Administrability, Residence, And Citizenship – Overview
As noted earlier, tax mavens often invoke ability-to-pay considerations to justify the worldwide taxation of an individual’s income and assets by the nation in which she resides. The country in which an individual lives exercises in personam jurisdiction over that individual. In addition to such personal jurisdiction, the nation of her residence is often the country in which an individual works (at least in significant part), earns some (often much) of her investment income, and maintains some (often much) of her assets. By virtue of her presence in the country of her residence, that country, the argument goes, is best positioned to measure and tax an individual’s overall capacity to pay by aggregating her worldwide income and assets and by enforcing against this resident the taxation of her aggregate income and assets. These ability-to-pay considerations, combined with the substantial public benefits the nation of residence provides to its residents, underpin the near universal practice of worldwide income taxation by the nation in which an individual lives.
At first blush, this argument for residence-based taxation leaves no room for a defense of citizenship-based taxation. If residence-based taxation of worldwide income and assets is the proper way to measure and tax an individual’s overall abilityto- pay and if such residence-based taxation correctly reflects the governmental benefits bestowed on individuals by virtue of their respective residences, it is the nation in which a U.S. citizen lives which should tax her worldwide income and holdings. If a U.S. citizen lives abroad, it follows from this argument, the nation of residence, rather than the United States, is best positioned to assess such citizen’s ability to pay by aggregating and taxing her worldwide income and assets. Moreover, the nation in which an individual lives is also properly compensated for the public benefits it provides to its residents by taxing globally such residents’ income and assets.
However, there is a compelling administrability argument for citizenship-based taxation: Citizenship is an administrable proxy for domicile, an individual’s permanent home. Many nations, implicitly or expressly, define residence for tax purposes as domicile rather than physical presence during the tax year. When residence is defined as domicile, residence-based taxation and citizenship-based taxation overlap; domicile [*1324] resembles citizenship since both emphasize permanent allegiance rather than immediate physical presence. An individual may be domiciled in a particular nation on the basis of his long-term affiliation with that nation even if he is physically absent from that nation for prolonged periods, just as he may be a citizen of a nation from which he has long been absent. In such cases, the permanent allegiance of domicile resembles the permanent allegiance of citizenship.
Citizenship is accordingly an administrable proxy for domicile, a proxy which, while sometimes over inclusive, obviates the need for fact-intensive determinations of permanent residence. Thus, citizenship-based taxation makes sense as a matter of enforceability; citizenship, as a marker for domicile, implements residence-based taxation in an administrable manner. From this vantage, citizenship-based taxation proves to be closer to residence-based taxation than first appears to be the case, since citizenship and domicile resemble each other by embodying permanent allegiance to a particular nation even in the absence of immediate physical presence in that nation.
To explore this defense of citizenship-based taxation as an administrable proxy for domicile-based taxation, I examine and compare the tax definitions of residence utilized by three English-speaking nations, Canada, Australia, and the United Kingdom. 154 Four themes emerge from this international inquiry. First, the definition of residence for tax purposes typically takes one of four alternative forms. For tax purposes, residence status is usually triggered automatically by a fixed quantum of physical presence in a particular nation, usually 183 days in the year. In addition, residence is also often defined in tax contexts subjectively, in terms of less physical presence augmented by additional factors connecting an individual to the country in question. Moreover, residence for tax purposes is frequently characterized in terms of “ordinary residence” in a particular nation. Finally, residence for tax purposes is also often, implicitly or expressly, defined as domicile, an individual’s permanent home. 155 Second, these concepts – residence, ordinary residence, domicile – often vary in meaning among different tax systems. Sometimes these variations in meaning are subtle; sometimes they are quite pronounced. There is consequently divergence among residence-based income tax systems, even [*1325] when the tests of residency for tax purposes are formulated in nominally identical terms. Third, determining residence for tax purposes is a fact-intensive inquiry, particularly
when residence is defined not as a fixed quantum of physical presence in a specific nation but, rather, as physical presence supplemented by other circumstances, as “ordinary” residence, or as domicile. In such contexts, residence status is manipulable by the (potential) taxpayer and costly for the tax collector to monitor and enforce. Fourth, the outcome in many cases is the same whether the criterion for taxation is residence defined as domicile or citizenship. Both domicile and citizenship focus upon permanent allegiance rather than immediate physical presence. Because residence is often a fact-intensive, potentially manipulable inquiry, citizenship, as a proxy for domicile, provides a more administrable approach to the taxation of an individual’s worldwide income and assets than does domicile.
