Is everybody obliged to pay taxes somewhere?

Lawyer Anji Faugoo-Boolell delivered an insightful presentation at the Young International Fiscal Association (IFA) Network conference on the intricate topic of determining domicile status. Beginning her discourse with a notable tax controversy involving Akshata Murty, the wife of the UK Prime Minister, Mrs Faugoo-Boolell adeptly navigated through the complexities of domicile law and its implications for taxation. 

Controversy Surrounding UK Prime Minister’s Wife’s Tax Affairs

Mrs Faugoo-Boolell started her presentation by referencing Akshata Murty’s tax controversy, which erupted due to her claim of non-domicile status in the UK. Murty’s case underscored the significant tax advantages associated with non-domicile status, allowing individuals to potentially save substantial sums on foreign earnings. While Murty eventually announced her decision to pay UK tax on her global earnings, the legality of claiming non-domicile status in the UK remains a contentious issue. Faugoo-Boolell highlighted that such practices are not uncommon among high-income earners, and are often facilitated by financial advisors within the framework of existing laws.

“The reason why I have them on this slide is not because they are popular, but it is to go back to my question. Is everybody obliged to pay taxes somewhere? This is how I wish to present the concept of domicile to everyone. So, for those who recognize her, Akshata Murty was plunged into a tax controversy at some point last year. The issue was based on two aspects. One was that she claimed the non-domicile status, and two, because of that status, she was potentially saving millions of pounds on her overseas earnings over a period of years. Now, Ms. Murty has since announced that she will pay UK tax on her global earnings. But claiming non-domicile status is technically not illegal in the UK. This is a practice that is, in fact, encouraged by her financial advisors. She would not be the only high-income earning individual to be doing that in the UK, and it is also done within a framework. So when she declares herself as non-dom, she would have to pay 30,000 pounds levy to the government of the United Kingdom in order to be spared from all her foreign taxes. So again, the question is, is everybody obliged to pay taxes somewhere? As most of you will realize, the fact that the UK prime minister’s wife declared herself as non-dom, there was this public perception of unfairness, especially as taxes were rising in the UK, and the layperson had to pay more taxes at that time,” Mrs Faugoo-Boolell elaborated. 

Application of Domicile Law: A Mauritian Perspective

Transitioning to the concept of domicile, Mrs Faugoo-Boolell talked about its significance in the context of taxation. Drawing from legal scholar George Von Schanz’s definition, she emphasized that domicile reflects an individual’s economic ties to a community, necessitating a contribution to that community through taxes. The lawyer juxtaposed the residence rule, where residents pay taxes on worldwide income, with the source rule, wherein non-residents are taxed only on income sourced within the jurisdiction.

Turning to Mauritius, Mrs Faugoo-Boolell outlined the hybrid tax system incorporating both residence and source rules. She dissected Section 5 of the Income Tax Act, delineating the criteria for determining tax liability based on residence status. Faugoo-Boolell underscored the significance of factual evidence, day-counting formulas, and formal entitlements in establishing residency, citing examples from domestic and international jurisdictions.

“We have the concept of taxation in persona and taxation in rem. Taxation in persona is the residence rule, and taxation in rem is the source rule. So in Mauritius, residents pay taxes on their world income, whereas non-residents will pay taxes on Mauritian source income only. So what is the rationale? What is the rationale behind the concept of residence? I’ve quoted from George Von Schanz. He was a legal scholar who, in fact, turned the terminology income meaning in 1872, and this is what he had to say: Every person who benefited from the obligations of the commune being fulfilled should also share in the responsibilities and pay tax. We go back here to my question, is everyone obliged to pay taxes somewhere? Persons being economically tied to a community, and everyone who benefits from this community, share their responsibility by paying taxes, whether they have benefited by being residents or by carrying out business activities in that community. This is why we have the residence rule and the source rule. Normally, it is domestic law that dictates the choice of the imposition of tax. In Mauritius, we have a hybrid system where both residence rule and source rule apply. This is where we come to section 5 of the Income Tax Act, bearing in mind that I’m going through all these principles to create and give the foundation of how we get to know this law. So section 5 (1) (a) of the Income Tax Act constitutes the source rule. So as it says, income shall be deemed to be derived by a person, where the income was derived from Mauritius, whether the person was resident in Mauritius or elsewhere. And section 5 (1)(b) constitutes the residence rule. So as a general rule, a resident of Mauritius is taxable on his worldwide income. So section 5 (1)(b) reads, the income was derived at a time when the person was resident in Mauritius, whether the income was derived from Mauritius or elsewhere,” she explained. 

