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The Tests for the Determination of the Scope of Taxes: The Territorial Location of the Object and the Personal Link of the Taxpayer to the Country
Published online by Cambridge University Press: 12 February 2016
Extract
The scope of income tax is generally determined in the light of two criteria: the personal link of the taxpayer to the country and the link between the income and the territory of the country imposing the tax. The imposition of tax on the basis of the second of these criteria is known as “the source of the income” approach.
A similar term, the doctrine of “source”, was used in the British income tax system to denote a different theory. That theory was based on the idea that all income must have a “source” and that no one ought to be taxed in a given year unless it can be shown that he had a source from which income could be derived during that year. It should be noted, however, that notwithstanding the linguistic resemblance between the terms used for the two theories, in fact they deal with different matters. Hence, though perhaps historically related, the two concepts should not be confused.
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References
1 The considerations in favour of the method adopted by the Income Tax Ordinance have been set out in the explanatory comments of the Inter-Departmental Committee on Income Tax in the Colonies not possessing self-government that prepared the “Model Ordinance” upon which the Palestine Income Tax Ordinance was based. See Cmd. 1788, H. M. Stationery Office, 1922, pp. 5–6.
2 See Silke, , South African Income Tax (2nd ed., 1961), sec. 74.Google Scholar There is a later edition of this work than that cited which the writer has not been able to obtain.
3 Cmd. 1788, p. 20.
4 See the definition of the term “gross income” in the South African Income Tax Law, 1941, section 7. See also Lazar, L., “Income Tax Provisions which Affect the Foreign Investor in the Republic of South Africa” (1964) British Tax Review 419, 420–421.Google Scholar
5 Palestine Discount Bank Ltd. v. Tel-Aviv Assessing Officer (1947) A.L.R. 418.
6 Assessing Officer v. Z. Gross (1960) 14 P.D. 688, 690.
7 See also the case of Assessing Officer Tel-Aviv 5 v. Ciora Godik International Productions (1965) Ltd. (1969) (I) 23 P.D. 36. In this case, too, the Court in fact used the expression “having its source in Israel” as equivalent to accruing in or derived from Israel.
8 See section 5(4) of the Income Tax Ordinance, which was added by the Income Tax (Amendment) Ordinance, No. 26 of 1946, Palestine Gazette, No. 1485, of 31 March 1946, Suppl. 1, p. 150. This provision now appears in section 5 (1) of the Ordinance.
9 See also Witkon, A. and Neeman, Y., The Law of Taxation—Income Tax, Estate Duties and Betterment Tax (4th ed., 1969) 129Google Scholar (in Hebrew): “The opinion that the words ‘accruing in (or) derived from Israel’ refer to the connection and the link between the country and the source of the income is well based on logic, English law and the provisions of the law.”
10 See, for example, the language used in the English Income Tax Act, 1918—Schedule D, Case V, para. 2: “Tax in respect of income arising from possessions out of the United Kingdom.” The identical language now appears in the English Income Tax Act, 1952, section 123(1)V.
11 Cmd. 1788, p. 5.
12 Liquidator, Rhodesian Metals Ltd. v. Commissioner of Taxes [1940] A.C. 774, 789. See also Silke, , South African Income Tax (2nd ed., 1961) 77Google Scholaret seq.
13 See the South African decision Boyd v. C.I.R., 1951(3) S.A. 525 (A.D.); 17 S.A.T.C. 366, quoted by Silke, op. cit. sec. 75.
14 See Silke, ibid. sec. 73 and cases cited therein.
15 The expression “hachnassat avoda” has been translated in the Laws of the State of Israel to “work income”; but the present writer prefers the expression “employment-income”.
16 Assessing Officer v. Z. Cross, supra n. 6.
17 See Silke, op. cit., chapter 6, sec. 67 et seq.
18 Income Tax Ordinance (Amendment) Law, 1961, 15 L.S.I. 28.
19 Paragraph 5(3) of the Income Tax Ordinance, 1941. introduced by the Income Tax (Amendment) Ordinance, No. 11 of 1945, Palestine Gazette, No. 1400, of 2 April 1945, Suppl. 1, p. 60.
