The passage discusses how Article 4(2) of the OECD Model Tax Convention provides "tie-breaker" rules

to resolve the tax residency of individuals who are considered residents in two different countries.
These rules establish a hierarchy of criteria to determine which country has the right to tax the
individual's worldwide income under a double tax treaty. The tie-breaker rules proceed in a specific
order:

1. Permanent Home

- The first test is whether the individual has a "permanent home" in one of the two countries. If they
have a permanent home in only one country, they will be considered a resident of that country for tax
purposes.

- A "permanent home" is defined by the OECD commentary as a place arranged and kept for
continuous use, not just a temporary stay for business or leisure. The home should be available to the
individual at all times, meaning it should not be rented out or otherwise inaccessible to them.

- The 2017 update to the OECD commentary clarified that a house owned by the individual but rented
out to third parties would not count as a "permanent home" because it is not available to them.

2. Centre of Vital Interests

- If the individual has permanent homes in both countries, the next criterion is to determine where
they have the closest personal and economic ties, or their "centre of vital interests." This involves
considering various factors, such as family location, social and professional relationships, business
activities, property administration, and cultural or political ties.

- Determining the centre of vital interests is complex and requires an analysis of all relevant facts. The
personal actions of the individual receive special attention, and the entire situation must be considered
to understand the individual's most significant connections.

3. Habitual Abode

- If the centre of vital interests cannot be determined, or if the individual does not have a permanent
home in either country, the "habitual abode" test applies. This criterion considers where the individual
habitually lives, indicating a regular or customary use of a property.

- The 2017 update emphasized that "habitual abode" does not simply mean counting the number of
days spent in each country. Instead, it refers to the frequency, duration, and regularity of stays that form
a settled routine in the individual's life. Thus, it is possible for a person to have a habitual abode in both
countries.

4. Nationality
 - If habitual abode does not resolve the issue, the tie-breaker looks at the individual's nationality. If the
person is a national of one country but not the other, they will be deemed a resident of that country.

5. Mutual Agreement Procedure

- If none of the above criteria resolve the tie, the competent authorities of the two countries will use a
mutual agreement procedure to come to a decision regarding the individual's residency.

Key Concepts Explained:

- Permanent Home vs. Habitual Abode:

- A "permanent home" refers to a dwelling that is continuously available for the individual's use,
representing a permanent arrangement rather than a temporary stay. The home must reflect personal
use, such as having the individual's belongings there or being a place where they live for extended
periods.

- "Habitual abode" involves frequent use of a property, suggesting that it is part of the individual's
routine and not just a temporary or transient place of stay. It is assessed over a sufficient period to
understand whether the stays are part of the settled routine.

Examples from Case Law:

1. O'Brien v. Quigley [2013] IEHC 398 (Ireland)

- The Irish High Court dealt with whether an Irish national who lived in Portugal but owned property in
Ireland had a "permanent home" in Ireland. The tax authorities argued that because the property was
being refurbished, it remained available to the taxpayer. However, the court disagreed, stating that the
property did not qualify as a permanent home since it lacked a personal link (e.g., no belongings or
occupancy by the individual).

2. Beng Tan v. Commissioners [2016] AATA 1062 (Australia)

- In this case, an Australian citizen lived at his parents' house in Australia and his wife's parents' house
in Malaysia. The tax authorities deemed the taxpayer a resident of Australia based on the availability of
a "permanent home" in Australia (his parents' house). The court confirmed that having a key to the
house, keeping personal effects there, and using it as an official address established it as a permanent
home.
3. Pike v. Commissioner of Taxation [2019] FCA 2185 (Australia)

- Mr. Pike, an Australian citizen, worked abroad in Thailand and later Tanzania and Dubai. The court
had to determine whether he was a resident of Australia or Thailand during the tax years in question.
Although he rented houses in Thailand, the court ruled that his strongest personal and economic ties
were with Thailand. It found that his rented accommodation did not qualify as a permanent home
according to the OECD's interpretation, challenging the prevailing view that rented homes could meet
the criteria for a permanent home if not intended for short-term use.

