Chapter 2 How Double Taxation Arises — The Role of Domestic Tax Systems Every state has the sovereign right to determine its domestic tax policy and, therefore, theoretically should be allowed to frecly design its tax sys- tem according to its economic, social and political needs. A state would then have the legislative power to tax anyone and anything within its fiscal jurisdiction, which is determined on the basis of what it takes to be the rel- ‘evant “connecting factors’ Consequently, states may push the boundaries ‘of their fiscal jurisdiction on the basis ofthese connecting factors, in order to extend their tax claims with regard to cross-border activities. A cross-border activity is one that involves at least two separate jurisdic~ tions, and itcan be as obvious and simple as a company in one state selling its products to another state, or as complex as the transactions of a large ‘multinational corporation that conducts its business in many states, It ean also be an online purchase of a digital product from an overseas supplies, or the provision of services by an employee to an overseas subsidiary. Such scenarios call for the determination of certain questions: for example, who should be taxed, what should be taxed, and by which jurisdiction, Such {questions area key consideration inthe field of international taxation [Nevertheless a state cannot simply enforce its tax laws on another state if the transaction in question has no connection with te state seeking to levy the tax. In other words, for a state to impose a tax, there must be a taxable event and a taxable person, and the event and/or the person must have some connection o the state on the basis of which the state will impose the tax. This isthe generally accepted principle of international taxation which has ‘evolved over time. ‘There is, however, no single global international tax law that governs the taxation of these transactions. Taxes are still levied under the respective ‘domestic law ofthe elevant jurisdictions, and itis these laws that will have an impact on the cross-border transaction.* Thus, the starting point in de- termining or understanding the international tax implications of any cross- T_Asto "vonnectng factors se se 2 2. _‘The Buropean Union the exception with an array of supranational opsation thats ining onal member.[Chapter 2 - How Double Taxation Arises ~The Role of Domestic Tax Systems border activity is the domestic tax system of the jurisdictions involved and the provisions enacted to tax such activities. ‘This chapter considers the main connecting factors that form the basis for a state to impose its taxes in cross-border scenarios, examines the problems that arise from a conflict in the connecting factors, discusses the differenc- ces between worldwide tax systems and territorial tax systems and outlines the problem of double taxation, 2.1. Connecting factors for fiscal jurisdiction ‘The reach of a state's jurisdiction is generally determined on the basis of| particular connecting factors. Accordingly, a state may extend its laws (in- cluding its tax laws) to any person or item, in the presence of one or more connecting factors. Over the years, two key principles have emerged for the determination of jurisdiction: the personal base of jurisdiction and the territorial base of jurisdiction, ‘The connecting factors under the personal base of taxation are generally based on the tes thatthe taxpayer (be it a corporate entity or private in- dividual) has to the state, such as residence or domicile and nationality, ‘whereas for the teritorial base of taxation, the location of source of the income is the relevant connecting factor of income. For example, where a state relies on residence asa connecting factor, the fact that an individual or ‘company is resident in that state according to its domestic rules would be {enough for that state to consider that person under its tax jurisdiction and, consequently, subject to its domestic tax rues. Likewise, ifa state applies source as a connecting factor, any income sourced in that territory would ‘be subjected to its domestic tax rules, regardless of where te person deriv- ing such income is resident. ‘Most tax jurisdictions adopt a mixture of residence-based and source: ‘based taxation, opting to tax their residents on their worldwide income* land non-residents on income sourced within its borders (see also section 2.2.1. for a discussion on the worldwide and territorial tax systems). 