Residence Tiebreaker - Essay Example

RESIDENT TIEBREAKER UNDER ARTICLE 4(2) OF THE OECD RULE Course Institution Tutor Date Residence tiebreaker Introduction Residence tiebreaker arises when a person is considered as a tax payer in two countries due to considerations of being a resident in both. In such a case, a person may be overburdened with tax obligation. This issue facilitated for the development of a treaty for the purpose of tax reconciliation. The treaty will depend on the countries that the person is a resident. For instance, in the U.S. the law provides for a treaty that breaks the ties. A person will be subjected to the residency rules of just one of the countries in light of tax calculations. An individual on assignment in a foreign nation is most likely to fall under dual taxation. This may lead to a double taxation system. The above necessitates for the individual to utilize the relevant treaties available in determining residency.1 Fortunately, many nations in the world have come together in development of international laws that will safeguard such individuals from such huge tax burdens. There are conditions that an individual should fulfill to be considered a taxpayer of country X instead of country Y. These conditions are referred to as the tiebreaker rules. Different countries use different criteria in carrying out assessments to determine the residence of an individual. There are instances where a person can be considered as a taxpayer in two different countries. The law provides for dual citizenship. In such a case, the individual can pay tax twice under specified laws of the two countries. In most countries, the residence factor is addressed in Article 4.2 They all address it as the Residence Article. In a case where the two countries have a treaty in respect to tie-breaking rules, the two countries can settle their claims on which country has the right to tax the individual. In many cases, these provisions are highlighted in paragraph 2 of Article four of the law. The international law provides the treaty with supreme powers over the domestic laws in determining the residence of the person. The U.S. has adopted rules build by the OECD. The rules allow a state to carry out an assessment of whether a person is a resident under consideration of its internal laws. There are four determinants stipulated in the OECD model tax convention. The factors are permanent home, center of vital interest, habitual abode, and citizenship.3 Application for a treaty tiebreaker There is a sequence applying for tiebreaker rules. The existence of differences in their order stipulates that each treaty single-handed should be carefully examined before making a claim of residence. During application, the subject is supposed to implement the recently updated or revised guidelines of the OECD. These guidelines are international treaties under public international law. They are subject to interpretation accord to international law principles. Article 4(3) states that where a person is a residence of two countries under contracting terms, the person shall be deemed to be resident in the country where effective management is situated4. Article 4(3) stipulates that the two contracting states shall determine by mutual agreement where the individual shall be deemed resident in view of tax payment. If the two contracting states come into a disagreement, the individual shall not fall under residence of either state. This means that if the contracting states do not come to agreement, the taxpayer will only benefit from the fact that he or she will be exempt from double taxation.5 In a typical tiebreaker, the treaty provisions states that an individual is assumed as a resident of a country in which the individual has a permanent home. In case of maintaining two homes in two countries, the individual will be deemed a resident of the country, which his or her major vital interests are vested. In case it does not provide clear boundaries, the individual shall be deemed a resident of a specified country by determining his or her habitual abode. In other instances, the individual may maintain habitual abodes in both countries. In such a case, the individual shall be treated as a resident of the country that his or her nationality is based. In case of having both countries’ nationality, the competent authorities are brought to task in aid of mutual agreement towards settlement of the issue.6 Factors in determining tiebreaker In view of advising a person under such a circumstance, the following factors will be used to determine his or her resident under the agreements on OECD. The factors below are under the category of personal and family factors.7 Permanent home The number one factor carrying a determinant cause stipulates that the individual should have a home that is viewed as permanent. The OECD defines a permanent home as a place where an individual maintains an abode. In lighter points, a home can be represented by a furnished room. For a permanent home to qualify as a determining factor, the individual should always consider it always available for his or her use at all times continuously and not in instances where he or she needs to put up for a few days or a short duration.8 The OECD stipulates that any form of home may be put in consideration. Thus, a house or apartment belonging to or rented by the individual shall mean a home. What matters in such instances is the permanence of the home. Residency will be determined in favor of the country an individual has a permanent home. Centre of vital interest An individual, upon failing the home residency test shall be subjected to a center of vital interest test. This test will put the individual into an examination of his or her family and social relations, his or her occupation, political cultural activities, and the centre of his administration towards his own property. In this case, where a person maintains a home because his or her relatives live there and has possessions, can be used as a determinant of individual residence. The above elements demonstrate that the individual has centered his interests on that state. The law maintains that it is hard