International Aspects

Question 1

What did Lord Herschell say in Colquhoun v Brooks (1889)?

Answer 1

The Income Tax Acts impose a territorial limit: either (a) taxable income is derived must situate in the UK, or (b) the person whose income is to be taxed is resident here.

Question 2

What is the broad principle indicated in Colquhoun v Brooks (1889)?

Answer 2

The UK in principle taxes residents on their worldwide income and also taxes all sources of income located in the UK, wherever the recipients reside. This is a common starting point used by most countries in the world.

Question 3

What factors does the UK use in determining the extent of UK taxation?

Answer 3

Residence and domicile.

Question 4

What happened in the case of Plummer v IRC (1988)?

Answer 4

The taxpayer’s family moved to Guernsey, but the taxpayer remained in the UK to complete her education.

It was held that she had not acquired a domicile of choice in Guernsey since she had not lived there on a permanent basis.

Question 5

What happened in the case of F and another v IRC (2000)?

Answer 5

It was held that obtaining a British passport and a certificate of naturalisation was not sufficient evidence of the establishment of a domicile of choice.

If a domicile of choice had been established this had to be inferred from whether an individual had made a voluntary choice to reside in a country and remain there indefinitely.

In this case, F was an Iranian who was on an exit bar list in Iran, but who had expressed a desire to return there in the future. He had therefore not abandoned his domicile of origin in Iran.

Question 6

How many separate tests are there for determining whether a company is resident in the UK?

Answer 6

Three:

(i) The incorporation rule.
(ii) Residence of companies not incorporated in the UK is still determined by the common law test of place of ‘central management and control’.
(iii) : Special rule under s 249, FA 1994, deeming that a company is not resident in the UK if treated as a non-resident for the purposes of a double tax treaty.

Question 7

What is the incorporation rule?

Answer 7

Corporation Tax Act 2009, s 14: a company which is incorporated in the UK is UK resident for the purposes of the Corporation Tax Acts.

Question 8

When does the case law test for company residence apply?

Answer 8

It is relevant only to companies not incorporated in the UK.

Question 9

What is the case law rule for company residence?

Answer 9

It was authoritatively expressed in Lord Loreburn’s speech in De Beers Consolidated Mines v Howe (1906): ‘A company resides…where its real business is carried on…and the real business is carried on where the central management and control actually abides.’

Question 10

Can you go into more detail about the case law rule of company residence? (Part 1)

Answer 10

Statement of Practice 1/90:

(1) Directed at the highest level of control of the business of a company.
(2) Distinguished from the place where the main operations of the business are to be found.
(3) Does not demand any minimum standard of active involvement: may be exercised through passive oversight.
(4) Wholly a question of fact.

Question 11

Can you go into more detail about the case law rule of company residence? (Part 2)

Answer 11

(5) Particular importance is attached to the place where the company’s board of directors meet. But this is not necessarily conclusive.
(6) Even if the board of directors held meetings outside the UK, if it is in the UK they engage actively in the complete running of the business, they will not be regarded as being resident outside the UK.
(7) If the Board of Directors do not apparently exercise such control, HMRC then look to establish by whom it is exercised.
(8) Management and control is in the place of strategic management, rather than the place of day-to-day management.

Question 12

What is the effect of double taxation agreements on company residence?

Answer 12

Where the partner country adopts a different definition of residence, it may happen that a UK resident company is treated, under the partner country’s domestic law, as also resident there. In these cases, the double tax treaty normally specifies what the tax consequences of this ‘double’ residence shall be.

Question 13

How does a parent/subsidiary relationship affect company residence?

Answer 13

If the parent company usurps the functions of the board of a subsidiary, HMRC will draw the conclusion that the subsidiary has the same residence for tax residence as its parent.

Question 14

What is the ‘tie-breaker’ clause of the OECD Model Double Tax Treaty?

Answer 14

Art. 4.3: ‘[The company] shall be deemed to be a resident only of the State in which its place of effective management is situated.’

Question 15

What is the distinction between ‘central management and control’ vs. ‘place of effective management’.

Answer 15

Effective management may, in some cases, be found at a place different from the place of central management and control.

E.g. Company run by foreign executives, but final directing of power rests with non-executive directors in the UK. In such a case, the company’s place of effective management might well be abroad, even if it might be centrally managed and controlled in the UK.

Question 16

When and to whom is a domicile of origin attributed? Is it dependent on the place where the child is born?

Answer 16

To every person at birth (Udny v Udny (1869)) The domicile does not depend on the place where the child was born.

