081A Law of International Taxation Sg2021

Master of Laws (LLM)
Postgraduate Diploma in Laws

Postgraduate Certificate in Laws
Law of
international
taxation
Module A: Introduction
to international tax law
2021
R. Walters
LWM81A
This Study Guide was prepared for the University of London by:
̆ Richard Walters, LLB, MA (Business Law), Diploma in EU Law, Barrister, Lecturer in

Revenue Law, Queen Mary University of London.
The University of London gratefully acknowledges the contribution of Huigenia Ostik,

LLB, LLM (Tax), Lecturer in Taxation, University of Auckland, to the first edition of this
Study Guide.
This is one of a series of Study Guides published by the University. We regret that
owing to pressure of work the author is unable to enter into any correspondence
relating to, or arising from, the Guide.
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Contents
Contents
Chapter 1: Introduction to international taxation.............................................1

Welcome............................................................................................................................1
1.1 Introduction................................................................................................................1
1.1.1 Structure of the course.................................................................................. 2
1.2 How to use this Study Guide...............................................................................4
1.2.1 Reading..............................................................................................................4
1.2.2 Online resources............................................................................................. 5
1.3 Keeping up to date..................................................................................................6
1.4 Allocating your time..............................................................................................6
1.5 The examination......................................................................................................6
1.5.1 Preparing for the examination.................................................................. 7
1.5.2 Taking the examination...............................................................................8
1.6 Introduction to Module A.....................................................................................9
Chapter 2: International tax law........................................................................ 11
2.1 Introduction............................................................................................................ 12
2.2 International tax as international law.......................................................... 12
2.2.1 Public international law.............................................................................13
2.2.2 International tax law and the BEPS minimum standards..............13
2.3 International tax as domestic law................................................................... 14
2.4 DTAs as part of international law................................................................... 14
2.5 Practical relevance of international tax theory.......................................... 14
Chapter 3: Jurisdiction to tax.............................................................................. 17
3.1 Introduction............................................................................................................ 18
3.2 Nature of taxation................................................................................................ 18
3.3 Functions of taxation........................................................................................... 19
3.4 Tax principles......................................................................................................... 19
3.5 Classification of taxes......................................................................................... 20
3.6 Tax sovereignty..................................................................................................... 21
3.7 Jurisdiction to tax.................................................................................................22
3.8 Jurisdictional overlap..........................................................................................24
3.8.1 Example of jurisdictional overlap...........................................................24
3.9 Jurisdiction vacuum............................................................................................ 25
3.10 Jurisdictional imbalance.................................................................................. 27
3.11 Allocation of taxing jurisdiction.....................................................................28
3.11.1 Enforcement of foreign tax claims........................................................29
3.11.2 International relations............................................................................. 30
3.11.3 Primary jurisdiction to tax..................................................................... 30
3.11.4 Secondary jurisdiction to tax..................................................................31
3.11.5 Concluding remarks....................................................................................31
3.12 Jurisdiction to tax and connecting factors ..................................................31
3.13 Expansion of jurisdiction to tax ..................................................................... 32
Chapter 4: Residence and source........................................................................35
4.1 Introduction............................................................................................................36
4.2 Connecting factors...............................................................................................36
4.3 Person....................................................................................................................... 37
i
Law of international taxation: Module A
4.4 Residence................................................................................................................38
4.5 Worldwide basis of taxation............................................................................ 40
4.6 Income..................................................................................................................... 41
4.7 Source....................................................................................................................... 41
4.8 Territorial basis of taxation...............................................................................42
4.9 Global formulary apportionment (GFA).......................................................43
Chapter 5: Methods of relief............................................................................... 45
Introduction..................................................................................................................45
5.1 Principles of international taxation............................................................... 46
5.1.1 Capital export neutrality (CEN)............................................................... 46
5.1.2 Capital import neutrality (CIN)...............................................................47
5.1.3 Capital ownership neutrality (CON)......................................................47
5.1.4 National neutrality (NN)...........................................................................47
5.1.5 Market neutrality (MN)..............................................................................47
5.1.6 Inter-nation equity (INE)...........................................................................47
5.1.7 International tax principles: concluding thoughts.......................... 48
5.2 Methods of relief.................................................................................................. 48
5.3 Credit method of relief....................................................................................... 48
5.3.1 Bilateral and unilateral relief under the credit method................. 49
5.3.2 Full credit....................................................................................................... 50
5.3.3 Ordinary credit............................................................................................ 50
5.3.4 Tax sparing.................................................................................................... 52
5.4 Exemption method of relief..............................................................................54
5.4.1 Article 23B OECD MTC.................................................................................54
5.4.2 Full exemption............................................................................................. 55
5.4.3 Exemption with progression................................................................... 55
5.5 Deduction method................................................................................................56
5.6 Cooperative measures.........................................................................................56
Chapter 6: History of international tax law.....................................................57
6.1 Introduction............................................................................................................ 57
6.2 Nineteenth century.............................................................................................58
6.3 League of Nations (LON).....................................................................................59
6.4 Mexico and London drafts.................................................................................59
6.5 OECD MTC: 1963, 1973 and 1977........................................................................60
6.6 UN MTC................................................................................................................... 61
6.7 Multilateral efforts............................................................................................... 61
6.8 Base erosion and profit shifting......................................................................62
6.9 Role of supranational organisations..............................................................63
6.9.1 The OECD........................................................................................................63
6.9.2 OECD Committee on Fiscal Affairs (CFA).............................................63
6.9.3 United Nations (UN)................................................................................. 64
6.9.4 European Union (EU)................................................................................ 64
6.9.5 International Monetary Fund (IMF).................................................... 64
6.9.6 G8 and G20.................................................................................................. 64
6.9.7 United States ...............................................................................................65
6.10 Chronology of major events ...........................................................................65
Appendix I: Sample examination questions...................................................69
Question one................................................................................................................ 69
Question two............................................................................................................... 69
Feedback to question one........................................................................................ 70
Feedback to question two ....................................................................................... 70
Appendix II: Glossary..........................................................................................73
ii
Contents
Feedback................................................................................................................75
Activity 2.1...................................................................................................................... 75
Avi-Yonah................................................................................................................ 75
Rosenbloom............................................................................................................ 75
Qureshi.....................................................................................................................76
Part 2.........................................................................................................................76
Activity 3.1......................................................................................................................76
Activity 3.2..................................................................................................................... 77
Activity 4.1 .................................................................................................................... 77
Activity 4.2.....................................................................................................................79
Activity 4.3.....................................................................................................................79
Activity 5.1 (Full credit)............................................................................................. 80
Activity 5.2 (Full exemption method).................................................................. 80
Activity 5.3 (Exemption with progression)......................................................... 81
Activity 6.1..................................................................................................................... 81
Activity 6.2.....................................................................................................................82
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Notes
iv
Chapter 1: Introduction to international taxation
Chapter 1: Introduction to international

taxation
Welcome
Welcome to this course in the Law of international taxation, part of
the Postgraduate Laws Programme of the University of London. The
law of international taxation is used in this course to describe how
countries assert and limit their jurisdiction to tax cross-border flows
of income and capital gains, and the rules and principles that arise
therefrom. However, you should be aware that there is no universally
accepted view as to the precise nature of international tax law and
there is even a view that there is no overarching international tax
regime. It is not surprising that there are competing views in this area
as international taxation is a highly controversial and politically driven
area of study, which makes it all the more interesting and exciting.
1.1 Introduction
Governments have traditionally been very protective of what
they regard as their sovereign right to tax whatever amounts they
think fit. In an age of globalisation they are increasingly seeing the
practical need to cooperate with each other in order to ensure that:
they continue to have solid international relations; their economies
benefit from overseas investment; and they continue to collect what
is considered to be a ‘fair amount of tax’. This realisation has led to
agreements between states to provide relief from double taxation and
exchange information and even assist each other by collecting tax
revenue on their behalf.
Public awareness of international taxation is also at an all-time
high. Controversies surrounding the taxation of large multinational
companies, such as Apple, Google and Amazon, have brought the
area of cross-border taxation anomalies into the public domain.
Controversies such as these have highlighted the fact that the concern
is now not only that double taxation will restrict cross-border activity,
but rather that cross-border activity should neither escape taxation
nor promote tax avoidance. Accordingly, this has led to an awareness
among some countries that a more globalised approach to taxation is
needed. Initiatives such as the OECD’s Base Erosion and Profit-Shifting
(BEPS) initiatives will be considered throughout the course where
relevant. These initiatives have resulted in agreed pathways that aim
to ensure that domestic tax bases are protected and profits are not
shifted in order to reduce tax liabilities in one or more countries. In
addition, the OECD has issued in 2017 a new version of the OECD
Model Taxation Convention, which incorporates provisions and
guidance in line with the conclusions of the BEPS project. There is also
a new multilateral agreement that has the potential to automatically
amend large networks of double taxation agreements in line with the
recommendations arising from the BEPS Actions. If implemented, this
1
multilateral agreement would revolutionise international tax. At the

same time, there are political currents running in an opposite direction.
In particular, the United States has become less enthusiastic about
global cooperation and the UK is in the process of leaving the EU.
1.1.1 Structure of the course

The course is divided into four separate modules:
• Module A, Introduction to international tax law, introduces you
to the concept of jurisdiction to tax and considers how nation
states can justify claiming the right to tax certain persons and
activities. The focus then moves on to a major issue caused by
the interaction of two or more countries’ tax systems – double
taxation – and how countries have traditionally sought to address
this issue. The manner in which countries have dealt with ‘juridical
double taxation’ to ensure that cross border financial activity is not
impeded is also considered. The evolution of international tax law
and, in particular, bilateral agreements to eliminate double taxation
in certain circumstances is also examined.
• Module B, Double taxation conventions part I, introduces you
to the overall structure of double taxation conventions, as well
as providing you with an overview of the various types of model
taxation agreements that countries have entered into. Because
the OECD Model Tax Convention is the most influential model
tax convention, both Modules B and C focus on a selection of the
main provisions found in the OECD Model Tax Convention. Key
provisions considered in Module B include: Article 1 (persons
covered); Article 2 (taxes covered); Article 3 (interpretive issues);
Article 4 (residence); Article 5 (permanent establishments); Article 7
(business profits); Article 15 (employment income); and Articles 23A
and 23B (methods of relief ).
• Module C, Double taxation conventions part II, continues to
consider a selection of the main provisions found within the
OECD Model Tax Convention. These include: Article 6 (immovable
property); Articles 10, 11 and 12 (passive income articles); Article
13 (capital gains); Article 21 (other income); Article 24 (non-
discrimination); Article 25 (mutual agreement); Article 26 (exchange
of information); and Article 27 (assistance in collection). This
module also considers the concept of treaty abuse – where persons
benefit from the existence of a double taxation agreement, or a set
of such agreements, when they are not intended to benefit from
said benefits.
• Module D, Transfer pricing, starts by linking the OECD Model Tax
Convention and its requirement that profits of an enterprise that
makes intra-company transactions must be adjusted to reflect
the prices of transfers made between independent entities. Issues
specifically addressed include: comparability; transfer pricing
methods; and adjustments and dispute resolution.
Study sequence
The modules must be attempted in order and you must start by
studying Module A.
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Learning outcomes for the course

Having studied this course you should have the following skill sets and knowledge.
Knowledge and understanding
• Explain the integrated nature of the globalised market economy and what
role taxation plays in that economy.
• Clearly communicate the nature of taxation and the principles that most
frequently guide domestic and international tax policy.
• Describe the role of the supranational institutions that influence international
tax policy and in particular the Organisation for Economic Co-operation and
Development (OECD); United Nations and the European Union;
• Explain the evolution of international tax law and in particular the
development of bilateral double taxation agreements.
• Be conversant in the details of the major provisions of the OECD Model Tax
Convention as they relate to individuals and businesses.
• Describe the rules and principles that regulate and guide the international tax
aspects of transactions that cross national borders.
Intellectual/thinking skills
• Independently manage a large workload involving complicated subject matter.
• Source and filter out irrelevant information with increasing efficiency.
• Analyse real-life fact patterns and communicate possible solutions with
increasing clarity and ease.
• Recognise the issues that arise from factual situations.
Practical skills
• Develop communication skills that allow discussion of acquired knowledge
with international tax experts and non-experts alike.
• Develop their understanding of international tax law such that they can analyse
basic fact patterns and critically evaluate international tax policy initiatives.
• Source relevant information, literature and legal opinions, whether via
electronic or other means.
• Develop report-writing skills.
Transferable skills
• Demonstrate and be able to communicate effectively an awareness of the
environment within which rules and principles relating to international tax
law operate and, in particular, in relation to the fast-moving changes to policy
currently being witnessed in the area of international tax law.
• Develop the ability to communicate complex subject matter to experts and
non-experts alike.
• Demonstrate problem-solving skills by applying knowledge acquired during
the course to various fact patterns.
• Use information technology effectively, including word processing, online
resources and learning platforms.
• Independently manage a large workload involving complex subject matter.
• Communicate clearly and concisely knowledge and opinions related to
international tax law specifically, and the global economy, more generally.
• Develop report writing skills.
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1.2 How to use this Study Guide

Each module has a separate Study Guide and a version of this
introductory chapter is found in each Guide.
This Guide provides a starting point for your study of this course. Its
function is to introduce and explain the core syllabus topics. It is not,
however, intended to replace independent study of the primary legal
materials and other academic literature but rather to help you use
those other materials effectively.
In order to fulfil this function, the Guide is designed to be easy to read
and use. At times it includes quite detailed discussion of certain issues,
but in general it avoids duplicating material which you may find in the
readings. It also contains several features to aid your study:
• learning outcomes for the course as a whole and for each module
and each chapter, so you know what you are expected to achieve at
each stage of your study;
• learning activities to encourage you to think critically about the
material – please think about how you would answer each question
before you look at the feedback provided;
• sample examination papers plus guidance on how each question
might be approached are found in the Appendix to Module A, to
help you prepare for the examination for each module; and
• guidance on Essential reading.
Further assistance is provided by a Glossary found towards the end of
Module A. This contains some of the terms that you will come across
while reading this Guide and the wider literature. As is often the case
with language, there is often no single accepted definition of a given
term. Rather, the definitions in the Glossary provide a quick reference
point to assist your reading comprehension of the materials herein.
Due to the inter-relatedness of international tax law, you will often
find new terms being introduced. Where possible when a new term
or concept is introduced but is not discussed fully at that stage of the
materials, there will be a note directing you to a discussion of the term
at a later point in the materials. The Glossary is also useful in this respect.
1.2.1 Reading
The Study Guide refers you to various reading resources. All Essential
readings are made available to you via the Online Library, third party
websites or as scans which you can download from the course home
page of the Postgraduate Laws eCampus (see ‘Online resources’ below).
The Essential reading listed in this Guide is just the minimum that you
need to study and understand in order to pass the course. If you want
to increase your chances of achieving a good pass, you need to go
beyond that minimum. You will not be able to research every topic
exhaustively, and you are not expected to, but you should try to read
further on the topics that you find particularly important or interesting.
There are several ways to identify useful further readings. For example,
you could try looking up case reports, articles or other documents
mentioned in the Essential reading. And the internet is a hugely
4
valuable research tool. Just entering some key words about a concept,
notion, doctrine or principle into Google or another standard search
engine should help you to identify the titles of interesting articles
which you may then be able to find in the Online Library. Before you
start to read the remaining chapters of this Study Guide, you should
take a moment to explore the resources available to you in the Online
Library (http://onlinelibrary.london.ac.uk/resources). In particular, you
should be comfortable in accessing three important electronic journals:
Intertax, EC Tax Review (both available via Kluwer Law Online) and the
British Tax Review (available via the Westlaw database)
Other useful periodicals
Because international tax law is a rapidly developing subject, students
may like to chart developments through articles in periodicals. For
information only, some of the principal periodicals in the field are:
• Bulletin for International Taxation (Amsterdam; IBFD) – abbreviated
as ‘BFIT’ – a monthly publication; ISSN is 0007-4624 (previously
known as ‘BIFD’ or Bulletin for International Fiscal Documentation).
This has a database of Tax Treaty cases
• European Taxation (Amsterdam; IBFD)
• Cahiers de Droit Fiscal International (Studies on international
fiscal law) (Kluwer in conjunction with the International Fiscal
Association)
• Common Market Law Review (Kluwer Law International)
• EC Tax Journal (Key Haven Publications)
• International Tax Journal (CCH)
• International Tax Review (Euromoney Institutional Investor PLC)
• Tax Notes International (Tax Analysts; online only)
• World Tax Journal (IBFD).
Case reports
The course is not about the international aspects of the domestic law
of one particular State. So, this guide refers to decisions of major courts
from around the world.
Since 1997, a series of law reports has been published known originally
as the Offshore Financial Law Reports (OFLR) and now published as the
International Tax Law Reports (ITLR – available via LexisLibrary in the
Online Library). These contain the texts of important international tax
cases (including English translations of some cases). Philip Baker edits the
ITLR and there are some valuable case comments for most of the cases.
Simon’s Tax Cases available via LexisLibrary can also be useful.
A useful resource is the IBFD’s ‘Tax Treaty Case Law Database’. Details of
this can be found at: https://www.ibfd.org/IBFD-Products/Tax-Treaty-
Case-Law
1.2.2 Online resources

You can access the Online Library via the Student Portal. The Library
consists of several different databases containing an enormous
collection of case reports, journals and practitioner texts. Through
the Portal you can also access the Postgraduate Laws eCampus (also
5
known as the virtual learning environment or VLE). Here you can

download the Study Guides, as well as past examination papers,
Examiners’ commentaries and any updates to the study materials.
You can also contact fellow students on the course via a dedicated
discussion forum. Notices concerning changes to course materials or
administrative arrangements may be posted on the eCampus, so you
should check it regularly.
For more information on the Student Portal, Online Library and
eCampus, see the Programme handbook, which is available at:
https://london.ac.uk/current-students/programme-documents
1.3 Keeping up to date

International tax law is dynamic. This Study Guide was revised in 2020
and there may have been significant developments in the law by the
time you read it. If you are studying the course more than a year after
publication of this Guide, be sure to look out for notices on the VLE
detailing any major changes in the law or readings.
You should also track developments in the law through your own
research, for example by reading the Kluwer law journals such as
Intertax and EC Tax Review, which can be accessed online through the
Online Library.
1.4 Allocating your time

It is impossible to say with great precision how much time you should
set aside for studying Law of international taxation because your
individual learning rate will depend on your circumstances, fluency in
English and any prior study of law and tax law specifically. Furthermore,
some topics of the syllabus require considerably more time than others.
However, as a full-time Postgraduate Laws student you are expected to
spend approximately 120 hours studying and preparing for the exam
for each module of this course.
It is advisable to set aside a specific amount of time each week to
study each course, increasing the amount in the six weeks before the
examination. Some topics of the syllabus will require considerably
more time than others. The best advice is that you should allocate a
specific amount of time for the study of each module of the course
each week with a view to completing your study of all topics in the
syllabus so as to leave ample time for revision before the exam.
In the light of the recent coronavirus pandemic it is likely that the
conditions in which the examination takes place will change. However,
the substance of the examination will not change, and the following
paragraphs should be read with that in mind.
1.5 The examination

Important: The information and advice given here is based on
the examination structure used at the time this Guide was written.
However, the University can alter the format, style or requirements
of an examination paper without notice. Because of this, we strongly
advise you to check the instructions on the paper you actually sit.  
6
Your understanding of the material covered by the syllabus for this

module will be assessed by an unseen written examination of 45
minutes’ length, with reading time in which you will answer one
examination question. To the extent that there are any prerequisites for
this module, knowledge of the materials covered in those prerequisites
may be necessary to answer the questions in the examination for this
module.
There are two sample examination questions at the end of this Study
Guide.
1.5.1 Preparing for the examination

Study the full range of syllabus topics for each module
The University of London uses unseen examination as its main form of
assessment because it is both rigorous and fair. By ‘unseen’, we mean
that you will not know what examination question(s) you have to
answer until you are allowed to read the question paper at the start
of the exam. It is therefore very important that you get a good, broad
understanding of the syllabus for each module that you study. The
question may test any topic within the syllabus, or may require you to
draw on your knowledge of several topics (possibly including topics
studied in any prerequisite modules of the course). Don’t limit your
study to just a couple of topics.
Study actively – take notes

Successful examination preparation starts the moment you start
studying. Make sure you take notes on the material you read,
summarising the main points and putting them into your own words.
This will help you to understand and remember key issues, see
relationships between different sources, and develop your own ideas
and lines of argument. Undertaking the learning activities in the Guide
will also help you to do this. And make sure you allow time later on to go
back through your notes and refresh your memory closer to the exam.
Practise your exam technique

In order to do well in the examination, knowledge and understanding
of the subject is not enough – you also need effective exam technique.
Answering questions successfully under exam conditions requires a
particular set of skills which you can develop through practice. This
Guide offers two sample examination questions, and if you are studying
the course from 2019 onwards, have a look at any past papers, which are
available to download from the eCampus. There may also be Examiners’
commentaries on some papers – brief commentaries by the examiners
who marked the papers indicating the kind of issues that they would
expect an answer to each question to cover. Bear in mind that the law
may have changed since the older papers and reports were written.
It is sensible to practise answering some questions under examination
conditions – that is, writing an answer in 45 minutes without looking
at your notes or books. Time is very short in the examination and the
best way to make the most of it is to be prepared and practise. Practise
answering both essay questions and problem questions.
7
1.5.2 Taking the examination

