What Does ‘Residence’ Mean?

Abstract

Traditional income tax is founded upon theoretical principles which directly obstruct adaptability and flexibility of income tax provisions in a ‘virtual world’, especially regarding ‘residence’, ‘source’ and ‘permanent establishment’. The OECD solution was to determine the location of ‘permanent establishment’. However, when ‘load balancing’ was introduced the OECD’s recommendation became immediately redundant. Various domestic laws apply diverse methods to determine residence of an individual, inter alia, the ‘physical presence test’ and the ‘ordinary resident’ test. Where a DTA dual residence occurs a ‘tie-breaker clause’ is applied to resolve the issue.

Various ‘tests’ for, and definitions of, residence of a company exist internationally, inter alia, ‘place of management’, ‘place of effective management’, place of incorporation, place of residence of management. The USA applies place of incorporation as the residency test for corporations. However, ‘place of effective management’ is the preferred test implemented by the OECD within its Model Convention. The leading UK DeBeers (De Beers consolidated Mines Ltd v Howe (Surveyor of Taxes) (1906) AC455 [UK]) case established a precedent by applying the ruling that ‘central management and control’ “ordinarily coincides with the place where the directors of the company exercise their power and authority”. (op cit OECD Taxation & eCommerce, France, p146) The Northern Australia Pastoral case (Northern Australia Pastoral Co Ltd v FCT (1946) 71 CLR 623 [Australia]), however, held that the residence of a company is located where actual business operations are carried on. The OECD MC Commentary has defined ‘place of effective management’ as “the place where the key management and commercial decisions… are in substance made” (op cit OECD MC (2005), France, p82). According to Vogel the place of management of an enterprise “is where the managements’ important policies are actually made”(op cit Vogel, Professor Dr Klaus, University of Munich, and Co-Authors Klaus Vogel on Double Tax Conventions, Netherlands, p183).

“To tax and to please, no more than to love and to be wise, is not given to men” – Edmund Burke – On American Taxation. (Burke, Edmand (1729–97) “Burke was a prolific writer on the issues of political emancipation and moderation… protesting against the harsh handling of the American colonies”.

[op cit Oxford English Reference Dictionary [Sec. Ed.], 1996, p195]