18 June 2015

The Revenue Rule & International Taxation

by Sumitha Krishnan

International law is generally considered as the law of the nations and therefore, the rules of international law have developed into a long standing custom that they are dutifully followed by the individual countries. International taxation is one among such areas of law which is widely encroached by the international law and its rules. International law is broadly classified into public international law and private international law.

Of all the significant rules of private international law, the “Revenue rule” is widely recognized with respect to international taxation. Revenue rule is otherwise called as Rule 3 as enunciated by Dicey and Morris in their book “The Conflict of laws”.  Revenue rule, as understood in the English law, is the rule that prevents revenue authorities of a state from initiating a legal proceeding to claim or enforce its revenue, directly or indirectly in a foreign court.  According to Dicey, it is the rule that the courts of one country will not enforce the penal or revenue laws of another country. The rule is traced back to the decision in the case Government of India v. Taylor [see end note 1]. In this case a company was registered in England which was trading in India. The undertaking of the company was sold in 1947 and the proceeds were remitted back to England, and the company was placed in voluntary liquidation in the UK. The Indian Government sought to claim capital gains tax on sale of the undertaking. The House of Lords held that foreign revenue claims are unenforceable in English Courts.

The original purpose of the rule was to promote commerce by enforcing contracts that violated foreign customs laws. However, the content of the rule witnessed a change in the 20th century and is now applied to bar foreign government claims on tax matters and also the rationale shifted from promoting commerce to independent sovereignty, territoriality of legislations and administrative difficulties.


Revenue rule under common law as well as civil law system

The revenue rule is widely recognized in both common law as well as civil law countries.

Common Law System

The countries under the common law system enacted various legislations to be in consonance with the revenue rule. For example, the United Kingdom enacted the Foreign Judgments (Reciprocal Enforcement) Act, 1933 and USA ordained the Uniform Foreign Money-Judgments Recognition Act, which was adopted by 29 states and the District of Columbia. Both these legislations granted the right to recognize foreign judgments, however claims that are revenue and penal in nature are not enforceable. Further, the Brussels Convention, which provides for the recognition and enforcement of judgments within the European Union, is limited to “civil and commercial matters” and does not extend, in particular, to revenue. The revenue rule was applied by the Second circuit Court of Appeals of the United States in the case Attorney General of Canada v. R.J.Reynolds Tobacco Co [see end note 2]. In a series of three cases, claims were made by the Canadian Government, European Community along with the fifteen member states of the community and the Government of Ecuador for lost duties and taxes. In all three cases, the US court struck out the claim by the foreign government on the grounds that it was a claim for collection of taxes and that this contravened the revenue rule. In the case QRS 1 Aps v. Frandsen the Court [see end note 3] of Appeal in England rejected the claims of Danish tax authorities and upheld the revenue rule. The appellants were all Danish companies put into liquidation for asset stripping in contravention of Danish law. The respondent was resident in the UK and had owned them. The Danish tax authorities issued tax demands and the liquidators sought a similar sum in damages against the respondent.

Civil Law Countries

The national courts of civil law countries declined to recognize or enforce foreign laws on the ground that they are public laws. “Public law” includes penal or tax laws. The rationale behind this is that the public laws are subjected to the territorial limits and they cannot be enforced outside the territory [see end note 4]. The International Law Association in its report on “Transnational Recognition and Enforcement of Foreign Public Laws” [see end note 5], sought to analyze the status of recognition and enforcement of foreign public laws by the civil law countries. According to the report, all the civil law countries are of the opinion that foreign tax claims cannot be enforced in their courts. For example in the case Bulgariskastaten v. Takvorian [see end note 6] the Swedish court was of the view that “a state cannot use a Swedish court to collect taxes or to have other contributions made to a foreign state”. However, civil law countries would enforce a foreign tax claim if there is existence of a treaty or reciprocal enforcement agreement between the concerned parties [see end note 7].


Applicability of revenue rule is not absolute

The applicability of revenue rule suffers from certain exceptions. They are:

  1. Existence of a treaty or agreement between parties [see end note 8]: This is evident from the case Revenue and Customs Commissioners v. Ben Nevis (Holdings) Ltd [see end note 9]. In this case there existed a treaty between UK and South Africa for mutual assistance even before Finance Act, 2006 and Protocol 2010. SARS approached HMRC to recover the taxes owed by Ben Nevis in South Africa. The Court of Appeal held that though the concept of revenue rule prohibited the enforcement of foreign tax liabilities in the UK, the rule was always liable to be set aside by treaty.
  2. Cross-border Insolvency: This is a situation in which a person becomes insolvent in one state but holds assets in another state, and the creditors include the revenue authorities of the first state. The judgment of courts in several states is that the trustee in bankruptcy, liquidator or receiver can gain access to the assets in another country to satisfy the claim of creditors including revenue authorities. However, if the sole creditor is the revenue authority the exception does not operate and the rule is applicable.
  3. Indirect enforcement against executors or trustees: The revenue authorities cannot bring an action against the estate of a deceased person for taxes due. Secondly, if the executor or trustee is exclusively appointed to obtain access to the assets for the purpose of foreign tax credit, then the rule would operate. However, the courts will permit trustees to transfer assets abroad to meet a tax claim if the payment would be in the interest of the beneficiaries or trustees who would otherwise be personally liable for the debt.

To conclude, it could be said that the presence of the concept of revenue rule in the nascent stage of international taxation contributed to the development of source and resident based taxation in which the seed and very soul of international taxation lies. The recent developments in international taxation such as the adoption of European Union (EU) Council Directive 2011/16/EC & EU Council Directive 2010/24,  insertion of Article 27 (Assistance in collection of taxes) in the 2003 OECD Model Convention and revision of Article 26 (Exchange of information) in the 2005 OECD Model Convention, Tax Information Exchange Agreements (TIEAs), Foreign Account Tax Compliance Act (FATCA) and intergovernmental agreement (IGA) might lead to substantial decline in the use of the concept in the long-run.
[The author is an Associate, Direct Tax Practice, Lakshmikumaran & Sridharan, Chennai]

End Notes:

  1. 1955 AC 491
  2. [2001] U.S. App. Lexis 21,775;(2000) 4 I.T.L.R xxx (2d Ct. of Apps.,2000)
  3. [1999] STC 616
  4. ReSstate of Norway’s applications[1990] 1 AC 723 AT 808
  5. Report of the 63rd conference719 (1988)
  6. 1954. S.268
  7. International Law Association , Report of International Committee on Transnational Recognition and Enforcement of Foreign Public Laws.
  8. Lord Keith of Avonholm in Government of India v. Taylor [1955] AC 491,511
  9. [2012] EWHC 1807(Ch), [2013] EWCA Civ 578.


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