Question 17

What is the domicile of origin dependent upon?

Answer 17

On the domicile of the appropriate parent at the time of birth.

Question 18

What domicile of origin is given to a legitimate child born during the lifetime of his father?

Answer 18

They have their domicile of origin in the country in which his father was domiciled at the time of his (the child’s) birth.

Question 19

What domicile of origin is given to a legitimate child not born during the lifetime of his father, or is an illegitimate child?

Answer 19

They have the domicile of origin in the country in which his mother was domiciled at the time of his birth. (If the parents subsequently marry, the father’s domicile takes over).

Question 20

What domicile is given to someone who in later life acquires a domicile of choice and then abandons it without acquiring another?

Answer 20

The domicile which will revive will be the domicile of origin.

Question 21

In what two respects is a domicile of origin distinguishable from a domicile of choice?

Answer 21

(1) It is more difficult to prove that a person has abandoned his domicile of origin than to prove that he has abandoned a domicile of choice.
(2) If a person leaves the country of his domicile of origin, intending never to return to it, he continues to be domiciled there until he acquires a domicile of choice in another country. This is not true for a domicile of choice.

Question 22

How can an independent person acquire a domicile of choice?

Answer 22

By a combination of residence and intention of permanent or indefinite resident, but not otherwise.

Question 23

What was said in IRC v Duchess of Portland (1982)?

Answer 23

‘Residence in a country for the purposes of the law of domicile is physical presence in that country as an inhabitant of it.’

Question 24

What intention is required for the acquisition of a domicile of choice?

Answer 24

The intention to reside permanently or for an unlimited time in a country (Att-Gen v Pottinger (1861)). Must be residence that is indefinite in its future contemplation.

Question 25

Is the fact that a person contemplates that he may move decisive in removing domicile of choice?

Answer 25

No, a person who intends to reside in a country indefinitely may be domiciled there although he envisages the possibility of returning one day to his native country.

Question 26

If someone has in mind the possibility of a return to his native country should a particular contingency occur, when that jeopardise his acquisition of a domicile of choice?

Answer 26

Not if vague and indefinite: such as if he makes a fortune.

If it is clearly foreseen and reasonably anticipated (e.g. termination of employment) it may prevent the acquisition of a domicile of choice.

Question 27

How does Lee (2015) define domicile?

Answer 27

Generally the country that he regards as home. It is where he has his closest ties and when he is away, the place to which he intends to return.

Question 28

How long is a domicile of origin retained?

Answer 28

Retained unless and until it is abandoned by the acquisition of a domicile of choice.

Question 29

Is it enough to claim the necessary intention to reside permanently in a country to acquire its domicile of origin?

Answer 29

No, mere claims will not be enough: HMRC will require positive proof and actions speak louder than words. The following factors will be relevant: your permanent residence; your business interests; your social and family interests; your ownership of property.

Question 30

How can one lose a domicile of choice?

Answer 30

By the combination of: (1) ceasing to reside in the country in question; and (2) ceasing to intend to reside there permanently or indefinitely. Both conditions need to be satisfied.

Question 31

What is the domicile of a dependent person?

Answer 31

In general, the same as, and changes (if at all) with, the domicile of the person on whom he is, as regards his domicile, legally dependent.

Question 32

What is the difference between the tax liability of a resident and a non-resident?

Answer 32

A resident is in principle taxed on their worldwide income, whilst a non-resident is in principle taxed based on source.

Question 33

(OLD LAW): When is the question of whether or not you are ‘ordinarily resident’ relevant?

Answer 33

Only if you have foreign income during a tax year.

Question 34

(OLD LAW): What happens if you are a resident but not ordinarily resident in the UK?

Answer 34

You may claim the remittance basis for your foreign income. But you will always pay income tax on your UK income.

You cannot use the remittance basis for foreign gains unless you are not domiciled here.

Question 35

(OLD LAW): What does ordinary residence mean?

Answer 35

The word ‘ordinary’ indicates that your residence in the UK is typical for you and not casual.

Question 36

(OLD LAW): Will you be ordinarily resident here if you have always lived in the UK?

Answer 36

Yes.

Question 37

(OLD LAW): What attributes are enough for your residence to be considered ordinary?

Answer 37

(1) You do not need to intend to live in the UK permanently or indefinitely.
(2) Your presence here has a settled purpose - even if only for a limited period, there is enough continuity to say it is settled (e.g. employment).
(3) Your presence in the UK forms part of the regular and habitual mode of your life for the time being.
(4) You have come to live in the UK voluntarily. The fact that you came to the UK at the request of your employer rather than seek a new job does not make your presence here involuntary.