3, Worldwide income taxation can be defined as: the “[bjasis on which axis eve in many countries by inelading income Irom al soures, ie eespetive oftheir geo- seraphial origin” Worldwide Income in Ptemational Tax Glosrary, Oessary IBFD (aecessed 4 Sept. 2018),Connecting factors or fiscal jurisdiction 2.1.1. Residence as a connecting factor Under residence-based taxation, the residence status of a taxpayer deter ‘mines the extent ofthe taxpayers liability to tax within a particular state Generally, most states that adopt a worldwide taxation approach would subject their residents to tax in respect of their worldwide income. In this regard, residency tests are generally applied in order to determine if 1 corporate entity or an individual is sufficiently connected tothe state to ‘warrant taxation asa resident in that stat, ‘The tax residence status of a taxpayer not only determines their tax treat ment under domestic law but is also important when applying tax treaties. As itis further discussed in chapter 10, only residents of a contracting state are entitled to utilize its tax treaties. Also, where a person is resident in two contracting states, the relevant tax treaty usually contains provisions to resolve the dual residence, with the result that the taxpayer would be treated as resident in only one of those contracting states. This is important ‘because in determining taxing rights under a treaty, there can only be one state of residence and one state of source 21. Residence of individuals A state would normally stipulate (in its domestic aw) the connecting fac tors relevant in determining whether an individual is to be treated as res dent there, Whilst each jurisdiction usually has its own unique residency tests, Some common factors exist Physical presence ‘The physical presence test requires the individual to be physically present inthe state for specified period of time. The testcan be as straightforward, complicated or unique as the state prefer by using variables such as the {ype of days present, i, actual “days of physical presence” versus a “dur tion of activity” inthe state, ora specified period over which the physical presence is tobe accumulated, eg. ina fiscal yar, or ina 12-month period or over a period of preceding Years. Typically, many states havea physical presence threshold of 183 days or 6 months ina fiscal year Further variations can be incorporated inthe domestic law as to what con stitutes a day’s presence. For example, states may considera part of a day {fo amount to a full day in its calculation, while some states exclude transit u‘Chapter 2 - How Double Toxation Ari ‘The Role of Domestic Tax Systems days (ie. days of arrival and departure), Additionally, some states use the period of physical presence asthe sole test, whilst others apply it as one of| several factors to decide on tax residence, ‘The strengths of the physical presence test lie in its simplicity and objec- tivity. A quantitative threshold is set and if met, te taxpayer will qualify as a tax resident. On the other hand, itis clear that the test can be easily ‘manipulated so as to either artificially qualify or not qualify a person as & tax resident. Thus, we find jurisdictions (especially more developed states) preferring to adopt the domicile test. Domicile ‘The domicile test isa more subjective test in comparison to the physical pres ‘ence test. It ooks atthe facts and circumstances surrounding an individual’ ‘connection oa state. Ths test may include factors such as whether the indi- vidual’ family and economic ties are found in that state, oF if he has a perma- nent home available to him in that state. Rules vary widely and tax authorities may examine a combination of factors. A few of these are addressed below. — Availability of a residence or home: having a residence or home avail- able ina state implies that an individuals presence in that state is in fact rather permanent and not just merely casual. Here, an available residence or home would refer to any property that the xpayer has for his effective use in a permanent way. Inan Italian case, the Halian Supreme Court deliberated as to whether an individual's stay in his unregistered domestic partner's dwelling con- stituted an “available home"’ The test hinged on the concept of “avail- able o", which, according to legal precedence, was aterm that included both legal and factual access,” and that factual availability had greater influence than legal entitlement.“ ‘The Supreme Court also agreed that “available” included access via another party, inthis ease the domestic partner, and seemed to take guidance from a 2016 Australian case. In that case, the taxpayer was found fo have a permanent home available to him at the home of his wife's parents based on evidence that he had the keys, kept his personal belongings (including his car there and used that address as the registered location of his business.” 4 FE-CTPLombandy 13 July 2012, Decision No. 12. 5) NZ: Inland Revenue, 6 Mat. 2014, 1819/0, ap 8 6 NL:SC,3 Oct 2008 37513, Tax Treaty Case Law IBFD. 3. AU:AAT, 2 Sept 2016, eng Tan v. Commissioner of Taxation, (2016) AATA, 102,Connecting factors for fiscal jurisdiction ~ Economic, social or family tes: this test determines a persons resi dence from his way of lite and his family, social, political and cultural linksin the stat, This test tends tobe broader than merely considering the place where the individual resides or stays for any period, or where he has home. In some countries, ths test would take inthe location of the family home or the place where the person and his family normally live ‘This test has historically been a particularly dificult test to apply s+ pecially if the individual's economic and socal tes are split between two states and a choice has to be made as to which has precedence ‘With no definitive guidance as to how this is determined, it has been left tothe