Case Studies: Domicile Determination in Practice

To elucidate the practical application of domicile law, Mrs Faugoo-Boolell delved into two seminal cases from Mauritius: R v Hammond and Hilmi Dilloo v DG of the MRA. These cases underscored the fact-intensive nature of domicile determinations, which hinge on an individual’s lifestyle, intentions, and economic ties. She dissected the nuanced considerations involved in assessing permanent place of abode, habitual abode, and dual residence, shedding light on the multifaceted nature of domicile disputes.

“What is the state practice in determining residence of individuals? When is a person resident in a state? We have different rules, and this differs from country to country. We have rules based on facts and circumstances. The facts and circumstances surround the residence and where these people usually live. 

We have rules based on a day counting formula. In our domestic law, we have a day counting formula of 183 days, for example. In Ireland, they have their own. I think that over two consecutive years, they need to do 207 days or something like that. So each country has their own sort of parameter. 183 days means more than half a year, normally.

Then we have rules based on formal entitlement or registration. So for example, in the US, if you are a green card holder, you will be a resident there for the tax purposes. And you have rules based on a combination of these tests.

For the definition of residence under section 73 of the income tax law, with regards to individuals, the first option is a person who has his domicile in Mauritius and does not have a permanent place of abode outside Mauritius. We then have the second test. Is the person present in Mauritius in that income year for an aggregate period of at least 183 days? Or is the person present for an aggregate of 270 days over three income years. Now this is an alternative test. So a person can meet more than one of these characteristics under section 73. The day counting test was created because it came with more certainty. It’s easy to calculate when someone spends 183 days in a country, compared to facts and circumstances, which are very dependent on an individual’s lifestyle or an individual’s personal circumstances at that point in time.

But having said that, there are still certain issues one can face with the day counting system. 

What does it mean to be in a country for a day? Do you have to be there for 24 hours? Do you have to be there when the clock strikes midnight? So what are the tests for these?

We will now move to the domicile test. So a person who has his domicile in Mauritius and does not have a permanent place of abode outside Mauritius. So what is domicile? Where does the word domicile come from? Because firstly, domicile remains linguistically quite obscure. The term domicile itself derives from Roman law. It has to do with deciding what personal law is applicable to an individual. It comes from the idea that whichever part of the Roman Empire an individual came from and whichever part of the empire they went to, their personal law would follow them to govern certain aspects of their lives. So this is where the terminology domicile came from. So what is a domicile? Firstly, you cannot be without a domicile. Everyone in this room will have a domicile. You can only have one domicile at a time, unfortunately. You are normally regarded as domiciled in the country where you have your permanent home. Your existing domicile will continue until you acquire a new one. And your domicile is distinct from your nationality, citizenship, and your residence status. 

Obviously, the term domicile itself is not defined in the act. Therefore, it can mean domicile of origin. So this would mean domicile of one’s father at the time of birth. Now, if parents are not married to each other, it would be the domicile of one’s mother at the time the child is born. So now, the domicile of origin can change if you make a domicile of choice, which means that you choose to remain permanently and indefinitely in a new state. We then have the concept of domicile of dependence, and this usually applies to children. So our domicile, a child’s domicile, will follow the person on whom they are legally dependent, for example their father. In the olden times, this applied to wives as well, but thankfully, feminism came, and this is now just a question of how it applies to children.

