We welcome the publication of the paper. It provides an opportunity to consider an aspect of tax law over which there has hung a cloud of uncertainty since the Government announced its intention to carry out the review last year.

We make our comments on the concepts of residence and domicile in two separate sections. First we give our comments on possible changes that could be made in respect of the tests to be applied in judging whether an individual is, or is not, to be regarded as resident in the UK for a fiscal year. Second, we give our views on the use of the concept of domicile as the determinant of the scope of the charge to UK income tax and UK capital gains tax on an individual’s worldwide income and gains. We suggest that it is important to separate these two aspects of the subject matter of the Treasury paper. These are separate matters and deserve separate consideration.

Finally, we give our comments on the examples cited in the Treasury paper, and our replies to the specific questions for consultation. Appendices cover Residence for Tax Credits, Possible Changes and comments on the International Experience summary.

The paper is long on general principles, but short on specific ideas and proposals. This leads us to ask whether there are real problems, or whether the present review is driven by political considerations.

In preliminary discussions with the Revenue, we gained the impression that they are concerned specifically about the position of long-term residents in the UK who retain their foreign domicile of origin. If the Revenue wish to assert that such a taxpayer has acquired a domicile of choice in the UK, then the onus is on the Revenue to establish this, by reference to the facts. By the same token, an individual with a UK domicile of origin retains that domicile unless and until he acquires a domicile of choice elsewhere. Thus the rules work on the same basis in both directions. It is not obvious that this is a real problem, as opposed to a perceived problem.

The paper sometimes confuses the current state of the law with the current state of Revenue practice in applying the law, for example the phrase "are treated" seems to be used as a shorthand for "are treated by the Inland Revenue".

We believe that fair notice of any changes should be given, and that there should be appropriate "grandfathering" provisions. Notice is required in cases where the remittance basis ceases to apply, so that the taxpayer can set up arrangements for capturing the information required to make his tax return. Grandfathering provisions will be required in certain circumstances to ensure that any changes in the law are not retrospective in effect.

In para 2.4, it is suggested that an individual who spends less than 183 days here in a tax year, and who averages less than 90 days over a four year period, may yet be tax resident here if they "usually live in the UK and go abroad for short periods, for example on business trips". It is difficult to see how somebody could spend three-quarters of four years overseas and yet be living in the UK and only be going abroad for short periods.

Under a system of self-assessment it is essential that an individual can determine, at the time he submits his tax return, whether or not he was resident in the UK for the tax year in question. The averaging of the year with three future years, is difficult to reconcile with this requirement. Intention can also affect ordinary residence with reference to the anticipated length of a visit to the UK, which gives rise to problems in practice.

We consider that residence should be given a statutory basis with an arithmetic formulation. We suggest that 120 days in the UK should constitute residence and less than 120 days non-residence. Days of arrival should be counted and days of departure not counted.

A simple days of presence in the country of, say, 183 days in any fiscal year is commonly applied throughout the world and a slightly more sophisticated calculation taking account of presence in the previous two years, which encapsulates a number of points intended to be covered by the ordinary residence rules, would be simple to apply. The USA includes within the 183 days all the days in the current year, plus ¹/₃ of the days in the preceding year and ¹/₆ of the days in the year before that, which seems to work well in practice. The effect of this rule is to allow people to spend up to 120 days a year in the USA without becoming resident. The UK currently ignores, in computing days of residence, both days of arrival and days of departure, which may, on review, be regarded as excessively generous. It could be argued that including in the day count the day of arrival but excluding the day of departure would be more logical and fair. In practice the existing rules, which allow 91 days a year in the UK on average, while avoiding ordinary residence, effectively allow, under the current day count, considerably more days for the international traveller, so the economic impact of a change to a simple statutory system such as that used in the USA would not appear to have any substantial impact on the Government’s tax take and would be a step forward in certainty and simplicity.

Any review of residence and domicile will affect the poor as well as the rich. We think it short-sighted, therefore, not to consider the implications for the tax credits legislation in this review. It also flies in the face of an integrated tax and benefits system. We attach at Appendix 1 our understanding of the law in this area. If, as we suggest, the concept of "ordinary residence" for tax purposes were to be abandoned, then at least we would only have two meanings left, one for National Insurance and one for tax credits

Obiter of Viscount Sumner in IRC v Lysaght (1928) 13 TC 511 at 528 and of Nicholls J in Reed v Clark [1985] STC 323, taken with the decision in the university grants case, Shah v Barnet London Borough Council [1983] 1 All ER 226, suggest that it would be helpful not to retain "ordinary residence" as a determining factor of the tax code. These judicial decisions have all equated ordinary residence with actual residence, however brief. The reference to "ordinary residence" as a basis of taxing capital gains is otiose and should be removed from statute. Merely to abolish ordinary residence, however, would be to remove an important feature of our tax system which distinguishes the taxation consequences for individuals depending on the quality of their residence status in this country irrespective of their domicile. Where there is in such cases a proper desire to exclude certain individuals from a tax charge, such as on the exercise of share options, there should be included in the statute a rule that the charge does not apply to an individual who has not been resident for all three of the years prior to the taxable event. We do not think it helpful that a different definition of ordinary residence is used for Tax Credits, Appendix 1.

