De Beers Revisited: 98 years on

The European Commission is certainly not letting up easy on Ireland. In addition to the investigation into Apple’s tax arrangements with the Irish Revenue Commissioners, it was reported last night in the FT that the Commission is now investigating the ‘Double Irish’ tax structure.

This highly controversial measure allows companies to significantly reduce their tax bills and funnel profits to tax havens by virtue of a mismatch in residency rules. In the US, residency is based on place of registration, whilst in Ireland corporate residency is determined by “central management and control”. To exploit this mismatch, US multinationals merely need to place assets, such as intellectual property, with an Irish registered company which is controlled from a tax haven, such as Bermuda.

For Ireland, this mismatch is relatively unintended but nevertheless incredibly surreptitious, given the number of people employed by multinationals. The Irish residency rule owes its genesis to the bygone days of the British Empire. In 1906, an issue came before the House of Lords as to the corporate residency of a South African incorporated mining company, De Beers Consolidated Mines Ltd. The Court ultimately decided that the company was resident in London as “real business is carried on where the central management and control actually abides”. This was a question of fact and the court was satisfied of London residence on the basis that the majority of directors lived in England; that the directors’ meetings in London were the meetings where the real control was exercised; and that London controlled the negotiation of the company’s contracts.

This is just one of many archaic rules which are no longer fit for purpose. It serves to highlight just one of the many difficulties which we face in the reform of International Tax Law.

For the time being however, it is the European Commission which is unilaterally seeking reform of the way in which companies are taxed and indeed, this is its modus operandi. One wonders however whether politically this attack is prudent on the part of the Commission, given the rise of Euroscepticism and the fact that direct taxation is a field in which EU Member States are thought to have retained competence.


About taxatlincolnox

Tax law academic. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
This entry was posted in Tax Law. Bookmark the permalink.

4 Responses to De Beers Revisited: 98 years on

  1. T says:

    UK only changed its rules in 1988……. see Part 3 discussion related to the Daily Mail case


  2. Discussion of the Daily Mail, whatever the context, always makes me shudder


  3. I wouldn’t quite agree that the de Beers rule is no longer fit for purpose. If you were to determine corporate residence simply on the basis of where the company has been registered, one can see why it still makes sense to have some sort of control and management test.

    That said, one then gets into questions such as how one can genuinely say that the company has been managed from offshore – e.g. the whole Board of directors, all living in the UK, fly off to Guernsey for an hour or so, and then come back the same day. I think there’s something in the HMRC Manuals about how this can’t be realistic.


  4. Thank you for the comment.

    At the time I was writing this, I was referring to the fact that the rule was based upon circumstances of international trade which no longer ring true (which to be fair, I considered to be pretty low hanging fruit). What the test should be on the other hand, I’ll concede, is a very complicated question.

    Anecdotally, I have also heard of people flying in to x destination in order to have AGM’s etc and then fly out: the thought always captures my mind when I see so many hotels at airports!


Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s