In short, citizenship-based taxation is not an alternative to residence-based taxation but, rather, provides a more enforceable approach to worldwide taxation when residence means domicile. Since both citizenship and domicile measure permanent allegiance rather than immediate physical presence, citizenship-based taxation reaches similar results as domicile-based taxation, but reaches those results more efficiently, without factually intensive determinations of an individual’s domicile, i.e., his permanent home.
- Canada’s Residence-Based Taxation
Reflecting the international norm, Canada’s Income Tax Act (“ITA”) imposes worldwide taxation on all residents of Canada without regard to Canadian citizenship. 156 Consequently, a nonresident Canadian citizen pays Canadian income tax only on her Canadian-source income, 157 unlike a nonresident U.S. citizen who is liable for U.S. taxes on his worldwide income. 158 A resident of Canada who ceases to reside in that country is subject to a “deemed disposition” regime similar to new § 877A 159 since her abandonment of residence (even if she remains a Canadian citizen) terminates Canada’s taxation of her worldwide income.
[*1326] The ITA does not define Canadian residence. The ITA does instruct that a person is a Canadian resident for tax purposes if she is “ordinarily resident” in Canada. 160 The ITA also “deems” certain persons to be Canadian residents. 161 These deemed residents include individuals serving abroad in Canada’s military forces, 162 individuals acting in foreign countries as ambassadors and other “servants of Canada,” 163 and the dependent children of these individuals employed abroad by Canada. 164 The ITA also “deems” an individual to be a Canadian resident in any particular year under an automatic physical-presence test, namely, if the individual “sojourns in Canada in the year” for a total of “183 days or more.” 165
This statutory scheme has given rise to case law and administrative pronouncements under which a particular individual’s status as a Canadian resident vel non for income tax purposes is “determined on a case by case basis after taking into consideration all of the relevant facts.” 166 Chief among these fact-sensitive decisions is the Supreme Court of Canada’s opinion in Thomson v. Minister of National Revenue. 167
Mr. Thomson was a Canadian citizen. 168 Upon his retirement, he initially spent little time in Canada and kept no home there. Subsequently, in deference to his wife’s desire to be closer to family and friends, Mr. Thomson started spending summers in Canada. In 1935, he built a home in New Brunswick. However, he never spent 183 days in Canada in any year. Consequently, Mr. Thomson could not be classified as a Canadian resident for tax purposes by virtue of his physical presence alone. 169
Mr. Thomson spent most of the year at “his chief abode at Pinehurst, North Carolina … an expensive dwelling.” 170 He also spent “a month or two at Belleair, Florida” 171 annually. While he was in the United States, Mr. Thomson’s Canadian dwelling was closed, “except the quarters of a housekeeper and wife which [were] open the year around.” 172 “At all three places,” i.e. Mr. Thomson spent most of the year at “his chief abode at Pinehurst, North Carolina … an expensive dwelling.” 170 He also spent “a month or two at Belleair, Florida” 171 annually. While he was in the United States, Mr. Thomson’s Canadian dwelling was closed, “except the quarters of a housekeeper and wife which [were] open the year around.” 172 “At all three places,” i.e.,
In the context of Mr. Thomson’s follow-the-sun 174 lifestyle, the Supreme Court of Canada, with one judge dissenting, upheld the position of the Canadian tax authorities that Mr. Thomson was a Canadian resident and thus taxable by Canada on his worldwide income. The various judges’ opinions all emphasize that, when an individual, like Mr. Thomson, is physically present in Canada for less than 183 days in any year, his status as a Canadian resident vel non for tax purposes entails a facts and- circumstances inquiry:
The gradation of degrees of time, object, intention, continuity and other relevant circumstances, shows, I think, that in common parlance “residing” is not a term of invariable elements, all of which must be satisfied in each instance. It is quite impossible to give it a precise and inclusive definition. It is highly flexible, and its many shades of meaning vary not only in the contexts of different matters, but also in different aspects of the same matter. In one case it is satisfied by certain elements, in another by others, some common, some new. 175
Thomson would not have arisen under a citizenship-based tax system since Mr. Thomson was always a Canadian citizen and would thus have been subject to worldwide Canadian taxation if Canada taxed on that basis. Thomson thus highlights the efficiency of administering citizenship-based taxation as compared to residence-based taxation. Under a system of citizenship based taxation, cases like Thomson do not occur, since citizens are automatically subject to taxation on their respective worldwide incomes. There is thus no need under such a system for the tax authorities to delve into the taxpayer’s lifestyle, nor can the taxpayer arrange his affairs to minimize the appearance of residence under a system of citizenship-based taxation.
