHODS
An example in figures will facilitate the explanation of the effects 15. of the various methods. Suppose the income to be 100,000, 80,000 being derived from one State (the State of residence) and 20,000 derived from the other State (the Stafe of source). Assume that in the State of residence the rate of tax on an income of 100,000 is 35 per cent and that the rate of tax on an income of 80,000 is 30 per cent. Assume, too, that in the State of source the rate of tax is either: (1) 20 per cent or (i) 40 per cent, so that the tax payable therein is (i) 20 per cent of 20,000 = 4,000 or 8,000. (ii) 40 per cent of 20,000 If the taxpayer's total income of 100,000 arises in the State of 16. residence his tax would be 35,000. If he had an income of the same amount derived in the manner set out above, and, if there were no Convention between the State of residence and the State of source, the total amount of the tax would be, in case (i), 35,000 + 4,000 = 39,000 and, in case (ii), 35,000 + 8,000 = 43,000. If a Convention were concluded between the two States, based on 17. one of the following methods, the respective results in figures would be: a) Full exemption: The tax in the State of residence would be 30 per cent of 80,000 - 24,000. The total amount of tax payable would therefore be, in case (1), 24,000 + 4,000 = 28,000 and, in 32,000. case (it), 24,000 + 8,000
=
b)
Exemption with progression: The tax in the State of residence would be 35 per cent of The total amount of tax payable would 28,000. 80,000 therefore be, in case (i), 28,000 + 4,000 = 32,000 and, in case (ii), 28,000 + 8,000 = 36,000. Ordinary credit: The State of residence would compute tax on the total income at a rate of 35 per cent, i.e. 35,000. The amount of tax in the 69 (4687)
c)
State of residence corresponding to the income from the State of source would be 35 per cent of 20,000 = 7,000 (maximum credit). In case (i) the tax in the State of source would be 4,000 and the State of residence would allow a deduction of this amount since the question of restriction does not arise. The tax in the State of residence would therefore be 35,000 - 4,000 = 31,000. The total amount of tax would be 31,000 + 4,000 = 35,000. In case (i) the tax in the State of source would be 8,000 and the State of residence would allow a deduction of 7,000 only, that is the amount of the maximum credit. The tax in the State of residence would therefore be 35,000 - 7,000 28,000. The total amount of tax would be 28,000 + 8,000 = 36,000. d) Full credit: The State of residence would compute tax on the total income at a rate of 35 per cent, i.e. 35,000. In cesa (i) the tax in the State of source would be 4,000 and the State of residence would allow a deduction of this amount. The tax in the State of residence would therefore be 35,000 - 4,000 = 31,000 and the total amount of tax would be 31,000 + 4,000 = 35,000. In case (i) the tax in the State of source would be 8,000 and the State of residence would allow a deduction of this amount. The tax in the State of residence would, therefore, be 35,000 - 8,000 = 27,000. The total amount of tax would be 27,000 + 8,000 35,000.
18. Under the exemption systems the State of residence limits its charge of taxation to that part of the total income which, in accordance with the various Articles in a Convention, it has a right to tax. It will impose tax on that part of the income either at the rate of tax applicable to that amount of income (full exemption) or at the rate of tax applicable to the total income wherever it arises (exemption with progression). In either event, the level of the tax in the State of source would have no influence on the amount of tax given up by the State of residence. 19. Under an exemption system if the rate of tax in the State of source were the lower, the taxpayer would fare better than a taxpayer with the same total income arising solely in the State of residence. In the examples given, the tax in the case of full exemption would be 28,000 and, in the case of exemption with progression, 32,000, as compared with 35,000 if the total income arose solely in the State of residence. 20. If the rate of tax in the State of source were the higher, the result, in the case of exemption with progression, would be unfavourable for the taxpayer. In the examples given for case (i) in paragraph 15, the figure would be 36,000, as compared with 35,000 if the total income arose in the State of residence. But in the case of full exemption, the result, in the example given, would be in the taxpayer's favour, i.e. 32,000, as compared with 35,000. 21. Under these forms of exemption the State of residence would give up tax as follows: 70
(4688)
TABLE
I.
IN THE DIFFERENT CASES ILLUSTRATED ABOVE
THIS TABLE
SHOWS
THE
TOTAL
AMOUNT
OF
TAX
I.
II.
All income arising in the State of residence : ... tax 35,000 Income arising in two States, viz. 80,000 in the State of residence and 20,000 in the State of source. Convention .......................... full exemption .................... exemption with progression ......... ordinary credit ..................... full credit ........................
Tax in State
of source 4,000 (case i) 39,000 28,000 32,000 35,000 35,000
Tax in State
of source 8,000 (case ii) 43,000 32,000 36,000 36,000 35,000
No a) b) c) d)
TABLE
THIS TABLE SHOWS THE AMOUNT OF TAX II. GIVEN UP BY THE STATE OF RESIDENCE Tax in State of source 4,000 (case i) 0 11,000 7,000 4,000 4,000 Tax in State of source 8,000 (case ii) 0 11,000 7,000 7,000 8,000
