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League of Nations Fiscal Committee: Report to the Council on the Work of the Second Session of the Committee. C.340.M.140.1930.II.

Contents

                                   
Page 
Introduction 
I. Examination of recently concluded International Conventions for the Avoidance of Double Taxation 
II. General Position with regard to the Problems of Double Taxation and Tax Evasion 
III. Examination of the Questions left open by the General Meeting of Government Experts: 
A. Definition of the Term “Autonomous Agent” in Relation to the Term “Permanent Establishment” 
B. Rules for Apportionment of Profits or Capital from Undertakings operating in Several Countries, and Measures designed to avoid Double Taxation of International Trusts and “Holding Companies” 
C. Study of the Principles involved in the Avoidance of the Double Taxation of Authors' Rights and Patents 
D. The Question of Reciprocity and of the Most-favoured-nation Clause as they affect the Problem of Double Taxation 
IV. Grant by the Rockefeller Foundation 
V. Possibility of concluding Multilateral Conventions for the Avoidance of Double Taxation on Points on which a Sufficient Number of Countries seem to be in Agreement 
VI. Taxation of Foreign Motor Vehicles 
VII. Customs Duties and Fiscal Charges applicable to Newspapers 
VIII. Draft Resolution submitted by Sir Percy Thompson 
Appendices 
I. Clause 16 of Finance Bill 1930—Great Britain  10 
II. Summary by Professor Adams of the Replies received to the Questionnaire on Apportionment of Profits or Capital from Enterprises operating in Several Countries  10 
III. Summary by M. Clavier of the Replies received to the Questionnaire on Taxation of Authors' Rights and Patents  17 




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INTRODUCTION.

The Fiscal Committee has the honour to submit to the Council the following report relating to the work of its second session held at Geneva from May 22nd to 31st, 1930.

The following members of the Committee were present:

M. BLAU (Chairman per interim in the absence of M. BORDUGE).

Professor Th. S. ADAMS, assisted by M. ALVORD and Mr. CARROLL.

Dr. Gino BOLAFFI.

M. CLAVIER.

M. Diez DE MEDINA.

Professor Dr. FLORÈS DE LÉMUS.

M. MANTZAVINOS, assisted by M. BERTZAS.

M. PAASCHE (replacing Professor DORN).

Dr. SINNINGHE DAMSTÉ.

M. TETREL (replacing M. BORDUGE), assisted by M. BOISSARD.

Sir Percy THOMPSON, K.B.E., C.B.

Representing the International Chamber of Commerce:

M. R. JULLIARD.

I. EXAMINATION OF RECENTLY CONCLUDED INTERNATIONAL CONVENTIONS FOR THE AVOIDANCE OF DOUBLE TAXATION.

On February 22nd, 1928, Hungary and Yugoslavia concluded a Conventionnote for the prevention of double taxation in the matter of direct taxes (including contributions levied on account of subordinate public corporations, communes, etc.). The Convention is based on the distinction between impersonal and personal taxes, both the terms being interpreted in their ordinary sense.

In so far as concerns important taxes, the Convention follows the principles embodied in the 1928 model conventions. There is a slight difference as regards directors' fees: if these are paid in respect of services at a branch, the State in whose territory the branch is situated has the right of assessment (compare Article 7 of the Convention with Article 6 of draft Ia.). It may be noted further that under Articles 6 and 7, in determining the domicile of juridical persons, not only the real centre of management of the undertaking (vide Article 4 of draft Ia) but also the head office of the company is taken into account, the latter having priority over the said centre of management. This stipulation recurs in Article 9 (personal tax).

In principle, the personal tax is levied in the taxpayer's State of domicile, with the exception of income from immovable property (including mortgage debts) and industrial and commercial undertakings, and earned income (the latter forms of income are not excepted in the above-mentioned article in draft Ia). The tax on total wealth is based on the same principles as the personal tax on income. As regards administrative and legal assistance, there is only one provision dealing with this matter (Article 14).

As regards the exemption of shipping, the Committee can mention, in addition to Article 12 of the above-mentioned Treaty, seven Agreements: between Belgium and Sweden (May 31st, 1929), Canada and Japan (September 21st, 1929, Exchange of Notes), Canada and the Netherlands September 2 [?], 1929, Exchange of Notes), Canada and Greece (September 30th, 1929, Exchange of Notes), Canada and Sweden (November 21st, 1929, Exchange of Notes), France and Sweden (December 19th, 1929, January 25th, 1930, Exchange of Notes), Canada and Germany (April 17th, 1930, Exchange of Notes).

Total or partial exemption from the road-tax has been provided for in arrangements between the Netherlands and certain other countries—namely, Belgium, Denmark, Germany, Great Britain and Northern Ireland, and Sweden. These arrangements have been brought into operation by enactment of simultaneous internal legislation

Finally, a Treaty [?] was concluded between Austria and Hungary (June 25th, 1928), providing for administrative and legal assistance; the whole of this Treaty corresponds to the Treaty between Austria and Czechoslovakia of July 12th, 1926 (document C.345.M.102.1928.II, p. 224).

II. GENERAL POSITION WITH REGARD TO THE PROBLEMS OF DOUBLE TAXATION AND TAX EVASION.

The Fiscal Committee has taken note of the draft law recently submitted to the Congress of the United States of America with a view to avoiding double taxation. The Committee welcomes this attempt, the more so because the system of combating the superimposing of taxes by internal legislation has already shown itself as very efficacious. Proof of this is given in the Collection of Agreements (document C.345.M.102.1928.II, pages 185–211) and in Supplement I (document C.365.M.134.1929.II, pages 36–40). It is to be hoped that several States will be influenced to follow the same path, which will lead to the disappearance of the law of double taxation in a considerable field.




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III. EXAMINATION OF THE QUESTIONS LEFT OPEN BY THE GENERAL MEETING OF GOVERNMENT EXPERTS.

The Fiscal Committee continued at its second session the study of the various questions [?] the General Meeting of Government Experts in 1928 had not been able to go into sufficiently [?].

A. Definition of the Term “Autonomous Agent” in Relation to the Term “Permanent Establishment”.

The Committee examined on second reading the definition of the term “autonomous agent” in relation to the term “permanent establishment” which it had provisionally accepted at its previous [?] session, and adopted the following text:

In its endeavour to determine the principles which it might adopt as a guide in defining the terms “autonomous agent”note and “permanent establishment”, the Committee found that [?] criteria were employed in different countries.

(a) The first is a criterion of a legal nature, it being considered that the only agents dependent on [?] an enterprise are those having sufficient powers to conclude contracts binding upon that enterprise.

The Committee considered that this criterion was admissible, but was not applicable to every case.

(b) According to the second system, there is no “permanent establishment”, unless the agent has a fixed depot.

There are cases, however, in which the presence of an agent of an enterprise may connote, [?] that enterprise, the existence of a permanent establishment, although the enterprise undoubtedly has [?] no fixed depot; this is particularly the case with insurance companies and certain buying agencies.

(c) The third system takes into account the relations between the agent and the enterprise, the only agents regarded as not autonomous being those in receipt of fixed emoluments.

This may be a determining but it is not an indispensable factor in deciding whether there [?] is a non-autonomous agent, i.e., a permanent establishment.

(d) The fourth criterion is that of the continuity of the relations between the agent and the enterprise.

This criterion is not absolute and requires closer definition.

Taking the above systems into consideration, the Committee concluded that it would be advantageous to disengage a general principle governing the matter.

The fundamental principle is:

When a foreign enterprise regularly has business relations in a country through an agent established there who is authorised to act on its behalf, it shall be deemed to have a permanent establishment in that country.

A permanent establishment will thus exist when the agent, being established in the country:

  • (a) Is a duly accredited agent (fondé de pouvoir), who habitually enters into contracts on behalf of the enterprise for which he works;
  • (b) Is bound by an employment contract and habitually transacts commercial business on behalf of the enterprise in return for remuneration from the enterprise;
  • (c) Is habitually in possession, for the purposes of sale, of a depot or a stock of goods belonging to the enterprise.

As evidence of the existence of an employment contract under the terms of (b) may be taken. [?], the fact that the administrative expenses of the agent, in particular the rent of premises, the paid by the enterprise, or the fact that the latter's intervention is manifested by outward signs.

A broker who places his services at the disposal of an enterprise in order to bring it into touch with customers does not in his own person constitute a permanent establishment of the enterprise, even if his work for the enterprise is to a certain extent continuous or is carried on at regular periods.

Similarly, the fact that the commission agent (commissionnaire) acts in his own name for one of more enterprises, and receives a normal rate of commission, does not in principle imply the existence of a permanent establishment for any of those enterprises. This may not be the case, however, if he is required to devote the whole of his activities to a single enterprise.

Lastly, there cannot be held to be any permanent establishment in the case of commercial travellers not coming under any of the above-mentioned categories.

British Government Bill.