to shift an individual’s center of interest. Habitual abode Factual determinations are what make up tiebreaker rules. If the above points cannot resolve the issue of residency, then habitual adobe is used to break the test. Habitual abode is defined as the state where an individual spent the most time. Citizenship In cases where habitual adobe exists in both states or do not exist in either of the state, the committees determining the residency shall use the citizenship as a determining factor. Residence shall be ruled in favor of the country that the individual is a citizen. In cases where the individual is, a citizen of both states or is not a citizen of any of the two states; the competent authorities are given the mandate to settle the claim by mutual agreement.9 Marriage If an individual deemed married or have a joint household with a common-law partner leaves a country and leaves his or her spouse or common-law partner in that country, then the spouse shall constitute a tiebreaker. The same will apply to an individual who leaves a country with dependents. The resident shall be ruled in favor of the country where the individual has left his spouse or dependents. In case of a breakup with the spouse, the country shall no longer be considered as a tiebreaker. Social ties Residency may also be determined where an individual in the country say X maintains mailing address of that country. Residency is also assumed where an individual maintains a post office address. It may also include a place where an individual maintains safety deposit box. It may also be assessed in a place where an individual uses personal stationery, such as business cards, showing the country’s address, telephone listings, and local newspapers and magazine subscriptions of a country say Y. both countries should be in a treaty providing such ways of determining residence. Article 4(2) of the DTC states that an individual who possesses a green card is assumed a resident of the U.S. in regards to the DTC. Such a person shall be subjected to all treaty benefits for as long as the individual meets the conditions below.10 The first condition states that a person or individual shall have a permanent home or a habitual abode in the United States. The second condition states that the individual shall not be treated as a resident of another state other than the U.K., under any treaty touching the U.K. and another state. Economic tiebreaker factors Place of effective management An individual shall be claimed resident of a country where he or she carries out effective management of his or her obligations. Obligations shall mean managing his business, and managing his personal business affairs. Place of effective management will simply be interpreted as the place where key management and commercial decisions pertaining the business of the individual take place. There is no definition of the term effective management under international laws or tiebreaker treaties. The relevant authorities determining the residence of an individual shall use an agreed criterion in instances where effective management is to be used as a tiebreaker. Guidance for central management and control Guidance from central management and control is another form of a test used to determine the residence of an individual for purposes of double taxation applications. An individual shall be deemed resident of a country if he or she operates a business in the country. The central management of such a business should be within that country linking the individual to the business.11 As such, such an individual shall be deemed a resident because he operates gainful activities in the country under consideration. These two factors have no definite definition, but the courts have set up precedents that help in categorizing an individual under them. Place of business or activity for individual This refers to a facility that an individual uses to carry out his or her economic activities such as a workshop, a bar, and a shop among others. The individual shall be liable to tax in a country where he or she holds and pays rent directly, or owns the place in respect to carrying out his or her own economic activities. The business should not include a company since a company shall be separated from the owner and gain residence as a person in its own.12 Case of Elliot v. the queen This recent case involved residence in purposes of double taxation. The case illustrated in details to what extends a person may be a resident of a country X where X and Y are ion a treaty under the center-of-vital-interests tests. The court determined that the individuals originally from the U.S. running a consultancy firm in Canada had a residency in Canada. The residency was determined following the Canadian law categorizing residents. The court thoroughly analyzed the case under the treaty tiebreaker rule of the U.S.-Canada income Tax Treaty. In a conclusive remark, the court granted the individuals U.S. residency in consideration of their personal and economic interests were closer to the U.S. than Canada. Conclusion Residence shall continue to be used in determining the tax status of an individual. It will remain to be the connecting factor for taxation. However, the criteria for its determination shall remain to evolve in time. All countries in tax treaties should consider a common way of categorizing residence of an individual in order to reduce the burden created during such determination cases.13 Reference list Carroll, M. B. (1933). Taxation of Foreign individuals under the rule of tiebreaker concepts, Allocating Taxable Income methods vol. IV (League of Nations 1933). Carroll, M. B. (1939). ). League of Nations strategy for Prevention of International Double Taxation and Fiscal Evasion. League of Nations 1939 and Wittendorf, supra. Kevin, D. (2009). Canadian Residence for the purposes of a Double Taxation Agreement –consequences for tax liability. Tax for the Owner-Manager. Lang, M. (1999). Factors in determining tiebreaker: in Gassner, Lang & Lechner eds., Intertax, supra n. OECD, (1998). Harmful Tax Competition: An Emerging Global Issue. 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