2. POEM as a Tie-Breaker Rule Rethinking the POEM Tie ... · Rethinking the POEM Tie-Breaker Rule...
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Rethinking the POEM Tie-Breaker Rule in Tax Treaty Law Francesco Carelli D.Phil Student in Law, Balliol College, [email protected] 1. Dual Residence For tax treaty purposes, residence is defined by reference to the domestic laws of the contracting states. As a result, dual residence may arise when two contracting states (i) use different criteria or (ii) use similar criteria but inter- pret them differently. 2. POEM as a Tie-Breaker Rule Dual residence often leads to double taxation as both states consider themselves the state of residence. It is, however, a fundamental principle of the OECD Model that a person can only be a resident of one contracting state. To resolve this conflict, Article 4(3) of the OECD Model provides a tie-breaker. It states that a dual resident com- pany is deemed to be resident only in the state in which its 'place of effective management' (POEM) is situated. 3. POEM - Interpretation The POEM concept has not been satisfactorily defined in the OECD Model or the accompanying OECD Commentary. As a consequence, countries continue to interpret the concept on the basis of Article 3(2) of the OECD Model, i.e. in accordance with their domestic laws. This has led to the emergence of divergent approaches in state prac- tices, with two main views dominating the debate: the An- glo-Saxon concept of “central management and control” and the continental European concept of “place of man- agement”. 4. POEM - Limits Even if the POEM was given an autonomous meaning, the tie-breaker would have limits and could not be applied in various cases: A) Virtual offices B) Triangular cases 5. POEM - Possible Alternatives Upon closer examination, the following options have to be considered: • Should the concept of residence be changed (Article 4(1) of the OECD Model)? • Should the POEM test be replaced with a purely formal criterion? • Should the company’s economic nexus be placed at the forefront? If yes, how should the nexus be evaluated? • Would an integrated solution only be possible by com- bining factual and formal tests, i.e. a hierarchy of tests? • Or should the pursuit of mutual agreement or arbitration proceedings be the last resort? 6. Trends and Developments in Tax Treaty Practices - Empirical Evidence Despite the addition of the mutual agreement procedure (MAP) to the OECD Commentary, and the predominant view in the tax literature that MAP has already replaced POEM, the empirical study upon which this thesis is based has demonstrated that the POEM tie-breaker continues to play a crucially important role in solving dual residence. The G8 member states comprise the eight leading indus- trial nations: Canada, France, Germany, Italy, Japan, the Russian Federation, the UK and the United States. As of 2012, their tax treaty network comprised a total of 720 tax treaties. This pie chart clearly shows that the POEM tie-breaker is of paramount importance; more than 50 per cent of the tax treaties follow the OECD Model and adopt this criterion. However, even more striking is the fact that the POEM tie- breaker outnumbers the group of ‘best efforts’ rules by almost two and a half to one. Put differently, the POEM test is used in more than twice as many tax treaties as those containing MAP (22 per cent).
Transcript of 2. POEM as a Tie-Breaker Rule Rethinking the POEM Tie ... · Rethinking the POEM Tie-Breaker Rule...
Rethinking the POEM Tie-Breaker Rule in Tax Treaty LawFrancesco Carelli
D.Phil Student in Law, Balliol College, [email protected]
1. Dual ResidenceFor tax treaty purposes, residence is defined by referenceto the domestic laws of the contracting states. As a result,dual residence may arise when two contracting states (i)use different criteria or (ii) use similar criteria but inter-pret them differently.
2. POEM as a Tie-Breaker RuleDual residence often leads to double taxation as bothstates consider themselves the state of residence. It is,however, a fundamental principle of the OECD Model thata person can only be a resident of one contracting state.To resolve this conflict, Article 4(3) of the OECD Modelprovides a tie-breaker. It states that a dual resident com-pany is deemed to be resident only in the state in whichits 'place of effective management' (POEM) is situated.
3. POEM - InterpretationThe POEM concept has not been satisfactorily defined inthe OECD Model or the accompanying OECD Commentary.As a consequence, countries continue to interpret theconcept on the basis of Article 3(2) of the OECD Model,i.e. in accordance with their domestic laws. This has ledto the emergence of divergent approaches in state prac-tices, with two main views dominating the debate: the An-glo-Saxon concept of “central management and control”and the continental European concept of “place of man-agement”.
4. POEM - LimitsEven if the POEM was given an autonomous meaning, thetie-breaker would have limits and could not be applied invarious cases:
A) Virtual offices
B) Triangular cases
5. POEM - Possible AlternativesUpon closer examination, the following options have to beconsidered:
• Should the concept of residence be changed (Article 4(1)of the OECD Model)?
• Should the POEM test be replaced with a purely formalcriterion?
• Should the company’s economic nexus be placed at theforefront? If yes, how should the nexus be evaluated?
• Would an integrated solution only be possible by com-bining factual and formal tests, i.e. a hierarchy of tests?
• Or should the pursuit of mutual agreement or arbitrationproceedings be the last resort?
6. Trends and Developments in TaxTreaty Practices - Empirical EvidenceDespite the addition of the mutual agreement procedure(MAP) to the OECD Commentary, and the predominantview in the tax literature that MAP has already replacedPOEM, the empirical study upon which this thesis is basedhas demonstrated that the POEM tie-breaker continues toplay a crucially important role in solving dual residence.
The G8 member states comprise the eight leading indus-trial nations: Canada, France, Germany, Italy, Japan, theRussian Federation, the UK and the United States. As of2012, their tax treaty network comprised a total of 720tax treaties.
This pie chart clearly shows that the POEM tie-breaker is ofparamount importance; more than 50 per cent of the taxtreaties follow the OECD Model and adopt this criterion.However, even more striking is the fact that the POEM tie-breaker outnumbers the group of ‘best efforts’ rules byalmost two and a half to one. Put differently, the POEMtest is used in more than twice as many tax treaties asthose containing MAP (22 per cent).