No a) b) c) d)
Convention ........................ full exemption ...................... exemption with progression ......... ordinary credit ..................... full credit .........................
a)
Full exemption: 11,000 irrespective of whether the tax in the State of source is 4,000 or 8,000.
b)
Exemption with progression: 7,000 irrespective of whether the tax in the State of source is 4,000 or 8,000.
Under the credit system the State of residence retains its right to 22. tax the total income of the taxpayer, but against the tax so imposed it allows a certain deduction. A characteristic of the credit systems described above is that the State of residence is never obliged to allow a deduction greater than the tax paid in the State of source. Where the tax in the State of source is the lower, the taxpayer will 23. always have to pay the same amount of tax as he would have had to pay if he were taxed solely in the State of residence. [In case (0 35,000 35,000.] 4,000 + 4,000 Where the tax in the State of source is the higher, and where the 24. deduction is limited to the appropriate part of the tax imposed in the State of residence, the taxpayer will not get a deduction for the whole amount of the tax paid in the State of source. In such an event the result would be less favourable for the taxpayer than if his whole income 71
(4689)
arose in the State of residence. 36,000.]
[In case (i) 35,000 -
7,000 + 8,000
25. If the tax in the State of source were the higher, and the State of residence were to allow full credit, the taxpayer would have to pay the same amount of tax as if he were taxed solely in the State of residence. [In case (ii) 35,000 - 8,000 + 8,000 = 35,000.] 26. Under the various forms of the credit system described above, the State of residence never gives up an amount of its tax greater than the tax levied in the State of source. This underlines a fundamental distinction between the credit and the exemption systems. 27. In the above-mentioned examples the State of residence gives up the following amounts of tax: a) Ordinary credit: Where the tax in the State of source is Where the tax in the State of source is Full credit: Where the tax in the State of source is Where the tax in the State of source is 4,000 .... 8,000 .... 4,000 .... 8,000 .... 4,000 7,000 4,000 8,000
b)
28. A system where the State of residence gives up the part of its own tax appropriate to the income from the State of source - irrespective of the tax paid in the State of source - produces the same result as an exemption system with progression.
D.
THE METHODS PROPOSED IN THE ARTICLE
29. In the Conventions concluded between Member States both systems have been adopted. Some States have a preference for one system, some have a preference for the other. Theoretically a single system could be held to be more desirable, but, on account of the preferences referred to, each State has been left free to make its own choice. On the other hand, it has been found important to limit inside each system the number of methods to be employed. 30. In view of the limitation referred to in the last sentence of the previous paragraph, the Articles have been drafted so that Member States are left free to choose between two methods: the exemption method with progression (Article XXIII) and the ordinary credit method (Article XXIV). If two Contracting States both adopt the same method, it will be sufficient if the relevant Article is inserted in the Convention. On the other hand, if the two Contracting States adopt different methods, the name of the State must be inserted each in the appropriate Article, according to the method adopted by that State. 31. Perhaps it may be of interest to add that, in particular circumstances, each of the methods could, with advantage, borrow from the other. Thus it will be noted from paragraph 39 that paragraph 2 of 72 (4690)
Article XXIII - the exemption Article - is the credit method, and from paragraphs 47 to exemption method, in respect of the type of would obviate difficulties that arise under the III. Paragraph1
A.
drafted in accordance with 51 that the adoption of the income referred to therein, credit method.
COMMENTS ON ARTICLE XXIII (Exemption)
THE OBLIGATION OF THE STATE OF RESIDENCE TO GIVE EXEMPTION
In the Article it is laid down that the State of residence shall 32. exempt from tax income and capital, which in accordance with the Convention t may be taxed in the other State. The State of residence must accordingly give exemption whether or not the income or capital in question is actually taxed in the State of source. This is in accordance with most Conventions based on the exemption system between Member States of O.E.E.C. It is regarded as the most practical method since it relieves the State of residence from undertaking onerous and timeconsuming investigations of the actual taxation position in the State of source. Exceptionally some negotiating States may find it reasonable in 33. certain circumstances to deviate from the provision concerning the absolute obligation of the State of residence to give exemption. Such may be the case where one of the States adopts the credit method and the other State the exemption method. It may also be the case that the internal legislation of the State of source does not enable the fiscal authorities of that State to make use of a right to tax conferred on it by the Convention - e.g. where it does not impose capital tax. In such cases it is left to the negotiating States to agree upon the necessary modifications in the provision mentioned. B.