preference of individual states, which undoubtedly leads to ‘reater uncertainty fr the individual and est in confit wih ober states. = Permanent or principal residence, or habitual, usual or customary place of abode: this test usually refers to where cally stays or normally lives. The term “permaner bitual, normal”, “usual, or “customary” would suggest thatthe indi- ‘vidual resides there on a non-temporary basis, or is ordinarily resident there, Ibis also more ofa qualitative test than mere physical presence as it tends to look beyond the usual annual or 12-moath period. ‘More often than not, its left to judicial decisions to provide some sort ‘of guidance on these matters. In a New Zealand case, Commissioner of Inland Revenue v. Diamond’ te following (non-exhaustive) factors ‘were advocated by the Court of Appeal in determining the presence of| ‘a permanent place of abode = continuity of presence; — duration ofthat presence; = durability of the texpayer’s association with that particular place; ~ closeness of the taxpayer's connection with the dwelling; and ~ continuity of availability ofthe place on an indefinite (but not ev- elasting) basis It is important to note that whilst the term “domicile” is used in many countries, itis a concept that differs under common law and civil law. In states with a civil law system, domicile usually refers to the place of permanent residence or home. 8 NZ:CA 18 Dee 2015, [2015] NZCA 613, Diamond . Commissioner of Inland Revenue, Tax Treaty Case Law IBED.Chapter 2- How Double Taxation Arises ~The Role of Domestic Tax Syst Domicile under common law is more difficult to define. An old UK case held that “a place is property the domicile of a person in which his babi tation is fixed without any present intention of removing therefrom”.” ‘Thus, the term “domicile” signifies a permanent home or place where a person is a permanent resident with the intention of remaining there for fan indefinite period “unless and until something (which is unexpected or the happening of which is uncertain) shall occur to induce him to adopt some other permanent home”.” Once established, the domicile ‘can continue even if the person is away for a long period, as long as the intention remains of returning to the domicile as @ permanent resi- dence." Therefore, it implies a permanent home of residence — and “if that was not intelligible by itself no ilustration could help to make it intelligible” ‘Two elements are thus necessary for the existence of domicile under com- ‘mon law, namely (i) a residence of a particular kind; and (i) an intention of a particular kind. Thus, “domicile” under common law must be more than just “habitual residence” or a “permanent home”. The residence must answer a qualitative as well as a quantitative test. The person must reside inthe state where he takes up residence and must intend to stay there per- ‘manently, There must be a fixed intention at that relevant time to regard the place of residence or setlement as the permanent home forever. It is the establishment of this intention that presents the most difficulty in de= termining “domici Adding to that difficulty isthe requirement for hindsight. It may be that a significant amount of time may have passed (or may need to pass) betore ‘a pattern/history can be discerned or established sufficiently so as to de~ termine domicile. In the New Zealand case of Commissioner of Inland Revenue v. Diamond,” in deciding the taxpayer's tax residence status for the years 2004 to 2007, an analysis was made of his movement and connec- tions with New Zealand over a 20-year period. 9. UK: 1892, Crignish x Conignish, 2c 180 10, BI. Sykes &€ MC. Pres, Aasraion Private International Low pp. 34-315, (Tae Law Book Company Ltd 1987). 1. RU. Jeey, The Inpac of State Sovereignty on Global Trade and International ‘azatin pp. 5031 (Kluwer Law International 1999), 12. UK! 1838, 7HLC. Lond Cranworth n Whicker v, Hone. TR. Md See alo supra 9.Connecting factors for fiscal jurisdiction Other factors States sometimes also use other factors (generally in addition tothe above) in determining the residence or domicile status of an individual. These include = official registration: some states regard persons whose names are in their population registers (eg. for voting purposes) as tax residents; — nationality: citizenship can determine the residence status of an indi vidual in certain circumstances; and = immigration status: an individual's immigration or residence visa may influence his residence status 2.1.2, Residence of companies ‘There can be a variety of factors that determine a company’s tax residence, ‘These can range from the straightforward, such as the place of incorpora- tion or the location ofthe registered office, to more subjective tests, such as, the place of management, ora combination of both, ‘Where company tax residence is based on the place of incorporation or le= ‘gal seat, or the location ofthe registered office, the outcome forthe compa ny is fairly obvious — itis clear whother the company is, or isnot, a resident ‘of that particular state. However, the vulnerability of such objective criteria to abuse has seen a growth in more substantive