DOUBLE taxation is one of many subjects which have assumed much increased importance as a result of the war. Nor is the increased importance due solely to higher rates of taxation, though the imposition of taxes running up to more than 50 percent has created situations in which double taxation of income amounts to practical expropriation. Another serious factor is the change in the fiscal situation of the leading countries which the war has brought about. Countries which before the war were in position to supply their own requirements of capital or even had a surplus for investment abroad, have become borrowers; other countries have found themselves not only in a position to invest abroad but almost compelled to do so. Our own country could hardly maintain its policies of restriction of imports through high tariffs, exportation of surplus food products, collection of foreign government debts and the building up of a merchant marine, without making foreign investments to balance the international account.

Again, lack of confidence in domestic finance and depreciation of currencies have created a demand for foreign investments even in countries whose capital resources are inadequate for their own requirements, and in the most stable European countries anxious investors having seen the disastrous consequences of war on the strongest of states, have felt that it was unwise to put all their eggs in a single basket, and have invested part of their capital abroad.

The setting up as separate nations of what were formerly parts of a single kingdom, which remain more or less economically interdependent, as in the case of the succession states of Austria, is still another of the many contributing influences as a result of which the subject has assumed very real and general significance.


The problem arises mainly in relation to income and inheritance taxes. In its international aspects double taxation of income is by far the most important phase of the question, but in our own country double taxation of inheritances by the States has created a particularly unsatisfactory situation. Attempts to deal with the problem have been made in domestic legislation in our own and foreign countries, and through international conferences -- notably those conducted under the auspices of the League of Nations -- which have resulted in a number of international conventions for the mitigation of the burden.

Dealing first with the activities of the League of Nations, since these have included authoritative studies of the theoretical and practical aspects of the problem, the question was discussed at the Brussels conference (1920) and referred to the Provincial Economic and Financial Committee. In accordance with the request of this Committee Sir Basil Blackett, of the British Treasury, submitted two interesting memoranda -- one dealing historically with British income tax practice, and the other with the purely economic question of the effects of double taxation on foreign investments. In September, 1921, the Financial Section of the League invited a group of economists consisting of Professors Bruins of Rotterdam, Einaudi of Turin, and Seligman of New York, and Sir Josiah Stamp of London, to prepare a report on the subject. The group made in April, 1923, a full report dealing first with the economic consequences of double taxation on the equitable distribution of burdens and on the flow of capital, and second with the possibility of relieving or mitigating its evil effects either by domestic legislation of states or by international agreements.

The Committee next brought together a group of technical experts, requesting them to examine both this problem and the collateral problem of tax evasion from an administrative point of view. These experts used as a basis the report of the economists, which they characterized as a masterly report of inestimable value to them, and adopted resolutions that embodied the principles which in their judgment should govern the formulation of conventions for relief from double taxation. These resolutions were set forth with extended comments in a report published by the League under date of February 7, 1925. This report was brought to the attention of the International Chamber of Commerce, which had been continuously interested in the subject, and that body after extended examination through a Committee headed by Prof. T. S. Adams expressed its substantial agreement with the experts.

The next step was to ask the same group, enlarged to include representatives of other countries, to draft types of conventions of either a general or a bilateral character for the purpose of giving effect to the principles agreed on. The enlarged group met in Geneva in May last, but the session then held was occupied largely in securing agreement on principles on the part of the many new members, and it was not found possible at that time to do more than prepare preliminary drafts of conventions which are to be considered at an adjourned session to be held in October.


Double taxation of income arises from the fact that a tax may logically, and can effectively, be levied either where the income arises or where the recipient resides. In our own legislation both these principles are applied, and in addition a tax is levied on our own citizens even if they reside abroad and their income is derived from foreign sources.[i] The English income tax, the oldest of those in existence, though it is in the main a personal tax nevertheless taxes the income of non-residents derived from English sources. As a practical matter, it is hardly conceivable that any state which levies an income tax would wholly relinquish this source of revenue.

