Manual

for the Control of

International
Tax Planning
3
Harmful International Tax Planning:
Common Behaviours and Mechanisms to
Identify Them

3.7. Tax Residency

CIAT
Inter-American Center of
Tax Administrations
 Manual
for the Control of
International
Tax Planning

3
Harmful International Tax Planning:
Common Behaviours and Mechanisms
to Identify Them

3.7. Tax Residency

Carlos Protto

August, 2023
Manual for the Control of International Tax Planning
© 2022 Inter-American Center of Tax Administrations (CIAT)

ISBN:
978-9962-722-22-9

Diagramming:
CIAT Communication and Publications Coordination

Copyright

The opinions expressed are exclusively those of the author(s) and do not necessarily reflect the
viewpoint of the Inter-American Center of Tax Administrations-CIAT, its Executive Council or the
tax administrations of the member countries.

The Inter-American Center of Tax Administrations (CIAT), authorizes the total or partial reproduction
of this work by any means or procedure, whether known or to be known, provided that the source
and copyright holders are properly quoted [Link]
 About the Author

Argentinean, Public Accountant (UBA), Master in Tax Administration

(Free University of Brussels). Since 2009, Director of International
Tax Relations of the Ministry of Economy of the Argentine Republic.
Between 2015 and 2018 he was also in charge of the Direct Taxation
Department of said directorate. Negotiator, for the Argentine Republic,
of the Conventions to Avoid Double Taxation and of the Multilateral
Instrument for the Implementation of the Recommendations of the
BEPS Project, for which he acts as competent authority, interpreting
their corresponding application. Argentine representative to the
Carlos Protto
OECD Committee on Fiscal Affairs and member of the Steering Group
of the Inclusive Framework for the Implementation of the OECD/
G20 BEPS Project. Between 2016 and 2020, he served as vice-
chair of Working Group No. 1 “Tax Conventions and Related Issues”
of the OECD Committee on Fiscal Affairs. Member of the Committee
of Experts on International Cooperation in Tax Matters of the United
Nations (2017-2021 and 2021-2025 periods). Member of the G-24
Working Group on Tax Policy and International Tax Cooperation.
Representative of the Argentine Republic to the MERCOSUR Tax
Specialist Group.
 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
Tax residency

Content

3. Harmful International Tax Planning: Common Behaviours and Mechanisms to

9
Identify Them
3.7. Tax residency 9

3.7.1. Introduction 9

3.7.2. Tax subject criteria 10

3.7.3. Notion of residence 12

[Link]. Tax residence of individuals 12

[Link]. Tax residence of individuals 13

3.7.4. Tax effects derived from residence 14

3.7.5. Tax risks linked to the notion of residence 16

3.7.6. Indicators to identify the risk of abuse of the notion of residence 19

[Link]. Increase in deregistrations from the taxpayer registry 19

[Link]. Increase in operations with residents of certain jurisdictions 19

3.7.7. Procedures to mitigate the risk of abuse of the notion of residence 20

3.7.8. Conclusions 21

Bibliographic References 26

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 Manual for the Control of International Tax Planning

3 Harmful International Tax

Planning: Common Behaviours
and Mechanisms to Identify
Them

3.7. Tax residency

3.7.1. Introduction
In recent decades, particularly since 1980, the process of integration of goods, services and
markets among different countries has accelerated considerably. Free trade agreements and
regional integration processes, as well as progress in telecommunications have contributed to
this. This has promoted the free movement of goods, capital, and people, with the corresponding
mobility of production factors to maximize the profitability of economic agents -in some cases
through reduced costs, including tax costs- particularly for multinational companies. To this
end, they have undergone complex restructuring, giving rise to integration processes, with
components scattered in different countries and regions.
International standards on taxation have had to adapt to this global way of undertaking investments
and commercial activities, deepening the guides related to essential elements such as the notion
of tax residence, permanent establishment, the arm’s length principle and transfer pricing, the
beneficial owner principle, among others.
On the other hand, in an increasingly globalized world, in which cross-border trade and
investment are more common, the expansionary trend of their network of international tax
treaties is deepening in countries. However, since the agreements limit the taxation powers of
the States that sign them, they bring with them a high risk of misuse of these instruments, even
by way of schemes that defy the norm to obtain tax advantages. This risk motivates the constant
evolution of tools aimed at counteracting such maneuvers to the point that the tax agreements
themselves contain mechanisms that are at the forefront of international taxation, to protect the
tax revenues of the countries whose tax legislation is intended to be breached (for example,
clauses on double residence; limitation of benefits; anti-fragmentation rules of activities and anti-
division of contracts that seek to circumvent the notion of permanent establishment; safeguard
clauses based on the tax principle that, unless expressly mentioned, the agreements do not
reduce tax obligations in the State of residence; and provisions on permanent establishments in
third States, etc.).
The purpose of this section is to address the notion of tax residence within the main criteria
generally used in domestic legislation. The objective of these criteria is to subject taxpayers
to taxation in each jurisdiction, identifying those behaviors that tend to avoid falling under said
notion, with the aim of reducing the tax burden. Precisely, these behaviors gave rise to its evolution
within the norm. Similarly, the effects on the tax system that derive from the configuration or not
of the residence will be described, both in terms of direct and indirect taxes. In addition, certain

9
 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
Tax residency

controversial or unresolved aspects, related to the notion of residence, which introduce a risk
of abuse for the tax authorities, will be detailed. Finally, the indicators that tax administrations
should consider in identifying this risk will be explained, while detailing the information deemed
appropriate for them to collect and some procedures that they could undertake to mitigate this
risk.

