Festschrift on a Festschriften: The Why of the Royalty Provision in Tax Treaties

Richard Vann, The History of Royalties in Tax Treaties 1921 – 61:  Why?, in Comparative Perspectives on Revenue Law:  Essays in Honour of John Tiley (John Avery Jones et al., eds., 2008), available at SSRN.

Writing for Festschriften is an art.  A Festschrift author must pay tribute without being trite; advance our knowledge in an area without being presumptuous; and engage an audience beyond the scholar about whose work the Festschriften is focused.  No small feat.

For a model of the genre, look no further than Richard Vann’s The History of Royalties in Tax Treaties 1921 – 61:  Why?, which was published in a collection of essays in honour of John Tiley, one of the UK’s great tax scholars.  Although the essays were published in 2008, I suspect that Vann’s chapter will only get its due now that he has posted the abstract on SSRN.  (One of my longstanding frustrations with book publishers is their reluctance to permit authors to post chapters on line in full.  This chapter is a case in point.  It deserves a wider audience than it will receive.)

Vann’s chapter is readworthy for four reasons.  First, Vann is a marvellous writer.  One could substitute some of his pieces for bedside reading authored by Mario Vargas Llosa.  To illustrate, Vann identifies Tiley’s major contributions as anchoring the tax history movement, surveying the borders of the schedular system, and asking not only what the law is but why it is so.  Vann lines up his efforts in this chapter with Tiley’s contributions:

[A]n international cocktail is appropriate to celebrate Tiley’s work and this one will mix the history of the tax treaty rule on royalties up to the emergence of the modern form, the borders of the provision and the fundamental question of why we have it (viewed from a historical perspective).

The sketch of the tribute to Tiley’s work has been paid, the lines for the addition Vann will make to our knowledge have been drawn, and with the next paragraph, Vann captures the audience.  He proposes to explore the history of the royalties article with a view to answering the question: why  has the royalties article persisted in tax treaties when the transnational income flows to which it applies could have easily and logically been covered by other articles such as the article dealing with business profits?

It is common to divide the history of tax treaties up to 1961 roughly into three eras:  the early League of Nations models and treaty practice in the 1920s and 1930s; the Mexico and London models and treaty practice in the 1940s; and the Organisation for European Economic Cooperation work and treaty practice in the 1950s.  A second reason that Vann’s chapter is worth reading is that altogether aside from the historical tax treaty treatment of royalties, it provides a rich and detailed discussion of the various factors at play more generally in the formulation of treaty policy during each of these periods.

The depth and richness of Vann’s experience with tax treaties – both academically  in thinking about the the policy rationales that support the decisions they reflect and practically in working  with tax treaty administrators – is a third reason to read this essay.    Because tax treaty negotiations are generally not exposed to public scrutiny, obtaining insight into the justification that undergirds particular choices is a matter of speculation.  In reviewing the history immediately following the 1928 treaty models Vann offers two possible explanations for the tensions around the allocation of taxing rights between the source and residence state for payments that might broadly be referred to as royalties.  He offers a “political” explanation that is rooted in the perspectives of the small number of nations with representatives on the Fiscal Committee at the time that wanted stronger source country taxation and a “technical” explanation that is based on the complexities of characterization of payments and the difficulty of preventing different jurisdictions from characterizing the same income stream differently.  Vann is able to offer these hypotheses and develop them throughout the chapter in a way that connects the pieces of the forty-year story he tells because of his vast experience in this area.

Finally, Vann’s chapter reports on an enormous amount of detailed research work in an economy of space.  He tracks the history of the royalty provision not only as reflected in the model treaties, commentaries, and observations, but also it evolved in the treaties of particular countries.

The piece serves as the “must start” point for research on the royalties article of tax treaties, without question, but it also serves as a useful roadmap for others wishing to pursue the political economy of tax treaties or the historical evolution of inter-nation tax negotiations more generally.