The opinion of the Tax Court of Canada in Gaudreau v. The Queen 176 more recently illustrated the fact-based nature of residence determinations and the administrative difficulties inherent in such determinations. Gaudreau also indicates that residence for tax purposes is often understood as domicile and that domiciliary taxation resembles citizenship-based [*1328] taxation because domicile and citizenship are both measures of permanent allegiance rather than short-term physical presence.
Mr. Gaudreau was a Canadian citizen. An engineer, Mr. Gaudreau worked for his employer in Egypt from September 1996 until April 2000. During this period, Mr. and Mrs. Gaudreau maintained in Ontario a furnished home that Mrs. Gaudreau had inherited from her parents. While in Egypt, they did not rent their Ontario home, which Mrs. Gaudreau used occasionally while her husband stayed in Egypt. In Egypt, Mr. and Mrs. Gaudreau “rented a semi-furnished apartment on a yearly basis.” Among his continuing contacts with Canada, Mr. and Mrs. Gaudreau’s adult children lived there and Mr. Gaudreau maintained Canadian bank accounts. Mr. Gaudreau made one short return visit to Canada during the four years he was employed in Egypt and intended to retire to Canada after completing his assignment in Egypt.
Citing Thomson and the factual nature of residence determinations, the court held that Mr. Gaudreau, while employed and physically present in Egypt, remained “ordinarily resident” in Canada and thus subject to Canadian income taxation on a worldwide basis. According to the court, the facts indicated that Mr. Gaudreau “and his wife left Canada on a temporary basis only.” Mr. Gaudreau did not “give up his ties with Canada”: “[A] person’s temporary absence from Canada does not necessarily lead to a loss of Canadian residence … even if close personal and economic ties are maintained in Canada.” 177 Like Thomson, Gaudreau is a fact-intensive case. Also like Thomson, Gaudreau would not have arisen if Canada, like the United States, imposed worldwide income taxation on its nonresident citizens, since Mr. Gaudreau, like Mr. Thomson, remained at all times a Canadian citizen.
However, Thomson and Gaudreau differ in the tests of residence each applied. Mr. Thomson spent much of each year in Canada at his home there. Residence in Thomson was a matter of his annual physical presence in Canada. That presence fell short of the 183 days necessary for automatic residence but was sufficiently substantial so that, when augmented by other factors, Mr. Thomson was a resident of Canada for tax purposes on a facts-and-circumstances basis. Mr. Gaudreau, in contrast, briefly returned to Canada once in four years. Otherwise, he was in Egypt. While phrased in statutory terms as “ordinary residence,” the concept of residence implicitly underpinning Gaudreau is the concept of domicile, that is to say, the taxpayer’s permanent home.
Though Mr. Gaudreau had no significant physical presence in Canada for four years, the Canadian court nevertheless characterized his stay in Egypt as “temporary” and thus consistent with his status as a Canadian resident. Mr. Gaudreau can only be considered as “ordinarily” resident in Canada for this extended period if residence is understood as domicile, i.e., [*1329] “permanent residence,” 178 in the nation to which an individual “is most closely related” 179 despite his physical absence from that nation. If Egypt was only Mr. Gaudreau’s “temporary” home, Canada must have been his permanent home.
Gaudreau indicates that, when residence is defined as domicile, residence-based taxation resembles citizenship-based taxation.When residence is understood as an individual’s domicile (as it implicitly was in Gaudreau), the focus shifts from the individual’s physical presence in any particular year to the nature of his long-term allegiance. Mr. Gaudreau’s retention of his Canadian citizenship was an administrable proxy of this permanent allegiance. Despite his four-year presence in Egypt, Mr. Gaudreau viewed Canada as his permanent home. Domiciliary residence in a case like Gaudreau proves citizenship-like, since the key inquiry in such a case is not annual physical presence, but long-term commitment.
In short, Canadian law embodies alternative tests of residence: an automatic physical-presence test (residence per se if an individual spends 183 or more days in Canada); a subjective physical-presence test (residence based on the totality of the circumstances, including physical presence); “ordinary” residence; and, by implication, domicile. Especially in its latter three incarnations, residence is an inescapably fact-intensive inquiry. Citizenship is an administrable proxy for domicile – permanent allegiance even in the absence of immediate physical presence – and thus obviates the need for extensive factual inquiry. A Canadian system of citizenship-based taxation would with greater efficiency have obtained the same results in Thomson and Gaudreau, since both Mr. Thomson and Mr. Gaudreau retained their respective Canadian citizenships.