THE RESERVATION OF THE PROGRESSION
In most of the Conventions concluded between Member States on 34. the basis of the exemption system the State of residence retains the right to take the amount of exempted income or capital into consideration when determining the rate of tax to be imposed on the rest of the income or capital. A similar provision therefore is inserted in the Article. The provision concerning progression, proposed in the Article, 35. relates only to the State of residence. A question arises, however, when a State of source which applies a progressive tax scale gives up the right to tax and the non-resident taxpayer derives other income from that State. Different principles may be applied by a State of source in determining its progression. Its internal tax law may provide for the calculation of the progression on the global income of the taxpayer or only on the total income arising to the taxpayer in the State of source. The form of the Article does not prejudice the application by the 36. State of source of the provisions of its national legislation concerning the progression. If two Contracting States wish to clarify whether, or to what 73 (4691)
extent, the State of source shall have the right to use a progression they are left free to do so in bilateral negotiations. C.
ALTERNATIVE FORMULATION OF THE ARTICLE
37. An effect of the exemption system as it is drafted in the Article is that the taxable income or capital in the State of residence is reduced by the amount which the State of residence exempts. If in a particular State the amount of income as determined for income tax purposes is used as a measure for other purposes, e.g. social benefits, the application of the exemption system in the form proposed may have the effect that such benefits may be given to persons who ought not to receive them. To avoid such consequences, the Article may be altered so that the income in question is included in the taxable income in the State of residence. The State of residence must then in such cases give up that part of the total tax appropriate to the income concerned. This procedure would give the same result as the Article in the form proposed. States can be left free to make such modifications in the drafting of the Article. If a State wants to draft the Article as indicated above, paragraph 1 may be drafted as follows: e Where a person being a resident of a Contracting State derives income from or owns capital in the other Contracting State and that income or capital, in accordance with the provisions of this Convention, may be taxed in that other Contracting State, the firstmentioned State shall, subject to the provisions of paragraph 2 of this Article, allow as a deduction from the income tax or capital tax that part of the income tax or capital tax, respectively, which is appropriate, as the case may be, to the income derived from or the capital owned in that other Contracting State. D. SPECIAL TREATMENT OF LOSSES 38. Where the State of residence allows as a deduction from the income it assesses the amount of a loss incurred in the other State, there should be no objection if, when profits are made subsequently in the other State, the amount of the exemption for the later years is restricted appropriately. States are left free in this respect and, if it is found necessary for clarification, can refer to such a restriction in the Article. Paragraph2 39. In Articles XX and XXI the right to tax dividends and interest is divided between the State of residence and the State of source. Such is also the case with respect to royalties, as regards Greece, Luxembourg, Portugal and Spain. As a consequence double taxation in these cases cannot be expected to be avoided by the application of the exemption method since this method secures that the State of residence gives up its right to tax the income concerned, but the State of residence is left free to apply the exemption method if it wants to do so. For the State of residence an application of the credit method would normally seem to give a satisfactory solution. Consequently, the paragraph is drafted in accordance with the ordinary credit method. If, however a given Contracting State has a special tax system (e.g. Switzerland) where the tax 74 (4692)
credit method is not yet applied and where it therefore would be difficult to apply such method as provided for by paragraph 2 of the Article, such Contracting State may, in bilateral negotiations, use other measures in order to alleviate the double taxation mentioned in such paragraph 2. In the cases referred to in the previous paragraph certain maximum 40. percentages are laid down for tax reserved to the State of source. In such cases the rate of tax in the State of residence will very often be higher than the rate in the State of source, Consequently, a limitation of the deduction in accordance with the ordinary credit method would have only a limited significance. If in such cases the Contracting States find it preferable to use the full credit method they can do so by deleting the second sentence of the paragraph.
III. A. METHODS
COMMENTS ON ARTICLE
XXIV (Credit)