3.7.2. Tax subject criteria

According to the jurisdictional prianciple of taxation, a country usually uses certain criteria to
subject people to tax for certain specifically foreseen events. These events are called taxable
events, because it is understood that they maintain a certain connection with that country, which
legitimizes it to impose the tax. Some taxes that fall on these taxable events consider the taxable
capacity of the people.
In the beginning, when the taxed event consisted of carrying out a transaction, obtaining income
or holding assets, the character of the person who performed, obtained, or possessed it mattered
little, insofar as the taxed event occurred within the territory of a certain jurisdiction. In such
cases, it is said that the source of the taxable event is in that jurisdiction, which is commonly
known as the “State of source.” This aspect of taxation is essential for those countries that have
territorial tax systems, in which transactions, income or assets are covered by taxes by the
mere fact of having occurred, having been obtained or located, within the territory in which such
countries exercise jurisdiction, their source is in them.
On the other hand, when countries began to adopt more complex tax systems, incorporating
taxable events taking place outside their territory, it was necessary to structure them based on
another type of criterion, which would allow them to link such phenomena with their jurisdiction.
It cannot be overlooked that, initially - when cross-border operations were uncommon1 - the
presumption of existence of a link (strong enough to legitimize the exercise of powers of
taxation) between a jurisdiction and the establishment, by a person, in that jurisdiction), was not
considered a controversial aspect. Given that this establishment in that jurisdiction presumed
that the economic activities of that person would take place there, it was considered that those
economic activities gave rise to the taxable events covered by the taxes that such jurisdiction
intended to require.
Thus, these tax systems began to adopt, in addition to the criterion of territoriality or source,
a criterion of subject to tax with respect to the people located in their territory, both for the
transactions they carry out, the income they obtain or the assets they own, regardless of the
place where such transactions are carried out, such income is obtained, or such assets are
located. In this way, a “full or comprehensive subjection” emerged based on the personal link
between the taxpayer and the State.
This new criterion allowed the States to create more equitable taxes, capable of evaluating in a
more direct way the contributory capacity of the subjects covered by them, perfecting the taxes
until then demanded, many of which indirectly contemplated that capacity.
The “full or comprehensive subjection” referred to in the preceding paragraph may cover questions
of nationality or citizenship and extends to persons who remain continuously, or sometimes only
for a certain period, in the territory of the State in question. For this, certain elements become

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 Manual for the Control of International Tax Planning

relevant, such as the domicile that the subjects may establish within that territory. Based on
this, taxes usually cover persons (individuals or corporations) who have a domicile within the
territory of the jurisdiction, regardless of issues such as their nationality or place of incorporation.
Furthermore, some legislations subject the individuals who provide services on board ships
whose base port is in their territory to full taxation.
Regarding the term “domicile”, it is possible that, in each jurisdiction, a different scope is attributed
to it, depending on what its domestic legislation provides in this regard, and it may turn out that
there are quite different interpretations between countries. Thus, in some countries it could be
considered that it consists of the place where a person habitually stays (real domicile), as opposed
to another that is fixed in contractual clauses (legal domicile) with the intention of establishing
the application of the regulations of a certain jurisdiction in the framework of possible legal
proceedings. Similarly, and from a formal point of view, the notion of “fiscal domicile” becomes
relevant, which is the one reported as constituting the seat of the business of a specific taxpayer.
However, with respect to this last definition, in turn, it can be defined in a different way between
countries to provide for full taxation on subjects who have their tax domicile in them.
By virtue of these various definitions, it may turn out that there are conflicts of tax residence
between more than one State - a matter that will be examined in greater detail in subsequent
sections - a situation that could be explained, for example, with those cases in which for a
jurisdiction the fiscal domicile is the place from which business activities are carried out
(permanent establishment) while, in another, it is defined by the place where the actual address
of the company is located (parent company). In the case of individuals, it could be the case that
several countries consider that the same subject has a tax domicile in them when, for example,
one of them is the place where the subject usually resides, in another country part of his assets
are located and, a third country considers that this party plans to re-establish himself there in the
future because his center of vital interests is there.
Now, if the countries, on the one hand, tax people who are fully taxed there for their income,
transactions, and assets, whatever their generating source (world source); and, on the other
hand, they also tax any other person for transactions, income or assets sourced within their
territory; it is usual that, due to the interaction of the tax systems of the different jurisdictions,
a double or multiple taxation is generated. This occurs when the subjects are fully covered by
taxes in more than one jurisdiction - for example, by being domiciled in more than one country, or
by having the nationality of one and the domicile in another (the notion of double legal taxation).
To avoid this phenomenon, the internal laws of these States usually contain mechanisms aimed
at eliminating the double or multiple taxation experienced by people who are fully subject to tax
in their jurisdiction, for transactions, income, or assets from foreign sources.
Notwithstanding this, to favor the international flow of investments, it is important, in addition
to adequate macroeconomic conditions, to have a reliable environment that allows projecting
in the medium and long term. To this end, countries usually enter international treaties to avoid
double taxation which, by promoting an equitable distribution of tax revenues among States, aim
to reduce tax barriers to cross-border trade and investment, which favors the exchange of goods
and services, as well as the flow of capital. In addition, such instruments clarify and standardize
taxation criteria, thereby offering greater legal certainty to the operations carried out between the
persons of the Contracting States.

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 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
Tax residency

At this point in the analysis, it is appropriate to indicate that, when assigning taxation powers to
a State -with respect to an element of income or assets-, what the treaty does is authorize it to
apply its respective regulatory framework, while if the agreement restricts or denies the tax, said
State will be prevented from fully exercising its internal regulations. That is why in the tax area it
is often said that “the agreements do not create taxes” but are only limited to allowing, restricting,
or denying the application of those contemplated in accordance with the domestic legislation of
the Parties.
Regarding the harmonization of the taxation criteria mentioned above, it should be noted that
these international instruments tend to introduce certain elements aimed at specifying the
circumstances in which States can exercise their taxation powers. In this context, and to define
which are the subjects that will be covered by their provisions, the tax conventions introduced
the notion of “residence” with the purpose of defining, in a consistent manner, those persons who
are subject, in each jurisdiction, to full taxation.
From the dissemination of the above criterion, through the network of tax conventions the
internal positive law of several jurisdictions incorporated the notion of residence, to determine
the circumstance from which people would become fully subject to tax in them. This was due, in
part, to the fact that said notion shares certain essential features with those elements that were
already used domestically (for example, home, place of stay, place of incorporation, etc.), while
allowing adequate interaction with the commitments assumed internationally in tax treaties,
whose provisions must be respected by the internal legislation of the countries.
Over the decades, the main criteria from which the jurisdictions began to subject people to tax
in their internal legislation are that of the “source,” on the one hand, and that of the “residence,”
on the other2.