- Australia’s System of Residence-Based Taxation
The concept of domicile, implicit in the Canadian tax notion of ordinary residence, is explicit in Australian tax law. Like Canada, Australia taxes its residents on a worldwide basis, i.e., on income “derived directly or indirectly from all sources, whether in or out of Australia.” 180 For these purposes, Australia’s tax statute, somewhat tautologically, defines as an Australian resident “a person … who resides in Australia.” 181 In addition, the Australian statute provides that a person is an Australian resident:
- whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;
- who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia. 182
The Australian tax statute, like its Canadian counterpart, thus declares an individual physically present in Australia for 183 days in the year to be an Australian resident for tax purposes for that year. However, the Australian 183-day rule is a presumption of residence that can be rebutted if the individual has “his usual place of abode … outside Australia.” 183 Also like its Canadian counterpart, the Australian tax law classifies a person physically present in Australia for less than 183 days to be an Australian resident if supplemental factors indicate that the person “resides in Australia.” 184
The Canadian court implicitly applied the concept of domicile in Gaudreau by finding Mr. Gaudreau’s four-year stay in Egypt to be “temporary” and thereby viewing Canada as his permanent home. In contrast, the Australian tax statute expressly defines domicile as a form of Australian residence, triggering worldwide income taxation. There is, however, considerable tension within the Australian statute, as an individual domiciled in Australia can nevertheless satisfy the Australian tax commissioner that his permanent place of abode is outside Australia.” 185 Since domicile is an individual’s permanent home, it is not readily apparent how a person domiciled in Australia can have a permanent home elsewhere, although the Australian statute acknowledges this possibility.
Unsurprisingly, the Australian courts and tax authorities confronting this statutory scheme emphasize (like their Canadian peers) the fact-intensive nature of determinations of residence. As Australia’s Commissioner of Taxation has declared, under the Australian tax statute, “it is not possible to provide conclusive rules for determining the residency status of individuals leaving Australia temporarily… . The weight to be given [*1331] to each factor will vary with individual circumstances of each case and no single factor is conclusive.” 186
Instructive in this context is the decision of the Federal Court of Australia in Federal Commissioner of Taxation v Applegate. 187 Mr. Applegate was an Australian lawyer who had been born in Australia 188 and apparently was an Australian citizen. 189 He agreed to open an office for his Sydney-based law firm in Vila, New Hebrides. In November 1971, Mr. and Mrs. Applegate (who was pregnant) surrendered their apartment in Australia and rented a home in Vila. Mr. Applegate obtained admission to the New Hebrides bar and “left no assets in Australia, but he retained his membership in Australia of the Hospitals Contribution Fund.” 190
Originally, the Applegates had intended for their child to be born in New Hebrides, but they instead elected for Mrs. Applegate to return to Sydney for the child’s birth. Subsequently, when Mr. Applegate’s health deteriorated, he decided that the tropical climate in New Hebrides was bad for him. The Applegates accordingly returned to Sydney for good in September 1973, earlier than they had originally expected. The issue in Applegate was whether Mr. Applegate was an Australian resident while in New Hebrides and thus taxable by Australia on the non-Australian income Mr. Applegate earned while employed abroad. Mr. Applegate acknowledged that his domicile remained Australia while he worked and lived in New Hebrides. However, he argued, on these facts it was his “clear intention … [to] reside outside Australia permanently but not indefinitely,” 191 and he came back to Australia sooner than expected only because of unanticipated health problems. Consequently, though Australia was his domicile, Mr. Applegate was not an Australian resident for tax purposes while in New Hebrides since he had his “permanent place of abode” in Vila. Hence, Mr. Applegate maintained, as a nonresident of Australia, he was not liable for Australian income taxes on the non-Australian income he earned in New Hebrides.
