The impact of the communications revolution on the application of "place of effective management" as a tie-breaker rule: CIOT submission to the OECD on the draft paper of February 2001, sent on 3 July 2001 This paper sets out the comments of the Chartered Institute of Taxation on the paper issued by the Business Profits TAG of the OECD in February 2001
The essence of the tie-breaker test is that it must provide a solution to the question of the place of residence of a company based upon a real and substantive connection with the centre from which profits are generated and not upon formal or legalistic concepts. This means that the place of effective management test remains the best primary test which should only be displaced if that place cannot itself be determined, either because effective management is spread over more than one country or never stays in one country with any degree of permanence. Accordingly, we would not like to see this primary test replaced.
We think that paragraphs 12 - 34 of the paper give a useful summary of the present law relating to the place of effective management in a traditional environment. As to whether that test needs to be refined (paragraphs 62 - 68), we think that a company’s Articles of Association are unlikely to give reliable and relevant information. It is a question of fact where the central control and management is exercised. Similarly, and as noted below, the place of incorporation is unlikely to be relevant. However, the other factors listed in paragraph 64 are clearly relevant, subject to the caveat that the directors may reside in one territory, but run a company from another territory - especially within the EU.
In the absence of a clear place of effective management the “fall-back” test should be (by analogy with the test for individuals of “centre of vital interests”) the place where the economic nexus is strongest (paragraph 59). The place of incorporation and the place where the directors/shareholders reside are both inappropriate for the reasons given in the discussion draft. The place where the economic nexus is strongest may not always be easy to decide but, except in extremely rare cases, it will always produce an answer and one based on real and substantive criteria.
The factors of land, labour, capital and enterprise enumerated in paragraph 59 are fundamental tests of economic nexus and we agree with the analysis and conclusion in paragraph 60.
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