United Kingdom Special Commissioners of Income Tax Decisions

Trevor Smallwood Trust v Revenue & Customs [2008] UKSPC SPC00669 (19 February 2008)

Spc00669

CAPITAL GAINS TAX – double taxation relief – trust assets included shares which would realise a gain on disposal - UK settlor had power to appoint new trustees - tax planning scheme – new trustees in Mauritius appointed after which shares sold after which UK trustees appointed - all events took place in same tax year - whether trustees entitled to double taxation relief – whether trustees resident only in Mauritius – no - or also resident in the UK – yes - whether place of effective management of trust was Mauritius - no – or UK – yes - appeal dismissed – TCGA 1992 S 77(7); Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981 SI 1981 No 1121

THE SPECIAL COMMISSIONERS

TREVOR SMALLWOOD AND MARY CAROLINE SMALLWOOD

TRUSTEES OF

THE TREVOR SMALLWOOD TRUST

Appellants

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

TREVOR SMALLWOOD

SETTLOR OF

THE TREVOR SMALLWOOD TRUST

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

Special Commissioners: DR A N BRICE

DR J F AVERY JONES CBE

Sitting in London on 10 to 14 December 2007

Kevin Prosser QC with Elizabeth Wilson, Counsel, instructed by KPMG Bristol for the Appellants

Timothy Brennan QC, with Akash Nawbatt, Counsel, instructed by the Solicitor of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008
 


DECISION

The appeals

1. In 1989 Mr Trevor Smallwood (Mr Smallwood) settled property on trust for the benefit of himself and his family. Mr Smallwood and his wife, Mrs Mary Caroline Smallwood, (the Trustees) are the present trustees of the Trevor Smallwood Trust (the Trust). On 10 January 2001 the then trustees sold shares in FirstGroup plc (FirstGroup) giving rise to chargeable gains. On 26 January 2001 the then trustees sold shares in Billiton plc (Billiton) giving rise to chargeable gains. The Trustees claimed that they were entitled to double taxation relief because, at the dates of the disposals, the Trust was resident in Mauritius.
2. The Trustees appeal against a closure notice issued by the Commissioners of Her Majesty's Revenue and Customs (the Revenue) on 31 January 2005. The closure notice amended the Trust's tax return for the year ending on 5 April 2001 to include the full amount of a gain of £6,801,011 arising on the disposal of shares in FirstGroup, and of a gain of £17,378 arising on the disposal of shares in Billiton, and disallowed the claim for double taxation relief. The closure notice stated that, under the provisions of section 77(1) of the Taxation of Chargeable Gains Act 1992 (the 1992 Act), the Trustees were not chargeable on these gains and so the amendment would not result in any amendment to the tax payable by the Trustees for the year ending on 5 April 2001.
3. Mr Smallwood, as settlor, appeals against a closure notice issued by the Revenue on 31 January 2005. The closure notice amended Mr Smallwood's return so as to show an amount of £6,818,390 as chargeable gains and tax of £2,727,356 as due.

A summary of the legislation

4. We consider the legislation in detail later but a short summary is given here. Section 77(1) of the 1992 Act provides that, if a chargeable gain accrues to the trustees of a settlement from the disposal of settled property, and if the settlor has an interest in the settlement, the trustees are not chargeable to tax but the gains are treated as accruing to the settlor. As Mr Smallwood is also a beneficiary of the Trust he has an interest in it. Section 77(7) provides that the section does not apply unless the settlor is, and the trustees are, resident in the United Kingdom during any part of the year. Section 277 of the 1992 Act provides for relief from double taxation in relation to capital gains tax in cases where an Order in Council declares that arrangements specified in the Order have been made with the government of any territory outside the UK.
5. The Double Taxation Relief (Taxes on Income) (Mauritius) Order 1981 SI 1981 No. 1121 gives effect to the Convention set out in a Schedule to the Order (the Treaty). The Treaty is with the Government of Mauritius for the avoidance of double taxation with respect to taxes on income and chargeable gains. Article 13(4) provides:

"13(4) Capital gains from the alienation of any property … shall be taxable only in the Contracting State of which the alienator is a resident."

6. Residence is defined in Article 4. Article 4(1) provides that the term "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation therein by reason of stated criteria. Article 4(3) provides:

"(3) Where by reason of the provisions of paragraph (1) of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated."

A summary of the issue

7. The appeal relates to a tax avoidance scheme that is intended to work in the following way. A non-resident trust which has a gain on its assets appoints Mauritian trustees for part of a tax year and realises the gains during the period that the trust is resident in Mauritius. United Kingdom resident trustees are appointed before the end of the tax year. The provisions of section 77 of the 1992 Act potentially apply because the trustees are resident in the United Kingdom for part of the year within the meaning of section 77(7). Conversely section 86, which attributes gains of non-resident settlements to beneficiaries, does not apply if the trustees are United Kingdom resident for any part of the year. The Trustees argue that the Treaty prevents the United Kingdom from taxing the gains. There is a parallel appeal by Mr Smallwood because, as settlor, any gains will be chargeable on him under section 77(1)(c) if the Trustee's argument does not succeed.
8. In this appeal a corporate trustee who was tax resident in Mauritius was appointed in December 2000. The corporate trustee disposed of shares in January 2001 and realised gains. In March 2001 Mr and Mrs Smallwood, who are resident in the United Kingdom, were appointed as Trustees. It was accepted that the Trustees were resident in the United Kingdom for part of the year of assessment ending on 5 April 2001 and so a liability for capital gains tax arose under section 77(7) of the 1992 Act. However, the Trustees argued that they were entitled to double taxation relief under section 277 of the 1992 Act and Article 13(4) of the Treaty.
9. The issue in the appeal was whether the Trustees were entitled to double taxation relief. As argued that issue raised two questions which were:

(1) Was the trustee resident for the purpose of the Treaty solely in Mauritius when the gains were made and, if so, does Article 13(4) of the Treaty prevent the United Kingdom from taxing the gains?

(2) If the trustee was resident for the purpose of the Treaty in both the United Kingdom and Mauritius when the gains were made, was the place of effective management (POEM) of the Trust under Article 4(3) of the Treaty situated in Mauritius (as argued by the Appellants) or in the United Kingdom (as argued by the Revenue)?

The evidence

10. There was a statement of agreed facts. Three bundles of documents were produced. Oral evidence was given on behalf of the Appellants by:

Mr Paul James Bazzone, a Vice President of Morgan Stanley Quilter and a private client fund manager of that firm in Bristol

Mr Roger John Gadd, a director in the private client department at KPMG Bristol

Mr Jaye Jingree the Managing Director of KPMG Peat Marwick International Limited (PMIL) of Mauritius

Mr Wilfrid Koon Kam King (Mr Koon), a partner in the firm of KPMG Mauritius and a director of PMIL

Mr Jean Claude Liong Wee Kwong (Mr Liong) a partner in the firm of KPMG Mauritius and a director of PMIL

Mr Subhas Purgus, a partner in the firm of KPMG Mauritius and a director of PMIL

Mr Shamil Shah an Assistant Manager at PMIL who worked under the supervision of Ms Taher and Mr Jingree

Mr Trevor Smallwood, one of the Appellants in this appeal

Ms Mowlooda Randeria Taher the departmental manager at PMIL with responsibility for regulatory matters and compliance; Ms Taher undertook certain administrative matters at PMIL when PMIL was appointed as trustee of the Trust

Mr Robert Picton Turbervill, a Senior Manager at KPMG Bristol; Mr Turbervill is a Chartered Tax Adviser and before that was an Inspector of Taxes.

11. The oral evidence of Mr Koon, Mr Liong, Mr Purgus, Mr Shah and Ms Taher was given by video link from Mauritius.

The facts

12. From the evidence before us we find the following facts. We have in particular found the facts which are relevant to the issue in the appeals which concerns the place of effective management of the Trust. The Appellants argued that this was in Mauritius and the Revenue argued that it was in the United Kingdom.

