Corporate Residence in the Modern World

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1.0 Introduction
This phrase ‘central management and control’ was coined by Lord Loreburn in the landmark case ruling of De Beers Consolidated Mines Ltd v Howe (1906) 5 TC 198 at 213 in the early years of the 20th Century.
Case Background Previously, the company’s headquarters was at Kimberly meaning that almost all its general meetings were carried out there. Its main business was Diamond Mining in South Africa which were sold through contracts that ran annually for delivery in South Africa. Some of the company’s directors were South African Residents and these directors meetings were carried out both in Kimberly and London in the United Kingdom. But looking at the composition of its directors, most of them were England residents. Meetings that were held in the English Capital were used to make most of the key decisions that impacted greatly on the direction of the company’s business. The London based office was the one that engaged in all of the negotiations concerning contracts with the syndicates that bought the diamonds. This office was also the one that determined how the mines were to be developed, directors’ appointments etc.In short, it was London that controlled and imposed the key decisions taken by the company directors that even affected Kimberly and its activities in South Africa. Lord Loreburn, after reviewing all these facts, found it appropriate to treat the Company as a resident of the United Kingdom. He came up with the principles that: ‘A company resides, for the purposes of Income Tax, where its real business is carried on … I regard that as the true rule; and the real business is carried on where the central management and control actually abides’. It is very important that when one is using offshore structures to do business in a foreign jurisdiction to always ensure that said entity exists as a tax resident in a favorable jurisdiction. When one incorporates a company in the UK, then it is treated as a tax resident of the United Kingdom. This is mostly referred to as taxation on the incorporation basis. This can be very different in other jurisdictions which may opt to apply taxation on a management basis. This can be defined to refer to where central management and control of a multinational corporation occurs.
2.0 Central Management and Control This test of company residence was established in the English court system in 1906. This came through a decision in the case involving De Beers Consolidated Mines v Howe (Inspector of Taxes)1.The court ruled that a corporation is said to reside where it carries out its real business. The ruling went further to clarify that real business is deemed to be carried out where the central management and control of the company abides. This ruling has acted as a benchmark in very many other cases and not a lot has changed over the past one century apart from a small change in the UK legislation which defined a UK tax resident as any company that has been incorporated in the United Kingdom.
1 De Beers Consolidated Mines Ltd v Howe (1906) AC 455

On the issue of central management and control, the HM Revenue & Customs (HMRC) is of the view that the location of meetings is inconsequential if the company’s directors are under the instructions of another person. The HMRC further states that to greater ascertain the level of control of these meetings, it is imperative that the events that occur in between these meetings are keenly looked at to make sure that this board has any real control on the said entity2. This control can be absent if the board is made of merely stooge directors that have been assembled for the sole purpose of appearing to be in control. With this dealt with, we can say that the residence of the directors is not of particular importance but the place where they congregate to approve and sign off significant contracts and also to consider or reconsider decisions. Companies could also consider having a requirement of there being one or a certain number of local directors in the company. This however cannot be for mere rubber stamping of decisions. They have to be included and actively take part in decision making meaning that it is imperative they posses suitable knowledge and qualification that will enable them understand what they are doing. The case of Mr. R and another v Holden (Inspector of Taxes) SpC 422 shows the importance of company directors making informed decisions as opposed to merely rubber-stamping board resolution3. The special commissioner in presenting his judgment stated that the court does not consider the mere acts of signing resolutions as actual management. He further stated that effective management entails the possession of some minimal information on the resolution being discussed accompanied with some form of input on whether the resolution should be passed or not.
2 Alvin C Warren Jr, ‘Alternatives for International Corporate Tax Reform’ (1994) 49 New York University Tax Law Review599.
3 Mr. R and another v Holden (Inspector of Taxes) SpC 422
On the issue of control and managements, the ruling stated that where the locations of the physical acts of signing the documents is different from the location of the actual decision was taken, the latter place is what will be considered as the location of central management and control for the purposes of company residency and subsequent taxation regimes. The distinction between management and control has also been discussed in the case involving FCT v Commonwealth Aluminum Co Ltd. In this case, it was concluded that control is the best test in determining the residency of a multinational corporation. The court even went a step further to clarify the word ‘controlled’ when it is passively used in its most ordinary meaning 4. The following steps should be taken into consideration by a non-UK incorporates company that has some form of footprint in the UK in order to make sure it remains out of the clutches of the HMRC;- * It should ensure that its strategic and sensitive decisions are taken at board meetings * These meetings should be held on a fairly regular basis * The venue of these meetings must be outside the UK’s Jurisdiction * By all means, a UK-based director should avoid attending these meetings via video or telephone link whilst he is in the United Kingdom. * Board members have to be sufficiently briefed on the agenda to make sure they make informed decisions during these meetings * The meetings’ minutes and any other records relating to it should be securely kept till that time when the HMRC cannot challenge the residency status because of being time-barred.
4 FCT v Commonwealth Aluminum Corporation Ltd (1980) 80 ATC 4371.