What about our local case law? What do we know about domicile in our local case law? Firstly, let’s go to the permanent place of abode. Again, the test under section 73 states that one will hold domicile in Mauritius if they do not have a permanent place of abode elsewhere. So what is a permanent place of abode? This is a question of fact, determined in light of the circumstances of the case. 

In the case of R v Hammond, which is typically quoted when it comes to permanent place of abode, Lord Campbell CJ stated that a man’s residence is where he lives with his family and sleeps at night. It is always his place of abode in the full sense of that expression. Therefore, a permanent place of abode must exhibit the attributes of a place of residence or a place to live as contrasted with simply an overnight, weekly or monthly accommodation of a traveller. Now, we have the case of Raymond Clyde Chung King, the applicant, versus the director general of the Mauritius Revenue Authority. This was a finding of the ARC with regards to the applicant who was employed as an executive project director by a company based in Sweden, essentially for a power plant project undertaken in Cine Valley. So what happened is that assessments were raised on him. So in the returns of income for the years of assessment, the applicant declared only part of his emoluments received. And at that point, he was receiving his emoluments in Mauritius in an account jointly held by him and his spouse. The MRA then raised an assessment. His emoluments had been revised based on certain bank lodgements because he was receiving income into his accounts that remained unexplained. In this case, the applicant stated that in fact, he stayed in Mauritius for more than 183 days, but that he did so as he was compelled to stay in Mauritius for reasons totally beyond his control. He qualified this as a force majeure. And the MRA’s case was that the applicant was resident in Mauritius by virtue of section 73.1A of the Income Tax Act, so the domicile test.

This is what the committee had to say with regards to his domicile status:

‘Despite applicant’s contention that his physical, psychological, and psychiatric state compelled him to return back to Mauritius from Senegal, which in his view amounts to a force majeure, we note that he was paid his full month package of 7,800 euros for this whole period. It is more probable than not that this payment represented the consideration for the services he was still providing to his employer as per his contract, albeit from Mauritius. Having perused the contract of employment, we find no requirement or understanding that applicants should be based outside Mauritius. In fact, as per clause 20, all notices under the agreement shall be deemed delivered when delivered to applicants addressed in Mauritius. We also note that as per clause five of the applicant’s contract, his employer had undertaken to pay social contributions in favor of the applicant in accordance with the laws of Mauritius. The governing law of the agreement is also the laws of Mauritius as per clause 24. All these add up to the requirement to credit applicants in remuneration in a bank account in Mauritius.’

For all these factual reasons, it was found by the committee that, in fact, the applicant was domiciled in Mauritius and he had taxes due in this jurisdiction,” Mrs Faugoo-Boolell highlighted.

International Perspectives and Tax Treaty Provisions

Expanding the discourse to international tax treaty provisions, Mrs Faugoo-Boolell expounded on the resolution of dual residence conflicts. She elucidated Article 42 of the OECD model convention, which outlines a hierarchical approach to determining tax residency in cases of dual residence. She underscored the importance of holistic assessments in evaluating an individual’s center of vital interests and habitual abode, citing precedents from Australia, Canada, and Switzerland.

“The second case that I will quote is the case of Hilmi Dilloo v DG of the MRA. Please bear in mind that this case is under review. We are still awaiting judgment. I appeared, in fact, for the assessment review committee in this case, so I will not be talking about the controversial points. What’s interesting in this ruling of the assessment review committee is the alternative reasoning that was found. In terms of the facts, the applicant was employed as a sales manager with a company based in the Kingdom of Saudi Arabia, and he had not submitted his returns for income for the years of assessment 2016, 2017, 2018, and 2019. An audit was initiated into the applicant’s tax affairs, and the latter was requested to submit information and documents. After analysing the applicant’s bank statements and information available at the MRA’s office, it was noted that he had transferred money from his Saudi Arabian bank account into his local Mauritian account. So the applicant was informed of these findings and he was also informed that the MRA was of the opinion that he is a resident of Mauritius and was hence taxable on all his income, whether derived from Mauritius or elsewhere, when the income is received in Mauritius as provided by Section 5.3 of the Income Tax Act.