1989 - Mr Smallwood and the Trust

13. Mr and Mrs Smallwood have, at all relevant times, been resident in the United Kingdom. Mr Smallwood first became a client of KPMG Bristol in 1986 when that firm advised him on a management buy-out of a company later called Badgerline Holdings Limited (Badgerline).
14. On 24 February 1989 Mr Smallwood created the Trust for the benefit of himself and his family. The power of appointing new trustees was vested in Mr Smallwood. Mr Smallwood is also a beneficiary of the Trust. The assets of the Trust included a number of shares in Badgerline which floated in 1993.
15. In about 1994 KPMG Bristol became tax advisers to Mr Smallwood and to the Trust. Mr Gadd has a senior role at KPMG Bristol and is the relationship manager for many clients one of which is Mr Smallwood. Mr Turbervill provides expertise in tax matters.
16. On 16 June 1994 the then trustees retired and Lutea Trustees Limited (Lutea) were appointed. Lutea is a company incorporated in Jersey and is also the trustee of a number of trusts settled by clients of KPMG Bristol. There is a long-standing relationship between KPMG Bristol and Lutea. From 16 June 1994 until 19 December 2000 Lutea was the sole trustee. As the United Kingdom tax advisers to the Trust KPMG Bristol was expected to advise on the United Kingdom consequences of any course of conduct that offshore trustees were considering.
17. In 1995 Badgerline merged with another company to become FirstGroup and Mr Smallwood was appointed Chairman. By June 1997 the assets of the Trust included 2,428,184 ordinary shares in FirstGroup which were derived from the original shares in Badgerline. While Mr Smallwood remained as Chairman of FirstGroup there were stock exchange restrictions on the sale of shares held by him and during this time Lutea did not decide to sell any of the shares in FirstGroup held by the Trust. In September 1999 Mr Smallwood retired as Chairman, and director, of FirstGroup and thus became free of the restrictions on the sale of shares.
18. In early 2000 Mr Gadd introduced Mr Smallwood to Mr Bazzone of Quilter & Co Limited (Quilter) and in May 2000 Quilter were instructed to advise on a portfolio of shares held for the Trust. Thereafter a number of accounts were set up by Quilter both for Mr Smallwood and for some family trusts including the Trust. At that time the funds managed by Quilter consisted of a small portfolio of quoted shares and unit trusts and Quilter managed this portfolio on a discretionary basis in accordance with a mandate agreed with Lutea. However, quarterly statements regarding all the Smallwood family trusts were copied to Mr Smallwood for information in his capacity as settlor and beneficiary and regular updates were sent to Mr Smallwood with copies to Mr Gadd. There were quarterly review meetings at the offices of KPMG Bristol attended by Mr Bazzone and Mr Smallwood. Overall Mr Smallwood and the family trusts held a large holding of FirstGroup shares and Mr Bazzone formed the view that it would be prudent to reduce such a major exposure and to reduce the size of the holdings.
19. By 2000 the assets of the Trust also included a portfolio of shares managed by Merchant Securities Limited (Merchant) which including 5,866 shares in Billiton.
20. It was appreciated that, if the FirstGroup shares were sold, a large chargeable gain would accrue to the trustees which would be attributed to Mr Smallwood under section 86 of the 1992 Act and that any capital gains tax paid by Mr Smallwood would be recoverable from the trustees under paragraph 6 of Schedule 5 of the 1992 Act. Thus any capital gains tax would ultimately be borne by the Trust. Mr Turbervill therefore advised on a tax planning exercise.

August – November 2000 – the tax planning exercise

21. On 10 August 2000 Mr Gadd wrote to Mr Smallwood to follow up a discussion about tax savings which could result from the appointment of Mauritius trustees. The letter said:

"In essence, if the intention is to sell FirstGroup shares during this tax year, the order of the transactions would be as follows:

1. Lutea Trustees resign in favour of trustees based in Mauritius (who can be partners in KPMG there)

2. The shares are sold

3 UK resident trustees are appointed before 5 April 2001."

22. The letter went on to suggest that, if Mr Smallwood wished to proceed, then the advice of Tax Counsel would be sought and there would be discussions with Lutea who would have to be convinced that there was a good chance of success before retiring as trustee.
23. On 11 October 2000 Lutea gave instructions to KPMG Bristol to instruct Counsel to advise about capital gains tax. Later that month Mr Gadd, Mr Turbervill and a representative of Lutea attended a Conference with Counsel chosen by Lutea. On 15 November 2000 Lutea wrote to Mr Smallwood about the preparation of the papers for Lutea to retire as trustees in favour of Mauritius trustees. On 20 November Mr Smallwood replied to say that the FirstGroup shares had remained flat for some time and that it would be sensible to consider their sale. He felt that Lutea "should consider that Mauritius was a sensible route to progress".

November 2000 – the approach to PMIL

24. After the Conference with Counsel Mr Gadd "took a back seat" and Mr Turbervill continued with the work involved in the tax planning exercise. At KPMG Bristol the desks of Mr Gadd and Mr Turbervill faced each other and they discussed matters on a regular basis. Mr Turbervill knew that he needed to find a Mauritius trustee so he asked his colleagues for a recommendation and was told about Mr Koon of PMIL.
25. PMIL was a trustee company wholly owned by KPMG Mauritius. KPMG Mauritius acted "under the same umbrella" as KPMG Bristol in the sense that they were both part of the KPMG worldwide organisation. The relationship was described as being "all part of the same family". However, each firm was a distinct entity and each firm took its own decisions. The firms were commercially independent and there was no sharing of profits. The constitution of PMIL required that three directors were party to all decisions and that any documents were signed by two directors. At the relevant time there were four directors, namely. Mr Jingree, who was the managing director of PMIL and who had the primary responsibility for the Trust; Mr Koon, Mr Liong and Mr Purgus. Ms Taher and Mr Shah were the members of staff at PMIL who undertook work for the Trust.
26. A little before 24 November 2000 Mr Turbervill telephoned PMIL and spoke to Ms Taher. He mentioned the proposal for a tax planning exercise which involved the sale of some shares.
27. On 24 November 2000 Mr Turbervill sent an email to Ms Taher and said that his client was the Trust and that Mr Smallwood had been a tax client for many years. Mr Smallwood had settled FirstGroup shares in the Trust which were then worth about £6M. The shares could not be sold without a large tax liability unless there was protection from a double tax treaty. The email continued:

"After taking Counsel's opinion it had been decided in principle that the Jersey trustee will resign in favour of Mauritius trustees, so that the trust becomes tax resident in Mauritius. Provided that the new trustees agree that it is sensible to sell the FG [FirstGroup] shares they will do so at some time within the next 3-4 months. If they sell the shares before 5 April 2001 they would then retire in favour of United Kingdom resident trustees, also before that date. If this course of action is followed, it is hoped that no United Kingdom tax liability will arise upon the sale as a result of the United Kingdom/Mauritius treaty."

28. The email went on to ask if PMIL was "prepared to act as trustee on this basis" and asked for some advice on the tax implications and an indication of costs. In oral evidence which we accept Mr Turbervill told us that by those words he thought he meant that he was making it clear that he was offering PMIL an assignment which could potentially last for only three or four months. There was no stipulation that the shares had to be sold before 5 April 2001 although it was clear from the email that there was a hope and a confident expectation that the shares would be sold.
29. Mr Jingree of PMIL replied to Mr Turbervill on 27 November 2000. He said that, in principle, PMIL was agreeable to taking over the trust but that the usual acceptance procedures (which were described) would have to be satisfied. He went on to say that, in order to enjoy the benefits under the United Kingdom-Mauritius double taxation agreement, the offshore trust had to apply for a tax residency certificate; central management and control had to be in Mauritius; and a number of stated conditions had to be complied with. Mr Jingree also stated that, if a trust were tax resident in Mauritius, then it was taxable in Mauritius where there was an income tax but no capital gains tax. Attached to the letter of 27 November 2000 was a note of PMIL's fee charging structure.
30. Mr Turbervill replied on 1 December 2000 and sent a number of documents to comply with PMIL's acceptance procedures. These included copies of the original trust deed and of subsequent documents. On 4 December 2001 Mr Jingree wrote to KPMG Bristol about Mr Turbervill's letter of 1 December and asked for some information about Mr Smallwood, about Quilter and about FirstGroup. The letter asked if Quilter would continue to operate as the fund manager when the trust was registered in Mauritius. On 7 December Mr Turbervill sent some information about Mr Smallwood and said that information about Quilter and FirstGroup was available on the internet.

Early December 2000 – Mr Gadd advises Mr Smallwood and Quilter

31. On 5 December 2000 Mr Gadd wrote to Mr Smallwood about terms of engagement for the Mauritius tax planning. The letter stated that Lutea had confirmed that they were willing to retire in favour of new Mauritius trustees and that KPMG Bristol would comment on the deeds of retirement and appointment (of new trustees). The letter added that PMIL would act as trustees on the retirement of Lutea and that, once the assets had been transferred, the new trustees would be in a position to consider a disposal of FirstGroup shares and it was hoped that this would be "within the next 2-3 weeks".
32. Towards the end of 2000 Mr Gadd told Mr Bazzone about the tax planning which was being undertaken on behalf of Mr Smallwood and said that, as part of this tax planning, Lutea would retire and PMIL would be appointed in their place after which a substantial holding of FirstGroup shares would be transferred to Quilter who would then be asked to dispose of the holding.
33. On 18 December 2000 Mr Bazzone received share certificates relating to 2,428,184 shares in FirstGroup and transfer forms signed and sealed by Lutea transferring the shares from Lutea to Quilter as nominee holder. Mr Bazzone confirmed with Lutea and Mr Gadd that the shares should be held in the Trust account pending further instructions. The shares were held by Quilter on an execution only basis. Normally Mr Bazzone would have explained to a client the risks associated with such a large holding but he did not do this because he knew that the disposal of the shares was part of tax planning arrangements being carried out by Mr Smallwood on the advice of KPMG Bristol which he had been asked to facilitate.