3.0 Company Residence in the Modern World In the modern world, before a legal or political jurisdiction can proceed to levy taxes on multinational, a level of threshold must have been met on the part of the company in the form of residency pr permanent establishment. In the modern way of doing business, an entity may enter into a new market via a subsidiary, a branch, a representative office or even through foreign direct investment. The current international tax regime has different ways of recognizing these various structural forms. The threshold tests of residency and any other type of establishment are a key part of the transfer pricing regimes5. These thresholds however, fail in taking into account the unique composition and ways of doing business in the modern multinational corporations that greatly contrasts with the common practices about half a century ago. These taxation regimes are made up of legal means and concepts that fail to factor in the new modern economic realities of international business.
4.0 Discussion The main purpose of any international taxation regimes is to assign these taxation rights to the relevant jurisdictions. At present, there is single set of taxation rules to tax the income of a multinational at a global level even if this said entity may be getting a lot of income from its international business. In the current system, jurisdiction to tax is a matter handled almost exclusively by domestic law. This has not evolved to match the current trends in business whereby the tax payers or taxpaying entities have evolved to become global or international citizens.
5 Monica Brown-Gianni, ‘Transfer Pricing and Formulary Apportionment’ (1996) 74 Taxes169, 180.

In some instances at a global platform, the generally accepted international principles are deemed applicable, which may be due to bilateral agreements and treaties between two or more jurisdictions. Common practice is also the application of the fundamental concepts of source of income and norms of residency that originated in a League of Nations report that was put forward in 1923 6. These two concepts have been improved on over the years and are applicable to all multinational corporations whether modern or traditional in nature. Even though this was effective the previous years where globalization was at a minimum, the same cannot be said of it in this modern era. Globalization has led to developments of frictions between traditional principles that embrace outdated methods of doing business and the modern multinational corporations that make use of modern technology in conducting business transactions and even board meetings. These traditional principles are incorporated in international treaties as well as domestic law. A great deal of legal formalisms is required in the implementation of the principles of source of income as well as legal residency on these global corporations. These two concepts of source and residency are at times viewed as competing principles. On a more basic level, the source jurisdiction has the primary right to corporate taxation. In traditional modes of taxation and doing business, the entity is required to have a physical presence in a particular jurisdiction. This resident jurisdiction retains the key rights on taxation even though it may under certain circumstances tend to give credits on the basis of the monies paid in the source jurisdiction so as to eliminate incidences of double taxation which creates a poor business environment. The issues of permanent establishment and residency also tend to have a role in taxation.
6 Jacques Sasseville suggests that the distinction between a threshold and a source rule is, to a large extent, academic. Jacques Sasseville, ‘The Future of the Treaty Rules for Taxing Business Profits’ (2000) 2000 World Tax Conference Report 5:1, 5:3.