The Revenue booklet IR20 is unhelpful, as it answers the wrong questions with incomplete and, arguably, incorrect answers. Whether or not our suggestion of a new, and statutory, formulation of residence, is taken, the booklet should be withdrawn and replaced by a booklet that attempts to answer the question: "How do I decide whether or not I was resident in the UK during the last tax year?", rather than a booklet that gives a potentially misleading answer to the question: "When do I cease to be UK-resident on leaving the UK?".

We are pleased that the Government has not rushed into drawing premature conclusions or introducing hasty legislation. That said, given the damaging effect of uncertainty in this area, if no changes are to be made which would restrict the rules as they currently apply, then an early statement at high level to this effect would be beneficial.

There is very considerable anecdotal evidence from professional advisers of the economic benefits to the United Kingdom of the current rules and in particular of the tax privileges given to those who are not domiciled in a country of the United Kingdom but are resident here. There is no quantified or anecdotal evidence to suggest that the Government is forgoing significant amounts of revenue as a result of the operation of the present rules.

In our view, the current rules operate well for the majority of individuals. There is clearly a group of individuals for whom the link with the UK is less strong and for whom a tax charge based on income and gains from UK-situs assets only is appropriate. We recognise that the concept of domicile arose from a previous era where the need was perceived to identify a link with the UK for those living in the Empire, but such historical antecedents do not, of themselves, negate the usefulness of the concept today. There are clear and obvious dangers in changing provisions that are generally thought to work well in attracting investment and expertise to the United Kingdom.

We start from the position that the available, albeit unquantified, evidence suggests that the current regime is well-targeted in encouraging internationally mobile entrepreneurs and other individuals with useful skills or large capital wealth to take up residence here. It is therefore especially important that if any changes are to be introduced they should be preceded by a rigorous, quantified economic assessment of their effect. Even in the rare cases where major taxation changes are preceded by such a rigorous economic assessment, they often have unpredictable effects. It is therefore especially important that changes should only be introduced if they will demonstrably produce a net economic benefit to the United Kingdom.

It is intrinsically difficult to quantify the effect of any change, particularly in the domicile rules, because there is no requirement to disclose income, gains or wealth which would be subject to UK taxation if the individuals were domiciled in the UK. Non-domiciled individuals working in the UK pay tax on their UK earnings in the UK. If they are also working outside the UK those earnings will normally be subject to taxation in the country where the work is performed, and if they were taxable in the UK on their world-wide income the UK tax system would give them a credit for the foreign tax on those overseas earnings, so that the additional tax paid in the UK is, in many cases, likely to be small. The investment income of such executives will be taxed in the UK if it is remitted to the UK directly or indirectly, and may in addition suffer withholding taxes at source and may be taxable in the home country, as in the case of US citizens. Again the additional taxation likely to be raised by the UK if such individuals were taxable on their worldwide income would be relatively small.

In the case of seriously wealthy individuals, resident but not domiciled in the UK, the position is more complex as their wealth is very often held in overseas trusts, foundations or companies and the amount of income, gains and assets held by UK resident non-domiciliaries is unknown as there is no requirement to divulge these details to any fiscal authorities. The UK has substantial anti-avoidance provisions which apply to its domiciliaries which seek to look through offshore structures and tax the individual as if he was in possession of the income gains or wealth held offshore. These rules do not currently apply to UK resident non-domiciliaries. The deemed domicile provisions which apply for inheritance tax are not normally a problem to such an individual, as assets held in excluded property settlements remain outside the inheritance tax net. If such individuals who are, by definition, both wealthy and not intending to live in the UK permanently or indefinitely were to be brought within the full ambit of the UK tax net, in the same way as those who are residing here permanently or indefinitely, the likelihood is, in the opinion of those who advise them, that most of them would not remain resident in this country for tax purposes. They might continue to visit, they might even keep a property in the UK for their use during such visits, provided that the residence rules enabled them to do so, as they do at the moment, but their centre of vital interests would shift from the UK. There are still numerous territories around the world where such people would be most welcome to make their main base, without incurring a significant tax charge.

What neither we, nor the Government, are able to do at the moment is to begin to quantify what effect this would have on the UK economy in terms of reductions in direct and indirect employment, loss of tax paid directly on remittances of income and gains and loss of value added tax, and other taxes on the not inconsiderable consumption currently made by such individuals in the UK.

We feel that it is most important that before any substantial changes are made to the existing domicile rules an independent research project should be commissioned to endeavour to quantify the effect of any such changes. The Institute would be willing to support any such research, as it has done in co-operation with the Inland Revenue on self-assessment and with Customs & Excise on value added tax over recent years.

