Legal Modernism in the Interwar Period
The Interwar period is my favorite epoch of research, mainly in areas less connected to law. In this epoch, modernism in arts manifested itself particularly productively and science was methodologically deeply reshaped. In literature, modernism was characterised as a ‘departure from familiar forms’ (cf. Bernard Bergonzi, Late Victorian to Modernist 1880 -1930, In: The Oxford Illustrated History of English Literature, ed. Pat Rogers, Guild Publishing: London 1987, p. 393). Legislative achievements of this epoch might be perceived as less impressively caught in the torrent of human creativeness, yet they also contributed to social and cultural development. Having this in mind, I asked myself a thought-provoking question: was there legal modernism in the Interwar period? And if so, did comparative law play a role in it?
I chose an example from international taxation because this field is instrumental in clarifying my question. The main subject matters of international taxation are avoidance of double taxation and tax evasion. In international law, there is no doubt that every state has the right to tax revenues on its territory according to its constitutionally founded order, even if these revenues would be also taxed by another state. Thus, avoiding double or even multiple taxation is not perceived as an obligation of a state in international law. However, economic considerations speak against the tempting approach to tax revenues twice that some states always wished to implement. Therefore, most states adopted an approach that alleviates over-taxing individuals and enterprises. Moreover, international taxation as an area of legal studies signals an element of extraneity that comparative lawyers often feel they have to explain. Yet, practically, taxation is regularly domestic. Therefore, ‘international taxation’ may exist only within the specific meaning of this term in law, namely as domestic taxation in cases involving a foreign element. Particularly, domestic taxation systems regularly include concepts and rules referring to double taxation. Their comparative study helped shaping the legal field known today ambiguously as ‘international taxation’. Meanwhile, one subject matter approach dominates international taxation, namely the investigation into the allocation of taxation rights in cases where more than one state may claim the right to tax. Yet this is not my topic for this blog piece. I am interested here in the way in which legal comparatists and other jurists started framing their legislative proposals pertaining to double taxation conceptually.
Attempts to Come to Terms with Double Taxation and Tax Avoidance Issues
The League of Nations’ Draft Convention for the Allocation of Business Income between States, which was published in 1928, provides a good illustration for comparative law in action in the area that gave rise to the emergence of international taxation. For contemporary research purposes, the full text of the Draft Convention can be found as an attachment to the Report presented at the General Meeting of Government Experts on Double Taxation and Tax Evasion of the League of Nations dated October 1928 (cf. Publications of the League of Nations, II. Economic and Financial 1928. II. 49). The text was also made accessible in a study that analysed the emergence of the draft (cf. Sunita Jogarajan, Double Tax and the League of Nations. Cambridge: Cambridge University Press, 2018).
The Draft Convention was the first general piece of legislation that aimed to come to terms with intricacies of international taxation in a global perspective, proposing a system of rules that allotted taxation items to countries that signed bilateral or multilateral conventions aiming at avoidance of double or multiple taxation. The American scholar Edwin R.A. Seligman (1861 – 1939, Columbia University) led a group of economists who authored a report contributing substantively to the drafting of the text (cf. Rebecca Kysar, Unraveling the Tax Treaty, Minnesota Law Review, 2020, vol. 104, pp. 1755-1837), but not to its form as a legal instrument. The drafters of the Model Convention, presumably like the rest of the world, might not have been aware of the fact that they initiated a new, fundamental area of international law. Indeed, in most industrialised countries, international taxation did not play any important role some hundred years ago. For instance, British and French industry operated within colonial empires where domestic taxation prevailed (cf. Gilbert Tixier, Droit fiscal international. Paris: Presses Universitaires de France, 1986, p. 11). Therefore, many fundamental questions concerning the details of the work accomplished by the drafters that interest researchers today cannot be clarified with sufficient certainty as sources are scarce. We may assume that preparatory works for the draft started with the scrutiny of bilateral conventions aiming at the avoidance of double taxation. These conventions have a long history, as for instance the first French/Belgian convention was signed in 1843 (cf. Roland Walter, Sophie Borenstein Fiches de Droit fiscal international, 2 ed Paris: ellipses, 2011, p. 19). Conceptually, the structure of bilateral conventions was rather vague. Methodologically, the first step to draft them was the development of common definitions, e.g. defining coherently concepts such as ‘domicile’ or ‘residence’, a step where methods of comparative law dominated. What followed was a politically and economically determined scheme for the attribution of taxation rights. However, until today differences in defining and applying a common terminology remain in conventions. Therefore, comparative law is still an important support for international taxation.
