THE MOST QUOTED phrase in tax case law history is arguably that of The Lord Chancellor as he considered tax residency for companies in the De Beers case back in 1906. “…a company resides, for 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.”
The world has moved on some way since those famous words were uttered over a century ago. Two world wars fuelled the rapid pace of technological progress in the early 20th century.
Capital gains tax was invented but came after the atom bomb; the advent of the jet engine made international travel commonplace: television, telephones and fax machines made the world progressively smaller.
Today, we live in the generation of the internet and the mobile phone. Smartphones are the norm and data streams around the world at the speed of light.
Rules set in the 1980s
Yet in all that time there has been no major change to the law that governs company tax residency. In the late 1980s, the UK introduced an incorporation rule, meaning that UK incorporated companies were now automatically tax resident in the UK as a matter of domestic law. However, that aside, the rules remain unchanged.
A foreign incorporated company will find itself tax resident in the UK (and therefore potentially subject to corporation tax on its worldwide income) if the central management and control of the company resides in the UK. This is a legacy of De Beers but what does it actually mean?
Most companies will maintain that they are really controlled through their board meetings. This was certainly the case in De Beers, where the board of a South African company was meeting and making decisions in London.
The decisions made in the boardroom were the central management and control of the company and the company itself was held to be UK resident for tax purposes. However, not every company is controlled through its board meetings as we shall go on to see.
If the foreign company is held to be UK resident by virtue of central management and control abiding in the UK, one could look to the relevant double tax treaty if the company is also resident in another country. This might happen because the company was incorporated in another country with an incorporation rule of its own.
The UK treaty tie-breaker clauses mostly follow the language recommended by the OECD where the place of effective management settles the matter. However, this is not always the case, most notably in the UK-US treaty. The company will only be treated as tax resident in one jurisdiction and that will be the one where it has its place of effective management.
In the Laerstate case, this is precisely what did happen. The case centred on a Dutch investment vehicle that Dieter Bock used to buy and sell shares in pan-African broker Lonrho in the 1990s and generally covers the period 1992 to 1996, even though the case was eventually heard in 2009. Broadly speaking, the judge considered that the company was not in fact controlled by the directors via board meetings but was in fact controlled by Dieter Bock, both at times when he was on the board of directors and equally when he was not.
Guiding tax principles
Despite the fact that the law appears to be essentially still the same, there are some useful guiding principles that emerge from Laerstate that merit a conversation with your tax advisor if you are not already familiar with them.
Suffice to say, the company was found to have its central management and control in the UK (where Dieter Bock had been controlling the company), as well as its place of effective management.
Back in the 1990s, we lived in a world of fax machines; mobile phones and emails existed but were much less prominent than today: BlackBerrys and smartphones were certainly a long way off.
Looking at the Laerstate judgment, Avery Jones makes several distinct findings of fact regarding places where documents were signed and decisions were taken. He is helped in his analysis by the diary notes kept by Dieter Bock’s tireless executive assistant. But it is the sheer pace of the advancement of technology over the last 15 years that leads us to developments in technologically driven forensic investigation techniques.
The advance of technology, especially the parts that the internet and email play in so many aspects of our lives, has led to an explosion in the volume of available data that can be reviewed as part of an investigation. Today, highly skilled forensic technology specialists obtain, process and manage huge volumes of data. Data mining and data analytics can reveal patterns and trends or pinpoint areas of potential trouble for further detailed review.
Tax data easier to access
Data contained on laptop computers, servers, BlackBerrys and iPhones in formats such as emails, instant and text messages and even voice calls, can easily be recovered by investigators and used to piece together a detailed picture of exactly what the users where doing, where they were doing it and often with whom.
Similarly, locators in these devices can be used to find out where the user is at any time and posts on blogs or social networking sites often give a detailed (and sometimes minute-by-minute) updates on their activities.
Using this technology, it is now possible to ascertain exactly where people were when key business decisions were taken. In the context of a board meeting, it might become less important where the meeting is physically held: the significance and impact of the contribution of individual participants will receive increased scrutiny.
Where a key participant is joining by telephone or video conference, it might be that their exact location at the time will become critical in determining where a decision was taken.
It is to be anticipated that HMRC will look for a test case that brings tax residency into the 21st century.
Kevin Hindley is a managing director with Alvarez & Marsal Taxand UK LLP. Daniel Barton is a senior director with Alvarez & Marsal’s Dispute Analysis & Forensic Services practice.
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