The law provides that gains, profits and income from (1) transportation or other services rendered partly within and partly without the United States, or (2) from the sale of personal property produced (in whole or in part) by the taxpayer within, and sold without, the United States, or produced (in whole or in part) by the taxpayer without, and sold within, the United States, shall be treated as derived partly from sources within and partly from sources without the United States. Gains, profits and income derived from the purchase of personal property within, and its sale without, the United States, or from the purchase of personal property without, and its sale within, the United States are treated as derived entirely from sources within the country in which sold, except that gains, profits and income derived from the purchase of personal property within the United States and its sale within a possession of the United States or from the purchase of personal property within a possession of the United States and its sale within the United States are treated as derived partly from sources within and partly from sources without the United States.

The principal difficulties in the taxation of non-resident aliens and foreign corporations arise in connection with income from sources partly within and partly without the United States. In general, it may be said that in dealing with such income there is kept in mind the definition of income adopted by the Supreme Court, viz., the gain derived from (a) capital, (b) labour, and (c) the sale of capital assets. Regard is had to the amount of capital and labour in the United States in determining the amount of income from sources within the United States.

If a non-resident alien performs services partly within and partly without the United States his income from sources within the United States is computed by reference to the time he has been occupied in the United States. Thus, if he has worked 300 days in the taxable year

within the United States is then to be determined by processes or formulas of general apportionment prescribed by the Commissioner of Inland Revenue with the approval of the Secretary of the Treasury (Revenue Act of 1926, Section 217).

1 Revenue Act of 1926, Section 217 (e).

and 100 days thereof in the United States, for a total salary of $3,000, his income from sources within the United

Before the 1921 law no income from sources within the United States was considered to arise by reason merely of the manufacture or production of goods in the United States. If goods were manufactured or produced in the United States by a non-resident alien or foreign corporation and sold abroad, no part of the profit was taxed in the United States. Under the 1921, 1924 and 1926 laws, however, manufacture or production gives rise to income from sources within the United States. The difficulty is to make a fair apportionment of the part of the income attributable to manufacture and of that attributable to sale. The two methods of apportionment in use are described in the footnote below.1

The proper allocation to sources within the United States of income derived from transportation services between points in, and points outside, the United States has occasioned a great deal of difficulty, and has caused considerable ill-feeling on the part of non-resident aliens and foreign

Where the manufacturer or producer regularly sells part of his output to wholly independent distributors or other selling concerns, in such a way as to establish fairly an independent factory or production price-or otherwise establishes such a price to the satisfaction of the Commissionerand such selling or distributing branch of the business is located in a different country from that in which the factory is located or the production is carried on, the net income attributable to sources within the United States is computed by an accounting which treats the products as sold by the factory or productive department of the business to the distributing or selling department at the independent factory price so established.

Where no such independent factory or production price has been established, the net income is first computed by deducting from the gross income derived from sources partly within and partly without the United States the expenses, losses and other deductions properly apportioned or allocated thereto, and a rateable part of any expense, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The net income so determined is then divided into halves. One of these halves is then apportioned in accordance with the value of the taxpayer's property within and without the United States. The remaining half of such net income is apportioned in accordance with the gross sales of the taxpayer within and without the United States. Suppose the net income is computed as above at $50,000. The taxpayer's property within the United States is $600,000, and his total property within and without the United States is $750,000. Gross sales in the United States

L

corporations engaged in that business. The feeling has been intensified by the various changes in the rulings of the Commissioner. It was first ruled that the income of a foreign steamship company from sources within the United States consisted of the gross receipts from outgoing business, less such a portion of the aggregate expenses, losses, etc., as such receipts bore to the aggregate receipts from all ports. In subsequent rulings this basis was abandoned, and in one ruling the place of payment was made the determining factor as to source. A later ruling made the place of embarkation controlling, while still another made the place in which the contract was made the determining factor. Since 1921 a new and more equitable basis has been provided. The present rule is given in the footnote.

are $60,000, and total gross sales within and without the United States are $75,000. His income from sources within the United States will be:

If the taxpayer regularly employs in his books of account a detailed allocation of receipts and expenditure which reflects more clearly than the two methods above outlined the income derived from sources within the United States, an application to base the computation upon his books will be considered by the Commissioner (Regulations 65, Article 328).

