REPORT OF THE COMMITTEE ON INTERNATIONAL DOUBLE TAXATION

REPORT OF THE COMMITTEE ON INTERNATIONAL DOUBLE TAXATIONSource: Proceedings of the Section of International and Comparative Law (American BarAssociation), (SEPTEMBER 6-7, 1948), pp. 62-68Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/25742782 .

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PART III?COMMITTEE REPORTS OF THE DIVISION OF INTERNATIONAL LAW

REPORT OF THE COMMITTEE ON

INTERNATIONAL CONTROL OF ATOMIC ENERGY

The committee has no recommen

dations.

The United Nations Atomic Energy Commission reported on May 17, 1948, that it had "reached an im

passe." It had been "forced to recog nize that agreement on effective mea sures for the control of atomic energy is itself dependent on cooperation in broader fields of policy." The three

reports of the Commission are on the

provisional agenda for the session of the General Assembly of the United

Nations, to convene at Paris on Sep tember 21, 1948.

The legal aspects of "this para mount problem of humanity," as it is called by General Marshall, are

completely overshadowed by the po litical aspects. It is to be hoped that the elements of semantics and propa ganda will not prevent ? rational con

sideration of the problem by the Assembly.

Members of the Section may pos

sibly take some comfort from the fol

lowing words of Mr. Osborn, Deputy Representative of the United States to the United Nations Atomic Energy Commission :

". . . . we have not come to the end of the road on the control of atomic energy. Rather wTe have blazed a trail which leads to a known destination and our problem now is to get the Soviet Union to follow7 that trail along with the rest of us."

Respectfully submitted, Edgar Turlington,

Chairman James V. Bennett Joseph P. Chamberlain Thomas K. Finletter Norman M. Littell

REPORT OF THE COMMITTEE ON

INTERNATIONAL DOUBLE TAXATION The committee is happy to report

that a resolution formulated by this committee in collaboration with the Committee on International Tax Treaties of the Section of Taxation was adopted unanimously by the two

committees, but its adoption by the Association has become unnecessary as its purpose has been accomplished. This resolution is to the general effect that the United States should not un

dertake in tax conventions to enforce

foreign tax claims, and is supported

by carefully prepared reports of the

respective committees.

Subsequent to the preparation of these reports, however, at an informal

hearing on March 23, 1948, before a

subcommittee of the Senate Commit tee on Foreign Relations, officials of the State and Treasury Departments and representatives of the Tax Com mittees of the National Foreign Trade

Council, Inc., and of the United States Associates reached an understanding concerning restrictions on the clauses

62



COMMITTEE REPORTS OF INTERNATIONAL LAW DIVISION 63

on collection of taxes in the Franco American Tax Convention, signed October 18, 1946, and the exclusion of such clauses in future tax conventions.

Consequently, it is not now necessary to have the resolution adopted. More specifically, the understand

ing is essentially that a protocol to the Franco-American Convention of 1946 is to be negotiated, and it is to provide in substance that the United States will not aid in collecting French tax claims against United States citi zens or their estates and United States

corporations. Moreover, general pro visions on the collection of finally determined foreign tax claims, and the

application of measures of conser

vancy in the case of those not finally determined, such as appeared in ar

tide 12 of the pending Franco-Ameri can Tax Convention of October 18, 1946, will not be incorporated in fu ture conventions for the avoidance of double taxation, whether in the field of income or estate taxes.

Nevertheless, for your information, the resolutions and this committee's

report follow.

Respectfully submitted, Mitchell B. Carroll

Chairman John H. Alexander Kenneth F. Burgess Daniel O. Dechert Maxwell E. McDowell Charles Ruzicka William R. Spofford Forest D. Siefkin Thomas N. Tarleau

PROPOSED RESOLUTIONS

I. Resolved, That the United States should not undertake to en force the tax claims 1 of foreign governments.

II. Resolved, That the foregoing resolution be communicated to the Department of State, the Treasury Department, and the Com

mittee on Foreign Relations of the United States Senate.

