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Elimination Double Taxation Under Double

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Question:

Discuss About The Elimination Double Taxation Under Double?

 

Answer:

Introducation

The first criteria on the basis of which income tax is charged on an individual or entity is on the residence principle. In order to compute taxable income, it is to be determined whether the individual or entity is a resident of the country or not. In the case of New Zealand., the concept of residence is a significant part of the Goods and Service Tax Act 1985 (Goods and Services Tax Act, 1985). As per the Act the concept of residence is important as on the basis of this it is determined whether an individual is assessable to worldwide income or only on the income which is earned in New Zealand. The residents of New Zealand are assessable for the income which is earned worldwide and non-residents are assessable for the income earned in New Zealand (Wells & Lowell, 2013). As per the provisions of the New Zealand’s Tax laws a person will be a resident of the country if that individual has a permanent place of abode in New Zealand, the person is present personally in the country for more than 183 days in total in any 12 months period or the person is personally absent from New Zealand for the service of the country. As per the provisions, a company will be considered to be a resident of New Zealand, if the company was incorporated in New Zealand or if the company has its head office situated in New Zealand or if the core management of the company operates from New Zealand (Kelsey, 2015). If any of the above mentioned conditions are satisfied the company will be considered as a resident of New Zealand.  Residence concept proves to be vital when tax is being calculated for interests in foreign superannuation schemes. The amount which is drawn in lumpsum from superannuation schemes will be taxed for a resident following either the schedule method or the formula method. The residence of the individual is also significant for calculating family tax credits under family scheme. Moreover, under Goods and Service Tax Act of 1985, residence is important term as it is used to determine the place from which the supply of goods and services initiated. Another area where the residence of the individual is relevant is where there is filing requirements under SLSA 2011 for New Zealand’s Based Borrowers (Blakely et al., 2015).

 

Description of Article 4 of OECD

Article 4 of OECD deals with the concept of resident which is a widely used concept in taxation laws. The convention states that a resident is an individual who is liable to pay taxes to the government on the basis of residence, operations of management and other similar criteria on the basis of which tax is charged on an individual. This does not include any person who is liable to pay taxes in a state for the income which is generated from the sources within the state. The main purpose of this article is to clearly define the term resident and also solve the conflicts which arises due to double residence cases (Cracea, International Bureau of Fiscal Documentation & Organisation for Economic Co-operation and Development., 2013). The problems usually occurs when one or both of the Contracting States claims that the individual is a resident of their territory. Para 1 of Article 4 of the convention, covers all cases where an individual is deemed to be a resident of the state as per the domestic laws of the state but subjected to the tax limitation to the sources of income in that state or to the capital situated in that state.

Para 2 of the Article 4 states the cases where a person is a resident of both the contacting states and the conflict of residence arises. Such conflicts are solved by applying special provisions, where the rules give the right to collect taxes from a resident to one state. Moreover, the article gives preference to a contracting state where the person has a permanent home available to him. The paragraph makes it clear that the state where the individual has a permanent home, will be considered to the resident of that particular state. The article specifically makes it clear that the home must be a permanent one or as intended by the individual to retain the home for a permanent stay basis. Such a case will not be considered if the person is on a temporary stay basis. However if the individual has a permanent house in both the contacting state, the article gives preference to the state where the individual has economic and personal relations or where the vital interests of the individual lies. In the circumstance, the place of residence cannot be determined then the article requires an alternative criteria where habitual abode is identified first and then nationality is considered. If the individual has nationality of both the states or if the individual does not have nationality of any state, then the residency of the individual is to be determined by mutual agreement between the contracting states. As given in the cases laws, Commissioner of Inland Revenue vs MW Diamond [2015] NZCA 613, the judgement of the court was that Mr Diamond did not have a permanent home in New Zealand even though he had a property in New Zealand which was used as an investment property as Mr Diamond in this case had never intended to dwell in the property (Diamond Case, 2018). The court adopted Australian Test for permanent place of abode and concluded that such means a home in New Zealand. Thus the court concluded Diamond did not have permanent residence in New Zealand and thus the decision was in favor of Diamond. Thus it can be said that as per the provisions of Article 4, permanent place of abode cannot also be a basis for determining the resident status of an individual.

