Unilateralism, Bilateralism, and Multilateralism in International Taxation

Abstract

We have several kinds of measures for mitigating or eliminating international double taxation and stimulating international trade. Some of them are unilateral, the others are bilateral, and still others are multilateral. A natural question here: why we have all these measures? The answer lies in the historical development of international tax system. In the early days of income taxation, countries implemented unilateral measures to mitigate international double taxation. The United Kingdom adopted the Dominion Income Tax Relief. The United States introduced rather generous measures, the foreign tax credit. Other countries allowed tax credit for foreign income tax or exempted foreign income altogether. These unilateral measures are still in place. Beginning in the 1930s, countries have concluded bilateral tax treaties to eliminate double taxation completely or to encourage trade between two countries. If the countries had successfully concluded a multilateral tax treaty in the 1930s, bilateral tax treaties would not have proliferated today. Even though we don’t have any multilateral tax treaties, we have tax norms based on a multinational consensus. The OECD has developed its model tax treaty and guidelines for transfer pricing. Recently, G20/OECD published reports on their project against base erosion and profit shifting (BEPS). In sum, partly because of a historical coincidence, all three kinds of measures are and will be in place in the field of international taxation.

Keywords: tax treaty, foreign tax credits, the League of Nations

JEL Classification: F20, F60, H20, H26, H87, K33, K34