In the case whereby the taxpayer is a multinational entity, the principle of residency tends to be the applicable threshold test that is applicable in a bid to determine the right to tax. Permanent establishment is generally just a proxy for residency. This permanent establishment concept is mainly used to meet the threshold for taxing the entity’s profits as opposed to the source rule for these profits7. In cases where the multinational corporation is actively getting income, these principles are applied in a bid to have the threshold test in order to give the green light for the jurisdiction to exercise their legal right to tax the income of the company that is sourced from within its borders. In the traditional manner of doing business, the jurisdiction’s right to levy taxes dependent on whether the company to be taxed had physical or formal residence in the taxing jurisdiction8. In other words, the residency requirement examines the relationship between the taxing jurisdiction and the tax payer and the status depends on the adopted structure by the taxpayer. There are cases in which there is a parent – subsidiary relationship that leads to having separate business establishments under the laws of the jurisdiction involved. In such like cases, the subsidiaries have residency under the law9. In other arrangements such as the head office-branch type of relationship, will need to take into consideration the applicable double taxation agreements10. These in the end lead to elevating branches to the level of permanent establishments. In cases whereby a permanent enterprise leaves the host jurisdiction, the rights to taxation under domestic law moves to the newly moved to jurisdiction in relation to all the income that is connected to this permanent establishment.
8 International Tax Agreements Act 1953 (Cth) s 4.
9 P Baker, Double Taxation Conventions and International Tax Law (1994) 14
10 Andrew Snyder, ‘Taxation of Global Trading Operations: Use of Advance Pricing Agreements and Profit-Split Methodology’ (1995) 48 The Tax Lawyer1057, 1073.

This means that the presence of a permanent enterprise in a foreign country, in accordance with the applicable agreements on double taxation will mean that the new jurisdiction will have the exclusive rights of taxing any incomes that are connected to this permanent establishment. This principle is based on the fact that a commercial enterprise should have sufficient presence in a source jurisdiction through which it carries out its commercial activities before it falls under the taxation laws of that jurisdiction.
5.0 Determining Jurisdictional Residence or Presence The issue of jurisdictional presence is actually the determination of the relationship between the taxing jurisdiction and an enterprise which is a necessary requirement in order for there to be existence of taxing rights between the two. These rights can only exist when one of two certain measurements is deemed to be satisfied. There must be proof of existence of an establishment. This will satisfy the existing domestic laws hence granting the jurisdiction the taxing rights over the enterprise’s income. This can be viewed in simple terms as a test of residency. The second measurement requires there to be proof of existence of a permanent establishment of another jurisdiction’s enterprise. This second measurement is determined using the international agreements on double taxation and needs the enterprise to rent or own a fixed place where it conducts its commercial activities11. In the case of multinational corporations, both these measurements are applicable since their commercial activities are usually conducted in both subsidiary and branch form. Determining whether a subsidiary is a resident of a jurisdiction and also whether a branch owns enough assets to be permanent establishments is quite easy.
11 Victor Zonana, ‘Introduction: International Tax Policy in the New Millennium: Developing an Agenda’ (2001) 26 Brooklyn Journal of International Law 1253–54.
Difficulty normally arises when attempting to figure out if a resident subsidiary is a foreign subsidiary or a dependent agent. One has to take into consideration whether the legal tests give the jurisdiction the taxing right on the multinational corporation’s economic activity12. We have to understand what these legal tests entail before considering why they do not succeed in allocation according to the economic activity.
6.0 Multinational Entity Subsidiary In this case, the residency test will have two main implications. It is quite normal to have a subsidiary of a foreign corporation being considered a resident of another jurisdiction which results in it having a case of dual residence. There may also be an incident whereby a U.K based business conducts its operations through a subsidiary that has been incorporated in another jurisdiction. This will most definitely rule out the test of incorporation’s applicability. In such a case, residency will occur through either of the residual tests. This can expose the entity to the issue of double taxation or in other instances, less than single taxation due to the inconsistency of application of domestic laws in the different jurisdictions. This will result in unnecessary complexities when trying to make sure that the resident is not subjected to less than single taxation or even double taxation13. One must also remember that splitting a legal jurisdiction on the basis of taxation has more to do with having a physical presence. Even though the results of the different taxation regimes may be similar, it must be remembered that the grueling process determining the type of residency and giving of exemptions and credits so as to avoid the issue of double taxation is hugely unnecessary.
12 Paul McDaniel, ‘Reflections on International Taxation for the 21st Century’ (2000) 2000 World Tax Conference Report 20:1, 20:4