Article XXIV, which embodies the credit provision, follows the 41. ordinary credit method: The State of residence allows, as a deduction from its own tax on the income or capital of its resident, an amount equal to the tax paid in the other State on the income derived from, or capital owned in, that other State, but the deduction is restricted to the appropriate proportion of its own tax. The ordinary credit method is intended to apply, inter alia, to 42. dividends, interest and royalties where the State of source has a limited right to tax, but the possibility of a certain modification is referred to in the comments under paragraphs 39 and 40. According to the Article the deduction, which the State of residence 43. is to allow, shall not exceed that part of the income tax which is appropriate to the income derived from the State of source. If a resident of one State derives income of different kinds from the State of source and that State, according to its tax law, imposes tax only on one of these incomes, the maximum deduction which the State of residence is to allow will be that part of its tax which is appropriate only to that item of income which is taxed in the State of source. If a resident of one State, deriving income from another State, has a loss in his State of residence - less than the income from abroad - the tax charged in the State of residence will in its entirety be appropriate to the income from the State of source, and the maximum deduction which the State of residence is to allow will consequently be the tax charged in that State. A modification of the credit method was requested by Italy. The 44. Italian taxation system is based predominantly on the principle of the territoriality of the tax, that is to say, in principle, any income arising abroad is not taxable in Italy for the purposes of the impersonal or schedular taxes (i.e. tax on income from movable property, tax on income from built-up property, tax on income from land, etc.) but, when taxablz, is charged to the progressive complementary tax or to the company tax. In view of that fact, Italy wishes to limit the credit to that part only of the tax paid abroad which exceeds the Italian impersonal or schedular tax not 75 (4693)
charged in Italy. It is agreed that Italy can be left free to apply the credit method with such modification.
B.
REMARKS CONCERNING TAX ON CAPITAL
45. Capital taxes are included in the proposed Article. As the Article is drafted, credit is to be allowed for income tax only against income tax and for capital tax only against capital tax. Consequently, credit for or against capital tax will be given only if there is a capital tax in both Contracting States. 46. Under bilateral negotiations, two Contracting States may agree that a tax called a capital tax is of a nature closely related to income tax and may, therefore, wish to allow credit for it against income tax and vice versa. There will be cases where, because one State does not impose a capital tax or because both States impose capital taxes only on domestic assets, no double taxation of capital will arise. In such cases it is, of course, understood that the reference to capital taxation may be deleted. Furthermore, negotiating States may find it desirable, regardless of the nature of the taxes included under the Convention, to allow credit for the total amount of tax in the State of source against the total amount of tax in the State of residence. Where, however, a Convention includes both real capital taxes and capital taxes which are in their nature income taxes, the Contracting States may wish to allow credit against income tax only for the latter mentioned capital taxes. In such cases, Contracting States are free to alter the proposed Article so as to achieve the desired effect.
C.
THE RELATION IN SPECIAL CASES BETWEEN THE TAXATION STATE OF SOURCE AND THE ORDINARY CREDIT METHOD IN THE
47. In certain cases a State, particularly a State which is commonly referred to in O.E.E.C. as an industrially under-developed State, may for particular reasons give concessions to taxpayers, e.g. tax incentive reliefs to encourage industrial output. In a similar way, a State may wish to free from taxation certain kinds of income, e.g. pensions to war wounded soldiers. 48. When such a State concludes a Convention with a State which applies the exemption system, no restriction of the relief given to the taxpayers arises, because that other State must give exemption regardless of the amount of tax, if any, imposed in the State of source. But when the other State applies the credit system the concession is nullified, inasmuch as that other State will allow a deduction only of the tax paid in the State of source. Moreover, by reason of the concessions, that other State secures what may be called an uncovenanted gain for its own Exchequer. 49. Should the two Contracting States agree that the benefit of the concessions given to the taxpayers in the State of source are not to be nullified, a deviation from Article XXIII, paragraph 2, and Article XXIV will be necessary. 76 (4694)