tests, such asthe place of | ‘management, and these ests are not so clear in comparison, For one thing, Wide variety of terminology is used, such as the “place of management”, the “place of effective management” (PoEM), “day-to-day management”, the “centre of top-level management” or “the place where the management decisions are taken or implemented”. The lack of standardization does not end there; one of the key issues with applying substantive criteria is that even if the same terminology is used, the interpretation or application by fone state is likey to be different from that by another. For example, the definition of “management” itsll varies widely under the domestic law and practices of different countries. For example, management could be defined as management and control (“policymaking”) or operational management (policy execution”). The head office could be the registered office (“legal hhead office”) or the principal place of control or operational management "administrative head office”). Also, Some countries use the place of prin- cipal activity o indicate the place where the business is managed Below, the most common criteria used in the residency test are discussed.‘Chapter 2 - How Doub Place of incorporation Some states may determine corporate residence on the basis of the place of| incorporation (oF registration) This isthe most formal factor on the basis of which corporate residence can be established. In this case, the place of creation or registration of a corporation can be seen as equivaleat to the place of birth of an individual or of his citizenship. Furthermore, for the purposes of private international law, a corporation's domicile is eonsid- «ered tobe the country ofits incorporation." Thus, some countries may also use the place of incorporation or registration of companies as the determi- rant factor for residence for tax purposes. This means that the state where the company is legally incorporated or registered isthe one recognized as its residence state. This is the case of states like Argentina, Canada, Esto- nia and the United States." Place of effective management While some states consider the place of effective management (PoEM) to be the place where strategic or key decisions concerning the company are taken others treat the PoEM as being the place where day-to-day manage- ‘ment of the company is carried out. In general, many states follow, inter alia, the PoEM approach to determine corporate residence, However, with the test being ultimately determined based on the facts and circumstances of each case, the courts have largely not been able to provide any objective guidance on the application of the test and, in the absence of legislative guidance, the test remains highly subjective. Central management and control Generally, central management and control (CMC) signifies the ultimate level of policy decision making or superior control (eg. the board of direc: tors), while day-to-day management of the business is considered to be ‘operational management (e-. top-level executives). "The CMC criterion cannot be mentioned without reference to the land- ‘mark UK ease, De Beers Consolidated Mines Limited v. Howe (Surveyor 4, See G.1. Loomer, he disuncton beeen corporate residence and corporate ‘taxation: is improvement posible? 6 Canadian Tax Jounal | (2015), . 10, 1S. See BIR Obuoforibe, Avricle 4~ Resident sec. 22:4, Global Tx Treaty Com- smcntaies IBFD (accessed 24 Sept. 2018) 16, Foradealed discussion of the concep “place of effective management, sce ch 10 of eis book.Connecting factors for fiscal jurisdiction of Taxes." In this case, the judge held that “a company resides for the purposes of income tax where its real business is carried on . E egard that asthe true rule; and the real business is caried on where the central management and control actually abides”. The decison refers wo the place ‘where the defacto contol is exercised and where the “eal business is, in fact, conducted. “Management and control” is considered a composite test. 1t does not imply ether day-o-day management ofthe business by execu- tives or contol by shareholders through their voting power. Management and contol shouldbe central ie. the highest level of control) to the busi ness a8 whole" ‘The decisive question is thus where the key decisions on the company’s policies are made, This is a purely factual evaluation that not only takes into ‘account where the board of directors meets, but also focuses on the kind of Aecisions made. Thus, the CMC would lie with the parent company if itis actually its board of directors that makes the key management decisions for ‘a subsidiary company. That the board has discretionary power over the sub- sidiary would, however, not be enough to conclude that the parent company exercises CMC. Additionally, the expansive nature of the CMC means that third party, one that is not even within the formal structure of the compa: ny, may be considered to be wielding CMC. In the Australian case of Bywva- {er Invesiments, the person ultimately deemed to be having CMC over the ‘companies in question was not in fact a formal officer of the companies.” 