3.7.3. Notion of residence

Without prejudice to the definitions that may be contemplated in the tax laws, “residence” can
be defined as the place in which a person is established, that is, the place where they carry out
their activities3. This shows the existence of a significant link with the jurisdiction that intends
to exercise its powers of taxation, through full subjection; and it justifies it based on the taxable
capacity displayed in the taxable events of such subjects, in such a way that they help to solve
the activities that the State develops and which cover them.
However, the following considerations should be made here: it is necessary to establish different
guidelines for individuals and corporations to determine that they are in a jurisdiction. Indeed,
in the case of individuals, there are certain parameters based on which an individual can be
considered a “resident,” particularly the period during which the person remains in a jurisdiction.
Moreover, the tax legislation of several countries usually attributes the status of “resident” to
corporations constituted under the positive law of those States.

[Link]. Tax residence of individuals

Regarding individuals (also known as natural or human persons in some countries) it is noted
that some countries consider those who have their nationality as residents for tax purposes, as
an approach to the place where they live and carry out their economic activities (that give rise

12
 Manual for the Control of International Tax Planning

to taxable events). This entails a close link that fully legitimizes the subjection to its taxation,
to the extent that they have not remained abroad for more than a certain period (continuously
or not). Another principle adopted by countries is to consider foreign nationals as residents
for tax purposes, namely those who, for immigration purposes, have obtained their permanent
residence in them or who, without having obtained it, have remained in their territory for a certain
period (continuous or not)4. However, when such an approach is not sufficient, some laws5 have
refined the criteria by emphasizing practical issues, such as having a permanent home6, or
keeping a presence and vital interests in the jurisdiction7, understood as closer economic and
personal relationships.
Other laws also contemplate, notwithstanding the objective parameters based on the permanence
in the territory of the jurisdiction, cases in which the intention of the people to settle, or not, in the
country in which they are circumstantially becomes relevant8.
Something to be considered is the fact that, for tax purposes, some legislations consider those
subjects who hold the nationality of that country and have personal or economic relations with
that jurisdiction to be residents. This is so even though they may not be physically in the territory
and remain in it below the temporary thresholds provided in the norm. For this to be the case,
the following assumptions should hold: they obtain a certain portion of their income from sources
located there, or a certain portion of their estate is located in its territory, or if a close relative
resides in that jurisdiction9.
Along these lines, although with a less voracious tax collection purpose, some tax laws have
tried to attract residents through the establishment of promotional regimes with more favorable
tax measures, such as tax holidays10 (see section [Link] below), than that of countries whose
residents the jurisdiction is trying to attract. This is also done by introducing more lax time
provisions to determine that a person is in their territory; generally accompanied by certain
minimum investment requirements11.

[Link]. Tax residence of individuals

As for corporations (also known as legal entities or companies), it should be noted that there are
two main criteria to consider when determining their residence. Initially, the countries addressed
the residence of these subjects, emulating the criteria adopted for individuals natural. In this
way, the figure of corporation was modeled after that of individuals, a principle to establish
their nationality. By virtue of this, the status of resident was assigned to entities that had been
constituted in their jurisdiction, that is, created in accordance with their internal law, or through
which they had obtained their legal status12.
This principle proved relatively efficient until the international activities carried out by such
subjects grew. For this reason, this principle was distorted, in a certain way, when, according to
the commercial law of some nations, the legal status of certain entities incorporated abroad was
recognized. In fact, it is necessary to discuss here the specific treatment that some laws usually
confer on some permanent establishments - understood as such by tax agreements, the fixed
places of business from which companies carry out their activity, including the branch offices.
The commercial legislation of several countries regulates the case of local branches of foreign

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 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
Tax residency

entities, providing in many cases their registration as such in public registries, so that their legal
status is recognized13.
Based on this, various situations arose to the point that the domestic legislation of some countries
ended up conferring the character of residents to the branches, even though their head offices
had been incorporated abroad and obtained their legal status in accordance with the positive
law of another jurisdiction14.
Subsequently, and after having detected some aggressive planning schemes executed by certain
taxpayers eager to reduce or avoid their tax obligations, some tax laws gave preponderance to a
different principle, to consider corporations as residents, downplaying their place of constitution.
In this way and trying to emulate the principle applicable to individuals regarding the “center of
vital interests”, the notion of “head office” emerged15. The purpose of this new approach was to
establish a connection between the entities and the States in which they should be fully taxed,
based on economic aspects.
Thus, such laws managed to counteract the manipulation of the tax residence favored by the
free choice of the jurisdiction of incorporation of the entities - generally based on preferential tax
regimes combined with a wide network of tax treaties - without prejudice to the fact that their
substantial activities are carried out effectively in other jurisdictions, often with higher levels of
taxation.

3.7.4. Tax effects derived from residence

As indicated above, the main effect of the configuration of residence in each jurisdiction is full
subjection to its tax legislation, not only for the transactions carried out, the income obtained or
the assets located within its territory, but also, out of it. In this regard, it should be borne in mind
that full subjection has a significant impact on direct taxation, since indirect taxes fall on the
taxed event in the same way, both on people who have the status of resident and non-resident
subjects.
It should be noted here that the regulations of several countries, regarding direct taxation, contain
differences regarding the tax treatment applicable to taxable events generated by resident and
non-resident subjects. Indeed, residence has a truly relevant effect on the way direct taxes
are determined and collected. Considering the internal regulations of a significant number of
countries, residents must determine their tax obligations, generally based on tax returns16, and
then pay them through the voluntary entry of the determined tax - without prejudice to the ensuing
computation of the amounts that may have been withheld from them from time to time or earned
by third parties during the fiscal period. For their part, non-residents (called foreign beneficiaries
in some countries)17 are taxed based on withholding mechanisms at source (generally on a
gross basis), according to which the determination and income of the tax is paid by the local
subjects with whom they operate18.
However, in accordance with the tax legislation of several countries, obtaining income from
business activities carried out in the territory of a jurisdiction, or the ownership of assets located in
it, is subject to taxation. This, by virtue of the above source principle, so fundamental differences
are not usually found in terms of the determination of the tax obligation, beyond the observation
that, in general terms, is usually made on certain circumstances linked to the taxable capacity

