The national income tax systems of developed countries and principles of tax jurisdiction were shaped in the early years of the twentieth century when their economies were relatively independent and closed. Before World War I income taxes were not used extensively in developed countries and most enterprises restricted operations to their domestic markets, with international trade and investment being limited and heavily regulated. Nevertheless, cross-border investment and commerce were growing, and, in response, countries entered into bilateral tax treaties (tax treaties) with other countries to overcome the double taxation arising from international trade and investment. The network of tax treaties expanded significantly following the development of a model tax treaty by the League of Nations in the 1920s, based on the principles, policies and concepts of the inter-war period. International taxation comprises national tax systems and a network of tax treaties.
While enterprises have globalized, and operate as integrated international businesses, tax authorities typically operate independently with some international cooperation measures, such as information exchange. Many international enterprises have acted deliberately to limit information they provide to tax authorities in the jurisdictions in which they operate, which may prevent tax authorities from having full knowledge about the operations of enterprises. Even though tax treaties contain exchange of information measures, these measures are still underused by tax authorities. Developments in international taxation have not reflected the significant changes in the international trade system that have occurred since the end of World War II. Globalization has created an integrated international economy, and the implications of this change are profound. International enterprises may engage in worldwide tax planning, but at times, the tax planning may amount to tax avoidance. This situation reflects the significant imbalance of power between international enterprises and national tax authorities.