A comparative analysis of residence issues in income tax and a case study of Nigerian and South African legal system.

Abstract

In exercising income tax jurisdiction, the state can choose to have a link with the personality of the income earner who resides within its territory whether or not the income was derived from a source within its territory (residence-based taxation). No universal rules for determining the tax residence of a person (either natural or juristic) for tax purposes apply in all circumstances. Thus, the states have different definitional rules of residence as contained in their respective income tax legislation and as interpreted by their courts. The global economic integration makes taxpayers move freely and exploit ambiguity created by the divergence of definition of tax jurisdiction between the States. The research explores the possibility of achieving cooperation amongst the States in delimiting the scope of their substantive and enforcement tax jurisdiction without losing their sovereignty. The cooperation envisioned by this research is a departure from the traditional approach, where the focal point of achieving cooperation is either bilateral or multilateral tax treaties. that focus on protecting the tax base of the party-state, ignoring the taxpayers who face conflicting claims due to inconsistencies in the definitional rules. The research argues that the cooperation could be achieved through comparative analysis of the definitional rules in order to ascertain the level of convergence and divergence and how they could extend mutual respect for each other’s tax sovereignty and balance their interests against that of the taxpayers in defining the tax residence. For the purpose of in-depth analysis, the research is restricted to Nigeria and South Africa. Nigeria has adopted the residence-based system at the inception of its income tax system, while South Africa initially adopted sourced-based system but later switched to the residencebased system. Thus, the two states operate residence-based tax system. They are also parities to Bilateral Treaties in order to resolve the double taxation inherent in the system. However, the conflict remained unresolved. The thesis found that the definitional rule of tax residence is not universal. Traditionally, the States adopted the bilateral tax treaty regime to resolve the potential jurisdictional caused by the diversity. However, the reality of the economic viii integration foists a challenge on that regime. Hence, the current move towards a multilateral tax treaty, which also runs against the tenet of the states’ tax sovereignty. Therefore, there is a conflicting interface between the need for the States’ cooperation in designing their tax residence rules and the states’ tax sovereignty. The research revealed that a comparative analysis of the diverse definitional rules balances the two conflicting interests. The comparison of the Nigerian and South African regimes bring home the significance of the comparative analysis. It is found that the two regimes operate different and irreconcilable rules on the definition of tax residence. While, the South African regime is closer to the global trend, the Nigerian rules are complex and inconsistent, which could have impacted the existing double taxation agreement (DTA) between Nigeria and South Africa.