Challenges in Applying the Tie-Breaker Tests:

- Global Mobility: In a globalized world, determining a person's "centre of vital interests" is more
complicated, as individuals often have significant connections to multiple countries. This complexity
requires tax authorities to weigh all facts and circumstances to find the "centre of the centres."

- Court Interpretations: Different courts may not always align with the OECD's commentary, leading to
varying outcomes. For example, in Pike's case, the interpretation of "permanent home" differed from
the standard view, creating potential inconsistency in applying the rules.

Conclusion:

Article 4(2) of the OECD Model Treaty provides a structured approach for resolving dual residency cases
by examining the individual's connections to each country. The process involves a hierarchical test,
starting with the availability of a permanent home and proceeding through the centre of vital interests,
habitual abode, nationality, and mutual agreement. However, applying these tests is not always
straightforward, and the evolving nature of international lifestyles presents ongoing challenges in
ensuring consistent and fair outcomes.

Let’s break down the passage and delve into the important elements regarding the changes to Article 4
of the OECD Model Tax Convention, focusing on dual residency for entities and the shift from the Place
of Effective Management (POEM) test to the Mutual Agreement Procedure (MAP).

1. Background on the OECD Model Tax Convention and Article 4

The OECD Model Tax Convention is used as a framework for negotiating bilateral tax treaties to avoid
double taxation and prevent tax evasion. Article 4 of the Model Convention determines a taxpayer's
residency for treaty purposes. Residency status is crucial because it affects tax benefits, such as relief
from double taxation.
a. Pre-2017 Approach: The POEM Test

- Previously, the OECD Model Convention used the POEM test as a "tie-breaker" rule to resolve cases
where a company or entity was considered a resident in two countries simultaneously. The POEM test
aimed to determine the primary residence of the entity by identifying the place where the entity's
management and commercial decisions were made in substance.

- The concept was that the "effective management" of an entity refers to the location where the most
significant business decisions are made, not necessarily where administrative tasks occur. This approach
required analyzing various facts and circumstances to pinpoint the single place of effective management
at a given time.

b. Challenges with POEM

- Application Issues: The POEM test proved challenging to apply consistently across different
jurisdictions, as countries could interpret the term differently. For example, some might focus on the
location of the board meetings, while others might emphasize where strategic decisions are actually
carried out.

- Potential for Manipulation: The POEM test could be manipulated by multinational enterprises (MNEs)
seeking to change their tax residence by shifting the place where key decisions are made, potentially
moving management to low-tax jurisdictions.

2. The 2017 Update: Shift to the Mutual Agreement Procedure (MAP)

The 2017 update to the OECD Model Treaty introduced a significant change to Article 4 by replacing the
POEM test with the MAP as the method for resolving dual-residency situations.

a. Introduction of the MAP

- Under the new approach, when a person (other than an individual) is a dual resident (i.e., considered
a tax resident in two countries), the tax authorities of the two countries will attempt to reach an
agreement to determine the place of tax residence.

- The MAP considers various factors, such as:

- Place of Effective Management (POEM): Even though the MAP replaced POEM as the sole test,
POEM remains a factor in the decision-making process.

- Place of Incorporation or Constitution: The legal jurisdiction where the entity was formed or
registered can influence the decision.
 - Other Relevant Factors: This can include the location of the entity’s economic activities, the
residence of its board of directors, or where major business operations take place.

b. Outcomes When Mutual Agreement is Not Reached

- If the competent authorities of the two countries cannot agree on the entity's residence status, the
dual-resident entity may not be entitled to any relief or exemption from tax under the treaty. This
implies that the entity could face taxation in both countries without the benefits of the treaty.

- However, there is a provision that allows the competent authorities to agree on specific exemptions
or reliefs on a case-by-case basis.

3. The Role of the Commentary and Alternative Approaches

a. OECD Commentary on MAP (Paragraph 24.1)

- The updated commentary explains that various factors must be evaluated to determine the tax
residence of a dual-resident entity, considering the real substance of management and commercial
decision-making.

- Paragraph 24.1 suggests a broader analysis rather than a rigid application of the POEM, considering
the place of incorporation, the location of the headquarters, and other economic links.

b. Use of POEM as an Alternative

- While the 2017 update replaced POEM with MAP, some countries may still prefer to use POEM as a
tie-breaker and can opt to continue applying it under their tax treaties.