REPORT

The question has been raised, at

hearings during the winter of 1947 before a subcommittee of the Senate Committee on Foreign Relations, con

cerning the ratification of the conven

1 The term "tax claims" as used herein includes claims for income, es

tate, or other taxes levied or assessed

by the tax administration of a foreign country against nationals or corpora tions of the United States, of the for

eign country itself or of third coun

tries, whether or not they have been

finally determined by the administra tion or by the courts of the foreign country. However, it is recognized if a tax convention provides that one state shall grant a reduced rate (e.g., 15 per cent as compared with a gen eral withholding rate of 30 per cent) or an exemption from tax in respect of income derived from sources within its territory by residents of the second

contracting state, the first state may properly claim the difference in rates

tion with France on double taxation, signed October 18, 1946, as to whether the United States should undertake to enforce finally determined French tax claims and apply measures of conser

or the whole tax if a resident of the second state receives the income for the account of a resident of a third state who is not entitled to the bene fits of the convention. (See sec. 4, Statutory Rules and Orders 1946, No.

1331, issued by British Commissioner of Inland Revenue, relating to the in come tax convention between the United States and the United King dom; Part I, 5 Regulations issued by Canadian Income Tax Division of

Department of National Revenue re

lating to the Reciprocal Tax Conven tion between Canada and the United States.) No such procedure is pro vided in connection with the conven tions concluded by the United States with France, or with the Union of South Africa.



64 SECTION OF INTERNATIONAL AND COMPARATIVE LAW

vancy in support of those which have not been finally determined (Report of Hearings on Senate Document, Ex

ecutive A, 80th Congress, First Ses

sion, hereinafter referred to as "Hear

ings, Executive A"). The language of

article 12 of that convention first

commits the two states to lend assis tance and support to each other in the collection of taxes to which the

convention and that of July 25, 1939, relate, together with interest, costs, and additions to taxes and fines not

being of a penal character according to the laws of the state requested, in cases where the taxes are definitively due according to the laws of the state

making the application. The article

then, in part, provides that :

"(2) In the case of an application for enforcement of taxes, revenue claims of each of the contracting states which have been finally de termined will be accepted for en forcement by the state to which

application is made and collected in that state in accordance with the laws applicable to the enforcement and collection of its own taxes.

"(4) If the revenue claim has not been finally determined, the state to which application is made will take such measures of conservancy (in cluding measures with respect to transfer of property of nonresident aliens) as are authorized by its laws for the enforcement of its own taxes." (Emphasis supplied.)

The seriousness of the matter is shown by the even tighter provisions in article XV of the convention with the Union of South Africa relating to taxation, signed December 13, 1946

(Senate Document, Executive 0, 80th

Congress, 1st Session). This conven

tion was referred on April 24, 1947, by the Senate to its Committee on For

eign Relations, but no action has been taken pending the outcome of the

hearings on the convention with

France. Without discussion of the other ar

ticles of the South African convention

(which are to be criticized for what they do not contain rather than for

what they do), it should be pointed

out that the provisions on collection of taxes in article XV are even more

objectionable than those in article 12 of the convention with France, for the

following reasons:

1. The first paragraph of said article

XV does not even contain the con

dition precedent that the taxes in question must be "definitively due

according to the laws of the State

making the application." 2. The second paragraph of said ar

ticle XV is similar to that in article 12 of the convention with France, ex

cept that the word "will" (which has been construed by the Treasury to

mean "may") is replaced by the man

datory "shall." Therefore, if the

Union should make application to the

United States to enforce a "finally determined" tax claim, such request would have to be honored by the United States, without option to de

cline. 3. While paragraph (4) of article

XV of the Union convention says

merely that the United States "may" take measures of conservancy at the

request of the other contracting party, there is no general "escape clause"

such as that in article 8(2) of the convention with France. The latter

categorically states that "in no case9'

shall the provisions "relating to dis

closure of information in particular cases or to mutual assistance in the

collection of taxes be construed so as

to impose upon either of the contract

ing states the obligation to carry out

administrative measures at variance

with the regulations and practice of either contracting state or to supply

particulars which are not procurable under its own legislation or informa tion which is of such nature that it

would involve violation of an indus

trial, business, or trade secret or com

promise its security." (Emphasis sup

plied.) Certainly, the enforcement of a for

eign tax claim, or the taking of "mea

sures of conservancy" would be "at

variance with the regulations and

practice" of the United States. Per




haps this was realized during the ne

gotiations with the Union (which took place in 1944, while those with France Were completed in 1939) and therefore this nullifying escape clause was omitted. However, this omission can not blind us to the basic fact that

Congress has delegated to the Trea

sury only the powers necessary to ad minister the tax laws which it enacts; and further, that United States citi zens have never granted, in the Con stitution or elsewhere, any authority to the federal government to enforce, or assist in enforcing, foreign tax claims against themselves.