At this session Sir Percy Thompson, the British member of the Committee, communicated to his colleagues a clause (Appendix I) which the British Government had submitted to Parliament in the Finance Bill of the year in order that it might be possible for Great Britain to conclude international agreements for the avoidance of double taxation resulting from divergent definitions of the term “autonomous agent”.




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The Committee noted Sir Percy Thompson's communication with great interest and thanked him for showing them this proof of confidence.

The contents of the clause do not differ materially from the conclusions adopted by the Fiscal Committee in the above report. The British clause would appear of a nature greatly to facilitate the conclusion of international agreements on the basis of the recommendations adopted by the Fiscal Committee.

B. Rules for Apportionment of Profits or Capital from Undertakings operating in Several Countries and Measures designed to avoid Double Taxation of International Trusts and “Holding Companies” note.

At its previous session the Fiscal Committee had framed a detailed questionnaire on this question which it had forwarded to all its members and corresponding members in order to obtain full information concerning the practices at present followed in the different countries.

The Committee received replies concerning some twenty countries. This copious and very important documentation has been summarised in a report prepared by Professor Adams (Appendix II).

The Committee has also received communication of the conclusions arrived at by the International Chamber of Commerce.

The Committee held an exhaustive discussion, which revealed the complexity of the question and the numerous obstacles which face any attempted solution. Nevertheless, while fully realising the difficulty of the task, the Fiscal Committee is of opinion that the moment has come to deal with the real substance of the question, since, until this is settled, one of the principal causes of double taxation will continue to exist.

The Committee decided to concentrate chiefly on this point. It feels that for the same reason the grant of the Rockefeller Foundation (see hereafter) should be employed primarily for this object.

The Committee requested a Sub-Committee composed of M. BLAU, M. BORDUGE, Professor DORN, Professor Dr. FLORÈS DE LÉMUS and Sir Percy THOMPSON to prepare the discussion for the next session.

C. Study of the Principles for the Avoidance of Double Taxation of Author's Rights and Patents.

As in the case of the preceding question, the Committee had forwarded to all its members a questionnaire on authors' rights and patents. The replies received have been summarised in a report drawn up by M. Clavier (Appendix III).

The General Meeting of Government Experts, which was held at Geneva in October 1928, suggested that the Fiscal Committee should endeavour to discover a method for the avoidance of double taxation levied on the income derived from authors' rights and patents. At its first session, the Fiscal Committee made a preliminary study of this subject.

Certain members were of opinion that the régime had been fixed by Article 9 of the draft 1a, drawn up by the Government experts (document C.562.M.178.1928.II). This article is worded as follows:

“Annuities and income from other sources not referred to in the previous paragraphs shall be taxable in the State of fiscal domicile of the creditor of such income.”

Other members pointed out that, at previous meetings, no decision had been take either with regard to authors' rights or the income derived from patents. This appeared to be confirmed by the fact that the Government experts' report recommended the Fiscal Committee to study the question.

Certain members of the Committee also observed that the above-mentioned Article 9 contained a printer's error, since the word “sources” should have been “créances”. In support of this argument, they advanced the following reasons:

  • 1. In all previous documents the word “créances” had always been employed (document F. 212, page 32, litt. H. document C.216.M.85.1927.II, pages 11 and 16);
  • 2. The text of Article 9 had been taken from the above documents and had been adopted without alteration by the General Meeting of Government Experts;
  • 3. The last part of the article refers to creditors (“créanciers”) which implies the existence of a “créance”;
  • 4. The commentary on this article twice employs the expression “créances”, but makes no mention of “sources” (document C.562.M.178.1928.II, page 13);
  • 5. Article 8 of draft 1c, based on the Article 9, referred to above, also contained the word “créances” (document C.562.M.178.1928.II, page 20), so that, if the word “sources” is maintained in Article 9, draft 1a, the provisions of draft 1c would differ from those of draft 1a, which would be contrary to the intention expressed by the Government experts.

Lastly, certain members thought that, in certain cases, the income derived from authors' rights or patents might come under Article 5 of draft 1a, which refers to industrial, commercial or agricultural undertakings and any other trades or professions carried on in the person's own place of residence.

Without wishing to offer any opinion on the text of Article 9 of draft 1a adopted by the Government experts, the Fiscal Committee, at its first session, came to the conclusion that, before any decision was reached as to the method of avoiding double taxation on authors' rights and patents, it would be advisable to enquire into the fiscal systems at present applicable to them in the various countries. It accordingly drew up a questionnaire which was sent to the regular and corresponding members of the Fiscal Committee.




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During the present session, the Fiscal Committee has considered the replies received to this questionnaire and which have been summarised by M. Clavier (Appendix III). On the basis of these data the Committee has adopted in first reading the following conclusions:

The Committee did not wish to offer any opinion on the drafting of Article 9, as it appears in draft 1a, which is incorporated in the Government experts' report.

The Committee was of opinion that, without going into these questions, one could solve the problem by determining the category in which income derived from authors' or inventors' rights should be placed for the purpose of the application of the model conventions.

This would obviously make it possible to bring such income under the system contemplated for income of a similar nature in the model conventions, and it would thus have the effect of preventing such income from being taxed simultaneously in more than one country.

The examination of the replies received from Governments led to the following conclusions:

(a) Fees collected by the Author or Inventor himself.

In most countries, when the fees are collected by the author or inventor himself, they are treated as professional earnings (with a few exceptions, particularly in one country, where income of this kind is regarded as income derived from movable capital).

The Committee considered that this system was fair and consistent with the economic nature of income of that kind.

That amounts to saying that in the international sphere the income will follow the rule laid down in the model conventions for professions carried on in the person's own place of residence when he has no permanent establishment abroad, and will consequently always be taxable in the country of the author's or inventor's domicile.

(b) Fees collected by the Heirs or Assigns (Legatces, Donees, etc.) of the Author or Inventor.

Certain countries take the view that the personality of the heirs and assigns is a continuation, in a sense, of the personality of the author or inventor, and that the nature of the rights in question [?] not modified by their [?] transfer. They therefore consider that income derived from authors' [?] and patents is in the nature of professional earnings in the case of heirs or assigns, just as much as in the case of authors and inventors.

Another group of countries hold that the transfer of authors' rights or patents to heirs or assigns modifies the nature of the rights and makes them similar to rights the income from which is taxed, as income from movable capital. This argument is strengthened by the fact that on the transfer a succession or donation duty is collected, similar to that imposed in like circumstances on transfers of movable capital.

Whether the income in question is regarded as professional earnings or income from movable capital in the international sphere, by following the rules laid down in the model conventions one always find, that the right of taxation belongs to the country in which the heir or assign is domiciled.

(c) Authors' or Patents' Fees collected by Grantees.

The same problem arises when copyright or patent fees are collected by grantees.

In this case, however, it should be observed that the income received by the grantee is entirely different in nature from that received by the author himself or his heirs or assigns. The income received by the latter, whether in the form of a transfer fee paid once for all or in the form of royalties or shares, follows the rules for the income from authors' rights referred to under (a) and (b) above, and is therefore taxable in the country in which the intitulee is domiciled. The income received by the grantee, on the other hand, will always be in the nature of industrial or commercial income, and will be taxed as such in the international sphere, according to the rules established for the taxation of the income of undertakings operating in the territory of one or more countries. In most of these cases the authors' rights and patents become part of the assets of the grantees' undertaking and the income derived therefrom cannot be separated from the aggregate income of the undertaking. This applies, for example, in the case of a publisher who buys a writer's work in order to publish a book and place it on sale; and it applies also to a manufacturer who buys a patent to use it in manufacturing his goods.

There are also cases, however, in which income from authors' rights and patents is distinguishable from the grantee's other income. We may mention the case of a publisher who buys [?] the copyright of a musical composition in order to sell the performing rights to theatre and concert managers, or the case of a trader who buys patents from different inventors in order to sell them or lease the right of exploitation to a manufacturer or manufacturers.

As we have already observed, however, in both cases the income is industrial or commercial and should in principle be taxed as such.

(d) Authors' or Inventors' Fees collected by Persons or Bodies (Authors' Societies, Inventors' Societies, etc.) specially entrusted with the Collection of such Income.

1. The person or body entrusted with collection, whether he receives a commission or takes it share in the income from the authors' rights or patents, will only be taxed on his own profits and by the country in which he carries on business, while the income received by the author or inventor is taxed by the country in which the latter is domiciled.


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2. Where special bodies exist for the purpose of collecting authors' fees or patent fees (authors' societies, inventors' societies, etc.), certain countries impose a flat-rate tax on the society which collects the fees in the capacity of the author's or inventor's agent, and this applies even if the author or inventor is resident abroad. Inasmuch as the latter pays income-tax in the country in which he is domiciled, it is undeniable that this system may give rise to double taxation. Such is the case if the amount of the flat-rate tax imposed on the body which acts on the author's or inventor's behalf exceeds the tax that would be payable on the commission actually drawn by that body. The Committee is of opinion that, in order to avoid this double taxation, the country in which the body is domiciled should limit itself to taxing only the commission actually drawn by the body.