Planning to fulfil the requirements of separation of income from capital, and of capital gains from original capital, is not usually a problem for the sophisticated individual who is well-advised. For the less financially aware, working within the code applied by the Revenue to determine remittances is a nightmare, leading to error, inadvertent incorrect disclosure and expensive enquiries. The "rules" applied by the Revenue in dissecting a remittance from a mixed fund to measure income, capital gain and original capital are not well founded in decided case law, are an invitation to challenge and need to be reconsidered.

Chapter 3 is the least satisfactory chapter of the paper. Summarising complex legislative provisions is always difficult. In giving a true picture of a country’s tax system one must also take account of its revenue authorities’ published and unpublished practice. The summaries in Chapter 3 are so condensed as to be in danger of being misleading.

It is noted that many countries simply adopt a residence/non-residence divide. The UK system, where several different levels of attachment to the UK are applied in determining tax liability, is a valuable feature in attracting skills and capital to the UK. This inevitably leads to some additional complexity. This is not, however, disproportionate to the benefits that accrued to the UK as a whole from these rules. It also assists in relieving the complexities of double taxation in a variety of circumstances.

3.12

The survey does not address key issues in relation to other jurisdictions which are relevant. First, it makes no attempt to consider what opportunities may be available under the tax systems of the countries surveyed for individuals to limit the effects of worldwide taxation through careful planning. It cannot be assumed that, if the UK were to limit the benefits that it currently offers, individuals concerned would somehow simply end up paying tax either in the UK or elsewhere, and therefore remain in the UK to pay additional taxes. This is particularly the case for individuals with substantial financial interests.

Secondly, it assumes that all countries have a uniform desire, ability and cultural attitude towards taxation, particularly with respect to actually paying tax on foreign income and gains, whether legally required or not. A comparison can only be made by looking at the rules relating to international taxation in the round rather than very selective aspects.

We welcome the recognition that the excluded property rules in their application to trusts have priority over the reservation of benefit provisions. We believe that this recognition should be given wide publicity so as to repair the previous uncertainties concerning the Revenue’s view.

Our main comment about the examples is that although they are apparently designed to show how the rules apply in practice, in a number of cases they do not reflect what happens in real situations.

In reality, in relation to Bill this example would almost never occur. A conclusion of domicile based on a single fact, namely length of stay in the UK, is clearly at odds with the law of domicile which requires all facts to be taken into account. This example would certainly be contrary to case law, eg McKenzie (1951) 51 SRNSW 293, which concluded that, in the absence of other evidence, residence may be decisive. Thus, although mere length of residence is normally insufficient, it is necessary to consider the quality of residence in order to draw the necessary inference of intention (Ramsay v Liverpool Royal Infirmary [1930] AC 588).

Under the existing law of domicile, such an individual would inevitably establish an objective pattern of life that would demonstrate an intention to remain in the UK permanently or indefinitely.

The example does not deal with comparable situations. Clive is a foreigner who only spends nine months on secondment in the UK. Dan, on the other hand, has spent his whole life in the UK except for a 24-month assignment in the United States. It is an obvious case that calls for different treatment as they are in entirely different circumstances.

It ignores the fact that Clive as a US citizen will be liable to US tax on the gains referred to in the example. If he remitted the proceeds to the UK, he would be liable to pay tax. The actual amount from which the UK Revenue will benefit will be restricted to the excess, if any, of UK tax above US tax. Thus, a modest amount of tax, if any, would potentially be collected from an individual with the most limited connections with the UK.

This example does not illustrate a point of principle, but simply the problems inherent in every threshold situation. This illustrates a difficulty, which is not unique to the UK, between visitors whose stay is continuous and those who visit. The question of whether days of arrival and departure should be included or ignored will always produce different results at the margins. However, the policy on this must be seen in the context of the overall rules. For example, in the UK, where days are ignored, a 91-day average is sufficient for visitors to become resident. In the United States, where days of arrival and departure are counted, the average, broadly speaking, is 120 days a year. Likewise, in the context of deciding whether an individual is resident on the basis of spending 183 days in the tax year, this can be influenced at the margins by relatively short periods abroad. A number of countries adopt a 183-day rule and the same issue arises whether days of arrival are counted or ignored.

The present UK system of grading connection with the UK by reference to residence, ordinary residence and domicile provides perhaps one of the fairest ways of dealing with this sort of situation, since the consequences of becoming resident in these circumstances are less severe than if a single criterion applied.

The same comments apply as in relation to example 3.

The contention in paragraph 2.21 makes no sense in the context of the UK tax system. Although in some cases it may be difficult to evidence intention, in the vast majority of cases, where this is material, intention can be determined from the circumstances. It is not simply dependent on whether that intention is notified to the tax authorities.

This example, which involves the application of paragraphs 3.3, 3.4 and 3.5 of IR20, reflects a sound underlying principle, namely trying to distinguish between visitors who come to the UK frequently by design from those who end up coming to the UK frequently fortuitously.

In reality, each of the examples 3, 4 and 5 would in most cases be subject to the application of tax treaties. Based on the fact patterns hypothesised in each case, it would appear that, in effect, all individuals would be likely to be treated as non-UK resident under the tiebreaker provisions.

