Historical notes on the international efforts aimed at eliminating double taxation (draft)

Note: I always had difficulty in finding my way through the maze of developments on international tax. The problem increased if I would need to go a bit backwards in time and do an historical analysis. In the information age, these historical analyses are made easier because of Internet. The text below (which started as a joke) is just a road map to finding your way in the field of tax treaties and as any unfinished work needs still some polishing! Nevertheless, I post this note because I want to use it Monday during the Lecture on research tools at the Leiden International Tax Centre. Most of the links are to free websites, while only a few direct you to the IBFD (paid) Database.

The efforts aimed at eliminating international double taxation begun with a series of model or draft model bilateral tax conventions by the League of Nations and were pursued in the Organisation for Economic Co-operation and Development (OECD) in regional forums, as well as in the United Nations

In 1921, the League of Nations, acting in response to an appeal for action aimed at eliminating double taxation, entrusted a team of four economists, Sir Josiah Stamp(UK), Professor Einaudi (Italy), Professor Bruins (Netherlands), Professor Seligman (US), with the task of preparing a study on the economic aspects of international double taxation.

The four experts expanded on the doctrine of economic allegiance, which states that the determination of the quantum of tax that an individual is required to pay to each competing jurisdiction is closely linked to ascertaining where the true economic interests of that individual are to be found. In that regard, the experts found that four factors ultimately bear some incidence on the sharing of the tax base, namely (i) the principle of production or acquisition corresponding to the place of origin of the wealth; (ii) the principle of location, that is, the situs of the wealth; (iii) the principle of legal rights assimilated to the place of enforcement of the rights to the wealth; and (iv) the principle of consumption or appropriation or disposition of wealth which is the place of residence or domicile of the ultimate owner.

The 1923 Report recommended a scheme that rested on a distinction between taxes on global income (personal taxes) and all other taxes (impersonal taxes). The former were to be levied based solely on residence, while the latter were to be divided between residence and source based on the principle of economic allegiance. The four economists determined that the most important factors for determining the international tax competence are the origin of wealth and the residence or domicile of the owner who consumes the wealth. Therefore, an equitable sharing of tax jurisdiction requires the apportioning of economic allegiance between origin (source) and domicile (residence). This principle as demonstrated in the table below turned out to be quite favourable to residence.

Category Of Wealth (Preponderant Element - Origin Vs Domicile)
I. Land (Origin)
II a. Mines, oil wells, etc. (Origin)
II b. Commercial establishments (Origin)
III a. Agricultural (Origin)
III b. Money, jewelry, furniture, etc. (Domicile)
IV. Vessels (Origin (registration))
V a. Mortgages (Origin (property taxes) - Domicile (income Tax))
V b. Corporate shares (Domicile)
V c. Corporate bonds (Domicile)
V d. Public securities (Domicile)
V e. General credits (Domicile)
VI. Professional earnings (Domicile)

In 1922, the Financial Committee of the League invited a group of high-level tax officials from several countries to study the administrative and practical aspects of international double taxation and international tax evasion. In the course of sessions held from 1923 to 1927, the group following the previous work of the four economists drafted the first bilateral Tax Conventions, the so-called 1927 Draft which included:
- Convention for the Prevention of Double Taxation in the Special Matter of Direct Taxes dealing with income and property taxes;
- Convention for the Prevention of Double Taxation in the Special Matter of Succession Duties;
- Convention on Administrative Assistance in Matters of Taxation; and
- Convention on [Judicial] Assistance in the Collection of Taxes.

The 1927 Draft Convention for the Prevention of Double Taxation contained only 14 articles, 8 of them concerning income allocation of the so-called impersonal taxes. For example:
- Income from immovable property was taxable in the State in which the property in question was situated (Art. 2);
- Income derived from investments in transferable securities other than shares was taxable in the State in which the debtors of such income were at the time resident (Art. 3);
- Income from shares or similar interests was taxable in the State in which the real centre of management of the undertaking was situated (Art.4);
- Income from any industrial, commercial or agricultural undertaking and from any other trades or professions was taxable in the State in which the persons controlling the undertaking or engaged in the trade or profession posses permanent establishments. In case, the undertaking would posses permanent establishments in both States, each of the two States would tax the portion of the income produced in its territory (Art. 5);
- The fees of managers and directors of joint-stock companies were taxable in the State in which the real centre of management of the undertaking is situated (Art. 6);
-Salaries, wages or other remuneration of any kind were taxable in the State in which the recipients carry on their employment, with the exception of officials and public employees serving abroad, which were taxable in the State which pays those salaries (Art. 7);
- Public or private pensions were taxable in the State of the debtor of such income (Art. 8); and
- Annuities or income from other claims not referred to in the previous paragraphs were taxable in the State of fiscal domicile of the creditor of such income (Art. 9).

