International Tax - Assignment Example

Since the jurisdiction for tax imposition in many cases is based on the residence status, the residents and non-residents distinction is of much importance (capitaltaxconsulting.com, 2011) 2. It should be noted that OECD model treat Article 4(1) of the OECD, gives a definition of a Contracting State resident as a person who is “liable to tax therein by reason of his domicile, residence, place of management, or any other criterion of a similar nature.” Article 4(1) further provides that a resident is not inclusive of any person who has a tax liability only in respect of income from sources in the country.

This definition of a resident may seem straightforward; however, it raises a number of difficult issues. What does “liable to tax” mean? Is a person who is exempt from tax, such as a charity or a government, liable to tax? Is a person who does not pay any tax because of loss carryovers or deductions liable to tax? Are citizenship and place of incorporation criteria of a similar nature? Liable to tax means the aggregate amount any given person is legally obliged to make payment of to the relevant authority due to a taxable event’s occurrence.

Exempt persons may involve in a taxable event and thus at some point may become liable to tax (For instance; an instance where a government institution is supposed to withhold and remit taxes). A person having deductions or losses or may have a tax liability as long as taxable event is the ending result or a net claim on assets, for example net income. (investopedia.com, 2011) What determines whether a citizen is either a resident or a non-resident are the circumstances like domicile while a company’s incorporation makes it automatically a resident in many states (oecd.org, 2003) 3.

Assume that Country A and Country B both define a resident as an individual who is present in the country for at least 183 days. Is it possible for an individual to be a resident of both Country A and Country B under this test? It is possible in a leap year. The countries are to further find a solution to the issue of residence like nationality to avoid taking the individual as a resident of both nations. (oecd.org, 2003) 4. What are the “Facts and circumstance” strengths and weaknesses test of residence?

Under the test, Is it possible for an individual to be resident in two countries? In more than two countries? The outstanding strength that can be associated with the test of residence on “facts and circumstances” is that of giving a consistent way of determining whether an individual or a company is to be considered resident or not for the purposes tax imposition. The weaknesses attributable to this method of residence determination is that, given country’s test may be different from another and this kills uniformity in determining tax liabilities.

A good example is that of Australia where for a person to be resident, they have to spend above average of their time in the state in the year of income while in Japan, they depend mostly upon the domicile or residence that is maintained for one or more years. (treasury.gov.au, 2011) In rare situations an individual can be resident in two or more countries like where they point out the person should be in the country for 183 days or more and it is in a leap year of income like in Canada and Ireland.

(treasury.gov.au, 2011) 5. In a country using facts and circumsta