These examples illustrate simply that tests of residence based on strict accounting of days (examples 3 and 4), as well as those based on facts and circumstances (example 5), both have their particular difficulties. None of these is unique to the UK tax system and changes in these areas would continue to create some unfairness or anomalies at the boundaries, although those boundaries would be differently drawn. In most but not all cases, these issues at the boundaries are capable of being resolved satisfactorily by double tax treaties.

The fact that the reasons for being in the UK are different in this example does not suggest that there is anything unfair about the way in which the two individuals are treated. Indeed, example 6 is perhaps the best illustration of how the rules influence economic behaviour to the benefit of the United Kingdom. It covers the support of the UK both as an international business hub and as a base for those with substantial financial interests. Example 6 illustrates that foreign domiciled individuals are encouraged to come to the UK for varying periods of time, benefiting the UK in different ways.

This example merely illustrates the application of the remittance basis. Anecdotal evidence would suggest that it is too simplistic to be realistic. Firstly, foreign businessmen moving to the UK will normally try to arrange their affairs so that they do not remit income, if possible, in order to invest in the UK. Again, the example illustrates the beneficial effect of the regime in encouraging foreign businessmen to relocate to the UK, whether they use remitted income to fund their investment here or not. The significance of Norman in this illustration is the ability of the UK to attract entrepreneurial skills and capital.

Although Oscar may benefit from the remittance basis, the actual tax treatment of such an individual and the benefit to the UK of his presence is obscured. First, foreign individuals who live in the UK but have businesses abroad will usually have income and gains which ultimately may be remitted to fund living in the UK. Secondly, in reality such individuals do invest in the UK. Unlike other tax favoured investment, this is less easy to identify, since it is not made within neatly defined regimes such as EIS, etc. Thirdly, even if such individuals do not remit taxable income and gains, individuals who have business interests abroad, but who live in the UK, actually spend significant amounts of their money in the UK because they are living here and not elsewhere. Consumption of every kind of services ranging from restaurants to private banking, medical and other professional services are beneficiaries of this behaviour. Again this is difficult to measure, but anecdotal evidence suggests that this contributes to economic activities and employment. Any direct tax revenue, which conceptually might be thought of as lost because of the remittance basis, would need to be balanced against the potential loss of those activities, and in most cases VAT at 17.5% on the turnover of such services. This would be a net loss to the UK if such individuals left and no similar persons came to the UK in the future.

Example 8 again illustrates the beneficial effect on behaviour of attracting highly skilled workers to the UK. Quentin is not in comparable circumstances to Paula simply on the basis that he is UK domiciled. Domicile is acquired by the combination of residence and an intention of permanent or indefinite residence (see Dicey & Morris Rule 10). It is quite clear that if Quentin intends to come and live in the UK permanently he will be UK domiciled as soon as he arrives and lives here. He cannot both intend to live in the UK permanently and intend to return to his country of origin.

This illustrates a surprising application of the Revenue’s own rules in this area. The examples reveal no real difference only on the basis of time spent between the visits of Ruth and Seth. If there is a change of intention in year 3 on the part of Seth, then this would need to be indicated by factors not set out in the example (see comments on examples 3, 4 and 5). Thus, if any point of principle is illustrated, it is the manner in which the policy is applied. In the vast majority of real cases, absent other facts both individuals would be non-resident under tiebreaker provisions in tax treaties.

This example is of the longstanding rule relating to the status of income in the hands of individuals who have disposed of the source of that income, rather than the question of manner and sequence of remittance. It is simply one of many driven by a variety of policies.

By comparison, for example under the current taper relief regime, an employee of BP plc who purchases shares in that company and holds them for two years may sell them and pay CGT at 10% on the gain. If the same individual buys shares in Shell, then he will pay at the full CGT rates.

The benefit of permitting such rules from a policy point of view is that they encourage the bringing of funds to the UK for either investment or spending. If the rules were to be changed, this would simply encourage such money to be invested or spent abroad.

Chapter 3 is, not, we suggest, a satisfactory summary of the way in which foreign jurisdictions actually operate.

There are simple errors. For example, the French phrase "domicile fiscal" is translated as "fiscal domicile", despite the fact that France, as a civil law jurisdiction, does not have the common law concept of domicile and the phrase refers to a concept that is essentially ‘habitual residence’, lacking the necessary connotation of permanence.

Perhaps more importantly, there is a lack of understanding of the actual way in which matters are treated by foreign revenue departments. In both Switzerland and France, the approach customarily taken by the tax adviser of a wealthy client taking up residence is to enter into a discussion with the country’s Revenue authority to agree a formulation for the satisfaction of fiscal demands for future years, along the lines of the arrangement that was declared ultra vires for the UK Revenue in Fayed & others v Advocate-General for Scotland and IRC [2002] STC 910.

The survey does not address key issues in relation to other jurisdictions which are relevant. It makes no attempt to consider what opportunities may be available under the tax systems of the countries surveyed for individuals to limit the effects of worldwide taxation through careful planning.

A further point is that the summary is of jurisdictions in the OECD. If an internationally mobile individual leaves the UK as he considers the fiscal climate in the UK to be unconducive, it is likely that he will move to a tax haven, not to another OECD country.