One method of deviation might be that, where such c tax-spared s. 50. income is in question, the exemption method could, as pointed out in paragraph 48, be applied. Already, to cover special cases, a deviation from the exemption method, which embodies the credit method, has been proposed in paragraph 2 of Article XXIII, so that a deviation in this case from the credit method embodying the exemption method might be acceptable. Another deviation might be the adoption of what is called c matching credit ). This method secures that the State of residence will allow as a deduction from its own tax an amount corresponding to the tax which would have been paid in the State of source if no concession had been granted by that State. In order that the system should give satisfactory results, it is necessary that the State of source should be able to notify to the State of residence the amount of tax that would have been paid if no relief had been granted. Member States are left free to settle in such cases whether 51. deviations are to be made from the ordinary credit method, and, if so, what form the deviations are to take, and what conditions are to be fulfilled before the deviations. D.
SPECIAL CREDIT WITH RESPECT TO DIVIDENDS
Certain States wishing to apply the credit method allow in their 52. Conventions, in respect of dividends received from companies in other States, credit, not only for the amount of tax directly levied on the dividends in those other States, but also for that part of the companies' tax which is appropriate to the dividends. Member States applying this method are left free to do so.
77 (4695)
ANNEX I COMMENTARY ON ARTICLE XXV CONCERNING THE MUTUAL AGREEMENT PROCEDURE In the Article are set out the rules governing the so-called mutual 1. agreement procedure to be followed where differences of opinion or other difficulties arise as to the application of the Convention. The Article also embodies some general rules regarding the exchange of views between the competent authorities concerned on the interpretation or the application of the Convention. Paragraphs 1 and 2 The rules laid down in paragraphs 1 and 2 provide for the 2. elimination in a particular case of taxation which does not accord with the Convention. The provisions of paragraph 1 establish a ight for the taxpayer concerned to address himself to the competent authority of the Contracting State of which he is a resident. The taxpayer may use this right whether or not he has exhausted all the legal remedies open to him according to the national tax legislation of both States. Neither is it a prerequisite for the use of this right that the actions concerned have already resulted in incorrect taxation; the evident risk of such taxation as a consequence of the measures already taken would be sufficient. The competent authority of the Contracting State of which the 3. taxpayer is a resident will, of course, subject his application to a careful examination and ask for all evidence available. As a result of such an examination the authority may find that the matter can be solved without recourse to the mutual agreement procedure. On the other hand, although adjustments might be required in the State of residence only, an exchange of views as well as of information with the competent authority of the other Contracting State may be useful, e.g. to obtain support for a certain interpretation of the Convention. In paragraph 2 it is laid down that in case the State of residence 4. is not itself able to arrive at an appropriate solution, the competent authority of that State shall communicate with the competent authority of the other State with a view to reaching an agreement regarding the taxation in dispute. Among the cases in which this procedure could be applied might be mentioned the case where one Contracting State which, in the particular case, is considered by the other State to have no right to tax under the Convention, taxes income not being subject to tax under the laws of that other Contracting State. Other examples are the case 79
73095 0-62-vol. 4-
(4697)
of the application of non-discrimination clauses and the case of difficulties arising in the allocation of profits among associated enterprises. 5. No time-limit is specified in the Article for presenting claims under paragraph 1. Any time-limit that may be fixed upon bilaterally should be reasonably generous. Paragraph3 6. The provisions of paragraph 3 invite the competent authorities to resolve general difficulties of interpretation or application by means of mutual agreement and enable the authorities to enter into such agreement, if possible. 7. In the second sentence of paragraph 3, a possibility is for the competent authorities to deal also with such cases indicated of taxation as do not come within the scope of the provisions double of the Convention. Of special interest in this connection is the case of a resident of a third State having permanent establishments in both Contracting States. It is, of course, desirable that the consultations concerned should result in the effective elimination of the double taxation in question. Paragraph4 8. This paragraph provides that the competent authorities of the Contracting States may communicate with each other directly. It would thus not be necessary to go through diplomatic channels. suggested by the second sentence of paragraph 4, the setting up of aAs Commission may in certain cases be advisable. When dealing with a particular case, it might be found of value to allow the taxpayer to make representations in writing or orally. If agreed upon unanimously, this procedure should be open to the Commission. 9. As the provisions embodied in this Convention as well as Commentaries annexed thereto are the result of a close international the work within the Fiscal Committee, a possibility near at hand would joint call upon the Fiscal Committee to give an opinion on the be to correct understanding of the provisions where special difficulties of interpretation arise as 'to particular points. Such a practice, which would be in the mandate and aims of the Fiscal Committee with regard line with progressive elaboration of uniform law for the avoidance of double to the might well make a valuable contribution to arriving at a desirable 'taxation, uniformity in the application of the provisions. 10. In the future when a multilateral Convention may have been agreed upon, it might be useful to consider more precise rules on such an international consultative procedure.