The golden rule for examination success is to answer the question
asked; don’t just reel off a pre-prepared answer on a particular topic.
Start by reading the question carefully – it sounds obvious, but it is
essential. Under the examination rules in force at the time of writing
this Guide, you are given five minutes to read the paper before you
start writing your answer. Use that time wisely. Then, spend a few
minutes planning your answer before you start writing it.
It is tempting to start writing straightaway when you have so little
time, but planning your answer should help ensure that it has a clear
and coherent structure. Whether you are writing an essay or tackling a
problem question, your answer should begin with a clear introduction.
This need not be long – two or three short sentences should do.
In introducing an essay, you should generally identify: what you
think the question is asking of you and the approach that you will be
adopting in your answer. In answering a problem question, start by
identifying the main legal issues that the fact scenario raises.
Whichever type of question you answer, you will not have time to
explore all relevant issues in depth. With only 45 minutes, you need to
be selective and concentrate on what you see as the most important
issues – though ideally you will briefly note, in your answer, other
issues that may be relevant and explain why those you are focusing on
are particularly important.  
A few points to bear in mind:
• In writing the body of your answer, you will need to be succinct. 
• Avoid vague generalisations.
• Use clear language in straightforward, short sentences.
• Use a structure that is logical and shows that you are moving from
one issue to another in a way that makes thematic sense.
• Substantiate your arguments by identifying relevant law.
• When referring to cases, you do not need to give a full citation – a
short name (e.g. Saint Gobain or Avoir Fiscal) will suffice. Do not
waste time describing irrelevant facts; just mention the key point(s)
of the case in relation to your argument.
If you do all the above – provide a clearly structured answer which
clearly addresses the question and is supported by reference to
relevant legal authority – you should at the very least achieve a pass.  
Better answers generally also do one or more of these things:  
• analyse the question carefully, identifying any underlying
assumptions or points of ambiguity which can then be exposed
and discussed;
• display an awareness of the context within which the question has
been asked; and 
• discuss relevant academic commentary.
8
1.6 Introduction to Module A

This first module of the course introduces you to some major concepts
and problems in the area of international tax law:
• Chapter 2 introduces you to the idea of international tax law. It
considers the debates around the very existence of an international
tax law regime, as well as providing some important contextual
background.
• Chapter 3 considers the nature of taxation and how its special role
in society and the economy of a nation state creates unique issues
when we consider the interaction of the tax regimes of two or more
nation states.
• Chapter 4 considers how nation states have sought to justify
and delineate their tax reach. Concepts considered here include:
economic allegiance, nationality, residence and source.
• Chapter 5 introduces you to the most commonly used methods
of relief from double taxation adopted by nation states: credit
method, exemption method, and deduction method.
• Chapter 6 tracks the evolution of international tax law and so
considers both double tax agreements and other international
initiatives that seek to regulate the tax aspects of international tax
law.
Learning outcomes for Module A

Having studied this module you should be able to:
• Critically evaluate the nature of international tax law generally and whether it
forms part of international law specifically.
• Explain the jurisdictional issues that underlie the international tax regime:
jurisdictional vacuum and overlap.
• Explain the justification for countries asserting their jurisdiction to tax.
• Describe the main methods of relief from double taxation.
• Catalogue the major events in the development of the international tax
regime generally and the role of the OECD specifically.
• Explain the interaction of EU law and the international tax regime.
9
Notes
10
Chapter 2: International tax law

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
• Form an opinion as to whether international tax is a form of international law,
a form of domestic law or a combination of international and domestic law.
• Differentiate between the various arguments for and against international tax
being considered to be a form of international law.
• Illustrate the impact that forming one view over another will have on the
interpretation of the various principles and rules that will be explored
throughout the course.
Essential reading
• Avi-Yonah, R.S. International tax as international law. (Cambridge: Cambridge
University Press, 2007) [ISBN 9780521618014] Chapter 1. Available via
Cambridge Core in the Online Library.
• Avi-Yonah, R. Advanced introduction to international tax law. (Cheltenham:
Edward Elgar) Chapter 1. Available on the VLE.
• Christians, A. ‘Hard law and soft law in international taxation’ (2007) 25(2)
Wisconsin International Law Journal 325–33. Available via HeinOnline in the
Online Library.
• Miller, A. and L. Oats Principles of international taxation. (London: Bloomsbury,
2017) [ISBN 9781526501691]. Chapter 2. Available on the VLE.
• Panayi, C. ‘International Tax Law in a post BEPS World’, 2016, Singapore School
of Accountancy Research Paper Series Vol. 4, No. 3, Paper No: 2016-S-47,
especially pp. 48–50 (freely available at: https://papers.ssrn.com/sol3/papers.
cfm?abstract_id=2785480)
• Qureshi, A. The public international law of taxation. (Graham and Trotman Ltd,
1994), Chapter 1.
• Qureshi, A. ‘International law and tax counsellors’ (1992) 4 African Journal of
International and Comparative Law 205–15. Available via HeinOnline in the
Online Library.
• Rosenbloom, D. ‘The David R. Tillinghast lecture: international tax arbitrage
and the “international tax system”‘ (1999–2000) 53 Tax Law Review 137–66.
Available via HeinOnline in the Online Library.
Useful further reading

• Dagan, T. International tax policy: between competition and cooperation.
(Cambridge: Cambridge University Press, 2018) [ISBN 9781107531031]. A
useful and critical look at international tax law. Available via Cambridge Core
in the Online Library.
• Loutzenhiser, G. Tiley’s revenue law. (Oxford: Hart Publishing, 2019)
[ISBN 9781509921331] Part VI.
11
2.1 Introduction
This chapter considers the term ‘international tax law’. It is an
introductory chapter and it provides a contextual background to the
remainder of this module and course.
International tax law is the term used in this course to describe the
rules and principles that together regulate the taxation consequences
for individuals and businesses that enter into cross-border transactions.
In spite of this overarching theme, there is no consensus as to the
precise nature of international tax law.
The notion of international tax has caused some controversy over the
years as there are divergent views as to whether: (i) international tax
constitutes a form of international law; or (ii) the rules and principles
that many nation states apply when drafting their domestic rules and
negotiating their many double taxation agreements merely form part
of each nation state’s domestic tax regime. These arguments go to the
heart of the question of the extent of a nation state’s jurisdiction to tax.
The concept of jurisdiction to tax is considered in Chapter 3.
Both viewpoints have support from well-established tax experts. Whilst
this may seem overly theoretical, the issue is a live one in that it has
real practical relevance when it comes to both drafting and applying
rules. For example, as you will see, the Organisation for Economic Co-
operation and Development (OECD) is responsible for guiding the tax
policy of many nation states and how you view the nature of their work
informs how much reliance nation states should place on their work.
Considering what we mean when we talk about international tax is
therefore at the heart of this chapter.
This chapter provides an overview of the various views and seeks to
provide you with the opportunity to read around the topic, analyse
the various commentators’ viewpoints and arrive at your own view.
Your view will then ultimately affect how you view the subject moving
forward so it is advisable to invest the time to read the various views of
commentators on this important topic.
2.2 International tax as international law

Some commentators view international tax as a subset of the broader
notion of international law. This view is justified by the network of
double taxation agreements (DTAs) that nation states enter into and
the view that initiatives that are complied with by many nation states
are a form of soft law or customary law.
According to Professor Avi-Yonah, international tax law constitutes an
international tax law regime, which itself forms part of international
law. Consequently, countries are constrained by the international tax
rules they adopt. Supporters of the international tax regime view cite
the network of over 2,000 bilateral tax treaties that contain definable
principles that underlie the treaties and are common to many of them.
They also call in aid the growing cooperation and coordination of
tax policies and rules across countries with disparate tax systems. On
another view these are still separate trade deals between individual
states which may vary and not accord with international ideals.
12
2.2.1 Public international law

Public international law governs the relations between states,
determining their mutual rights and obligations. It consists of those
principles and rules of conduct that states feel bound to, and do,
observe. In some cases, it can also bind persons. Public international
law consists of:
• International agreements – for present purposes these are tax
treaties, the general nature of which we will consider in Module B.
• Customary international law – this consists of international state
practice or the commonly held view of states on certain matters
plus a belief that there is an attendant obligation. It is necessarily
ambiguous and quite hard to ‘pin down’, especially in relation to the
commencement of a particular ‘rule’. Some customary international
law has been codified in treaties.
• General principles of law – which are the international aspects of
domestic laws.
Some authors think that international tax law consists of those
principles of public international law which involve jurisdictional
conflict in relation to cross-border transactions. This view stems from
the fact that tax laws tend not to be ‘international’ and international
tax law therefore consists of the international aspects of domestic
tax law plus customary practices plus tax treaties. Arguably, therefore,
international tax law is much more than just a subset of public
international law.
2.2.2 International tax law and the BEPS minimum

standards
The OECD and in particular the OECD/G20 have had a great influence
on international tax law by agreeing between themselves a model
double tax convention (MTC) that they agreed to adopt. This has been
supplemented by work by the OECD/G20 on the issue of base erosion
and profit shifting (BEPS). This was the problem of companies shifting
profits to countries where they would be taxed more lightly. This work
resulted in final reports of the BEPS Actions and subsequent changes
to the OECD MTC. This is argued by some to constitute soft law in that
they are not legally binding. However, there is an expectation that
the BEPS outputs will be implemented by parties that are part of the
consensus. Further, several aspects of the reports agree minimum
standards and agreement to these effectively creates a duty to act in
line with those minimum standards.
There are four minimum standards (preventing treaty shopping,
country by country reporting, fighting harmful tax competition and
improving dispute resolution) contained within the BEPS Actions
and together these constitute areas where all OECD/G20 countries
have committed to consistent implementation of these standards.
Other areas considered in the BEPS Actions (such as hybrid mismatch
arrangements and best practice in interest deductibility) have resulted
in countries agreeing to act in a similar general policy direction as
opposed to agreeing to a baseline standard. The OECD anticipates that
over time the tax regimes of countries will begin to converge in relation
13
to these more general policy areas and that it is possible that these
areas may then also constitute minimum standards. Given that peer
review of the minimum standards takes place on a regular basis, this
would arguably result in further support for the claim that international
taxation is binding in its nature and therefore a form of law.
Interestingly, the OECD uses tax sovereignty as a justification for
its drive towards fuller co-operation and potential convergence of
tax policy in at least the areas that are considered to facilitate BEPS.
See OECD, OECD Policy Brief, October 2015, BEPS Update No. 3, p.1.
See: https://www.oecd.org/ctp/policy-brief-beps-2015.pdf
Activity 2.1
With reference to the Essential reading, summarise the main arguments made by
Avi-Yonah, Rosenbloom and Qureshi on their view of the nature of international
tax law. What arguments persuade you most?
Feedback is available at the end of the Study Guide.
2.3 International tax as domestic law

Other commentators view the term international tax to be a misnomer
in that all rules relating to cross-border transactions necessarily form
part of each nation state’s domestic tax regime. Related to this point is
the fact that several commentators, including Graetz and Rosenbloom,
do not consider that the rules and principles that have emerged over
the years together constitute a separate international tax regime.
Rather their view is that nation states are free to legislate as they see
fit. On this view, any cooperative measure is not a constraint on that
nation state’s right to claim the right to tax but rather an extension of
their sovereign right to manage their fiscal affairs in the most beneficial
manner. Proponents of this view have referred to the fact that the
international tax system has been referred to as being ‘apparently
imaginary’ (Rosenbloom 2000, International Tax Arbitrage).
2.4 DTAs as part of international law

There is also a third hybrid view that whereas the actual double
taxation agreements can be described as forming part of international
law, the various initiatives are not a form of law and so do not
constitute part of international tax law.
2.5 Practical relevance of international tax theory

As noted in the introduction, the issue of whether international tax
constitutes a form of international law is of real practical as well
as theoretical relevance. The practical relevance of this question is
evidenced by legitimacy concerns. However, the fact that so many
states have entered into treaties to deal with double taxation is
testimony that these treaties and the initiatives that guide states in the
management of their cross-border taxation issues together effectively
form part of the international legal order.
Whether there is or is not a separately identifiable international tax
regime is ultimately a matter for you to evaluate. However, there
14
is no doubt that the domestic tax rules implemented by national

governments are significantly affected by the need to cooperate with
other countries.
As will be seen throughout this course, countries usually make bilateral
agreements but these bilateral agreements take into account the
standards and the models agreed by OECD, though there are some
initiatives such as multilateral agreements in relation to specific areas
of taxation.
15
Notes
16
Chapter 3: Jurisdiction to tax

Learning outcomes
• Explain the nature of taxation and the principles against which most taxes are
analysed.
• Describe the various ways in which taxes can be classified.
• Describe the concept of sovereignty and its relationship with a nation state’s
jurisdiction to tax.
• Differentiate between the notions of jurisdictional overlap and jurisdictional
vacuum.
• Explain the concepts of ‘primary jurisdiction to tax’ and ‘secondary jurisdiction
to tax’.
• Critically discuss the most frequently referenced tax factors that nation states
use to establish a sufficient connection with their jurisdiction.
• Explain the evolution of states’ desires to expand their jurisdiction to tax when
faced with what they consider to be cross-border tax avoidance.
Essential reading
• Alley, C. and D. Bentley, ‘A remodelling of Adam Smith’s tax design principles’
(2005) 20 Australian Tax Forum 579–624, in particular:
• Tax functions: 582–85
• Tax principles: 585–88 and 591–603.
• Avi-Yonah, R.S. International tax as international law:
• Jurisdiction to tax and residence: 22–24
• US controlled foreign company rules: 24–28.
Available via Cambridge Core in the Online Library.
• Baker, P. ‘The transnational enforcement of tax liabilities’ (1993) 5 British Tax
Review 313–18. Available via Westlaw in the Online Library.
• Beale, J.H. ‘Jurisdiction to Tax’ (1919) 32(6) Harvard Law Review 587–633.
Available via JSTOR in the Online Library.
• Burgers, I. and A. Mosquera ‘Corporate Taxation and BEPS: Fair Slice for
Developing Countries’ (freely available at: https://repub.eur.nl/pub/101731/
ELR_2017_10_01_004.pdf ).
• Foreman, T. ‘Being subject to two (or more) tax regimes’ (2004) 765 Tax Journal
8. Available via LexisLibary in the Online Library.
• Graetz, M. ‘Taxing international income – inadequate principles, outdated
concepts and unsatisfactory policy: Tillinghast lecture’ (2000–2001) 54 Tax Law
Review 261–336, in particular:
• Enforceability: 312–15.
17
• Kaplow, L. ‘Taxation’ in Polinksy and Shavell (eds) Handbook of law and

economics. (London: Elsevier, 2007) 647–755, in particular:
• Functions of taxation: 651–52.
Available via the VLE.
• Palmer, R.L. ‘Toward unilateral coherence in determining jurisdiction to tax
income’ (1989) 30(1) Harvard International Law Journal 2–64, in particular:
• Tax principles: 42–46.
• Jurisdiction to tax: 3–8.
Useful further reading

Loutzenhiser, G. Tiley’s revenue law. (London: Bloomsbury Professional, 2019)
[ISBN 9781509921331]. Chapters 1 and 2 give a good overall view even if it is
from a UK perspective.
3.1 Introduction
This chapter places taxation as it applies at a domestic level in the
context of a globalised marketplace where individuals, investors
and businesses transact and move across borders with increasing
frequency. In order to have a grounding in international tax law, it is
first necessary to clarify our understanding of how taxation operates
at a domestic level. In particular, we need to understand: (i) what we
mean by taxation; (ii) what functions we expect taxation to perform
in an economy; (iii) what principles can best achieve the smooth
operation of those functions; and (iv) the variety of taxes that a nation
state may adopt.
What emerges is that a state’s tax policy is intrinsically related to a
state’s political and economic situation. Governments use taxes to raise
revenue, support their policies and steer the behaviour of participants
in their economy. Unsurprisingly, governments are keen to hold on
to as much control over their tax policies as possible. This chapter
introduces the relationship between the exercise of each nation state’s
desire to control their tax policy decision making in the increasingly
globalised marketplace.
As each nation state determines its own tax regime, the movement of
people and investment across borders creates the potential for taxable
amounts to fall: (i) within the tax reach of only one nation state; (ii)
within the tax reach of two or more nation states; or (iii) outside of
the tax reach of any nation state. These three basic scenarios create
problems for nation states that international cooperation seeks to
address. Chapter 4 considers how these problems arise and so sets the
foundation for the remainder of Module A, which considers how nation
states have sought to address these issues.
3.2 Nature of taxation

There is no universally accepted definition of a ‘tax’. Many definitions
of tax identify several common positive and negative features. The
features are that a tax:
18
• is a compulsory payment
• is paid to government or a representative of government and
• has a public benefit in that the funds it generates are used for
public goods such as armed forces, roads and other infrastructure,
as well as ensuring some redistribution of wealth
• the taxpayer does not receive any specific benefit in return for the
payment of the tax
• it is not a user fee or charge and
• it is not a fine or penalty.
3.3 Functions of taxation

The primary purpose of taxation is to raise money for the state. In
doing so a state may wish to fulfill its political agenda by public works
(like roads) and promoting equality through redistribution of income
and wealth.
Taxation is also used to influence behaviour either to discourage
misuse of alcohol and tobacco or to encourage investment, saving
or environmentally friendly activities and so on. In the international
context these may encourage international involvement, as when a
foreign company is given a reduced tax regime in order to invest in a
country.
3.4 Tax principles

The principles of equity, economic efficiency and simplicity (which
include administrative convenience) are often cited as the three major
principles that should guide tax policy. These principles are difficult to
define and are best regarded as starting points for the discussion of the
nature of a tax and providing criteria to judge whether a tax is effective.
These principles are modified when we come to look at international
tax policy.
First we consider the tax principles from a purely domestic perspective.
In other words, what principles should guide a government seeking to
implement rules that together reflect the optimal tax system for that
nation state? Traditionally, the principles of equity, economic efficiency
and simplicity have formed the policy basis for domestic tax regimes.
Equity requires that taxes are levied fairly across society. This notion of
society has traditionally envisaged a national society. ‘Ability to pay’
is often referenced as a measure of the equity of a tax or tax regime.
Generally, it has focused on ‘horizontal equity’ (taxpayers in similar
situations should receive similar tax treatment, i.e. taxpayers that derive
the same amount of income should be taxed in the same way) and
‘vertical equity’ (taxpayers should be separated according to their level
of income with the result that taxpayers in different situations should
be treated differently, i.e. progressive taxation).
Economic efficiency requires that tax is imposed in a manner that least
interferes with wealth creation. Traditionally, neutrality was a virtue
to be aspired to. Taxes should try not to interfere with commercial
decisions. The perfect market hypothesis stipulates that markets, left
19
to themselves, bring about optimally efficient outcomes. There are,

however, numerous examples of taxes that seek to encourage (e.g.
research and development tax credits) or discourage (environmental
taxes) certain types of behaviour or activity. In contradistinction
to neutrality, where markets are shown to fail, taxes can perform a
regulatory function whereby they can neutralise or correct negative
externalities.
Simplicity is a derivative principle that includes a number of other
‘sensible’ ideas, such as comprehensibility, visibility, transparency,
certainty, effectiveness, coherency, consistency and administrative
convenience.
Administrative convenience requires that taxpayers are subject to rules
that are easy to understand and apply, and that governments bring
in rules that can be implemented with as little waste of resources as
possible. There is no perfect tax. A tax may be equitable between
taxpayers but require much public administration. Another tax may be
easy to collect but is not transparent and may be regressive.
Activity 3.1
What does it mean to say that equity, efficiency and simplicity are the core
principles by which tax systems, individual taxes and other aspects of a tax system
are commonly judged? How can simplicity be a principle?
3.5 Classification of taxes

Taxes are often classified into various categories on the basis of their
nature or the object of their focus (e.g. gift taxes attach to transfer
of gifts from one person to another). References to international tax
in this course are references to taxes on income and on capital gains
(hereinafter income and capital gains are collectively referred to as
‘income’ unless it is necessary for a distinction to be drawn).
Taxes are often categorised into ‘direct’ and ‘indirect’ taxes and this
distinction is important for our purposes. This course considers only
direct taxes. As with the definition of ‘tax’, there is no universally
accepted definition of ‘direct tax’; however, for the purposes of this
course we will refer to John Stuart Mill’s classic distinction between
direct and indirect taxes:
A direct tax is one which is demanded from the very persons who it
is intended or desired should pay it. Indirect taxes are those which
are demanded from one person in the expectation and intention
that he shall indemnify himself at the expense of another.
This means that direct taxes are assessed directly on the taxpayer. This
does not mean that direct taxes are collected directly in all situations.
As you may be aware, many direct taxes are collected indirectly (e.g.
via withholding or through PAYE in the UK). However, one crucial
distinction between direct and indirect taxes is that direct taxes often
have the capacity to take into account the circumstances of individual
taxpayers. So, for example, the UK has a personal allowance for income
tax so that in 2019–2020 a person must earn over £11,000 before they
are subject to the tax. This contrasts with indirect taxes that do not
20
generally take into account the personal circumstances of the taxpayer.