This requires like cases to be treated alike. The examples provided in Part 2 illustrate that residents and non-residents are not in like positions, and similarly that individuals who are only resident and not ordinarily resident are not in like positions and domiciled and non-domiciled individuals are not in the same position. This is true even in the case of individuals who are not domiciled but remain in the UK for significant periods of time. Non-domiciled individuals inevitably have more significant connections with foreign countries, with associated costs. This can include maintaining a home in the country of their domicile, travelling there for ordinary family and personal occasions, specialised education for their children, and a much higher likelihood of double taxation. Anecdotal evidence suggests that non-domiciled individuals place little reliance on key UK government expenditure for healthcare and education, normally paying for these themselves, and are not reliant on Social Security benefits. Individuals who are genuinely not domiciled in the UK will leave (unless they die in the UK prematurely) and, as a result, the UK will not normally bear the cost of their ageing even if they spend the whole of their working lives in the UK. During that time, they contribute in any event to direct tax revenues on UK source income and gains and on those amounts remitted to the UK.

While the report does indicate in some of the examples areas where the Revenue might clarify their practice, particularly in relation to residence and non-residence, it does not make a case for changes in principle. The paper notes the complications inherent in the tax treatment of internationally mobile individuals. The UK system, despite its complexity, represents a considerable simplification, however, for both employers and individuals. Most of this complexity arises as a result of the interaction of tax systems. The UK regime, despite its domestic complexity, minimises this issue. Indeed, any narrowing of the application of the current rules will result in increased rather than decreased complexity for this reason. Multinational companies and individuals with substantial financial interests of the kinds referred to in the examples will typically seek professional advice in dealing with these issues. The complexity is not disproportionate to the circumstances of the persons concerned.

We consider that domicile which is, in essence, a concept of long-term belonging is an appropriate basis from which to "identify those with a long-term connection to the UK who have an obligation to help support the UK exchequer on the basis of their worldwide income". We believe that the extension of the concept of domicile in IHTA 1984, section 267 should not be applied to Income Tax and Capital Gains Tax. In relation to Inheritance Tax, section 267 may be justified as an anti-avoidance measure for those acquiring a non-UK domicile, but it is difficult to see its justification in relation to those who have never been domiciled in the United Kingdom under the general law. However, the excluded property trust provision usually means that it is seldom oppressive in practice.

We believe that residence is an appropriate short-term connecting factor to the UK, ensuring an appropriate contribution to the UK exchequer provided that it is coupled with relief for those who do not have the long-term connection constituted by domicile. The test of residence, however, should, in our view, be more precise, being based on days of physical presence and determinable from the application of a formula using a weighted average of presence in the year concerned and in the previous two years. Such a test would provide more certainty than reference to the otiose concept of ‘ordinary residence’. The use of a test, such as an exemption for an individual who has not been UK-resident for the previous two years, would be appropriate for "specialist" legislation such as that relating to employee share schemes, for example ITEPA 2003 s421E. We do not consider that using citizenship (or the possession of a residence visa) as a short-term connection, as is done in the USA, is appropriate.

We believe that the concepts of domicile and residence provide objective criteria for determining when the long-term or temporary connection is severed, suspended or restored, subject to our comments on determining residence and domicile under (2) above.

We believe that the concepts of domicile and residence establish an appropriate divide between long-term and temporary connections to the UK.

The example deals with situations where it is suggested that individuals resident in the UK for 30, 40 or 50 years are domiciled overseas. While it is accepted that it is possible in some cases for individuals to live in the UK for significant periods of time, our view is that such cases are not the norm, and is indeed the reason why early cases such as IRC v Bullock 51 TC 522 end up in court at all. Proper testing of taxpayers’ claims by the Revenue in this regard under the existing law of domicile and applying the normal obligations to provide information to support their positions will permit a proper identification of those with longer-term connections in the UK. While in the ordinary context there are special burdens of proof in relation to domicile, in our view these are of less significance in the tax context, because of the necessity of taxpayers providing information under the self-assessment regime to support assertions in their tax returns.

An arbitrary test based on a fixed number of years would be unsuitable. It fails to deal with the ways in which non-domiciled individuals contribute to the UK. The existing rules based on the concept of permanent home identify real connections. In this regard, it may be noted that the deemed domicile provisions for inheritance tax probably raise little revenue. Genuinely non-domiciled individuals will not be affected by it, unless they are longer-term visitors who die prematurely. Individuals who claim to be, but are not, genuinely non-domiciled, will be subject to the tax in any event.

It may be noted that attempts to impose an arbitrary limit may have other unintended consequences from a policy perspective. For example, if individuals are deemed domiciled in the same way, it may be necessary to adopt a much narrower definition of residence, in order to permit foreign individuals to visit the UK for part of the year over longer periods of time. At present, it is relatively easy to become UK resident, but the consequences for foreigners are not severe as a result of the remittance basis.

