The founding period: 1920–1945
The original and initially sole purpose of the global tax regime was tomitigate
international double taxation in order to liberalize international trade
and investment. In 1918 the United States introduced the foreign tax credit
that foresaw unilateral tax relief on foreign source income. Other countries
followed suit in consecutive years.6 Parallel to this development the
League of Nations, in response to demands by the International Chamber
of Commerce, proposed a collective effort to find a coordinative solution
to the problem of overlapping tax jurisdictions. The League appointed
economists to address the issue and convened several conferences of technical
experts and government officials (League of Nations, 1923). What
became apparent was that both the source and residence principles were
justifiable on specific grounds. Emphasizing individual fairness implies
that the residence principle should be accorded more weight, as it is more
conducive to basing taxes on the ability to pay. On the other hand, the
consideration that the source country provides the infrastructure which
allows the generation of income in the first place leads to a preference for
source taxation. According to the so-called benefit principle, taxes are the
price for the public goods used to produce private profit. Both of these
arguments are simple and intuitive. None of the scholars who have addressed
the allocation of taxing rights have exclusively favoured one or
the other; the general preference is for a solution which accords different
weights to each (a brief and accessible overview of the continuing debate
is contained in Li, 2003: 49–57).