- Paragraph 24.5 of the commentary acknowledges that different countries have reservations and
specific approaches regarding the tie-breaker, as countries can interpret POEM differently or have
distinct legal precedents affecting their stance.

4. The Multilateral Instrument (MLI) and BEPS Project

- MLI and BEPS Background: The Multilateral Instrument (MLI) was developed under the OECD's Base
Erosion and Profit Shifting (BEPS) project to enable simultaneous updates to multiple tax treaties to
address tax avoidance strategies.

- Optional Adoption of the MAP: The MAP approach introduced in the 2017 update is optional under
the MLI. Countries can choose whether to adopt the MAP, retain POEM, or use another tie-breaking
mechanism when updating their bilateral treaties.
5. Historical Context and Interpretations of POEM

- 2014 Commentary on POEM: The 2014 OECD commentary described the POEM as the place where
"key management and commercial decisions that are necessary for the conduct of the entity’s business
are in substance made." This requires a thorough analysis of facts, including where significant decisions
are taken, even if formal meetings are held elsewhere.

- Debates on POEM: There is a long-standing debate about whether POEM aligns more closely with the
"seat" concept (legal headquarters) or "central management and control" (actual decision-making
power). The 1977 OECD commentary aligned it with central management, but later views acknowledged
differences.

6. Country-Specific Applications and Examples

- UK's Approach: Initially, the UK aligned POEM with central management and control, but later
recognized situations where they might differ (e.g., a company run by executives abroad but controlled
by non-executive directors in the UK).

- US Model Treaty: The 2016 US Model Treaty introduced a mutual agreement approach similar to the
MAP, where dual-resident entities are not automatically considered residents of either country for
claiming benefits.

7. Significant Case Law Involving POEM

- South African Case (Oceanic Trust Co v SARS, 2011):

- The South African court held that the POEM of a trust was the location where management
decisions were substantively made, not merely formal administrative functions. The court sided with the
interpretation that management in Mauritius was formal, but substantive decisions were made in South
Africa.

- UK Case (HMRC v Smallwood, 2010):

- The UK Court of Appeal emphasized that while formal board decisions were made in Mauritius, the
substance of decision-making occurred in the UK. Thus, the trust was considered UK-resident.

- Lee and Bunter v HMRC (2017):

 - This case further illustrated the complexities of determining POEM, where the tribunal looked at
where important management decisions (like asset disposal) occurred in substance rather than formal
locations of decision-making.

8. Implications of the 2017 Update

- Flexibility and Case-by-Case Analysis: The shift to MAP provides a flexible approach, allowing for a
case-by-case determination of tax residence. The new approach accounts for the economic realities of
the business, rather than relying solely on formal criteria.

- Continued Relevance of POEM: Although POEM is no longer the primary tie-breaker, it remains a
significant factor in the analysis. Countries may still use it in practice, and historical understanding of
POEM is crucial for interpreting tax treaties.

- Challenges and Uncertainties Remain: Since the new approach involves negotiations between
competent authorities, it can be less predictable than a rigid rule like POEM. The outcome may vary
depending on the positions taken by the countries involved.

In summary, the 2017 update to the OECD Model Treaty replaced the POEM test with a more flexible
MAP process for determining the residence of dual-resident entities. This shift aims to provide a more
holistic analysis of an entity’s economic ties and decision-making processes. However, it also introduces
some uncertainties, as competent authorities need to agree on the outcomes. The debate over the
exact role of POEM continues, and jurisdictions may interpret and apply the concept differently based
on case law and specific treaty provisions.

1. POEM vs. Seat and Central Management and Control (CMC) Concepts

• Seat Concept: The "seat" refers to the legal location or place of incorporation of a
company. It is where the company is officially registered and where its legal or
administrative functions are centered.
• Central Management and Control (CMC): This concept, traditionally used in UK tax
law, refers to the location where the highest level of control and strategic management is
exercised, typically by the board of directors or key decision-makers.
• POEM: POEM, as defined by the OECD, focuses on where key management and
commercial decisions that are necessary for the conduct of an entity's business are
substantively made. It reflects the actual place where decisions are taken rather than just
where day-to-day operations or administrative tasks occur.