From what has been shown in the foregoing report, the conclusion may be drawn that income from authors' rights or patents, which is characteristically such and does not fall into the class of industrial or commercial income, should always be taxed by the country in which the intitulee is domiciled.

D. The Question of Reciprocity and of the Most-favoured-nation Clause as they affect the Problem of Double Taxation.

The General Meeting of Government Experts had recommended that this question should be examined by the Fiscal Committee. The latter arrived at the following conclusion:

In view of the fact that the bilateral or multilateral agreements on double taxation are based on the principle of reciprocity, that is to say, involve reciprocal treatment for the nationals of the contracting parties, the Fiscal Committee, while not wishing to give an opinion on an exceedingly difficult point of international law, considers that the application of the most-favoured-nation clause to the nationals of a country which had not acceded to the said agreements would constitute a treatment of those nationals contrary to equity and to the spirit of the clause.

Nevertheless, in order to prevent this point from arising, it is desirable that in commercial or establishment treaties concluded in the future it should be made clear that the most-favoured-nation clause in its application to fiscal matters does not extend to special provisions for the avoidance of double taxation.

IV. GRANT BY THE ROCKEFELLER FOUNDATION.

The Fiscal Committee has been informed that a gift of 90,000 dollars has been offered to the League of Nations by the Rockefeller Foundation to enable the League to carry on its work relating to double taxation. The Committee unanimously desires to add its thanks to those already expressed by the Council to the Rockefeller Foundation for its generous action.

The members of the Committee also express their particular gratitude to their distinguished colleague, Professor Adams, who, in taking the initiative to which this most generous donation is due, has given fresh proof of his devotion to the work undertaken by the Fiscal Committee in the matter of double taxation.

The Fiscal Committee, having been invited by the Secretariat to express its opinion as to the kind of work it would be desirable to undertake in order to make the best use of the funds placed at the League's disposal by the Rockefeller Foundation, makes the following recommendations:

  • 1. In order to enable the Fiscal Committee to pursue the studies it has undertaken in the vast field of double taxation, the Committee should be provided with a staff of specialists who would be recruited and directed by the League Secretariat and who would work on lines laid down by the Fiscal Committee and in contact with its members.
  • 2. This staff would, primarily, carry out research work in regard to the methods of allocating or apportioning profits made or distributed by undertakings operating in two or more countries.
  • For that purpose the following subjects should be examined in detail:
  • (a) The laws in force in the different countries; regulations, decrees, orders and decisions; administrative practice and procedure; working principles and methods of accounting; their effect upon international double taxation;
  • (b) Methods—more particularly accounting methods—of ascertaining taxable profits which could be adopted by the fiscal administrations of the various countries and which would at the same time be equitable and reasonable from the point of view of the undertakings taxed, and would as far as possible prevent international double taxation, more particularly:
  • (i) When the taxable profits are computed on the basis of separate accounts;
  • (ii) When empirical methods are employed to obtain an approximate estimate of such profits;
  • (iii) When a system of fractional apportionment is employed.



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  • 3. The staff should undertake any other studies relating to double taxation which might be required of it by the Secretary General of the League of Nations in consultation with the Fiscal Committee.
  • 4. The staff should further keep up to date and render accessible so far as possible the information it has collected.

The Fiscal Committee, being of opinion that the Rockefeller grant should be used primarily for the study of the question of the apportionment of profits, requested the Sub-Committee of five members appointed to prepare discussion of the problems, namely, M. BLAU, M. BORDUGE, Professor DORN, Professor FLORÈS DE LÉMUS and Sir Percy THOMPSON, to be good enough to give the Secretary-General of the League of Nations, should he so request, an opinion on any questions relating to the use of this gift.

V. POSSIBILITY OF CONCLUDING MULTILATERAL CONVENTIONS FOR THE AVOIDANCE OF DOUBLE TAXATION ON POINTS ON WHICH A SUFFICIENT NUMBER OF COUNTRIES SEEM TO BE IN AGREEMENT.

The Fiscal Committee has accepted the following proposals which it believes might be adopted by a considerable number of States if carefully formulated.

The adoption of a multilateral convention on the proposed lines would not wholly prevent double taxation among the contracting States even on the classes of income enumerated, but it would materially encourage the movement to reduce double taxation by uniform law—a method which in important respects is obviously superior to the method of reducing double taxation through the instrumentality of bilateral conventions.

The Fiscal Committee has appointed a Sub-Committee consisting of Dr. BOLAFFI, Mr. CAREY, M. CLAVIER and Dr. SINNINGHE DAMSTÉ with instructions to submit at the next meeting of the Fiscal Committee a draft multilateral convention based upon the following general proposals and embodying such other measures to reduce international double taxation as are likely, in the opinion of the Sub-Committee, to secure the acquiescence of a considerable number of countries:

Proposal 1. — That the following classes of income shall be taxable only in the State of fiscal domicile of the recipient or creditor of such income:

  • (a) Annuities;
  • (b) Authors' royalties or rights;
  • (c) Interest on (public ?) debt (except from mortgages) issued after a future date to be agreed on;
  • (d) Wages of workers living on one side of a frontier and working on the other.

Proposal 2. — That salaries of officials and public employees who are serving abroad and public pensions shall be taxable only in the State which pays such salaries or pensions.

Proposal 3. — Immovable property (land and houses) shall be taxable only in the country in which they are situated.

Proposal 4. — The profit derived by a company from the operation of industrial, commercial or agricultural undertakings shall not be taxable in a country other than that in which the real centre of management of the company is situated unless the company has one or more permanent establishments in such other country.

Branches, mines and oilfields, fixed plants, factories, workshops, agencies, warehouses, offices and depots shall be regarded as permanent establishments. The fact that an undertaking has business dealings with a foreign country through a bona fide agent of independent status (broker, commission agent, etc.) shall not be held to mean that the undertaking in question has a permanent establishment in that country.

Nevertheless, income from maritime shipping and air navigation concerns shall be taxable only in the State in which the real centre of management is situated.

The Sub-Committee will have to consider, in connection with this proposal:

  • (a) Whether the term “company” should be defined.
  • (b) Whether it would be desirable to add the following proposal:
  • “Should the undertaking possess permanent establishments in two or more countries, each of those countries may tax the portion of the income produced in its territory. The competent administrations of the two contracting States shall come to an arrangement as to the basis for apportionment.”



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  • (c) Whether it would be desirable also to add the following proposal:
  • “The fact that an undertaking has business dealings with a foreign country through a local company, the stock of which it owns in whole or in part, should not be held to mean that the undertaking in question has a permanent establishment in that country.”

VI. TAXATION OF FOREIGN MOTOR VEHICLES.

The draft Convention which had been prepared by the Fiscal Committee is being discussed by the Permanent Committee on Road Traffic. The Fiscal Committee requested a Sub-Committee composed of Dr. SINNINGHE DAMSTÉ (Chairman), Dr. BOLAFFI and M. CLAVIER to be good enough to study the conclusions that the Permanent Committee on Road Traffic might reach, and to discuss them, if necessary, with the representatives of that Committee.

VII. CUSTOMS DUTIES AND FISCAL CHARGES APPLICABLE TO NEWSPAPERS.

The Fiscal Committee was informed that the Advisory and Technical Committee for Communications and Transit, at its last session, held at Geneva from March 10th to 15th, 1930, adopted the following resolution:

“The Committee notes the results secured by the European Conference on the Transport of Newspapers and Periodicals and the resolution on that subject adopted by the Council at its session in January 1930,note and decides:

  • “(a) . . . . .
  • “(b) To propose to the Fiscal Committee the formation of a joint committee of the Fiscal Committee and the Transit Committee, to consider the question raised in Chapter IV of the Final Act of the Conference (Customs and fiscal taxes applicable to newspapers). The joint committee will report to the Fiscal Committee and to the Transit Committee. The members of the joint committee appointed by the Transit Committee will be selected by the Chairman, who is requested to choose for that purpose one member of the Committee and two or three experts from persons concerned with the publication or the distribution of newspapers.
  • “. . . . .”

The Fiscal Committee accepted the proposal to form a joint committee and invited M. CLAVIER (Chairman), M. BLAU, M. BORDUGE, Professor DORN and M. KNEPPO to represent it on this joint committee.

VIII.

DRAFT RESOLUTION SUBMITTED BY SIR PERCY THOMPSON.

Sir Percy Thompson has submitted to the Fiscal Committee the following draft resolution:

“That the prevalent view that an undesirable economic result, viz., the creation of an artificial barrier which impedes the free flow of capital into the channels in which it can be most usefully and profitably employed, is produced by double taxation is fallacious: that origin taxation is solely responsible for this undesirable economic result which would remain unaffected if all taxes based on residence were everywhere abolished and in consequence double taxation ceased to exist.”