An example that accords with this view is the value-added tax (VAT)
that is levied at a flat rate and so ignores completely the circumstances
of the taxpayer. So, if you are a millionaire you pay the same tax as a
person earning a low wage when buying a coffee in a coffee shop.
This course is concerned with the international aspects of direct
taxation and so does not consider indirect taxes such as VAT. We also
do not consider taxes such as tariffs which are imposed by countries on
imported goods.
3.6 Tax sovereignty

Sovereignty is a political concept which can be the subject of much
dispute, as shown by the Brexit debates in the UK. It has been
described as encapsulating the concept that a nation has exclusive
regulatory jurisdiction over the territory subject to its control. The law
has long recognised the concept of sovereignty. For example, in the US
Supreme Court, Chief Justice Marshall in M’Culloch v Maryland (1819)
stated:
The sovereignty of the state extends to everything which exists
by its own authority or is introduced by its permission.
Accordingly, ‘tax sovereignty’ can be defined as the extent to which a
state has absolute power to raise tax revenue and therefore legislate
on tax matters in any way it sees fit. Traditionally, nation states have
acknowledged that they all have an unrestricted right to raise tax
revenue and draft their tax laws in accordance with their national
interests. Given the important role played by taxation in an economy,
it is easy to understand why nation states have held on to the notion
of an unrestricted right to tax and why they have traditionally resisted
handing over any aspect of their tax sovereignty to other governments
or supranational bodies. In spite of this resistance, many nation states
have had to face up to some very practical reasons why they need to
allow certain inroads into their tax sovereignty. These reasons include:
• the need to maintain good international relations, which means
that nation states need to respect the fact that nation states all
value their own respective sovereign right to tax;
• the fact that nation states have traditionally not interfered with
the tax affairs of other nation states, which has made enforcing
domestic tax rules overseas problematic; and
• the need to ensure that inbound and outbound investment
decisions are not negatively impacted by tax rules that prejudice
transactions with overseas dimensions.
In terms of the need to ensure that inbound and outbound investment
decisions are not negatively affected by domestic tax rules, a good
example of a restricted form of tax sovereignty is evidenced by the
European Union (EU). The Member States have agreed in the various
EU treaties that taxation in relation to matters concerned with trade
are within the jurisdiction of the EU in the sense that it directs that
Member States adopt various principles. However, the Member States
have reserved to themselves direct taxation. The European Court of
Justice has decided that although this remains within the sovereignty
21
of the Member States it has to be exercised consistently with the terms

of the treaty.
Although the EU provides a good example of constraints placed on
tax sovereignty, governments around the world recognise that in a
globalised world where both people and capital are highly mobile,
it is difficult, if not impossible, simultaneously to: (i) ensure capital is
invested efficiently in their economies; and (ii) ensure they receive a fair
proportion of the tax due on overseas placement of its subjects and
their investments. It can be said that governments have been ceding
their tax sovereignty on a case-by-case basis or ‘need to cede’ basis. In
effect, this means that wherever the potential advantages of ceding an
aspect of tax sovereignty outweighs the disadvantages of ceding that
aspect of tax sovereignty, governments determine that such a ceding is
worthwhile and vice versa.
Although inroads made in and out of the EU context are not exactly the
same, some of the inroads are similar. For our purposes, one particularly
important inroad is the restriction placed on a nation state’s ability to
determine its jurisdiction to tax in an unrestricted manner. A nation
state’s jurisdiction to tax refers to the idea that nation states need to
determine their tax reach with respect to their right to tax transactions
that have overseas dimensions. In other words, how far can they cast
their tax net in relation to inbound and outbound economic activity? In
the context of international tax, sovereignty has been described as ‘the
maximum limit of a nation’s power to enforce its claims, and thus the
maximum effective limit of its tax jurisdiction’ (Palmer 1989).
A further example, alluded to at 2.2 above, is the work of the OECD/
G20 in respect of the BEPS Actions. As noted there, although the
OECD has stated that the BEPS Actions protect tax sovereignty, there
is support for the view that the BEPS Actions constitute an inroad into
sovereignty. As discussed above at 2.2, where the minimum standards
are viewed as effectively binding then it appears that these initiatives
support the view that international tax law exists but that they also
provide an example of a significant inroad into the tax sovereignty
of countries that are party to these agreements. The signature of the
Multilateral Convention to Implement Tax Treaty Related Measures in
2016 provides further support for this view.
The notion of a nation state’s jurisdiction to tax and the practical limits
that nation states have traditionally faced when trying to assert their
jurisdiction to tax across national borders are considered below.
3.7 Jurisdiction to tax

The term jurisdiction describes legislative, executive and judicial power.
More specifically, legislative jurisdiction is the power of a political body
to apply its laws to a given person, thing or occurrence. Executive
jurisdiction is the power of a political body to take administrative
action in regard to a person, thing or occurrence. Judicial jurisdiction is
the power of a political body to subject a given person or occurrence to
its judicial process.
As applied to a nation state’s right to adopt tax rules as it sees fit, it can
be said that the term ‘jurisdiction to tax’ refers to the ‘tax reach’ of a
22
given nation state; in other words, the extent to which a nation state
includes amounts of income in its tax base when these amounts cross
jurisdictional or territorial borders.
In relation to direct taxation, traditionally there has been agreement
surrounding some fundamental aspects of the nature of the
jurisdiction to tax. This agreement involves a nation state being able to
include within its tax base certain types of income without reproach
from other nation states. Specifically, this means the acceptance that
other nation states will include the following within their tax base
(referred throughout this module as ‘Principles A–B’):
Principle A
• Income of persons who are residents of their state, irrespective of the
location of the source of that income.
Principle B
• Income of persons who are not residents of their nation states but who
are present or do business in their nation state where that income is
derived from activity or investment in their nation state.
The existence of an agreed core set of principles relating to the

jurisdictional extension of a nation state’s tax reach has provided
some certainty for taxpayers and governments alike. These principles
can be described as connecting factors in that a person, an activity,
some property or an amount of income is considered to have some
form of connection with a particular state. The connection must be
sufficiently strong to justify an assertion of their jurisdiction to tax in
one of the three aforementioned categories. However, different states
have different rules as to the various connecting factors. For example,
an individual may be regarded under UK law as being resident and
thus taxable in the UK but simultaneously resident and thus taxable in
France. These rules are not coordinated. Thus, there is potential for more
than one state to assert its jurisdiction to tax over an amount of income
falling within one of the above categories (jurisdictional overlap).
There is also potential for two or more sets of domestic rules to operate
in such a way that an amount of income falls outside the above
categories (jurisdictional vacuum). This is primarily due to the fact that
although there is agreement that states may assert their jurisdiction
to tax in relation to the above three categories of income, there is no
requirement that nation states adopt rules in this way. In other words,
there is no formal requirement of a minimum level of taxation. This
means that it is possible that certain amounts of income that cross
national borders may escape taxation altogether.
A further related concern arises from the fact that even when the
appropriate principles are applied in a context involving two or more
states, the principles may operate in such a way as to disadvantage
one state over another. For example, nation states have different levels
of economic strength and where two or more nation states determine
to divide up the tax take relating to income that arises as a result of
international activity, there is the potential for the stronger or wealthier
nation state to resolve to reduce the instances of double taxation in
23
such a way that works to its advantage but to the disadvantage of the
other nation state. This jurisdictional imbalance forms the basis of the
notion of inter-nation inequity.1 1
See Chapter 5 below.
The concepts of jurisdictional overlap, jurisdictional vacuum and

jurisdictional imbalance are considered in more detail below.
3.8 Jurisdictional overlap

Where, for example, two or more nation states assert their jurisdiction
to tax in a manner consistent with the above-mentioned principles,
taxpayers who satisfy one or more of the principles in more than one
jurisdiction may be subject to the claims of more than one jurisdiction.
A national of Country A (Country A resident) invests capital in Country
B. This invested capital generates income and it is agreed that the
income generated has a source in Country B. Where Country A adopts
principle A above – extending all the income generated by its nationals
wherever those amounts arise – and Country B asserts the right to tax
on the basis of principle B – income of persons who are not nationals
of their nation states but who are present or do business in their
nation state and that income is derived from activity or investment in
their nation state – the income generated in Country B by Country A
resident will fall within the jurisdiction to tax of both Country A and
Country B. This situation is referred to here as ‘jurisdictional overlap’.
The result for Country A resident is that they will be subject to tax
on the same amount of income under each of the two countries’ tax
regimes – this is referred to as juridical double taxation.
Nation states recognise that it is beneficial for (i) taxpayers in Country A
resident’s position, (ii) Country A and (iii) Country B for Country A resident
to be able to invest in Country B without obstacles. Jurisdictional overlap
that operates in the way described in the example acts as an obstacle to
such investment. States have determined that given the importance of
tax sovereignty to them and their mutual recognition of the scope of the
jurisdiction to tax, it is in the interests of all concerned to come together
and adopt solutions to the jurisdictional overlap issue. Adopting a
solution to this issue will lead to fewer instances of juridical double
taxation and therefore fewer obstacles to both inbound and outbound
investment (and economic activity more generally).
We consider the ways in which nation states have determined to
resolve the issue of juridical double taxation in Chapter 5 (Methods of
relief ) and we track the historical development of the current position
in Chapter 6 (History of international tax law).
3.8.1 Example of jurisdictional overlap

It may help to go over a brief example of a situation where
jurisdictional overlap could arise:
• Janet is a resident under the tax law of Country X and works as a tax
consultant.
• Janet has international expertise and is contracted to supervise a
large project in Country Y.
• Janet earns the equivalent of $150,000 in Country X and $45,000 in
Country Y.
24
• Country X subjects to tax all the income of its residents (wherever

that income arises) and so subjects $195,000 to tax.
• Country Y taxes all income derived in Country Y irrespective of the
residence of the person that derives the income. This means that
Country Y taxes $45,000.
• The effect of this for Janet is that she has to pay tax on the $45,000
in both Country X and Country Y.
• Had Janet earned the additional $45,000 in Country X (as opposed
to Country Y) she would only have been subject to tax on that
$45,000 in Country X (and not also in Country Y).
• Accordingly, by working in Country Y Janet is worse off.
This is referred to as juridical double taxation. Both countries (X and Y)
consider that they have jurisdiction to tax Janet’s $45,000. Country X
considers that it can tax the $45,000 as Janet is a resident and subject
to tax on a worldwide basis and Country Y considers it can tax the
$45,000 as the income has a Country Y source. This example provides
an example of the residence and source jurisdiction to tax overlapping
in relation to $45,000.
By changing the facts a little we can see that Janet could be in an even
more onerous position with respect to jurisdictional overlap.
• Imagine that the rules as to what constitutes residence differ in
Countries X and Y. As a result, Janet is treated by both Country X
and Y as being a resident under their domestic law (this could be
because Janet spends a long time working in Country Y but has her
home in Country X).
• Also imagine that both countries use the worldwide basis of
taxation.
By changing the facts we can see that because Janet is treated as being a
resident in both countries and because both countries use a worldwide
basis of taxation, Janet is subject to taxation on the full $195,000 in both
countries. This is potentially a very onerous position and again Janet is
potentially worse off because she has decided to travel overseas, stay
there and work. Had she earned the additional $45,000 in Country X,
only Country X would have had the jurisdiction to tax her income and so
there would be no instance of jurisdictional overlap.
It should be noted that $150,000 is not a concern because it is only
subject to tax in Country Y (countries do not generally subject non-
residents’ foreign source income to taxation and Janet is not a resident
of Country Y and the $150,000 is earned outside Country Y).
3.9 Jurisdiction vacuum

As detailed in Chapter 5, nation states have long considered the issue
of jurisdictional overlap and adopted various mechanisms to deal
with this issue. As discussed in Chapter 6 they have generally based
their approaches on the tax principle of neutrality as applied in an
international context. Although far from perfect, their approaches have
been relatively successful in reducing instances of juridical double
taxation. However, more recently, nation states have been preoccupied
with the need for rules to take account of the need for fairness in the
25
domestic tax system with each member of a particular state paying

their fair share of taxation.
There was something of a paradigm shift when trade became
increasingly global and investment and labour became increasingly
mobile. The ease with which taxpayers could manage their tax affairs
to reduce their overall tax liability soon became apparent, particularly if
they organised their affairs so that neither of the Principles A–B above
were invoked. This is possible because, while nation states agree to
respect Principles A–B where a nation state has sought to implement
them, there has been no formal requirement for nation states to draft
their laws in accordance with those principles. Furthermore, even
where those nation states seek to implement those principles, they
may use inconsistent criteria to determine the relevant connecting
factor with their jurisdiction. This means that it is theoretically possible
for a taxpayer to operate in a country and generate income in that
nation state without that nation state asserting Principles A–B. When
transactions with international dimensions fall outside of these
principles or they are applied but there are specific rules relating to
connecting factors that are applied inconsistently across jurisdictions,
there is scope for those transactions to fall within a jurisdictional
vacuum. This concept captures the notion that there are spaces
between different sets of tax regimes where taxpayers can operate
without falling within any nation state’s jurisdiction to tax.
An example comes from the 1970s. At that time Italian companies
were taxed according to their place of incorporation, while in the UK
companies were taxed where their central management and control
was sited. Accordingly, Italian companies would incorporate in the UK
but control their companies from Italy. In this way, they managed to
avoid tax in both the UK and Italy. Both the UK and Italy changed their
laws in due course.
As will be seen later, there is an increasing emphasis being placed
on what is a fair amount of tax that should be paid by international
operators. The cases of multinational companies such as Apple, Google
and Amazon have brought this ability to fall within a jurisdictional
tax vacuum to the public attention. The principle of fairness or equity
so applied to the global marketplace adopts an extended notion
of society where there is a need for taxpayers to pay their fair share
of taxation and according to their ability to pay. In other words, it is
difficult to justify the effective non-taxation of company profits in any
nation state when those companies are generating huge profits across
more than one nation state. Permitting the profits of such companies
to fall within a jurisdictional vacuum caused by uncoordinated
international tax policies is considered to be fundamentally unfair
and so breaches the principle of equity as applied in an international
context.
We will see throughout the course that the issue of jurisdictional
vacuum has become so well publicised that both governments around
the world and supranational organisations such as the OECD have seen
fit to focus significant resources and time on ensuring that taxpayers
engaged in cross-border activity have fewer and fewer opportunities
to operate within a jurisdictional vacuum. This is particularly true of the
26
G20 and OECD’s base erosion and profit shifting initiatives.
3.10 Jurisdictional imbalance

A further extension of the principle of fairness or equity as applied
to the international arena is the need to address the problem of
jurisdictional imbalance. This refers to the idea that there may be a
pull between two or more nation states who simultaneously assert
their jurisdiction to tax over certain persons or transactions. Although
huge advances have been made in the international tax area by
providing relief from double taxation, jurisdictional imbalance is
evident whenever the tax take for the relevant amount of income is not
equitably divided between the nation states who claim a connecting
factor along the lines of Principles A–B above (see 3.7).
More precisely, jurisdictional imbalance refers to a situation where two
or more countries have a justifiable claim to exercise some jurisdiction
over the tax revenue generated by the relevant person or activity, but
the net result for one of the nation states is that they lose out because:
• there is an unequal bargaining position vis-à-vis the nation states
involved, which may give nation states with stronger economies
and greater political clout an unfair advantage;
• the connecting factors used by the nation states involved are
considered by some to favour more developed nations; or
• the economic strength of the nation states involved may determine
the level of sophistication of their tax regimes.
Jurisdictional imbalance therefore envisages an environment where
our Principles A–B are respected but some nation states nevertheless
perceive there to be a national benefit in ensuring that they apply
Principles A–B in such a way that the benefit is at the expense of
another state.
Recently, there has been an increased focus on the desperate need
for there to be not only a fair amount of tax paid by international
operators overall, but also that nation states with weaker economies
need to ensure that they are not being deprived of their fair share of
tax revenue. This issue has recently received more attention due to
the recognition that nation states with weaker economies desperately
need to be able to generate their own revenue in order to ensure their
continued development – and all nation states are seeking to protect
their taxes post the global financial crisis.
In particular, the concept of double taxation emerged through the
work of the OECD/G20 in relation to hybrid mismatches. Hybrid
mismatches involve arrangements that exploit differences in the
tax treatment of instruments, entities and transfers between two or
more countries e.g. hybrid entities, dual residence companies and
hybrid instruments and transfers. The OECD has focused on instances
of ‘unintended’ double non-taxation i.e. where countries do not
intentionally structure their tax systems in a way that results in no tax
liability. These instances exclude situations where the relevant country
has determined to provide for special tax concessions (such as tax
exempt savings vehicles or a specified personal allowance).
Given that the ability to access a DTA can bring with it DTA benefits
(such as relief from double taxation or reduced withholding rates),
27
instances of double non-taxation can arise when a DTA is used

properly i.e. when the taxpayer seeks to benefit by accessing the DTA
in a manner unintended by the DTA. The improper use of DTAs has
also been a focus of the work of the OECD/G20 in relation to BEPS. In
particular the Multilateral Convention to Implement Tax Treaty Related
Measures 2016 and the updated version of the OECD MTC 2017 include
provisions relating to the improper use of DTAs.
This notion of jurisdictional imbalance is also related to the principle of
‘inter-nation’ equity, which is discussed in Chapter 5 (Methods of relief ).
3.11 Allocation of taxing jurisdiction

We have seen that nation states frequently use similar types of
connecting factors to demarcate their jurisdiction to tax. In particular,
states adopt rules that assert their jurisdiction to tax in relation to a
personal attachment to a particular nation state (nationality) and to an
economic attachment to a particular nation state (origin or source of
income generation). These concepts are considered further in Chapter
4 (Residence and source).
We have also seen that the adoption of these types of principles by
different nation states can result in sub-optimal situations for both
taxpayers and governments alike. Also discussed was the realisation
that nation states need to reduce the negative externalities associated
with the adoption of such principles. One method adopted by states
is to allocate taxing jurisdiction in certain circumstances to one nation
state or another. As we will see in Chapter 5 (Methods of relief ), many
countries incorporate methods of relief from double taxation in their
domestic tax regimes, which does away with the need to allocate the
rights to tax amounts to one nation state or another. However, there
is also a large network of double tax agreements (DTAs), which are
treaties entered into by two nation states that allocate the rights to tax
certain amounts in a legally binding context.
When we talk about allocating taxing jurisdiction, we necessarily have
to consider a scenario with more than one nation state in which a
taxpayer who is considered to have sufficient connecting factors with
more than one of those nation states is subject to taxation under both
nation states’ domestic tax regimes. When this happens, the allocation
of taxing jurisdiction function of the DTA looks to the type of income
generated by the person and considers which nation state has the
primary right to tax the income (primary jurisdiction to tax) and which
has the secondary right to tax the income (secondary jurisdiction to
tax).2 The operation of DTAs is covered in detail in Modules B and C. For 2
Primary and secondary jurisdiction to
tax are discussed below.
the purposes of this part, you just need to be aware that one of the main
functions of a DTA is to allocate the right to tax to one signatory or the
other in situations that would otherwise result in double taxation.
Given the importance of tax revenue to national states you may
wonder why nation states would ever enter into DTAs or limit their
right to tax income over which they have a legitimate claim. Several
factors have traditionally been associated with nation states’ decisions
to limit their jurisdiction to tax in some way.
28
3.11.1 Enforcement of foreign tax claims

From a practical perspective, it is difficult for a nation state to assert an
unlimited jurisdiction to tax in an overseas context, because it does not
have the ability to collect tax when the taxpayer is overseas or because
it does not have information about the activity taking place outside of
its jurisdiction.
We will see in Module C that nation states have decided to assist each
other by exchanging information about taxpayers’ financial details and
in some cases even helping each other to collect tax revenue owed
to another nation state. For the purpose of Module A, you just need
to be aware that previously there were various practical obstacles in
the way of nation states asserting their jurisdiction to tax and these
can be traced back to the historical evolution of the concept of tax
sovereignty. Nation states considered that tax policy was at the very
heart of their national sovereignty and, as a result, the doctrine of
non-enforcement of other nation states’ tax claims was developed.
The practical difficulty of collecting revenue derived by persons based
overseas or in relation to funds held overseas therefore provided a limit
to the assertion of a nation state’s jurisdiction to tax.
The principle of non-enforcement is evidenced by judicial dicta dating
back to Planche v Fletcher (1779):
One nation will not take notice of the revenue laws of another.
More recently, the House of Lords in the case of Government of India v
Taylor [1955] AC 491 considered the issue. Per Lord Keith of Avonholm:
…enforcement of a claim for taxes is but an expression of the
sovereign power which imposes the taxes, and an assertion of
sovereign authority by one state within the territory of another,
as distinct from patrimonial claim by a foreign sovereign,
is (treaty or convention apart) contrary to all concepts of
independent sovereignties.
Per Viscount Simonds:

My Lords, I will admit that I was greatly surprised to hear it
suggested that the courts of this country would, and should,
entertain a suit by a foreign state to recover tax. For at any
time since I have had any acquaintance with the law I should
have said as Rowlatt J said in King of the Hellenes v Brostrom...
It is perfectly elementary that a foreign government cannot
come here — nor will the courts of other countries allow our
government to go there — and sue a person found in that
jurisdiction for taxes levied and which he is declared to be liable
to by the country to which he belongs.
This case was, however, distinguished in Re Norway’s Application [1990]
1 AC 809 where the courts held that an application by the state of
Norway for evidence in a tax case before the Norwegian courts was not
defeated by the principle in the Government of India case.
There also can be issues in a bankruptcy or liquidation where one of
the creditors is a fiscal authority. In these circumstances, the courts
will allow the proceedings to continue as to stop them would be to
prejudice the ordinary creditors: see Baker in the Essential reading.
29
Activity 3.2
Read the cases of Government of India v Taylor [1955] AC 491 and Re Norway’s
Application [1990] AC 809 and make a case note.
3.11.2 International relations

A further reason nation states have limited their jurisdiction to tax is
due to the political realities of the time. The tax rules of one nation
state can result in economic consequences for another nation state
and where these economic consequences are negative, international
relations can become damaged. The result of deterioration in
international relations may result in the affected nation state
introducing retaliatory measures. Thus, it is considered best practice
to consider the consequences of tax policy that has international
dimensions prior to legislating.
Not all economic consequences are negative. For example, and as
discussed in Chapter 5 (Methods of relief ), some nation states include
tax sparing provisions in their DTAs, which are considered to benefit
the nation state in which the income arises and are sometimes
included in DTAs between nation states who are in unequal bargaining
positions due to their divergent economic strength.
3.11.3 Primary jurisdiction to tax