20 Income Tax (Amendment) Ordinance, No. 26 of 1946. It may be interesting to note that recently the Minister of Finance has been empowered to exempt for a certain period from tax the income and the capital gains of a “company for international commerce” (i.e. a company registered in Israel as a foreign company whose business is conducted entirely abroad) if the income is deemed to have derived from Israel only by virtue of the above-mentioned section 5(1) of the Income Tax Ordinance. Similarly, he may exempt dividends paid to non-residents by such a company out of exempted income. The Minister may grant those exemptions only upon a recommendation of the Board of the Investment Centre. See the bill for the Encouragement of Capital Investments (Amendment No. 6) Law, Sefer HaHukim, No. 572 (1968–69), p. 242.
21 Income Tax Ordinance (Amendment No. 6) Law, 1965, 19 L.S.I. 24.
22 Sulley v. Attorney General (1890) 2 T.C. 149, approved in Grainger & Son v. Gough [1896] A.C. 325; 3 T.C. 462.
23 The consideration of the place where the contract was drawn up was emphasized in Grainger v. Gough, supra, as well as in other cases, e.g., MacLaine v. Eccoti [1926] A.C. 424; 10 T.C. 481.
24 See Firestone Tyre and Rubber Co. Ltd. v. Lewellin (1957) 37 T.C. 111.
25 See, for example, section 108 of the Ordinance, which provides for the assessment and taxation of a non-resident in the name of his agent; sections 116, 118 and 119 which make the agent answerable, lay down his duty to provide information to the Assessing Officer and grant him the authority to retain money he receives in order to be able to pay tax liabilities as well as the right to indemnification for tax pay ments he makes. See also the other provisions included in sections 106–119 which are found in part 6 of the Ordinance, and which relate to tax liability imposed on a principal through his agent or representative. Note, however, that certain of these provisions relate only to a non-resident and others both to a non-resident and a resident of Israel.
26 See the decision in Bray v. Colenbrander; Harvey v. Breyfogle [1953] A.C. 503; 34 T.C. 138 and cases cited therein.
27 Royal Commission on the Taxation of Profits and Income, Final Report (1955) Cmd. 9474, para. 299.
28 Compare South African law which emphasizes the place of performance of the work. See Silke, op., cit., sec. 77.
29 Assessing Officer v. Z. Gross, supra n. 6.
30 See Assessing Officer Tel-Aviv 5 v. Giora Godik International Productions (1965) Ltd. (1969) (I) 23 P.D. 36. For a critical comment on this judgment, see Sapira, M., “Place of Income for the Purpose of Income Tax” (1969) 25 Hafraklit 309–311.Google Scholar
31 Section 5(2) of the Income Tax Ordinance (as amended).
31a It may be mentioned that additional exemptions for non-residents and for new residents (i.e. new immigrants) were laid down in the Encouragement of Capital Investments Law, 1959, and its various amendments.
32 This basis for imposing tax is provided for in English income tax law in respect of certain types of income chargeable under schedule D, Cases IV–V, certain types of employment-income taxable under Schedule E, and also certain short-term capital gains taxable under Schedule D, Case VII.
33 Kneen v. Martin (1934) 19 T.C. 33.
34 The Scottish Provident Institution v. Allan [1903] A.C. 129; 4 T.C. 591; The Scottish Provident Institution v. Farmer, 6 T.C. 34; Walsh v. Randall (1940) 23 T.C. 55.
35 Thomson v. Moyse [1961] A.C. 967.
36 Timpson's Executors v. Yerbury [1936] 1 K.B. 645; 20 T.C. 155; Walsh v. Randall (1940) 23 T.C. 55.
37 Carter v. Sharon (1936) 20 T.C. 229.
38 I.R.C. v. Gordon [1952] A.C. 552; 33 T.C. 226.
39 See Income Tax Order (Relief from Double Taxation) 5724–1963, K.T. No. 1504 (1963/64) p. 152. See also Income Tax Order (Tax Relief in Respect of Foreign Income of an Israeli Resident), K.T. No. 1504 (1963/64) p. 151.
40 K.A. No. 482, vol. 13, p. 551. See Income Tax Order (Prevention of Double Taxation) (The United Kingdom of Great Britain and Northern Ireland), 1963, K.T. No. 1442, (1962/63) p. 1395.