21.1.3, Residence of other entities ‘The residence rules for entities other than companies depend on the form of the entity. Generally, corporate residence rules tend to apply to busi= ‘ness organizations that operate as companies, eg. partnerships limited by shares, limited lability companies, trust companies and cooperative socie~ ties. For legal entities that are unincorporated businesses, which (depend ing on the domestic law of the state in which such a business is situated) ‘may or may not be treated as separate egal and taxable persons, residence ‘may be generally determined by either a place-of-organization test or a place-of- management test. 17K: 1006, De Rare Comolidaed Mines Limited Howe (Surveyor of Taser, AC ASS (1906). 18. See R. Couzin, Corporate Residence and Interasonal Taxation pp. 38-47 (BPD 2002), Online Books IBFD. 19, AU: Bywater hivesments Lite v. Commissioner ofTaation; AU: HCA, Ha Wang Bank Berhad v. Commissioner ef Taxation, (2016) HCA 4S, 0[Chapter 2 - How Double Taxation Arises ~The Role of Domestic Tax Systems Determining the residence of a partnership may be difficult because of the informality with which a partnership can be established. Regarding ‘general partnerships, these could be treated as taxable entities in their own. right, or as fiscally transparent, depending on the law of the state in which the partnership is organized. Where such partnerships are treated as com- panies, their tax residence is generally determined, based on the rules for ‘corporate residence, In jurisdictions where such partnerships are fiscally transparent, the Lax residence follows the esidence of the partners.” ‘Trusts also pose their own challenges, The residence ofa trust may be de- termined by the place of residence ofthe trustees, the place of management or administration of the trust, or the place where the trust is organized. However, it could also be based on the location of the trust assets, on the residence of the beneficiaries, or on the residence ofthe settlor or grantor.” ‘These variations are all possible under different domestic law systems. {A branch or permanent establishment of a company does not have separate legal existence. However, if the location of management is based at the branch, it could satisfy the residence requirements in certain jurisdictions. Tn such cases, the parent company may become a resident atthe location of the branch, 2.1.2. Citizenship as a connecting factor Under citizen-based taxation, taxes are imposed based on the citizenship status of individuals. This means that citizens of states that adopt this sys- tem are liable o tax in that state regardless of where they physically reside. As a consequence, even citizens living outside the state for a long time are taxable there, provided they retain ther citizenship. Citizen-based taxation is not very common. That said, the United States js notable for its full adoption of the citizen-based approach, taxing its citizens on their worldwide income, irespective of whether or not they are resident in the United States. However, while this basis of taxation is not ‘common, a few states nevertheless contain limited aspects of citizenship taxation within their statute books, 20. Some countries do not permit no individuals as partners. 21, A. Esson & V. Thurony, Fis! Transparency pp. 961965 (Tax Law Design ‘and Drafting 2000); P, Baker, Double Tasavion Conventions pp. 1B 7-31 (Sweet & ‘Maxwell 2003),International double taxation 2.1.3. Source as a connecting factor Unlike residence-based and citizenship-based taxation, which impose taxes based on the connection between a taxpayer and a state, here the ‘connection lies between the cross-border activity and the state. Where 1 state applies source as a connecting factor, it treats income sourced in its territory as subject to its tax jurisdiction and, consequently, to its ‘domestic tax rules. Thus, income sourced in that state may be subject to taxation there regardless of where the person deriving such income is, resident. Every state has its own rules "basic source rules") under its domestic law to decide where income arises for taxation purposes. These rules are nor- mally based on the location of the economic activity that generates the income, i. where the profits accrue or arse. Additionally, how these rules are applied generally depends on the type or nature of the income, and these rules vary widely, Although common global patterns emerge regarding sourcing rules for particular items of income, there is no general global sourcing rules by ‘hich states must abide, As such, a state is free to deem that a particular item of income has been sourced within its borders, and, in doing so, it ‘may have recourse tothe criteria that it sees fit. This situation may lead to incidences of double taxation, as discussed in section 2.2.2. 