If the trend toward tighter commit ments made such progress on the route from Paris to Pretoria, what

may one expect to see in the conven

tions with Belgium, the Netherlands,

Luxemburg, Denmark, New Zealand, and Mexico?and perhaps other coun

tries?which are now in various stages of negotiation?

The importance of a prompt expres sion of the attitude of the American bar is manifest from the views ex

pressed by representatives of the

Treasury at the above-mentioned

hearings before a subcommittee of the

Committee on Foreign Relations of

the United States Senate (Hearings, Executive A). The representative of the National Foreign Trade Council,

Inc., had requested information as to

just what procedure was envisaged by the Treasury Department in enforcing a finally determined French tax claim or applying measures of conservancy in support of one that was not finally determined.

In his reply, the representative of

the Treasury states that

"Through the provisions of article 12 (2) the United States undertakes to collect taxes from France 'in ac cordance with the laws applicable for the enforcement and collection of its own taxes/ and, as part of such procedure, to conserve the as sets as provided in its laws for the enforcement of its own taxes. Lead

ing statutory provisions in the In ternal Revenue Code on this sub

ject are: sections 272, 274, 3640, 3651, 3655, 3670, 3672, 3678, 3690,

3692, 3693, 3700, 3701, 3740, 3744, and 3748.2 Such sections extend all the way from methods for distraint and sale of property to filing claims in a bankruptcy proceeding. Closely related to the collection provisions are sections 56 (c) and 272 (j), authorizing extensions of time for payment and section 3761, authorizing compromise when doubt exists as to liability for the tax or its collectibility. Given situations

necessarily involve a choice of sev eral methods of procedure." (Hear ings, Executive A, p. 149.)

2 These sections listed by the Trea sury Department as pertinent to the powers of the Commissioner to assist a foreign government in collecting its tax claim may be briefly described as follows: section 272, I.R.C., setting forth the procedure before the Tax Court of the United States; section 274, concerning bankruptcy and re

ceiverships; section 3640, authorizing the Commissioner to make inquiries, determinations, and assessments of all taxes and penalties; section 3651, au

thorizing collectors to collect all taxes

imposed by law; section 3655, re

garding notice and demand for tax; section 3670, prescribing when the amount of unpaid tax shall be a lien

upon all property, real or personal, of the person owing the tax ; section

3672, setting forth the conditions under which the lien will be valid as against any mortgagee, pledgee, purchaser or judgment creditor; 3678, concerning a civil action to enforce the lien; section 3690, authorizing the collector to collect taxes by dis traint and sale ; 3692, prescribing when the collector may levy on property; section 3693, concerning proceedings on distraint; section 3700, authorizing the collector to seize and sell real estate when he cannot find sufficient

personalty; section 3701, concerning proceedings in distraint on real estate ; section 3740, stating that no suit for recovery of taxes will be commenced unless authorized by the Commis sioner and directed by the Attorney General ; section 3744, giving jurisdic tion to the district court of the United States for the district where the lia

bility was incurred or the taxpayer resides; section 3748, on periods of limitation.

3




The Treasury report adds that in

administering the Swedish and French tax conventions the United States has been called upon only once to coop erate in collection, and, in that case, it was found appropriate to file suit for collection in the federal district court. However, the suit was dropped because, when the taxpayer was con

tacted, payment was made. (Id. at

149, 150.) In his oral statement with reference

to this subject, the Treasury represen tative mentioned that "through sec

tion 273, I.R.C., the Commissioner is

granted broad powers to make jeop ardy assessments and the collectors to make immediate demands of the taxes so assessed. . . Again, through section 3690 of the Internal Revenue Code and related sections, the collec tors are given broad powers of dis traint and sale of assets upon the tax

payer's neglect or refusal to pay the tax within 10 days after notice and demand." (Id. at 87.)

This information hardly answers

specifically the questions as to the

procedure contemplated under article 12 of the tax convention. Does this mean that the United

States wTould itself bring suit on a

claim which has been "finally deter mined" by a foreign tax administrator, without its even being confirmed by a

foreign court decision? And, if the

foreign claim has not been finally de

termined, does it mean that the "mea sures of conservancy" envisaged are

"distraint and sale" of the taxpayer's assets?

The adoption of these treaty provi sions are opposed, for the following reasons: they are contrary to the ex

isting common law and jurisprudence ; and even if a treaty could be entered

into which would override the existing

law, it would be against public policy to do so.