19 December 2000 – the appointment of trustees in Mauritius

34. On 18 December 2000 Mr Turbervill spoke to Mr Shah of PMIL who confirmed that he had all the relevant documents. There were some minor points about the deed of retirement and appointment of trustees which would be sorted out with Lutea after which the Trust would be registered in Mauritius. Mr Turbervill noted that PMIL would ask for advice from Quilter about the sale of the FirstGroup shares.
35. On 19 December 2000 Mr Jingree wrote to Lutea about the deed of retirement and appointment of new trustees and a deed of indemnity. On the same date Lutea as trustee passed a resolution recording that, following a Conference with Counsel, KPMG Tax Advisers recommended to the Trustees that they retire in favour of PMIL. The resolution formally approved the Deed of Retirement and Appointment of New Trustees and a Deed of Indemnity. On the same day by Deed of Retirement and Appointment, Lutea retired as trustee and Mr Smallwood, in exercise of the power vested in him, appointed PMIL as the new trustee of the Trust. PMIL was incorporated and tax resident in Mauritius.
36. Also on 19 December 2000 Mr Gadd wrote to Mr Smallwood and told him about the new appointment. The email went on:

"We have agreed with all parties that the FirstGroup shares will be transferred to the Quilter nominee account already in place. As you know they already hold the share portfolio for the offshore trust in this way. When the appointment of new trustees has been completed the new trustee will advise Quilters to change their nominee records accordingly. …

The new trustees have confirmed that they intend to take advice from Quilters as to the appropriate time or price to sell the FirstGroup shares. We can also review the position regarding the other shareholdings in the trust as there may be tax benefits in realising any gains that exist on these shares. It is of course the new trustees that will give instructions to Quilters for the disposal of any shares."

37. Mr Gadd told us that the "all parties" mentioned in the first paragraph would have been primarily Lutea and possibly also the Mauritius trustee. The arrangement was that the share certificates would remain with Quilter and not get transferred to Mauritius.
38. Between 19 December 2000 and 2 March 2001 PMIL, as trustee of the Trust, carried out the general administration of the Trust in Mauritius. In particular PMIL registered the Trust in Mauritius as an Offshore Trust; opened a bank account with the Baroda Bank in Mauritius; appointed Quilter and Merchant to act for the Trust; and authorised the sale of the shares. PMIL also carried out due diligence on Quilter and Merchant and formed the view that, as both were already familiar with the trust assets, and were based in the same jurisdiction as the assets, they were both appropriate fund managers to advise on the assets. All the necessary documentation was prepared.
39. On 29 December 2000 the Trust was, on a declaration made by PMIL as resident trustee, registered as an Offshore Trust in the Register of Offshore Trusts in accordance with s.29 of the Mauritius Offshore Business Activities Act 1992

3-9 January 2001 – events before the sale of the FirstGroup shares

40. Mr Jingree was in India from 29 December 2000 to 12 January 2001. During this time he was in touch with Ms Taher and Mr Shah and would speak to them on the telephone about two or three times each day. Emails and faxes sent to Mr Jingree at PMIL during his absence were dealt with by Ms Taher or Mr Shah. Mr Jingree did not have computer connections in India to receive emails.
41. On 3 January 2001 Mr Bazzone of Quilter wrote to Mr and Mrs Smallwood and sent some performance information about their various portfolios. The letter stated that Quilter had received the FirstGroup shares "relating to the offshore settlement" from Lutea and the shares had been placed to the account of the Trust "pending further instructions from the trustees".
42. On 4 January 2001 Mr Bazzone telephoned Mr Gadd and said that he had received the share certificates for the FirstGroup shares from Lutea but had not received any notification from the new trustees. The shares were showing a price of £2.60 but instructions were needed from the trustees. Mr Bazzone thought it would be difficult to sell all the shares in one go but they could possibly be disposed of in tranches and he would await instructions from the offshore trustees. Mr Gadd told Mr Turbervill that he had spoken to Mr Bazzone who was recommending that the shares be sold and asked Mr Turbervill to find out what was going on in Mauritius.
43. Mr Turbervill then telephoned Mauritius to find out what was happening and to prompt them to get on with anything that they should be doing or that he thought they should be doing. He spoke to Mr Shah of PMIL and "asked for an update". Mr Turbervill mentioned that Mr Bazzone (of Quilter) thought that the FirstGroup share price was very favourable at £2.56 and that he advised that they should all be sold. Mr Shah said that Mr Jingree was out but if an email were sent outlining the advice it would be dealt with more quickly. Mr Turbervill made a note for himself that it was advisable for Quilter to have an engagement letter with PMIL.
44. We accept the evidence of Mr Bazzone that at no time did he recommend that all the shares should be sold. Mr Turbervill told us that he interpreted what Mr Bazzone had said as that all the shares should be sold which fitted in with the original tax planning scheme.
45. On 5 January 2001 Lutea gave written instructions to Mr Bazzone of Quilter to hold the existing account with Lutea to the order of PMIL as new trustee. Mr Jingree's name (as a director of PMIL) was given as the contact.
46. Two days after his conversation with Mr Gadd on 4 January Mr Bazzone sent an e-mail to Mr Jingree, as a director of PMIL. The full text of this e-mail was as follows:

"Dear Mr Jingree

I understand that the trusteeship of the above settlement is in the process of being transferred to yourselves from Lutea Trustees in Jersey.

We manage a portfolio of equities for this particular settlement. As a result, we will need one of our account opening documents to be completed by yourselves as the new trustees as well as being provided with a copy of the trust deed and change of trustee document. We will also need a copy of the signatories list. The investments will need to be transferred across from the existing a/c to the new account. If the appointment of new trustees document does not expressly mention the transfer of assets then we will need a short note of confirmation to this effect.

I have faxed an application to your office today marked for your attention. All documents are acceptable by return by fax to take matters forward.

There is a substantial holding of FirstGroup shares held within the portfolio. The shares have performed very well recently and the trustees may therefore wish to consider realising some of the shares held. Although the shares are due to go ex-dividend in the near future, it is quite common for share prices to fall slightly at that time to compensate new purchasers. They are today trading at about 265p compared to about 210p in October.

If the trustees do wish to sell any shares then we will need to be instructed in writing to do so by the trustees.

I look forward to hearing from you in due course but in the meantime if I can be of any further help then please do not hesitate to call me. [His telephone number was given.]

Paul Bazzone"

47. On 8 January 2001 at 11.10 am Mr Shah spoke to Mr Turbervill on the telephone to ask about the procedure for selling the FirstGroup shares. PMIL had had Mr Bazzone's email recommending the sale. Mr Turbervill said that he foresaw that the trustees would consider the advice and, if they chose to accept it, would give instructions for the sale; it was entirely their decision. Mr Shah said that they were still waiting for Lutea to fax them the deed of indemnity. (We were told that the deed of indemnity was a deed whereby the new trustees indemnified the outgoing trustees.)
48. Also on 8 January 2001 PMIL sent an email to Mr Bazzone, with a copy to Mr Turbervill, saying that they were awaiting the duly executed deed of indemnity from Lutea for the new trustees to assume trusteeship. They would complete the account opening application form but asked for assistance in providing certain information. By copying the email to Mr Turbervill they were asking him to provide the Trust Deed and Deed of Retirement and Appointment to Mr Bazzone.
49. On 8 January 2001 at 12.21 pm Mr Turbervill sent an email to PMIL, Lutea, and Mr Bazzone saying:

"It is essential as part of the tax planning exercise that the FirstGroup shares are not sold until after KPMG Mauritius have validly become the trustees.

To avoid any suggestion that Lutea may remain the trustees until the deed of indemnity has been executed and forwarded to KPMG Mauritius please may we all agree that no instructions to sell the shares are given until the signed deed has been received."