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 Manual for the Control of International Tax Planning

of the residents, which is usually implemented through personal deductions (for example, family
charges, interest on mortgage loans, medical assistance fees, life insurance, rental of the
taxpayer’s home)19.
As previously anticipated, indirect taxes -as they tax indirect manifestations of taxable capacity
and do not require further details from the subjects covered by them- go without, in their structure,
the notion of residence (except for issues that require some type of additional precision for the
purposes of equating the treatment applicable to operations carried out by such persons, to that
falling on those of a similar nature covered by the tax and carried out by local subjects)20.
Beyond the aforementioned, because of the residence in a certain jurisdiction, the subjects are
affected by the obligations to comply with certain formal duties, beyond the payment of the taxes
in question. These duties usually involve the preparation and presentation of tax returns, both
determinative of taxes and informative; as well as the possibility of being liable for the actions that
the tax administrations may undertake under their powers of verification, such as requiring the
keeping of books, records and vouchers of the operations and transactions made, summoning
them to answer questions or provide documentation, visit their facilities for the purposes of
an inspection, or even searching such facilities, with the help of the public force and with the
corresponding authorization of the judicial authorities, or even preventively close them when
damage to the treasury is found21.
On the other hand, the importance that, in agreements to avoid double taxation, gains the notion
of residence cannot be ignored, since access to the tax benefits contained in its provisions
depends on it. Indeed, such international instruments apply to persons who are residents of one
or both Contracting States, by virtue of the internal legislation of each of them22. However, it
should be noted that such agreements only regulate - except for the non-discrimination clause23
- certain direct taxes, in particular those that fall on obtaining income and ownership of assets,
with indirect taxes falling outside their scope of application, whether sales or added value taxes,
or taxes specific to certain transactions24.
Among the benefits set forth in said treaties, mention may be made of the restriction on the
powers of taxation that a State party to a tax agreement may exercise with respect to taxable
events occurring in its territory (income obtained from sources located there or assets located
there). This restriction may manifest itself as a maximum limit to the level of taxation that may be
required of the source State or, in some cases, as an exclusive power in the State of residence,
in which case, the source State may not demand any tax, operating as an exemption at source.
One must stop here and think about the protection that, of this tax treatment, the competent
authorities of the tax agreement must carry out, through the mutual agreement procedure usually
provided for in said agreements25; contemplating -some of them- tax arbitration to resolve cases
in which the parties have not reached an agreement within a certain period26.
Another factor to consider in relation to tax residence and agreements to avoid double taxation
is the mechanism to define double residence contained in such instruments. As seen above,
the agreements apply to those persons who are residents of one or both Contracting States.
However, these international agreements do not regulate the circumstances in which a person
must be considered a resident, but that is governed by the domestic legislation of their Parties.
Therefore, given the various criteria used by the internal regulations of the countries to define
said circumstance, some people may end up having residence in more than one jurisdiction and,

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 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
Tax residency

by virtue of this, be subject to full taxation of their income, assets, and other transactions that
they carry out, either in those territories or outside of them.
The relevance of the mechanism to resolve double residence lies in the fact that, because of
its application, one of the Contracting States will not be able to continue considering the person
involved as a resident and, therefore, should limit itself to taxing those incomes or assets that are
sourced in that jurisdiction, but only to the extent that such taxation is enabled by the agreement.
By virtue of the foregoing, under certain circumstances, it is highly attractive for taxpayers to
be considered residents of those jurisdictions that have a wide network of agreements to avoid
double taxation, especially when, in them, the levels of taxation are comparatively more favorable
than in others.
However, it should be noted that although the agreements restrict taxation in that State from
which taxpayers obtain income or own assets, they were not designed to limit or prevent taxation
in the State in which they reside (except, as may be seen above, that the residence was not
accepted by virtue of the mechanism to avoid double residence), unless said restriction is
expressly contemplated among the conventional clauses27.

3.7.5. Tax risks linked to the notion of residence

From its origins, the notion of residence, which, as seen in section 3.7.4, entails full tax
obligations - capturing with greater precision the taxable capacity of individuals - has required
the tax authorities to face certain actions carried out by taxpayers with a view to framing, or not,
within the scope of said notion, and to benefit from the tax treatment, achieving a reduction in
the tax burden derived from it.
The main risks associated with the notion of residence are described below, which present
challenges both for the authorities in charge of the design of tax policy and for the tax
administrations.
When the configuration depends on questions involving facts and evidence, there is a history
where one can see that some taxpayers have managed to enjoy the benefits related to staying
in a jurisdiction, without it being considered that their tax residence is in it.
To this end, they favor, in the case of individuals, the comparative advantages offered by
establishing their residence in other jurisdictions. Notwithstanding the assessment that may be
made regarding the tax plan, it cannot be overlooked that, motivated by other-than-tax aspects
that contribute to improving the quality of life, human beings, particularly those with greater
purchasing power, tend to reside in places other than the ones they come from. Among such
aspects, factors such as geographical, infrastructural, climatic, social, educational or health or
security are usually considered, as well as issues related to economic stability, legal security and
the robustness and trust in the financial system.
However, the greater the tax burden of a jurisdiction, the greater the tendency of people who are
affected by it to try to reduce that component of their cost of living. Therefore, it is not uncommon
for those subjects who, at the beginning of their economic activity, were in jurisdictions with
high levels of taxation, to devise schemes that allow them to modify their tax residence without
necessarily implying discontinuing their activities in these jurisdictions. It is from then on, that