The question of the ultimate disposition of the burden of a tax on income from domestic sources, levied upon non-residents, was considered at length by the economists selected by the League. In the case of a country seeking to borrow capital from abroad, a tax levied on the interest from the loan secured is likely to be thrown back either directly or indirectly on the borrowing country. Where, however, foreign capital is seeking to exploit the natural resources or commercial opportunities of a state, the tax on the income which that capital earns is not likely to be passed on.

As a logical consequence countries whose natural resources are relatively large in proportion to the foreign interests of their residents are apt to stress the principle of taxation according to the source of income (especially as there would be strong political objection to the exemption of foreigners from a tax to which citizens engaged in similar enterprises would be subject); while the great capitalist countries are equally insistent on the principle of taxation according to residence.

The technical experts in their resolutions drew a distinction between taxes which are independent of the status of the taxpayer and those which are determined by such status; between impersonal taxes and personal taxes, or, using the French terms between impôts réels and impôts globals. They suggested that the former should be levied only in the country in which is found the source of the income, and the latter only in the country of residence (domicile) of the recipient of the income. The practical value of the distinction has been questioned, and it must be admitted that the modern income tax is usually in some respects a personal and in other respects an impersonal tax.

In applying the distinction the experts laid down the general principle that taxes at progressive rates should be regarded as personal taxes, and should be levied only by the state of domicile. Acceptance of this principle would mean that no state would levy surtaxes on non-resident individuals on income derived from sources within the state either with reference to their total income from all sources or with reference to their total income from sources within the state.

Both the United States and Great Britain at present attempt to levy surtaxes on non-resident aliens on the basis of their total income from sources within the taxing country. There is, however, reason to believe that such attempts are not very productive, and on practical as well as on theoretical grounds the two countries might well, under reciprocal agreements, forego such surtaxes. The administrative difficulties of effecting collection are great, and in any case in which the sums involved are sufficient to warrant the expense the taxpayer can make these difficulties practically insuperable by measures such as the interposition of a foreign corporation under his ownership and control between the source of the income and himself.

Apparently also, though this is not perhaps absolutely clear from the report, the experts considered that no state should levy on the profits of an enterprise owned by non-residents taxes computed at progressive rates even if the scale were established entirely without regard to the status of the owners. This question is one on which American and British practice have differed sharply.

The British laws have proceeded on the principle that the ability to pay, which is the broad justification of the progressive income tax system, is a purely individual matter and while income taxes are collected in Great Britain from corporations as a matter of administrative convenience, the system of relief is so arranged that if the income of a corporation were wholly distributed and the income of every individual shareholder were nevertheless still below the exemption limit, the shareholders would in the aggregate be entitled to recover an amount of tax equal to the tax payable in the first instance by the corporation. We have adopted the view that not only may corporations properly be subjected to an income tax as separate entities, but the principle of ability to pay may properly be applied to them through a scale of graduated taxes without regard to the status of their shareholders. This was the vital difference between our excess profits tax and the British. Whatever may be said on the question of principle, it is highly improbable that states in which the most important enterprises are being exploited by nonresidents will in practice forego the right to levy graduated taxes on such enterprises.

It should be added that the experts clearly recognized that the principles laid down by them were not likely to be immediately and universally adopted, and made suggestions for procedure in cases where the states could not see their way to accept these principles in their entirety.


