Abstract
The implications of ‘source’ have been diversely interpreted by both academics and judges. It is possible to have a state of affairs where there are multiple sources and two ‘dominant’ causes for generating income.
Vogel’s ‘benefit theory’ argues that the country that furnished the majority of benefits pertinent to the generating of income carries the costs of such benefits and should be entitled to exclusive taxation rights as compensation.
The ‘entitlement theory’ is based on the source State being entitled to tax income generated within its geographical borders. The ‘economic allegiance’ theory attributed to the introduction of the ‘permanent establishment’ concept, which is utilised to attribute profits of a business to the ‘source’ country. ‘Permanent establishment’ is a topical issue apropos the virtual world. Contentious points at issue are ‘place of business’, ‘fixed’ and ‘carried out’.
Implicit to the ‘geographical location’ test is that the ‘specific location’ need not be a specific ‘fixed point’ and a ‘geographical area’ will suffice. The ‘duration’ test requires that an activity is regularly repeated during a certain period of time but there may be interruption in business operations. ‘Permanent establishment’ has been extended to embrace the concept of ‘agent’.
Vogel deems ‘source’ to be the “state that in some way or other is connected to the production of the income in question, to the state where value is added to a good” (Pinto refers to Klaus Vogel, “Worldwide vs Source Taxation of Income – A Review and evaluation of Arguments (Part I)” (1998) 8–9 Intertax, pp. 216, 223 [op cit Pinto, Dale E-Commerce and Source-Based Income Taxation (2003), Netherlands, p48]).
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Notes
- 1.
op cit Pinto, p48.
- 2.
op cit Olivier, Lynette and Honiball, Michael, International Tax, A South African Perspective 2008, Fourth Edition (2008), South Africa p52.
- 3.
Pinto refers to Klaus Vogel, “Worldwide vs. Source Taxation of Income - A Review and evaluation of Arguments (Part I)” (1988) 8–9 Intertax, pp. 216, 223 [op cit Pinto, p48].
- 4.
Rhodesia Metals Ltd (In Liquidation) v Commissioner of Tax 11 SATC 244 (1938).
- 5.
Rhodesia is the “former name of a large territory in central-southern Africa, divided into Northern Rhodesia (now Zambia) and Southern Rhodesia (now Zimbabwe). The region was developed by and named after Cecil Rhodes, through the British South Africa Company, which administered it until Southern Rhodesia became a self-governing British colony in 1923 and Northern Rhodesia a British protectorate in 1924. From 1953 to 1963 Northern and Southern Rhodesia were united with Nyasaland (now Malawi) to form the federation of Rhodesia and Nyasaland”.
As per Encyclopedia.com et al. A Dictionary of World History ( 2000 ). Available at http://www.encyclopedia.com/doc/1O48-Rhodesia.html [Accessed 5 January 2009].
- 6.
Ibid, Rhodesia Metals Ltd (In Liquidation) v Commissioner of Tax 11 SATC 244 (1938). Also, op cit Olivier and Honiball, p53.
- 7.
op cit, Pinto, p48.
- 8.
idem. Pinto references definition to Richard and Peggy Musgrave, p48.
- 9.
Lever Brothers & Unilever, CIR v 1946 AD 441, 14 SATC 441 [RSA] (“Lever Brothers case”).
- 10.
supra.
- 11.
Ibid, Lever Brothers case (1946) [RSA].
The Lever Brothers case laid down authority in South African tax case law that “source” means the “originating cause”. Briefly, the facts and judgement of the Lever Brothers Case were as follows: A Dutch company held shares in companies carrying on business in different parts of the world along with debts owed by certain Dutch companies. A South African company acquired the Dutch company, and as such took over the debt liability. The South African Commissioner sought to tax the interest paid by the South African company to its creditors based on the contention that the source of the interest paid on the loan was the debt which was located where the debtor, now a South African company, resides. However, none of the agreements relating to the debt were entered into in South Africa. The court held that the sale, which gave rise to the debt, occurred in England and not in South Africa. “In determining the source of income it must first be determined what the source is from which the income is derived and when this has been determined, the place where that source is located must be ascertained. The source of income is not the quarter from which it comes but rather the originating cause of its receipt”. It was thus held that the source of the interest received was not derived from a South African source. - [ibid, Emslie, Trevor; Davis, Dennis; Hutton, SJ; & Olivier, Lynette Income Tax Cases & Materials 3rd Ed ( 2001 ), South Africa, p105-110].
- 12.
op cit, Olivier and Honiball, p52.
- 13.