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 Manual for the Control of International Tax Planning

the comparative advantages referred to in the preceding paragraph begin to play a fundamental
role, and the tax system adopted in other countries may be decisive.
In this sense, it should be noted that some countries, particularly those with scarce resources and
a small internal market, tend to adopt tax regimes with low levels of taxation that, combined with
other State policies, allow them to become centers of attraction for investments and businesses.
They do this so the income generated outside their jurisdiction be rerouted to benefit their
economy.
In relation to this, and without the intention of making any value judgment here on the sovereign
decisions adopted by each country, it should be recalled that towards the end of the 1990s,
the OECD Committee on Fiscal Affairs published a report “on harmful tax competition28 which
contained certain objective factors to identify, with the aim of counteracting, preferential tax
regimes that contain elements that make them harmful to other States, including a low or
no tax combined with any of the following factors: local subjects cannot access the regime
(“ring-fencing”), lack of transparency regarding which subjects are covered by them, absence
of effective exchange of information for tax purposes. Based on this, the tax laws of several
countries introduced measures to counteract the hollowing out of the tax base that presuppose
the transactions that their local taxpayers will enter with individuals domiciled in jurisdictions
considered low or null taxation jurisdictions29 or that have regimes considered harmful, especially
when they do not have instruments that allow international tax cooperation.
Beyond the general low or no tax regimes that may characterize any country, certain tax regimes
can be identified aimed at attracting residents by granting certain advantages. In this sense,
some laws contain certain “tax holidays” consisting of granting new residents, during a certain
period, reduced rates or some tax relief from certain incomes or assets - generally by merely
applying a territorial regime to them30.
Although it is more frequent in the case of corporations, it should be noted that another tax
reason why an individual may consider modifying his tax residence deals with the possibility of
accessing a decrease in the tax burden, not only in the country in which he resided until then, but
also in third States with which it operates, because of the network of agreements to avoid double
taxation that another jurisdiction may have. As stated in section 3.7.4, such treaties achieve
their purpose, generally, by attributing exclusive powers of taxation (generally to the State of
residence, thus depriving the source state from taxing) or, through recognition in the residence of
a method to eliminate double taxation (tax exemption or credit) for those income or equity items
that have been taxed at source.
However, in relation to corporations, similar behaviors can be seen to reduce the tax burden that
falls on them, by modifying their tax residence; although in certain circumstances, depending
on the criteria and assumptions contemplated in the domestic legislation of each country, the
manipulation is based solely on aspects of a formal nature, with the weighing of facts and evidence
being less relevant. Such would be the case, for example, when the place of incorporation is the
determining factor provided for in internal regulations. Notwithstanding this, it is worth mentioning
here that, in these situations, anti-abuse provisions may be applicable, particularly those based
on the principles of economic reality and the prevalence of the substance over the form.

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 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
Tax residency

Under these circumstances, the creation of entities under the corporate law of some jurisdictions
for the mere purposes of obtaining tax residence in them is frequent. In this regard, we must
not minimize the importance of the facilities that, in view of the above provisions regarding the
intention of becoming a center of attraction for foreign investment, some States offer for the
establishment, in them, of entities that conduct activities in third countries31.
On the contrary, in the case that, as indicated above, the laws of some countries have been
adapted to counteract the manipulation that could occur of the notion of residence based solely
on the principle of place of incorporation (considering as residents those entities that, although
they were not incorporated in accordance with their internal law, maintain their head offices in
their territory), the analysis of circumstantial aspects becomes relevant again. Case by case,
they make it possible to demonstrate whether a certain corporation should be considered a
resident for tax purposes. For this reason, there is an underlying risk that the tax administrations
are made to believe that the head office is not in their jurisdiction, alleging that it is located either
in where the firm was created, or in some other jurisdiction.
Now, beyond the loss of tax revenues caused by the effective change of residence of taxpayers
- regarding which there is nothing that the tax authorities can object to because no abuse was
observed - it should be emphasized that the true risk faced by tax administrations is ensuring
adequate compliance with tax obligations by those subjects who, although they claim to have
changed their residence, the facts and circumstances prove otherwise.
It should be borne in mind that the loss of tax resident status in a jurisdiction does not usually
entail substantial changes in the determination of tax obligations in relation to taxable events
that may occur within that jurisdiction. Indeed, and as indicated in section 7.3.4, in accordance
with the tax legislation of several countries, obtaining income from activities carried out in the
territory of its jurisdiction, or owning assets located there, is subject to taxation by virtue of
the above criteria of the source. In this regard, it should be noted that, for example, business
income obtained in a territory by a subject who does not have the status of resident is usually
taxed in the same way as if it had been obtained by a local subject -generally under the notion
of permanent establishment.
Therefore, the main impact of the change of residence will occur for the income generated and
the assets located outside the territory of the country in question, since it will no longer be able
to exercise jurisdiction over them (for no longer having the state of residence or state of source
status).
By virtue of the foregoing, the notion of residence reveals a double risk with a collection impact
that tax administrations must mitigate. On the one hand, that related to the verification of the
effective loss of resident status under the terms of the legislation of the country in question,
with the ensuing inability of taxing income and assets from foreign sources. On the other, the
risk connected to verification regarding whether it is appropriate to consider that a subject has
the status of resident in a country with which an agreement has been signed to avoid double
taxation, which would force the application of the possible preferential tax treatment granted
within the framework of that instrument.

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3.7.6. Indicators to identify the risk of abuse of the notion

of residence
Given that the configuration of the residence status is due to the evaluation of empirical issues, it
should not be surprising that the consideration that there may be an eventual abuse of the notion
of residence also requires the consideration of elements of fact and proof. However, some of the
indicators that are explained in this section may warn tax administrations about this risk.

[Link]. Increase in deregistrations from the taxpayer registry

In the first place, an issue that tax administrations cannot ignore is the entry into force of
preferential tax regimes in countries of the same region. In effect, both the closeness and the
socio-cultural similarities between the countries could encourage residents of a certain State,
with high levels of taxation, to begin to process tax residency in jurisdictions that have more
lax tax regimes, although without losing, in practice, the status of resident in their respective
countries of origin. Considering this, an analysis of the reasons invoked by the taxpayers of the
registry that, in certain fiscal periods, abruptly requested the reduction in taxes, as well as the
jurisdictions in which they have since declared to reside, may be indicative that some of these
would offer more favorable tax treatments likely to motivate such fictitious changes of residence.
Now, the detection of such abusive maneuvers would require the consideration of those facts
and evidence that the legislation of each country requires, namely, keeping a permanent home,
the existence of vital interests, the provision of accommodation for their stay in the country, etc.
However, the verification of a prolonged stay in the territory, whose residence would have been
-in theory- lost (which could, for example, arise from the verification of immigration records),
could entail the existence of some of the elements referred to above, which will have to be
reliably identified to satisfy the requirement set forth in the standard.