After discussion, the Fiscal Committee has decided to adjourn the decision on this question until its next session.




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Appendix I. GREAT BRITAIN.

Clause 16 of Finance Bill, 1930.

16. — (1) Subject to the Provisions of this section if His Majesty in Council is pleased to declare:

  • (a) That any profits or gains from the sale of goods arising directly or indirectly to a person resident in any foreign State or in any part of His Majesty's dominions outside the United Kingdom through an agency in the United Kingdom or to a person resident in the United Kingdom through an agency in any foreign State or in any part of His Majesty's dominions outside the United Kingdom are chargeable both to United Kingdom income-tax and to income-tax payable under the law in force in that foreign State or that part of His Majesty's dominions; and
  • (b) That arrangements as specified in the declaration have been made with the Government concerned with a view to the granting of relief from such double taxation,

then unless and until the declaration is revoked by His Majesty in Council, the arrangements specified therein shall, so far as they relate to the relief to be granted from United Kingdom income-tax, have effect as if enacted in this Act, but only if and so long as the arrangements, so far as they relate to the relief to be granted from the income-tax payable in the foreign State or in the part of His Majesty's dominions, have the effect of law in the foreign State or the part of His Majesty's dominions.

Provided that no arrangements made under this section shall exempt from United Kingdom income-tax any profits or gains which either:

  • (i) Arise from the sale of goods from a stock in the United Kingdom; or
  • (ii) Accrue to a person resident in the United Kingdom; or
  • (iii) Accrue to a person not resident in the United Kingdom directly or indirectly from the sale of goods effected in the United Kingdom through any branch or management in the United Kingdom or through any agency in the United Kingdom where the agent has and habitually exercises a general authority to negotiate and conclude contracts.

(2) Any declaration made by His Majesty in Council under this section shall be laid before the Commons House of Parliament as soon as may be after it is made and, if an address is presented to His Majesty by that House, within twenty-one days on which that House has sat next after the declaration is laid before it, praying that the declaration may be revoked, His Majesty in Council may revoke the declaration and the arrangements specified in the declaration shall thereupon cease to have effect, but without prejudice to the validity of anything previously done thereunder or to the making of a new declaration.

(3) The obligation as to secrecy imposed by any enactment with regard to income-tax shall not prevent the disclosure to any authorised officer of the foreign State or part of His Majesty's [?] mentioned in the declaration of such facts as may be necessary to enable relief to be duly given in accordance with the arrangements specified in the declaration.

Appendix II. APPORTIONMENT OF PROFITS OR CAPITAL FROM ENTERPRISES OPERATING IN SEVERAL COUNTRIES.

Summary by Professor Adams of the Replies received to the Questionnaire.

The replies to the questionnaire reveal great diversity of law and practice regarding most of the subjects to which the questions are addressed. Moreover, many of the replies are incomplete. In the case of such questions, it is difficult to make a satisfactory summary, and it is plain in general that an accurate comparison of law and practice can only be made by a group of experts who will devote their entire time to this subject for a period of a year or more. The principal significance of the questionnaire is the proof which it supplies of the need for systematic and continuous study.

Nevertheless, on one or two points of importance, the replies reveal a close approach to uniformity of law and practice. It appears clear, for instance, that, in assessing the profits of a branch of a foreign company (and more particularly in assessing the profits of a subsidiary or [?] of a foreign holding company), a large majority of States avowedly seek to determine the profits of the branch separately and for that purpose pay regard only to the accounts of the branch itself, without reference to the accounts of the foreign company. In the absence of separate


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accounts, or where the separate accounting is unsatisfactory, various methods of approximation are widely used. But only in a small minority of States is preference given to the “method of apportionment” by which the income of the branch or subsidiary is computed as a fraction of the entire income of the foreign corporation or holding company.

The following summary is neither accurate nor complete. But, under some questions, it reveals uniformities which are real and significant and, under others, diversities of law and practice which are highly important.

Question (a):

By what general methods does the administration of your country arrive at the ascertainment of the profits of undertakings operating in several countries?

A. Undertakings domicilednote in one State with Branches in Foreign Countries.

Practically all States call for a full declaration of profits in such cases, and a large majority of States hold the entire income subject to taxation in some manner or degree. Nevertheless, the most significant aspect of the replies is their evidence of the growing extent to which some amelioration or reduction is granted in respect of profits earned abroad.

1. A number of States practically exempt profits allocated to establishments located in foreign countries (hereafter called “foreign establishments”) — Bolivia, Danzig, Estonia, France, Hungary, Italy (for certain classes of undertakings), Japan (business-profits tax), Netherlands (as regards unincorporated undertakings), Spain (as regards the trade-licence tax), the United States of America (by deduction against its tax).

2. An important group of States, by deduction or reduction of rate, exempt the greater part of the profits allocated to foreign establishments, reserving a minimum part for the home country — Austria, Belgium, Greece (limited companies only), Netherlands (tax on distributed profits of corporations), Spain, Switzerland.

3. Canada, Germany, Great Britain, Greece (unincorporated undertakings), Japan (for income tax), Roumania, Poland, South Africa and Sweden, tax the entire profits as a general rule, but important deductions or offsets for profits taxed in certain other jurisdictions are given in Great Britain (Dominion taxes only), Canada and probably other States here mentioned.

4. The practice of exempting profits allocated to establishments located in countries with which the home country has a bilateral convention for the prevention of double taxation is apparently spreading.

B. Local Branches of Foreign Undertakings.

This case is considered under question (b).

Question (a) bis:

By what general methods does the Administration of your country arrive at the ascertainment of the profits of trust and holding companies operating in several countries?

A. Where a Holding Company domiciled in one State controls one or more Foreign Subsidiary Companies.note

The replies indicate that, in a majority of the countries, no distinctive status is given to the holding company for purposes of taxation, and the dependent or affiliated corporation is taxed as an autonomous corporation. In such States, if the dividends received by an ordinary corporation are taxable (e.g., Japan), the dividends received by a holding company are taxable: if dividends are exempt to an ordinary corporation, they are exempt to the holding company (e.g., South Africa and the United States of America). In Austria, the Netherlands and Spain, a partial exemption is granted. A foreign subsidiary of a German holding company is taxed with the parent company if the two constitute an economic unit.

B. Where a Subsidiary Corporation is controlled by a Foreign Holding Company.

This case is considered under question (c).




  ― 12[4214] ―

Question (b):

What are the methods for determining the income of branches of foreign business concerns doing business in your country?

The method followed by most countries in the first instance is to base the assessment on the separate accounts of the branch which is taxable only on income derived within the taxing State. Belgium and Poland specifically require special accounts for the branch, and it is the practice in other countries for branches to keep separate accounts. If the special accounts of the branch establishment are inadequate or misleading, they may be corrected to reflect the true income, or various empirical methods may be employed to estimate the taxable profit.

The principal methods employed are the following:

  • (a) The accounts of the entire undertaking are demanded in order to determine the amount of profit allocable to the branch. This amount may be determined by an apportionment taking into account the assets, turnover, expenditure or number of employees of the branch as compared with the assets, turnover, expenditure, or number of employees of the entire undertaking.
  • (b) The income of the branch may be determined by basing the assessment on a comparison with the earnings of local undertakings engaged in similar business, for example, by ascertaining the percentage of net profit to gross turnover of such undertakings (Belgium, France, Great Britain, etc.). The law of one country (Germany) provides that, when such method is employed, the assessment cannot be less than a minimum equal to the normal rate of interest on the capital invested in the local branch.
  • (c) The income of the local establishment is estimated by reference to a certain extent on external indications, such as salaries of employees, rent paid for premises and other expenditure.
  • (d) The income may be assessed in a lump sum which serves as the basis for taxation for several years (Germany).

A very few countries base the tax in the first instance on a certain proportion of the total income of the foreign undertaking (Spain and a few Swiss cantons). Another country may assess the profits of the branch in that manner when it has no regular separate accounting and certain other prescribed methods are not applied (Germany). The law of another country provides for an apportionment corresponding to the ratio of assets, but ordinarily employs the separate accounting method, condemning the method of proportional allocation on the ground that there is no necessary relation between the local situation of a capital asset and the income earned in the area in which it is situated, and that it is unsatisfactory in practice and productive of anomalies (South Africa).

Question (c):

Ditto for affiliated corporations.

Practically all the replies state categorically that the local company, which is a subsidiary of a foreign corporation, is a separate legal entity and enjoys the same treatment as other national companies. It is therefore taxed on the basis of its own accounts. A number of replies mention measures that may be taken to assess the profits of a subsidiary company correctly when its accounts are inadequate or misleading, and notably the following:

  • (a) A profit may be ascribed to the subsidiary company based on a comparison with the profits of other companies engaged in a similar business. In making such comparison, the law of one country (Belgium) authorises taking into account the capital invested, turnover, number of workers, rental of real estate, motor power employed and other relevant data.
  • (b) Where the subsidiary is rendering services to the foreign parent, its profit may be fixed on a commission basis.
  • (c) When the subsidiary and the foreign parent constitute a “single economic unit”, the subsidiary may be treated as a branch (Germany, Spain).
  • (d) In order to prevent evasion or show true income, the fiscal authorities may allocate income as between the foreign parent company and the local subsidiary (United States of America).
  • (e) Where the profits of a subsidiary are artificially concealed, a charge may be made upon the parent company based upon the true profits of the subsidiary (Great Britain and Spain).