50. Mr Turbervill told us that he did not regard this email as an instruction not to sell the shares but was just requesting the recipients to satisfy themselves that the deed of indemnity had been signed before any action was taken.
51. At this stage we record the oral evidence given to us by Mr Jingree about the deed of indemnity. His evidence was that he was of the view that the deed of indemnity should be signed and in place before any decision was taken to sell the shares. He agreed that the deed of indemnity protected the outgoing trustees (Lutea) and not PMIL but repeated that the need for the deed of indemnity was a policy that had been adopted. When it was put to him that it would have been a breach of trust to delay a sale which was in the interests of all the beneficiaries in order to await the deed of indemnity he said that he maintained the decision that had been taken that the deed of indemnity should be awaited.
52. On 9 January 2001 PMIL passed a resolution that a bank account be opened with the Bank of Baroda in the name of the Trust and that the Bank be requested to honour all documents with the joint signatures of any two of the four directors. The four directors were Mr Jingree, Mr Koon, Mr Liong and Mr Purgus, all of PMIL.
53. We accept the evidence of Ms Taher that there were no set rules as to the briefing of the Board of directors of PMIL for any decisions to be taken by them, Generally, prior to a decision being taken by the Board, whether by way of meeting or circular resolution, the directors would be briefed either verbally by staff members (Ms Taher or Mr Shah) or through a briefing note prepared by staff members. A briefing note might be accompanied by some verbal explanation prior to, or at, Board meetings. Sometimes Mr Jingree briefed the directors. Many of the decisions relating to the Trust were taken by circular resolutions rather than by full meetings.
54. On 9 January 2001 PMIL sent a fax to Mr Bazzone, with a copy to Mr Turbervill, attaching an account application booklet. Some parts had not been completed and were marked "we will complete shortly". Ms Taher explained to us that she sent a copy of the email to Mr Turbervill because it was the practice at that time to continue dealing with whoever had introduced a client and by copying the email to him she was informing him that she was having difficulties in completing the form. On the same date Ms Taher wrote to Mr Turbervill to say that the completed account application booklet had been sent to Mr Bazzone and asked for help in completing the incomplete parts. These included the parts dealing with investment objective and attitude to risk. She added:

"Upon receipt of your reply we would immediately fax the completed signed documents to Quilter. We trust the instructions for the sale of the shares would be given tomorrow should the selling price still be up."

55. Mr Turbervill replied to say that the decision regarding the trustees' investment policy was theirs but from his knowledge of the client he would suggest that capital growth was of prime importance and that the attitude to risk was medium. There should be no restrictions. In oral evidence he accepted that it was not his job to decide on the trustees' attitude to investment risk but said that he was merely making suggestions. In evidence before us Mr Jingree accepted that PMIL, as trustee, should decide for themselves their attitude to risk based on the provisions of the trust deed and the powers given to them.
56. On 9 January 2001 Mr Shah sent a note to Ms Taher to say that he had spoken to Mr Bazzone of Quilter with regard to the movements in the price of the FirstGroup shares. The current price was between 285 pence and 290 pence per share. The price had moved upward from 210 pence in October 2000, to 234 pence on 8 December 2001, to 265 pence on 6 January 2001 to 289 pence on 9 January 2001. As the price was on the upward trend Mr Shah noted that the trustees "may consider disposal now for the total holding". Mr Shah noted that Mr Bazzone would send an email requesting the various documents for effecting the sale.
57. On 9 January 2001 Ms Taher and Mr Shah prepared a briefing note for the Board of directors of PMIL which stated that the deed of indemnity had been received and that the Trustee was empowered to act for the Trust. Due diligence had been carried out on Quilter and the Trustees were recommended to retain Quilter as the fund manager of the Trust. Quilter had advised the Trustees that they might wish to dispose of the shares in FirstGroup as the price was rising and the Trustees were recommended to sell the entire shareholding in the hope that all the shares would be disposed of by at least 31 March 2001 to avail of tax planning benefits.
58. On 10 January 2001 Ms Taher sent a fax message to Lutea, with copies to Mr Turbervill and Mr Bazzone, acknowledging receipt of the duly executed deed of indemnity.

10 January 2001 – the telephone meeting of PMIL

59. On 10 January at 08.30 am Mr Bazzone sent an email to Ms Taher setting out what was needed in order to action the sale of the FirstGroup shares. This included the rest of the account application booklet, a copy of a signatory list of the trustees, and a letter of instruction signed by the trustees with details of the number of shares to be sold (which he stated as 2,428,184) together with any limit on the price (and an indication price to sell shares in amounts of up to £25,000 at the time of writing was £2.89).
60. On 10 January 2001 Mr Jingree was still in India. Mr Liong was not in the office either. Ms Taher and Mr Shah saw Mr Koon and told him that a decision had to be taken about the sale of the shares for tax planning reasons and following advice from the fund managers that the price was going up. Accordingly a meeting of the Trustees was called by Mr Koon in his office. The meeting took the form of a telephone conference held between Mr Koon and Mr Purgus in Mauritius and Mr Jingree, on his mobile telephone, in India. The telephone conference was also attended by Ms Taher and Mr Shah in Mauritius.
61. During the telephone meeting Mr Jingree reminded those present that the Trust had migrated to Mauritius within the context of a tax planning exercise and that the shares, if the trustees decided to sell them, had to be sold before the end of March or the beginning of April. He briefed Mr Koon and Mr Purgus that it was to the advantage of the beneficiaries that they should take a decision to sell the shares. As it was in the interest of the Trust and the beneficiaries the trustees thought it best to dispose of all the shares well before the end of the tax year. The price of the shares was also discussed. The meeting also discussed the appointment of the investment manager. The meeting agreed to proceed with the sale of all the FirstGroup shares. We accept the evidence of Mr Koon that the reason for that decision was because the sale was in the interests of the beneficiaries of the trust to maximise the trust fund by the proceeds not attracting tax in the United Kingdom. Following the telephone meeting Ms Taher and Mr Shah were instructed to proceed with the administrative matters relating to the sale, and the giving of the instructions for the sale, of all the FirstGroup shares.

10 January 2001 – the formal resolutions

62. On 10 January 2001 PMIL resolved in writing that Quilter would continue to act as the fund manager of the Trust. The written resolution records "THAT Quilter & Co Ltd who managed the portfolio of the trust's assets when the trust was resident in the United Kingdom, would continue to act as the fund manager of the trust". PMIL also resolved in writing that the investments of the trust would be transferred to the new account held with Quilter, that all necessary opening accounts would be executed by PMIL, that PMIL would take appropriate actions pertaining to any investment or divestment of the Trust's assets under the recommendation of the fund manager Quilter and that necessary instructions would be sent by PMIL to the fund manager for effecting the transactions.
63. Also on 10 January 2001 PMIL passed another resolution in writing. It recited that the price of FirstGroup shares had been going up with the shares being traded at 285 pence per share at that date compared with 210 pence per share in October 2000. It also recited that the fund manager had recommended that the shares be sold "now". It was resolved that the disposal of the 2,428,184 shares in FirstGroup plc held by the Trust be approved, that Quilter be given written instructions to sell the shares at the best market price available, and that the proceeds of sale be held on deposit in the fund account with Quilter until further notice.

10 January 2001 – the shares are sold

64. On 10 January 2001 Ms Taher sent Mr Bazzone the documents he had requested earlier the same day and a sale order with instructions for the sale of 2,428,184 FirstGroup shares at the best available market price.
65. On the same day, Mr Bazzone sold all the shares for total proceeds, after dealing costs, of £6,801,012. Shortly after close of business on 10 January 2001, Mr Bazzone informed PMIL that, in accordance with their instructions, the shares had been sold. On 12 January he sent details and confirmed that the proceeds of sale would be held on deposit earning interest pending instructions. Also on 12 January Mr Bazzone wrote to Mr Smallwood and gave him details of the sale of the shares held by the Trust saying that he had notified the Mauritian trustees and awaited their further instructions. He added that he had also sold 100,000 FirstGroup shares held to the personal account of Mr Smallwood.

25 January 2001 - the proposed timetable

66. On 25 January 2001 Mr Gadd wrote to Mr Smallwood and summarised what had happened so far including the appointment of PMIL as trustee, the issue of the certificate of registration as an offshore trust by the Mauritius authorities, the appointment of Quilter as the new trustee's investment manager, and the opening of the bank account. He said that it only remained for Lutea to transfer the balance of the cash and for a formal investment contract to be entered into between the trustee and Merchant. He then outlined a proposed timetable and said that, to complete the tax planning exercise, Mr Smallwood would need to appoint United Kingdom resident trustees in place of PMIL. Mr Gadd added that he would liaise with them to ensure that the necessary deeds were prepared and executed and would oversee the changeover to make sure that all assets were transferred to the new trustees' control.

January 2001 – the sale of the Billiton shares

67. On 26 January 2001 Mr James Baxter of Merchant faxed a message to Mr Jingree together with a set of account opening forms for Merchant. He added that he needed an authorisation to carry out a transaction that day; he wanted to sell the holding in Billiton and take the profits and move the resulting funds to Hays plc. On the same day PMIL resolved "THAT Merchant Securities Ltd, who managed the portfolio of the trust's assets when the trust was resident in the United Kingdom, would continue to act as the fund manager of the trust". The account opening forms were signed by Messrs Jingree and Liong, and faxed back that same day along with the requested authorisation to sell the Billiton shares at the best possible price.
68. On 6 February 2001 the Mauritius tax authorities issued a tax residence certificate certifying that the Trust, which had been registered in Mauritius on 29 December 2000, was resident in Mauritius for the purposes of Mauritius income tax. We accept the evidence of Mr Jingree that the certificate of 6 February applied from the date of the registration of the Trust.

