The Influence of the 1954 Japan-United States Income Tax Treaty on the Development of Japan’s International Tax Policy

Abstract

This article examines some of the background to the 1954 Japan-United States Income Tax Treaty from a historical perspective.

Japanese domestic law developed the “source” of income concept and implemented a foreign tax credit system during the three years of treaty negotiations. The 1954 Treaty was intended to be applied to cross-border transactions on the basis of these domestic law principles. Japanese law and US law, through the medium of tax treaties, affected each other. The treaty-based source rule, crystallized in article 13 of the 1954 Treaty, demonstrates the interaction between the tax laws of Japan and those of the United States.

The accumulation of practices subsequent to the 1954 Treaty is reflected in Japan’s 1962 tax reform, which is a direct ancestor of Japan’s current tax law governing international transactions. One can thus observe the influence of the 1954 Treaty on the formation of Japan’s international tax policy in the middle of the 20th century. This experience can be interpreted as an example of a rather successful legal transplant in the field of international income taxation. As this article shows, the story was not a simple one, as it did not involve one side categorically imposing its system on another.

Keywords: tax treaty, international taxation, legal transplant

JEL Classification: K34, F51, H25