On a recent bus tour of Barcelona, the recorded commentary declared the ‘immortal’ words of exiled Catalonian President Josep Tarradellas on his return in 1977: ‘Citizens of Catalonia, I am here’. This immediately conjured in my mind the immortal line from the BBC’s Goon Show: ‘Everybody’s got to be somewhere.’ Great philosophy it aint, but the concept of ‘being here’ has been a cornerstone of modern international taxation since its salad days a hundred and fifty years ago – ‘where you are’, rather than ‘who you are’.
Despite an intuitive tendency – demonstrated countless times over the years in meetings with prospective clients – to think that international taxation depends on ‘who you are’ (French, German, Spanish, Catalonian), citizenship actually plays a minor role in establishing where direct tax is paid. There are only two countries that tax on the basis of citizenship. One is the African state of Eritrea. The other – slightly larger and louder – is the United States of America. Everyone else looks at ‘residence’ – essentially ‘where you are’. The only time citizenship kicks in is when two competing countries tied by tax treaty are totally stumped.
The confusion is forgivable when you open international taxation journals. Recent news included Montenegro’s joining the ranks of those countries selling citizenship for a mess of pottage. For as little as a 250,000 Euro investment and 100,000 Euro donation to the Government, it will be possible to achieve citizenship within 6 months. Apart from being delightfully situated next to Bosnia and Serbia (complete with NATO membership), it offers the bonus of potential EU membership by 2025 (if the current European order lasts that long), with the advantage of access to the rest of the EU. Apart from Americans (and perhaps wealthy Eritreans) who might court the idea of a second citizenship to enable them to give up the first (thus avoiding draconian tax reporting and, possible, additional tax payment), the principal attraction of these schemes is Visa access for those from even less popular countries (and EU access, where relevant). Tax doesn’t get much of a look-in.
Israel is firmly in the ‘residence’ camp and its statute law is well-developed. It is therefore surprising that, in a recent High Court appeal decision concerning a poker player who claimed to be resident nowhere (‘everybody’s got to be somewhere?’), one of the justices declared that a person who is a resident and citizen of Israel, especially one who was born and raised in Israel, even if he goes abroad for a prolonged period, will only shake off residency if he does something clear to break that residency and establish residency elsewhere. Examples cited are renouncing citizenship, and sale of house and assets in Israel. Less convincing would be academic studies or a foreign company posting.
This is diverging a long way from ‘where’, and giving a degree of importance to ‘who’.
As Israel is a member of the OECD and signatory to many double tax treaties based on its model, treaty interpretations will take precedence over domestic law, although there may be an increase in the incidence of mutual agreement procedures. But, it will be interesting to see how matters develop with non treaty countries, as well as the rare situations where an individual claims ‘not everybody has to be somewhere’.