The Australian courts agreed, threading their way through the circuitous statutory path under which Mr. Applegate could be domiciled in Australia, but still have his “permanent place of abode” in New Hebrides. [*1332] Confronting the tension in the Australian tax statute, Judge Fisher acknowledged that “it would amount to a contradiction in terms to suggest that an independent person could be domiciled in Australia but with his permanent residence outside Australia, if permanent bears its ordinary meaning.” 192 Consequently, Judge Fisher construed the statutory term “permanent place of abode” to mean something less than permanent, “the taxpayer’s fixed and habitual place of abode. It is his home, but not his permanent home.” 193 Thus, Mr. Applegate was not an Australian resident while practicing law and living in New Hebrides. Though he was domiciled in Australia for that period, his home in New Hebrides was sufficiently “fixed and habitual” to make Mr. Applegate a nonresident of Australia.
For present purposes, it is not critical whether Applegate was decided correctly. 194 It is, however, important that Applegate would not have arisen if Australia, like the United States, taxed the worldwide incomes of its citizens. 195 This again highlights the comparative administrative efficiency of enforcing citizenship-based taxation. Such taxation obviates the need for fact intensive inquiries into resident status. Citizenship is an enforceable proxy for domicile, as both are categories of permanent allegiance to a particular nation even in the face of physical absence from that nation.
Mr. Applegate conceded that Australia remained his domicile while he and his family lived in New Hebrides. However, similarly situated taxpayers may not be so forthcoming since domicile, in the conventional sense of the taxpayer’s permanent home, may entail a fact-intensive inquiry that would impede the tax collector’s efforts. Citizenship, by way of contrast, is a more easily determined status and thus makes the tax more readily enforceable.
- The United Kingdom’s Residence-Based Taxation
The United Kingdom’s tax law also deploys the terms “resident,” “ordinarily resident,” and “domicile,” but differently than do the tax laws of Australia and Canada. Indeed, the United Kingdom’s approach to residence-based taxation highlights the variation among residence-based tax systems, as well as the similarities of domicile and citizenship.
[*1333] Instructive in this context is Reed v. Clark. 196 The taxpayer in Clark was Dave Clark of the Dave Clark Five. 197 The issue addressed in Clark was Mr. Clark’s status as a resident vel non for U.K. income tax purposes for the tax year 1978- 1979. 198 Mr. Clark was a British citizen. He was domiciled in the United Kingdom and was both “resident” and “ordinarily resident” in the United Kingdom before and after the tax year 1978-1979. However, for that particular year, Mr. Clark lived in the Los Angeles area and made a quick trip to Toronto and New York. He did not spend a single day during the year 1978-1979 in the United Kingdom.
Mr. Clark claimed that he was not a U.K. resident for 1978-1979 and thus owed no U.K. income tax on his non-U.K.-source income for that tax year. The U.K. tax agency, H.M. Revenue and Customs (“HMRC”), countered that Mr. Clark was a U.K. resident for 1978-1979 and thus owed U.K. income tax on his worldwide income for that year, including the income earned outside the U.K. in 1978-1979. Mr. Clark prevailed.
Mr. Clark was unmarried. He lived in the United Kingdom with his mother and nephew in a London house he had given to his parents in 1964 as the Dave Clark Five experienced their initial success. Mr. Clark also rented an apartment in London. While he lived in California, this rented apartment was left empty despite the efforts of Mr. Clark’s real-estate agents to sublet it. While Mr. Clark was in the United States, he kept in touch by telephone with his secretary and accountant in the United Kingdom who “looked after” Mr. Clark’s “business interests in the United Kingdom.” 199
The relevant U.K. statute imposed income tax on:
The annual profits or gains arising or accruing –
(i) to any person residing in the United Kingdom from any kind of property whatever, whether situated in the United Kingdom or elsewhere, and
(ii) to any person residing in the United Kingdom from any trade, profession or vocation, whether carried on in the United Kingdom or elsewhere … . 200
[*1334] The worldwide taxation of U.K. residents’ incomes was augmented by the statutory command that any British subject who had his “ordinary residence” in the United Kingdom was subject to worldwide U.K. income taxation if such subject had “left the United Kingdom for the purpose only of occasional residence.” 201
The Clark court started with the uncontroversial premise that “where a person resides is essentially a question of fact and degree.” 202 While “a taxpayer may reside [in the U.K.] although physically absent from this country for the whole year … each case must depend on its own facts.” 203 In this case, “[the taxpayer] was not residing in the United Kingdom in the tax
year 1978-79. For the whole of that year his home and place of business were in Los Angeles. In my view on the primary facts that conclusion is inescapable.” 204
Moreover, the court held, Mr. Clark’s one-year residence in the United States was not “occasional” within the meaning of the U.K. tax statute. 205 Rather, “there was a distinct break in the pattern of the taxpayer’s life … for just over a year” as he lived and worked in the Los Angeles area for the year, “mostly in one fixed place of abode,” and “did not visit [the United Kingdom] at all.” 206 On these facts, Mr. Clark, though domiciled in the United Kingdom and ordinarily resident in the United Kingdom before and after his year in the United States, had not “left the United Kingdom for the purpose only of occasional residence broad.” 207 Accordingly, Mr. Clark was a nonresident of the United Kingdom for income tax purposes for the year 1978-1979, even though he was both domiciled and ordinarily a resident there. Mr. Clark thus owed no U.K. income tax on his non-U.K.- source income for that tax year.