2.2. International double taxation International double taxation may arise from the coallicts of domestic rules applied to cross-border transactions, as explained in the following. sections of this chapter. One of the objectives of international tax prin- ipl is to ensure that income is not taxed more than once.”” Double (or ‘multiple taxation is undesirable, as it impedes international trade and in- ‘Therefor, it is not surprising that a significant aim of international tax law is the prevention and elimination of double taxation. This is predominantly done in two ways: () the granting of double taxation ree, either unilater- 22S. van Weeghel, The Inproper Use of Tax Treaties p. 3 (Kluwer Law Intern ‘ional 1998),(Chapter 2 - How Doublo Taxation Arises ~The Role of Domestic Tax Systems. ally (domestically) or bilaterally (via tax treaties); and (i) the allocation of taxing rights via tax treaties.” 2.2.1, Worldwide vs territorial tax systems Every state has a sovereign right to design its tax policy and system as it sees fit. Naturally, this gives rise to a variety of systems and approaches, with no two tax systems being exactly alike, However, despite this disparity ‘and lack of standardization, many states have taken a common approach as to the basis for imposing lability to tax. This encompasses the following: (worldwide taxation, normally imposed by a state on persons thatthe state deems to be resident within its jurisdiction; and (i) territorial taxation, normally imposed by a state on Sources of income for capital within that state, States using residence or citizenship as a connecting factor normally adopt ‘worldwide basis of taxation and impose taxes on the income of their resi- dents regardless of where the income is derived from. On the other hand, in states that adopt the territorial basis of taxation, taxes are imposed only ‘on domestically sourced income regardless of the residence status of the recipients, This, of course is a broad generalization, as most states adopt a mixture of both systems. Under @ pure worldwide taxation system, only the residents of the state ‘would be taxed, and non-residents would not be taxed, even ifthe income ‘was sourced within that state. However, most states (which purportedly adopt a worldwide basis) also tax non-residents on income sourced within the state, Additionally, over the years, jurisdictions with a pure worldwide ‘approach have inereasingly inclided oiher aspects ofthe territorial system in their domestic tax systems: for example, many countries nowadays ex- tempt the foreign income of ther tax residents, or defer the taxation of such Likewise, some states adopting a territorial basis may tax foreign income if remitted into the state, or they may deem certain forcign income to be soureed domestically, thus not strictly limiting their taxing rights to only domestically sourced income. The appeal of territorial taxation lies in its 23. Double taxation rele is discussed in chs. 3 (unilateral relief) and 17 (treaty ‘elle, while the allocation of taxing rights Under ax trates is discussed in chs. 1-16 ofthis book 20International double taxation apparent simplicity with regard to implementation, The compliance and ‘administrative burden is much reduced if the taxing authority only has to concern itself with the taxable activities within its borders, However, the increasing interconnectivity of the world’s economy means that these states may be losing out on significant potential revenue. From the above discussion of worldwide and territorial basis of taxation, ‘one thing becomes clear: it is common that a state may provide different tax treatment forts residents vis--vs its non-residents, Inthe evoss-border context, this may present practical difficulties, not leas the issue of eollect- ing taxes due from a person not within the borders of the taxing state. It is therefore common practice for states to include administrative provisions to-address this point.* Inevitably, the diversity in domestic tax systems leads to several problems, ‘one of which is that of double taxation. Sections 2.2.2, and 2.2.3. address the incidence of double taxation where this arises from a conflict of domes- tic law systems." 2.2.2. Juridical double taxation Juridical double taxation refers to the situation where a taxpayer is taxed twice in respect of the same item of income of capital, In an international 24. One of such common mechanisms used 1 optimize the collection of taxes is ‘wnboding taxes on income derived by non-residents, In such cases, witoling axes se imposed on gross income payments, andthe are usally final, Le. there i 29 re- ‘uirement to file a tax return based on the actual net income. The sli in which the income has its source i imited inthe actions it can take against a non eesident who ‘snot poset inte state and who doesnot have significant asets in he source tte. Generly, he acceptable urage of witholling taxes, particularly on a gross bass is limited t investment income derived by non-residents, such as dividends, interest and royalties, and to some extent directors’ Tes. However, developing counties often im pose a witolding ax under thei domesti ax laws on certain types of ative income, such a consulting, technical, and management fees. Matters related othe adminis tin of taxes will be discussed in-depeh in Volume 2 ofthis book. 2S." Another being tx avoidance, which wil be exploed in detail jn Volume 2 of ‘his Hook. In order to make su that the tx charge works as intended, is rapotant to have robust laws tht wll bring the relevant taxpayer atv, income, or