[Link]. Increase in operations with residents of certain

jurisdictions
Another element that becomes relevant when assessing the risk of abuse of the notion of residence
is the existence of agreements to avoid double taxation that contemplate certain comparative
advantages for residents of the countries with which they have been concluded, particularly tax
treatments at the source for a certain type of income more favorable than that provided for in
internal legislation when it is obtained by the residents themselves. This could manifest itself
through an unexpected increase in the operations carried out by subjects domiciled in such
jurisdictions, which would oblige the tax administrations to inquire, on the one hand, whether
such subjects should be considered residents of such jurisdictions by virtue of the provisions
contained in such bilateral treaties. Once this is done, the tax administration should inquire about
the relevance of the intervention of such subjects in the operations involved or if, on the contrary,
their filing is due to aggressive planning schemes tending to evade the tax obligations of the
States (“treaty-shopping”).

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 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
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When such foreign subjects do comply with the residence test in the jurisdictions with which the
corresponding bilateral tax instruments are in force, although there does not appear to be any
abuse of the figure of “resident”, it could nevertheless be reasonable to conclude that one of the
main purposes of their intervention (particularly when they lack sufficient substance to undertake
the operations that are imputed to them) would be to obtain such tax advantages. Here would
come into play the benefit limitation provisions contained in the very tax treaties, as well as anti-
abuse regulations provided for in domestic legislation (in this regard, see below sections 3.18
“Misuse of instrumental corporation,” 4.1 “General anti-evasion/avoidance regulations: domestic
and international” and 4.4 “Powers to ignore or redefine transactions”).
In general, local taxpayers tend to resort to these schemes, either from the entry into force of an
agreement to avoid double taxation with such characteristics, or after the introduction of certain
modifications in the internal tax legislation that end up increasing the fiscal pressure that falls on
those sectors with sufficient resources to face it.
It should also be considered that the filing of subjects in those jurisdictions with which tax
agreements are in force establishing more favorable treatments, can also be carried out by
persons residing in third States, since the latter do not have treaties with the country of source,
or because the treatment included in them is not as favorable as that signed with the jurisdictions
in which they decide to file their income tax return.
For this reason, the identification of those tax agreements signed by a country introducing
more favorable tax treatments than those usually granted by that country in its bilateral treaties
becomes relevant. This will help identify the abusive use of such instruments by subjects who,
in practice, do not necessarily reside in them or create legal entities there for the purpose of
benefiting from these agreements.

3.7.7. Procedures to mitigate the risk of abuse of the

notion of residence
There are several tools that States, and their tax administrations can use to counteract certain
abuses of the figure of resident perpetrated by taxpayers. Regarding the design of the tax policy
itself, some jurisdictions could introduce into their domestic legislation, certain mechanisms
aimed at neutralizing the effects of a subsequent loss of resident status, such as, for example,
the so-called exit taxes («exit taxes») incorporated by several European countries32. They
presume that, the day before losing resident status, the subject sold the assets he owns abroad
(whose income, upon assuming the condition of non-resident, would no longer be subject to the
tax jurisdiction of the country in question).
In addition, jurisdictions with a wide network of tax treaties that come to assume a certain risk of
abuse through the use of entities with dual residency, could consider signing the Convention to
Implement Tax Agreement Issues to Prevent Base Erosion and Profit Shifting, emanating from
Action 15 of the BEPS Project. Article 4 of this Convention would allow updating, to the new
international standard, the mechanism for defining the residence of such entities contained in
the agreements to avoid double taxation. Failing that, jurisdictions could evaluate the relevance
of holding bilateral negotiations to modify those instruments that imply greater risk.

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 Manual for the Control of International Tax Planning

On the other hand, the Tax Administrations also have tools that they could use to mitigate the
risk of abuse of the figure of resident. In this sense, the introduction of information requirements
to local taxpayers to provide elements capable of confirming certain risks of abuse previously
detected should be noted, in the terms described in the preceding section. In this way, and in
relation to the subjects who invoke their residence in other jurisdictions -particularly those with
which a tax agreement in force granting more favorable treatment- certificates of tax residence
issued by the administrations of such jurisdictions could be requested, to validate such invocation.
In addition, depending on the control powers that are at their disposal, the tax administrations
could organize inspections of certain taxpayers who, based on a risk matrix prepared for this
purpose, have notified the transfer of their residence to those jurisdictions identified as offering
preferential tax regimes. This will allow detecting whether they effectively ceased to comply
with the requirements set forth in the regulations of each jurisdiction to cease to be considered
residents.
Regarding foreign intermediaries, linked to local contracting parties, the latter could be required
to supply certain information, linked to the former, which makes it possible to assess whether
they are able to assume the risks, carry out the functions and own the assets worthy of the
remuneration established in their transactions with those local taxpayers. The examination
of said information can help to detect whether such intermediaries, based on their economic
substance, can be considered interposed parties with the aim of reducing the tax obligation that
would have corresponded in the absence of said intermediation33, in clear «treaty-shopping»
maneuvers as those referred to in the preceding section.
Finally, situations like the one described in the preceding paragraph could also be detected
through the exchange of information for tax purposes carried out under the international treaties
that the States have signed - both bilaterally34 and multilaterally35. By virtue of this procedure,
tax administrations can be asked not only about certain transactions carried out with subjects
domiciled in other jurisdictions, but also regarding the effective residence of the subjects involved
therein.

3.7.8. Conclusions
With globalization and the increase in cross-border trade and investment, the risk of
taxpayers putting into practice abusive schemes of tax regulations grows, both domestically
and internationally, as established in tax conventions that provide for tax advantages that to
a large extent may motivate such practices. For this reason, the countries have coordinated
the implementation of measures aimed at mitigating this risk and counteracting such harmful
schemes, protecting the consistency of the tax systems of the jurisdictions whose tax revenues
are intended to be breached.
In this context, it is of paramount importance to identify the risks inherent to the residence notion
and then design measures to mitigate them. Among these measures, it is possible to adopt
normative definitions that emphasize questions of a factual nature that, although they are not
simple to verify, avoid aggressive tax planning perpetrated to circumvent those merely formal
parameters on which domestic legislation of the countries is often based (as is the case of the
simple establishment of a domicile abroad or the creation of a legal person there).