13 Michael J Graetz, ‘Taxing International Income: Inadequate Principles, Outdates Concepts, and Unsatisfactory Policies’ (2001) 26 Brooklyn Journal of International Law1357, 1417

These being simply tests, it would be better if they do not factor in the actual locations of the various incomes. This is because this test of corporate residency is not the best means to determine the taxation rights if we borrow from the school of thought that economic activity is not joined at the hip with physical presence of the said commercial entity14. With this in mind, we can see that the issue of residence when dealing with multinational corporations is quite unstable and seems to be outdated in the modern world. Jurisdictions should ensure flexibility in determining an entity’s residency as this will be to both the taxpayer and the jurisdictions’ advantage.
7.0Permanent Establishment and Physical Presence This concept of permanent establishment is very important in the taxation of multinational corporations since their trading carried out mostly form of branches. This format of having branches is now the most widely adopted means of carrying out business by these large corporations like banks and financial institutions. Agreements on double taxation have managed to introduce the principle of concept of permanent establishment in the levying of taxes on multinational corporations15. This is mainly on the issue of the taxation rights that are attached to them. The mere existence of a permanent establishment does not have to necessarily mean the evidence of residence in this jurisdiction. This is one of the preconditions or evidence that the jurisdiction needs in order to determine its right to tax this commercial entity’s generated income16. Permanent establishment is a critical threshold test to be able to levy source-based taxation since it can act as a proxy for residence of the particular corporation.
14 Klaus Vogel, ‘Worldwide vs. Source Taxation of Income - A Review and Re-evaluation of Arguments (Part II)’ (1998) 10 Intertax 310; Plambeck, above n 26, 1155
15 League of Nations, Report on Double Taxation (1923) Doc EFS 73 F 19.
16 John F Avery Jones, ‘Are Tax Treaties Necessary’ (1999) 53 New York University Tax Review 1 1

The owning or renting of a business premise in a certain jurisdiction was viewed as showing one’s economic allegiance to the jurisdiction’s taxation regime when this permanent establishment concept was initially embraced. However, in these modern times, many multinational corporations are able to provide products and services that enable them to carry out economically significant operations in a short time span coupled with flexibility in their location. This concept of permanent establishment is interwoven with the prevailing source and transfer pricing regime of the jurisdiction. Opponents to this school of thought claim that this is not a true reflection of the real location of the economic activity that is greatly contributing to the entity’s income. There are mainly two ways through which an entity may be declared as having a permanent establishment in certain jurisdiction:
8.0 The Test of Presence
According to the fifth article of the OECD convention, the term permanent establishment is defined as a permanent place of business through which the enterprise is carried out whether partly or wholly17. By this definition, there has to be an enterprise of a contracting state and also crucially a fixed place of business for there to exist a permanent establishment per se. It has to be noted that there is no universal definition of the term enterprise in the OECD Model Tax Convention as this has been left to the discretion of judges to come up with their own judicial interpretation18. This issue came up in 1990 in the Australian High Court in Thiel v FCT.19
17 Vito Tanzi, ‘The Impact of Economic Globalization on Taxation’ (1998) 52 Bulletin for International Fiscal Documentation 338, 339
18 OECD, Model Tax Convention on Income and on Capital (1992) Article 5(1).
19 Thiel v FCT (1990) 90 ATC 4717.

It was imperative that they define this term in order to fully understand the seventh article of Australia-Switzerland double tax agreement. This was important so as to know whether his activities in Australia could be referred to as carrying out business and whether this can be referred to as an enterprise by definition. The second condition for one to be referred to as a permanent establishment is that the business should be ‘fixed’. In the traditional taxation regime, a fixed place of business needed to have a proven connection between the enterprise’s area of business and the ground/ soil within the tax treaty’s jurisdiction. The fifth article of the OECD does not expressly define what a fixed of place of business is but does include some examples that we can relate to: A branch, An Office, A factory, A Workshop, a place of management and a mine or a place where natural resources are extracted from the earth. A place of business can as well be defined as physical object that is substantial and commercially viable to be able to serve as a basis of commercial activity. The place of business has to be fixed for it to be considered a permanent establishment20. There also needs to be a degree of permanency to the place with the business operations being carried out on an almost regular basis and not just temporary in nature. But the establishment can exist for a short time period and still be considered a permanent establishment as long as there was a degree of permanence.
20 Jeffrey Owens, ‘Tax Reform in the 21st Century’ (1997) 14 Tax Notes International 583, 593