41 K.A. No. 359, vol 11, p. 49. See Income Tax Order (Prevention of Double Taxation) (Sweden), 1961, K.T. No. 1178, (1960/61) p. 2436.
42 K.A. No. 515, vol. 15, p. 55. See Income Tax Order (Prevention of Double Taxation) (France), 1966, K.T. No. 1847, (1965/66) p. 1015.
43 K.A. No. 554, vol. 15, p. 373. See Income Tax Order (Prevention of Double Taxation) (Finland), 1966, K.T. No. 1880 (1965/66) p. 1935.
44 K.A. No. 615 and 615a, vol. 16, p. 219 and 258a. See Income Tax Order (Prevention of Double Taxation) (Germany), 1967, K.T. No. 1987, (1966/67) p. 1233.
45 K.A. No. 638, vol. 16, p. 567. See Income Tax Order (Prevention of Double Taxation) (Denmark), 1967, K.T. No. 2030, (1966/67) p. 2233.
46 K.T. No. 649, vol. 17, p. 149. See Income Tax Order (Prevention of Double Taxation) (Norway), 1968, K.T. No. 2240 (1967/68), p. 1712.
47 See Draft Double Taxation Convention on income and capital published by the Organisation for Economic Cooperation and Development (O.E.C.D.) on 27 September 1963, O.E.C.D. Document C(63) 87.
48 Treasury Bulletin M.K. 11/6 (Undated, in Hebrew).
49 The Treaty for Prevention of Double Taxation between Israel and Great Britain was recently considered by the Supreme Court in Assessing Officer v. Giora Godik Ltd. (1965) (III) 19 P.D. 349.
50 The use of the concept “permanent establishment” in domestic fiscal law was considered at the Congress of the International Fiscal Association held in Vienna in 1957; see Studies in International Fiscal Law, vol. 34A, pp. 193 et seq. Ten years later the 21st Congress of the Association held in Stockholm in 1967 considered the subject: “The Development in Different Countries of the Concept of a Permanent Establishment, Notably from the Point of View of Harmonization in Future Double Taxation Agreements”—see Studies on International Fiscal Law, vol. L II, pp. 283 et seq. Note especially the excellent national report on Israel written by S. Dar-Ziv, ibid., 471 et seq.
51 See, for example, sec. 5 of the convention with Britain. Note that a special arrangement in respect of profits derived from shipping and air transport is also provided for in Israeli domestic law. See Income Tax Ordinance, sections 70–75.
52 3 L.S.I. 95.
53 Estate Duty (Amendment No. 3) Law, 1964, 18 L.S.I. 179. For earlier amendments, see Estate Duty (Amendment) Law, 1956, 10 L.S.I. 40; Estate Duty (Amendment) Law, 1957, 11 L.S.I. 152.
54 11 L.S.I. 152.
55 A general convention with Sweden—K.A. No. 461, vol. 13, p. 391 (see also Estate Duty (Prevention of Double Taxation) (Sweden) Order, 1965, K.T. No. 1726 (1964/65), p. 2046); a convention with France with regard to property left to certain cultural or humanitarian institutions—K.A. No. 541, vol. 15, p. 329 (see also Estate Duty (Prevention of Double Taxation) (France) Order, 1968, K.T. No. 2100 (1967–68), p. 622) and a somewhat similarly limited arrangement with Switzerland concerning the canton of Basel-Stadt was signed on 14 March 1969, with retroactive effect as from 1 April 1966.
56 11 L.S.I. 152.
57 18 L.S.I. 179.
58 13 L.S.I. 149.
59 15 L.S.I. 101.
60 Section 10 of the Nationality Law, 1952, 6 L.S.I. 50, as amended by the Nationality (Amendment) Law, 1958, 12 L.S.I. 99.
61 See Wheatcroft, G.S.W., Estate and Gift Taxation (London, 1965) 124–125.Google Scholar
62 Cf. Gafny, S., “The Adaptation of Tax Conventions to the Needs of Developing Countries” (1969) 4 Quarterly Tax Journal, 10–18 (in Hebrew)Google Scholar.