February/March 2001 – Mr and Mrs Smallwood appointed trustees

69. Early in February Mr Gadd reminded Mr Turbervill to complete the tax planning for the Trust. On 14 February 2001 Mr Turbervill sent an email to PMIL saying:

"We would now like to proceed urgently with the appointment of United Kingdom trustees, which must take place, subject to your approval, before 7 March.

I suggest that we have a suitable deed drawn up here by a United Kingdom solicitor and then agree its terms with you. Please confirm as soon as possible whether this is acceptable."

70. PMIL replied on 15 February and summarised the matters which needed to be finalised before the Trust was exported "back to the United Kingdom". These included the payment of the trustees' fees, the retirement of the trustees and the de-registration of the trust in Mauritius.
71. On 1 March 2001 Mr Turbervill wrote to PMIL to confirm the action to take place the following day. Mr and Mrs Smallwood would sign the counterpart deed; PMIL would sign and date the original deed and then airmail it to KPMG Bristol. PMIL would then apply for the de-registration of the Trust. Mr Turbervill also asked PMIL to confirm that they would be dealing with the Mauritius tax return for the period in which the trust was resident in Mauritius. On 1 March PMIL asked Mr Turbervill to advise whether they should proceed with the de-registration of the Trust. On 1 March 2001 Mr Turbervill replied saying that the de-registration should take place as soon as Mr Smallwood had signed the deed "tomorrow". Mr Turbervill confirmed that the fee note rendered by PMIL was in order and payment could be made from the funds held.
72. On 2 March 2001, by Deed of Retirement and Appointment, PMIL resigned as trustee in favour of Mr and Mrs Smallwood. In the period from 2 March 2001 to 5 April 2001 the trustees were therefore resident and ordinarily resident in the United Kingdom.
73. Also in March 2001 PMIL resolved that the Trust be de-registered and a request made to strike off the name of the Trust from the Register of Offshore Trusts in Mauritius.

The tax returns in Mauritius

74. On 21 September 2001 PMIL rendered an income tax return to the revenue authorities in Mauritius in respect of the income of the Trust.

The legislation in more detail

75. Before turning to the reasons for our Decision we set out in more detail the relevant legislation in force at the relevant time and then the arguments of the parties.

The 1992 Act

76. Sections 2, 69 and 77 of the 1992 Act are relevant in these appeals and they provided:

"2 Persons and gains chargeable to capital gains tax, and allowable losses

(1) Subject to any exceptions provided by this Act, and without prejudice to sections 10 and 276, a person shall be chargeable to capital gains tax in respect of chargeable gains accruing to him in a year of assessment during any part of which he is resident in the United Kingdom, or during which he is ordinarily resident in the United Kingdom

69 Trustees of settlements

(1) In relation to settled property, the trustees of the settlement shall for the purposes of this Act be treated as being a single and continuing body of persons (distinct from the persons who may from time to time be the trustees), and that body shall be treated as being resident and ordinarily resident in the United Kingdom unless the general administration of the trusts is ordinarily carried on outside the United Kingdom and the trustees or a majority of them for the time being are not resident or not ordinarily resident in the United Kingdom ….

77 Charge on settlor with interest in settlement

(1) Where in a year of assessment—

(a) chargeable gains accrue to the trustees of a settlement from the disposal of any or all of the settled property,

(b) after making any deduction provided for by section 2(2) in respect of disposals of the settled property there remains an amount on which the trustees would, disregarding section 3, be chargeable to tax for the year in respect of those gains, and

(c) at any time during the year the settlor has an interest in the settlement,

the trustees shall not be chargeable to tax in respect of those but instead chargeable gains of an amount equal to that referred to in paragraph (b) shall be treated as accruing to the settlor in that year.

…

(7) This section does not apply unless the settlor is, and the trustees are, either resident in the United Kingdom during any part of the year or ordinarily resident in the United Kingdom during the year.

The Treaty

77. Articles 1, 2, 4,13 and 24 of the Treaty are relevant in these appeals and they provided:

"Article 1 Personal scope

This Convention shall apply to persons who are residents of one or both of the Contracting States.

Article 2 Taxes covered

(1)     The existing taxes to which this Convention shall apply are:

(a)     in the United Kingdom of Great Britain and Northern Ireland:

(i)     the income tax;

(ii)     the corporation tax; and

(iii)     the capital gains tax;

(hereinafter referred to as "United Kingdom tax");

(b)     in Mauritius:

(i)     the income tax;

(ii)     the capital gains tax (morcellement);

(hereinafter referred to as "Mauritius tax")….

Article 4 Residence

(1) For the purposes of this Convention, the term "resident of a Contracting State" means, subject to the provisions of paragraphs (2) and (3) of this Article, any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. The terms "resident of the UK " and "resident of Mauritius" shall be construed accordingly. …

(3)     Where by reason of the provisions of paragraph (1) of this Article a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.

Article 13 Capital gains

(1)     Capital gains from the alienation of immovable property, as defined in paragraph (2) of Article 6, may be taxed in the Contracting State in which such property is situated.

(2)     Capital gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State.

(3)     Notwithstanding the provisions of paragraph (2) of this Article, capital gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

(4)     Capital gains from the alienation of any property other than that mentioned in paragraphs (1), (2) and (3) of this Article shall be taxable only in the Contracting State of which the alienator is a resident.

(5) The provisions of paragraph (4) of this Article shall not affect the right of a Contracting State to levy according to its law a tax on capital gains from the alienation of any property derived by an individual who is a resident of the other Contracting State and has been a resident of the first-mentioned Contracting State at any time during the five years immediately preceding the alienation of the property

[Paragraph (5) was amended with effect from 2003, which was after the events with which this appeal is concerned, so as to apply to persons other than individuals and during the fiscal year of the alienation or the six preceding fiscal years.]

Article 24 Elimination of double taxation

(1)     Subject to the provisions of the law of the United Kingdom regarding the allowances as a credit against the United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof):

(a)     Mauritius tax payable under the laws of Mauritius and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within Mauritius shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the Mauritius tax is computed. …

 (3)     Subject to the provisions of the law of Mauritius regarding the allowance as a credit against Mauritius tax of tax payable in a territory outside Mauritius (which shall not affect the general principle hereof):

(a)     United Kingdom tax payable under the laws of the United Kingdom and in accordance with this Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within the United Kingdom shall be allowed as a credit against any Mauritius tax computed by reference to the same profits, income or chargeable gains by reference to which the United Kingdom tax is computed. …

(4)     For the purposes of paragraphs (1) and (3) of this Article profits, income and capital gains owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with this Convention shall be deemed to arise from sources in that other Contracting State."

The arguments

78. We can summarise the relevant changes of residence of the trustee during the tax year and the consequence for chargeability of the gains in the United Kingdom in tabular form.

Dates	6 April 2000 to 19 December 2000	19 December 2000 to 2 March 2001 ("the Mauritius Period")	2 March 2001 to 5 April 2001 ("the UK Period")
Residence of trustee	Jersey [not accepted by Revenue]	Mauritius	UK
Domestic law residence of trustee	Not relevant	Mauritius	UK
Chargeability of trustee to UK CGT	Yes	Yes	Yes

79. By section 2 of the 1992 Act, since the trustees (as a single body of persons - see section 69) are resident in the United Kingdom for part of the year 2000-01 (namely the UK Period) they are chargeable to capital gains tax on all the gains made in the year. (It should be mentioned that, by concession, chargeability is often limited to the period of residence but no concession applies in the case of trustees.) There was no evidence about whether the residence of the trustee under Mauritian law ceased on 2 March 2001 or applied for the whole of the year from 1 July 2000 to 30 June 2001.
80. The relevant part of section 73 of the Mauritian Income Tax Act 16 of 1995 provides:

"73 Definition of residence

For the purposes of this Act, "resident", in respect of an income year, when applied to - …

(d) a trust, means a trust—

(i) where the trust is administered in Mauritius and a majority of the trustees are resident in Mauritius;…"

81. Section 2 of the Mauritian Income Tax Act 16 of 1995 is the interpretation section and provides that the definitions of "income year" and "year" are:

""income year", in relation to the income of any person, means the year in which that income is derived by him …

"year" means a period of twelve months commencing on 1 July".

