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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.

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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)

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(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-. -

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(3045) (3257) (3309) (3409) (3485) (3529) (3587) (3687) (3745) (3791) (3865)

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PART III-GIFT TAX CONVENTIONS

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


PART IV-MODEL TAX CONVENTIONS

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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) ----------------------------------------

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PART IV MODEL TAX CONVENTIONS

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SECTION 1 LEAGUE OF NATIONS

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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)
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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) -. .-------------

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(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) -------- - - -

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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

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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

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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.

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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

..............

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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.

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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.

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- 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

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-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

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- 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

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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.

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(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

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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

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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

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" 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

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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.

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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

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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.,

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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

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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

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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.

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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

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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;

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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:

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-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

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-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

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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

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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.

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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

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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

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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. '

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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.

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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,

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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.

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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

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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

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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..

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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

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(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.

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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.

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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,

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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,

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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.

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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.

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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.

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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

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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

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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.

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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 .

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- 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,

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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

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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.

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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(-

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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.

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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.

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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 ...

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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

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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

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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.

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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.

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- 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.

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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.

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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 ()

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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.

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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).

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"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,

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---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

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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.

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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.

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- 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.

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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 .

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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 to- fiscal 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.

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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.

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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

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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).

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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).

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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.

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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.

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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).

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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.

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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

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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.

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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.

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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:

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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.

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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.

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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.

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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).

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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.

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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:

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"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

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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.

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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.

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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

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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.

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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

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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

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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.

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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.

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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

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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.)

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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.

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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

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[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.

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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.

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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.

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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."

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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.

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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-

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- 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

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-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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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.

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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.

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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.

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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.

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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

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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.

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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 :

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(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

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-- 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."

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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)

..

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AUTHORISED AGENTS FOR THE PUBLICATIONS OF THE LEAGUE OF NATIONS


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).

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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

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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

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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 .

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[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.

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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.

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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. .

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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.

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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.

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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

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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.

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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.

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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.

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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. "

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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 .

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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.

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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

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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.

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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.

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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.

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Article 2.

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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-

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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

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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.

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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

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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

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. 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.

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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:

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Greece. Hungary:

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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.

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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.

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(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.

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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.

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-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

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-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.

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-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

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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.

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- 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

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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.

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: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 ......... ....................
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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.

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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.

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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.

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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.

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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.

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-- _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."

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-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."

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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

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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.

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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.

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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),

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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).

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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

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- 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

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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.

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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.

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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.

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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.

FISCAL SYSTEM APPLICABLE TO AUTHORS' RIGHTS.

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.

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FISCAL SYSTEM APPLICABLE TO AUTHORS' RIGHTS.

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.

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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.

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-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.

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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

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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

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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.

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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.

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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

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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

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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.

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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

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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.

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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 ".

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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.

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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.

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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.

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(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.

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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.

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[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.

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-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.

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-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.

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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.

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-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

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-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.

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- 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.

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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

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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.

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-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

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- 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.

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-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.

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-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

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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

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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.

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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.

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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"

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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).

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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

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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.

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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.

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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."

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"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

REPORT TO THE COUNCIL

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.

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- 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.

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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.

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(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

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-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 Kingdo