The question of allocation as between a foreign parent and a subsidiary corporation organised in the Netherlands or in Greece is evidently of secondary importance, as such corporations are not taxed until profits are distributed.




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Question (d):

(d) In the case of (1) branches and (2) affiliated corporations:

  • (i) Is the income of the branch or affiliated [?] corporation determined separately? or
  • (ii) Is it determined as a fraction of the entire income of the company of which the taxpayer is a branch or to which it is affiliated? or
  • (iii) Has the Administration the option of following either method?

Answered under questions (a) and (b).

Question (e):

If the method (ii) is followed, what system is employed for checking the income of the mother-company?

In practically no reply is any regular system described for checking the income of the mother-company. The balance-sheet and profit-and-loss account and other pertinent information may be requested from the parent company and carefully examined, but the difficulties of checking such information are admitted.

Questions (f) and (g):

  • (f) When the branch or affiliated corporation in your country operates at a profit, whereas the entire concern operates at a loss, is any cognisance taken of the loss in determining the income of the branch or affiliated corporation?
  • (g) What is your practice if the branch or affiliated corporation in your country operates at a loss, whereas the entire enterprise realises a profit?

Practically all the countries which base the assessment of the branch on separate accounting answer categorically that no attention is paid to the profit or loss of the parent company in determining the liability of the branch. The branch is taxed in accordance with the showing of its own accounts, provided they are properly kept. One country (Spain) allocates to the branch a proportion of the profit or loss of the entire concern, because it treats the branch and the entire concern as a unit. Similarly, the Swiss cantons which tax on the proportional allocation basis, and the few other countries which exceptionally tax on that basis, declare that they take into account the profit or loss of the entire concern.

Subsidiary companies are, according to the replies, always taxed independently of the foreign parent, except that Spain merges the subsidiary with the foreign parent for purposes of ascertaining tax liability, and the German law authorises the taxation of the subsidiary with the foreign parent when they form a single economic unit.

Question (h):

When a company has its real centre of management in your country, but its other operations (for example, manufacture) in another country, is a fraction of the profits ascribed to the head office and, if so, how is that fraction determined?

Summarily stated:

  • 1. The largest number of responding States tax the entire profits in such a case — Bulgaria, Canada, Great Britain, Greece (except for limited companies), Germany, Japan (income tax), Poland, Roumania, South Africa (when sales are controlled in South Africa).
  • 2. A smaller number attach minor importance to the real centre of management, and allocate profits primarily to the countries or establishments of manufacture and sale — Estonia, Danzig, France, Hungary, Japan (business profits tax), United States of America.
  • 3. Other countries, in effect, ascribe a fraction of the profits to the head office: Austria (not less than one-tenth for limited companies and one-quarter for commercial partnerships or private companies), Belgium (rate reduced to one-quarter on profits realised and taxed abroad), Bolivia (less taxes paid abroad), Italy (when Article 9 of the Royal Decree of August 12th, 1927, is not applicable), Netherlands (taxable distributed profits accruing outside reduced by two-thirds),


      ― 14[4216] ―
    Spain (Spanish companies taxable in respect of not less than one-third of the profits), Switzerland (a minimum profit varying from 10 to 25 per cent).

Question (i):

When a company has its real centre of management in some other country than yours, but other operations (for example, manufacture), in your country, is a tax imposed in your country and, if so, how is it assessed?

Practically all the answers to this question are in the affirmative, but in South Africa, “if an intermediary stage in a series of business transactions which resulted, as a whole, in the production of income were carried out in the Union, no attempt would be made to assess for Union taxation a portion of the profit derived from transactions which, as a whole, were controlled from outside the Union”.

The method of assessment is usually not stated in detail, but in a majority of States profits are determined on the basis of a separate accounting or balance-sheet, where available. Only two replies (from Spain and Switzerland) state that a fraction or portion of the profits may be ascribed to the centre of management situated in another country. In the Netherlands, “when the company has its real centre of management in a country other than the Netherlands, but its other operations are carried on in the Netherlands, the total profits are deemed to be realised in the Netherlands”.

In Italy, the tax is assessed “on the industrial income—that is, on a part of the profits representing the difference between the cost of production and the sale price of wholesale merchants in the country”.

Question (j):

If a company, with its head office in one State, has a branch in your State which makes sales in a third State without having there a permanent establishment, are the profits derived from the sales in the third State ascribed to the branch or to the head office or partly to each?

In a large majority of the States, such profits are ascribed to the branch. For Great Britain, the answer depends upon whether the trade in the third State is controlled by the branch. In Spain such profits “are always ascribed to the head office”. In Sweden, such profits would be exempt from Swedish taxes if manufacture did not take place in Sweden.

Question (k):

With regard to any of the above cases, is any special method of assessment followed where there are permanent establishments in your country belonging to the following foreign enterprises, and, if so, what method?

  • (a) Banks and banking companies;
  • (b) Insurance companies;
  • (c) Railroad, motor-omnibus and other transport companies;
  • (d) Power and light companies;
  • (e) Gas companies;
  • (f) Telegraph and telephone companies;
  • (g) Mining and extractive industries;
  • (h) All other kinds of firms for which special methods would be necessary.

Most of the countries consulted apply the general rules contained in their law to the enterprises mentioned under (k) with the possible exception of insurance companies. The special methods indicated by them for determining the income of these enterprises are only in many cases methods of checking or supplementing the ordinary accounts of the branch, which as a general rule continue to be the basis of assessment.

In Bolivia, a 40 per cent deduction is made on gross profits in respect of expenses; the remaining 60 per cent are regarded as net profits and are taxed.

(a) Banks. — The taxable profits, in relation to the total profits, of a bank in a country where the bank possesses agencies is determined by the ratio of expenditure on staff in that country to the total expenditure on staff (agreements made by Austria with Hungary and Czechoslovakia, Free City of Danzig).


  ― 15[4217] ―
In other countries—more particularly for the purpose of checking the accounts—the ratio is taken of the gross receipts obtained in the country to the total gross receipts (Germany, Danzig), or the ratio of local transactions to total transactions (Italy, Spain).

In the Netherlands, the Administration has issued detailed rules for the calculation of the profits realised by a branch bank. These rules are to some extent associated with those relating to the apportionment of working capital.

(b) Insurance companies. — The methods of assessment most generally adopted for the purpose of determining the share of the total profit falling to a specific country consists in taking the proportion of the premiums collected in that country to the total premiums collected by the company (Austria in the treaties of that country with Hungary and Czechoslovakia, Danzig, Finland, Germany, Italy, South Africa, Spain, Switzerland).

Certain countries calculate the profits as a lump sum and apply for this purpose a coefficient to the amount of the premiums collected; thus, in the Netherlands, profits are as a general rate estimated at 10 per cent of the premiums collected in that country (companies may, however, if they so request, be assessed as laid down in the previous paragraph). In Sweden, the taxable income is also a percentage of the gross premiums collected: 5 per cent for marine insurance, 6 per cent for fire, 15 per cent for life insurance, 10 per cent for other branches of insurance.

Other countries fix profits, not in proportion to the total profits of the company, but by comparison with national undertakings: the percentage of profits in relation to the amount of the premiums collected in the country must be the same. This is the principle applied in France (the method is, as a matter of fact, optional) and in Portugal.

(c) Railroad and other transport companies. — The profits earned in a country may be assessed in relation to the total profits of the company, either by taking the mileage in the country (Danzig, Switzerland), or by reference to the comparative amount of the revenue obtained (Spain, Italy), or, on the other hand, to the expenditure incurred in the country (United States of America).

In Bolivia, 45 per cent of gross profits are regarded as expenses, and 55 per cent are taxed.

The Netherlands fix the taxable income of railways by applying a coefficient of the amounts collected in the Netherlands. In South Africa, the taxable profits of shipping companies is fixed at 10 per cent on freight for passengers, live-stock, mails and goods shipped in the Union.

(f) Telegraph and telephone companies. — South Africa determines the income of submarine telegraph and wireless telegraph companies by taking 5 per cent of the amount payable in respect of all messages delivered for transmission from any office within the Union.

Question (l):

Are any special methods of assessment employed in the following cases:

  • 1. Enterprises manufacturing or buying in another country and selling through a permanent establishment in your country: what is your method of determining the profit of the latter establishment?