82. Although this seems to make the trustees resident for the whole period from 1 July 2000 to 30 June 2001 the evidence was that the trustees paid tax only for the period 19 December 2000 to 2 March 2001. We shall make the assumption that residence was limited to this period. In case this is wrong we shall also consider later the effect of our decision on POEM.
83. The issue is what is the effect on the Treaty of domestic law residence for part of the year coupled with chargeability for the whole year. Is it possible to apply the Treaty to residence for part of the year? Both parties contend that one can do so, though with different consequences.
84. We have found it easier to make a flow chart of the contentions of the parties rather than set them out separately since they interact:


I

85. In words, both parties' primary contentions are based on the left-hand side of the flow chart, namely that one can look separately at the trustee's residence in the Mauritius Period and the UK Period. Mr Prosser for the Appellants contends that one should look only at residence at the moment of alienation, or in the alternative (which is also Mr Brennan's contention for the Revenue) the whole of the Mauritius Period. They both contend that the consequence is that, during the Mauritius Period, the trustee is a resident only of Mauritius for the purpose of the Treaty (which we shall call Treaty Residence). The consequences of this diverge when they come to apply Article 13(4). Mr Prosser says that the consequence is that gains are taxable only in Mauritius. Mr Brennan contends that Article 13(4) says nothing about the effect of chargeability to United Kingdom tax during the Mauritius Period, and if there were any Mauritian tax (which in fact there is not) that is a matter for credit under Article 24.
86. If they do not succeed on this contention, both parties agree, moving to the right-hand side of the flow chart, that there is dual residence to be dealt with by applying the tie-breaker in Article 4(3) to determine the state in which the place of effective management of the trust is situated (or, as Mr Prosser prefers to say, of the trustee qua trustee). We suspect that it is the fear of the unknown consequence of this that has driven both parties to make as their primary contentions a way of avoiding the consequences. It is common ground that one should apply the tie-breaker separately to each period. If Mauritius wins the tie-breaker we are returned to the same difference of view about the effect of Article 13(4). If the United Kingdom wins it is common ground that the United Kingdom can tax the gains.
87. We can enlarge upon these contentions under their three separate strands: first, the interaction of residence and chargeability; secondly, the effect of Article 13(4); and thirdly, the tie-breaker.

(1) The interaction of residence and chargeability

88. The chargeability of the trustee for the whole year 2000-01 as a result of residence for part of the year (the UK Period) opens the possibility of contending for successive periods of residence when applying the Treaty. When applying Article 4(1) of the Treaty to determine Treaty Residence, both parties contend that during the Mauritius Period the trustee was not "liable to taxation therein [in the United Kingdom] by reason of residence" (which in the context must mean the fact of residing) because at that time the trustee has not resided in the United Kingdom and one cannot use hindsight to say that residing in the United Kingdom in the UK Period means that the trustees are liable to tax in the Mauritius Period by reason of residence. Mr Prosser put this in two ways: first that one should look only at the time of the alienation to determine chargeability (and also the effect of Article 13(4)), and secondly, (which is also Mr Brennan's contention) that one should look at the whole of the Mauritius Period for both purposes. The Tribunal put forward a third possibility to the parties that liability to tax is equated to Treaty Residence in Article 4(1) and in looking at the whole tax year one must necessarily use hindsight to say that by virtue of residing in the United Kingdom in the UK period the trustees are liable to tax in the tax year.
89. The following example in paragraph 10 of the Commentary to Article 4 of the OECD Model (this part was added in 2000; we consider below the status of Commentaries adopted after the Treaty was made), to which the Tribunal drew the attention of the parties, seems to be relevant to the issue of whether one can use hindsight:

"The facts to which the special rules [ie the tie-breaker in article 4(2) applicable to individuals] will apply are those existing during the period when the residence of the taxpayer affects tax liability, which may be less than an entire taxable period. For example, in one calendar year an individual is a resident of State A under that State's tax laws from 1 January to 31 March, then moves to State B. Because the individual resides in State B for more than 183 days, the individual is treated by the tax laws of State B as a State B resident for the entire year. Applying the special rules to the period 1 January to 31 March, the individual was a resident of State A. Therefore, both State A and State B should treat the individual as a State A resident for that period, and as a State B resident from 1 April to 31 December."

90. This implies that residing in a later period leading to residence in the earlier period does cause dual residence in the earlier period and therefore the tie-breaker is engaged. But both parties can, and do, contend that it is not directly applicable because it can still be argued that the example implies that subsequent residing causes residence throughout the tax year, which is not the case here since the subsequent residing causes residence in the subsequent period only, and merely chargeability in the earlier period. Mr Prosser also notes that this Commentary was added later.

(2) The effect of Article 13(4)

91. So far as Article 13(4) is concerned, Mr Brennan contends that this is concerned only with relief from tax in the source state and says nothing about preventing chargeability to tax in a subsequent residence period within the same tax year. It will be seen that this depends upon the first strand, that chargeability and residence are different, and so even though there is concurrent chargeability, residence in Mauritius and the United Kingdom is sequential. Mr Brennan contends that this is not a question of dual residence and that the Treaty deals with the double chargeability by credit under article 24. Mr Prosser contends that article 13(4) should be applied at the time of alienation, for which he relies on article 13(5) referring to an individual who "has been a resident of the first-mentioned Contracting State at any time during the five years immediately preceding the alienation of the property" as indicating that the rest of article 13 should be applied by reference to the time of alienation. He contends that residence in article 13(4) means Treaty Residence at the time of alienation and, if that is in Mauritius, the gains are taxable only in Mauritius; the United Kingdom is prevented from taxing them, whatever is the basis for that charge. Alternatively he contends that the same result applies if one looks at the Mauritius Period.

(3) The tie-breaker – place of effective management

92. Both parties contend in the alternative that the route in the right hand side of the flow chart applies and the tie-breaker is engaged. On this basis if Mauritius wins this brings both parties back to their article 13(4) contentions. For such contention they no longer seek to separate successive periods of residence and they treat United Kingdom residence for the purpose of article 4(1), by equating liability to tax with residence, as being for the whole year 2000-01, and the Mauritian Period as the period of residence in Mauritius also for the purpose of article 4(1). It is common ground that the tie-breaker must necessarily be applied separately to the Mauritius Period (and if the Mauritian residence continued, which we have assumed that it did not, to the UK Period). The example in the Commentary quoted above supports this approach.

Reasons for decision

93. We consider the three strands of argument separately but we start by considering the correct approach to interpreting a treaty, which was not controversial

The approach to interpreting a treaty

94. In IRC v Commerzbank [1990] STC 285, 297-8, in a passage approved by the Court of Appeal in Memec v IRC [1998] STC 754, 766g, Mummery J summarised the approach to treaty interpretation laid down by the House of Lords in Fothergill v Monarch Airlines Ltd [1981] AC 251 in the following way:

"(1) It is necessary to look first for a clear meaning of the words used in the relevant article of the convention, bearing in mind that 'consideration of the purpose of an enactment is always a legitimate part of the process of interpretation': per Lord Wilberforce (at 272) and Lord Scarman (at 294). A strictly literal approach to interpretation is not appropriate in construing legislation which gives effect to or incorporates an international treaty: per Lord Fraser (at 285) and Lord Scarman (at 290). A literal interpretation may be obviously inconsistent with the purposes of the particular article or of the treaty as a whole. If the provisions of a particular article are ambiguous, it may be possible to resolve that ambiguity by giving a purposive construction to the convention looking at it as a whole by reference to its language as set out in the relevant United Kingdom legislative instrument: per Lord Diplock (at 279)

(2) The process of interpretation should take account of the fact that—

'The language of an international convention has not been chosen by an English parliamentary draftsman. It is neither couched in the conventional English legislative idiom nor designed to be construed exclusively by English judges. It is addressed to a much wider and more varied judicial audience than is an Act of Parliament which deals with purely domestic law. It should be interpreted, as Lord Wilberforce put it in James Buchanan & Co. Ltd v. Babco Forwarding & Shipping (UK) Limited, [1987] AC 141 at 152, "unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation': per Lord Diplock (at 281–282) and Lord Scarman (at 293).".

(3) Among those principles is the general principle of international law, now embodied in article 31(1) of the Vienna Convention on the Law of Treaties, that 'a treaty should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose'. A similar principle is expressed in slightly different terms in McNair's The Law of Treaties (1961) p 365, where it is stated that the task of applying or construing or interpreting a treaty is 'the duty of giving effect to the expressed intention of the parties, that is, their intention as expressed in the words used by them in the light of the surrounding circumstances'. It is also stated in that work (p 366) that references to the primary necessity of giving effect to 'the plain terms' of a treaty or construing words according to their 'general and ordinary meaning' or their 'natural signification' are to be a starting point or prima facie guide and 'cannot be allowed to obstruct the essential quest in the application of treaties, namely the search for the real intention of the contracting parties in using the language employed by them'.

(4) If the adoption of this approach to the article leaves the meaning of the relevant provision unclear or ambiguous or leads to a result which is manifestly absurd or unreasonable recourse may be had to 'supplementary means of interpretation' including travaux préparatoires: per Lord Diplock (at 282) referring to article 32 of the Vienna Convention, which came into force after the conclusion of this double taxation convention, but codified an already existing principle of public international law. See also Lord Fraser (at 287) and Lord Scarman (at 294).

(5) Subsequent commentaries on a convention or treaty have persuasive value only, depending on the cogency of their reasoning. Similarly, decisions of foreign courts on the interpretation of a convention or treaty text depend for their authority on the reputation and status of the court in question: per Lord Diplock (at 283–284) and per Lord Scarman (at 295).