(1) A careful review of the law cf the United Kingdom and the United States on this subject leads to the fol

lowing general conclusions:

(a) "It may safely be said to be the weight of authority that one sov

ereign state or country cannot main tain in the courts of another an action to recover taxes owing to it by a citi zen or subject thereof or levied in

pursuance of its taxing autho?ty against anyone else" (Ann. 165 A.L.R., p. 796).

The rule in English jurisprudence that one state will not enforce the revenue laws of another state dates from the 18th century, the first appli cation of the rule being attributed to

Lord Hardwicke, in Boucher v. Law

son, Cas. temp. H. 85, 95 Eng. Reprint 53 (1734). The rule was first directly enunciated by Lord Mansfield in Holman v. Johnson, 1 Cowp. 341, 98

Eng. Reprint 1120 (1775), and re

peated by him in Planche v. Fletcher, 1 Doug. 251, 99 Eng. Reprint 164 (1779), in each of which cases he stated that one country does not

"take notice of the revenue laws of

another." The point was reaffirmed in

James v. Catherwood, 3 Dow. & Ry. 190 (1823). In Sharp v. Taylor, 2 Phil. 801, 41 Eng. Reprint 1153 (1848), it was declared that the courts of Eng land would not refuse to decide rights of joint importers involved simply be

cause, in the course of their business, some fiscal law of a foreign country (here the United States) had been

violated. These five cases form the

origin of the rule, although each of

them involved questions as to the en

forceability of a contract and not the

collection of a tax due to a foreign state. In each case, the ruling was

based upon a desire to promote com

merce.

Moreover, the rule has been de

veloped in England so as to prevent a foreign sovereignty or a subdivision

thereof from enforcing a tax claim in

the English courts. (Sydney Munici

pal Council v. Bull, [1909] 1 K.B. 7; King of Hellenes v. ostrom, L.J. 306

(1923); Regina v. Drukker, [1928] 1 Ch. D. 877.)

The recognition of this rule as be

tween members of the British Com

monwealth of Nations is shown by the fact that the United Kingdom has




not agreed to mutual assistance in the collection of taxes in any of the tax conventions with other members of the Commonwealth. This rule is also followed in the conventions con

cluded by the United States of Amer ica with the United Kingdom and with Canada, neither of which con tains an article on mutual assistance in the collection of taxes.

(b) The United States Supreme Court has never questioned the va

lidity of this rtde with regard to fed eral taxes. Tne only reported case

found in which a foreign sovereignty has sued fpr taxes in a court of this country is King of Spain v. Oliver 1816; P.C.) Pet. C.C. 276, Fed. Cas.

No. 7813, in which the Spanish Crown sued for the recovery of import duties.

?he action was based upon the terms of a royal license, and was decided

upon principles of contract, rather

than upon any general revenue laws.

Although the United States Circuit Court took jurisdiction of the cause, there was.no contention or discussion as to the right of the foreign monarch to maintain the action in the courts of this country. The court decided the case on its merits and denied a recovery,of the duties.

(c) The rule has been followed by a state court with regard to the fiscal fows of foreign nations. The first ap

plication of the doctrine in the United States appears in Ludlow et al. Trus

tees for Creditors of Randall v. Van

Rensselaer, 1 Johns (N.Y.) 94 (1806), in which recovery was allowed on a

promissory note, although the note was not stamped as required by the

fiscal laws of France, in which country the note had been executed and was

not enforceable in France because of

the lack of stamps. The note was to

be paid in New York. The court, in allowing recovery despite noncompli ance with the French fiscal laws, an

nounced that it did not sit in New York "to enforce the revenue laws of

other countries."

(d) The weight of authority in the United States supports the proposi tion that one state will not entertain

a suit to enforce the revenue laws of another, despite the fact that the St. Louis Court of Appeals has held that the courts of Missouri will not refuse to entertain an action for the collec tion of an income tax obligation in curred by defendants while there resi dent and brought by tax officers of that state empowered to sue in any court of competent jurisdiction (State

of Okfohoma ex rei. Okfohoma Tax Commission v. Rodgers, 165 AX.R,

785, 193 S.W. (2d) 919). This excep tional decision was predicated on the

mutual obligations of the states under

the United States Constitution; the court declared that the "contrary doc trine was the product of the commer

cial world, and arose at a time when there was great commercial rivalry and international suspicion." It was

applied as between wholly sovereign states (Id. at 795). See also J. A.

