Economic and financial section > Double taxation and tax evasion

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The maximum BP laid down by American law is obtained by drawing, from point A,
a line parallel to the straight line OC; the maximum proposed by the League of Nations experts
is obtained by drawing a line parallel to the straight line OK. The curve OC being concave,
it is clear that any point K taken between O and C on the curve will give an angle KOB, which
is less than the angle COB. The American maximum BP is therefore always greater than the
maximum BG, no matter what may be the ratio between the income assigned to the country
of origin and the country of domicile respectively, i.e., no matter what may be the position
of point A on the line OB.
The idea which forms the starting-point for determining the maximum is the same in both
methods, i.e., the country of domicile should not, by reason of the fact that a part (AB) of the
taxpayer’s property is invested abroad, remit a sum larger than the tax on that portion
calculated at its own rate of taxation. Under Method V, however, the rate adopted for
the purpose of this calculation is that applicable to the taxpayer’s total income; under Method VI
the rate is that applicable only to the portion invested abroad. It is this difference which is
illustrated by the graph Fig. 14.
It is necessary also to discuss the last paragraph of the recommendations of the technical
experts quoted above. The paragraph is as follows:
“In order to prevent a taxpayer whose entire income arises abroad from escaping all taxation
in his State of domicile, the amount to be deducted on the above basis should in all cases be
restricted to some fraction of the total tax chargeable in the .State of domicile.”
The first clause in the above sentence furnishes an obvious reason for imposing this maximum,
but this fraction-limit would also operate when the income is not entirely derived from abroad.
If a very small portion (OA) of the taxpayer’s property
is invested in his own country, the deduction provided
for in paragraphs {a) and (b) (ascertained as in Fig. 12 by
making OB-l = AB, and taking BG — BjK) would be BG;
this would absorb practically the whole of the tax to the
detriment of the country of domicile. The fraction-limit
BQ accordingly operates in any case, the result being that
there are separate maxima:
A maximum provided for in paragraphs {a) and (b),
calculated in accordance with the amount of the income
derived from abroad; and
A fractional maximum as provided for in the third
paragraph, fixed as a flat rate, at a quarter, fifth, one-tenth,
etc., of the tax chargeable on the taxpayer’s total wealth.
Method VII.
As an alternative method, the technical experts
paragraph (2)):
“ Taxation in the State of origin of only a portion of the income arising there, the other
portion being taxed in the State of domicile, but at the rate applicable to the total income from
every source. ”
Let us suppose that a taxpayer domiciled in country X possesses a total income (OB)
amounting to 100,000 francs, of which 80,000 francs (OA) are earned in X, and 20,000 francs,
(AB), consisting of profits accruing from a factory, are earned in Y. If we assume that the two
countries X and Y have, by treaty, agreed that a portion — three-quarters, for instance
— of the income derived from the factory will be taxed in the country of origin, the remaining
quarter (AF) should be taxed by the country of domicile X at the rate applicable to the whole.
C
propose (Chapter II, resolution 3,