Conclusion Global Business and International Fiscal Law 307

Nevertheless, it is plain that the separate accountingarms length approach does not resolve the question of the basis of apportionment, but converts it into a series of determinations in relation to specific items of income or expenditure. Furthermore, the arms length principle does not provide a clear and uniform measure. The Carroll report recognised that Arms Length did not always entail the independent­dealer criterion, but could be satisfied by prices based on remuneration for services see Langbein 1986, p.636. The position was summed up by the German report, which stated that fractional apportionment was not only the ideal method, but one that would in practice be used in the numerous cases where `separate assessment ¶was not feasible. Hence, national fiscal authorities would need to give each other reciprocal assistance to facilitate allocation and to develop agreed general principles, which might take the form of defined allocation percentages League of Nations 1932, p.122. This anticipated that what could perhaps not be resolved by a global agreement on a system of general apportionment would have to be negotiated piecemeal over a longer period see Chapter 8 below. If general apportionment could not be established because of the difficulties of ensuring uniformity, separate accounting and arms length would nevertheless require international coordination to implement case­by­case special apportionments.

6. Conclusion

We have seen that the establishment as a major means of state finance of taxes on income and profits, in the first two decades of the 20th century, raised questions of fairness or equity, both at the national and international levels. Nationally, the issues of proportionality or fairness of application could be resolved through the state political mechanism. It is notable, however, that although broad principles, such as higher rates of tax or `super­tax ¶on higher incomes, were debated through relatively open and representative political processes, the specifics of their application, especially to business and corporate income, became embedded in technical and bureaucratic processes of administrative regulation. Although these processes could attempt to ensure a degree of fairness nationally, the wide involvement of firms in international trade and investment meant that some international coordination was required to ensure the equalization of global conditions of competition. Ideally, it was thought, this could best be achieved by agreement on general principles allocating jurisdiction to tax between the various states involved in different types of international economic activity. However, this quickly proved impossible, since the issues of fairness within each state in taxation of incomes and profits were influenced by the characteristics of its international economic relations. Thus, Britain taxed all types of income in the hands of the recipient, and its major role in world trade and international lending reinforced the view that all its residents should be taxed on all income from anywhere in the world. Although domestically a refund was paid to companies of the tax on that proportion of their profits paid as dividends and therefore taxed again in the hands of shareholders, there seemed no reason to make such a refund to foreign companies. This was particularly so since other countries applied separate taxes to business profits and to personal income. For other countries, especially in continental Europe, fairness consisted in taxing the earnings from all types of assets, including shares and loans or debt­claims, where the assets were located; not surprisingly, these countries were largely net importers of capital. Hence, the different perspectives of national states on tax principles were exacerbated by considerations of national economic interest. Nevertheless, significant progress was made in agreeing on the form and many of the principles of a model bilateral treaty; but the approach it embodied entailed the reciprocal bargaining of tax rights, which would tend to reinforce the preoccupation with national interests. More seriously, the allocation between national states of different tax rights made it difficult to treat an internationally­organised enterprise as a single unity, since this would require agreement at the international level on issues which were already hard to resolve nationally the definition of the tax base of a business as well as on general principles for the allocation of the enterprises tax base among the various countries in which it operated. Thus, the question of inter­state equity in the allocation of income from international business was avoided; or, rather, it was postponed, since the enforcement by states of the different rights to tax internationally­generated income would inevitably lead to specific problems and eventually to more general conflicts. By preferring to treat internationally­organised businesses as separate national entities on the basis of separate accounting, the main national tax administrations avoided opening up the discussion of the broader policy matters. They therefore preserved their own roles as technical administrators of a fiscal system whose underlying policy bases were determined and legitimated by largely national political processes. Significantly, the Fiscal Committee could be regarded as one of the quiet and unsung successes of the League, achieving an unusual degree of agreement and even action during a period otherwise marked by increasing economic nationalism and political conflict. This was due in no small measure to its having treated international taxation as an essentially technical matter. Such an approach also had disadvantages, since it meant that agreements reached in the international forum could be difficult to implement nationally. For example, J.G.Herndon, who was secretary to the US delegation at the 1928 meeting, refers to the failure of the attempt in 1930 to enact a version of the draft convention on direct taxation into US law, to facilitate exemption of dividend payments from withholding tax at source. He attributed this failure to the lack of substantial public opinion in the US in support of the proposal, since its aims had not been publicised. It would have been to the benefit of the US, since the income of American residents from foreign investment in 1927 was some 900m, while the outward flow was only 275m; but the Treasury Departments Bill failed for lack of time, as the Ways and Means Committee was busy with the tariff reform, an issue with greater domestic political resonance Herndon 1932. However, perhaps the most important outcome of the inter­war years was to begin to create a community of international tax specialists. The decade of discussions which produced the drafts agreed at the 1928 meeting had resulted from many meetings and discussions of the issues. The governmental representatives on the Committee of Technical Experts had consulted closely with business representatives nominated by the ICCs double taxation committee. They were also influenced by the experience of negotiation of bilateral treaties by some states, mainly those of central Europe. There were increasing regular contacts of fiscal specialists, whether government officials, academics or business representatives or advisers. Frequently, individuals combined more than one role, or moved from one to another. This began to generate a community within which ideas and perspectives as well as economic advantage could be traded. It was these direct contacts between specialists which filled the gap created by the difficulties of resolving by any general global principles the issues of international allocation of the tax base of international business. 2 T HE T AX T REATY S YSTEM The key legal mechanism for the coordination of states jurisdiction to tax international business has been the bilateral tax treaty. By accepting that the internationally agreed texts of 1928 and 1935 would not be treated as a multilateral treaty but as a model for bilateral agreements, the foundation was established for a highly flexible system. The basic text of the model could be adapted to the particular circumstances of each pair of partner states, while in turn the adaptations made in bilateral negotiations could feed back into future, multilaterally agreed models. The reports of the international committees responsible for drafting the models came to be a common point of reference for national courts in helping to interpret the treaty texts. On the other hand, while the flexibility of the system has facilitated its growth, it has resulted in an uneven patchwork of great complexity. The reliance on bilateral agreements results in bargaining which tends to focus on the trading of national benefits, rather than the establishment of an equitable and effective international regime. Thus, state negotiators will be concerned with the relative net revenue gains, and this produces an incentive for states to design national taxes applying to foreign investors, mainly withholding taxes on dividends and other payments, which act as a bargaining counter for treaty negotiations. The revenue consideration may be offset for some states by the desire to attract foreign investment; but such states may be in a weak position to press their claim to jurisdiction if their interest is in offering tax holidays or other benefits to foreign investors. The unevenness and porosity of the treaty network undermine its regulatory effectiveness. The lack of any clear criteria of international tax equity has encouraged and legitimized international tax planning and avoidance, which have been facilitated in turn by the inducements offered by states anxious to attract investment or financial business. This has consequently led to a process of continual renegotiation of treaties, as the economically stronger countries seek to block loopholes in the treaty network, especially those which allow unintended beneficiaries to take advantage of treaty provisions by `treaty­shopping ¶ The increased international mobility of capital has also made it increasingly important to ensure international coordination of tax systems, but the process of inter­state negotiation is slow and ponderous, resulting in continual problems of disjunction with domestic tax changes and reforms.

1. Postwar Development of the Bilateral Treaty Network