British Companies and International Double Taxation

From the Frist World War to the 1945 UK-US Tax Treaty

Abstract

The aim of this study is to clarify the historical premises of the establishment of the tax treaty between the UK and the US in 1945. Particularly, the UK-US treaty to prevent the international double taxation made an economic and political impact on the UK multinationals and the government. It was the first time that the UK government concluded a general tax treaty with elsewhere in the British Empire.

The problem of international double taxation on business income between UK and US occurred since the First World War. However, the UK government did not introduce a foreign tax relief for foreign investment to the US until 1945 because the government persisted to abhor reduction of the tax revenue. Thus, the tax issue became one of the causes that the British investment to the US had been sluggish. In addition, not a few UK multinationals were forced to change their organization alongside the tax environment during the period, raising cries of protest through some employer's associations such as the Federation of British Industries. The organizational changes like Phelps Dodge or Courtaulds sometimes influenced corporate long term investment strategy. Finally, the introduction of the American dividend tax in 1936 and the outbreak of the Second World War pushed the UK multinationals into further tax planning to alleviate the tax burden. The corporate behaviors and complaints of those firms made the UK government reconsider the tax regime of the interwar period. As a result, the general tax treaty between the UK and the US was concluded in 1945, a prototype of tax treaty of not only both countries but many countries in the Post Second World War.