The experts next proceeded to lay down rules for determining the sources of income. These rules have been approved by the International Chamber of Commerce and are substantially similar to those embodied in our own Federal legislation. Income from real estate (or mortgages thereon) and income from agricultural enterprises are attributed to the country in which the property is situated; earned income to the country in which the services are rendered; income from business to the country where the business is conducted -- an apportionment to be made if the business is carried on in more than one country provided that in each there is a real establishment and not a mere agency. Incidentally the experts recommended as a concession to practicability that maritime navigation undertakings should be taxed in only one country, namely that in which the effective control was exercised -- a provision similar to that in our own statutes exempting on a basis of reciprocity the earnings from shipping registered under a foreign flag. Some shipping interests have urged that this rule should be accepted as based on principle rather than on expediency. It is difficult to see how such a contention could be sustained, though the fact that shipping income is earned mainly on the high seas and the extreme difficulty of making any satisfactory apportionment thereof between states seem amply to justify the experts' recommendation.

In regard to interest on bonds, deposits and current accounts the experts suggested that:

The state in which the debtor is domiciled shall, as a rule, be entitled to levy the schedular tax, but the experts recommend the conclusion of agreements whereby (particularly by means of affidavits and subject to proper precautions against fraud) reimbursement of, or exemption from, this tax would be allowed in the case of securities, deposits or current accounts of persons domiciled abroad, or whereby the tax would be levied either wholly or in part by the state in which the creditors are domiciled.

They thus recognized the right of the debtor country to impose the tax and the practical consideration that the tax is likely to be passed back directly or indirectly to the debtor country.

The resolutions of the experts did not deal with inheritance taxes at length, but merely indicated that the rules for income taxes were applicable mutatis mutandis to them.

While the theoretical discussion was proceeding, substantial progress was being made in negotiation of treaties for the mitigation of double taxation. In June, 1921, a convention was signed at Rome between Austria, Hungary, Poland, Italy, Jugoslavia and Rumania. A large number of bilateral conventions have been entered into, Germany, Italy, Austria, Switzerland and Sweden being among the parties to them.

The bilateral conventions which have been negotiated have followed generally the lines of the experts' resolutions. An interesting exception, however, is the convention between Great Britain and the Irish Free State, which adopts the principle of residence and ignores the source of income.


Turning now to the consideration of internal legislation, the question of double taxation within the Empire appears to have been raised in the British Parliament as early as 1860, but it was not until the heavy war taxes came into effect that an attempt was made, in 1916, to alleviate the hardship. The question was discussed at an Imperial war conference in 1917 and was exhaustively considered by a Royal Commission in 1919, and that Commission laid down the principles which in its opinion should be the basis of any sound solution of the problem. The Commission also considered the question of double income taxes in relation to foreign countries but did not see its way in the existing circumstances to recommend any change in the British practice. British measures for relief have therefore with minor exceptions been limited to double taxation within the Empire.

In our Federal practice the question of double taxation was dealt with as soon as it became at all serious. The specific provisions enacted have exhibited much the same characteristics as our income tax laws in general. In many cases the spirit of the provisions has been broad, and indeed liberality has at times become prodigality. On the other hand, specific provisions have frequently been arbitrary and impracticable and too often the administration has been productive of irritation and expense to taxpayers, rather than of revenue to the Treasury.

Since 1918 the law has contained provisions under which taxpayers might make a deduction from their United States income taxes in respect of income taxes paid in other countries. Such provisions were the more necessary because of our practice of imposing the tax on citizens irrespective of residence or the source of the income. We could hardly tax our citizens representing American business abroad on their income earned where they were residing, without substantial relief in respect of taxes paid in that country.

The allowances made have not always been based on well established principles of taxation; at times they have been obviously excessive. For instance, under the 1918 law a citizen resident in the United States could deduct from his United States tax all taxes paid to foreign countries on his income from sources therein, even though such taxes exceeded the domestic tax on the foreign income in question. Thus if his American rate were 20 percent and one-third of his income were from foreign sources and subject to a foreign tax of 60 percent, he would pay no American tax at all. A rule involving such sacrifice by our Treasury of taxes on income which was derived from American sources was quite uncalled for and it was changed in 1921.

By a curious oversight an even more anomalous situation existed under the 1918 law, as a result of which a domestic corporation might in effect exclude from its gross income dividends received from a foreign corporation and yet deduct from its American taxes any taxes levied on those dividends by the foreign country. This error was also corrected in 1921.