2. Ongoing Debate Over POEM's Alignment

 • The passage highlights that there has been a long-standing debate over whether POEM is
more closely aligned with the seat or CMC concept.
• Despite the discussions, including those held by the 2001 Technical Advisory Group, no
clear consensus has been reached on a precise definition. The suggestion is that POEM
may be nearer to the seat concept because it focuses on substantive decision-making
rather than simply administrative functions.

3. Changes in Interpretation Over Time

• When the 1977 OECD Model Treaty was published, the UK Inland Revenue equated
the POEM with the place of central management and control. This suggested that both
concepts were essentially the same in identifying the tax residence.
• However, with the 1992 revision of the OECD Model Treaty, the UK Inland Revenue's
view evolved, acknowledging that the POEM could be different from the CMC location.
The revision recognized that effective management might occur in a different place than
where the central management and control is exercised.

4. Examples of Divergence Between POEM and CMC

• The passage provides an example to illustrate the divergence: if a company is run by

executives who make key decisions abroad, but the ultimate directing power rests with
non-executive directors who meet in the UK, the POEM may be located abroad, while the
CMC (and therefore tax residency) could be in the UK.
• This example shows that POEM and CMC do not always coincide, as POEM focuses on
the actual location of decision-making, while CMC may look at the legal or formal
structure of management.

5. Implications for International Tax Treaties

• The recognition of these nuances has led to changes in tax treaty practice. While POEM
was initially equated with CMC, evolving interpretations have acknowledged that
different factors might influence the determination of a company's tax residency.
• Modern treaties and the OECD Model have begun to reflect this understanding, leading
to more flexible approaches to resolving dual residency cases, such as using Mutual
Agreement Procedures (MAP) instead of rigid POEM-based tests.

In summary, this passage illustrates how the concept of POEM has shifted from being closely
associated with CMC towards being recognized as a distinct criterion that may align more
closely with the seat concept. The evolution in the OECD's approach acknowledges the
complexity of modern business structures and the need for more flexible methods in determining
tax residence

1. Case Background: The Oceanic Trust Co Case and Smallwood Decision

• In the case involving Oceanic Trust, the trust argued that its key management decisions
were made in Mauritius by its sole trustee, the Oceanic Trust company. This argument
 aimed to establish that the POEM, and thus the tax residency, was in Mauritius rather
than South Africa.
• The trust referenced the UK case HMRC v Smallwood and Anor (2010) to support its
claim. The Smallwood case provided guidance on determining the POEM of an entity.

2. Key Principles Established by the Smallwood Case Regarding POEM

The South African High Court accepted the Smallwood decision as a useful reference and
highlighted several principles:

• Substantive Decision-Making Location: The POEM is where key management and

commercial decisions necessary for the entity's business are substantively made. This
aligns with the OECD’s understanding of POEM.
• Ordinary Location for Decision-Making: Typically, the POEM is the place where the
entity’s senior decision-makers (e.g., board of directors) determine actions for the entity
as a whole.
• Comprehensive Evaluation: There is no absolute rule to determine the POEM; it
requires an analysis of all relevant facts and circumstances. This flexible approach
considers the substance of management activities rather than merely their formal or legal
locations.
• Single POEM at Any One Time: While an entity may have multiple places of
management, there can only be one POEM at any given moment. This is important for
establishing a singular place of tax residency.

3. South African Court’s Interpretation and Its Implications

• The South African High Court endorsed the OECD’s interpretation of POEM, which
focuses on the substantive location of key decision-making, rather than on the
administrative tasks or day-to-day management.
• This ruling differed from SARS’ previous stance in its Interpretation Note, which
emphasized where day-to-day management occurred and where decisions were
implemented. The court's focus was on where the key decisions were actually made.

4. Distinction Between POEM and Central Management

• The court clarified that the POEM is not necessarily the same as the central management
or the formal seat of the entity. Although management may be centralized in one place,
the effective management could occur elsewhere if significant decision-making happens
abroad.
• The decision also emphasized that while the principles from the Smallwood case were
used to resolve this particular dispute, the court did not establish the Smallwood test as
the sole or definitive standard for determining POEM. It reiterated that various factors
must be considered, and no single test would always apply.