Apparently, all countries with an income tax impose it on profits derived from selling through a permanent establishment in their territory goods that have been manufactured or bought in another country. The basis of assessment in most cases is evidently the net sales of “merchanting” profit realised within the country, allowing, in the case of goods manufactured in another country, a manufacturing profit to the latter. In some instances, however, where goods are purchased in one country and sold in another, the entire profit is taxable in the country of sale (Great Britain, United States of America).

South Africa usually accepts the Customs evaluation as the basis for determining the sales profit.

The Swiss cantons in most instances tax the excess realised over current market prices, or base the assessment on the profit realised by an independent Swiss firm.

Greece allows a deduction from the net sales profit equal to 5 per cent for general expenditure of the head office.

Austria has adopted arbitrary allocation fractions, being half-and-half where an undertaking buys in one State and sells in Austria or vice versa, and two-thirds of the profit for the State of manufacture and one-third for the State of sale.

  • 2. Enterprises manufacturing in your country and selling elsewhere: is a profit ascribed to the manufacturing establishment?

The general rule seems to be that a certain profit should be ascribed to manufacturing in a given State, although the goods are exported and sold elsewhere. South African law goes farther and


  ― 16[4218] ―
Declares the whole of the profits taxable if the control of the enterprise is in its territory. Austria allocates two-thirds to the country of the manufacture and one-third to the country of sale.

  • 3. Enterprises continuously buying is your country through a permanent establishment but selling in another country: is any profit ascribed to the buying establishment?
  • 4. Enterprises purchasing raw materials from other companies in your country with a view to manufacturing and selling elsewhere: is the foreign enterprise deemed to be carrying on business in your country and taxable on a presumed profit?

The great majority of States declare categorically that they do not endeavour to allocate a profit to buying establishments situated in their territory and do not try to tax a foreign concern which buys raw materials directly from local enterprises. A few States, however, assimilate the buying establishment to an export house (Bulgaria, Portugal) or assess the buying establishment on the basis of a commission (e.g., the Netherlands, Spain). France and Germany hold such a foreign company taxable on profits derived through a permanent establishment for the purposes of the tax on industrial and commercial profits.

Austria also allots a fraction of the profit to a buying office and, where there is no buying office, it allots a fraction of the profits for tax purposes if the materials purchased are exported through the commercial travellers employed by the head of the undertaking, or the latter himself.

Question (m):

When a company has a debenture debt, is the charge on this debt ascribed solely to the real centre of management or is it distributed between the different permanent establishments? In the latter case, what is the system of distribution?

Practically all countries recognise the rule of apportioning the interest charge on a debenture debt of the company to the various branches or sources as a part of the overhead or debt in the proportion that they are concerned, or in proportion to capital employed (Italy, Sweden), to assets (Japan), to profits (Spain), or to income, receipts or some other factors (Germany), or to gross income (United States of America).

Belgium regards such charges as attaching exclusively to the foreign central office responsible for the issue, unless a part of the loan has been especially allocated for the requirements of the Belgian establishments. Where the head office is abroad, Portugal takes no account of debts. As Great Britain does not allow interest to be deducted in determining assessable profits, no question of apportionment arises.

Questions (o) and (p):

  • (o) What are in this connection the chief difficulties of an international character which the administration in your country has experienced?
  • (p) Are there any particular suggestions or recommendations which you would like to communicate to the Fiscal Committee in this connection?

A considerable number of States, while not alleging that the international difficulties which they have experienced in connection with the taxation of undertakings operating in several countries are important, nevertheless mention the practical difficulties they have encountered and suggest the lines on which they think a solution might be found.

One of the questions most often referred to is the difficulty of exactly determining the profits on manufacture and the profits on sale. Denmark suggests meeting this difficulty either by applying a general coefficient to the business turnover or, preferably, by imposing taxation only in the country in which the business operations yielding the profits were carried on (the effect of this would be to eliminate the country in which the head office is situated in all cases when neither the manufacture nor sale took place in that country, but the problems would still remain when manufacture and sale took place in different countries).

As regards balance-sheets separately drawn up by each establishment, Austria and Hungary indicate practical difficulties which may arise in this way (when, for example, one of the countries concerned objects to the balance-sheet in so far as it is concerned and desires to include profits which have already been taxed in another country), and they suggest that international agreements should lay down detailed and uniform rules for the allocation of taxation. For example, Austria proposes conventional percentages of allocation. Other countries, such as the United States of


  ― 17[4219] ―
America, consider the method of “separate accounting” as decidedly preferable to any hard-and-fast formula for allocation.

Canada desires that the principle of reciprocity should be established in regard to exemption: the United States of America, on much the same lines, recommends that the country of the head office should grant a credit or offset for taxes already paid in foreign countries.

Switzerland asks that the Fiscal Committee should not adopt too wide a definition of the term “permanent establishment”. This would limit the number of cases to which the rules regarding the allocation of profits would apply and would improve political and commercial relations between the countries.

Finally, Canada recommends the translation of foreign legislation on the taxation of the profits of industrial and commercial undertakings.

Appendix III. TAXATION OF AUTHORS' RIGHTS AND PATENTS.

Summary by M. Clavier of the Replies received to the Questionnaire.

Twenty-one countries replied to the questionnaire concerning the fiscal system applicable to: (1) authors' rights, and (2) periodic payments derived from patents. The following tablesnote give a summary of the replies received by the Secretariat.

We think it may be useful to analyse the data set out in the above tables, so as to obtain a general survey of certain points of special interest.

I. AUTHORS' FEES.

Many countries have combined their replies to questions Nos. I and II. That is logical, because the manner in which income is taxed depends on the nature of the income.

This being borne in mind, the replies on the main points may be grouped as follows:

  • (1) When the income from authors' rights is collected by the author himself, it is usually regarded as professional earnings. In Spain, however, it is treated as income derived from capital in the form of movable property.
  • (2) When the income is collected by the heirs or assigns (legatees, donees), it is regarded as:
  • (a) Income derived from movable property: in Austria, Belgium, Germany, the Netherlands, Spain and Switzerland;
  • (b) Income derived from the exercise of a profession: in Bulgaria, Czechoslovakia, Greece, Hungary, Italy, Roumania and Sweden.
  • (3) When the income is collected by grantees, it is regarded as:
  • (a) Income derived from the exercise of a profession: in Belgium, Bulgaria, France, Greece, Italy, Sweden and Switzerland (if derived habitually in the exercise of a profession);
  • (b) Income derived from movable property: in Great Britain, Netherlands, Poland, Roumania, Spain and Switzerland (if only derived from time to time).
  • (4) When the income is collected by companies or other bodies specially instructed to collect it:
  • In Belgium, the tax of 2 per cent on professional earnings is levied at the source. This, however, is treated only as an instalment on the regular payments which will have to be made by the authors themselves subsequently, if they are domiciled or resident in the country.
  • In Canada, the agent (trustee) or collecting company must declare the income, but the person on whose behalf it is collected pays the tax.
  • In France, such income is taxed in the name of the beneficiaries. This is also the case in Denmark.

There seems to have been a misunderstanding concerning this question. Most countries have replied as though the question referred, not to companies entitled to collect income derived from authors' rights for and on account of the authors, but to companies exercising rights acquired by themselves for their own benefit. This question has therefore been confused with the next concerning tranfers or grants.

Sale or Grant of Authors' Rights. Division of income.

Division between a number of years is the practice in Austria, Belgium and France.

In other countries, the tax is levied as and when the income accrues, only if the sale is effected against periodical payments or payment by instalments. This is the case in Bolivia, Denmark, Finland, Great Britain, Italy, Poland, Roumania and Spain.

There is no division in Bulgaria, Czechoslovakia, Germany, Great Britain, Greece, Hungary, the Netherlands, Sweden and Switzerland.

In Canada, no tax is levied in respect of the sale or grant of authors' rights, the transaction being regarded as equivalent to a sale of capital.




  ― 18[4220] ―

Foreigners.

In Austria and Germany, foreign authors only pay taxes if they have some permanent establishment or agent in the country.

In Belgium, the 2 per cent tax on professional earnings deducted at source is final. No other taxes than this are subsequently levied on foreign authors.

In France, taxation is only leviable if the author is domiciled or resident in the country.

In Sweden, foreign authors are only liable to taxation if they have a fixed establishment in the country or collect income in the form of royalties paid by a Swedish enterprise.

In Norway, foreigners are not taxed unless they rent a studio in which to work or premises for the exhibition, on payment of an entrance fee, of works of arts or for their sale.

II. PERIODICAL PAYMENT ON ACCOUNT OF PATENTS.

No special comments. The system is everywhere practically the same as that applied in the case of authors' fees.

FISCAL SYSTEM APPLICABLE TO AUTHORS' RIGHTS.

Questions I and II.

I. What is the fiscal system applied to authors' rights when the latter are collected:

  • (a) Directly by the author, his heirs or assigns (donees, legatees, etc.);
  • (b) By grantees;
  • (c) By companies or other bodies especially entrusted with the collection of such income?