Para 3 of Article 4 is concerned with companies and other bodies of individuals irrespective of the fact that they are legal person or not. It is a rare thing for companies to be liable for taxes as a resident in more than one state, but it is possible. For example, a company which is registered in one state and has management in another state will be subject of conflict as to which state resident is the company. In order to avoid such a conflict special provisions have been included. Whenever there is a case of dual residency of a non-individual then paragraph 3 of Article 4 requires the competent authorities of the contracting states to resolve the conflict by mutual agreement. The competent authorities of both contracting states will consider aspects such as headquarters of the company, where does the non-individuals day to day management is done, where the books of accounts are kept and other such factors. Para 3 also makes it clear that the if the contracting parties are not able to resolve the conflict then it will not allow relief or exemption to the non-individual under the convention. In some cases states prefer to apply the rule of effective management of the company for determining the residential status of the company (Padia & Maroun, 2012).

 

Analysis of Tie Breaker Test as per OECD Convention and Income Tax Act 2007

As per the provisions of Income Tax Act 2007, the concept of a resident is defined for both individuals and non-individuals like companies, body of individuals (Income Tax Act, 2007). Article 4 of OECD Conventions covers the tie breaker tests which the contracting states must employ in order to get residency of an individual or non-individual in case of Double Taxation Agreements (Genschel & Rixen, 2015). The tie breaker tests which the parties should adopt as per the provisions of Income Tax Act 2007 and OECD Conventions are given below:

Permanent Home Test: The first test for the checking residency of an individual is to check whether the individual has a permanent home in New Zealand. This tests have three requirements which needs to be fulfilled in order to establish residency status for a state which are a home of individual must be there, it has to be permanent and the home must be available for living. It is clear from the provisions as contained in the OECD Convention the term home is used in the physical sense and any form of home may be taken in account such as flat, rented house, furnished rooms. The home must be kept with the intention of permanent use or stay and not for a stay which is intended for a short duration. Another important aspect is that the home must be available for the use of the individual. On the basis of these factors the test is conducted and judgements are made. If individual has a permanent residence in both the countries then the contracting states will apply the next test.

Personal and Economic Relation Test: The next test applied is Personal and Economic Relation Test which shows the individual is closer to which state in terms of economic ties or personal ties (Corkery et al., 2013). The economics ties may be business ties, property, other economic interest whereas the personal ties include family, social relations, the place from which the individual belongs. As per the case of Hertel vs MNR 93 DTC 721 at 723, it was revealed that the number of economic or personal relations which an individual has with a country is not material enough to take a decision but the root or depth of the relation is to be examined which is of more significance (Lang, Rust & Owens, 2014). In a circumstance that this test cannot be determined than the contracting states have to move on to the next test.

Habitual abode Test: In this test it is determined whether the person habitually or normally lives in the country or not. In case of this it is to be determined whether the individual lives habitually in New Zealand or in other country to determine the residency status of the individual (Ault, 2013).

Nationality and Mutual Agreement Test: When the individual has habitual abode in both the countries then the residency status is determined by the nationality test where the nationality of the individual is taken into consideration (Kok, 2016). When the residency status cannot be determined by the tie breaker tests than the convention provides the use of Mutual Agreement between the Contracting State to decide the issue.

 

Double Tax Agreements between New Zealand and Australia

In case of a person who is not an individual such as a company or institutions the tie breakers test varies a bit. The first test which is mostly conducted is the effective management test. In this test it is determined whether the effective management of the company is situated in New Zealand or in the other country where the company has management (Gutuza, 2012). Another test which is generally applied is mutual agreement between competent authority in order to decide I which state the residency of the company lies with. These are the tie breaker tests which are provided in the OECD Convention and it is also consistent with the provisions of Income Tax Act 2007 (Avi-Yonah, 2015). New Zealand has established ties with other countries in order to avoid conflicts which relates to residency status of a person who is not an individual. These ties are established by entering into Double taxation agreements with other countries. The double taxation agreements are useful to determine a company’s residency belongs to which country. In this case New Zealand has entered into Double Taxation Agreements with Australia (Collard, 2013). As per the agreements whenever there is a case of Dual Residency of person who are not individuals then the test are conducted as usual. In the test of Effective management, the decision of the residency of the company will be taken on the basis of where the effective management of the company is situated whether it is in New Zealand or Australia (Goosen, 2014). If the effective management test cannot produce the desired results than the mutual agreements between competent authority is to be taken for the determining the residency status of the company. The DTA agreements between New Zealand and Australia follow the provisions as established by Income Tax Act of 2007 and also the provisions of Article 4 of OECD Conventions (Kleist, 2012).