Holshouser Co. et al. v. Gold Hill

Copper Co., 138 N.C. 248, 50 S.E. 650, 70 L.R.A. 183 (1905), permitting the State of New Jersey to prove a claim for franchise taxes against an insol vent corporation in North Carolina. When the tax liability has passed

into a judgment of a court of the tax

ing state in a proceeding in which the court has properly acquired jurisdic tion over the subject matter and the

parties, such judgment is, under the full faith and credit clause of the Constitution, enforceable in the courts of another state, or in the federal courts sitting in such other state, even

if the original liability for the taxes would not as such have been enforced in such courts. Milwaukee County v.

M. E. White Co., 296 U.S. 268, 88 L.

ed. 220, 56 Sup. Ct. 320 (1935). However, the weight of authority is

represented by the leading case on the

point in the United States, State of Colorado v. Harbeck, 231 N.Y. 71,133 N.E. 357 (1921), in which the court declared that an attempt to give a

Colorado tax enforcement statute ex

traterritorial effect would conflict with the rule precluding one state from

acting as another's tax collector, say

ing "The rule is unversally recognized




that the revenue laws of one state have no force in another." The rule has been applied by the New York courts in State of Maryhnd v. Turner, 75 Misc. 9, 132 N.Y. Supp. 173 (1911) ; Re Bliss, 121 Misc. 773, 202 N.Y. Supp. 185 (1923), and Re Martin, 136 Misc. 51, 240 N.Y. 393 (1930) (affirmed without opinion in 229 App. Div. 772, 243 N.Y. Supp. 845 (1930), affirmed in 255 N.Y. 359, 174 N.E. 753 (1931)).

The United States Supreme Court, in Moore v. Mitchell, 281 U.S. 18, 74

L. ed. 673, 50 Sup. Ct. 175 (1930), denied the right of a county treasurer of Indiana to sue in New York the estate of an Indiana decedent for In diana property taxes, on the ground of lack of legal capacity to sue out side Indiana, saying that it was not

necessary to express any opinion upon the question, considered by the court

below, whether a federal court in one

state will enforce the revenue laws of another state.

In conclusion, whereas one state will grant full faith and credit to a judgment of the courts of another up

holding tax liability, because of the close relationship of the states under the Federal Constitution, and whereas one state may even entertain, under certain conditions, a suit to enforce tax liability arising under the laws of

another, the weight of authority is that the courts of the United States

would not aid in enforcing the tax laws of another sovereign nation.

(2) Assuming, though not conced

ing, that the United States might override this rule by treaty and

grant full faith and credit to the tax judgments of other contracting states and even aid in enforcing foreign tax claims that have not been finally de

termined, such international commit ments would be contrary to the in terests of the United States, and should therefore not be undertaken.

The primary purpose of conven

tions for the avoidance of double tax ation is to encourage the development of foreign trade. Political and eco

nomic conditions in many foreign countries have never been less con

ducive to the making by United

States citizens and corporations of in vestments and the opening of busi ness establishments of all kinds. They must face not only the risk of the loss of their capital and income through currency devaluation but also the ob stacles and restrictions of nationalistic or xenophobic legislation. In all parts of the world there is a sinister cam

paign to defeat the efforts of the na

tionals of this country to assist in economic reconstruction.

There is no reason to doubt that in

general American citizens and corpo rations, if protected against double

taxation, will to a large extent be dis

posed to invest and trade abroad.

They will pay the taxes properly due the other countries where the income arises. However, if they are exposed by treaties to having assets situated in the United States subjected to dis traint or lien to secure the collection of a foreign tax claim, or to having our courts order the execution of a

foreign tax judgment without any op

portunity for a hearing on the merits, they could hardly be expected to sub

mit themselves to liabilities in the countries with which tax conventions will be concluded. The trade-promo tion purpose of the tax conventions will thus be frustrated.

Apart from the indisputable fact that it is against public policy to agree to enforce the laws of a foreign sovereign state which have no appli cation in the United States, such laws often embody principles that are con

trary to principles ? inherent in our

own Internal Revenue Code and

Regulations. Hence, it would be

against public policy to obligate our tax administration and courts to en

force such laws.3

3 After this report was submitted, the Senate approved conventions for the avoidance of double taxation with

France, the Netherlands and Den

mark, as reported in "Report on United States Tax Conventions with

Denmark, France and the Nether

lands," by Mitchell B. Carroll and

put out by the Tax Committee of the National Foreign Trade Council, Inc., in August 1948.



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REPORT OF THE COMMITTEE ON INTERNATIONAL DOUBLE TAXATION

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