80 (4698)
APPENDIX RECOMMENDATION OF THE COUNCIL OF O.E.E.C. AMENDING THE RECOMMENDATION OF THE COUNCIL CONCERNING THE AVOIDANCE OF DOUBLE TAXATION (Adopted by the Council at its 501st Meeting, on 7th July, 1961)
THE COUNCIL
Having regard to Article 13(c) of the Convention for European Economic Co-operation of 16th April, 1948; Having regard to the Recommendation of the Council of 3rd July, 1959, concerning the Avoidance of Double Taxation (hereinafter called the z Recommendation of the Councili,) [C(59)147(Final)]; Having regard to the Recommendation of the Council of 19th July, 1960, amending the Recommendation of the Council of 3rd July, 1959 [C(60) 157(Final)]; Having regard to the Report of the Fiscal Committee of 19th June, 1961, and, in particular, paragraphs 37 and 38 of, and the Annexes to, that Report [C(61)97 and Corrigendum];
DECIDES:
The first sub-paragraph of paragraph 2 of Section I of the 1. Recommendation of the Council shall be amended and shall read as follows: To adopt, either when concluding new Conventions or when ( 2. revising existing Conventions, the provisions set out in the Annex to this Recommendation, as interpreted by the Commentaries contained in the Reports of the Fiscal Committee of 28th May, 1958, 18th June, 1959, 13th July, 1960, and 19th June, 1961, and as qualified by the reservations in the Commentaries of the Report of the Fiscal Committee of 19th June, 1961. A third sub-paragraph shall be added to paragraph 2 of Section I 2. of the Recommendation of the Council which shall read as follows: c Notwithstanding the provisions relating to royalties in the Annex to this Recommendation, the other Member countries declare that they are prepared in bilateral Conventions and subject to reciprocity to concede to Greece, Luxembourg, Portugal and Spain a right to impose tax at 5 per cent on the gross amount of royalties, to which rate these four countries declare that they are prepared in such Conventions to limit their tax at the source where the recipient of the royalties has not in their respective territories a permanent estab81
(4699)
lishment with which the right or property giving rise to the royalties is effectively connected. 3. Paragraph 4 of Section III of the Recommendation of the Council shall be amended and shall read as follows: c 4. To submit to the Council, before 1st July, 1963, a Draft Convention for the avoidance of double taxation with respect to taxes on income and capital as well as concrete proposals for the implementation of that Convention. 4. The Annex to the Recommendation of the Council shall be amended and completed as it is amended and completed by the provisions set out in the attached Annex'. 5. The Recommendation of the Council of 19th July, 1960, referred to above, is hereby repealed.
1. Note : This Annex contains the text of Articles XX to XXV, which are to be found on pages 25 to 33 of the present Report, and of Articles XV to XIX, which are to be found on pages 23-29 of the Third Report of the Fiscal Committee published in August 1960 under the title e The elimination of double taxation s.
82
(4700)
FROM THE CATALOGUE
THE ELIMINATION OF DOUBLE TAXATION 64 pages First report of the Fiscal Committee of the O.E.E.C. (September 1958) Sw. fr. 3.40 NF 3.00 $ 1.00 5s. (demy 8vo) (July 1959) O.E.E.C. the of Committee Fiscal the of report Second Sw. fr. 3.00 NF 3.00 $ 1.00 5s. 52 pages (demy 8vo) Third report of the Fiscal Committee of the O.E.E.C. (August 1960) Sw. fr. 3.00 NF 3.00 $ 1.00 5s. 52 pages (demy 8vo) DM 2.70 DM 2.70 DM 2.70
TAXATION SYSTEMS APPLICABLE TO INVESTMENTS IN THE OVERSEAS COUNTRIES ASSOCIATED WITH MEMBER COUNTRIES OF O.E.E.C. AS AT 31st DECEMBER 1959 (November 1960) Volume I. Belgian Congo and Ruanda-Urundl Somaliland under Italian Trusteeship Portuguese Provinces Surinam British Territories (General Part) NF 5.00 $ 1.25 7s. 6d. (demy 8vo) Volume II. Former French Territories in Africa Dutch West Indies Individual British Territories
98 pages
Sw. fr. 5.00
DM 4.30
In preparation.
THE EFFECTS OF DIFFERENTIAL TAX TREATMENT OF CORPORATE 1959) AND NON-CORPORATE ENTERPRISES, by Cesare Cosciani (February E.P.A. Project No. 314 DM 7.70 Sw. fr. 9.00 NF 9.00 $ 2.25 13s. 158 pages (crown 4to)
(December 1957) THE INFLUENCE OF SALES TAXES ON PRODUCTIVITY, by Ch. Campet E.P.A. Project No. 315 DM 7.70 Sw. fr. 9.000 NF 9.00 $ 3.50 18s. 276 pages (demy 8vo)
GUIDE TO LEGISLATION ON RESTRICTIVE BUSINESS PRACTICES IN EUROPE AND NORTH AMERICA E.P.A. Projects Nos. 5/19 and G/22 Denmark, France, Germany, Ireland and Italy (February 1960) Volume I. 330 pages (demy 8vo) United States of America Volume II. Netherlands, Norways, Sweden, United Kingdom and (February 1960) 438 pages (demy 8vo) DM 41.00 Sw. fr. 48.00 NF 48.00 $ 12.00 3.10s. The two volumes 1960) (December E.E.C. the and E.C.S.C. the Portugal, Volume III. Austria, Canada, DM 20.50 Sw. fr. 24.00 NF 24.00 $ 6.00 1.15s. 380 pages (demy 8vo)
(4701)
O.E.E.C. SALES AGENTS DEPOSITAIRES DES PUBLICATIONS DE L'O.E.C.E.