(6) Aids to the interpretation of a treaty such as travaux préparatoires, international case law and the writings of jurists are not a substitute for study of the terms of the convention. Their use is discretionary, not mandatory, depending, for example, on the relevance of such material and the weight to be attached to it: per Lord Scarman (at 294)."

95. Article 31 of the Vienna Convention on the Law of Treaties referred to in this quotation provides as follows:

"1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:

Any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;

Any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.

3. There shall be taken into account together with the context:

any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;

any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;

any relevant rules of international law applicable in the relations between the parties.

4. A special meaning shall be given to a term if it is established that the parties so intended."

96. Mr Brennan also contended that we should apply a commonsense approach to tax treaties following Lord Walker in Pirelli Cable Holding NV v IRC [2006] STC 548 at [150] where he said:

"[105] In his printed case Mr Aaronson QC (for the respondent Pirelli companies) acknowledged (para 38) that if commonsense or plain justice required it, the Revenue might be able to justify what he has called a selective reading of ss 231 and 247. The requirements of justice are not easy to discern in the world of cross-border taxation of multinationals, but I think that commonsense does point in favour of the Revenue's appeal. The evident purpose of s 788(3)(d) and of article 10 of the DTAs is to give a tax credit (of a certain sort) to a non-resident shareholder who receives a dividend from a United Kingdom company. It is central to the concept of the United Kingdom granting a tax credit to the shareholder in respect of a dividend that some United Kingdom tax should have been paid (or at least payable) in respect of that dividend. It would be an abuse of language, and contrary to commonsense, to speak of granting a tax credit when no such tax has been paid."

97. While it is no doubt never wrong to apply commonsense we believe that Lord Walker was dealing here more with domestic law, which was Mr Aaronson's point, than tax treaties, although in that particular case the two were closely linked. But even if we were to apply common sense we do not consider that it would favour Mr Brennan's interpretation.
98. The Treaty is based on the OECD Model Tax Convention of 1977. The OECD Model has a Commentary explaining the terms of the Model which is accordingly an important means of interpretation of the Model and treaties following the Model. Although not the subject of argument in this appeal, we are aware that there is academic literature discussing how the Commentary fits into articles 31 and 32 of the Vienna Convention. Our view is that the negotiators on both sides could be expected to have the Commentary in front of them and can be expected to have intended that the meaning in the Commentary should be applied in interpreting the Treaty when it contains the identical wording. This is as much true of the United Kingdom which is a member of the OECD as it is of Mauritius, which is not. The difference is that the United Kingdom had the opportunity of stating that it disagreed with any part of the Commentary by making an Observation, while Mauritius did not, although the Commentary does now contain Observations by a number of non-OECD member countries, but not including Mauritius. The main treaty interpretation issue here is over the meaning of "place of effective management" in article 4(3). If the Commentary contains a clear explanation of the meaning the term it seems clear that the parties to the Treaty intended that such explanation should be more important than the ordinary meaning to be given to the terms of that phrase. This is either on the basis that the existence of the Model and Commentaries demonstrate that the parties intended it as a special meaning within article 31(4) of the Vienna Convention, or that the Vienna Convention does not purport to be a comprehensive statement of the method of treaty interpretation. Its own commentary states that "Accordingly the [International Law] Commission confined itself to trying to isolate and codify the comparatively few general principles which appear to constitute general rules for the interpretation of treaties" (Introduction paragraph (5)). The Commentary has been referred to in a number of decisions by the United Kingdom courts.
99. The relevance of Commentaries adopted later than the Treaty is more problematic because the parties cannot have intended the new Commentary to apply at the time of making the Treaty. However, to ignore them means that one would be shutting one's eyes to advances in international tax thinking, such as how to apply the treaty to payments for software that had not been considered when the Treaty was made. The safer option is to read the later Commentary and then decide in the light of its content what weight should be given to it.

(1) The interaction of residence and chargeability

100. With that introduction to the approach to be taken, we turn to the residence and chargeability issue. We consider that the domestic law distinction between residence and chargeability, so that if one is resident for part of a year one is chargeable for the whole of the year, is too subtle a distinction to be made when interpreting the Treaty. Article 4(1) equates the two by defining Treaty Residence in terms of liability to tax (which is the same as chargeability):

"For the purposes of this Convention, the term "resident of a Contracting State" means… any person who, under the law of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature."

101. So long as the liability to tax is by reason of one of the listed items, of which the relevant is residence, meaning in the context the act of residing, then there is no distinction between Treaty Residence under article 4(1) and liability to tax. If liability to tax were caused by something not in the list, such as (hypothetically) that trustees are resident if a United Kingdom resident has at any time put assets into the trust, it would seem to follow that such residence was not by reason of one of the listed items and so that was not Treaty Residence for article 4(1) even though there was chargeability.
102. On whether hindsight can be used, we do not consider that "by reason of... residence" means solely past or current residing. If residing in a subsequent period causes residence for the whole year, then liability is by reason of residence, meaning residing. The Commentary's example set out above implies this. In it the individual moves from state A to state B on 31 March and is treated by state B as resident for the whole of the calendar year (assumed to be the tax year). The example states that the tie-breaker is to be applied to the period 1 January to 31 March, under which state A wins because at tat time there are no connections with state B. Since we equate residence for article 4(1) with liability to tax the Commentary's example is equally applicable to chargeability to capital gains tax for the whole tax year under section 2 of the 1992 Act. If one cannot use hindsight to determine residence (or liability to tax) it would matter in what order a person spend the requisite days in a state in order to become a resident. Suppose an individual is resident in state X if he is present for 183 days, if the alienation occurred before any of them, and one cannot use hindsight, it could be argued that at the time of alienation he is not a resident of State X by reason of residing because he has not so far resided in state X. But if he was present for one day before the alienation and 182 days after it, why should the result be any different?

(2) The effect of Article 13(4)

103. So far as the interpretation of article 13(4) is concerned we agree with Mr Brennan that article 13 in general deals with a conflict between taxation on the basis of source and on the basis of residence. Certainly articles 13(1) to (3) depend on source: immovable property in either state, movable property of a permanent establishment in the state other than the Treaty Residence state, and ships or aircraft owned by an enterprise with its place of effective management in one of the states. But article 13(4), relating to gains on all other property (including therefore property in a third state), is more general and does not contain any reference to source. It states that if the alienator is Treaty Resident in one state the gains are taxable only in that state. Any dual residence, which we have equated with chargeability, should have been solved by the tie-breaker determining the Treaty Residence before one arrives at article 13. The result would be that if the state other than that of Treaty Residence taxed by its domestic law on any basis other than Treaty Residence the Treaty would prevent it. There would be no scope for any basis of taxation in the non-Treaty Residence state to continue. The plain words "taxable only" in the Treaty Residence state mean what they say.
104. Mr Brennan states that if (contrary to the facts here) Mauritius had taxed the gain the trustees would be entitled to credit under article.24 of the Treaty. He is able to say this because credit does not depend on Treaty Residence in the UK in the Mauritius Period, as it would do under article 23B of the OECD Model (assuming for the moment that one can be Treaty Resident for part of a year), because article 24 operates by sending one to domestic law: "Subject to the provisions of the law of the United Kingdom regarding the allowances as a credit against the United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof)…". He did not elaborate this but section 794(1) of the Taxes Act 1988 provides that:

Subject to subsection (2) below, credit shall not be allowed under any arrangements against any of the United Kingdom taxes for any chargeable period unless the person in respect of whose income or chargeable gains the United Kingdom tax is chargeable is resident in the United Kingdom for that period.

105. This requires residence (with some exceptions in subs (2) which are not applicable here), in domestic law for the chargeable period, which for trustees is defined in section 832(1) to mean the year of assessment. Mr Brennan's submission implies that he accepts that residence for part of a year is residence for the year for this purpose, which seems reasonable since the purpose of credit is to relieve double taxation. He is therefore contending that both according to section 2 of the 1992 Act and the Treaty the trustee is not resident in the United Kingdom during the Mauritius Period, while at the same time contending that it is so resident for section 794, which is not impossible but makes us doubt that this result was intended.
106. If Mr Brennan is right about credit, both states would have to give credit for each other's tax because the gain would have a source (for double taxation relief purposes only) in both states under article 24(4). This not a fatal objection since it is possible to work out the credit in a straightforward manner if the foreign tax is before any credit for United Kingdom tax, or by iteration if it is after such credit, which is unusual but not unique as we believe this can also arise in inheritance tax. But we consider that the unusual results relating to credit reinforce our view that Mr Brennan's interpretation is not correct.
107. Our interpretation of the Treaty is the simplistic one that domestic law chargeability for the whole tax year (when by reason of a basis set out in article 4(1), such as residence ie residing) results in Treaty Residence throughout the tax year regardless of whether that chargeability was caused by residing in a later part of the tax year. This means that during the Mauritius Period there is dual residence that has to be solved by the tie-breaker. As a result of our decision on the interpretation of article 13(4) this means that if Mauritius wins, the United Kingdom cannot tax the gains; and if the United Kingdom wins it can.