The principle of allowing a credit against the American tax for foreign taxes paid has from the first been extended to taxes paid by foreign subsidiaries of a domestic corporation. The rules laid down in the statutes for computing the credit in such cases have however been and still are unsatisfactory and impracticable.

Ever since 1918 any allowance for foreign taxes to a resident alien has been conditional on his own country granting a similar credit to citizens of the United States residing in that country. The general theory of reciprocal exemption is entirely sound, but our form of procedure is open to the objection that it requires foreign countries to conform to a method of exemption which we have devised instead of to a method mutually agreed upon. This objection has particular force in a case such as that under our 1918 law, where our scheme was theoretically unsound and extravagant. It was not reasonable that a resident alien should be denied all relief under that statute because his own country did not grant relief to the same unreasonable extent as ourselves. The law surely might have provided for relief either to the same extent as our citizens were relieved in his country or to the extent of the relief granted by us to residents who were citizens, whichever might be the lower.

In 1921, as already noted, exemption from United States income taxes was granted to foreign shipping on a basis of reciprocity. This broadminded provision, which undoubtedly involved a sacrifice by our Treasury greater than the immediate gain to our shipping interests, has been availed of by the principal maritime countries.

It is probable that any further steps in the direction of relief from double taxation which we may take will be in the same form. With our growing interests in foreign countries it would seem wise to adopt a liberal policy. There are activities other than shipping to which similar treatment might be given and we might be well advised to offer exemption of non-residents from surtaxes on a reciprocal basis.

Incidentally we should assuredly be wise to modify our attitude towards non-residents in the matter of returns, penalties and other matters of procedure. At present we proceed on the theory that it is the duty of every one the wide world over to be familiar with our law and to file a return under it if he has income from an American source as defined by us, whether he has an agent or office here or not. Our laws levy the taxes on "every individual" and require a return from every individual having net or gross income from American sources in excess of specified limits and our regulations interpret the language literally. Penalties are provided by law and the regulations apply these provisions to residents and non-residents alike. The penalties collected from non-resident aliens must have been trivial, but the trouble, annoyance and expense occasioned by these provisions has been considerable. The English courts, construing provisions which required "every person" chargeable with supertax to make a return and made "every person" failing to make such a return liable to a penalty, held that a non-resident alien was not required to make a return nor liable to the penalty. The Lord Chancellor, Viscount Cave, said (Whitney v. Commissioners of Inland Revenue) it was not easy to understand "by what right such a penalty could even in express terms be imposed" and concluded that the provision could not have been intended to apply to such a person. Lord Phillimore said he was sure it was not the duty of a non-resident and undomiciled alien to know English tax law, and Lord Dunedin said:

"The next step lay with the appellant, and he made no return, and I agree that the penalty section is inapplicable. For the appellant is not subject to the jurisdiction of the English Court, nor has the British Parliament power to enjoin him personally to do anything."

These views seem eminently reasonable and it is much to be desired that the Treasury or the courts should interpret our law similarly or that Congress should modify it to the same effect. At present we are merely creating precedents to no profit, which may be followed by other countries to the detriment of our citizens.


Our State income tax laws are not -- with few exceptions -- unduly burdensome, though the methods of apportionment of income are in some cases intricate and unsatisfactory. It is in the field of inheritance taxes that our States have acquired unenviable fame.