The UK system provides an important incentive to attract individuals with capital wealth, entrepreneurial abilities or other scarce skills to the United Kingdom and to contribute to the country’s international competitiveness. In circumstances where there is a combination of various factors, it is extremely dangerous to tamper with one important factor in the hope that it will not have an adverse impact. As indicated in the introduction, an early statement that no change is proposed would eliminate a great deal of uncertainty, which itself has an adverse impact.

Attempts to change some of the rules, such as those referred to in example 10, would undermine these objectives, and indeed some liberalisation of the rules may be appropriate to encourage capital inflows.

The modern UK economy is service based. Considerable emphasis is also placed on exporting services and goods. The present rules facilitate and support these industries by, in effect, allowing foreign customers to come to the UK, rather than having UK businesses go to them. Mona in example 6 and Oscar in example 7 are exactly the kinds of customers who are encouraged to come to the UK, and proposals that would discourage or drive them away would be counterproductive.

We believe that the difference in treatment between domiciliaries and non-domiciliaries has a clear economic rationale. It may be arguable that some non-domiciliaries would remain residents of the United Kingdom even if those provisions were withdrawn, but in practice we believe that the number of such non-domiciliaries is small, and that it would be difficult to formulate more accurately targeted rules which would be acceptable to our European Union and other international partners. As we have said, we believe that the concepts of residence and ordinary residence should be subsumed within a single concept of residence determined on the basis of a formula.

The existing rules have served the United Kingdom well in contributing to making the UK one of the most important international financial, trading and business centres. Although quantification is always problematic, these rules have probably contributed far more than the combined effect of most incentives, which have come and gone over the years. This is because they represent deep-rooted principles of the UK tax system which, while like all tax rules they may be subject to imperfection, have been known and recognised all over the world for very many years.

It is a mistake to compartmentalise each type of foreigner who is in the UK for varying amounts of time and reasons. It is the scheme of the legislation as a whole, combined with the cumulative effect of the rules, which support the competitiveness of the UK economy.

We believe that the tax rules to which residence and domicile are relevant take into account the equivalent arrangements of other countries. However, we consider that a simplification of the residence rules could be helpful.

The inadequacy of the international comparisons in the paper has already been discussed. It cannot be emphasised too strongly that any realistic assessment of the position of internationally mobile individuals in other countries involves a very extensive study of law and practice of international taxation of such individuals in many countries. There may be additional features found in other jurisdictions that might be worth considering.

These are idealistic expressions which we support in relation to all tax law. It is well known that they are easier to express than to achieve. There is an argument for bringing more clarity to existing practice on residence, and perhaps legislating some concessionary treatment, such as the split-year rules. There is, however, also a case for the continued application of case law principles in conjunction with Revenue guidance, which could be expanded to include some of the more common situations not presently dealt with in IR20, or elsewhere, to try to avoid some of the arbitrary application of some of the rules to illustrate the examples.

The purpose of any incentive regime is to encourage particular behaviour. Thus, the choice by foreign individuals to become UK resident only or to spend significant amounts of time in the UK without fear of serious double taxation is calculated to cause such individuals to prefer the UK tax regime to that of other countries. Thus, the overall benefit to the country and any tax raised from them is a net benefit, in principle at no cost to the Exchequer, since it only gives rise to additional tax revenue which would otherwise go to other countries. Proper administration of the existing rules would prevent its exploitation by those to whom it ought not to apply. This would not require any rule changes. The existing law is proportionate to the issue and appropriate to the policy objectives.

To qualify for tax credits a claimant must be generally "in the UK" (section 3(3) TCA 2002). This requires physical presence here (see Tax Credits Technical Manual (TCTM) 02003).

If a claim should be a joint claim (because a couple or polygamous unit "live together"), claimants who are not "in the UK" are excluded. This means that a husband with a wife who works abroad for longer periods could be making a claim based on his single income only (which could lead to higher credits).

For those who are "ordinarily resident in the UK" certain periods of temporary absence are ignored (see Reg 4 SI 2003/654). Thus, if the wife goes to work abroad for 8 weeks only, the claim remains a joint claim.

The Regulations do not actually define what is meant by "in the UK", but do state the circumstances in which a person shall be treated as not being in the UK, ie if they are not "ordinarily resident" (see Reg 3 SI 2003/6540). The Revenue interpret this as meaning that claimants must be both physically present here and "ordinarily resident" (or treated as ordinarily resident – there are exceptions to the ordinarily resident rule – see below).

Ordinary residence here has a different meaning from that used for tax or NI purposes (see TCTM 02003 et seq, the introduction to which is reproduced below):

"The term "ordinarily resident" is not defined, but its established meaning is that a person is ordinarily resident if they are normally residing in the United Kingdom (apart from temporary or occasional absences), and their residence here has been adopted voluntarily and for settled purposes as part of the regular order of their life for the time being.

"In considering whether a person is ordinarily resident, all the circumstances of the particular case will need to be considered.

"’Ordinary residence’" is a concept, which is also used for income tax and national insurance. For guidance on the meaning of "ordinarily resident" for tax purposes, see the Residence Manual. For guidance on its meaning for national insurance, see the National Insurance Manual. For tax credits, the guidance here should be used."