ARGENTINA - ARGENTINE Editorial Sudamericana S.A. Alsina 500, BUENOS-AIRES. AUSTRALIA - AUSTRALIE B.C.N. Agencies Pty. Ltd., 62, Wellington Parade. East
MELBOURNE, C. 2.
AUSTRIA - AUTRJCHE Gerold & Co. Graben 31, WIEN I. Sub-Agent : GRAZ : Buchhandlung Jos. A. Kienreich. BELGUM - BELGIQUE N.V. Standaard-Boekhandel, Huldevettersstraat 57, ANTWERPEN. Librairie des Sciences (R. Stoops). 76-78, Coudenberg, BRUXELLES. BRAZIL - BRISIL Livraria Agir Edit8ra, Rua Mexico 98-B, RIO DE JANIRO. CANADA Queen's Printer - Inprlmeur de la Relne, OTTAWA. Prepayment of all orders required. Les commandes sont payables d'avance. CUBA La Casa Belga, O'Reilly, 455, HAVANA. DENMARK - DANEMARK Ejnar Munksgaard Forlag, Ndrregade 6, KOBENHAVN. FINLAND - FINLANDE Akateeminen KirJakauppa, Keskuskatu 2, HELSINKI. FRANCE Presses Universitalres de France, 108. boulevard Saint-Germain, PARIS 6'. GERMANY - ALLEMAGNE Deutcher Bundesverlag, G.m.b.H., Bundeshaus, Schliessfach 137, BONN. Sub-Agents : BERLIN : Elwert & Meurer. MUNCHEN : Hueber. HAM. BURG : Reuter-Klockner; und in den massgebenden Buchhandlungen Deutschlands. GREECE - GRICE Librairle Kauffmann, 21 rue du Stade, ATHkNES. ICELAND - ISLANDE Innkaupasamband B6ksala h.f.. REYKJAVIK P.O. Box 888. INDIA - INDE International Book House Ltd. 9 Ash Lane, Mahatma Gandhi Road, BOMBAY L Oxford Book and Stationery Co., NEW DELHI, Scinda House. CALCUTTA, 17 Park Street. IRELAND - IRLANDE Eason & Son, 40-41 Lower O'Connell Street, DUBLIN. ISRAEL Blumstein's Bookstores Ltd., 35 Allenby Road, and 48 Nahlath BenJamin St., TEL-AVIV. ITALY - ITALIE Libreria Commissionarla Sansoni, Via Gino Capponi 26, FIRENZE.
Via Paolo Mercuri 19/3, ROMA. Corso Cavour 93, BARI. P.E.M., Corso di Porta Romana 87/B, MILANO. Sous-Dtpositaires : GENOVA : Librera Di Stefano. Napoli : Libreria L. Cappelli. PADUA : Librerla Zannoni. PALERMO : Libreria C. Cicala Inguaggato. ROMA : Libreria Hcepll. ROMA Librerta Tombolini. TORINO Libreria Lattes. Maruzen Company Ltd. 6 Tori Nichome Nihonbashi, TOKYO. LUXEMBOURG Librairie Paul Bruck, 33, Grand'Rue, LUXEMBOURG. MOROCCO - MAROC B. E. P.1. 8, rue Michaux-Bellaire, RABAT. THE NETHERLANDS - PAYS-BAS Wholesale Agent : Meulenhoff & Co., N.V. Importeurs, Beulingstraat 2, AMSTERDAM. Principal Retailer : W.P. Van Stockum & Zoon, Buitenhof 36, DEN HAAG. NIGERIA University Bookshop Nigeria Ltd., University College, IBADAN. NORWAY - NORVkGE A/S BokhJornet, Lille Grensen 7, OSLO. PAKISTAN Mirza Book Agency, 9-A Shah Alam Market .LAHORE. PORTUGAL Livraria Portugal, Rua do Carmo, 70. LISBOA. SOUTH AFRICA - AFRIQUE DU SUD Van Schaik's Book Store Ltd., Church Street, PRETORIA. SPAIN - ESPAGNE Mundi Prensa, Castell6 37, MADRID. Libreria Borsch. Ronda Universidad 11, BARCELONA. Fritzes, Kungl. Hovbokhandel, Fredsgatan 2, STOCKHOLM 16. SWITZERLAND - SUISSE Librairle Payot, 40. rue du March6, GENPVE, et h Lausanne. Neuchltel, Vevey, Montreux, Berne, Bale at ZUrich. TURKEY - TURQUIE Librairie Hachette, 469 Istiktal Caddesi, Beyoglu. ISTANBUL. UNITED KINGDOM and CROWN COLONIES-ROYAUME-UNI H.M. Stationery Office P.O. Box 569, LONDON, S.E.I. Branches at : EDINBURGH, BIRMINGHAM, , BRISTOL. MANCHESTER, CARDIFF, BELFAST. YUGOSLAVIA - YOUGOSLAVIE Jugoslovenska KnJilga, Marsala Tita 23, P.O.B. 36, BEOGRAD. UNITED STATES OF AMERICA O.E.E.C. Mission, Publications Office, Suite 1223, 1346 Connecticut Ave, N.W. WASHINGTON 6, D.C.
SWEDEN SUkDE JAPAN - JAJON
O.E.C.E.,
Les commandes provenant de pas oil 'O.E.C.E. n'a pas encore ddisgnd de ddpositatrea peuvent dtre adresades d : Service de Diffusion et Vente, 33, rue de Franqueville, Paris 16-.
Orders and inquiries from countries where sales agents have not yet been appointed may Service, be sent 33. to rue : de Franqueville, Paris 16. O.E.E.C., Distribution and Sales O.E.E.C. PUBLICATIONS, 2, rue Andr6-Pascal, Paris XVI-. PRINTED IN FRANCE
No. 13.723.
(4702)
SECTION 3 ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD)
(4703)
EXPLANATORY NOTE
The Organisation for Economic Cooperation and Development (OECD) had only recently been formed at the time of preparation of this document, and had not published any materials relating to work being done under its auspices on model tax convention provisions. The Council of the OECD, however, at its organizational meeting held on September 30, 1961, approved certain resolutions previously adopted by the OEEC relating to the elimination of double taxation through the use of tax conventions. The texts of the resolutions of the OEEC which were approved by. the OECD are printed above beginning at pages 4559 and 4615 in Volume 4 of this document. The United States, being a full member of the OECD, is obliged by the terms of the resolutions to notify the OECD of the reasons why provisions of the model tax convention recommended by the OECD have not been adopted in any bilateral tax convention concluded between the United States and another country which is a member of the OECD.
(4704)