 

Conclusion 

As per the above discussion it is clear that the residency concept is of utmost importance in tax calculations for an individual or a person other than an individual. However there exists certain loopholes in the taxation laws considering the concept of residence. One of the problems which the tax authority faces while calculating the taxable income of a resident is the accuracy of the calculations. For a resident worldwide income is taken into consideration for tax purposes. Another issue is determining the test of effective management in case of a person who is not a individual. The place of effective management is hard to determine when the company has operations in more than one country and has equal management focus in both the countries. In such a deadlock case the issue is to be sorted by mutual agreements which itself is tricky to establish if there is no Double Taxation agreements between them. If the conflict cannot be solved by mutual agreements than the company will be liable for taxes in both the countries.

 

Reference

Ault, H. J. (2013). Some reflections on the OECD and the sources of international tax principles.

Avi-Yonah, R. S. (2015). Advanced introduction to international tax law. Edward Elgar Publishing.

Blakely, T., Cobiac, L. J., Cleghorn, C. L., Pearson, A. L., van der Deen, F. S., Kvizhinadze, G., ... & Wilson, N. (2015). Health, health inequality, and cost impacts of annual increases in tobacco tax: Multistate life table modeling in New Zealand. PLoS medicine, 12(7), e1001856.

Collard, S. (2013). Workplace pension reform: Lessons from pension reform in Australia and New Zealand. Social Policy and Society, 12(1), 123-134.

Corkery, J., Forder, J., Svantesson, D., & Mercuri, E. (2013). Taxes, the internet and the digital economy. Revenue Law Journal, 23(1), 7.

Cracea, A., International Bureau of Fiscal Documentation, & Organisation for Economic Co-operation and Development. (2013). OECD model tax convention on income and on capital. IBFD.

EntitiesIndividuals, P., & Individuals, P. (2018). Diamond Case. Taxaccountant.kiwi.nz. Retrieved 19 February 2018, from https://taxaccountant.kiwi.nz/79-cases/138-diamond-case

Genschel, P., & Rixen, T. (2015). Settling and unsettling the transnational legal order of international taxation. Halliday, TC, & Sha ? fer, G. C.(Ed.), Transnationallegalorders, 154-184.

Goods and Services Tax Act 1985 No 141 (as at 01 July 2017), Public Act Contents – New Zealand Legislation. (2018). Legislation.govt.nz. Retrieved 19 February 2018, from https://www.legislation.govt.nz/act/public/1985/0141/latest/DLM81035.html?src=qs

Goosen, C. (2014). International tax planning: the concept of place of effective management (Doctoral dissertation, University of Cape Town).

Gutuza, T. (2012). Has recent United Kingdom case law affected the interplay between'place of effective management'and'controlled foreign companies'?: analysis. SA Mercantile Law Journal= SA Tydskrif vir Handelsreg, 24(4), 424-437.

Income Tax Act 2007 No 97 (as at 20 December 2017), Public Act Contents – New Zealand Legislation. (2018). Legislation.govt.nz. Retrieved 19 February 2018, from https://www.legislation.govt.nz/act/public/2007/0097/latest/DLM1512301.html

Kelsey, J. (2015). The New Zealand experiment: A world model for structural adjustment?. Bridget Williams Books.

Kleist, D. (2012). Methods for elimination of double taxation under double tax treaties–with particular reference to the application of double tax treaties in Sweden.

Kok, R. (2016). The Principal Purpose Test in Tax Treaties under BEPS 6. Intertax, 44(5), 406-412.

Lang, M., Rust, A., & Owens, J. (Eds.). (2014). Tax Treaty Case Law around the Globe 2013. Linde.

Padia, N., & Maroun, W. (2012). Determining the residency of companies: difficulties in interpreting' place of effective management'. Journal of Economic and Financial Sciences,5(1), 119-134.

Wells, B., & Lowell, C. H. (2013). Income Tax Treaty in the 21st Century: Residence vs. Source. Colum. J. Tax L., 5, 1.

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