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Sovereignty and Tax Residence

It's an odd thing when you think about it. Tax systems which work simply on the basis of the source of the income often have a definition of tax residence buried inside their rules. Take Gibraltar or Hong Kong for example. When it comes to companies these territories tax only (with a few important exemptions) on the basis of the source of the income. So why would you bother with a redundant definition of tax residence? If a territory is not taxing world wide income based on the residence of a company then surely no one needs to know about the residence of a company.

Except it's not that simple. In this article, which was published in the June edition of the Bulletin of International Taxation, I discussed the idea that there are two ways to think about tax residence for companies; the first is simple utility in regard to taxation, and the second is that the defining of those entities which are or are not tax resident in a jurisdiction is an act of sovereignty, rather like defining the boundaries of a the sovereign power of the territory. This company, but not this company, is subject to the power of a territory. The hard won devolved exercise of sovereignty of territories like Gibraltar means that this should be guarded carefully and for that reason the definition of tax residence contained in s74 of the Income Tax Act protects Gibraltar's power to exercise its jurisdiction - if it chooses to. That is not to say it must, but that it can.

In addition to this, the ever increasing number of international regimes such as The Common Reporting Standard, the Mandatory Disclosure regime and the DAC rely on what I christen "tests of belonging" that is tests which either mirror or are related to tax residence tests. To have no tax residence test in your law, even if none is required is to surrender the ability of your territory to participate in these regimes on its own terms and instead either makes participation impossible or relies on some backstop definition which may result in some unfair results.

This article discusses tax residence and its utility beyond a demarcation of taxing rights. Taking Gibraltar and Hong Kong as examples, it argues that the act of claiming tax residence is an act of sovereignty, and predicates participation in the international tax community for territories. www.ibfd.org/...

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