A lot of the arguments at the review committee turned upon whether the applicant was, in fact, a resident of Mauritius and whether he fell under Section 73.1A of the test. So was he domiciled? Did he have a domicile in Mauritius? This is what was found:

‘In view of the evidence deduced during the hearing and the elaborate submissions on behalf of both parties on the issue of residence, the committee further determines that the applicant was resident in Mauritius at the material times. We are satisfied that he falls under the first limb of the definition. A person who has his domicile in Mauritius and his permanent place of abode is not outside Mauritius. Any determination on such an issue is a question of fact and resolves significantly on the intention of a person as can be gathered from his acts and doings. The main cogent features which led us towards this conclusion are as follows. The applicant is employed by a multinational company, namely Microsoft. He was based in Mauritius for about four years. He obtained a proposal from Microsoft to move to Saudi Arabia, which he accepted. He later moved to Canada, where he is still employed by the same multinational. In relation to the applicant shifting to Saudi Arabia, the committee accordingly does not perceive any intention ‘de changement de domicile’. 

The feature which applicant relies on to show his ties to Saudi Arabia for the relevant years of assessment are very regular, even for temporary workers, albeit he stayed in Saudi Arabia from 2011 up to 2018. He rented a house, his children were born there, he had a valid driving license and a bank account there, and he was even going to the children. He held a resident identity card which had an expiry date akin to a work permit, and he mentions his nationality as Mauritian. The applicant’s version is that he paid expatriate tax in Saudi Arabia, which suggests that he was considered as an expatriate and not someone whose permanent place of abode is Saudi Arabia. We open the parenthesis to note that the requirements to benefit from a foreign tax credit were not met. This is not very relevant here. So during the period under review, he invested his income in acquiring a residential building in Mauritius, and this constitutes a property tie apart from the plot of land he already owned. He was further receiving rental income from this property. When the house is rented, it does not mean that it is not available to the applicant as submitted on behalf of the applicant, as there are means to terminate a lease contract.’

Therefore, in light of all these facts, it was found by the assessment review committee that for all intents and purposes, the applicant was domiciled in Mauritius and owed taxes to this jurisdiction. 

All these cases are very fact heavy and depend really on the lifestyle that the applicants tend to lead.

We have certain perspectives from Australia about the factors which are used by the commissioner in reaching a state of satisfaction as to a taxpayer’s permanent place of abode. This has been laid down in a taxation ruling from the Australian Tax Office (ATO) in Harding versus FCT 2019. This case was about Mr. Harding, who was a resident of Australia for tax purposes in the income year ended 2011. Prior to 2006, Mr. Harding worked in the Middle East for approximately 16 years. In 2006, he returned to Australia with his wife and children to live in the family home in Queensland, leaving again in 2009, permanently, to live in Bahrain. Mr. Harding’s wife and children would remain in Australia and join him following the schooling of his middle child. During this time, Mr. Harding rented a furnished apartment with the intent to buy a larger property once his wife and children joined him. In 2011, his wife chose to remain in Australia after which time they separated between 2009 and 2015. Mr. Harding moved between three fully furnished apartments in the same building, while his wife remained in the family home in Australia. So the ATO argued that Mr. Harding did not have a permanent place of abode outside Australia because his apartment was viewed as temporary while he waited for his wife and children to join him in Bahrain.

The issue here was whether Mr. Harding was a non-resident of Australia for tax purposes in 2011, i.e. whether he did not reside in Australia in 2011 and whether he had established a permanent place of abode outside Australia. In the earlier decision, the court had held that the maintenance of Mr. Harding’s fully furnished apartment overseas was not sufficient to satisfy the permanent place of abode. Although the Court of First Instance focused on Mr. Harding’s specific accommodation in Bahrain and whether it was considered to be sufficient, the full court, which was a three-bench court, stated that this test was far too narrow to decide what the permanent place of abode was. Indeed, for the purposes of permanent place of abode, this should not be determined by reference to whether a person is permanently located at a specific house, but rather the identification of a country or state in which the person is living permanently. So the full court confirmed the holistic approach taken by the court in first instance in considering the full situation of the taxpayer, and especially considering Mr. Harding’s intention not to return to Australia following his departure in 2009. In this context, while he still had a place to live in Australia, the full court found that he did not treat this place as his home. They rejected the commissioner’s arguments that the taxpayer resided in Australia having regard to the objective connections that he retained in Australia. In the end, the full court decided that the connections, the quality and the nature of those connections did not support a finding that Mr. Harding was not a resident of Australia, or were not sufficient to outweigh Mr. Harding’s intention to leave Australia indefinitely. So this concerns many expatriates seeking to work overseas or currently working overseas. Again, we see how fact heavy the test of domicile can be, and it can really take a different route depending on the facts of your particular case.