For comparatists, the most fascinating point is found in the legal technique used in drafting international instruments dealing with international taxation. This technique was established early, and the Draft Convention marks the moment where the issue was conceptualised in a way accessible to jurists. Already in this convention, the technique typical of the conflict of laws (private international law) was applied. The structure of the rule of the conflict of law, which distributes the applicable laws via a connecting factor was used as the main instrument that permeates the language of the Draft Convention.
A typical provision, e.g., the Art. 2 of the Draft Convention (1928) says:
The income from immovable property, i.e., that which corresponds to the actual or presumed rental value of such property, as well as any other income from such property which is not covered by Article 5, shall be taxable in the State in which the property in question is situated. This rule shall apply to income from mortgages or other similar obligations.
The above formulation may be compared with Art. 6.1 of the OECD Model Convention with Respect to Taxes on Income and on Capital (1953) that reads as follows:
Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
The conceptual structure of both articles is the same. The right to the taxable item ‘income from immovable property’ is distributed according to the connecting factor, the old Roman ‘situs’, and not according to citizenship or residence of the potential taxpayer. Paradoxically, connecting in the conflict of laws equals disconnecting. Choosing one connecting factor means giving up other possible connections. The best examples are choices between citizenship and domicile as connecting factors that are fundamental to processes in which rules of the conflict of laws take shape. The approach applied by the drafters of the Draft Convention consisted in returning to conceptual roots in cases of problems and unclarity. This approach is methodologically well justified (cf. John Jacob Kaag, “Pragmatism & the lessons of experience”, Dædalus, 2009, vol. 138/2, pp. 63–71.) Yet, the use of this technique made also the application of the convention and its understanding for non-jurists cumbersome as the language typical of the conflict of laws is not easily accessible.
Ambiguity of Pattern-Setting in Law
It is of course not new that jurists use techniques and concepts from other areas of law to regulate new problems. Analogy is one of the most frequently used instruments in legal creativeness. The Draft Convention (1928) is an illustrative example of such a creative attempt. Later, in the OECD Model Convention with Respect to Taxes on Income and on Capital OECD (1953) and in the UN Model Convention (1980) this technique was maintained strictly. Today, the subject-matter related work of the experts drafting the Draft Convention is still appreciated : it still helps developing alternatives to existing, sometimes unpopular taxation solutions and taxation proposals (cf. Philip Baker, “The League of Nations’ Draft Convention for the Allocation of Business Income between States — a New Starting Point for the Attribution of Profits to Permanent Establishments”, British Tax Review, 2018, Issue 5, pp. 514-520, particularly p. 514; Reuven S, Avi-Yonah, Who Invented the Single Tax Principle?; An Essay on the History of the U.S. Tax Policy, New York Law School Law Review, 2014/15, vol. 59, pp. 309–319, particularly p. 310). With this idea in mind, Philip Baker (2018: 515) stated: “It is immediately apparent, however, to anyone with a background in bilateral double taxation conventions how much the wording of the Draft Convention has influenced the wording of virtually all modern tax treaties.”