Primary jurisdiction to tax is asserted by a nation when it claims the
right to tax income irrespective of the jurisdictional claims of other
nations. Obviously, if double taxation is to be avoided, each instance
of income should be subject to the primary jurisdiction of only one
nation state. We will see as we progress through this module and
the remainder of the course, that in spite of the number of countries
exempting the taxation of certain types of foreign source income, there
are many instances where more than one nation state asserts the right
to tax particular types of income.
A claim of primary tax jurisdiction involves a nation state asserting its
economic connection with the relevant taxable amount of income and
so asserting its primary right to tax that amount. Such a situation may
or may not result in double taxation. For example, where a resident
of Country A (Country A resident) invests in Country B and generates
income in Country B then Country B would assert its economic
connection with the income and so assert its primary right to tax the
Country B income. Country A, which has the personal connection with
the income by way of the residence of the Country A resident, will have
the secondary claim to tax the Country B income (i.e. Country A should
only tax the Country B income to the extent that Country B does not
tax the income).
Generally speaking, economic relationship-based claims are treated
as primary, as the claiming state (i.e. source state) will be in a stronger
position to assert its jurisdiction to tax than another state which has,
for example, a personal connection with the same taxable amount. The
principle that expresses this economic connection is referred to as the
‘source’ principle. In other words, where a nation state can demonstrate
30
that an amount of income originated within its national borders, then

it can claim taxing jurisdiction over the relevant amount due to the fact
that the amount has a ‘source’ within its national borders.
The justification for the economic connection with a particular taxable
amount of income being within a nation state’s jurisdiction to tax is
based on the benefit principle, which provides that the tax burden of
any taxpayer should be proportionate to the benefits received by that
taxpayer. In other words, when a taxpayer derives the benefit of using
a nation state’s resources and generates income that has a source in
that state, the taxpayer’s income has an economic connection with
that state. However, some commentators also refer to the difficulty in
enforcing extraterritorial claims to tax amounts as a justification for the
‘source’ basis.
3.11.4 Secondary jurisdiction to tax

Secondary jurisdiction is claimed by a nation when it asserts the
right to tax a person that falls within its definition of resident for tax
purposes but allows the taxpayer a foreign tax credit to the extent that
the income in question is taxed by another nation on the basis of an
economic relationship. A claim of secondary tax jurisdiction should
not result in juridical double taxation as tax is collected by Country A
only to the extent that it is not collected by Country B. In this scenario,
Country B has the primary jurisdiction to tax and Country A has the
secondary jurisdiction to tax due to the fact that Country A’s claim
to tax the income derived by Country A resident in Country B stands
behind the claim of Country B.
Generally speaking, personal relationship-based claims are treated
as secondary. The state that can claim a taxable amount is personally
connected with its jurisdiction will be in a weaker position when
asserting its jurisdiction to tax than another nation state which has an
economic connection with the same taxable amount.
3.11.5 Concluding remarks

The above discussion describes the theoretical position and one for
which there is considerable support. However, as we progress through
this course, we will see (in Modules B and C) that when we consider
provisions under DTAs based on the OECD MTC, there are many
instances in which the source state is granted reduced taxing rights in
relation to certain types of income (e.g. passive or investment income)
and that the definitions of concepts that attract source-state taxing
rights are more narrowly defined in DTAs (such as the definition of a
‘permanent establishment’) based on the OECD MTC as opposed to the
UN MTC.
3.12 Jurisdiction to tax and connecting factors

As noted above at 3.7, there is some general agreement that states
will assert their jurisdiction to tax on the basis of three main principles
that are based on the following having a connection with the state
asserting its jurisdiction to tax: (i) a person, whether natural or legal
(expressed as nationality though residence is often substituted for
31
nationality); (ii) an activity or transaction (expressed as source); or (iii)

immovable property situated in a nation state (expressed as source).
Broadly speaking, states assert their jurisdiction to tax on the basis
of an agreed set of connecting factors. It has already been noted
that there is no uniformity as to the specifics of these factors and so
defining how a person or activity meets the requisite threshold for
having a connection with a particular nation state is often a matter for
that nation state alone.
How a nation state defines its connecting factors is not necessarily the
end of the story. We will see in Modules B and C that where a nation
state has entered into a DTA with another nation state, the terms
of that DTA provide an overlay that must sit on top of the domestic
rules in certain circumstances. For example, we will see below, and in
more detail in Module B, that where a person is considered to have
a personal connection with both nation states and those states have
entered into a DTA, the provisions of the DTA provide a hierarchy of
tests that seek to establish with which nation state the person has the
greater personal connection. Once the greater personal connection
has been established, the person is treated as falling within the tax
jurisdiction of that nation state with regard to certain types of income.
In Chapter 4 of this module we look at the ways in which nation states
have sought to establish a sufficient connection with either a person
or an activity or transaction to justify bringing any income derived by
those situations into their jurisdiction to tax.
We will revisit the notions of primary and secondary jurisdiction to tax
in Modules B and C when we consider the structure of the OECD MTC
and the allocation of taxing rights between residence and source state
under DTAs based on the OECD MTC, as well as how this allocation may
be modified under the UN MTC.
3.13 Expansion of jurisdiction to tax

This aspect of a nation state’s jurisdiction to tax has primarily been
witnessed in the context of companies and seeks to address the issue
of jurisdictional vacuum (see 3.9). The combination of a number of
factors results in a situation where some states have sought to expand
their jurisdiction in relation to companies that are nationals of other
nation states who derive profits in other nation states but which
are controlled by a group of shareholders who are nationals of their
jurisdiction. An example may best illustrate the scenario that these
nation states seek to include in their tax jurisdiction:
A small group of shareholders who are residents of Country A (the
‘shareholders’) establish a company in Country B. The shareholders
control all the operations of the company established in Country B.
Although the company derives no profits in Country A (so has no
economic connection with Country A), and although the company is a
resident in Country B (and so has no personal connection with Country
A), Country A decides to include the profits derived in Country B in its
tax base. Frequently, Country B will be a country with no or very low
tax rates. The benefit to the shareholders of establishing a company in
a low tax jurisdiction is that they can generate profits overseas that do
32
not fall within the tax base of Country A. If Country A fails to include
those Country B profits in its tax base, it is possible for its residents
to escape taxation in Country A by generating profits overseas. The
fact that companies have separate legal personalities enables the
shareholders to shield the Country B profits from Country A taxation.
A number of countries have adopted rules that look through the
separate legal personality of the company in these circumstances
and treat the profits generated by the company as being derived by
the shareholders. As Country A can assert the right to tax the profits
accruing to its residents, it effectively expands its jurisdiction to tax by
including the Country B profits in its tax base.
This effective expansion of Country A’s jurisdiction to tax takes place
even though the Country B profits are not connected to Country A
under any of the Principles A–B looked at above. Rules that take this
form are generally referred to as ‘controlled foreign company’ rules
and they are found in the domestic tax regimes of a number of nation
states, such as the United States, the United Kingdom and many
countries in the EU.
Country A justifies this expansion of the generally accepted jurisdiction
to tax principles on the basis that (i) the company is controlled by
its residents and so there is a need to look through the fact that the
company is established in Country B and (ii) without such rules the
profits will be subject to less than single taxation.
33
Notes
34
Chapter 4: Residence and source

Learning outcomes
• Describe the concepts of residence and source.
• Explain the relationship between the concepts of residence and source and
the general goals of international tax law.
• Differentiate these concepts and explain any practical or theoretical problems
inherent in the continued reliance on these concepts.
• Analyse a basic pattern and apply legal principles to identify the key facts that
may point towards a person or activity being considered to have a sufficient
connection.
• Explain the relevance of the terms residence and source in a DTA context at a
general level.
Essential reading
• Altshuler, Shay and Todler ‘Lessons the United States can learn from other
countries’ territorial systems for taxing income of multinational corporations’
(Tax Policy Center, 21 January 2015): www.taxpolicycenter.org/publications/
lessons-united-states-can-learn-other-countries-territorial-systems-taxing-
income/full
• Avi-Yonah, R.S. International tax as international law. (CUP, 2007), Chapter 3.
Available via Cambridge Core in the Online Library.
Review, 261–336:
• Source: 316–20.
• Company residence: 320–23.
• PWC, Evolution of territorial tax systems in the OECD (prepared for
the Technology CEO Council, 2 April 2013): www.techceocouncil.
org/clientuploads/reports/Report%20on%20Territorial%20Tax%20
Systems_20130402b.pdf
• Shay, Fleming and Peroni ‘What’s source got to do with it? Source rules and
US international taxation’ (2002–2003) 56 Tax Law Review 81–156. Available via
HeinOnline in the Online Library.
• Shaviro, D. ‘The crossroads versus the seesaw: getting a “fix” on recent
international tax policy developments’ (2015) 69 Tax Law Review 1–42.
• Vogel, K. ‘Worldwide vs. source taxation of income – a review and re-
evaluation of the arguments (part I)’ (1988) 8–9 Intertax 216–29. Available via
Kluwer Law Online in the Online Library.
35
4.1 Introduction
This chapter follows on from where Chapter 3 left off: nation states
while being theoretically free to tax whatever amounts they consider
fall within their jurisdiction will nevertheless generally try to establish
some form of connection either with a person or an amount of income
before they exercise their jurisdiction to tax those amounts. As seen
above at 3.7, there is some general agreement about the types of
principles that are to be applied to establish a sufficient connection
with a nation state.
We saw in Chapter 3 that nation states generally base their jurisdiction
to tax on: (i) the origin of the relevant person; (ii) the origin of the
relevant amount of income; or (iii) a combination of (i) and (ii). They also
tend to agree that where there is immovable property, such as a piece
of land, then any income derived from that property creates a sufficient
connection with the nation state in which that property is situated. In
this chapter we consider these connecting factors in greater detail. In
particular, we consider the concepts of ‘nationality’ (or ‘residence’) and
‘source’. Both concepts are problematic in that there is no universally
accepted definition of either concept and this is at least in part due
to the fact that: definitions of these terms vary across nation states;
different types of taxpayer may be subject to different nationality-type
rules even within a jurisdiction; and different types of payments are
subjected to different source rules even within a jurisdiction.
Both connecting factors also take on a treaty meaning in the context of
DTAs. These will be explored in depth in Module B but for the purposes
of this chapter we will consider these concepts at a general treaty level.
4.2 Connecting factors

It has traditionally been accepted that nation states will respect the
decision of other nation states to include within their jurisdiction the
ability to tax amounts derived in line with Principles A–B (see 3.7). This
does not mean that nation states must accord with these principles.
They can, for example, negotiate with each other to arrive at an alternate
position and have traditionally been free to narrow the scope of their
jurisdiction to tax. Traditionally, therefore, Principles A–B have provided a
basis for the maximum level of a nation state’s jurisdiction to tax.
In order to draft rules these principles need to be applied to factual
scenarios of taxpayers engaged in international activity. The work
of Georg von Schanz is very influential in this area in that he viewed
the primary way of defining a nation state’s jurisdiction to tax on the
basis of ‘economic allegiance’. For von Schanz, a person with personal
connections in one state and economic connections in another
could owe an economic allegiance in both states. In such a case, he
envisaged a division of the tax base on the basis of residence and
source and suggested that the tax take should be divided between the
states on a 1:3 basis.
Although von Schanz’s suggestion as to the precise division of the tax
take from international transactions was never adopted, his work is
still relevant. Not only does his idea of ‘economic allegiance’ provide an
36
overarching theoretical framework that allows the concepts of personal

economic allegiance (residence state) and purely economic allegiance
(source state) to sit side by side, but he also considers that the source
state should have the primary right to tax income. His view that there
was a need for a formula as a means of dividing up the tax take is still
very much a live issue.
The following outlines the two main expressions of economic
allegiance as expressed by von Schanz (persons and activity or
transaction) and then discusses how these aspects of economic
allegiance form the basis for the jurisdiction to tax of many states.
4.3 Person
When states seek to justify bringing income within their jurisdiction
to tax on the basis of a connection that person has with them, they
are faced with a number of issues, including whether different rules
are needed for different types of persons. In other words, should
individuals, companies, trusts and partnerships all be subject to the
same connectivity tests?
Even where, for example, a state has decided to adopt a person-specific
test, such as a separate test for individuals, there is still the issue of
whether a formal test or a test requiring factual assessment is the best
way to ensure the person has the requisite connection to justify an
assertion of its jurisdiction to tax.
Both of these are a matter for states in that each state will need to
evaluate the most effective method of formulating rules related to a
person’s connections. When we look at different tax regimes across the
globe, we see some similarities and differences. In terms of similarities
we see:
• Nation states generally use residence as the connecting factor for
determining tax jurisdiction rather than using nationality, with the
major exception being the United States.
• Nation states generally adopt special rules for a person’s tax
residence and these frequently have different meanings to
residence status in other contexts, such as immigration.
• Nation states generally adopt different rules for different classes
of person, so that individuals and companies will have their own
special tax residence rules.
• Nation states that recognise entities such as trusts and partnerships
will often look through the structure to that of the trustee or
partners respectively and will consider the connections that the
person underlying the trust or the partnership has with their state.
• Nation states often adopt rules for individuals that focus on (i)
their physical presence in their nation state, (ii) their personal and
economic connections with that nation state, or (iii) a combination
of tests along the lines of (i) and (ii).
• Nation states often adopt rules for companies that focus on (i)
the place of registration, (ii) the place from which the day-to-day
business decisions are made, (iii) the location of the directors, or (iv)
a combination of some or all of these tests.
37
When nation states adopt different rules for a person’s residence from
those of other jurisdictions there is the potential for jurisdictional overlap
and jurisdictional vacuum to occur. In terms of jurisdictional vacuum,
if Country A claims that Company X is a resident on the basis that its
business management decisions take place in Country A and Company
X derives profits in Country B and Country B claims that Company X is a
resident of Country B because Company X is incorporated in Country B, it
is possible that all Country A residents’ profits arising in Countries A and B
will be included in the tax bases of both countries, due to both countries
adopting a worldwide basis of taxation (see 4.5 below). This is due to the
fact that in this example both Country A and B claim the jurisdiction to
tax Company X on a worldwide basis.
In order for all Company X’s profits in Countries A and B to be included
in Country A’s tax base, it would be necessary for Country A to
operate a worldwide basis of taxation (this is discussed in more detail
below at 4.5). Traditionally, states that have relied upon a person’s
connection with them have used the test of residence and frequently
when residence was used as a basis for taxation it was coupled with a
worldwide basis of taxation. In other words, states that operate regimes
based on the residence of persons subject their residents to tax on all
income and profits wherever those profits arise. So, in our example,
where Country A considers Company X to be a Country A resident
and Country A operates a worldwide basis of taxation, then Country
A will include all Country A and Country B’s profits in its tax base.
Where Country B considers Company X to be a Country B resident and
Country B operates a worldwide basis of taxation, then Country B will
include all Country A and Country B’s profits in its tax base. The result
is that the profits in Country A and B are subject to double taxation.
As already noted, states frequently decide to provide relief from this
type of double taxation either in their domestic tax regimes (unilateral
relief ) or may decide to enter into DTAs on a bilateral basis in order to
relieve double taxation.
Although the determination of residence is crucially important for
the scope of the jurisdiction to tax to be identified and for double
taxation relief to be effected, also crucial to these issues is the concept
of ‘source’. As discussed below, not all states subject their residents to
tax on a worldwide basis. Some states determine whether a person has
a sufficient connection with them – by using, for example, the concept
of residence – but then only extend their jurisdiction to tax to amounts
that have a ‘source’ within their own jurisdiction (see 4.7). Persons that
are non-resident are treated in the same way as residents under such
a territorial system, as the jurisdiction to tax only extends to amounts
that have a source within the nation state.
4.4 Residence
We have seen that nation states need to justify their jurisdiction to tax
and generally extend their tax reach either consistently with Principles
A–B (see 3.7), or at least do not extend their tax reach beyond the scope
of those principles. We have also seen that nation states often consider
that the connections a person has with their nation state justify their
ability to include those persons within their jurisdiction to tax.
38
Traditionally, jurisdiction, emanating as it does from a nation state,

has been based upon nationality and territoriality. This notion of
jurisdiction can be applied to the international tax context and takes
the form of the Principles A–B (see 3.7). Tax rules tend to modify and in
some cases expand the definition of nationality vis-à-vis their ability to
assert jurisdiction to tax over persons who they consider to have the
requisite connection within their territory by using the concept of tax
‘residence’ as opposed to nationality.
In most nation states’ tax regimes residence is used as the principal
connecting factor. The United States is the exception with its continued
focus on citizenship and nationality. However, this concept of tax
residence is not necessarily the same as residence used in other
contexts, such as immigration law.
Generally, the main justification for residence taxation is based on
the notion of ability to pay, which we considered in Chapter 2 as one
aspect of the need for taxes to be equitable. ‘Ability to pay’ provides
that citizens should contribute to the provision of public goods
in proportion to their respective incomes. In order to determine it
correctly, it is necessary to assess the income on a net basis, so that
the costs incurred in generating it are subtracted from the tax base. It
is also necessary for the tax base to include all income of the taxpayer,
irrespective or where it is generated (i.e. irrespective of its source). This
means that a tax based on ability to pay must be levied on a global
or worldwide basis and it also means that the residence state is in the
best position to assess their residents on their worldwide net income.
This is because the residence state will generally have better access to
information pertaining to their residents than perhaps the source state.
When a state determines to subject its residents (or tax nationals)
to tax on a worldwide basis, this necessarily means that amounts of
income with a domestic and a foreign source will be caught within
the tax net of that state. All states agree that domestic source income
falls within their jurisdiction to tax with the consequence that Country
B residents are not taxed on their Country C income by Country A as
the connection between the Country B resident and Country A is far
too weak and may even be non-existent. However, how foreign source
income is treated is a feature that increasingly distinguishes states’ tax
regimes from one another.
Some of the issues that states need to consider when drafting their
residence rules were outlined above. Although states often need to
consider the same types of issue when drafting these rules, there is no
need for those states to coordinate their definition of residence with
those of other nation states. The result is that it is possible for a person
to be a tax resident of more than one state (‘dual resident’ with the
potential for double taxation caused by jurisdictional overlap) on the
one hand, and also to derive income while not satisfying the residence
rules of a state that may well be connected to that income (with the
potential for double non-taxation caused by a jurisdictional vacuum).
When the problem is one of dual residence, reference must be made
to a DTA (if there is one) as this will provide a set of tests that seek to
determine to which state the person has the strongest connection.
39
Once this has been determined, the person is deemed to be a resident

for the purposes of the DTA and so can claim relief from double
taxation under the DTA provisions. The DTA dual-resident tests are
considered in Module B.
Where, however, the problem is one of a person not satisfying the
residence rules in any of the states that have an economic connection
with the income derived by that person, there is an altogether different
problem. This problem has received increasing attention in recent
times and there have been calls to re-configure the rules relating to
international tax law such that states coordinate the international
aspects of their domestic tax regimes and their DTAs in a way that
minimises the possibility of persons being able to generate income
without paying any or what is perceived to be enough tax. This
problem forms part of the work by the OECD and G20 on base erosion
and profit shifting.
4.5 Worldwide basis of taxation