At one level, Clark buttresses the characterization of U.S. citizenship-based taxation as an international “outlier.” 208 If the United Kingdom followed the United States’ policy of taxing its nonresident citizens’ worldwide incomes, Mr. Clark, a Britishcitizen since birth, would have owed [*1335] U.K. income tax on his worldwide income in 1978-1979. 209 Instead, Clark implements a concept of residence as short-term presence, irrespective of longer-term affiliation. Though domiciled on a permanent basis in London and though “ordinarily resident” there, Mr. Clark was not a U.K. resident for tax purposes for the single U.K. tax year he spent in the United States.
Clark also highlights the variation that exists within residence-based income tax systems. Had Clark been either a Canadian or an Australian case, it would have been decided the other way. Mr. Clark admitted that he was ordinarily resident in the United Kingdom. Under Canadian standards, this admission would have made Mr. Clark a U.K. resident for 1978-1979 despite his total absence from the U.K. during that tax year. Under Canadian law, an individual “ordinarily resident” in Canada is a resident for tax purposes. 210
Mr. Clark also admitted that he was domiciled in the United Kingdom. Under Australian tax law, that domicile would have created a presumption of residence for tax purposes, 211 a presumption which Mr. Clark could not have overcome as a result of his abode in the Los Angeles area. Under the Australian tax statute, 212 Mr. Clark’s California home would not have surmounted the presumption of residence status, whether such home was assessed under the literal terms of the Australian tax statute (“permanent place of abode”) or under the more forgiving judicial standard applied in Applegate (“fixed and habitual place of abode”).
There are no U.K. statutory definitions of the tax terms “resident,” “ordinarily resident,” and “domicile.” As an administrative matter, HMRC, consistent with Clark, defines these as short-term, intermediate, and permanent residence, respectively, and, also consistent with Clark, construes these as three independent categories. Thus, according to HMRC, an individual is a U.K. resident for tax purposes if either she is physically present “in the UK for 183 days or more in the tax year” or, if her physical presence in the UK is less than this, but she “keeps connections in the UK such as property, economic interests, available accommodation and social activities.” 213 Hence, according to HMRC, an individual can trigger U.K. residence status for tax purposes either under a per se physical-presence test of 183 days in the year or under a facts-and-circumstances test for residence.
Although “residence” for U.K. tax purposes is a matter of annual status, HMRC indicates that “ordinary residence” requires more, namely, that an individual’s U.K. presence “has a settled purpose,” which, even if it is “for [*1336] only a limited period … has enough continuity to be properly described as settled.” 214 In addition, ordinary residence requires that an individual’s U.K. presence is “part of the regular and habitual mode of … life for the time being.” 215 An individual who comes to the “UK for three years or more” is deemed to “have established a regular and habitual mode of life.” 216 Thus, as a rough approximation, a single year in the United Kingdom may be sufficient to establish U.K. residence for that year, while three years is required for “ordinary residence.” Per Clark, an individual may be ordinarily resident in the United Kingdom but not resident for a particular year in which he is abroad.
Finally, HMRC defines the taxpayer’s domicile in conventional terms as his “permanent home.” 217 In Clark, the fact that Mr. Clark was domiciled in the United Kingdom was irrelevant to his status as a resident vel non for the tax year 1978-1979. In short, the three categories – resident, ordinarily resident, domicile – are, for U.K. tax status, independent of each other, as demonstrated by Mr. Clark, who was not resident in the United Kingdom for the tax year 1978-1979 though he was ordinarily resident in the United Kingdom and was domiciled there.