CIR v Black 957 (3) SA 536 (A), 21 SATC 226, 1957 Taxpayer 172 at 542 [RSA]. Also, Emslie et al. Income Tax Cases & Materials 3rd Ed (2001), p130:
In the Black case the taxpayer was a stockbroker on the Johannesburg Stock Exchange. The taxpayer opened what is referred to as a ‘Speculation Account’ in London, England, where ‘speculative dealings in shares’ were carried out. These ‘speculative dealings in shares’ gave rise to debit and credits occurring on the taxpayer’s ‘Speculation Account’. Furthermore, the taxpayer authorised the London brokers to deal on his behalf without reference to him. While such authorisation had been granted it should be noted that in practice reference was in fact made to the taxpayer in almost all cases. The taxpayer made a profit from those London share dealings and SARS sought to include this profit in the taxpayer’s taxable income in RSA. It was determined, upon this matter proceeding to court, that a “reasonable conclusion was that the main, the real, the dominant, the substantial source of the amount accrued was the use of the taxpayer’s capital in London”. Thus, the profit could be said to have a dominant source in London and, therefore, was not taxable in South Africa.
- 14.
supra.
- 15.
Transvaal Associated Hide and Skin Merchants v Collector Tax Botswana, 29 SATC 97 1967 (BCA) [Botswana] (“Transvaal Hide case”).
The taxpayer’s business activities, washing, curing and selling of hides, were located in RSA and Botswana. However, the washing and curing of the hides, which occurred in Botswana was viewed as the ‘dominant’ cause as the curing process was an ‘essential feature of the business’. Thus, while the “selling [of] the cured hides was necessary and a causa sine qua non of the accrual of the income”, the location of the causa sine qua non cannot be the decisive factor in determining source as there may be multiple causae sine qua non. [op cit, Emslie et al., p124].
- 16.
Ibid, Transvaal Hide case (1967) [Botswana].
- 17.
Commissioner of Taxes v. W. Dunn & Co. Ltd (1918, AD, 614) [Rhodesia].
- 18.
supra.
- 19.
Millin v CIR 3 SATC 170 1928 AD207 [RSA].
- 20.
Support for the apportioning of income earned where more than one dominant cause exists may be found in the RSA tax case, Tuck v CIR 49 SATC 28 1988 (3) SA 819 (A) (“Tuck v CIR”), which set a precedent in the RSA allowing apportionment of an amount between capital and revenue. It is, however, uncertain whether such a case would apply in other jurisdictions or whether it may even be applied successfully as support for the application of quid pro quo apportionment within an international tax, cross-border, context.
In terms of the Tuck v CIR case, an employee received shares in 10 annual instalments upon retirement. The delivery of such shares was subject to the restraint of trade clause imposed upon the employee. However, the employee reflected the receipt of the instalments as relating half to the restraint of trade and the other half as the receipt of a lump sum received for compensation for the termination of services. Within RSA tax legislation, the receipt of the lump sum at the time of the Tuck v CIR case met the definition of revenue and was taxable, and the amount received for the restraint of trade clause met the definition of capital and was not taxable. The RSA Commissioner, dissatisfied that a portion of the amount was not taxable, disallowed the employee’s assessment and assessed the employee for tax based on the entire amount received. Tuck, the employee, appealed to the Supreme Court of Appeal based on two main arguments, namely:
-
(i)
That the causally relevant factor which resulted in the receipt of the shares was the taxpayer’s compliance with the restraint agreement; and
-
(ii)
Alternatively, that the receipt of the shares was attributable at least in part to the taxpayer’s compliance with the restraint agreement and hence an apportionment of the receipt as between income and capital should take place. [op cit, Emslie et al., p282]
Tuck’s contentions referred to the judge’s dictum as held in the Lever Bros case; that is “that the source of receipts, received as income, is not the quarter whence they come, but the originating cause of their being received as income, and that this originating cause is the work which the taxpayer does to earn them, the quid pro quo which he gives in return for which he received them”. [op cit, Emslie et al., p283].
-
(i)
- 21.
op cit, Pinto, p17.
- 22.
idem p19.
- 23.
As cited by Pinto: Richard Musgrave and Peggy Musgrave, “Inter-Nation Equity” in Modern Fiscal Issues: Essays in Honor of Car S. Shoup (1972), p71, cited in Richard Doernberg and Luc Hinnekens, Electronic Commerce and International Taxation (1999), p306 (note 641). [op cit Pinto, p36].
- 24.
op cit, Pinto, p36/Refer to Footnote 28, p120, Pinto, p49.
