Tax Treaties and Denizenship Based Tax Systems

Abstract

The current age of the global economy can be distinguished from the period following WWI by the increasing mobility of human capital, which calls for revisiting the international tax rules that were shaped and developed over a century ago. Following the end of WWI, developed countries placed extensive restrictions on cross-border migration (after a long period of approximately six decades in which cross-border movement of individuals was relatively free), which made the movement of individuals between countries relatively difficult. That is why throughout most of the twentieth century human capital mobility was considered relatively static, unlike financial capital that has become increasingly mobile starting from the second half of the twentieth century. However, over the past several decades, the mobility of both physical and human capital increased significantly, which inadvertently led to a fiercely regulatory race to the bottom (including the relaxation of the migration regulatory framework, the financial regulatory framework, and the tax regulatory framework).

This article addresses the tax implications and challenges that arise from the increasing mobility of human capital and focuses on a relatively recent migratory trend in which hundreds of millions of people leave their homes and families to establish permanent residency in a different country. Further, this article explores how, for various reasons, these migrants refrain from acquiring full membership status (citizenship) in the country of destination even though most of their home countries removed any limitations from acquiring and holding more than a single citizenship. In light of recent migratory trends, this article addresses personal jurisdiction issues and focuses on Article 4 definitions of “resident” of over 3,000 bilateral tax treaties. Issues pertaining to the need for additional measures concerning the territorial nexus, the reexamination of different source rules, and changes needed to the concept of permanent establishment exceed the scope of this article.

Keywords: Tax, International Tax, Tax Policy, Immigration, International Law, Denizenship, Tax Treaties

JEL Classification: K2, K33, K34, K37