The British tax system consequently applies the concepts of residence, “ordinary residence,” and “domicile” differently than do the Australian and Canadian tax systems. To see these differences, compare Gaudreau, Applegate, and Clark. Mr. Gaudreau was gone from Canada for a longer period (four years) than Mr. Clark was absent from the United Kingdom (one year). Nevertheless, Mr. Gaudreau was deemed to be a Canadian resident for tax purposes for the four years in question because he was “ordinarily resident” in Canada and was in Egypt only “temporarily.” In contrast, Mr. Clark was not a U.K. resident for his single year abroad, even though he was ordinarily resident in the United Kingdom. While in Canada an “ordinary” resident is automatically a Canadian resident for tax purposes, in the United Kingdom it is possible to be, like Mr. Clark, ordinarily resident but not a resident in a particular year.
Mr. Applegate was presumptively an Australian resident for income tax purposes because he was domiciled in Australia and overcame that presumption only by demonstrating that Vila was his “fixed and habitual place of abode.” On the other hand, Mr. Clark’s U.K. domicile was irrelevant to his status as a resident vel non for income tax purposes for 1978-1979. Someone domiciled in Australia is presumptively a resident of that country for income tax purposes. In contrast, an individual may be domiciled in the [*1337] United Kingdom, like Mr. Clark, but that fact is irrelevant to his status as a U.K. resident vel non for income tax purposes.
In contrast, the concept of “domicile” plays a critical role under the U.K. inheritance tax 218 and under the U.K.’s “remittance” system for taxing foreign-source income. The Inheritance Tax Act 1984 (“IHTA 1984”) taxes “transfer(s) of value” while the “transferor” is alive, i.e., gifts, 219 as well as “transfers on death.” 220 These inter vivos and testamentary transfers are taxed on a worldwide basis if the transferor is domiciled inside the United Kingdom. 221
Under the “remittance” system of taxing foreign-source income, an eligible U.K. resident may elect to defer U.K. taxation on certain “foreign income” 222 until such income is actually “received in the United Kingdom.” 223 A U.K. resident can defer tax on qualifying foreign income under the remittance system only if such resident either is not ordinarily resident in the United Kingdom 224 or is not domiciled in the United Kingdom. 225 Thus, an individual with qualifying foreign-source income cannot defer U.K. tax on such income under the remittance system if she simultaneously triggers all three independent categories of the U.K. tax law, i.e., residence, ordinary residence, and domicile. 226
The fact-intensive nature of the domicile inquiry – Where is the taxpayer’s permanent home? – is reflected in Civil Engineer v. Inland Revenue Commissioners. 227 In that case, the taxpayer, a civil engineer, was born in England and worked there from 1949 until 1960. 228 He then moved to Hong Kong where he worked, first as an employee, then through his own “extremely successful” “consulting practice.” 229 During his thirty years in Hong Kong, the taxpayer sometimes visited England and at times owned [*1338] property there. In 1990, he returned to England, bought a house in Sussex, and made non-U.K. gifts in Jersey and Guernsey. 230
The taxpayer claimed that these non-U.K. gifts fell outside the scope of the U.K. inheritance tax since he had shifted his domicile from England to Hong Kong. 231 The U.K. tax authorities countered that the taxpayer had, since birth, maintained his domicile in the U.K. and that this domicile was unchanged at the time of these gifts, despite the taxpayer’s long-term residence in Hong Kong. 232 Consequently, as inter vivos transfers by an individual domiciled in the United Kingdom, the 1990 transfers were subject to U.K. inheritance taxation.
Special Commissioner Jones agreed with the government, defining the question in factual terms, namely, whether the taxpayer “intended to remain permanently or indefinitely in Hong Kong” 233:
It is common knowledge that many British people worked in Hong Kong during the British lease for their working lives intending to retire to England or Scotland, thus retaining their domicile of origin in one of those countries. The taxpayer seems no different. His daughters were educated in England, he paid annual visits to England, and eventually he returned and bought a house in England and as far as I know has lived there since 1990. In the absence of positive evidence of a different intention, I am unable to find that he had ever established a domicile of choice in Hong Kong … . Accordingly, I find that he was domiciled within the United Kingdom at the time of the two transfers on 23 April 1990. 234
The outcome in Clark is quite different from the result that would have occurred in a factually equivalent case involving a U.S. citizen, as a U.S. citizen would have paid U.S. income taxes while living abroad for the year, as did Mr. Clark. 235 However, the denouement in Civil Engineer parallels the U.S. result on these facts. A nonresident U.S. citizen is subject to U.S. taxation on his gifts, even if the donor-citizen’s physical presence in the United States has been minimal or nonexistent. 236 Similarly, the taxpayer in Civil Engineer paid U.K. transfer tax on his 1990 gifts by virtue of his U.K. domicile, despite his intermittent physical presence in the U.K. for the preceding thirty years. In this context, U.S. citizenship-based taxation again resembles residence-based taxation when residence is defined as domicile.