Question 38

(OLD LAW): Can you be ordinarily resident in more than one country?

Answer 38

Yes.

Question 39

What are the main points about domicile?

Answer 39

(1) You cannot be without domicile.
(2) You can only have one domicile at a time.
(3) You are normally domiciled in the country where you have your permanent home.

Question 40

What was said in Whitney v IRC (1926)?

Answer 40

‘The UK resident is taxed because he enjoys the benefit of our laws for the protection of his person and his property.’

Question 41

What is the difference between taxing someone as a UK resident and a foreign resident?

Answer 41

A UK resident is subject to UK income tax on all his income worldwide wherever its source.

A foreign resident is only liable to UK income tax on income arising to him in the UK.

Question 42

(OLD LAW): What was the rule for determining residence?

Answer 42

1) The ‘183 day’ rule: counted on the basis of nights spent in the UK.
2) The ‘91 day’ rule: applies if someone who had left the UK for permanent resident abroad if their visits to uK averaged 91 or more days per tax year over 4 year period, excluding ‘exceptional circumstances’
3) Where the individual had not become resident elsewhere it was difficult to show that he did not remain uK resident.

Question 43

What was said in Gains-Cooper v R&C Comrs (2010)?

Answer 43

The CoA said that to lose UK residence it was necessary to ‘severe social and family ties’ with the UK but this test was held by the SC to be too strong a test. A distinct break is necessary but only involves a substantive loosening of ties.

Question 44

What are the automatic non-residence tests?

Answer 44

1) Was resident in none of the past 3 years and spent 46 days in the UK in the tax year.
2) Was resident in any of the past 3 years and spent fewer than 16 days in the UK in the tax year.
3) Left the UK to carry out full-time work abroad and spent fewer than 91 days in the tax year and no more than 30 working days in the UK.

Question 45

What are the automatic residence tests?

Answer 45

1) Spends more than 182 days in the UK.
2) Has only one home, which is in the UK, and he is present there for 30 days in the tax year.
3) He carries out full-time work in the UK.

Question 46

What are the types of UK ties for the third test?

Answer 46

1) Spouse or minor children resident in the UK
2) Existence and use of place to live in the UK (does not include a holiday home).
3) Work in the UK for at least 40 days
4) Presence in the UK for more than 90 days in either of the past 2 years.

Question 47

What does ITTOIA 2005 s832 tell us?

Answer 47

The remittance basis. A taxpayer who is UK resident, but not UK domiciles, may claim to be taxed on the remittance basis (i.e. on income received in the UK).

Question 48

What special charges are there on non-doms?

Answer 48

£30,000 charge each year if resident for 7 out of past 9 years.

£60,000 charge if resident for 12 out of past 14 years.

£90,000 for those resident in past 17 out of 20 years.

Unless income is actually brought to or enjoyed in the UK there is no charge.

Question 49

How must a trade be characterised for it to be assessed as foreign income (for UK resident)?

Answer 49

The trader must be resident in the UK, but the trade must be carried out wholly abroad.

Question 50

What if a person is not resident in the UK but earns from his duties performed in the UK?

Answer 50

He is only taxable on the earning in respect of duties performed in the UK.

Question 51

How is a taxpayer entitled to relief from double taxation?

Answer 51

1) Under the double tax treaty with the other country. There will be a credit for one amount of tax against the other.
2) TIOPA 2010 s18: unilateral relief. This takes the form of a credit against the UK tax equal to the foreign tax paid.

Question 52

What are the two models for bilateral double tax treaties?

Answer 52

OECD and UN Models. Both are very similar (75% of the words are identical).

Question 53

Why might DTTs generally be unnecessary?

Answer 53

Because almost all countries prevent double taxation unilaterally by having the residence country either grant an exemption to foreign source income or grant a foreign tax credit for source country tax.

Question 54

Where do DTTs shift tax revenue from to whom?

Answer 54

Shift tax revenue from source countries to residence countries, because generally the source country is allowed to impose the first tax on any revenue deriving from sources within it.

Question 55

What is the general rule for source and residence international income?

Answer 55

Generally, source jurisdictions retain their right to tax active (business) income, except for short-term activities, but give up some of their right to tax passive (investment) income.

So, source country taxes business profits attributable to a branch or subsidiary of a foreign company (defined as a permanent establishment). But does not tax, or only very lightly tax, at source on payments to residents of the other country, such as interests on loans, dividends on shares, or royalties on intellectual property.

