Avoiding a taxable presence in belle époque and interwar Britain

Abstract In the 21 st century, developed economies have faced an erosion of their tax base by multinationals who sell to their consumers without establishing a taxable presence, typically by gaming the treaty concept of «permanent establishment». The long-running dispute between the French government and internet giant Google is possibly the best-known example. Yet the problem of non-resident traders avoiding a taxable presence did not emerge with the advent of the digital economy, nor is it a creation of the modern tax treaty network. As this article argues, it was an issue for UK tax administrators from the inception of the British income tax in 1842, with serious attempts to counter it first being made in the 1880s. Those efforts were motivated as much by pressure from domestic business for protection from «unfair» foreign competition as by a need for revenue, and were derailed by a judicial ruling of 1896 that confirmed the right of overseas firms to structure their UK operations in a tax-efficient way. From then until the 1920s, the taxation of non-residents selling to the UK remained politically contentious. During World War I, the state hit back against foreign traders by passing a wide-reaching anti-avoidance rule, but court proceedings in 1922 rendered that law practically useless. As a result, the power of the Inland Revenue to deal with avoidance by non-residents remained extremely weak throughout the interwar period. The article asks why no further attempt was made before World War II to strengthen the Treasury’s defences. It argues that a consensus developed between business and the state that it was more important to discourage other jurisdictions from asserting taxing rights over British exporters, than for the UK to impose effective taxation of overseas firms. Despite having little to bargain with, British negotiators achieved some success in the former endeavour.