=| Jurisdiction to Tax Introduction Ipsomenmay.-bewtarabli Unser le tax, Jaws, of a country because of nthe acivides hat fe ; malonal. usage, Jurisdictio iweallea™ res gurCe ju risdiction.”? All countrie tax exercise source jurisdiction; that is, they tax income arising or having its source in their country. : A country also may impose a tax.on ingame, becauseof a.nexuspeiwecn ©: the countryand the person earning ig the income, A jurisdictional, claim over 9's verter inoMne DAREN SHE Westas Detwveti the COUNTY tity making that.clnimapdsbenet™ son, ‘subject to ta ject to tax is called “1¢ nce jurisdiction.” Persons subject to the Tesidence jurisdiction of a country generally are taxable on their worldwide income, without reference to the source of the income. That is, the person is typically taxable on both domestie-source income andl foreign-source income With fow exceptions, countries that exercise residence jurisdiction do so only. with respect to die income of individuals and legal cndies, dhl they onsider to be resident tries—the United States is the primary ‘cxample=— tion over their citizens as well as over thei I ae erence fight to impose their i income tax not only on. the world woldwide t "incom ame, of th Hsidents, Dat also on the wor ‘worldwide moos idwide income. of their. "their nopresident,citiz ‘When a resident of a country earns income from outside the country forcign-source income), the claim of that country to tax the income based on ils residence jurisdiction may overlap the claim of a foreign country for tax revenue based on source jurisdiction. The cla reyenue ass on. sesiclencn ju dictios ve Ce, claims of.other-conntrics, In addition, counties16 International Tax Primer with incompatible source, of income rules may th tax, the same income inder. their source jurisdictions, Unless resolved ‘satisfactorily, the competing” “aici for tax revenue based on residence and source would stifle interna- tional investment and commerce. In addition, the tax burdens imposed on persons earning income from cross-border transactions would be unfair under traditional concepts of tax equity. The measures that countries have adopted by tax treaty or by domestic legislation to mitigate international double taxation are addressed in Chapter 3. Although persons engaging in transnational activities face some risks of double taxation, they also have some possibilities for international tax avoid- ance, These opportunities result from certain gaps in the residence and source jurisdictions of most countries. The undertaxation of income from cross- border transactions is both inefficient and unfair. Undertaxation is inefficient because it induces taxpayers to engage in the undertaxed activities instead of taxable activities producing a higher before-tax rate of return. It is unfair because taxpayers caring equal amounts of income do not pay equal taxes. Some countri es have increased the risks of undertaxation of transna- tional income by operating as tax havens, Tax haven countries typically obtain some revenue from foreign taxpayers, but the amount js very small in comparison with the amount of tax revenue that other taxing jurisdictions lose on account’ of their conduct. The tax codes of many countries are replete with complex provisions designed to protect the legitirnate tax claims of countries against the beggar-thy-neighbour policies of tax haven coun- tries. The most important of these rules are addressed in Chapter 5. Unilateral action by countries to block tax haven abuses often has been ineffective, due in significant part to the inability of the source and residence countries to obtain information about transactions routed through a tax haven. Virtually all of the tax havens have adopted bank secrecy rules and similar non-disclosure rules that facilitate tax avoidance and evasion. In recent years, the member countries of the ORCD have taken an initiative to limit what they characterize as harmful tax competition, One major goal of that initiative is to limit the ability of countries to act as tax havens by put ting pressure on them to amend their non-disclosure rules to allow for exchanges of information with governments having a legitimate interest in that information. This initiative is discussed in Chapter 7,A. B. Defining Residence To exercise residence jurisdiction, a cou try must, proyide..rules that Tesidents or as nonresiclents. mal enuiues cither asChapter Two Tv ‘The rules for determining the residence of individuals and legal entities are discussed below in section 2,B,1 and 2,B,2 respectively, Certain tax meaty issues are addressed in section 2,B,3, below, and in Chapter 6 1, Residence of Individuals An ideal test of residence is one that individuals can apply to obtain a clear, certain, and fair result. Certainty is highly desirable because the tax con- sequences for residents and nonresidents are very different, and individuals need to know whether they are residents or nonresidents. Despite the desir ability of a simple and certain test for residence, however, an arbitrary test for determining residence is objectionable on fairness grounds and is likely to \ result in many individuals who engage in cross-border activities ending up as residents of more than one county. In reality, the most that can be expected is a test that provides simplicity and fairness for the overwhelming majority of taxpayers and applies more refined rules to the remaining minority. (Jn many countries, residence is determined under a very broad facts- and-circumstances test. In effect, the government seeks to determine from objective manifestations whether an individual has established his or her allegiance to the country by joint cial Life Phe most significant manifestation of allegiance is probably the maintenance in the country of a,dwelling or abode that is available for the taxpayer's use. Also relevant, however, might be the place where the individual engages in income-producing activities, the location of his or her fashily, the s maintained in the country, the individual’s visa and immigration st the individual’s actual physical presence in the country. Some countries use an arbitrary test, often tied to the number. of days.of g its economic and s : presence in the country, lor determining residence, A common, but detective, rule or ge presupton that an individual present in @ country for at Teast 183 = days of. the taxable year is @ resident for that year. The 13-day test isprob- ably cnforceal i i is extremely di a country to enforce, however, when many individuals are “frequently enteri g and leaving the country without border checks. In most counties, the test probably cannot operate effectively unless the burden of proof is put on the individual to prove that he or she is not present for the 183-day period. Many individuals with sub- stantial economic ties to a country can plan around the 183-cday test. As a result, a country using that test is bkely to catch unsophisticated and unadvised individuals, some of whom may not in fact have very substantial ties to that country.18 International Tax Primer Unless buttressed by some simple presumptions, a facts-and-circum- stances test is unsatisfactory because it is often excessively difficult to apply. A facts-and-circummstances test that uses certain objective tests to establish presumptions may provide a good balance between certainty and fairness. It may be appropriate for such a test to apply more rigorously in situations in which a taxpayer is attempting to give up residence in a country than in situations in which a taxpayer is acquiring residence in the country, The following presumptions might be used, separately or in combination, to establish a prima facie case for residence: | eIndividuals present in a country for 183 days or more ina taxable year fe Tesidents Tor that year unless they estab a gin the cov SS ish that they do not have dwelling im the n the country a and are not citi ens of the country. lndividuals having’a dwelling in the country are residents urlless they also have a ae as ih another country. oe =“ | itizens of a country are residents unless. they. have. established a dwellin; abroad and are regularly outside the country fort for mor rMDOTE than WBF days per year. — olndividuals. who have established residence in a country cannot relic quish sesidence, status until they have established. residence another.country. slndividuals who have cither resident or nonresident status for visa or immigration purposes might be presumed to have the same stat To Tor iWeGine ex purposes, although that presumption might be rebuttable. 2, Residence of Legal Entities ' 1 ace, of The.residence of a corporation is generally determined either by.refer 1a nes eos\enhee £9 its place of incorporation or its place of management. The place cBincoi parsing teacnmaconero vand certainty to the government and the taxpayer, It also allows a taxpayer to freely choose i iifial place of residence. Countries that, market themselves as tax havens typically offer convenient and inexpensive’ arrangements for incorporating under their laws, In general, a corporation cannot freely change its place of incotporation without triggering a tax on the gains that may have accrued on its property, including intangible property that may have a very high market value. i