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From its inception, the international tax regime was heavily influenced by the United States. The regime is traditionally traced back to the work of the four economists for the League of Nations in 1923, who came up with the orig- inal compromise underlying the tax treaty network, i.e., that passive income should be taxed primarily at residence and active income primarily at source (the “benefits principle”). Arguably, this compromise between the claims of res- idence and source countries was made possible by the U.S. unilateral adoption of the foreign tax credit in 1918, because the United States (already the world’s largest capital exporter) was (unlike the UK) willing to cede taxing jurisdiction to the source by allowing a dollar for dollar credit (originally without limita- tion). Edwin Seligman, the U.S. representative to the four economists, used the credit to persuade them to adopt the benefits principle. In addition, because the United States rejected exemption to alleviate double taxation, it laid the groundwork for the single tax principle, first embodied in the original League of Nations model treaty of 1927 (e.g., imposing withholding tax on interest unless it was taxed at residence).


Reprinted from The International Tax Journal, Vol. 46, no. 2, 2020, 29-33, with permission of Kluwer Law International.