Legislative History of United States Tax Conventions Vol. 4: Model Tax Conventions

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Legislative History of United States Tax Conventions Vol. 4: Model Tax Conventions

Hochgeladen von

Copyright:

Verfügbare Formate

LEGISLATIVE HISTORY OF UNITED STATES TAX CONVENTIONS

PREPARED BY THE STAFF OF

THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION

Volume 4 Model Tax Conventions

U.S. GOVERNMENT PRINTING OFFICE 73095 0 WASHINGTON : 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions i 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions ii 1962

LEGISLATIVE HISTORY OF LNITED STATES TAX CONVENTIONS SUMMARY OF CONTENTS

(3) (65) (151)

HeinOnline -- 4 Legislative History of United States Tax Conventions iii 1962

PART III-GIFT TAX CONVENTIONS

Section 1. General Information ----------------------------------Section 2. Australia --------------------------------------------Section 3. Japan ----------------------------------------------VOLUME 4

(3955) (3961) (3993)

Section Section Section

HeinOnline -- 4 Legislative History of United States Tax Conventions iv 1962

PART IV MODEL TAX CONVENTIONS

HeinOnline -- 4 Legislative History of United States Tax Conventions 3997 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 3998 1962

SECTION 1 LEAGUE OF NATIONS

HeinOnline -- 4 Legislative History of United States Tax Conventions 3999 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4000 1962

(4151) (4195) (4203) (4225)

(4257) (4265) (4271)

HeinOnline -- 4 Legislative History of United States Tax Conventions 4001 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4002 1962

E.F.S. 73. F. 19.

ECONOMIC AND FINANCIAL COMMISSION

submitted to the Financial 'Committet

PROFESORS BRUINS, EINAUDI, SELICMAN AND SIR JOSIAH STAMP

HeinOnline -- 4 Legislative History of United States Tax Conventions 4003 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4004 1962

April 5th, 1923.

Economic and Financial Commission

PROFESSORS BRUINS, EINAUDI, SELIGMAN AND SIR JOSIAH. STAMP

HeinOnline -- 4 Legislative History of United States Tax Conventions 4005 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4007 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4008 1962

ECONOMIC AND FINANCIAL COMMISSION

Report by the Experts

HeinOnline -- 4 Legislative History of United States Tax Conventions 4009 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4010 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4011 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4012 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4013 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4014 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4015 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4016 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4017 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4018 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4019 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4020 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4021 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4024 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4025 1962

ELEMENTS Or1EcoNOsMtc ALLEGIANCE.

HeinOnline -- 4 Legislative History of United States Tax Conventions 4026 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4027 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4028 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4029 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4030 1962

HeinOnline -- 4 Legislative History of United States Tax Conventions 4031 1962

This consideration obviously re-enforces that of origin. its yield ariss.

The land is physically located where