In recent correspondence the Revenue have indicated that it is unlikely that someone who is not ordinarily resident for tax purposes and not domiciled in the UK would be able to meet the ordinary residence test for tax credit purposes.

One of the reasons given for a different definition of ordinary residence for tax credits is that, unlike for income tax, it is necessary to consider a person’s current circumstances throughout the period of an award (rather than for a year of assessment). In particular, it is not considered that ordinary residence for the purposes of tax credits is something that can finally be decided only retrospectively based on what has happened over a number of years.

Crown servants and their partners can be treated as being "in the UK" without the need to satisfy the ordinary residence test at the same time (see TCTM 02005 for more detail).

Persons who are not "in the UK" but are receiving state retirement pension or contributions-based JSA may continue to be entitled to child tax credit only, because EC regulation 1408 overrides national regulations (see TCTM 02007).

All income counts for tax credit purposes – there is no remittance basis.

In general, people whose right to enter or remain in the United Kingdom is subject to a limit or conditions are not entitled to Child Tax Credit (CTC) or Working Tax Credit (WTC) (see TCTM 02101 and SI 2003/653). These are people who are subject to immigration control. The Low Incomes Tax Reform Group (LITRG) are campaigning for them to continue to get "old" CTC, as they pay taxes but get no credits. If a person is granted refugee status, he can claim tax credits for the period beginning with the date he first submitted his claim for asylum (see TCTM 02105). If one member of a couple or polygamous unit is not subject to immigration control then entitlement to tax credits remains for the joint claim (see TCTM 02106).

In this spirit of sharing ideas and without in any way wishing to endorse any such change, we have considered whether it would be possible to bring in a deemed domicile provision for income tax and capital gains tax as it applies for inheritance tax. We doubt whether this simplistic approach would work as the taxes are quite different. The excluded property trust rules for inheritance tax purposes enable some non-UK domiciled individuals to remain resident in the UK for tax purposes without bringing overseas assets within the charge to IHT. If the existing offshore anti-avoidance rules were applied to such individuals for income tax and capital gains tax, however, it seems likely that many non-UK domiciliaries would merely shift their centre of vital interests to an alternative regime with more favourable rules, which would defeat the object of the exercise.

It appears that one of the problems which the Revenue have with enforcing the existing domicile rules is the difficulty of showing an individual’s intention of remaining in the UK permanently or indefinitely, or to establish a domicile of choice here. It might be worth considering a change in the rules so that, for example, an individual, after being resident in the UK for, say, 17 out of 20 years, may be required to demonstrate he has the intention of not residing in the UK permanently. We are, however, not of a single view on this. Some of those contributing to this paper hold the view that such an approach would merely accentuate the distinction between the well-advised non-domiciliary and the less well-advised, with little real change.

The Swiss make special arrangements for the internationally mobile, seriously wealthy individual by means of the forfait under which an individual pays tax in Switzerland by agreement, on the basis of his likely expenditure in the country, and on any overseas income in respect of which he claims the benefit of the Swiss double taxation treaties, instead of on his world-wide income and gains. His contribution to the economy of the country is therefore commensurate with his lifestyle therein, but his family’s income, gains and wealth not enjoyed in the country are not liable to tax there. It is understood that similar arrangements can be made, for example, in France and Austria. Most European countries do not assess to tax, income, gains and wealth retained within offshore trusts and underlying companies, unless distributed to residents, so that there are plenty of jurisdictions in which the wealthy, internationally mobile individual may reside within Europe no less fiscally friendly than the UK under existing rules. This is in addition to those jurisdictions recognised as tax havens such as, within Europe, Monaco, Andorra, Liechtenstein, Gibraltar, the Isle of Man and the Channel Islands, or those further afield in the Caribbean, South East Asia and the Pacific regions. There is no shortage of congenial places for the internationally mobile wealthy to live, and modern communications make this a practical proposition.

The USA taxes individuals by reference to citizenship and this might be considered superficially attractive, but in fact many people residing in the UK take out British citizenship without intending to live here permanently or indefinitely, purely because it makes international travel much easier in terms of visa requirements and even airport queues. Many such individuals retain dual nationality despite their home state sometimes requiring them to renounce citizenship if another nationality is taken, although this can normally be re-obtained on returning home and giving up British citizenship. Nationality is a factor which features in the residence tie-breaker clause, under a number of double taxation treaties, but to give it greater dominance as a factor in the determination of an individual’s tax liability seems unlikely to be helpful.

As requested we enclose our comments on the table in Chapter 3. It should be borne in mind that such a table is of limited use in identifying the advantages and disadvantages of the current UK system of residence and domicile, or in measuring the international tax competitveness of the UK.

An executive seconded to the UK or elsewhere is interested in the net amount he will receive after tax, the cost of living in the jurisdiction, the effect of the local tax laws on his share options and shares disposed of and the non-fiscal attributes of his intended relocation.