Is the De Beers Principle Applicable Today? Nowadays, there have been great improvements in communication technology and it cannot be compared to how companies were being run one century ago. There is the use of video and teleconferencing in conducting board meetings hence it is not a requirement for many company directors to travel almost half the globe in order to attend a board meeting unless there is an explicit requirement of their physical presence at the meeting to maybe sign important documents that cannot be done over a video link. That said, I think this principle is still applicable to these modern companies as it were 100 years ago. There are various factors that can render a key board meeting as having been conducted the in the U.K even if the said meeting was done over video-link or teleconferencing. If the company does not want to be considered a United Kingdom resident, it should make sure that the United Kingdom based director does NOT participate in any key meetings via video link whilst still in the United Kingdom. This in a court of law can be considered as the company having made key controlling decisions in the United Kingdom which makes it a resident and according to the De Beers principle, can be legally taxed by the HMRC.

9.0 Conclusion In many of the cases, the location of effective management tie-breaker test seems to provide the best results. This might be the case but this test must also be able to be applied effectively in all the instance whereby the issue of dual residency has comes up. Many options have been forward to replace this but of all of them; it is only the place of incorporation that is capable of providing some form of certainty. Using the place of incorporation does not give the correct policy outcome in all cases and it is also very easy to be manipulated. Jurisdictions may also try and use the criterion that considers the area with the strongest economic nexus of the multinational to determine its residency.

Bibliography
Case Laws and Acts
De Beers Consolidated Mines Ltd v Howe (1906) AC 455
Mr. R and another v Holden (Inspector of Taxes) SpC 422
FCT v Commonwealth Aluminum Corporation Ltd (1980) 80 ATC 4371.
Thiel v FCT (1990) 90 ATC 4717.
International Tax Agreements Act 1953 (Cth) s 4.

Journals and Reports
Jacques Sasseville, ‘The Future of the Treaty Rules for Taxing Business Profits’ (2000) 2000 World Tax Conference Report 5:1, 5:3.
P Baker, Double Taxation Conventions and International Tax Law (1994) 14
Paul McDaniel, ‘Reflections on International Taxation for the 21st Century’ (2000) 2000 World Tax Conference Report 20:1, 20:4
Victor Zonana, ‘Introduction: International Tax Policy in the New Millennium: Developing an Agenda’ (2001) 26 Brooklyn Journal of International Law 1253–54.
Michael J Graetz, ‘Taxing International Income: Inadequate Principles, Outdates Concepts, and Unsatisfactory Policies’ (2001) 26 Brooklyn Journal of International Law1357, 1417
League of Nations, Report on Double Taxation (1923) Doc EFS 73 F 19.
OECD, Model Tax Convention on Income and on Capital (1992) Article 5(1).
Vito Tanzi, ‘The Impact of Economic Globalization on Taxation’ (1998) 52 Bulletin for International Fiscal Documentation 338, 339
John F Avery Jones, ‘Are Tax Treaties Necessary’ (1999) 53 New York University Tax Review 11
Alvin C Warren Jr, ‘Alternatives for International Corporate Tax Reform’ (1994) 49 New York University Tax Law Review599.
Books
Monica Brown-Gianni, ‘Transfer Pricing and Formulary Apportionment’ (1996) 74 Taxes169, 180.
Andrew Snyder, ‘Taxation of Global Trading Operations: Use of Advance Pricing Agreements and Profit-Split Methodology’ (1995) 48 The Tax Lawyer1057, 1073
Klaus Vogel, ‘Worldwide vs. Source Taxation of Income - A Review and Re-evaluation of Arguments (Part II)’ (1998) 10 Intertax 310; Plambeck, above n 26, 1155
Jeffrey Owens, ‘Tax Reform in the 21st Century’ (1997) 14 Tax Notes International 583, 593