A worldwide basis of taxation refers to a system of taxation that
includes income from all sources (i.e. domestic and foreign source).
This means that the geographical location of the source of income is
irrelevant and all such amounts are brought within the tax base of the
state of residence of the relevant taxable person. The worldwide basis
of taxation relies upon the residence of the relevant person and so the
concept of ‘residence’. More specifically, the domestic law definitions of
residence form the foundation for this form of taxation.
The worldwide basis of taxation forms the basis of a number of
different domestic tax regimes. However, it is important to note that
although many states have maintained a worldwide basis of taxation
for individuals, there are more and more instances of states moving
away from a worldwide basis of taxation for companies. This tax policy
shift is in great part due to the fact that: (i) it is administratively more
convenient to exempt some, if not all, foreign source income; and (ii)
companies are more likely to establish their headquarters in states that
exempt foreign dividends from taxation in at least some circumstances
(i.e. international competitiveness).
When a state adopts a worldwide basis of taxation and determines that
they will relieve juridical double taxation, it generally uses one of two
methods of relief: credit method or the deduction method of relief.
References to ‘global taxation’ are references to ‘worldwide taxation’
and the terms may be used interchangeably in this course and in other
contexts.
Activity 4.1
Outline how juridical double taxation might arise when there is a lack of
congruence between the tax regimes in the following scenarios:
1. source state and source state;
2. source state and residence state;
3. residence state and residence state.
40
4.6 Income
When states seek to justify bringing income within their jurisdiction to
tax on the basis of a connection that a particular activity or transaction
has, they are faced with how to determine whether a particular amount
of income can be justifiably considered to originate in its jurisdiction.
When an amount of income has an origin in a particular state, it is
said to have a source in that state. What determines the source of an
amount may depend upon the type of activity that generated the
relevant amount of income or profits. There is, however, no generally
accepted definition of income for the purposes of the source rules.
Indeed, the concept of source may be difficult to square with amounts
derived from, for example, the provision of a cloud computing service.
Locating and defining the source of amounts of income is no easy task.
Again, we see that states adopt different approaches to determining the
source of a particular amount of income and also in defining the actual
amount of income. States may disagree as to the type of transactions
that are to be treated as distributions of profits to shareholders (i.e.
dividends). Some will treat certain types of interest payments as
dividends on the basis that the interest payments, although formally
referred to as interest payments, are in substance more similar to
dividend payments. If two states disagree about the nature of the
payment and they adopt different source rules for dividends and
interest payments, there is the potential for both states to claim the
jurisdiction to tax on the basis of the source of the payment.
4.7 Source
The concept of source has been described as being at the heart of
international tax law in that the source of income must be determined
such that it can be determined which nation state has jurisdiction to
tax over the relevant amount of income (Shay et al. at 83).
As noted in Chapter 3, taxation on the basis of the source of the
payment is generally justified on the basis of the benefit principle but
practical reasons also support its usage including enforceability and
administrative convenience. We also saw that the state that claims that
the source of an amount is within its national borders is afforded the
primary taxing right over that amount. As a consequence, the general
position is that nation states acknowledge that all income with a source
in Country B can be taxed in Country B even if those amounts are not
derived by Country B’s nationals. The result is that where a Country A
resident derives taxable amounts in Country B, Country B will have the
primary taxing right over these amounts. These amounts are referred to
as having a ‘domestic source’ for Country B but are simultaneously the
‘foreign source’ amounts derived by a Country A resident. If Country A
operates a worldwide basis of taxation, Country A will be required to
acknowledge that Country B has the primary right to tax the Country
B source income. If Country A operates a system of relief from double
taxation (whether in its own domestic regime or through a DTA it has
with Country B), Country A will include the Country B income in its
tax base but it will provide Country A resident with a tax credit. The
operation of these double taxation relief rules is discussed further in
41
the following chapter but, for now, we need to appreciate that the
concept of source is important and plays a central role in the taxation
of international transactions and cross-border economic activity.
The support for source taxation on the basis of the benefit principle is
not universal. It is open to the question of what benefits residents, on
the one hand, and non-residents, on the other, should pay for. Some
commentators consider that non-residents operating in another state
– so, for example, a Country A resident operating in Country B – should
only pay tax in relation to the value of the benefits provided by Country
B to the Country A resident. Their view is that if Country A resident uses
particular roads in Country B to travel along to deliver their products,
Country A resident should contribute for its use of those roads. This
is considered to be a rather constrained view of the benefits that are
conferred on Country A resident and is one that supports a weaker
‘source’ state taxing right and therefore increased ‘residence’ state
taxing rights (Shay et al. at 90).
A less constrained view takes account of the fact that Country A’s
resident benefits from Country B’s political environment, legal
protection, education system, transport and communication and
redistributive policies that create a relatively stable order. These
benefits extend beyond the specific public services that Country A may
rely upon to support his income-generating activity in Country B and
may even constitute a similar level of benefits to the level of benefits
afforded to Country B residents. This is considered to be a stronger
view of the benefits that are conferred on Country A residents and is
one that supports a stronger ‘source’ state taxing right and therefore
reduced ‘residence’ based taxing rights.
Activity 4.2
‘The tax that a man is called upon to pay to the State may be said to be divisible
into two parts, that which is due for the specific protection and maintenance of
particular sources of income, and that which is due for the privileges which the
citizen himself enjoys in his person and residence.’
Analyse this quote from Sir Josiah Stamp made when he was giving evidence to a
UK Royal Commission in 1919. Pay particular attention to the differences between
source and residence bases of taxation.
4.8 Territorial basis of taxation

The territorial principle refers to the principle of levying tax only
within territorial jurisdiction of a sovereign authority or country. The
underlying theory is that no taxes can be levied outside this area
without violating the tax sovereignty of another state. Consequently,
both residents and non-residents of a state adopting this principle are
only taxed on the income from sources in that country and on property
situated in that country.
Under a pure territorial system, residents are not taxed on any foreign-
source income. However, some states adopting this principle also
bring in anti-avoidance legislation that expands their jurisdiction to
tax in certain specified circumstances. Also, while many states have
traditionally operated a worldwide basis of taxation, their adoption of
42
a territorial basis proceeds in a piecemeal way. For example, several

states now exempt certain foreign source dividends from the tax base
of their resident companies. We can refer to these systems as ‘partial
territorial systems’.
When a state adopts a territorial basis of taxation and relieves juridical
double taxation, it generally uses the exemption method of relief. At
a general level, this means that Country A will exclude all amounts of
income derived outside Country A from its tax base. The details of the
exemption method, and its variants, are considered in Chapter 5 below.
Activity 4.3
What are the benefits of moving towards a territorial basis of taxation of:
• residents of a state that is considering making the change
• non-residents of a state that is considering making the change
• the governments that are considering making the change?
4.9 Global formulary apportionment (GFA)

This subject is re-visited in Module D when we consider ‘transfer
pricing’ and is not an examinable topic for Module A. However, it is
referenced in Module A as you need to be aware that there is support,
in relation to multinational corporate groups, for a move away from
traditional concepts such as residence and source towards GFA for
the purposes of allocating taxing rights. GFA uses the geographical
location of a combination of factors such as sales, property and
employees, to determine the tax liability in a given state. The precise
weighting given to these factors is expressed in a ‘formula’ and given
that this approach captures the factors across the globe, it is referred to
as ‘GFA’. Some commentators have quite rightly pointed out that such a
move would constitute a move away from the taxation of income and
towards the taxation of those factors of production that are used to
allocate taxing rights to a particular jurisdiction per the formula.
We consider the advantages and disadvantages of GFA in Module D.
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Notes
44
Chapter 5: Methods of relief

Learning outcomes
• critically evaluate the major principles of international tax policy
• explain the justification for states seeking to relieve double taxation
• describe and compare the major methods of relief from double taxation
• differentiate at a general level unilateral and bilateral methods of relief
• calculate the tax payable for a person with domestic and foreign source
income by applying the various methods of relief from double taxation.
Essential reading
• Brinker, T.M. et al. ‘Relief from international double taxation: the basics’ (2005)
3 Journal of International Taxation 16–21. Available via ProQuest in the Online
Library.
Review 261–336, in particular:
• Neutrality: 270–77 and 323–27.
• Neutrality in the context of international taxation: 284–94.
• Inter-nation equity: 297–99.
• Rickett, R. ‘Foreign tax credits’: Chapter 8 in Lymer et al. (eds) The international
taxation system. (Kluwer Law International, 2002). Foreign tax credits: 139–45.
Available on the VLE.
• Shannon, H.A. ‘Tax incentives and tax sparing’ (1992) 20(2) Intertax 84–96.
Available via Kluwer Law Online in the Online Library.
• Weisbach, D.A. ‘The use of neutralities in international tax policy’ (2015) 68(3)
National Tax Journal 635–52. Available via Business Source Premier in the
Online Library.
Introduction
Chapters 3 and 4 introduced the potential problems that arise when
the tax regimes of nation states interact. We have seen that cross-
border activity creates the potential for both too little and too much
tax to be paid. Chapter 6 introduces the principles that have guided
nation states’ approaches to reducing the instances of jurisdictional
overlap. This chapter considers the most influential international tax
principles of various forms of neutrality and equity as applied to the
international context.
We will see that the principles that influence policy making in the
domestic context are slightly different when one considers tax rules in
an international context. It is clear that once transactions and persons
move outside the domestic tax regime other factors also come into
play. For example, the jurisdictional limits of Country A may interfere
with the fair taxation of Country A resident’s income derived in Country
B (perhaps due to the fact that Country B subjects Country A resident’s
45
income derived in Country B to tax without Country B having any

access to Country A resident’s circumstances, which would appear
to breach vertical equity concerns). This is also true of the reverse
situation where Country A taxes a resident of Country B who has
derived income in Country A.
As well as highlighting the principles that have traditionally guided
states’ approaches to relieve double taxation, this chapter also
introduces you to the most commonly used methods of relief from
double taxation. Relief from double taxation can be implemented by
states as part of their domestic tax regime and this is referred to as
unilateral relief. States may also choose to give effect to relief from
double taxation on a bilateral basis by way of a double tax agreement.
5.1 Principles of international taxation

This section considers the various principles that have guided
international tax policy making and in particular states’ decisions to
adopt a particular method of relief from double taxation. What we will
discover is that the first four principles considered below all revolve
around the concept of neutrality. Neutrality was introduced in Chapter
2 under the heading ‘Tax principles’ and we saw that it is a sub-set of
the principle that taxes should seek to be ‘economically efficient’.
More recently, equity or fairness has been considered to have a place
in the international tax policy setting. We also saw in Chapter 2 that
it is considered that equity or fairness should guide the domestic tax
policy decisions of states. Equity in the international tax law context has
come to mean ‘inter-nation’ or rather a fair or equitable allocation of tax
revenue across states. Equity has also more recently been used to justify
the revolt against international tax avoidance. This introduction of equity
into the international tax law discourse has added a further dimension,
namely that taxpayers should behave equitably vis-à-vis the revenue
authorities of the jurisdictions in which they operate or invest. In other
words, taxpayers should pay their fair share of tax revenue to the states
in which they have personal and economic connections.
5.1.1 Capital export neutrality (CEN)

CEN is a public finance concept that refers to the situation where
international tax policy is designed in such a way that a resident has no
incentive or disincentive to invest in or outside its state of residence. As
we will see when we consider the credit method below, CEN is realised
when the amount of tax that a resident must pay on their worldwide
income to their state of residence is the same whether they invest in
the state of residence or outside of the state of residence.
CEN is considered to be desirable as it facilitates the expansion of the
residence state’s residents into foreign markets. Residents of a state that
operates CEN will not be deterred from investing overseas or investing in
their state of residence on the basis of tax considerations. In other words,
under CEN the issue of the tax cost of investing in one or other location
should not bear on the resident’s location decision making.
However, CEN is more difficult to realise when the tax rates of the
residence state are lower than those in the state of foreign investment.
46
Furthermore, CEN can only be achieved when either a full credit is

provided or an ordinary credit is granted by a state that has a tax rate
higher than the state of investment.
Examples of the operation of full and ordinary credits are found at
Activity 5.1 and 5.3.3.
5.1.2 Capital import neutrality (CIN)

CIN is a public finance concept. It stipulates that investments within
a country should be subject to the same level of taxes regardless of
whether they are made by a resident or a non-resident. States that wish
to ensure that all investment within their economies are treated equally
for tax purposes generally exclude all foreign source income from their
tax base. In other words, they exempt from taxation all foreign source
income of their residents and only subject to tax the domestic source
income of residents and non-residents (see 5.5).
5.1.3 Capital ownership neutrality (CON)

CON is evidenced when international tax policy does not influence who
owns assets. In other words, international tax policy satisfies CON when
the ownership pattern of assets is efficient. This is based on the view
that the ownership of assets affects the productive use of those assets
and therefore international tax policy should not distort the decision to
own assets.
5.1.4 National neutrality (NN)

NN is a public finance concept that focuses on the need for a sovereign
state to maximise its own national interest and effectively creates a
disincentive for its residents to invest overseas. States that wish to ensure
that their residents maximise their investment domestically frequently
adopt the deduction method of relief from double taxation (see 5.6).
National neutrality has its critics. It is considered that adopting states are
focused on the advancement of their own economies at the expense of
non-residents, who are considering investing within their borders.
The main difference between CEN and NN is the way in which foreign
taxes are treated under the respective states’ tax regimes. CEN is
indifferent as to which state (residence or overseas) receives the tax
revenue, as long as the overall tax burden for their residents is the same
irrespective of the location of their investment. NN is considered only
to value the tax contributions made to its own government.
5.1.5 Market neutrality (MN)

MN provides that if two firms compete with each other in the same
market, they should face the same overall effective tax rates. By being
subjected to the same effective tax rate, the theory is that competition
between the two firms is not distorted.
5.1.6 Inter-nation equity (INE)

INE – also referred to as ‘inter-jurisdictional equity’ – was referred to in
3.10 (Jurisdictional imbalance). It refers to the equitable distribution
of tax proceeds from the production and the consumption of
internationally traded goods, taking into account the jurisdictions
involved and taxpayers of each jurisdiction.
47
5.1.7 International tax principles: concluding thoughts

Without tax rates and tax bases being the same across all nation states
it is impossible for CEN and CIN to be achieved simultaneously. CEN
and CIN are necessarily incompatible. NN can also cut across the other
forms of neutrality. The debate as to which international tax policy
should prevail is still very much alive and is well-documented in the
literature.
5.2 Methods of relief

The two main methods for relieving juridical double taxation are the
credit method and the exemption method. However, there are some
countries that operate a third method: the deduction method. Each of
these methods is considered below.
The effect of a country deciding to provide relief from double taxation
is that that country will relinquish some or all of its taxing rights
in relation to certain income of its residents. Therefore, the type of
method chosen impacts the extent to which a country can maintain
the amount of taxable income in a country.
The existence of differing methods of relief can be traced back to
attempts to eliminate juridical double taxation in the period following
the First World War. What emerged was that continental European
countries generally went on to use the exemption method, whereas
the United Kingdom and the United States used the credit method.
Countries may operate a variation of the credit and exemption
methods or a combination of the two. We consider the general position
in this chapter and also a few of the variations so that you have an idea
of how these methods operate in practice.
Whereas many countries have moved and continue to move towards
a system of territoriality in that they only tax income arising in their
jurisdiction (and so are effectively moving towards an exemption
system) the United States continues to use the credit method.
Some countries have elected to adopt their own domestic tax systems
of relief (called unilateral relief as there is no formal requirement for
reciprocity), as well as entering into double tax conventions (as these
are currently bilateral in nature it is perhaps of no surprise that this is
referred to as bilateral relief ). It is open to a state not to enter into a DTA
with another state and to either adopt a system of unilateral relief or
not to offer relief from double taxation. Some academics such as Tsilly
Dagan have called into question the value of DTAs and suggested that
it may be better for countries to use unilateral relief.
5.3 Credit method of relief

Unlike the exemption and deduction methods of relief, the credit
method focuses on reducing the tax payable by its residents as
opposed to reducing the income derived by their residents. States
seeking to relieve double taxation and who adopt a worldwide basis
of taxation often use the credit method of relief. Under this method,
residents with foreign source income include that foreign source
income in their tax return. The relevant income tax rates are then
48
applied to the resident’s total income. Once the tax liability has been
calculated, the resident may be granted a tax credit in relation to the
foreign tax paid on the income derived overseas.
States that adopt the credit method are able to so do under their
domestic tax regime (unilateral relief ) and under DTAs (bilateral
relief ). Some states provide both unilateral and bilateral relief and the
interaction between these two sets of rules is a fascinating area.
States are also free to choose from a number of variants of the credit
method. A few of the circumstances in which nation states will provide
tax credits are considered below:
A The foreign tax liability on the foreign source income, which differs
from the amount actually paid.
B All the foreign tax paid.
C The amount that the resident would have paid on their foreign
source income had they derived that foreign income in their
country of residence.
Circumstance A: it is possible for a state to provide a tax credit for foreign
tax to which their resident is initially liable but due to the regime of the
overseas jurisdiction that resident has not actually paid any tax (often
due to the availability of tax incentives in the overseas jurisdiction). This
is considered further in the section entitled ‘tax sparing’ below.
Circumstance B: a state may provide their residents with a tax credit
that represents all the foreign tax paid overseas. The resident state does
not factor in their own tax rates but rather simply uses the amount
of foreign tax paid to determine the value of the tax credit. This is
frequently referred to as a ‘full credit’.
Circumstance C: this approach is commonly adopted by states seeking
to implement CEN. They will provide a tax credit that has a value that
corresponds with the amount of tax that their resident would have
had to pay on that foreign income, if instead of earning the income
overseas, their resident had earned that income in the resident state.
This is frequently referred to as an ‘ordinary credit’.
5.3.1 Bilateral and unilateral relief under the credit method

The credit method may be used by nation states on a unilateral basis
and on a bilateral basis. Frequently, states have unilateral provisions
in their domestic law that can be relied upon by residents who derive
income from a state with which the resident state does not have a DTA
or where the unilateral provisions provide for relief in circumstances in
a situation in which the DTA does not provide relief.
Although you will not be examined on domestic provisions of any
particular country, you may care to investigate whether your country
– or a country whose tax system you are interested in – operates a
unilateral system of relief from juridical double taxation.
Article 23A is the relevant article of the OECD MTC that provides the
details of the mechanism for the credit method under a DTA. As noted
above, we will consider this provision in detail in Module B. For the
purposes of this module you need to be aware that bilateral relief from
double taxation using the credit method is available under a DTA.
49
5.3.2 Full credit

When designing a tax system in which the decision has been made
to subject residents to tax on the basis of their worldwide income
and the need to relieve juridical double taxation is recognised, nation
states have the choice not only of whether to provide unilateral and/
or bilateral relief but also under what circumstances they will provide a
credit for tax on their residents’ overseas income. As noted above at 5.3
there are several options. Circumstance B describes a situation in which
the residence state has decided as a matter of course that it will provide
a credit to the value of the foreign tax paid to an overseas revenue
authority by its residents in all circumstances. This does not mean that
a credit will be granted in all situations as there are generally some
eligibility criteria that a resident must comply with prior to the granting
of a credit (such as the foreign tax being identical or sufficiently similar
to the resident country’s own taxes). Rather, a full credit refers to the
fact that a nation state will provide a resident with a tax credit for
foreign tax suffered on overseas income to the full value of the foreign
tax paid when that resident can demonstrate that the foreign tax meets
certain eligibility criteria. Unsurprisingly, the details of these eligibility
criteria differ across tax regimes and DTA provision.
It is in this way that circumstance B (full credit) differs from circumstance
C (ordinary credit). The objectives of the full and ordinary credit are
different. However, it is possible that their effects may be the same in
some cases. Although the effect of a full credit on the tax payable by
the resident in their residence state is a constant (i.e. it will always cover
the full value of foreign tax paid once the eligibility criteria are met), the
effect of an ordinary credit varies depending on the relative tax rates of
the residence and source countries (see below for examples where the
residence and source state have different tax rates).
Activity 5.1 (Full credit)
Consider the following basic fact pattern and also the two questions below.
Country A resident derives income in Country A of 100 and income of 100 in
Country B. Country A taxes its residents on a worldwide basis and operates a full
credit method of relief. Country A’s tax rate is 30 per cent and Country B’s tax rate
is 40 per cent.
1. Calculate Country A resident’s tax payable in Country A and Country B.
2. Consider how the amount of the credit will differ for Country A resident under the
ordinary credit method as opposed to the full credit method (see example below).
5.3.3 Ordinary credit

As you can see from the activity on the operation of the full credit
method, a nation state may consider that the full credit method
disadvantages it as it collects less tax revenue as a result of operating
the full credit, whereas the source state collects an amount of tax that
is consistent with its rules. Also in a situation where income is taxed at
a higher rate than in the residence state, providing a full credit could
constitute a transfer of revenue from the residence state to the source
state. Again this is not considered desirable by many nation states.
50
For these reasons a number of nation states place limits on the amount
of credit that a resident can use to set off their tax liability in the
resident state. Often these limits will involve ensuring that:
• the foreign tax is the same or a similar type of tax to the income tax
payable in the resident state; and
• the size of the credit is no greater than the amount of tax that
the resident would have paid had they derived the income in the
resident state.
The consequences of the partial credit for the relief of double taxation
depend upon the extent to which the tax rates of the residence
state and source state vary. In the ordinary credit example below the
residence state has a lower rate of tax. The resident of a state that
operates a partial credit will not benefit from full relief from double
taxation. However, where the tax rate of the residence state is equal to
or higher than the source state’s tax rate, the ordinary credit will fully
cover the amount of foreign tax paid to the source state.
Example: Ordinary Credit where the resident state has a
lower tax rate
Calculate Country A resident’s tax payable in Country A and B:
• Country A resident derives income of 100 in Country A and B (i.e.
200 altogether).
• Country A resident has worldwide income of 200.
• Country A’s tax rate is 30 per cent and Country B’s tax rate is
40 per cent.
• Country A resident pays 40 in tax to Country B.
• Country A tax liability is 200 x 30 per cent = 60.
The Country A tax liability in respect of 100 = 30. This amount
represents the amount of tax that Country A resident would have had
to pay Country A had it derived the Country B income in Country A.
This amount represents the maximum amount of credit that Country A
will grant Country A resident under the ordinary credit method.
Country A calculates the tax credit as follows:
Country B income/Total income (100/200) x Country A tax (60) = 30
• Country A resident pays more tax under this method as they have
already paid 40 to Country B but only receive a tax credit of 30.
• Country A resident has a tax liability of 60 in Country A and can
reduce this to 30 (by making use of the ordinary credit).
• In sum, Country A resident must pay 30 to Country A and 40 to
Country B.
• Accordingly, Country A resident’s total tax payable is 70.
Example: Ordinary Credit where the residence state has a
higher tax rate
Calculate Country A resident’s tax payable in Country A and B:
• Country A resident derives income of 100 in Country A and B (i.e.
200 altogether).
• Country A resident has 200 worldwide income.
51
• Country A tax rate is 40 per cent and Country B tax rate is 30 per cent.
• Country A resident pays 30 in tax to Country B.
• Country A’s tax liability is 200 and this is subjected to the 40 per
cent rate = tax payable of 80.
Country A calculates the tax credit as follows:
Country B income/Total income (100/200) x Country A tax (80) = 40
• Country A tax payable = 80
• Country B tax paid = 30
• Country A credit = 40 but this exceeds the amount of foreign tax
actually paid and so Country A will reduce the credit to the amount
that Country A resident would have paid had it derived 100 foreign
source income in their resident state and not overseas.
• Accordingly, Country A resident has a tax liability of 80 in Country
A but this is reduced by a 30 tax credit, which results in Country A
resident paying 50 over to Country A.
• Country A resident has paid 50 to Country A and 30 to Country B,
totalling 80 tax overall.
Had Country A resident derived 200 in Country A it would have had to
pay tax in Country A of 80. The fact that Country A resident also pays 80
when it derives a combination of domestic and foreign source income
demonstrates that the ordinary tax credit provided by Country A has
resulted in a tax-neutral position for Country A resident i.e. the same
amount of tax is payable by Country A residents whether they invest at
home or overseas, which means that CEN is realised when Country A’s
rate of tax is higher or the same as Country B’s rate of tax.
5.3.4 Tax sparing