In 1928, the League of Nations released three different models (Ia, Ib, Ic) designed to prevent double taxation in the sphere of direct impersonal or personal taxes. The first draft still drew a distinction between impersonal and personal taxes, whilst this distinction was not present in the second and third draft.

In 1929, the League of Nations appointed a permanent Fiscal Committee. The Fiscal Affairs Committee approved in 1933 a draft convention on the allocation of business profits between states for the purposes of taxation. The 1933 draft convention is substantially based on the Mitchell B. Carroll report: Taxation of National and Foreign Enterprises: Volume 4 Methods of Allocating Taxable Income. Mr. Carroll, who was a former President of the Fiscal Committee of the League of Nations and the International Fiscal Association, with the help of a grant from the Rockefeller Foundation visited 27 countries and reported on their relevant legislation. The 1933 Draft Convention was slighly revised by the Fiscal Committee in June 1935.

With the Second World War, the world started diverging and the Mexico model convention of 1943 and the London model convention of 1946 are a good example of differences in view between countries. In 1946, the Fiscal Committee of the League of Nations, noting that a difference of opinion between capital-importing and capital-exporting countries persists, published both models together with commentaries. The Committee noted that "the work done both in Mexico and in London could be usefully reviewed and developed by a balanced group of tax administrators and experts from both capital-importing and capital-exporting countries and from economically-advanced and less-advanced countries, when the League work on international tax problems is taken over by the United Nations". Notwithstanding this pledge the United Nations did not occupy itself in the first decades of its existence with the development of the Model Tax Conventions.

Taking into account the progress had already been made under the League of Nations, the Organisation for European Economic Co-operation (later OECD) adopted its first Recommendation concerning double taxation on 25 February 1955. That recommendation was followed by the establishment of the Fiscal Committee, which was instructed to prepare a draft convention for the avoidance of double taxation with respect to taxes on income and capital

From 1958 to 1961, the Fiscal Committee prepared four reports under the title “The elimination of double taxation” The suggested new articles embodied the 1963
“Draft Double Taxation Convention on Income and on Capital” followed by the 1966 “Draft Convention for the Avoidance of Double Taxation with Respect to Taxes on Estates and Inheritances".

The revision of the 1963 draft model by the renamed Committee on Fiscal Affairs led to the 1977 “Model Double Taxation Convention on Income and on Capital”. Further revisions led to the publication in 1992 of the Model Convention in a loose-leaf format. This was the first step of an ongoing revision process intended to produce periodic updates the latest of which were in 2000, 2003 and 2005. The process of updating can be tracked down through the list of OECD reports that were adopted after the publication of the 1977 Model Tax Convention and that have resulted in changes to the text of articles of the Convention or the Commentary thereon.

As regards the United Nations, it was only in 1980 that the first UN Model Double Taxation Convention between Developed and Developing countries was published. The Ad Hoc Group of Experts on International Cooperation in Tax Matters adopted in 2000 a revised version of the UN Model, which was published by the United Nations as the 2001 UN Model. The UN Model is currently under revision.

But work on double taxation has also been taken at the regional and country levels. A good example is the so-called Andean Community Model. Decision 40 sets out an agreement to avoid double taxation between Member Countries. More recently the Andean Community has enacted a new decision that sets out to avoid double taxation and prevent tax evasion in the Andean countries. In accordance with the Cartagena Agreement the current members of the Andean Community include Bolivia, Colombia, Ecuador and Peru. On April 2006 Venezuela announced its decision to depart from the Andean Community.

Another good example is the multilateral double taxation treaty in place since 1983 between the Nordic countries (Finland, Sweden and Denmark) and other members of the Nordic Council (Iceland Norway), which replaced the previous bilateral treaties between the five countries.

Other models include the 1996 United States Model Income Tax Convention and the 1987 Intra-ASEAN Model Double Taxation Convention.