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 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
Tax residency

Finally, it is necessary to mobilize resources towards the audit areas to identify the possible risks
that the legislation presents (particularly due to its interaction with tax benefits provided both in
the tax systems of other countries and the tax agreements concluded with them). Then action
must be taken to detect and counteract any abusive maneuvers that may have been perpetrated
under the opportunities provided by the regulations. In this way, the aim is to protect not only
the tax revenues of the States -which are particularly relevant considering the leading role of
taxes when financing other State policies, even of an extra-fiscal nature- but also the principle of
equity, since tax evasion generates inequality scenarios that must be avoided so that all subjects
who are in similar conditions contribute in the same way with their tax obligations.

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Endnotes
1 It was not until the middle of the 20th century that technological advances in means of
transport and telecommunications stimulated the mobility of people, goods, and capital,
interconnecting these factors more and more immediately.
2 Curiously, both criteria summarize the dichotomy that the agreements to avoid double
taxation seek to resolve. Indeed, during the negotiations of the agreements to avoid double
taxation, the main tension lies at the time of attributing tax powers, precisely, between the
jurisdiction in which the income has been generated or the assets are located (source State)
and the jurisdiction in which the income recipient or owner of the estate resides (residence
State).
3 According to the case law of Canada, residence is the place “…in which a person intends to
establish himself, and in fact does so, or maintains or conducts his habitual way of life with its
accessories in terms of social relations, interests and conveniences in the place in question”
(Tax Court of Canada in “Case Neil Barry McFadyen v. Her Majesty the Queen,”,2000 DTC
2473, paragraph 99).
4 Subsections a) and b) of article 116 of the Income Tax Law, text consolidated in 2019 and
its amendments, of the Argentine Republic.
5 Article 762-N of the Fiscal Code of the Republic of Panama.
6 It can be a house or apartment, owned or rented. The Comments on Article 4 of the Model
Tax Agreement of the Organization for Economic Cooperation and Development (OECD)
clarify, in paragraph 13, that “The essential thing is the permanent nature of the home; which
means that the individual has arranged what is necessary so that the accommodation is
available to him at all times, continuously and not occasionally for stays that, for the reasons
that motivate them, must necessarily be of short duration (trips of pleasure, business,
studies, attending courses in schools, etc.).”
7 Subsection b) of article 122 of the Income Tax Law, text consolidated in 2019 and its
amendments, of the Argentine Republic, which emulates section 2 of Article 4 of both the
OECD Model Tax Agreement and the United Nations Model Tax Agreement on Double
Taxation between Developed and Developing Countries.
8 Second paragraph of subsection b) of article 116 of the Income Tax Law, text consolidated
in 2019 and its amendments, of the Argentine Republic.
9 Section 3 of article 10 of the Tax Statute of the Republic of Colombia.
10 Through this type of regimes, some tax benefits are granted during certain fiscal periods,
after which the general rule is applicable.
11 Article 5 Bis of Decree No. 148/007 mentioned above, as modified by Article 6 of Decree
No. 330/0016 and Article 163/2020 of the Republic of Uruguay, considers that a person
has economic interests in a country when he/she has in Uruguayan territory, (a) a direct
investment in real estate for a value greater than 15:000.000 Indexed Units, (b) a direct or
indirect investment, in a company for a value more than 45.000.000 Indexed Units; (c) a
direct investment in real estate for a value greater than 3:500.000 Indexed Units, provided
that it is made as of July 1, 2020 and records an effective presence in Uruguayan territory
during the calendar year of at least 60 days; or (d) a direct or indirect investment, in a

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 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
Tax residency

company for a value greater than 15.000.000 Indexed Units, provided that it is made as of
July 1, 2020 and generates at least 15 new direct jobs in a dependency relationship.
12 Article 4.2 of the Law of Internal Tax Regime of the Republic of Ecuador.
13 According to the positive law of some countries, “A branch is any secondary establishment
through which a company conducts (…) certain activities included within its corporate
purpose. The branch lacks independent legal status from its parent company. It is endowed
with permanent legal representation and enjoys management autonomy in the scope of the
activities assigned to it by the parent company, in accordance with the powers granted to its
representatives.” (Article 396 of the General Law of Companies No. 26,887 of the Republic
of Peru).
14 Last paragraph of article 116 of the Income Tax Law, text consolidated in 2019 and its
amendments, of the Argentine Republic. In this regard, it is anecdotal to note that, in that
country, the notion of residence arose from the incorporation, in 1998, of world income
within the object of the tax (previously, the tax system was based merely on the principle of
territoriality). At that time, the tax law - protected by the international standard - clarified that
stable establishments belonging to foreign subjects did not have the character of residents.
15 Section 2 of Article 9 of the Tax Code of the Federation of the United Mexican States considers
residents to be legal entities that have established in Mexico the main administration of the
business or their actual head office.
16 Subsection 1) of Article 18 of the Tax Code -Decree Law 830- of the Republic of Chile.
17 Article 102 of the income tax law, text consolidated in 2019 and its modifications, of the
Argentine Republic.
18 Title V of the Income Tax Law, text consolidated in 2019 and its amendments, of the Argentine
Republic.
19 For example, articles 30 and 58 of the Income Tax Law, text consolidated in 2019 and its
amendments, of the Argentine Republic.
20 Based on the remote cross-border trade flow increase, it is worth mentioning here the tax
reforms undertaken in the last decade to regulate, in terms of value added tax, the treatment
applicable to digital services and so-called service imports (for example, subsections d) and
e) of Article 1 of the Value Added Tax Law, text consolidated in 1997 and its amendments,
of the Argentine Republic).
21 Articles 33 and 35 of Law No. 11,683 of Tax Procedure, text consolidated in 1998 and its
amendments, of the Argentine Republic.
22 Article 1 of the OECD Model Tax Convention and Article 1 of the United Nations Model
Double Taxation Agreement between Developed and Developing Countries.
23 This provision protects residents of one State against discriminatory tax treatment in the
other State, without necessarily being limited to income or wealth taxes.
24 These include excise tax on foodstuffs or excise taxes, as well as stamp or registration
taxes.

