Twentieth century was known for a lot of historical milestones; the computer, the internet, increasing patches of democracy. The diplomatic achievement by breaking down barriers to global trade and encouraging countries to indulge in international commerce and construct the World Trade Organisation was definitely one of them. Development of international trade led to an overall reform in domestic taxation regimes. Income tax regimes have remained the same since the 1920s. With sharp turns in the fortunes of huge masses of people and corporate & individual taxes along with the stagnation of basic principles of transnational income tax regime; these things have grown to influence more and more how income tax can affect nations disproportionately. International taxation system has its foundation as the distinction between the country of residence and the country of source. This division of income tax base between any given two countries and figuring out which country would have the right to impose jurisdiction over taxation is what international taxation’s basic function is.

Distinction of tax bases

A division such as the one mentioned above, came up with the working groups like the International Chamber of Commerce and The League of Nation in the 1920s.  These groups had their main purpose as the removal of obstructions to international commerce and trade by tackling international double taxation. The groups initially on their way to achieve their purpose, started implementing a series of bilateral treaties that were later on held as the ‘Model Convention’ proclaimed by the Organization for Economic Cooperation and Development. One such example of such a Model Convention is the UN Double Taxation Convention between Developed and Developing Countries. It is also worth noting that the distinction of tax bases on the basis of source and residence is not the line of distinction. There are alternative lines of distinction too, such as on the basis of level of tax, benefit financed, etc. Ignoring such alternative divisions, it is crucial to understand this traditional division first.

Traditional division

When it comes to taxation between two different jurisdictions, for quite a few years the distinction of income tax bases in developed countries is usually on the basis of the following: The source country is given priority and exclusive jurisdiction to tax corporate bodies and business income, on the other hand the residence country enjoys exclusive jurisdiction over matters such as interest, dividends and royalties; basically investment income. Such a distinction functions because of a balance between bilateral taxation treaties and domestic taxation regimes. The domestic tax law which exists in the source country, generally, imposes taxes on business income arising within its borders regardless of who produces it. The residence country, at the same time, provides credit for foreign income taxes or exempts them, limited to the amount of the tax imposed.