The high net worth individual will take into account in deciding where to live the likely diminution in his wealth and income as a result of taxation, whether owned personally or by his family and through trusts, foundations, insurance policies and companies. He might choose a tax free location or a high tax jurisdiction which allows him to shelter his wealth directly, for example, by a fixed charge such as the Swiss forfait or the UK non-domicile rules, or indirectly through the use of offshore shelters not subject to tax in the jurisdiction in which he is living.

If he is unable to protect his wealth in this way, and considers that the resultant tax charge is unacceptable, he will be likely to move to a jurisdiction which will allow him to do so. Very few countries have the UK’s sophisticated anti-avoidance rules looking through offshore trusts and companies.

In relation to the summary:

No comment.

Tax incentives are given to encourage persons whose immigration is considered to be in the public interest, in particular if their professional activity is to promote science, research, arts and/or sports. The Austrian tax charge is reduced to what it would have been in the country from which they emigrated. High net worth individuals can similarly negotiate a special deal with the Ministry of Finance to pay a lump sum tax charge on a private deal basis which is based on the net benefit to the Austrian economy. Substantial tax advantages can be obtained through an Austrian private foundation.

Most capital gains other than real estate are exempt, and gains on real estate held for 5 years are taxed at 16.5%.

Inheritance and gifts tax is not charged on gifts under hand (don manuel), including bearer shares transferred by delivery.

No comment.

No comment.

No comment.

No comment.

High net worth individuals may negotiate a lump sum tax charge with the Ministry of Finance on a private deal basis which is based on the net benefit to the French economy. France is proposing to introduce special favourable tax and social security rates for expatriate executives seconded to France for a limited period, in addition to the existing tax-on-tax relief.

The tax law of the Federal Republic of Germany generally differentiates between domicile (Wohnsitz) and residence (gewöhnlicher Aufenthalt).

An individual has his domicile where he keeps a dwelling under conditions which suggest that he will maintain and use it. The law looks to the actual circumstances and does not address registration or other regulations. The dwelling must consist of rooms which are suitable for living. It must be used with some regularity. In case of temporary employment abroad it may be sufficient, however, if the dwelling is maintained and is available for use at any time.

An individual has his residence at the place where he stays under conditions which show that he is not there on a temporary basis. A temporary stay of more than six months’ uninterrupted duration will constitute residence from the commencement of the stay. Short-term interruptions and longer home vacations do not determinate residence. If the individual had the intention to remain for a longer period of time in Germany, he may have established residence even if the stay lasted less than six months. Neither a dwelling nor a limitation to one place or region is necessary. However, if the stay is exclusively for private purposes and does not last longer than one year, the individual has not established residence.

In Greece, a distinction is made between "residents" and "permanent residents" of Greece.

A permanent resident is somebody who resides in Greece and intends to reside in the country ad infinitum. The criteria used in practice are:

A permanent resident is subject to Greek income tax on a worldwide basis but unilateral relief is given for taxes paid abroad, even if there is no double tax treaty.

Mere residents are subject to Greek income tax only in relation to income arising in Greece.

In Greece there is no personal capital gains tax while a tax is levied on real property (irrespective of the status of the taxpayer).

The dividing line between permanent residents and (temporary) residents is somewhat "blurred" but, in practice, a person loses his permanent resident tax status if he takes up employment and residence abroad for more than a year, while a (temporary) resident would not become a permanent resident in a period of less than 5 years (unless he had the status of a permanent resident before, in which case he could re-acquire such a status very quickly). In all cases, the element of the intention of the taxpayer is a critical issue.

Expatriates working in Hungary may be entitled to a 10% deemed cost deduction as if they were self-employed. Housing costs paid by a foreign employer are not taxed on the employee.

No comment.

Income derived from writing, composing music, painting and sculpting, and from patents developed by individuals in Ireland is not subject to Irish tax. Nor are profits or gains from forestry or the sale of breeding stallions or greyhounds kept in Ireland.

No comment.

No comment.

No comment.

No comment.

No comment.

No comment.

No comment.

From 1 January 2004 a person will be resident in Norway if he stays in the country for more than 183 days in any 12-month period or more than 270 days in any 36-month period.

Resident foreigners working temporarily in Polish companies with foreign participation or in representative offices of foreign companies are taxed only on income derived from working in Poland or on Polish source income.

No comment.

Expatriate secondees of foreign companies providing expert assistance to Slovak companies are taxable only on Slovak source income.

No comment.

No comment.

The special treatment, known as lump sum taxation, or forfait, is available to foreigners who take up residence in Switzerland for the first time, or after an absence for more than 10 years, and who do not engage in lucrative activity in Switzerland.

Under this type of ruling, the taxation is in principle based on a deemed income equal to at least 5 times the annual rent of the property in which the individual lives. This means that any income from abroad will not be taxed and there will be no wealth tax.

If the tax bill for Swiss income (eg real estate) and privileged treaty income is higher than the lump sum, then the higher tax bill will be due.

In addition, some cantons offer a better treatment of inheritance and gift taxes for this particular type of taxpayer.

No comment.

No comment.

(territorial basis)