The gross income from sources within the United States derived from such services is to be determined by taking such a portion of the total gross revenues therefrom as (a) the sum of the costs or expenses of such transportation carried on by the taxpayer within the United States and a reasonable return upon the property used in its transportation business while within the United States bears to (b) the sum of the total costs or expenses of such transportation business carried on by the taxpayer and a reasonable return upon the total property used in such transportation business. The costs and expenses of the business carried on within the United States include expenses of loading and unloading in the United United States, rentals, office expenses, salaries and wages wholly incurred for services rendered to the taxpayer in the United States. Costs and expenses incurred in connection with services rendered partly within and partly without the United States are to be prorated on a reasonable basis between such services. Thus, ship wages, charter money, insurance, and supplies chargeable to voyage expenses will ordinarily be prorated for each voyage on the basis of the proportion which the number of days the ship was within the territorial limits of the United States bears to the total number of days on the voyage. Fuel consumed on a voyage is similarly apportioned on a mileage basis. The value of property used is the average property employed in the transportation service between points in and

Since 1921 income of non-resident aliens and foreign corporations consisting "exclusively of earnings derived from the operation of a ship or ships documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and corporations organized in the United States" is exempt from United States income tax. Of those countries which have granted an equivalent exemption to United States citizens and corporations the more important ones are: Argentine, Bulgaria, Denmark, Norway, Sweden and Venezuela. No reciprocal exemption has been granted by Great Britain.1

The foregoing survey of the two income tax systems reveals certain distinct differences in both theory and practice. These differences cannot be discussed, however, until we have noted the steps taken by both countries to relieve taxpayers from double taxation. If a country taxes on the basis of residence as well as origin of income, many of its taxpayers find themselves subject to tax not only in their own country, but also subject to the tax of other countries whose income tax laws stand on the same bases. The different factors making persons subject to tax in Great Britain and the United States have been set out, but any discussion of them at once involves us in the problems of double taxation. In the next chapter we shall set out those provisions of the two laws which have been designed to afford a certain measure of relief from double taxation, and we shall then be in a position to make a critical estimate of the factors used by each country to bring persons within the scope of its income tax laws.

points outside the United States during the taxable year on the basis of cost, less depreciation. Eight per cent. is usually taken as a reasonable rate of return to apply to such property. For ships the average is determined upon a daily basis for each ship, and the amount to be apportioned for each ship as assets employed within the United States is computed upon the proportion which the number of days the ship was within the territorial limits of the United States bears to the total number of days the ship was in service during the taxable period. As in the case of income from the manufacture of goods within the United States, so in the case of transportation services, the taxpayer may apply for permission to make the computation on the basis of his books of account if he has regularly employed a detailed allocation of receipts and expenditure which reflects more clearly than the method above described the income derived from sources within the United States (Regulations 65, Article 329).

1 Revenue Act of 1926, Section 213 (b) (8); Regulations 65, Article 89.

CHAPTER V

THE PROBLEM OF DOUBLE TAXATION

BOTH Great Britain and the United States afford relief to taxpayers who are subject to their own income tax laws as Iwell as to those of other countries. The extent of this

relief is as follows :—

Great Britain.

Foreign and Colonial income taxes on profits, subject to the British income tax may be deducted from the amount of such profits for purposes of assessment to British income tax.1

No direct credit against British income tax is allowed for payments of income tax to foreign countries. A measure of relief is, however, provided in cases where income subject to British income tax has also been charged with income tax in the British Dominions. This relief is the result of a recommendation of the 1920 Royal Commission on the Income Tax and was provided by the Finance Act, 1920.2 The statutory provisions contemplate a reciprocal arrangement between Great Britain and the Dominions to the end that the relief may be shared in part by each. Where, in the case of any Dominion, reciprocal relief has not been granted, further relief is provided by the British law.

In general, the relief given is at the rate of one-half the appropriate rate" of United Kingdom income tax and super-tax, unless the Dominion rate is less than that rate, in which case the rate of relief is the Dominion rate. Thus,

1 Stevens v. Durban Roodeport Gold Mining Co., Ltd., (1909) 5 Tax Cas. 402; 25 T.L.R. 316.

* Section 27. Limited and temporary relief had been granted during the war.

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