[*1339] Both citizenship and domicile entail permanent allegiance even in the absence of physical presence. Consequently, in cases like Civil Engineer, citizenship is an administrable proxy for domicile. Having been born in England, the taxpayer in Civil Engineer was apparently a British citizen. 237 Thus, in his case, a citizenship-based tax system would reach the same result as did a domicile-based system, though the citizenship-based system more efficiently obtains this outcome in an objective, enforceable fashion without the need for fact-intensive determinations of domicile, i.e., the taxpayer’s permanent home.
Consider finally the Jarndyce-like litigation involving the U.K. tax status of Mr. Robert Gaines-Cooper. The protracted Gaines-Cooper litigation highlights the factually intensive nature of the domicile inquiry and the consequent efficiency of using citizenship for tax purposes instead.
Mr. Gaines-Cooper, a successful entrepreneur, was born in England and is a British citizen. 238 His extensive activities took place both within and without the United Kingdom and included property development in Canada, 239plastics manufacturing in the Seychelles, 240 several businesses in California, 241 and a medical-products venture based in Italy. 242 His peripatetic lifestyle involved much international travel; 243 homes in the United Kingdom, 244 in the Seychelles, 245 in California, 246 and in Switzerland; 247 as well as a relatively brief marriage centered in California 248 and a subsequent marriage to a woman from the Seychelles who emigrated to the United Kingdom. 249
[*1340] Against this complicated factual background, 250 HMRC maintained that, for the relevant years, Mr. Gaines-Cooper was domiciled in the United Kingdom, ordinarily resident in the United Kingdom, and a resident of the United Kingdom. He disagreed on all three counts. In three different proceedings, HMRC prevailed on all points. 251
The initial opinion of the Special Commissioners pivots on the unsurprising assertion that an individual’s domicile depends upon “the totality of the evidence.” 252 In reviewing that evidence, the Commissioners wrote, there is a presumption that an individual’s “domicile of origin persists.” 253 In weighing all of the relevant evidence, it is probative of Mr. Gaines-Cooper’s domicile that he “always retained his British citizenship.” 254 Assaying the voluminous evidence, the Special Commissioners concluded that Mr. Gaines-Cooper had “not discharged the burden of proving to us that he abandoned his domicile of origin in England.” 255 Accordingly, for tax purposes, the Commissioners concluded, Mr. Gaines-Cooper was still domiciled in England. 256
In similar fashion, the Special Commissioners noted that the concept of residence for tax purposes is not defined statutorily and depends upon “all the facts of the case.” 257 On the complicated facts of Mr. Gaines-Cooper’s life, the Commissioners concluded, he “was resident in the United Kingdom” for the years in question 258 and was “ordinarily resident” there as well. 259 If ever there were a case demonstrating the administrative advantages of citizenship-based taxation, it is Gaines-Cooper. With great effort in a factually complicated setting, the Special Commissioners achieved the same result a citizenship-based system would have reached far more efficiently: There was no factual doubt that Mr. Gaines-Cooper was born a British citizen and remained one for the years in question.
[*1341] The subsequent opinion of the Chancery Division upheld the decision of the Special Commissioners, emphasizing “the lengthy and meticulous way” in which the Commissioners arrived at their conclusions about Mr. Gaines-Cooper’s domicile, residence, and ordinary residence. 260 The Chancery opinion, reinforcing the teaching of the Special Commissioners, emphasizes “that a person’s domicile of origin is particularly “adhesive.'” 261 Mr. Gaines-Cooper was born and thus originally domiciled in the United Kingdom. This, the Chancery Division indicated, made it difficult for him to overcome the presumption that he remained domiciled in the United Kingdom. This line of thought raises the question: Given the “adhesive” nature of a person’s original domicile, why not for tax purposes simply use the more easily determined status of citizenship to reach the same result?
Finally, the Gaines-Cooper saga played out a third time in the Court of Civil Appeal with the observation again being made that, on questions of residence, “so much depends on facts and their evaluation.” 262 In contrast, factually complicated cases like Gaines-Cooper do not arise under citizenship-based taxation.
(All footnotes will be provided at the end of this multipart series by Edward Zelinsky)