5. Broader Impact on International Tax and POEM Determination

 • This ruling reflects the flexible nature of the POEM concept under international tax law,
consistent with the OECD Model Treaty's guidance. The POEM determination requires
considering the substance of management activities rather than just formal legal
arrangements.
• The passage also notes that the OECD commentary does not treat the location of board
meetings as a decisive factor in itself, reinforcing that the focus is on where substantive
decision-making takes place, not merely where formalities occur.

6. Ongoing Debate

• The debate over the exact criteria for determining POEM continues. There is no
universally accepted rule for deciding the location of the POEM, as it lies between
various concepts like "seat," "central management and control," and other factors that
influence tax residency.

In summary, the passage illustrates that POEM determination involves analyzing the substance
of where key management decisions are made, aligning with the principles set out in OECD
guidance. While referencing precedents like the Smallwood case helps, it remains essential to
assess each case's unique facts and circumstances comprehensively.

The Lee and Bunter v HMRC case addresses the application of the Place of Effective
Management (POEM) concept in determining the tax residency of a trust. This case illustrates
the complexities involved in assessing where an entity is effectively managed and how
formalities may not always align with substance. Here’s a breakdown of the key elements of the
case:

1. Background of the Case

• The taxpayers participated in a tax avoidance scheme known as the "round the world"
scheme. The goal was to use the UK-Mauritius double tax treaty to avoid paying UK tax
on gains realized by UK trustees.
• To succeed, the trust needed to be considered a resident outside the UK, relying on the
tie-breaker provisions in the UK-Mauritius tax treaty. The key issue was whether the
POEM of the trust was in Mauritius or the UK.

2. The Tribunal's Approach to Determining POEM

• The tribunal focused on the central question: “Where were the most important decisions
relating to the governance or management of the settlements taken?”
• The tribunal examined the nature of the key decisions, such as the decision to dispose of
the shares, which constituted the entirety of the trust’s assets, and identified who made
these decisions. This approach aligns with the substance-over-form principle, focusing on
actual decision-making rather than formal arrangements.
3. Findings of the Tribunal

• The tribunal found that although, at a formal level, the decisions appeared to have been
made in Mauritius by the trust corporation, the reality was different. In substance, the
critical decisions were actually made in the UK.
• Therefore, the POEM was determined to be in the UK, making the trust a UK resident for
tax purposes. This meant that the trust could not use the UK-Mauritius treaty to avoid UK
taxes on the gains.

4. Implications of the Tribunal’s Decision

• The decision emphasizes the importance of analyzing where substantive management and
control activities occur rather than relying solely on formalities. It serves as a reminder
that formal structures, such as having a trustee based abroad, may not be sufficient if the
actual decision-making takes place elsewhere.
• The tribunal's approach aligns with the principle that POEM should reflect where key
management and commercial decisions are made, consistent with the OECD's guidance
on POEM.

5. Appeal and Potential Further Developments

• The taxpayers appealed the tribunal's decision, indicating that further legal developments
could arise. It's important to monitor subsequent decisions in this case for any changes or
clarifications regarding the application of POEM.

6. Updated 2017 OECD Model Treaty Approach to POEM

• Under the updated 2017 OECD Model Treaty, POEM is no longer the sole determinant in
dual residency cases. Instead, it is one of the factors considered as part of the Mutual
Agreement Procedure (MAP).
• MAP allows tax authorities from the two countries involved to come to an agreement on
the entity's tax residency, considering various factors beyond just POEM.

Key Takeaways:

• This case highlights that POEM requires a thorough examination of where substantive
decisions are made, not just where they are formally documented.
• The tribunal's decision reinforces the need for a substance-over-form approach in
determining the tax residency of trusts and entities.
• The move towards MAP under the 2017 OECD Model Treaty reflects a trend away from
a rigid reliance on POEM as the sole tie-breaker, acknowledging the complexity of
modern international business structures.

Overall, the Lee and Bunter v HMRC case illustrates the complexities in establishing POEM and
serves as a reminder of the importance of substance in tax residency determinations.