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 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
Tax residency

25 In accordance with Article 25 of the OECD Model Tax Convention and Article 25 of the
United Nations Model Double Taxation Agreement between Developed and Developing
Countries, when a taxpayer considers that the actions of a State resulted or may be result
in a taxation contrary to the agreement, they may raise their case before the competent
authorities of the Convention, who must do everything possible to eliminate any taxation
that does not comply with treaty provisions.
26 However, one can see that despite the progress made by the international tax community
with Action 14 of the Project to counteract the Base Erosion and Profit Shifting (BEPS),
there is still no global consensus regarding the convenience of including this type of clause
as a complement to the mutual agreement procedures of the agreements. Indeed, only a
third of the countries that signed the Convention to Implement Tax Agreement Issues to
Prevent the Base Erosion and the Relocation of Income, emanating from Action 15 of said
project, included the mandatory and binding resolution mechanism contained in Part VI of
that multilateral instrument.
27 This general principle of international taxation is confirmed, because of Action 6 of the
above BEPS Project, through section 3 of Article 1 of the OECD Model Tax Convention
and the third section of Article 1 of the Model Convention on Double Taxation between
Developed and Developing Countries of the United Nations, according to which, unless
expressly mentioned, the agreement to avoid double taxation does not affect in any way, in
a State, the taxation of its own residents.
28 OECD (1998), Harmful Tax Competition: An Emerging Global Issue, OECD Publishing,
Paris.
29 Chapter II of the above-mentioned report refers to such jurisdictions as “tax havens.”
30 For example, as of the enactment of Law No. 19,904 of September 19, 2020, Article 6 Bis
of Title 7 of the 1996 Consolidated Text (Personal Income Tax) of the Eastern Republic of
Uruguay, the individuals who acquire the status of residents from the year 2020 to choose
for any of the following advantages: (a) choose not to pay the Individual Income Tax on tax
liabilities from abroad for the next 10 fiscal years; or (b) choose to pay the aforementioned
tax on foreign movable capital income from the fiscal year in which the tax residence is
acquired, and indefinitely (except for a possible legislative change), at the rate of 7% (the
general rate of the Individual Income Tax for this type of income is 12%).
31 For example, pursuant to the 2001 International Business Corporations Act and the 1992
Corporations Act of the Commonwealth of the Bahamas, limited liability companies may be
incorporated, with up to a minimum of two non-nominative partners, and a minimum of one
director, and without requiring a minimum share capital value, at a cost of US$330.
32 These include those established by Australia, Canada, France, Germany, South Africa,
Poland, Spain, and the United States of America.
33 A similar regulation has been introduced in 2018 by the Argentine Republic (sixth paragraph
of article 17 of the income tax law, text consolidated in 2019 and its modifications).
34 Based on the OECD Model Agreement on Exchange of Information on Tax Matters.
35 Convention on Mutual Administrative Assistance in Tax Matters developed jointly by the
OECD and the Council of Europe, concluded in 1988 and amended in 2010.

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 Harmful International Tax Planning: Common Behaviors and Mechanisms to Identify Them
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Bibliographic References

Corte Tributaria de Canadá en “Case Neil Barry McFadyen v. Her Majesty The Queen”, 2000
D.T.C. 2473.
OCDE (2010). Convención sobre Asistencia Administrativa Mutua en Materia Fiscal de la OCDE.
OECD Publishing, Paris. [Link]
[Link]
OCDE (2002). Modelo de Acuerdo sobre Intercambio de Información en Materia Tributaria
de la OCDE. OCDE Publishing, Paris. [Link]
information/[Link]
OCDE (1998). Harmful Tax Competition: An Emerging Global Issue. OCDE Publishing, Paris.
[Link]
OCDE (2017). Modelo de Convenio Tributario sobre la Renta y sobre el Patrimonio de la
Organización para la Cooperación y el Desarrollo Económico. OCDE Publishing, Paris:
[Link]
patrimonio-version-abreviada-2017_765324dd-es
ONU (2017). Modelo de Convenio sobre Doble Imposición entre Países Desarrollados y Países
en Desarrollo de las Naciones Unidas. Nueva York: [Link]
uploads/2014/09/UN_Model_2011_UpdateSp.pdf

26
 Manual for the Control of International Tax Planning
General Structure

1. Introduction, Scope, and Objective 4.2. Specific anti avoidance rules: domestic and international
4.3. Anti hybrid regimes
2. International Tax Planning 4.4. Ability to disregard or recharacterize transactions
4.5. Rules relating to international tax transparency
3. Harmful International Tax Planning: Common 4.6. Rules limiting tax base erosion through financial
Behaviours and Mechanisms to Identify Them instruments
3.1. Thin-capitalization and other international financing 4.7. Transfer pricing regulations
operations 4.8. Anti tax haven rules
3.2. Transfer pricing manipulation 4.9. Measures to contain misconduct by promoters of tax
3.3. Tax treaty abuse planning schemes
3.4. Abuse of domestic rules 4.10. Mechanisms to prevent abuse involving transactions of
3.5. Hybrids commodities and raw materials
3.6. Business restructuring 4.11. Measures to contain avoidance or evasion by companies
3.7. Tax residency operating in the digital economy
3.8. Permanent establishments and commissionaire 4.12. Measures to contain the abuse of permanent
arrangements establishments and commission agents
3.9. Use of legal structures for concealment purposes, tax
havens, and harmful tax regimes 5. Tools for Combating International Tax Planning
3.10. Triangulation 5.1. Special information regimes, development and
3.11. Transfer of intangibles maintenance of databases: information obligations for
3.12. Payments for technical assistance, royalties, interests, taxpayers carrying out international operations
dividends, and service fees 5.2. Mechanisms to identify risks
3.13. Leasing operations 5.3. International cooperation
3.14. Improper contractual allocation of risk 5.4. Initiatives regarding corporate responsibility and fiscal
3.15. Artificial fragmentation of contracts governance
3.16. Artificial generation of losses and artificial allocation of 5.5. Cooperative compliance initiatives as a preventative
costs mechanism
3.17. Misuse of special purpose entities (also known as financial 5.6. Procedures to prevent abuse by companies operating in the
vehicle corporations) digital economy
3.18. Profit shifting 5.7. Taxation of Cryptocurrencies
3.19. Tax compliance risks by companies operating in the digital 5.8. Advanced Pricing Agreements (APA)
economy
6. Other administrative issues
4. Containment Measures for International Tax Planning 6.1. Audit of multinational enterprises and entities with
4.1. General anti avoidance rules: domestic and international international operations

[Link]