II. According to circumstances, is such income regarded as derived:

  • (a) From transferable securities;
  • (b) From the exercise of any trade or profession;
  • (c) From any other claim or source?

Replies.

Germany.

The tax is payable by the person or company for whose account the sums are collected.

The income may be derived from a trade or industry or the exercise of an independent profession.

Otherwise, the income is deemed to be derived from the leake or transfer of articles or rights.

As regards persons or companies subject only to restricted taxation, the sums in question are liable to income tax and to the corporation tax, unless they have already been taxed as income derived from an industry exc [?] in Germany through a permanent establishment or representative.

Austria.

Authors' rights are taxable in all cases, except in respect of foreigners who exploit their rights in Austria without maintaining a special establishment for that purpose.

Income is deemed to be derived from undertakings for gain, except where the right is exercised indirectly under an assignment for payment to a third person (publisher, heirs or legatees). In this latter case, it is regarded as the exploitation of working capital.

Companies exploiting authors' rights are taxable in the same way as undertakings engaging in a lucrative operation.

The remuneration paid to the author for the assignment of his rights is deducted from the profits if it includes definite sums or a percentage of the gross receipts.

If the rights are collected in the form of shares in the company, the deduction is not allowed.

Belgium.

1. — Income collected directly by the author: professional earnings. Taxes payable: tax on professional earnings and super-tax.

2. — Income collected by the heirs or authors' assigns: use of a transferable right (publication or reproduction). Tax payable: movable property tax.

3. — Income collected by grantees: this is liable to the professional earnings tax leviable on the person who collects them, less the amortisation of the price of the grant (number of years remaining to run before the work becomes public property).

The grantor (author) is taxable on the proceeds from the grant, less the expenditure mentioned (see later: Division).

4. — Income collected by companies or bodies especially entrusted with the duty of collection.

In order to avoid certain difficulties, the professional earnings tax is deducted at source at the rate of 2 per cent of the amount of the income, less only the cost of collection.

Deduction of tax is final as regards foreign authors.

As regards authors domiciled or resident in Belgium, this payment only constitutes provisional taxation subject to subsequent adjustment.

Bolivia.

Author's rights, being considered as intellectual capital, are the exclusive property of the author, his heirs or grantees as are the profits derived from their exploitation.

Income derived from these rights is considered to be derived from the [?] of a profession, and is therefore taxed as professional earnings, (personal services).

Bulgaria.

The authors themselves are not liable to taxation on profits (schedular tax).

The profits of assigns and grantees are taxable as commercial profits for the year in which they were collected.

All beneficiaries (including the authors themselves) are liable to the supplementary tax on total income in respect of income collected.

Canada.

I (a) and (b). — If the author or granted is resident in Canada, he is taxable on the total income derived from all sources, and credit is given for taxes paid to foreign countries.

I (c). — While the agent (trustee) or company collecting the income must make a return, it is the person on whose behalf the income is collected who pays the tax.

II. — The income from authors' rights is deemed to be received from carrying on business in Canada.


  ― 19[4221] ―
Denmark.

Authors' rights are subject to income tax and—if they are assigned—to the capital tax.

The tax is levied on the person who collects the rights (authors or assigns).

The tax is not deducted at source if the income from the rights is collected by companies. It is collected only rom [?] the author.

Nature of income.

As regards the author: income derived from personal work.

As regards the grantee: profit on the capital used for the purchase of the right. Spain.

From the fiscal point of view, authors' rights are regarded as income from movable property.

The rate of the tax is reduced when the income is collected by the children or widow.

There is at present no definite case-law on the matter. Finland.

There are no special legal provisions with regard to authors' rights.

Income derived from those rights [?], and the rights themselves, are liable to income and capital tax.

No distinction is made as regards the persons who receive the rights on the income derived from [?] different sources. France.

1. — Income collected by the author himself, his heirs or assigns, is subject to the tax on profits derived from non-commercial professions and to the general income tax, (if the beneficiaries are domiciled in France).

2. — Income collected by companies or other bodies: tax levied on the beneficiaries (as profits from non-commercial professions).

Nature of Income.

Derived from the exercise of a profession or lucrative occupation.

Note. — At the request of the persons concerned, the annual taxable profit may be determined by deducting from the average receipts for the previous five years the average amount of expenditure incurred during those same years.

Taxpayers must adhere to this system for the following years. Great Britain.

1. — When rights are collected by the author himself: an author resident in the United Kingdom is assessable to United Kingdom income tax. An author not resident in the United Kingdom is liable to bear United Kingdom income tax by deduction at the source from all royalties relating to sale of books, etc., in the United Kingdom.

2. — The same system applies when the rights are collected by grantees.

A person transferring rights is assessable to income tax in respect of the profits derived

1. — Rights collected by the author himself; income derived from the exercise of a profession or vocation.

2. — Rights collected by grantees or by authors not resident in the United Kingdom: the income is regarded as arming from the ownership of property.

3. — Profits from the purchase or sale of authors rights are regarded as derived from the carrying one [?] of a trade or business. Greece

Tax on authors' rights where the income does not exceed 150,000 drachma. Over that sum, the income is subject to the 8 per cent tax on the net income from liberal professions.

In practice, however, authors are not taxed, since they are not, as a rule very wealthy.

As there are no special legal provisions, income collected by the heirs or assigns is taxable under the law concerning the taxation of net income (commercial transactions)—i.e., tax on authors' rights up to 150,000 drachma and tax of 10 per cent on the remunder.

Consequently:

(1) Income from a profession where the taxable party is the author himself.

(2) In all other cases, income from a commercial enterprise.

Norway.

Income derived from the reason [?] of author's rights or of rights in artistic [?] property is regarded as having been earned by personal activities.

It is therefore taxable at the place of residence of the owner or at the head offices of the company to which the rights have been transferred.

Persons residing abroad are not taxed in Norway on income of this kind, unless they rent in that country a studio in which to work, of premises for the exhibition, on payment of an entrance fee, of works of art of for their sale. The same rules apply when the rights are transferred to a company or commercial undertaking. National companies or companies engaged in business within the country are alone taxable. If the company has its head offices in Norway, it is also taxed in respect of income acquired abroad by the exploitation or sale of rights.

Hungary.

Income collected:

(a) By the author: tax on personal profits in the place of his [?] domicile;

(b) By his heirs, etc., or grantees same system;

(c) By an institution set up for [?] the purpose: at the seat of the institution.

(d) By a company: at the place of its registered head offices

Nature of Income.

As income derived from an enterprise if an institution has been set up or if the person concerned exercises a profession in connection with this object.

If no profession is exercised, the income is regarded as income “from another source” (but never as income from a claim).

Italy.

Authors' rights are subject to the tax on movable property

(a) As professional earnings in the [?] name of the author, her heirs or [?];

(b) As income derived from an enterprise when the income is collected by a grantee

As professional earnings when the income is collected in the name of the grantee, but on behalf of the author if the latter draws a fixed annual sum or percentage on turnover, sales, etc.

If the author draws a percentage of the net profits, he is regarded as a partner, and a tax is levied on the whole of the profits. Consequently: professional earnings in the case of the author and his assigns and income from an enterprise in the case of a grantee exploiting the rights which he has acquired.


  ― 20[4222] ―

Netherlands.

As earned income when the author himself collects the income or delegates certain rights [?] to a publisher.

Income collected by heirs, douces, legatees [?] to grantees: income from movable property (capital sum) or from an occupation carried on at the person's own place of residence (his assent [?] to the performance).

Cession in return for an annuity. There is at present no law concerning the classification of [?] such annuities [?]i.e., whether they should be taxable as income from movable property (the amount of the capital sum [?]) or as earned income.

In the heirs [?], etc., ceded the right [?] in return for an annuity, such income would probably be taxable as income from movable property (the amount of the capital sum).

Poland.

As income tax only when authors do not carry on their own business (such as printing, publishing, etc.); otherwise, they are liable to income tax and to the industrial tax. Authors are treated very generously in the matter of the amount of costs and expenditure to be deducted.

Income collected by companies: this is dealt with under the fiscal [?] regime applicable to commercial enterprises.

Income collected:

(a) By the author: professional earnings.

(b) By heirs, assigns or grantees; income from claims and other similar sources (capital);

(c) By companies or other bodies [?]; system applicable to commercial enterprises [?]

Roumania.

Income collected:

(a) By the author, his heirs [?] or assigns: professional earnings;

(b) By grantees: transferable income;

(c) By companies or other bodies: transferable income accruing from the cession of rights in property. Income considered to be derived from movable property (capital) in the event of participation in the profits of the enterprise to which the rights are ceded.

Sweden.

In general, foreigners are only liable to taxation if they have a permanent establishment in Sweden, of if they receive [?] a royalty [?] from a business in Sweden.

Income collected by a professional author is treated as income derived from earning on a business.