- 25.
supra.
- 26.
idem p41.
- 27.
idem p49.
- 28.
supra.
- 29.
op cit, Pinto, p36/Refer to Footnote 28, p120, Pinto, p49.
- 30.
Georg von Schanz, accredited as the “inventor of the accrual concept of income taxation” was the founder of “Finanzarchiv [which] is the world’s oldest public finance journal. … Finanzarchiv , which switched from German to English in 1999, is now one of the official journals of the International Institute of Public Finance.” [Sinn, Hans Werner, Please Bring me the New York Times on the European Roots of Richard Abel Musgrave, (July 2007) p8. CESifo Working Paper No. 2050, Category I: Public Finance. Available at http://www.econstor.eu/bitstream/10419/26095/1/538342781.PDF [Accessed 19 September 2010]].
- 31.
supra.
- 32.
Predecessor of the United Nations, the League of Nations was founded and established post World War I with the signing of the Treaty of Versailles, in an effort to avoid another war with devastating consequences, as experienced with World War I, from occurring again. The League of Nations also dealt with other matters relating to international affairs, laws and economics. With the advent of World War II, the League of Nations had clearly failed to achieve its goals and objectives. Post World War II, the League of Nations was replaced by the United Nations.
- 33.
op cit, Pinto, p52.
- 34.
supra.
- 35.
Refer to 13 Defining ‘Source’ within an eCommerce Context, Part IV of this paper [p131].
- 36.
OECD Tax Policy Studies E-Commerce: Transfer Pricing and Business Profits Taxation (2005) (“OECD E-Commerce Transfer Pricing”) p77.
- 37.
op cit, OECD MC (2005), p26.
- 38.
idem, p85.
- 39.
op cit, Olivier and Honiball, p93.
- 40.
supra.
- 41.
op cit, Vogel, Professor Dr Klaus, University of Munich, and Co-Authors Klaus Vogel on Double Tax Conventions (2nd Edition) (1991), Netherlands, p200.
- 42.
Supra Vogel, Univ. of Munich and Co-authors, p200.
- 43.
op cit, OECD MC (2005), p85.
- 44.
op cit, Pinto, p76.
- 45.
supra.
- 46.
supra.
- 47.
- 48.
op cit, Olivier and Honiball, p95.
- 49.
The OECD provides the following brief biography of Arvid Aage Skaar:
[A] partner in the law firm Wiersholm (Oslo) and an adjunct professor of tax law at the Norwegian School of Management (Handelshøyskolen BI). He received his doctorate from the University of Oslo in 1991. His main publications are ‘Permanent Establishment – Erosion of a Tax Treaty Concept’ (1991); ‘Taxation Issues relating to Captive Insurance Companies’ (1998); editor of ‘Norsk skatteavtalerett’ (Norwegian Tax Treaty Law) (2005). He has published a number of articles and books, and has been teaching international tax law in Norway and abroad. He has been active in the International Fiscal Association (IFA) for many years.
Available at http://www.oecd.org/speaker/0,3438,en_21571361_40047302_40414394_1_1_1_1_1,00.html [Accessed 26 July 2010].
- 50.
op cit, Pinto, p92.
- 51.
supra.
- 52.
Piedras Negras Broadcasting Co v. Commissioner of Internal Revenue (1941) BTA 297, aff’d 127 F 2d 260 (5th Circuit 1942) [USA] - as cited in Pinto, p92.
Brief description of the Piedras Negras case, as cited in Goldberg, Sandford, Internet Sales Pose International Tax Challenges (“Goldberg – Internet Sales”) (1 June 1996). Available at http://www.robertsandholland.com/article.ihtml?id=86 [Accessed 30 July 2010]:
“[A] foreign corporation which executed contracts abroad relating to broadcasts designed to be heard by listeners in the U.S. was held not subject to U.S. income tax on the income from those contracts. The circuit court’s opinion in the case rested solely on the ground that the taxpayer’s source of income was outside the U.S., but the lower court also found that the foreign corporation was not engaged in a U.S. trade or business in the U.S. The lower court’s opinion was based on the in personam jurisdiction cases which had held that mere solicitation of business, where goods were shipped from outside the jurisdiction, was not sufficient to constitute ‘doing business’ for nexus purposes. In Piedras Negras, the Court held that the foreign broadcasting corporation cannot be said to be doing business in the U.S. solely due to its broadcasting. The Court reasoned that if a sale of merchandise, a solicitation of a sale or a distribution of a magazine by a foreign publisher, cannot constitute transacting business in a state, neither could mere broadcasting”. In other words, the customer base, as a sole examination, will not cause the supplier to be present in that state.
