Exemption from Taxation, General background
Prior to the Vienna Convention certain broad principles could be deduced from state practice on personal taxation of diplomats, though there was uncertainty about the legal basis and the theoretical justification for these principles. In general diplomats were whether by custom, by specific domestic legislation, or (as in the United Kingdom) by a combination of the two, exempted from taxation. Some writers described this as customary international law,1 while others said that it was a matter of courtesy or comity only,2 that it depended on reciprocity or that it followed from the fact that no enforcement measures could be taken if the diplomat declined to pay the tax. In none of the leading English cases dealing with the position of a member of a diplomatic mission in regard to rates is a clear distinction drawn between immunity from legal process or seizure of goods and exemption from liability. Both in Parkinson v Potter3 and in Macartney v Garbutt4 it was assumed that if it was shown that the diplomat was entitled to immunity by virtue of the Diplomatic Privileges Act 17085 he was a ‘person not liable by law to pay such rate’. Tax privileges were also justified on varying, though not incompatible grounds; (p. 293) first, that they derived from the principle that one sovereign does not tax another; secondly, that it was necessary to enable the diplomat to carry out his duties independently of the receiving State that he should be exempt from tax at least on goods and income connected with his work and residence in that State; and thirdly, that as a matter of administrative convenience—for revenue authorities as well as for diplomatic services—diplomats should be subject on a continuing basis to the tax regime of the sending State rather than to a succession of varying tax regimes in the States where they serve.6 All of these justifications were and remain sound reasons for tax exemption—and the second and third are helpful in explaining the exceptions to the general rule of exemption.
In considering the justification for the general exemption granted under Article 34 it is important to note that the diplomat continues to be liable to taxation by the sending State. If the sending State levies tax at a high rate he may therefore be financially disadvantaged in comparison with non-privileged residents of the receiving State. He is not in an absolute sense ‘privileged’. The position is, of course, different for staff of international organizations who, though they may well pay tax to the organization which employs them, are usually exempt from being taxed on their emoluments by their State of nationality or origin (assuming that it is a Contracting Party to the relevant agreement on privileges and immunities). An important consideration in determining the tax treatment of officials of international organizations is the need for parity of take-home pay among staff of equal rank. This is not a relevant consideration in the case of members of diplomatic missions.
1 eg Oppenheim (8th edn 1955) vol I pp 802–3; ILC Yearbook 1958 vol II p 100: ‘it may be regarded as a rule of international law that such exemptions exist, subject to certain exceptions’. Salmon (1994) paras 470, 472, and 473, says that the Belgian position before the Convention was that exemption was a matter of international law, but subject to the condition of reciprocity.