Income collected by the hears, etc., of a professional author: income derived from [?] carrying on a business.

Grantees, if the income is collected in the form of a royalty: income from carrying on [?] a business.

If the grantee is a publisher or theatre manager in professional), the income derived from explorting the neglets [?] as regarded as income from a business [?] .

The total amount paid for the rights is deducted at once, as expenses.

Switzerland.

Income collected:

(a) By the author; product of his labour;

(b) By his heirs or assigns: the authors' works are regarded as transferable securities: this capital is thus liable to the tax on capital, and in certain cantons [?], to income tax;

(c) By grantees: if they exploit the rights as a profession, the sums received are liable to income tax (or to the tax on the product of labour). In all cases, the tax on capital is payable in respect of the price paid.

Consequently:

(a) Tax on transferable securities levied on heirs and assigns and on grantees who concern themselves only occasionally with the exploitation of the rights [?].

(b) Professional income: in the case of authors, companies and grantees collecting lees by way of business.

Czechoslovakia.

Income collected (a) by the author or his heirs, if they exploit the rights as a profession: [?] income tax and general profits tax.

If the author carries on this profession solely as a subsidiary occupation, the income is not taxable.

If the heir (legatee [?] or donee) is a company, it is not liable to income tax, but to the general or special tax on profits. For purposes of taxation, account is taken of the number of years the profession from which the income is derived has been carried on [?].

Cession against a single payment:

Grantor (author): income tax.

Grantee: income tax and general profits tax in respect of the income derived from the exercise of the right. If the grantee is a company, it is only liable to the general or special tax on profits.

FISCAL SYSTEM APPLICABLE TO AUTHORS' RIGHTS.

Question III.

III. In the case of the sale or cession of authors' rights either against immediate payment of the actual price or in the form of securities or shares in an undertaking exploiting the authors' rights referred to, is the income from such sale or cession divided between several years for purposes of taxation?

Replies.

Germany.

In the case of sale or cession, the proceeds are only taxable of the assigned authors' rights formed part of a working capital. In that case the profit constitutes a part of the working profit.

Distribution over a number of years is not allowed.

Austria.

In practice, the income is divided between a number of years equal to the years during which the author has exercised his activity.

Belgium.

Division between a number of years equal to that for which the establishment of the instalments is authorised (together with the year of the cession regarded as the last).

Taxes payable: tax on professional earnings and supertax leviable on the grantor.

Bolivia.

Profits derived from sale or cession of author's rights are regarded as taxable income in respect of all sums collected by the beneficiary or beneficiaries during each year.




  ― 21[4223] ―

Bulgaria.

There is no division.

Canada.

Sale or cession. — Whatever the form of payment, the transaction is treated as the sale of a capital asset. The moneys received are not taxable as income.

Denmark.

Sale or cession. The profits are taxable in their entirely as income acquired at the time of sale and without distinction as to how the price was paid (cash or shares).

In the case of shares, taxation is levied as and when the profits accrue.

Spain.

The tax is payable in so far as the price of sale can be demanded by the author or his assigns. There is as yet no definite case-law on the subject.

Finland.

Whether the tax on the income is payable in a lump sum of spread over several years depends on the conditions governing the sale or cession.

France.

Cession to a publisher for a lump sum or against a royalty fixed per year or per copy sold.

Grantor: tax on income derived from non-commercial professions and general income tax.

The Council of State may, however, decide—as it has already done with respect to patents—that this profit is not taxable.

Grantee: liable in his capacity as publisher to the tax on industrial and commercial profits (and to the general income tax).

Great Britain.

There is no division. Any receipts liable are regarded as entering into the income or profits of the year in which they are paid.

Greece.

In case of cession to a joint-stock company, the system of joint-stock companies applies.

There is no division.

Hungary.

There is no division.

Italy.

The tax is levied at the time of the cession on the basis of the actual or computed price.

In some cases, there is an annual tax on the periodical payments.

Norway.

The sale or cession against immediate payment in cash is a taxable transaction. In the case of payment effected [?] in any other manner, the income is asseased at the selling value of the property at the time of cession. When payments are effected as and when sales or performances take place, or when payments are made in instalments, the income is held to be acquired on the date of each payment.

No cases are known in which author's rights or artistic property have been transferred in Norway in return for securities or shares in an undertaking.

Netherlands.

Sale against immediate payment. Up to the present, the administrative authorities have never taxed the grantor, unless the latter operates the same undertaking.

There is no division.

Poland.

Division according to existing circumstances.

Roumania.

Cession:

(a) Against immediate payment, the total income is taxed at the time of the cession;

(b) Against periodical payments the incidence of the tax is at the time of such payments;

(c) Payment in shares: the dividends are taxed at the time of their declaration.

Sweden.

There is no division.

Taxation is levied at once.

Switzerland.

There is no division.

The sum obtained is included in the income of the year of payment.

Czechoslovakia.

Cession against periodic payments.

Grantor, the heir: income tax and tax on annuities.

Grantee: as above.

If the heir cedes the rights against immediate payment, the proceeds are not taxed unless the sale occurs in connection with the operation of an undertaking for gain.

There is no division.




  ― 22[4224] ―

FISCAL SYSTEM APPLICABLE TO PERIODICAL PAYMENTS DERIVED FROM PATENTS.

Question IV.

IV. Same questions as under I to III concerning income from patents, if the fiscal system applied to the latter differs from that applicable to authors' rights.

Replies.

Austria and Cermany [?].

Same system, mutalis [?] mutandis, as applied to authors' rights.

Belgium.

The amounts paid for the use or concession of a patent are liable to the tax on movable property.

If the use of the concession is granted professionally, the proceeds therefrom are considered as income liable to the tax on professional earnings.

Sale or cession.

If the operation is directly or indirectly connected with the grantor's professional occupation, he is liable to tax in respect of the proceeds of the sale, less the price paid for acquiring the patent or its constitutive value (cost of research and study).

It is distributed over several years: same system as applied to authors' rights.

Bolivia.

Income derived from industrial patents is liable to the tax on capital investments.

If, however, the patent is not exploited on an industrial scale by the inventor, who merely receives an annual payment, such income is liable to the tax on professional earnings (personal services).

Bulgaria.

Inventors are subject to taxation as persons exercising a liberal profession and their assigns as persons exercising a trade, with respect to the year in which the profit [?] was collected.

Profits are taxable at source.

Canada, Denmark and Finland.

Same system as for authors' rights.

Spain.

Income from patents worked by an industrial undertaking is taxable as part of the net profits of the said undertaking.

Where the person receiving such income is economically independent of the undertaking, deduction is allowed, but not otherwise.

Neither is it allowed in the case of a foreign branch.

France.

An inventor who sells his patent is not liable to income tax (decision of the Council of State), even if the sale is made against annual or periodical payments.

Grant of working licences: the income received is liable to the tax on profits derived from non-commercial professions and to the general income tax.

This also applies to licences granted abroad, provided the beneficiary is doed [?] in France.

Grantee (generally a manufacturer) the profit [?] is included in the working profits and is liable to the tax on industrial and commercial profits and to the general income tax.

Companies: same system as applies to authors' rights.

Nature of income: derived either from the exploitation of an undertaking or lacrative [?] occupation.

Distribution over several years: see Note to the table concerning authors' rights.

Great Britain.

I. — (a) A patentee is liable to United Kingdom income tax in respect of all payments collected by him. Payments from British sources are received after tax has been deducted.

In the case of a patentee not resident in the United Kingdom, the tax is deducted at the source from all royalties or periodical payments which he is entitled to receive from persons in the United Kingdom.

(b) The same system appllea when payments are collected by grantees.

II. — (a) Payments collected by patentees or by grantees: the income is regarded as arising from the ownership of property.

(b) Profits derived from the purchase or sale of patents are regarded as derived from the carrying on of a trade or business.

III. — There is no division. Any receipts liable are regarded as entering into the income or profits of the year in which they are paid or payable.

Greece and Hungary.

Same system as applied to authors' rights.

Italy.

Same system applied to authors' rights. Periodical payments are, however, always held to be income derived from industry where the invention has involved the inventor [?] in a considerable outlay of capital.

Norway.

Same system as applies to authors' rights. It should, however, be noted that payments made against the cession [?] of rights in connection with patents are usually made in the form of an annual payment or in the form of an industrial participation. If the holder of a patent takes an active part in its exploitation, income is not considered to be [?] derived there from until the person concerned has received his share in the profits of the undertaking.

In cases of cession in return for an industrial participation, profits are assessed on the actual market value at the time of cession.

Netherlands, Poland, Roumania and Switzerland.

Same system as applied to authors' rights.

Sweden.

Same rules as applied to authors' rights. However, income derived from exploiting a patent is almost without exception regarded as income derived from carrying on a business.

Czechoslovakia.

Same system as applied to authors' rights. Payments for concessions are taxable even if the rights are exploited abroad, in so far as the grantor is resident in Czechoslovakia.

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