The issue of tax sparing involves the interaction of double tax relief and
tax incentives made available by a nation state that wants to encourage
foreign investment. Tax incentives available at the domestic level are a
controversial area. There is no consensus as to whether they promote
the desired outcomes in the short or long term. Although the benefits
of tax incentives under domestic tax regimes are controversial and a
subject of debate for economists and others, they do not fall within the
scope of this course. What we are interested in is whether a resident
of a state that operates a worldwide system of taxation will grant a
foreign tax credit when its residents derive foreign source income that
has either not been taxed or only partially taxed in the foreign state
because the resident’s overseas income benefited from tax incentives
in the foreign state. An example may help draw out the issue.
Example
• Country A resident derives income of 100 in Country A and 100 in
Country B.
• Country A resident conducts business activity in Country B in a
special economic zone that benefits from an exemption from
taxation for foreign investors for a period of 12 months.
• Country A operates a worldwide basis of taxation and so includes
200 in its assessment of Country A’s taxable income.
52
• Country A has a tax rate of 30 per cent and Country B has a tax rate
of 40 per cent. Country A resident derives income of 100 in Country
B but does not pay any tax to Country B as it benefits from the
special economic zone exemption.
• Country A resident applies for a tax credit to the value of 30 as this
represents the amount of tax that would have been payable in
Country A had the 100 been earned in Country A.
Tax position where tax sparing provided
If Country A operates tax sparing, it will provide Country A resident
with a tax credit for 40 despite the fact that this amount has not been
paid by Country A resident. The effect of the tax sparing provision is
that Country A resident has a tax liability in Country A of 60 (200 x 30%)
but this is reduced by a 30 tax credit. Accordingly, Country A resident
pays 30 to Country A.
Tax position where no tax sparing provided
If Country A does not operate tax sparing, it will not provide Country
A resident with a tax credit for 40 because this amount has not been
paid by Country A resident. The effect of Country A not operating tax
sparing is that Country A resident will have a tax liability in Country A
of 60 (200 x 30%) but no tax credit will be provided by Country A and
so Country A resident must pay 60 to Country A.
This example highlights the fact that the tax burden is greater for
Country A resident when Country A does not provide tax sparing.
Whereas it may seem reasonable for Country A to refuse to credit
foreign tax that has not been paid (due to Country B’s incentive
regime), this fails to take into account the impact that Country A’s tax
regime has on Country B. By offering foreign investors tax incentives,
Country B clearly wants to encourage foreign investment. This
objective is frustrated if it forgoes tax revenue on profits derived by
foreign investors but that loss of revenue fails to meet its objective. The
objective of Country B’s tax incentive regime is clearly to lower the cost
of operating in Country B for foreign investors. If those foreign investors
cannot benefit from a tax credit for the reduction in tax granted to
them by Country B, they may be less likely to invest in Country B as
they cannot receive the benefit of the incentives.
This issue arises solely in the context of credit methods that require
foreign tax to have been paid before a tax credit will be granted by the
residence state. As the requirement that foreign taxes have been paid
is fairly common, it is likely that unless a state provides tax sparing,
the value of tax incentives for residents of states that use such a credit
method is negated. As you will see below, a resident of a state that
operates an exemption method does not have to consider this issue
as the residence state will exclude the relevant foreign source income
from its tax assessment.
53
5.4 Exemption method of relief

This method of relief, like the deduction method, focuses on the
income derived as opposed to the tax payable. By this we mean that
instead of reducing the amount of tax payable by the resident, the
deduction reduces the amount of income that is subject to tax.
The exemption method relief, at its most basic, excludes the income
derived by its residents from locations outside its national border. For
example, where Country A operates an exemption method and one
of its residents derives income in Country B, Country A will not lay any
claim to tax the Country B income. Only Country B claims the right to
tax the Country B income derived by Country A resident. As with the
credit method, the exemption method has variants. One variant is the
method of exemption with progression and this is described below.
The exemption method is not considered to be consistent with CEN
because under the exemption method a resident is taxed differently
depending on whether they derive foreign source income. There is
a view that states that adopt the exemption method are breaching
the principle of CEN and so are incentivising their residents to derive
foreign source income. The extent to which this is true would appear to
depend on the tax rate overseas. Where the tax rate is higher overseas,
it is more difficult to argue that the exemption method incentivises
foreign investment. Rather, the exemption method is considered to
favour CIN because a state will tax all investment within its borders in
the same way (i.e. all domestic source income whether derived by a
resident or non-resident is taxed in the same manner).
States that adopt the exemption method do so for a number of
reasons. The justifications for using this method include:
• Administrative convenience as there is no need for the residence
state to assess their residents’ tax position in relation to foreign
source income.
• That it is equitable as it respects inter-nation equity and so does not
disadvantage developing countries.
Increasingly states are moving towards exemption systems in relation
to certain types of foreign source income (such as from foreign source
dividends from affiliates that are engaged in business activity). This was
discussed in the context of territoriality in Chapter 4.
States that are considering moving to the exemption method may
express the concern that because it excludes foreign source income
from the tax base of the residence state, its residents will move their
mobile capital to other states. In other words, the concern is that if a
state with a high tax rate exempts all foreign source income (or some
elements of foreign source income), there is the risk that its residents
will move their investment to nation states that have lower rates of tax
or to those that do not levy income tax at all.
5.4.1 Article 23B OECD MTC

We consider this article of the OECD MTC in Module B. For the purposes
of this module, be aware that states that enter into DTAs usually include
a provision that specifically deals with relief from double taxation.
54
5.4.2 Full exemption

This method excludes foreign source income from the tax base of a
state. The result is that a state that adopts the full exemption method
will apply its tax rates to all domestic source income whether derived
by a resident of their state or not. It is not relevant to that state that
its residents may have derived income overseas, as these amounts of
foreign source income do not enter the tax calculation of its residents.
Activity 5.2 (Full exemption)

Calculate Country A resident’s tax payable in Country A and Country B in the
following circumstances:
• Country A resident derives net income of 100 in Country A and net income of
100 in Country B.
• Country A has a tax rate of 30 per cent.
• Country B has a tax rate of 40 per cent.
• Country A operates a full exemption method of relief.
5.4.3 Exemption with progression

This type of relief from double taxation involves the residence state
taking the amount of exempt income (i.e. foreign source income of its
residents) into account when the residence state determines the rate at
which to tax its residents’ non-exempt income (i.e. their domestic source
income). This method is described as the ‘exemption with progression’
method because it enables the residence state to include the amount of
foreign source income in the taxable amount purely in order to establish
the appropriate marginal rate of taxation. Alternatively, some states
adopt a method by which they calculate the average rate to apply to the
domestic source income. This variant of the exemption method is still
thought of as excluding foreign source income from taxation but the
net result is that a resident of a state with a progressive rate structure
with foreign source income will pay a higher rate of tax on the domestic
source income than if it had not earned any foreign source income.
Activity 5.3 (Exemption with progression)

Consider the following fact pattern and answer the questions below:
• Country A resident derives 100 in Country A and 100 in Country B.
• Country A taxes net income at the rate of 30 per cent for the first 100 of net
income and at 40 per cent for amounts of net income greater than 100.
• Country B taxes all domestic source income at 40 per cent.
• Country A operates an exemption with progression method of relief.
1. Calculate Country A resident’s tax payable in Country A and B.
2. Explain if there is a difference in the amount of tax Country A resident must
pay to (a) Country A and (b) Country B where Country A uses the exemption
with progression method as opposed to the full exemption method.
Feedback is available at the end of the Study Guide..
55
5.5 Deduction method

This method of relief, like the exemption method, focuses on the
income derived as opposed to the tax payable. By this we mean that
instead of reducing the amount of tax payable by the resident, the
deduction reduces the amount of income that is subject to tax.
The effect of a nation state adopting a deduction method of relief is
that its residents are subject to tax on a worldwide basis but instead
of receiving a tax credit (as they would under the credit method) its
residents are allowed a deduction for tax paid overseas. The result
is that the foreign tax paid is treated in the same way as any other
allowable deduction. The deduction method does not fully relieve
the resident from double taxation. The operation of this method is
explained in the example below.
Example
• Country A resident derives income of 100 in Country A and 100 in
Country B.
• Country A operates a worldwide basis of taxation. The tax rate in
Country A is 30 per cent and the tax rate in country B is 40 per cent.
• Country A resident has paid 40 in Country B and is permitted to
deduct the 40 paid from its worldwide income: 200 – 40 = 160.
• The result is that Country A resident’s tax liability in Country A is
160 x 30% = 48
• Country A resident pays 88 tax on its worldwide income (48 + 40).
The effect of providing Country A resident with a deduction, and not
a credit, is that Country A resident pays more tax on its Country A and
B income than it would have done if Country A resident only derived
Country A income. Had Country A resident only derived Country A
income of 200, it would only have had to pay 60 overall as opposed to 88.
While the deduction method is generally not favourable for the
Country A resident, it is beneficial for Country A because the deduction
method is considered to favour national wealth maximisation (NWM).
NWM provides that Country A residents should only invest overseas
when the benefits to Country A are greater than the benefits from its
residents investing in Country A.
5.6 Cooperative measures

These are discussed in detail in Module C and a number of these
are briefly referred to in the Chronology Table in Chapter 6 and in
relation to initiatives that involve the European Union in Chapter 7.
However, you should be aware at this stage that there are numerous
ways in which nation states cooperate to eliminate double taxation.
Entering into bilateral DTAs that provide a specific mechanism for
dealing with instances of juridical double taxation is one such method.
Other methods include increased exchange of information, increased
involvement of non-OECD members in the work of the OECD, and
inter-governmental initiatives.
56
Chapter 6: History of international tax law
Chapter 6: History of international

tax law
Learning outcomes
• Explain the evolution of international tax law as a separate discipline.
• Describe the role played by the OECD and UN and other supranational
organisations in the development of international tax policy.
• Demonstrate a general understanding of recent cooperative international tax
initiatives such as base erosion and profit shifting measures.
Essential reading
• Cockfield, A.J. ‘The rise of the OECD as informal “World Tax Organisation”
through national responses to e-commerce tax challenges’ (Spring 2006) Yale
Journal of Law and Technology 136–87. Available via HeinOnline in the Online
Library.
• Friedlander, L. and S. Wilkie ‘Policy forum: the history of tax treaty provisions
– and why it is important to know about it’ (2006) 54(4) Canadian Tax
Journal 907–21. Available at www.ctf.ca/ctfweb/EN/Publications/CTJ_
Contents/2006ctj4.aspx
• OECD, Background Brief: Inclusive Framework for BEPS Implementation,
January 2017: https://www.oecd.org/tax/beps/background-brief-inclusive-
framework-for-beps-implementation.pdf
• Stevens, S.A. ‘The duty of countries and enterprises to pay their fair share’
(2014) 42(11) Intertax 702–08. Available via Kluwer Law Online in the Online
Library.
• Vann, R. ‘International aspects of income tax’ in V. Thuronyi (ed.) Tax law design
and drafting: Volume 2. (IMF, 1998). Available at: www.imf.org/external/pubs/
nft/1998/tlaw/eng/
• Wijnen, W and I. de Goede ‘The UN Model in Practice 1997–2013’ (March 2014)
Bulletin for International Taxation, available at: https://www.un.org/esa/ffd/wp-
content/uploads/2014/11/9STM_FinalPublishedVersionIBFD.pdf
6.1 Introduction
This chapter spans three centuries and adopts a chronological
approach. It introduces you to the policy that has guided international
tax law since 1869. It ends with a table that lists the major events in the
area of international tax law.
This a historical sketch rather than a detailed history. It is not possible
describe each and every initiative that has been introduced or is being
considered by the global community. Rather, this chapter tracks the
evolution of international tax law from a sole nineteenth century DTA
through to the introduction of the OECD’s Model Taxation Convention
in the 1970s – that still forms the basis of many DTAs around the world
today – to the recent initiatives to adopt coordinated measures to
counter international tax avoidance. This will help you understand
international tax law as it appears today.
57
Due to the interrelated nature of international tax law we will

necessarily have to consider the details of the OECD’s Model Tax
Convention and the more recent coordinated measures throughout
this course and so these will be considered in considerably more detail
in Modules B, C and D.
What emerges from this historical survey is that many of the concepts
we rely on today can be traced back over many years, to an altogether
different period in time. Much has been written about the outdated
nature of the fundamental concepts of international tax law (e.g.
residence and source) and the need for international tax policy to
be guided by new principles that better reflect the global market
economy.
We will see that international tax policy and domestic tax regimes place
heavy reliance on the concepts of residence and source and yet these
concepts are difficult to apply consistently and fairly. E-commerce and
the ability of multinational companies and high net worth individuals
to arbitrage their tax positions when nation states fail to coordinate
their tax policies, result in a situation where nation states are now
recognising that the international tax system must be modernised if
they are to be able to monitor such activity and collect much-needed
revenue.
By taking account of the historical evolution of international tax we
can develop a better understanding of how the international tax law
framework can accommodate all these developments.
6.2 Nineteenth century

In 1869 a treaty between Prussia and Saxony was entered into to
regulate the situation where Prussian citizens who owned land
in Saxony where they resided more or less continuously were
simultaneously subjected to tax in both Prussia and Saxony. The need
to regulate this situation arose from the fact that this double taxation
was claimed to interfere with citizens’ right to establish themselves
freely and so not to be discriminated against and incompatible with
the concept of common citizenship that was introduced by the
Constitution of the North German Federation.1 1
J. Hattingh, ‘On the origins
of model tax conventions:
The decision to enter into a treaty can be traced back to a petition that nineteenth-century German
citizens with connections in both Prussia and Saxony should be exempt tax treaties and laws
from taxation in the home state (residence state) in situations where concerned with the avoidance
of double tax’ in J. Tiley (ed.),
tax at source was charged in the other state (source state). This method
Studies in the history of
of relief from double taxation was rejected. Instead, a law was enacted tax law, Vol.6, Bloomsbury.
to deal with the double taxation issue in 1871 (the Imperial Law for the
Elimination of Double Taxation in the North German Confederation).
This law allocated the right to tax certain types of income in one of the
two countries and also provided that Prussia and Saxony enter into a
bilateral tax treaty.
The 1869 treaty between Prussia and Saxony displays some very
interesting features some of which are still found in treaties based on
the OECD MTC. For example, both the OECD MTC and the Prussia–
Saxony DTC include general rules surrounding the exclusive taxation
of the state of residence with some exceptions such as land and the
58
2
J. Hattingh, ‘On the origins
operation of a trade.2 Differences include reference to citizenship as
of model tax conventions:
a relevant connecting factor in the Prussia–Saxony treaty – this was nineteenth-century German
changed to residence in the above-mentioned 1871 law as it was tax treaties and laws
considered that the residence state was the state in which the person concerned with the avoidance
of double tax’, in ed. J. Tiley,
consumed the most public goods and services – and the reference
Studies in the history of
to residence in the OECD MTC. Another difference is that the Prussia– tax law, Vol.6, Bloomsbury.
Saxony treaty did not refer to the taxes to which it applies whereas the
OECD MTC does contain an article that details the taxes or types of
taxes to which it applies.
6.3 League of Nations (LON)

The LON was established in 1920, in accordance with the Treaty of
Versailles. The LON’s mission was to: ‘promote international cooperation
and to achieve international peace and security’. In the same year, and
so also shortly after the end of the First World War, the International
Chamber of Commerce put the issue of double taxation on the political
agenda.3 The LON requested that four technical experts prepare a 3
J. Farrell, The interface
of international trade
report dealing with a selection of issues related to double taxation.
and taxation (IBFD).
The Group of Experts prepared a General Report and Four Draft
MTCs (direct taxes; succession duties; administrative assistance and
assistance in collection).
By 1927 the group of experts ‘Committee of Technical Experts on
Double Taxation and Tax Evasion’ (consisting of 13 experts from North
and South America, Europe and Asia) published its first Draft Model 4
E. Pamperl, Chapter 2: The
Convention and Commentary for the avoidance of double taxation.4 This history of Article 16 of the
OECD Model Tax Convention,
first Draft favoured allocation to the state in which the relevant person in Pamperl, E., Article 16
was resident. This draft was not considered to be sufficiently wide in of the OECD Model
scope and therefore the LON established its own fiscal committee to Convention: history,
scope and future (IBFD:
review the appropriate approach to the drafting of the MTC.
2015), 25–42, 26.
Interestingly, the Fiscal Committee prepared a draft multilateral MTC
in 1933 but this was never accepted. The Fiscal Committee’s work
from that point on culminated in the Mexico Draft Double Taxation
Convention and the London Double Taxation Convention. These two
draft conventions are discussed below.
6.4 Mexico and London drafts

The Fiscal Committee met in June 1940 in Mexico City, and then
again in July 1943. Given the location and the time of the meeting it
is perhaps unsurprising that representatives from Argentina, Bolivia,
Canada, Chile, Colombia, Ecuador, Mexico, Peru, the United States
of America, Uruguay and Venezuela were in attendance. The Fiscal
Committee adopted a Model Bilateral Convention for the Prevention
of the Double Taxation of Income and a Protocol, and a Model Bilateral
Convention for the Establishment of Reciprocal Administrative
Assistance for the Assessment and Collection of Direct Taxes and a
Protocol.
The Fiscal Committee met again in March 1946 in London where the
Mexico Draft was reviewed and amended. One of the reasons for this
perceived need for change was that the attendees did not agree with
the Mexico draft. The main changes made were to the rules relating to
59
the taxation of interest, dividends, royalties, annuities and pensions.

It was noted at this meeting that there was a need for the work that
led to the Mexico and London Draft to be reviewed to ensure that
experts from both CEN and CIN countries and experts from developing
countries were involved with the review process. The UN was tasked
with this review work.
It has been reported that the Mexico and London Drafts were followed
during the period 1946–55 and that some 70 DTAs were entered into
during the same period. DTAs entered into during this time were not
entered into uniformly and so neither the Mexico, nor the London Drafts
received unanimous support. This is at least partly due to the fact that
the coverage of the draft MTCs was limited and the two drafts were
considered to be inconsistent in their approaches. There was a growing
consensus that DTAs should be applied as uniformly as possible and
that there was therefore a need to revisit the work of the LON.
6.5 OECD MTC: 1963, 1973 and 1977

The OEEC was formed in 1948 to administer American and Canadian
aid under the Marshall Plan under the reconstruction of Europe after
the Second World War and to remove obstacles to international trade
and development. The International Chamber of Commerce urged
the OEEC to promote provisions for the avoidance of double taxation
by way of bilateral agreements or unilateral provision. The possibility
of concluding a multilateral convention was also suggested. More
specifically, several countries advised the OEEC to create a permanent
scientific committee of tax experts. Initially the OEEC created an Ad
Hoc Committee but that Committee soon proposed that a permanent
committee be established. The OEEC’s Fiscal Committee was established
in 1956 and was tasked with studying issues of double taxation and
put together a draft Convention for the avoidance of double taxation.
The Committee took the London Model as its starting point. Initially a
Multilateral Convention was considered but this idea was not pursued
due to concerns about agreed definitions and application.
The Fiscal Committee issued its first report in 1958. Between 1958
and 1961, the Committee prepared four interim reports before finally
submitting its final report in 1963. This final report was entitled Draft
Double Taxation Convention on Income and Capital.
In 1960 the OEEC became the OECD. The OECD membership is
made up of mainly wealthy developed nation states and therefore
it is perhaps unsurprising that they sought to further their own
interests above those of non-members. Later drafts were criticised
by developing countries as they considered that source countries
were required to forsake too much revenue under the provisions
of these draft MTCs. As developing countries were more likely to
import as opposed to export investment, they considered that this
residence state bias was incompatible with their best interests. This
dissatisfaction with the bias inherent in the OECD MTC led to the
eventual development of a UN MTC (see below). It was not until 1977
that the OECD published the final version of the first OECD MTC. It is
this version that has formed the starting point for DTA negotiations
between nation states. It should be noted that the OECD MTC has been
60
regularly updated with the most recent updates being in 2010, 2014
and 2017.
We will consider the structure of the OECD MTC in detail in Modules
B and C but at this point you should be aware that the perceived
advantages of an internationally accepted model include:
• common rules of interpretation
• major aid to treaty negotiation
• a certain degree of uniformity of double taxation relief.5 5
A. Miller and L.
Oats, Principles of
international taxation,
6.6 UN MTC 5th Edition (Tottel Publishing:
2016), p.120.
After the end of the Second World War, the LON was succeeded by the
United Nations (UN). The UN dedicated a fiscal committee to the task
of furthering the work of the LON in relation to international taxation
but no progress was made in relation to the creation of a new MTC. As a
result, the Economic and Social Council of the UN requested that an ad
hoc group of experts be appointed to consider the facilitation of DTAs
between nation states at different stages of development.
This group published guidance on the negotiation of DTAs between
such states in 1974. Having published guidance, it was then considered
necessary to develop an MTC to be used during the negotiation of DTAs.
In 1980, the UN MTC was published and, as with the OECD MTC,
a Commentary to the UN MTC was published alongside it. The
Commentary to the UN MTC 1980 was broadly similar to the OECD’s
Commentary to the 1977 OECD MTC, the main difference being that
the UN MTC broadly favours the state of source – as opposed to the
state of residence – in relation to the allocation of taxing rights in
certain situations.
6.7 Multilateral efforts