The situation can not be better stated than in the language of the President's address to the conference called at his suggestion, which met at Washington on February 19, 1925:

"There is competition between States to reach in inheritance taxes not only the property of its own citizens, but the property of the citizens of other States which by any construction can be brought within the grasp of the taxgatherer. A share of stock represents a most conspicuous example of multiple inheritance taxation. It is possible that the same share of stock, upon the death of its owner, may be subject to taxation, first, by the Federal Government; then by the State where its owner was domiciled; then by some other State which may also claim him as a citizen; again in the State where the certificate of stock was kept; in the State where the certificate of stock must be transferred on the corporation's books; in the State or States where is organized the corporation whose capital stock is involved; and, finally, in the State or States where this corporation owns property. All this means not only an actual amount of tax which may under particular circumstances exceed 100 percent of the value of the stock, but the expense, delay and inconvenience of getting clearances of the States who claim a right to tax the property is a serious burden to the heir who is to receive the stock. Particularly is this expense disproportionate to a tax paid by a small estate which has but a few shares of stock. In many cases the expense alone must exceed the total value of the shares which it is sought to transfer. Looking at it from the standpoint of State revenue, I am told it is probable that the full cost to executors of ascertaining the tax and obtaining the necessary transfers is in the aggregate nearly as much as the tax received by the States upon this property of non-resident decedents. Here, indeed, is extravagance in taxation."

As the President emphasized, the burden of expense and trouble was in many cases more serious than the tax. By the transfer of personal holdings to a corporation formed for that purpose, and by other means, large taxes outside the State of the residence of the decedent could usually be avoided. The amount of tax thus became dependent on the foresight and ingenuity displayed by the decedent rather than on any ability to pay. Calculations made showing possibilities of taxes amounting to 100, 200 or even 300 percent of the estate were merely mental exercises of the expert.

Since the President's speech was delivered various events have improved the situation. By the Federal Tax Law of 1926 the credit for State taxes against the Federal tax was increased from 25 percent to 80 percent of the latter. Next came the decision of the Supreme Court in the Frick case which declared invalid a tax on tangible personal property without the State and held that the State of residence must allow the tax on corporate stocks owned by the decedent levied by the State of incorporation as a deduction from the value of the gross estate in computing its tax. This was followed by another Supreme Court decision which held invalid a tax on the transfer of stock of a foreign corporation owned by a non-resident based on the ground that the property of the corporation was mainly within the State.

Important States such as New York, Connecticut, Pennsylvania, and Massachusetts, have enacted laws containing reciprocal exemption clauses, and conferences of the taxing authorities of these States have been held in an effort to make such provisions effective. What the League has been seeking to bring about in the international sphere has thus been happening in our own interstate field.


In any review of the measures relating to double taxation which have been taken since the war, it must be constantly kept in mind that the period has been one of unexampled difficulties in the field of government finance. Allowing for this fact the progress made cannot be regarded as unsatisfactory. The efforts of the League of Nations have borne and are bearing fruit.

The United States by reason of its prosperity and its increasing foreign investments should be the leader in the adoption of broad and liberal policies in this field. Notwithstanding the amelioration of the situation in the recent past much remains to be done to put our State taxation on a fair and sound basis. There is room for improvement in our Federal law though even more in our methods of Federal tax administration. A Federal inheritance tax, for instance, is still levied on stock of a corporation owned by a non-resident decedent if either the corporation is organized under the laws of one of our States or the stock certificate is physically in the United States at the time of the death. Surely we might, on a basis of reciprocity, grant exemption in such cases; at least we might adopt a single test of liability. The President's criticisms of the States in this respect are justly applicable to the Federal Law.

The United States has hitherto declined to join in the work of the League of Nations, but if our apprehensions preclude us from following the same precise path, we have at least taken some steps along parallel lines. We have the opportunity and it is to our interest to keep pace with, or even move ahead of, other nations and to offer reciprocal relief to any that are prepared to advance with us. The fact that some of the best informed students of the subject are among those whose judgment on tax questions is most highly valued by Congress gives some grounds for hope that we shall not neglect our opportunities and duties.

[i] In the 1926 law exemption was granted to non-resident citizens in respect of earned income from foreign sources.

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  • GEORGE O. MAY, Member of the Committee on Double Taxation of the International Chamber of Commerce for several years
  • More By George O. May