capt, Within the tax ne It also important to Mock any loopholes that could be seed fo ircumvent these lav. To this end, sates often include anti-avoidance rules on theit Statute book. These rules tage ax avoidance schemes tha, let unchallenged, would "undermine the proper functioning ofthe charging ls. Some of the min ant-void- ance legislation relate to controlled foreign companies, transfer pricing, loss busing, Sd various tax abtrage schemes aChapter 2 - How Double Taxation Arises ~The Role of Domestic Tax Systems, context, juridical double taxation happens where two or more jurisdictions tax the same income or capital, and the same taxpayer. In cross-border situations, juridical double taxation isa result of overlapping taxing rights ‘on the same income or capital, which arises asa consequence of conflict in the connecting factors for taxation, Section 2.2.21. addresses the incidence of juridical double taxation in the cease where the income or capital is deemed to have been sourced in two states ("source-source conflict”). Section 2.2.2.2. addresses the incidence of juridical double taxation in the cease where, through the operation of domestic Iaw rules on residence, a taxpayer is found to be resident in two (or more) states (“residence-resi- dence conflict”), Section 2.2.2.3. addresses the incidence of juridical double taxation in the ‘case where the income or capital is taxed in one state because the taxpayer is resident there, and taxed in the other state because itis treated by that slate as having been sourced there ("residence-souree conflict”). 2.2.2.1. Source-source conflict In a souree-source conflict, two (or more) jurisdictions treat the taxable income of capital as having been sourced in each of their own respective states, Absent any provisions for rele, the taxpayer would be subject 10 taxation to the fullest extent of each state's laws. 2.2.2.2. Residence-residence conflict In the case of a residence-residence conflict, the taxpayer qualifies as a resident (for tax purposes) in two or more jurisdictions. As stated earlier in section 2.1.1, this outcome is as a result of the different tests used by jurisdictions to determine residence under their domestic law. Where a taxpayer is treated as resident, for example, in two different jurisdictions, the consequences ean be far-reaching. For example, if both jurisdictions tax their residents on a worldwide basis, both will be free to subject the taxpayer to comprehensive (i.e, worldwide) taxation along these lines. The 26. Even under tax tats, theres scant rei for source source confit, a notable ‘exception being fund in article 11 of the OECD Model (201), which sets out sourcing oles roparding interest income. 2International double taxation taxpayer will therefore be liable to tax, in botk states, on his worldwide income and capital, While domestic laws might not usually address this deadlock, tax treaties ‘generally provide a way out of such an impasse. Using the mechanism of a tie-breaker rule, treaties generally contain provisions to resolve dual residence and fix the taxpayer (for treaty purposes) with only one state of residence.” 2.2.2.3. Source-residence conflict Under the sourve-residence conflict, the taxing rights (of two different states) overlap where the taxpayer is a resident of one state, which has ‘worldwide (residence-based) taxation, and he has income or capital that is sourced in another state, which has territorial (source-based) taxation, ‘Many countries provide in their domestic laws for relief from double tax ‘ion arising from a source-tesidence conflict.” Also, teaty relief is gener ally available to resolve such issues.” 2.2.3, Economic double taxation Economic double taxation occurs when two different taxpayers are taxed. fn the same item of income or capital ‘A ypical example is that of dividends paid out by « company. If dividends that are paid out ofthe taxed profits ofa corporation are taxed again in the hhands of the recipient, that same income would have been taxed twiee, i fonce a the level ofthe corporation, and then again when distributed to the ‘company's shareholders.” Another example arises where the tax authorities ofa state make transfer Pricing adjustments to cross-border intra-group transactions, and no cor responding adjustment is made or allowed by the other taxing authority.” 21 Seech, 10 fora discussion of dual residence unde ax trates, 26. See ch. 3 ofthis book 29. See, gonealy part 3 ofthis bok: 30, _ Nevertheless many countries nowadays exempt dividend income (usually con ‘ional ona specified thesbod of sharcholding), especially dividends that are reat ated rom overseas. Such an approach would aver economic dovble taxation, 31, For more on corresponding adjustment, specially wih tpard to tx treaty provisions see se. IL3L2 23CChapter2- How Double Texation Ari ‘The Role of Domestic Tax Systems States generally provide in their domestic laws for relief for economic double taxation, particularly forthe more significant transactions, Save for narrow exceptions,” tax treaies may not generally provide for relief for economic double taxation. 32, Ser, for example article 9 ofthe OBCD Model Tax Convention (2017). 4