As referenced in the Chronology, which you will find at the end of this
chapter, you will see that there is an increasing focus on states tackling
issues with international policy in a coordinated way. However, there
is also an increasing focus on the benefits of tackling issues at the
multilateral level and coming up with multilateral solutions. As we
have seen, DTAs have always been bilateral in their nature. In other
words, DTAs have always involved two nation states coming together
in order to resolve the international tax problems of double taxation
and tax avoidance. Although this approach is understandable it is very
inefficient in that nation states have to negotiate separately with large
numbers of nation states (and this has knock-on effects on the speed
with which they can re-negotiate terms within an existing DTA). There
is also an increasing awareness that entering into different DTAs with
different states is likely to result in a highly uncoordinated approach to
international issues that is likely to result in undesirable outcomes.
Certain groups of nation states have sought to enter into multilateral
DTAs. Nation states that share common economic and political
concerns may decide that a multilateral approach is preferable. We
consider multilateral DTAs in Module B but for the purposes of Module
A you should be aware of the existence of, for example, the Nordic
61
Convention (1996), the CARICOM Agreement (1994), and the Andean

Pact Model Income, Capital and Wealth Convention (1971).
Although you do not need to be familiar with the details of the various
multilateral initiatives in this module, you should be aware of the
types of issue that nation states consider benefit from a multilateral-
level solution and the types of initiative that are in existence (e.g. the
signing of the Joint Council of Europe and OECD’s Convention on
Mutual Administrative Assistance in Tax Matters in 1988; the OECD
and EU’s Convention on Mutual Administrative Assistance in Tax
Matters, amended by Protocol in 2010; and the 2013 BEPS Action
15 which recommended the creation of a multilateral instrument to
modify bilateral tax treaties in line with BEPS outputs (this has been
realised with over 100 countries signing the Multilateral Convention to
Implement Tax Treaty Related Measures to Prevent Base Erosion and
Profit Shifting, 2016)).
It is, however, salutary to remember that these matters are politically
sensitive and action can depend upon the interest or motivation of the
various nation states.
6.8 Base erosion and profit shifting

In September 2013, G20 leaders endorsed a plan, developed alongside
OECD members, to ensure that profits are taxed where economic
activities take place and value is created. The theory is that if profits
are taxed on this basis then the opportunities for profits to be shifted
to low or no tax jurisdictions are minimised with the result that nation
states necessarily protect their tax bases from being eroded by such
behaviour. This is an extremely important and fluid area of tax policy. It
is important for a number of reasons, including that it:
• represents a departure from the view of tax law as a form-over-
substance discipline
• involves a very large proportion of countries across the globe,
which itself displays a coordinated approach to tax policy
• is wide-ranging and seeks to address issues of international tax
avoidance with a multilateral as opposed to unilateral or bilateral
approach.
Although four minimum standards (i.e. model treaty provisions to
prevent treaty abuse; country-by-country reporting; peer review in
relation to harmful tax practices; and resolution via dispute resolution)
and 15 Action Plans have been agreed upon, some areas will continue
to be monitored and reviewed. This means that the issue of BEPS is
still very much a ‘live’ issue and you are advised to keep up to date
with developments in this area. The details of the BEPS initiatives are
not examinable in Module A. However, you do need to be able to
demonstrate an awareness of subject matter of the BEPS initiatives at
6
OECD, BEPS – frequently
a general level and be able to discuss the nature of the various BEPS asked questions, 2016.
outputs (see Activity, activity feedback and chronology table below).6 Available at: www.oecd.org/
You should also be aware of the relationship between the BEPS Actions, ctp/beps-frequentlyasked
Multilateral Convention to Implement Tax Treaty Related Measures and questions.htm. Accessed on
19 May 2018.
the 2017 updates to the OECD MTC at a general level.
62
6.9 Role of supranational organisations

This subsection briefly outlines the supranational organisations that
influence international tax policy to a greater or lesser extent. You
can read more about their origins and their mandates by visiting
their respective websites. You do not need to be familiar with the
workings of all aspects of these organisations; rather the object of this
subsection is to explain the names and function of some of the most
influential policy-making actors in the international tax arena. Their
work will be referenced throughout this course.
6.9.1 The OECD

The Organisation for Economic Co-operation and Development (OECD)
describes itself as a ‘unique forum where governments work together
to address the economic, social and environmental challenges of 7
See www.oecd.org/
globalization’.7 The membership of the OECD consists of: Australia, ctp/exchange-of-
tax-information/
Austria, Belgium, Canada, Chile, the Czech Republic, Denmark, Estonia, taxtransparency_G8report.
Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, pdf. Accessed on 19 May
Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, 2018.
Norway, Poland, Portugal, the Slovak Republic, Slovenia, Spain, Sweden,
Switzerland, Turkey, the United Kingdom and the United States.
The OECD has been described as the most active organisation in the
field of international taxation.8 Even though the League of Nations is 8
A. Miller and L. Oats
Principles of international
the predecessor of the United Nations and not the OECD (or OEEC as it taxation, 2016 (Bloomsbury:
then was), the OEEC (now OECD) took the League of Nations’ last draft 2016), p.35.
convention as a starting point when preparing the first draft of the
OECD MTC.9 9
E. Pamperl, Chapter 2: The
history of Article 16 of the
We will see throughout this course that the OECD has been prolific in OECD Model Tax Convention,
the area of international tax law and its work lies behind much of the in Pamperl, E. Article 16 of
political discussion surrounding international tax law issues. While the OECD Model Convention:
history, scope and future
tax avoidance was always a concern of the OECD, initially the focus of
(IBFD: 2015), pp.25–42, 26.
developing a model tax convention was on the elimination of double
taxation. More recently the focus has shifted towards a coordinated
focus on eliminating aggressive tax planning (see the section on BEPS
above).
6.9.2 OECD Committee on Fiscal Affairs (CFA)

The CFA was established initially to examine tax policy across the
membership of the OECD. The CFA meets twice a year and does a
major part of the OECD’s work on taxation.10 Countries are represented 10
A.P. Morris and L.
Moberg ‘Cartelizing taxes:
by senior tax officials and tax administrators, which contrast with the
understanding the OECD’s
position under the LON in which only technical experts from a small campaign against “harmful tax
group of countries were represented. The CFA is divided into groups competition”’ (2012–13) 4(1)
that focus on a particular aspect of tax policy. Columbia Journal of Tax Law,
1-64, p.21.
The CFA was involved in preparing several interim reports on double
taxation and finally released the first Draft Model Taxation Convention 11
See OECD, Improving tax
on Income and Capital in 1963. The CFA now dedicates a significant compliance – the role of
amount of time to researching and publishing in the area of tax the OECD’s Committee on
Fiscal Affairs, 2012. Available
administration of both OECD and non-member countries. In particular,
at: www.uscib.org/docs/
the CFA has more recently focused on tracking aggressive tax planning Improving_Tax_Compliance.
schemes and considering the administrative dimension of tax policy pdf.
development.11
63
6.9.3 United Nations (UN)

At a general level in fiscal matters, the United Nations is involved with
promoting measures to ensure that developing countries get their fair
share of tax on profits from multinational companies operating within
their borders.12 More specifically, the United Nations Model Double 12
A. Miller, and L. Oats
Taxation Convention between Developed and Developing Countries Principles of international
taxation, 5th edition
(1980) (UN MTC) was based on the OECD’s 1973 MTC but with some
(Bloomsbury: 2016), p.36.
modifications. These modifications were considered to better protect
the interests of ‘developing’ or ‘transition’ economies. The UN MTC is
discussed in Module B.
6.9.4 European Union (EU)

The European Union (EU) has also been influential in guiding
international tax policy. In particular, this has impacted Member States
of the EU but the EU’s initiatives in this area have the potential to affect
anyone dealing with the EU or one of its Member States. In direct tax
matters, Member States retain their autonomous sovereignty to tax but
the European Court of Justice has insisted that this must be exercised
consistently with the EU Treaties. This has caused much litigation
with Member States insisting on their rights to tackle tax avoidance
and to enter into DTAs to properly allocate the taxing rights between
Member States. At the same time, there have been efforts between the
Member States who have adopted the Euro to adopt common rules of
accountancy and taxation. In addition, the EU Commission have used
their powers to regulate competition between Member States to attack
the use of special tax rates, particularly in Ireland.
6.9.5 International Monetary Fund (IMF)

The IMF plays a role in providing technical assistance to countries in
developing their tax policy and practice, particularly to low and middle
13
A. Miller and L. Oats
income countries.13 The IMF was established in 1945 during the Bretton
Woods Conference. The IMF is headquartered in Washington, DC. The taxation, 5th edition
purpose of the IMF is to promote international trade and promote (Bloomsbury: 2016), p.36.
stability in foreign exchange.
The IMF administers short-term lending facilities to countries with a
disequilibrium in their balance of payments. Technical assistance is
provided to members by special missions or resident representatives
who will render advice on economic management. The Central Banking
Department and Fiscal Affairs Department are particularly active in this
respect.14 14
IBFD Glossary p.470.
6.9.6 G8 and G20

The G8 was established in 1975 and is made up of heads of state of
the governments of the major industrial democracies.15 The G8 often 15
A. Miller, and L. Oats
request that the OECD report to them on international taxation issues. taxation, 5th edition
Recent requests include reports on transparency and base erosion and (Bloomsbury: 2016),
profit shifting. pp.35–36.
The G20 was first established in 1999 following the 1997 financial crisis.
In 2008, the G20 met for the first time and agreed to an action plan to
stabilise the global economy and summit meetings have been held
each year subsequently. As referred to below in the section on the base
64
erosion and profit shifting initiatives, the G20 has been instrumental in
the development of this initiative.
6.9.7 United States

Whilst not a supra national body, as the world’s largest economy
the USA has a unique position in international tax law. It often takes
different approaches to tax problems and provides unique solutions,
which other countries subsequently follow.
Activity 6.1
Discuss the relevance, or otherwise, of the history of international tax law.
Activity 6.2
Would you classify the following as hard law, soft law or non-binding guidelines;
or is there a better way of describing the nature of the following:
• OECD MTC
• OECD commentaries
• Individual nation states’ DTAs
• UN MTC
• EU case law
• BEPS outputs.
6.10 Chronology of major events

1869: Prussia-Saxony DTA
1909: Hungary-Austria DTA
1919: Formation of the International Chamber of Commerce (ICC)
1920: British Commonwealth Royal Commission and International
Financial Conference for the League of Nations in Brussels)
1921–23: Committee of Four Expert Economists for the League of
Nations (Bruins (Fr), Einaudi (It), Seligman (USA) and Stamp (UK))
1922–25: League of Nations Committee of Technical Experts
from Belgium, Czechoslovakia, France, the United Kingdom, Italy,
Netherlands and Switzerland
1923: The ICC formulated the Rome Resolutions on the classification
and assignment of different types of income
1925: Draft League of Nations Models
1926: Anglo-Irish DTA
1927: First League of Nations Models – The Geneva Models
1929: Pursuant to a recommendation of the General Meeting of
Government Experts, the Council of the League of Nations appoints
a permanent Fiscal Committee
1929–35: Thirty-five Comprehensive DTAs signed
1935: Draft Convention on the Allocation of Business Income between
1943: Mexico Draft
65
1946: London Draft and the establishment of the UN Fiscal

Commission
1954: Fiscal Commission abolished
1956: Establishment of Fiscal Committee (later renamed Committee
on Fiscal Affairs)
1963: OECD Draft Model Double Tax Convention on Income and
Capital
1966: OECD Model Double Tax Convention on Estates and
Inheritances
1967: UN Resolution 1273 led to the formation of the Group of
Experts
1977: OECD Model Double Tax Convention on Income and Capital
1977: EU Directive on Mutual Assistance
1979: UN publishes the Manual for the Negotiation of Bilateral Tax
Conventions
1980: UN Model Double Tax Convention between Developed and
Developing Countries, revised in 2001 and 2011
1982: OECD Multilateral Administrative Assistance Convention
1988: Joint Council of Europe and OECD Convention on Mutual
Administrative Assistance in Tax Matters signed
1992: OECD Model Tax Convention on Income and Capital goes
loose-leaf. Subsequent revisions 1994, 1995, 1997, 2000, 2003, 2005,
2008, 2010 and 2014
1995: OECD Transfer Pricing Guidelines
1998: OECD Report on Harmful Tax Competition
1998: OECD and EU develop Convention on Mutual Administrative
Assistance in Tax Matters, amended by Protocol in 2010
2000: OECD publishes Progress Report: Towards Global Tax Co-
operation: Progress in Identifying and Eliminating Harmful Tax
Practices
2000: Article 26 on Exchange of Information is extended to include
all taxes but not social security contributions
2001: OECD publishes 2001 Progress Report: The OECD’s Project on
Harmful Tax Practices
2002: Forum on Tax Administration created (consisting of 46 OECD
and non-OECD countries)
2002: OECD countries start concluding Tax Information Exchange
Agreements with ‘tax haven’ countries
2002: European Joint Transfer Pricing Forum established
2003: EU Directive on Savings Income (focuses on exchange of
information or withholding taxes in certain cases)
2004: OECD publishes 2004 Progress Report: The OECD’s Project on
Harmful Tax Practices
2006: Revised US Model, updated in 2016
66
2006: The Global Forum on Transparency and Exchange of

Information publishes a review of 82 jurisdictions’ legal and
administrative frameworks in the areas of transparency and
exchange of information for tax purposes, entitled Tax Co-
operation: Towards a Level Playing Field
2007: OECD releases Manual on Effective Mutual Agreement
Procedure
2010: OECD releases Report on the Attribution of Profits of
Permanent Establishment
2010: Tax Force on Tax and Development established to advise the
OECD’s CFA to communicate matters of relevance to developing
countries
2010: Latin and Central America Initiative (LAC Fiscal Initiative)
launched to improve taxation and public expenditure policies in the
region
2010: The Global Forum on Transparency and Exchange of
Information publishes Tax Co-operation 2010: Towards a Level
Playing Field
2010: Joint Council of Europe and OECD Convention on Mutual
Administrative Assistance in Tax Matters amended by a Protocol
which provides that bank secrecy for tax purposes is abolished
2010: United States introduces Foreign Account Tax Compliance
Act (FATCA), which has the object of detecting and deterring tax
evasion by US citizens who have funds overseas that they have not
declared
2011: EU Directive on Mutual Administrative Co-operation endorsed
2012: OECD releases two reports: Automatic Exchange of
Information and Protection of Confidentiality of Taxpayers
2012: OECD MTC amended such that Article 26 applies to
information exchange for tax as well as non-tax purposes
2013: BEPS Action Plan endorsed by the G20 (15 key areas): digital
economy; hybrid mismatch arrangements; controlled foreign
company rules; interest deductions; harmful tax practices; treaty
abuse; permanent establishments; transfer pricing (Actions 8, 9
and 10); measuring and monitoring BEPS; disclosure rules; transfer
pricing and country-by-country reporting; dispute resolution; and
multilateral instrument to modify bilateral tax treaties
2014: OECD and G20 develop Standard for Automatic Exchange
of Financial Account Information in Tax Matters: (i) Competent
Authority Agreement and (ii) Common Reporting Standard
2014: EU amends Savings Income Directive by enlarging types of
payment that fall within scope of Directive
2014: EU Directive on Administrative Cooperation amended such
that information regarding five specific types of categories of
income and capital will be automatically exchanged
2015: OECD and G20 publish interim report on Possible Tougher
Incentives for Failure to Respect the International Exchange of
Information Standards
67
2015: OECD and UNDP launch Tax Inspectors without Borders

2015: Work begins on development of a multilateral instrument to
implement the tax treaty related BEPS Action Plan (Action 15)
2015: OECD releases Implementation Package for BEPS Country-by-
Country Reporting (Action 13)
2015 (October): Final Package of Measures Representing Outputs
of OECD/G20 BEPS Project for Discussion at G20 Finance Ministers
Meeting
2016: European Commission publishes Anti-Tax Avoidance Package
proposal for measures that reduce instances of aggressive tax
planning, boost transparency between Member States and ensure
fairer competition for all businesses operating in the Single Market.
2016: Multilateral Convention to Implement Tax Treaty Related
Measures to Prevent Base Erosion and Profit Shifting (Multilateral
Convention) that incorporates many of the recommendations of the
final BEPS reports is adopted along with an Explanatory Statement.
2017: Over 70 ministers and high level representatives participate in
a signing ceremony.
2017: New version of the Transfer Pricing Guidelines published.
2017: Update to the OECD MTC published that incorporates many
of the recommendations of the final BEPS reports.
2018: The OECD announces that the Multilateral Convention will
enter into force on 1 July 2018 and it anticipated that the first
modifications to cover tax agreements will become effective.
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Appendix I: Sample examination questions
Appendix I: Sample examination

questions
Question one
Discuss the extent to which it can be argued that nation states are:
committed to multilateralism in tax matters on the one hand; and
prefer to manage their international tax relationships at a bilateral
level on the other hand.
Support your answer with references to bilateral and multilateral
initiatives.
Feedback is available at the end of this chapter.
Question two
The concept of economic allegiance with its inherent
regulation of taxing rights, sits uneasily with the idea of national
sovereignty.
P. Harris and D. Oliver, International commercial tax (CUP, 2010), 44.
Discuss this quote making reference to: the concepts of residence
and source; and the allocation of taxing rights under double tax
agreements based on the OECD MTC.
Feedback is available at the end of this chapter.
69
Feedback to question one

• This question provides you with an opportunity to demonstrate
your knowledge and understanding of the nature of taxation and
the particular issues that arise when the tax regimes of nation
states interact.
• Issues to be mentioned here include: the existence of bilateral and
multilateral measures in the international tax arena and the reasons
for their existence; the special nature of taxation; the problems
of jurisdictional vacuum, jurisdictional overlap and jurisdictional
imbalance; the notion of tax sovereignty and the need for nation
states to accept that they may need to give up some aspects of
their tax sovereignty.
• The initial problems inherent in issues of international tax law being
resolved by bilateral measures – such as length of time to negotiate
and re-negotiate – which results in bilateral DTAs being fairly
inflexible; unequal bargaining position of nation states; bilateral
measures creating a fragmented approach to resolving issues of
international tax law – and multilateral measures – such as the
difficulty inherent in getting some nation states to agree to matters
that they consider affect the scope of their tax sovereignty – should
be discussed at a general level.
• You can identify specific initiatives such as Multilateral Conventions
entered into by the OECD as well as the recent BEPS Action Plan 15,
which foresaw a multilateral approach to coordinating aspects of
nation states’ DTAs. As the Multilateral Convention to Implement
Tax Treaty Related Measures to Prevent BEPS, 2016 has now
been signed by over 100 countries it can be seen that the role of
multilateralism is increasing in significance.
• To conclude, you should commit to one of the options, i.e. take a
stand: do you consider that nation states will increasingly consider
multilateral measures to be the most effective way of resolving
international tax issues or will this multilateralism be constrained
in that nation states will still continue to wish to preserve their tax
sovereignty by entering into bilateral DTAs?
Back
Feedback to question two

• This question provides you with an opportunity to demonstrate
your knowledge of the relationship between tax sovereignty and
the need for nation states to respect the tax sovereignty of other
nation states while at the same facilitating international financial
activity and investment. You can mention customary international
law here and note that nation states generally agree that a non-
resident of a nation state should only be subjected to tax on the
income and capital gains that arise within that state. In other words,
there is no justification for taxing the foreign source income of non-
residents.
70
Appendix I: Sample examination questions
• There is a lot to discuss here and the following acts as a guide to

the points you may want to include in your answer.
• The concept of economic allegiance as a model for justifying
the tax reach of nation states should be analysed. Do you agree
with von Schanz’s view that the source state should be awarded
the majority of the tax revenue in relation to economic activity
emanating from that jurisdiction? Why has this aspect of his
doctrine seemingly been lost along the way?
• You may also refer to the historical position that nation states
traditionally did not see fit to interfere with the tax systems of
other nation states. To what extent does this idea constrain the tax
reach of nation states? Is it still true to say that this notion of non-
enforceability exists?
• You only need to consider the text of Module A and the reading
referred to when answering this question. Detailed reference to
topics outside of this module (such as details of tie-breaker tests
under Article 4 OECD MTC, which are the subject of Module B) are
not examinable.
• You should however, make reference at a general level to the
concepts of residence and source. A good answer will critically
evaluate the concepts and highlight some of the problems inherent
in these concepts both at a theoretical and practical level. You
could explore the fact that although residence and source are
relied upon in many tax regimes around the world, they are defined
differently across nation states’ regimes.
• A very good answer will open up the scope of the answer, place
the statement in the wider context and address issues such as
the fact that EU law makes an exception for discrimination on the
basis of residence and consider how the business environment
has changed since the concepts of residence and source were first
introduced.
• A very good answer will consider the juxtaposition between
the theoretical primacy of source state’s taxing rights and the
practical reality under the OECD MTC that the residence state is
frequently awarded the primary right to tax. You may also consider
how this allocation method impacts countries at lesser stages of
development.
• Reference can also be made to various methods of relief from
double taxation and the results of the BEPS Actions (such as the
minimum standards and Multilateral Convention 2016). Your views
as to the extent of the impact that these developments have had
on the concept of tax sovereignty could also be mentioned.
Back
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Notes
72
Appendix II: Glossary
Appendix II: Glossary

