Double income tax between UK and US, 1914-1945 – Impact on UK multinationals

Abstract

Tax rates on business income in many countries increased enormously during World War I and stayed at a much higher level than before the war. Particularly, the UK multinationals with subsidiaries based elsewhere other than the Empire suffered from the situation because the UK did not provide a foreign tax relief until 1945, when a tax treaty with US was signed. The aim of this paper is to clarify the historical premises of establishment of the tax treaty in 1945. The major premise of this paper is that the double income tax discouraged Britons' investment and impaired their competitiveness in US in 1914-1945. Nevertheless, it took three decades to realise the treaty. The first step was a 1936 tax on dividends paid to corporate shareholders. UK multinationals had to pay American dividend tax as well as British income tax and American corporation tax. For instance, J&P Coats, which had extensive interests in the US, would have had to pay a dividend tax of 10 percent. J&P Coats succeeded in tax planning which reorganised their British and American subsidiaries. Nonetheless, J&P Coats and other companies petitioned the UK government to eliminate the double income tax. The second step towards realisation of the treaty occurred after the outbreak of World War II. The problem of double income tax made a number of corporations regard transfer pricing as a method to avoid US taxation. Transfer pricing by using two invoices was, however, unsatisfactory to at least UK government authorities. UK abandoned inter-imperial preferential tax credit substantially through the negotiation with US in 1944-1945.