Question 56

Why might rich countries prefer the OECD model?

Answer 56

Capital-exporting richer countries prefer the OECD model treaty, which is more favourable to residence, while capital-importing developing countries tend to favour the UN model treaty, which is more favourable to source. For example, the UN model allows source taxation of short-term business activities paid to foreign service providers, even if they only enter the country for a short period.

Poor developing countries rely heavily on source-based taxation, in favour of the rich developed countries where investors reside.

Question 57

What is needed to establish source-based taxation under a DTT?

Answer 57

A permanent establishment.

Question 58

Why might a credit system be better than an exemption system for the taxpayer on foreign-based income?

Answer 58

Depending on tax rates:
A credit would mean you still pay the same rate of tax you would normally pay if it was domestic income, as the credit is used merely to prevent any double taxation.

An exemption would mean you essentially paid the same rate of tax as you would in the source country (which, if lower than the domestic rate, means you would pay less tax).

Question 59

Baistrochhi: What is the main normative goal of the international tax regime?

Answer 59

To avoid international double taxation. It provides a safety net for cross-border transactions, which entail inherently higher transaction costs than domestic exchanges: hence there is the element of an insurance motive.

Question 60

How does Baistrochhi a problem of the ITR?

Answer 60

A lack of co-operation between competitors has led to competition between incompatible standards.

By creating a compatible standard, it can creates an environment where network users can interact at relatively low transaction cost.

Question 61

How does Baistrochhi describe the ITR?

Answer 61

A two-sided platform: it provides shared resources and reduces the costs of providing services to both groups of users.

Countries and international tax payers are the two distinct groups. It allows for expanded international trade. Countries advertise themselves as investment locations when concluding tax treaties.

Question 62

How does the ITR reduce transaction costs, according to Baistrochhi?

Answer 62

Lowers transaction costs of cross-border income and capital markets.

Question 63

What does S 218 and Schedule 45 of the FA 2013 provide for?

Answer 63

The statutory residence test.

Question 64

What is the aim of the SRT?

Answer 64

Allows taxpayers to assess their residence status in a straightforward way.

Question 65

What happened in the case of Gaines-Cooper (2011)? (Part 1)

Answer 65

The question was rather narrow: what was the ‘proper construction’ of published HMRC guidance on UK residence on which the taxpayers relied?

Concerned judicial review: they had a legitimate expectation that he (Mr Gaines-Cooper) was not UK resident under HMRC guidance.

The Supreme Court refused the taxpayers’ appeal, rejecting their interpretation of the HMRC guidance.

HMRC now accept that they are bound by their published guidance, and can’t resile from it until it announces that proposes to alter the circumstances.. But case also showed that HMRC guidance is unreliably if badly drafted.

Question 66

What are more details of Gaines-Cooper (2011)? (Part 2)

Answer 66

HMRC published the booklet IR20 in 1973 to assist with the difficulty of determining the likelihood of residence status being accepted by HMRC.

Appellants argued that irrespective of true legal position, they should be afforded more benevolent interpretation of residence they claimed IR20 put forward. Alternative argument that HMRC had in practice implemented this benevolent interpretation for some years.

The SC believed the case had not been made for the idea that the HMRC had instituted a practice which had would have conveyed non-resident status. Evidence of this was too thin.

Question 67

What happened in Anson v HMRC (2015)?

Answer 67

Dispute was resolved in the taxpayer’s favour.

Case involved the treatment for UK personal income tax purposes of a membership interest in a Delaware LLC held by Mr Anson, a UK resident, where the LLC was fiscally transparent for US income tax purposes. Relevant question was whether under the provisions of the US-UK DTT, UK tax was computed by reference to which the US tax is computed.

Anson sought foreign tax credit relief for UK tax purposes on the US income tax he paid on the LLC’s business profits. Commissionners believed the income that had been taxed in the US was not Mr Anson’s, but that of the LLC.

FTT and SC found that the LLC’s business profits belonged to the members as they arose even if the members had no proprietary interest in the LLC’s assets. FTT described that the members had a personal right, and not a proprietary right, to the profits.

Question 68

What is the difference between a transparent and opaque entity?

Answer 68

The profits of an opaque entity are treated as its own and the company itself is taxed thereon. Members (i.e. shareholders) are then generally only taxed in relation to profits actually distributed by way of a dividend.

On the other hand, the profits of a transparent entity, such as a partnership, are treated as profits of the members (i.e. partners) themselves who are taxed on those profits as entitlement to them arises, irrespective of whether they are distributed.