Ability to pay – principle of economics based on the theory that taxes
should be equitable, so that a taxpayer’s burden should reflect his
economic capacity to bear that burden relative to other taxpayers.
Benefit principle – principle that taxes should be levied in accordance
with the use made or benefits received from government goods or
services. In other words, those who benefit from public goods should
pay more tax.
Economic allegiance – doctrine according to which a given
jurisdiction’s right to tax is determined by reference to the relative
proximity of certain economic characteristics to that jurisdiction
as compared with another, competing jurisdiction. The two most
important characteristics are where the wealth is produced and the
place where it is consumed or disposed of. These two characteristics
form the basis for the source principle of taxation on the one hand,
and the residence principle of taxation on the other. The doctrine first
achieved general recognition in the 1920s when a committee of four
economists submitted a report to the League of Nations setting out
basic principles underlying international tax law.
Foreign source income (overseas income) – used in the context of
double taxation relief measures to refer to the income the origin of
which is outside the taxpayer’s country of residence. Such income is
typically exempted from tax in the taxpayer’s country of residence
or where foreign tax has been suffered in relation to it, may entitle
the taxpayer to a tax credit. The test for whether or not income has
a foreign source varies from country to country and may depend
upon whether or not the question is raised in the context of a double
taxation convention or domestic law.
G20 – finance ministers and central bank governors from: Argentina,
Australia, Brazil, Canada, China, European Union, France, Germany,
India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Korea,
Turkey, United Kingdom and the United States.
League of Nations – was an international association of countries
created to maintain peace among the nations of the world. It was
established in 1920 and was headquartered in Geneva, Switzerland.
The League of Nations ceased to function after the Second World
War and was finally dissolved in April 1946. Its place was taken by the
United Nations. The League of Nations played a pioneering role in
developing model tax treaties during the 1930s and 1940s. Its work
was taken over by the OEEC, which then became the OECD.
National neutrality – public finance concept to the effect that
domestic or national economic welfare is maximised by creating
a disincentive to invest abroad (without totally deterring such
investment). A deduction for foreign taxes instead of e.g. a foreign tax
credit is an example of national neutrality.
73
Nexus – term generally used in the context of a state’s jurisdiction to

tax foreign or non-resident persons. As such it refers to whether the
relevant factors connecting that person to the jurisdiction in question
are such as to justify the exercise of such jurisdiction. Factors that
may be considered relevant – which may vary according to the facts
and circumstances or the tax in question within one jurisdiction, or as
between jurisdictions – include physical presence or economic activity
or a combination of both.
Tax base – broadly refers to the nature of the thing that is taxed i.e. the
taxable object such as income or capital gains. In a narrower sense the
term can be used to describe the amount or composition of the taxable
object or the net amount which is computed taking into account these
items.
Tax haven – the term does not have a precise meaning. It has been
described as referring to countries which are able to service their public
services with no or nominal income taxes and that offer themselves
as places to be used by non-residents to escape tax in their country
of residence. In addition to these features the OECD has identified the
following typical ‘confirming’ features of a tax haven: (i) lack of effective
exchange of information; (ii) lack of transparency; (iii) no requirement
for substantial activities. The term may also be used loosely to describe
countries that raise significant revenues from their income tax but
whose tax systems offer preferential tax features in order to attract
investment from other countries.
74
Feedback
Feedback
Activity 2.1
Avi-Yonah
International tax ‘is indeed part of international law’.
• Customary international law is law that ‘results from a general and
consistent practice of states followed by them from a sense of legal
obligation’ and Avi-Yonah supports his view of international tax
as international law by stating that there are ‘clearly international
practices that are widely followed’ and cites the example of
common methods of relief from double taxation; a large DTA
network (see Chapter 5: Methods of relief ).
• Avi-Yonah frames the debate as to the nature of international tax
law in terms of tax arbitrage in that it is in this area where there is a
question as to whether nation states are free to make tax rules that
affect transactions and activity with international dimensions or are
constrained by a higher order of rules i.e. international tax law (see
Chapter 3: Jurisdiction to tax).
• Avi-Yonah cites examples of the principle that non-residents are
not taxed on their foreign source income and controlled foreign
company rules as examples of customary international law (see
Chapters 3 and 4) and non-discrimination (see Chapter 7 and
Module D).
Rosenbloom
• Rosenbloom states that the very existence of international tax
arbitrage is evidence that there is ‘no such thing as international
income’.
• For Rosenbloom international tax arbitrage seems to flow
seamlessly ‘into the broader concept of reducing taxation
worldwide as much as the laws of nations allow’.
• The quest of some governments to find ways to combat
international tax arbitrage is the policy that underpins what is
referred to by some as ‘the international tax system’.
• Rosenbloom makes the point that the treatment of US residents’
income by overseas revenue authorities is not the business of the
US. This reinforces the sovereignty point (see Chapter 3) that nation
states are free to set their taxes as they see fit and also the related
concept of non-enforcement of foreign tax claims (see Chapter 3
also).
• DTAs are entered into freely by nation states and Rosenbloom
notes that the fact that DTAs are not allowed to restrict the rights
afforded to residents under their domestic tax regimes signifies
that the alleged ‘international tax system’ is necessarily restricted in
the manner it can address international tax arbitrage because DTAs
cannot restrict benefits arising under domestic tax laws.
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Module A: Introduction to international tax law
• In sum, Rosenbloom contends that ‘the only remaining place in

which the supposed international tax system could exist is the
domestic laws of nations’.
Qureshi
• Public international law of taxation (PILT) is a branch of
international law that provides an international normative
framework in normative matters.
• Norms of international law are generated by double taxation
agreements (DTAs) and other sources of international law
(customary international law and general principles of law).
• Qureshi considers that although PILT does affect the fiscal
jurisdiction of nation states in that it determines their tax reach
in certain situations, he considers (and this was written in 1992)
that nation states are still relatively free to legislate in respect of
their ‘substantive norms’ as they see fit. However, international law
may constrain the manner in which nation states design those
substantive norms that affect ‘aliens’.
• Qureshi considers that cooperative measures (such as mutual
administrative assistance in tax matters) regulate the framework
within which substantive rules operate as opposed to the rules
themselves.
• PILT is ‘not merely about DTAs and DTA problems but in fact a
comprehensive whole with other aspects.’
Part 2
• There is no correct answer here. Rather this part of the activity
provides you with an opportunity to reflect on the arguments you
have summarised. You may wish to read around the subject more.
Remember that academic writing tends to be full of references
to other authors’ work so you can follow leads and build a more
complete picture before forming a view.
Back
Activity 3.1
Equity, efficiency and simplicity are the most frequently cited tax
principles. The principle of equity concerns the spread of the economic
burden of taxation. Economic or allocative efficiency is concerned
with the optimal allocation of productive resources in the economy
as a whole. In other words, economic efficiency is about allocating
resources such that the maximum amount of wealth possible is
created. As a normative tax principle, simplicity is about freedom from
elements of limited utility, which includes not multiplying functional
elements beyond necessity. So, not only should each element of a tax
system be beneficial, effective and scalable, but there should also be as
few elements as possible with the same functionality.
Simplicity is sometimes described as being a derivative principle.
Accordingly, simplicity may well be viewed as a core tax principle
because of the fact that it represents or embodies other qualities and
76
Feedback
principles. Some of the principles that arguably inform simplicity are as

follows.
• Administrative efficiency: minimising the waste of valuable
resources in the achievement of the functional objectives of the tax
system.
• Transparency and certainty: the time and manner of payment,
as well as the quantum, should be clear to the taxpayer and every
other person.
• Consistency: those transactions having the same economic result
or social effect should also have the same tax result.
• Coherency: tax law being fully in line with societal goals.
• Effectiveness: the capacity of the tax system to achieve its
functional objectives.
• Enforceability: the ease by which the tax gatherer or other body
can ensure the rules are followed and the requisite amounts are
paid.
• Flexibility: the tax system’s responsiveness and capacity for
change.
Back
Activity 3.2
A company registered in England had been trading in India. The
undertaking of the company was sold in 1947, the proceeds remitted
to England, and the company placed in voluntary liquidation in the
United Kingdom. The Indian Government sought to prove in that
liquidation for a claim in respect of capital gains tax arising on the
disposal of the undertaking. The House of Lords unanimously held
that claims on behalf of a foreign state to recover taxes due under its
laws are unenforceable in English courts and so the claim was struck
out. Although this was a House of Lords case, the principle of non-
enforcement has been recognised by other common law jurisdictions
such as the United States, Canada, South Africa and Australia.
In Norway’s Application the House of Lords recognised the force of the
decision in the Government of India case. It held, however, that the
Norwegian Government was seeking to use an international treaty to
aid its enforcement of Norwegian taxes rather than use the English
courts to enforce a Norwegian tax. This looks rather to the form of the
proceedings rather than the actuality.
Back
Activity 4.1
1. In the source state–source state scenario juridical double taxation
can arise where two nation states assert their jurisdiction to tax
income or capital gains on the basis of the source of a particular
amount of income or capital gains. It is possible for a Country A
resident to be subjected to tax in Country A and B where both
Country A and B claim that Country A resident’s income has a
77
source within their national borders. This situation can arise when
Country A and B: (i) define the source of particular payments on
different bases in their domestic rules; and (ii) define the particular
categories of income differently. As we will see in Module B,
DTAs consider the major categories of income and deem certain
amounts of income to have a source in a particular state or
otherwise state that the state of residence has the right to tax
the relevant type of income. However, DTAs do not necessarily
eliminate all sources of conflict when two nation states assert that
an amount of income has a source in their respective states.
2. In the source state–residence state scenario juridical double
taxation can arise where a person has a personal connection
with one state (residence state) that adopts a worldwide basis of
taxation and an economic connection with another (source state)
and both states assert their jurisdiction to tax that income. Given
that taxing domestic source income is the norm it is not surprising
that a nation state that considers income to originate within its
national borders will assert the right to tax income generated
by a non-resident. Where the person’s residence state uses the
worldwide basis of taxation they will include in their tax base all the
income derived by their residents irrespective of where that income
arises (so this includes the domestic source income of another
state). This constitutes a clear case of jurisdictional overlap in
respect of the income derived overseas by a resident of a state that
uses the worldwide basis of taxation. The source state–residence
state is generally considered to be the most frequent cause of
juridical double taxation. Because of this issue, nation states often
enter into DTAs so that they can agree on a way to resolve the
jurisdictional overlap in respect of the aforementioned income.
3. In the residence state–residence state scenario juridical double
taxation can arise where two nation states assert their jurisdiction
to tax income or capital gains on the basis of the residence of
the person. While juridical double taxation arose in scenario 2
above because of jurisdictional overlap in respect of the income
derived overseas by a resident of a state that uses the worldwide
basis of taxation, the residence state–residence state scenario has
the potential to result in a greater amount of jurisdiction double
taxation. Where, for example, a person is resident under the tax
laws of two nation states that use the worldwide basis of taxation
and that person derives income in both states, it is possible that
they will subject to tax on their income from all sources. Where a
person is resident in two nation states they are classified as a ‘dual
resident’. There is a provision in DTAs that deals with cases of ‘dual
residence’ by providing a hierarchy of tests that seek to determine
the residence of a person for the purposes of that particular DTA.
Back
78
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Activity 4.2
• This quote requires you to consider the concepts of residence and
source and in particular the concept of economic allegiance and
the perceived duties that arise in relation to taxation (and so state
funding) of persons who benefit from protection from the state.
• You may also draw on knowledge acquired in Chapter 3 on the
jurisdiction to tax as there is a clear need to reference the benefit
principle.
• You can also evaluate the validity of the view that taxable income
must necessarily be divided into two components. Is there any case
for saying that all tax should be paid over to a global tax authority
and we should do away with the notion of national income
altogether? Or are there other less radical ways of dividing up the
tax base (such as formulary apportionment)?
• You should consider Georg von Schanz’s view of economic
allegiance as a justification for an exercise of taxing jurisdiction and
in particular his view that the source state should be allocated the
greater right to tax than the residence state.
• You can mention the extent to which Georg von Schanz’s view
was well received i.e. economic allegiance as a justification for
exercising tax jurisdiction has support but the idea that the source
state should have the primary right to tax income has not received
full support.
• You can discuss issues with residence and source bases of taxation.
Mention can be made of the nature of these tests and how these
tests often have formal aspects that can be manipulated by a
taxpayer to arrive at a position favourable to the taxpayer.
• You may also wish to fast forward to Chapter 6 (History of
international tax law) and consider the current re-focusing of
international tax policy on the location of economic activity in
initiatives such as the work of the OECD on Base Erosion Profit
Shifting (BEPS).
Back
Activity 4.3
First, note that much of the discussion on territoriality concerns
how a resident’s foreign source business income is taxed. States that
exempt certain types of active business income are generally classified
as territorial systems. However, they may still exhibit features of a
worldwide system. The fact that most systems are hybrid causes some
commentators to question the utility of the distinction.
The benefits that may accrue to the above categories are necessarily
inter-related:
• A taxpayer with foreign source income may be pleased that their
state of residence is considering moving to a territorial system.
However, the extent to which the state is moving away from a
worldwide basis is important as many states decide to move
to a hybrid system. As such, a resident taxpayer with overseas
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business income is more likely to be affected than those with, say,

employment income. Benefits to a resident taxpayer with the right
kind of income might include a lower tax burden if they derive
foreign source income in a jurisdiction with a lower tax rate. A lower
burden may have a knock-on effect on the prices they charge for
their products/services, which may help fuel economic growth. Tax
compliance requirements will also be reduced.
• A non-resident may consider moving their tax residence to a
territorial system, to enjoy the same benefits outlined above.
• Reasons include: administrative efficiency – exempting is likely to
use fewer resources than including foreign source income in the
national tax base; and international competitiveness and economic
growth – exempting foreign source income may mean increased
inward foreign investment and company headquarters relocations
or may simply be prompted by other states exempting foreign
source income.
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Activity 5.1 (Full credit)

• Country A resident has worldwide income of 200 and has paid tax
of 40 in Country B (100 x 40%).
• Country A resident’s liability to tax in Country A is 200 x 30% = 60.
• Where Country A provides a full credit for Country B tax paid this
will reduce the amount of tax Country A resident has to pay in
Country A. Accordingly, Country A resident will have to pay (200
x 30%) – 40 = 20. This represents the tax liability in Country A on
worldwide income minus the full amount of Country B tax paid.
• Country A resident therefore pays 20 tax to Country A and 40 to
Country B.
• Total tax payable is 60, which is exactly the same as Country A
resident having derived 200 in Country A where a 30% tax rate
applies.
• As compared to the ordinary credit example at 5.3.3 above Country
A resident pays 10 less when Country A operates a full credit
method of relief and therefore 10 more when Country A operates
an ordinary method of relief.
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Activity 5.2 (Full exemption method)

• Country A resident has 200 of worldwide net income: 100 + 100.
• Country A resident must pay tax to Country A: 30% x 100 = 30
(domestic source net income of Country A).
• Country A resident must pay tax to Country B: 40% x 100 = 40
(domestic source net income of Country B).
• Accordingly, Country A resident must pay tax of 70 on 200 net
worldwide income.
Back
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Activity 5.3 (Exemption with progression)

• Country A resident has 200 worldwide net income made up of 100
domestic source and 100 foreign source income.
• For the purposes of calculating tax payable there is a need to use
the tax rate of 40 per cent in order to accommodate the progressive
rates of taxation i.e. 40 per cent progressive rate x 100 (domestic
source income).
• The net income derived in Country B is still excluded from the tax
base of Country A and so Country A resident must still pay 40 (100 x
40%) to Country B.
• The result for Country A resident is that it must pay 40 to Country A
and 40 to Country B.
• While Country A resident pays the same amount to Country B,
when Country A operates an exemption with progression method
relief, Country A resident pays 10 more in Country A on its domestic
source income than it would if Country A operated a full exemption
method.
• If Country A used an exemption with progression method that used
an average rate then the Country B tax payable would still be 40
but the tax payable in Country A would be lower. This is because
the average rate for a taxpayer in Country A would be 35% ((30 +
40) divided by 2). Country A resident would pay 35 to Country A on
this basis.
Back
Activity 6.1
• There is no correct answer here; rather this activity involves
you reading and thinking about the relevance of what you are
reading as applied to the task of finding solutions to problems of
international tax law.
• There is a view that the relevance of old archival material may be
dismissed by some on the basis that any significance it might have
had has long been eclipsed by the development of model modern
tax conventions and of the legal systems to which those models,
16
Friedlander and Wilkie
and particular income tax treaties patterned on them, apply.16
(2006).
• Some commentators consider that income tax rules generally, and
tax treaties in particular, have no extrinsic reasons to exist except
to provide tools – in the case of income tax rules, principally for
funding public expenditures and encouraging or discouraging
domestic economic activity; and in the case of treaties, for
providing some measure of organisation about how these rules
coexist internationally without impairing business activity and the
mobility of capital and persons.
• There is also a view that the nature of DTAs impacts the relevance
of the historical development of DTAs (D. Ward, 2004).17 In
particular, DTAs have been described as a contract between two
parties and so the history of the interpretation of terms within such
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a contract may be useful for the re-negotiation of that particular

DTA. However, the fact that many DTAs are based on the OECD 17 D. Ward ‘Principles to
MTC may result in the historical development of the OECD MTC be applied in interpreting
tax treaties’ (1977) 25(3)
and its commentaries may help reveal the intentions of the treaty Canadian Tax Journal
negotiators, which in turn helps with the interpretation of the 263–70.
relevant terms of the DTA.
• D. Ward also considers that most textbooks on international tax law
do not include a historical analysis of particular DTA provisions and
that this supports the view that the usefulness of historical analysis
is limited.
• R. Vann is of the view that historical analysis is important and can
help with interpretative issues and cites an example of referencing
the 1945 League of Nations being useful to the interpretation of a
particular provision within the OECD MTC.
• Courts seem to reference historical developments of DTAs very
rarely.
• There is a need to consider individual DTAs because the OECD MTC
may not always reflect DTA practice.
• Not all historical material is accessible, and that part that is
accessible is not always organised in such a way that lends itself to
independent research.
Back
Activity 6.2
• There is a considerable amount of disagreement as to the
appropriate classification of many of the above initiatives.
• What can be said with certainty is that EU case law is binding in that
there is no question that judicial pronouncements on EU law at the
EU court are binding on Member States until such time as they are
overturned by legislation. This means that although the decisions
are not directly binding on nation states that are not members of
the European Union, it is quite possible that aspects of EU law will
impact the decision making of businesses and governments of
those nation states.
• The OECD considers that the BEPS outputs are ‘soft law’ and as such
are not legally binding but there is an expectation that the outputs
will be implemented accordingly. Is an expectation that guidelines
will be complied with enough to classify the guidance as a type of
‘law’?
• Although the OECD MTC is not legally binding, where individual
nation states base their DTAs on the provisions of the OECD MTC
then it is those individual DTAs that are binding on the signatories.
The same applies for the UN MTC.
• A more interesting issue is the nature of the Commentary to the
OECD MTC. There has been much discussion on this topic and we
consider it in more detail in Module B. Essentially the query relates
to whether nation states that base their DTAs on the OECD MTC
are also accepting that the terms of that DTA should be interpreted
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Feedback
in line with the Commentary to the OECD MTC. Nation states do

not generally expressly agree to such a position yet they are often
guided by the guidance in the Commentary. This question is made
all the more interesting because the Commentary is frequently
amended and so a further question arises as to which version of the
Commentary is to be referred to when interpreting DTA terms.
• Something that wasn’t specifically referred to in the question is
the relevance of the case law from other nation states that address
issues of international tax law. These are clearly not legally binding
outside of the jurisdiction in which the relevant court sits. However,
you should be aware that there is a growing body of case law
on matters such as the interpretation of terms in DTAs and it is
very useful to consider these judgments when building a case on
what a particular term means under a DTA. We look at the issue of
interpretation in detail in Module B.
Back
83
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081A Law of International Taxation Sg2021

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081A Law of International Taxation Sg2021

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Master of Laws (LLM)

Postgraduate Diploma in Laws

̆ Richard Walters, LLB, MA (Business Law), Diploma in EU Law, Barrister, Lecturer in

The University of London gratefully acknowledges the contribution of Huigenia Ostik,

Published by the University of London

Chapter 1: Introduction to international taxation.............................................1

Chapter 1: Introduction to international

multilateral agreement would revolutionise international tax. At the

1.1.1 Structure of the course

Learning outcomes for the course

1.2 How to use this Study Guide

1.2.2 Online resources

known as the virtual learning environment or VLE). Here you can

1.3 Keeping up to date

1.4 Allocating your time

1.5 The examination

Your understanding of the material covered by the syllabus for this

1.5.1 Preparing for the examination

Study actively – take notes

Practise your exam technique

1.5.2 Taking the examination

1.6 Introduction to Module A

Learning outcomes for Module A

Chapter 2: International tax law

Useful further reading

2.2 International tax as international law

2.2.1 Public international law

2.2.2 International tax law and the BEPS minimum

2.3 International tax as domestic law

2.4 DTAs as part of international law

2.5 Practical relevance of international tax theory

is no doubt that the domestic tax rules implemented by national

Chapter 3: Jurisdiction to tax

• Kaplow, L. ‘Taxation’ in Polinksy and Shavell (eds) Handbook of law and

Useful further reading

3.2 Nature of taxation

3.3 Functions of taxation

3.4 Tax principles

to themselves, bring about optimally efficient outcomes. There are,

3.5 Classification of taxes

generally take into account the personal circumstances of the taxpayer.

3.6 Tax sovereignty

of the Member States it has to be exercised consistently with the terms

3.7 Jurisdiction to tax

The existence of an agreed core set of principles relating to the

The concepts of jurisdictional overlap, jurisdictional vacuum and

3.8 Jurisdictional overlap

3.8.1 Example of jurisdictional overlap

• Country X subjects to tax all the income of its residents (wherever

3.9 Jurisdiction vacuum

domestic tax system with each member of a particular state paying

3.10 Jurisdictional imbalance

instances of double non-taxation can arise when a DTA is used

3.11 Allocation of taxing jurisdiction

3.11.1 Enforcement of foreign tax claims

Per Viscount Simonds:

3.11.2 International relations

3.11.3 Primary jurisdiction to tax

that an amount of income originated within its national borders, then

3.11.4 Secondary jurisdiction to tax

3.11.5 Concluding remarks

3.12 Jurisdiction to tax and connecting factors

nationality); (ii) an activity or transaction (expressed as source); or (iii)

3.13 Expansion of jurisdiction to tax

2.2.2 International tax law and the BEPS minimum