I will now deal with the issue of dual residence. So dual residence is a situation where an individual or entity is resident for tax purposes in two or more jurisdictions at the same time. We have an example that I’ve laid down here, where there’s an individual who has his domicile in Mauritius and spends, in an income year, 200 days working in State A. Therefore, he becomes a resident of State A under its domestic tax law, but he’s also a resident in Mauritius as he has his domicile in Mauritius and no other permanent place of abode. So he’s therefore resident in both Mauritius and State A.

So what happens when there is such dual residence? This is where the tax treaties provide separate rules to resolve that dual residence in favor of one of the contracted states only. This is provided for by Article 42 of the OECD model prevention. It’s a top-down approach. So if an individual is resident in both contracting states, his status shall be determined as follows, going through the tests one by one:

He shall be deemed to be resident only in the state in which a permanent home is available to him. If he has a permanent home available to him in both states, he shall be deemed to be a resident only in the state in which his personal and economic relations are closer. This is called the center of vital interests. Now, what is meant by the center of vital interests? I will quote from the OECD commentary here, because I think there’s no better way of saying it: ‘The center of vital interest is, regard will be had to his family and social relations, his occupations, his political, cultural, or other activities, his place of business, the place from which he administers his property. The circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention’. 

We also have the case where the tax court in Canada said that it is not enough to simply weigh or count the number of factors or connections on the side. They call it the depth of the roots of one’s center of vital interests. And we also have the Swiss Supreme Court, which laid down the significance of personal relationships to find the center of vital interest.

Now, if it is found that the center of vital interest cannot be determined, we’ll move to the test habitual abode. This is what the OECD commentary has to say: ‘the application of the criterion requires a determination of whether the individual lived habitually in the sense of being customarily or usually present in one of the two states, but not in the other during a given period. The test will not be satisfied by simply determining in which of the two contracting states the individual has spent more days during that period. That refers to the frequency, duration, and regularity of states that are part of the settled routine of an individual’s life, and are therefore more than transient’.

In the end, if this still does not work, we have the last proviso, which states that if he’s a national of both states, the competent authorities of the contracting states shall settle the question by mutual agreement. This is called the Tiebreaker test. You go through each one of them, and the last result will be the one by mutual agreement,” Mrs Faugoo

Legal, Factual, and Moral Obligations

Mrs Faugoo-Boolell asked thought-provoking questions regarding the legal, factual, and moral obligations associated with tax payment. While acknowledging the absence of inherent morality in tax law, she prompted reflection on the ethical imperatives surrounding tax compliance in an increasingly globalized world.

“Is everybody obliged to pay taxes somewhere? I gave the example of Akshata Murty, but I will break it down in three questions that I found helpful for myself. Is there a legal obligation to pay taxes somewhere? Not necessarily. We have seen that there are cross-border situations where mobile individuals neither pay tax in a source country, nor in the home country. And there has been a shift at the level of international taxation where source countries and home countries reduce the scope of taxation in order to attract investments and individuals. 

Is there a factual obligation to pay taxes somewhere? I believe that there is. Depending on the circumstances, factually, you will have to pay taxes somewhere.

And the last question I leave to all of you. Is there a moral obligation to pay taxes somewhere? As we know, the law has no morality attached to it, but should there be the moral obligation to pay taxes somewhere? ” she concluded.