CIOT comments on the OECD consultation on suggestions for changes to the OECD model tax convention of 27 May 2003, sent to the OECD on 3 September 2003. This paper sets out the comments of the Chartered Institute of Taxation on the OECD Discussion Draft dated 27 May 2003.
The general thrust of the paper appears to be to distinguish between the actual making of decisions and the formal approval of decisions. We agree that this is an essential distinction. The place of effective management remains an essential determinant of this distinction. We see the hierarchical test as an amplification of the place of effective management test, dealing with cases where the application of that test causes difficulty.
Para 24.1 of the Commentary says that a company can have only one place of effective management at any one time. We believe that this is not necessarily the case. For example, a company’s directors may be resident in different countries and all board meetings may be held by telephone conference call. In this case, there may be more than one place of effective management at any given time.
As regards the hierarchy of tests, we believe that the idea of a hierarchy is welcome, but that the tests should be aimed at applying the principles involved in determining company residence.
Option A (State with which economic relations are closer) is a wide test, and little guidance is given as to how it is to be applied.
Option B (place where business activities are primarily carried on) is a narrower test, and one that is capable of objective determination. However, guidance should be given as to how to measure the relative value of business functions carried out in different States. Is the measure to be qualitative or quantitative or based on a mixture of such and other values?
Option C (senior executive decisions test) appears to overlap the “place of effective management” test. Therefore, unless some distinction can be drawn between the place of effective management within a State and the State in which senior executive decisions are taken, we doubt the value of option C. Indeed, if option C is adopted, some clarification of the concept of “senior executive decisions” may be required. These would include decisions regarding policy and strategy, but would exclude day-to-day management decisions, even if made by senior executives.
Whilst therefore we consider that B is the most promising of the options given, it needs further work to refine it before being adopted.
Finally, we think that a test can only be regarded as being “determined” when it is determined by agreement of the Contracting States, and this should be expressly stated in the wording to avoid any argument that a determination can be made unilaterally, ie one State believing that it can determine the issue without regard to the view of the other State.
The Chartered Institute of Taxation
3 September 2003
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