2 - Jurisdiction to tax

Summary

INTRODUCTION

The traditional grounds of jurisdiction to prescribe in international law are nationality (“the activities, interest, status or relations of [a state's] nationals outside as well as within its territory”) and territoriality (“conduct that, wholly or in substantial part, takes place within [a state's] territory”). Territoriality is expanded to cover conduct outside a state's territory that has, or is intended to have, a “substantial effect” within its territory. As we shall see, international tax law modifies both concepts to a significant extent, resulting primarily in expanding the scope of nationality jurisdiction.

INDIVIDUALS: REDEFINITION OF NATIONALITY JURISDICTION AS RESIDENCE

Nationality is usually considered to be equivalent to citizenship. However, with the exception of the United States, almost no other country in the world claims the right to tax its citizens on foreign-source income when they live permanently in another country. The United States reserves the right to tax its citizens on worldwide income no matter where they live (IRC secs. 1, 2(d), 7701(a)(30)), a practice upheld by the Supreme Court in Cook v. Tait based on the benefits the United States provides its citizens even if they live overseas. However, the opinion is weak, its underlying rationale is doubtful given the limited benefits available to American citizens overseas, and almost no other country follows the rule. Thus, although international law seems to sanction the U.S. practice (and the United States has written it into all its tax treaties), it faces academic criticism and seems a dubious rule to follow.