The purpose of this paper is to examine whether the judicial approach to the interpretation of dual residency tiebreakers for individuals in double tax agreements (DTAs) exhibits certainty and coherence.

An individual with connections to more than one country may be considered a tax resident under the domestic laws of two States. In this context, the residency tiebreaker article in DTAs assumes central importance in the allocation of taxing rights between States (and potentially averting double taxation). States typically follow or adapt model tax treaties, most commonly the Tax Convention on Income and Capital, which has been controlled by the OECD since 1963 (OECD Model Convention).

The residency article in DTAs provides for a series of hierarchal factors to determine the tax residency of an individual where they appear to be a resident under the domestic laws of both signatories to the DTA. A common approach (following Article 4 of the OECD Model Convention) to the hierarchal factors determines tax residency based on the State where the person has a ‘permanent home;’ then the State where their ‘personal and economic relations’ are closer (which is followed by the parenthesised expression ‘centre of vital interests’ in the OECD Model Convention); then the State where they have a ‘habitual abode;’ and then nationality.

The highest courts in common law and civil systems recognise that the principles of treaty interpretation are governed by the Vienna Convention on the Law of Treaties (VCLT), which codifies principles of customary international law. While the VCLT gives primacy to treaty terms as agreed by contracting States, key terms used in the residency tiebreaker are undefined in DTAs. Thus, the attainment of certainty and coherence in the interpretation of residency tiebreaker rules critically depends on the judicial approaches adopted in international case law.

Our analysis of leading cases on the residency tiebreaker (based on Article 4 of the OECD Model Convention) shows that dual residency disputes tend to arise in situations where an individual has a permanent home in both contracting States to the DTA. Consequently, the tiebreaker based on the closeness of an individual’s ‘personal and economic relations’ to one State is overwhelmingly the decisive criterion in practice. The Commentary to the OECD Model Convention, which is frequently consulted in judgments, indicates a broad ‘facts and circumstances’ approach should be adopted for this criterion, but provides sparse interpretive guidance. In some instances, the conclusion that an individual has closer ties to a particular State appears arbitrary or is poorly substantiated. We contend that a pre-condition to realising coherence and certainty in the interpretation of the residency tiebreaker article involves the development of common international fiscal meanings to the central concepts mentioned therein, and this would be greatly facilitated if judges consistently had regard to salient decisions of higher courts in other jurisdictions. A body of coherent guidance could develop over time, and the OECD Model Convention Commentary could perform a valuable function by distilling and articulating the interpretive principles that are established in the international case law.

John Minas is an Associate Professor in the Department of Business Law and Taxation at Monash University, a Research Affiliate with the Tax and Transfer Policy Institute, Crawford School of Public Policy, at ANU, and an Adjunct Research Fellow in the Law Futures Centre at Griffith University.

Co-author, Dr Sonali Walpola, ANU