- 53.
- 54.
idem USA Supreme Court Quill Corp v North Dakota (91-0194), 504 U.S. 298 (1992) [USA]. Refer to footnote 28 of this paper [p56].
- 55.
International Shoe Co. v Washington 326 U.S. 310 (1945) [USA]. Cited in Goldberg, Sandford, Internet Sales Pose International Tax Challenges (1 June 1996). Available at http://www.robertsandholland.com/article.ihtml?id=86 [Accessed 30 July 2010].
- 56.
op cit, Goldberg, http://www.robertsandholland.com/article.ihtml?id=86.
- 57.
op cit, Olivier and Honiball, p97.
- 58.
op cit, Vogel, Univ. of Munich and Co-authors l, p205.
- 59.
op cit, Vogel, Univ. of Munich and Co-authors, p280 as cited in Pinto, p109.
- 60.
Lynette Olivier “is a Professor of Law at Pretoria University, a former tax Consultant with Pricewaterhouse Coopers, and now the CEO of the SARS Service Monitoring Office. She is the author and co-author of several tax publications”. [op cit, Olivier and Honiball, 2005].
- 61.
Michael Honiball “is a Tax Director at KMPG (Pty) Ltd, where he is countrywide head of International Tax and Transfer Pricing Services. He lectures at both the University of the Witwatersrand and at RAU, and he has published extensively on tax matters”. [op cit Olivier and Honiball, 2005].
- 62.
op cit, Olivier and Honiball, p99.
- 63.
op cit, Vogel, Univ. of Munich and Co-authors, p206.
- 64.
supra.
- 65.
“The…twelve-month test applies only to building sites or construction or assembly projects and must not be interpreted to imply that a place of business should generally be deemed to be a ‘permanent’ one only if it had existed for a minimum of twelve months” [op cit, Vogel, Univ. of Munich and Co-authors , p207].
Per Article 5(3) of the OECD MC, “A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months”. [op cit, OECD MC (2005) , p27].
- 66.
Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd [1942] 2 KB 184, 196 [Northern Territory of Australia].
- 67.
op cit, Pinto, p110.
- 68.
The OECD provides the following brief biography of Philip Baker:
Philip Baker is a barrister and QC practising from Grays Inn Tax Chambers. He was called to the bar in 1979, began practising in 1987 and took silk in 2002. He specialises in international tax issues, with a particular emphasis on double tax conventions, and on European Union law and taxation. He has a particular interest in the European Convention on Human Rights and taxation.
…He is the author of Double Taxation Conventions and International Tax Law and the editor of the International Tax Law Reports.
Available at http://www.oecd.org/speaker/0,3438,en_21571361_42209831_42839670_1_1_1_1,00.html [Accessed 30 July 2010].
- 69.
ibid Pinto, p110.
- 70.
ibid Olivier and Honiball p99.
- 71.
loc cit Transvaal Hide case (1976) [Botswana].
- 72.
Refer to 12.1. Traditional Definition of ‘Source’, Part IV of this paper [p115].
- 73.
‘Agent’ as defined by the on-line Oxford Advanced Learner’s Dictionary. Oxford University Press, 2010. Available at http://www.oxfordadvancedlearnersdictionary.com/dictionary/agent [Accessed 27/07/2010].
- 74.
Collins Dictionary Thesaurus., Bookman, Franklin Electronic Publishers, 1995.
- 75.
Article 5(5) of the OECD MC. op cit, OECD MC (2005), p27.
- 76.
op cit, Vogel, Univ. of Munich and Co-authors, p257.
- 77.
Supra Vogel, Univ. of Munich and Co-authors, p135.
- 78.
op cit, Vogel, Univ. of Munich and Co-authors, p135.
- 79.
op cit, Olivier and Honiball, p105.
- 80.
supra.
- 81.
ibid Vogel, Univ. of Munich and Co-authors, p257.
- 82.
ibid, Vogel, Univ. of Munich and Co-authors, p248.
- 83.
ibid, Vogel, Univ. of Munich and Co-authors, p248.
- 84.
Secretary for Inland Revenue v Downing (1975) 4 SA 518 (A) [RSA].
- 85.
op cit, Olivier and Honiball, p104.
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Bardopoulos, A.M. (2015). The Traditional Concept of ‘Source’. In: eCommerce and the Effects of Technology on Taxation. Law, Governance and Technology Series, vol 22. Springer, Cham. https://doi.org/10.1007/978-3-319-15449-7_12
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