Many opinions were expressed about the practical suitability and political expediency of solutions proposed in all mentioned conventions. In this sense, the Draft Convention proved to be a double edge sword, setting patterns, yet also imposing limits on the creativity of future generations of jurists. Adaptation to constant socio-economic changes is a challenge for jurists, who today use the successor models of the Draft Convention. Meanwhile, integration of new issues such as ‘permanent establishment of e-commerce’ remains possible within the mentioned model conventions, which proves the conceptual flexibility of the Draft Convention. The conceptual model and taxation regulation expressed in the conventions are two different, yet interrelated things. In the tension between the model and the actual regulation one may trace the fascinating element of these legal texts, often perceived as technical and sober.
Modernity in the Draft Convention (1928)
The Draft Convention (1928) is innovative in the sense that it is formally not an artefact that would represent directly binding and applicable law. It is a model that suggests to interested states linguistic patterns to coin bilateral or multilateral conventions. The Draft Convention differs from its predecessors, bilateral conventions between states that from their inception represented law in terms of its classical definition. The Draft Convention represents law in another sense. Its successors, the OECD Convention and the UN Convention reached authority among jurists and are therefore perceived as belonging to soft law, i.e., being relevant to law without being directly binding. Undoubtedly, the Draft Conventions laid the conceptual ground for the shaping of soft law that often overtakes tax conventions in contemporary practice. The reason for this intricacy is that experts in international taxation also drafted recommendations along the proposed texts that were expanded to interpretive guidelines for bilateral or multilateral conventions concluded within the patterns proposed by the conventions. In the above aspects, I can see elements of legal modernity, the breach with the past or its decisive transformation. Comparative law was not only used here to compare, yet also to further goals defined or anticipated by the drafters in order to ‘promote international cooperation’ (cf. Jaakko Husa, A New Introduction to Comparative Law. Oxford/Portland: Hart Publishing, 2015, p. 59). This is comparative law at its best.
In my brief contribution, I wished to stress that conceptual patterns in law, once established, prefigure the legislative work over decades, if not centuries (cf. Galdia, Marcus, Legal Constructs. Reflections on Legal-Linguistic Methodology. Poznań: Rys, 2021, p.27). What is more, certain epochs are more disposed than others to engender legal innovation through establishing new conceptual and linguistic patterns. In fact, jurists, like poets, who since centuries write sonnets, may tend to apply the same form for the expression of changing contents. This is exactly the development that we may trace while looking back at the Draft Convention of the League of Nations. Apparently, language in all forms of its institutional application steers the work of jurists beyond isolated words or details of legal regulation. Yet, the inventiveness of jurists encounters institutionally imposed limits, even in well-intended intellectual creation of their predecessors. For a jurist, looking forwards means always also looking back. In my case, I had to go back to 1928 to trace the conceptual background of the particular area of legal studies known today as international taxation that emerged due to the work done by the committee of experts. A step further could also be taken, and it would lay bare structures of concepts used in international taxation and their anchorage in the legal discourse of past centuries. Yet such an investigation would overburden my short note limited in time and space to the European Interwar period.
Posted by Marcus Galdia, Dr. phil. Dr. iur., Associate Professor of Law, International University of Monaco, mgaldia[at]monaco.edu, ORCID: 000-0008-0490-5213.
This piece belongs to Season 2 of the “Cross-jurisdictional dialogues in the Interwar period” series dedicated to less-known legal transfers which have had a palpable impact on the advancement of the law. The Interwar period was a time of disillusionment with well-established paradigms and legislative models, but also a time of hope in which comparative dialogue and exchange of ideas between jurisdictions thrived. The series is edited by Prof Yseult Marique (Essex University) and Dr Radosveta Vassileva (Middlesex University). To access the other pieces from this series, either select the ‘Interwar Dialogue’ category or click on the #Series_Interwar_Dialogue tag on the BACL Blog.
Suggested citation: M Galdia, ‘A Double-Edge Sword in International Taxation: The Rules for the Distribution of Taxation Rights Take Shape in the Interwar Period’, BACL Blog, available at https://british-association-comparative-law.org/2023/12/28/a-double-edge-sword-in-international-taxation-the-rules-for-the-distribution-of-taxation-rights-take-shape-in-the-interwar-period-by-marcus-galdia/
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