(3) The tie-breaker – place of effective management

108. We therefore turn to the tie-breaker in article 4(3). The issue is what is the meaning of "place of effective management" ("POEM").
109. Mr Prosser QC and Miss Wilson contend that at the time of the Treaty the commentary to the OECD Model recorded the United Kingdom's view that central management and control ("CMC") meant the same as POEM. It is legitimate to apply the current Commentary that POEM is where the key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made, which will normally be where the most senior persons eg the board of directors make their decisions. Although the statements of Chadwick LJ in Wood v Holden [2006] STC 443, that it is not clear that the place of CMC is different from POEM, and that in the context of a single transaction case it is very difficult to see how the two tests could lead to different answers, are not binding the same view should be adopted. The two tests are for practical purposes the same. The directors cannot be regarded as a rubberstamp or puppet if they apply their minds to the decision-making process. A distinction must be drawn between directors being dictated to by an outsider, and directors taking the decision pursuant to a tax scheme devised by an outsider who gives advice to and influences the board, Wood v Holden at [27].
110. Mr Brennan QC and Mr Nawbatt contend that one should follow the words of the current Commentary to the OECD Model "The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made". It is not the correct approach to ask where the CMC is situated and to say that POEM must be in the same place on the basis of Chadwick LJ's statement in Wood v Holden. Effective management implies realistic positive management, see Wensleydale's Settlement Trustees v IRC [1996] STC (SCD) 241.
111. There was thus some debate about whether, or to what extent, POEM differed from CMC. We consider that this misses the point; the two concepts serve entirely different purposes. CMC determines whether a company is resident in the United Kingdom or not; POEM is a tie-breaker the purpose of which is to resolve cases of dual residence by determining in which of two states it is to be found. CMC is essentially a one-country test; the purpose is not to decide where residence is situated, but whether or not it is situated in the United Kingdom, even though courts do sometimes express their decisions in terms of a company being resident in a particular foreign jurisdiction, as was the case in Wood v Holden. There is nothing impossible in finding CMC in two countries, in spite of the word "central." Suppose South Africa had an income tax in 1900-01 and applied CMC as its residence rule, would a court there have decided that the CMC of de Beers was in South Africa? Taking the facts from 5 TC 198, the head office according to the articles was in South Africa; the chairman (Cecil Rhodes) and nine of the 16 ordinary directors were there and two more travelled between London and South Africa; the technical management of the operations at the mines were decided by the directors at Kimberley who met weekly (but who were to consult the London directors on matters of exceptional importance); and the Kimberley directors could incur other expenditure up to £25,000 [we calculate that this is equivalent to £1.8m today according to the retail price index], plus another £50,000 with Cecil Rhodes' personal approval in special circumstances. We consider that CMC would also have been found in South Africa. But these facts which were before the House of Lords did not prevent its CMC being in the United Kingdom. Even if we are wrong about its also having a CMC in South Africa, Union Corporation Ltd v IRC (1953) 34 TC 207 is a case in which the Court of Appeal decided (obiter) that a company in a not dissimilar situation to de Beers was, for the purposes of a profits tax provision, both ordinarily (ordinarily being agreed to make no difference) resident in the United Kingdom and South Africa. And Swedish Central Railway Co v Thompson 9 TC 342 is a decision of the House of Lords that was later in Bullock v Unit Construction 38 TC 712 regarded as an example of a case where the facts did not enable a finding to be made that CMC was exercised in any one country.
112. POEM, on the other hand, must be concerned with what happens in both states since its purpose is to resolve residence under domestic law in both states, caused for whatever reason, which could include incorporation in one state and management in the other, or different meanings of management applied in each state, or different interpretations of the same meaning of management applied in each state, or divided management. One must necessarily weigh up what happens in both states and according to the ordinary meaning to be given to the terms of the treaty in their context (to quote article 31 of the Vienna Convention on the Law of Treaties) decide in which state the place of effective management is found. Effective is used elsewhere in the OECD model and the Treaty in "effectively connected" in articles 10, 11 and 12 which is an odd use of English. We believe "effective" should be understood in the sense of the French effective (siège de direction effective) which connotes real, French being the other official version of the Model, though not of the Treaty. In our hypothetical example of de Beers being a dual resident, it then becomes material to what level of management the effective management refers, and only then is it relevant to discuss whether the level of effective management is similar to the level of CMC. Fortunately matters of that sort do not arise in this appeal. Accordingly, having regard to the ordinary meaning of the words in their context and in the light of their object and purpose we approach the issue of POEM as considering in which state the real management of the trustee qua trustee is found.

Place of effective management - the authorities

113. We turn to guidance from United Kingdom cases where the issue of POEM has arisen. First in time is Wensleydale's Settlement Trustees in which Special Commissioner David Shirley said of POEM in the ordinary meaning of language at 250j:

"I emphasise the adjective 'effective'. In my opinion it is not sufficient that some sort of management was carried on in the Republic of Ireland such as operating a bank account in the name of the trustees. 'Effective' implies realistic, positive management. The place of effective management is where the shots are called, to adopt a vivid transatlantic colloquialism."

114. Mr Prosser warned about adopting alternative paraphrases such as "calling the shots" because in a way shareholders called the shots but this was not a relevant type of control. However, we adopt his reference to "realistic, positive management."
115. The issue of POEM arose only in the light of the Special Commissioners' decision in Wood v Holden (at that stage under its anonymised name R v Holden [2004] STC (SCD) 416). Having decided that at [145] "…the Appellants have failed to satisfy us that the central control and management of EBV was not in London…" they considered only counsel for the Revenue's contention that CMC and POEM were the same and came to the same conclusion (at [146]) on the basis that there was no indication that any effective management decisions were taken in the Netherlands, although the company was resident in the Netherlands under Dutch law being incorporated there. Their decision was reversed by Park J and by the Court of Appeal who decided that the company was resident in the Netherlands. We would respectfully say that it is normally no part of United Kingdom tax law to decide where a company is resident if that is not the United Kingdom. Where such a concept is needed, as in the CFC legislation, the statute has to deal with it. On the basis of their decision the issue of POEM did not arise although Chadwick LJ said at [44] that he found it very difficult to see how, in the circumstances of that case, the two tests could lead to different answers. The circumstances of that case were that the company was incorporated in the Netherlands and the only two decisions it had to make, a purchase and sale of certain shares, were taken in the Netherlands. Presumably he had in mind that if instead the company has been resident in the United Kingdom because of its incorporation, both CMC and POEM would have been in the Netherlands, the latter overriding United Kingdom residence on the basis of incorporation.
116. An interesting difference of judicial opinion arose in Indofood International Finance Ltd v JP Morgan Chase Bank NA [2006] STC 1195 in which the issue was whether a Mauritian issuer company and its Indonesian parent company would have taken "reasonable measures" if they had interposed a Dutch company between the issuer and the parent company when termination of the Indonesia-Mauritius tax treaty meant that the rate of withholding tax increased and the noteholders were entitled to redeem their notes. The trust deed for the issue was governed by English law and the court had to deal with the somewhat unsatisfactory question of (inter alia) what an Indonesian court would have decided was the POEM of a non-existent hypothetical Dutch company. The Chancellor took one view and at [57]:he said:

"As counsel for the issuer pointed out the test, as elaborated by the OECD commentary, refers to the place where 'key' decisions are taken. The provisions of the trust deed and, more particularly, of the note conditions show clearly that they must be taken by the parent guarantor. Whilst I do not doubt that the board of directors of Newco would be permitted to determine what to do with the handling charges and equity capital and would be responsible for complying with the requirements of Dutch law, those are hardly the 'key' decisions. Let it be assumed that the issuer and Newco are otherwise resident in Holland and the question arose whether to interpose Newco it is, in my view, plain beyond doubt that such a decision and the terms of any interposition would not be left to the issuer or Newco but would be decided by the board of the parent guarantor. In particular it would not be left to the board of the issuer or of Newco to decide whether to assign or to accept the benefit of the loan agreement between the parent guarantor and the issuer and if so on what terms. Questions in relation to any subsequent migration, substitution or interposition of another company between the parent guarantor and Newco or between Newco and the issuer would be decided by the board of the parent guarantor. In my view it is plain that the place of effective management of the issuer is Indonesia and that the place of effective management of Newco, if interposed between the parent guarantor and the issuer, would be Indonesia too.

117. Chadwick LJ was inclined to take the opposite view and at [75] he said:

"It is unnecessary to decide whether the Indonesian court would hold, also, that Newco was not resident in the Netherlands–on the ground that its 'effective management' (in the context of article 4.4 of the Dutch DTA) was situated in Indonesia. On that point my provisional conclusion differs from that reached by the Chancellor; but I do not think that any useful purpose would be served by a detailed analysis. I prefer not to decide the point in the present case. I should add, however, that had I reached the conclusion that on the balance of probabilities the Indonesian Tax Court would hold that Newco was resident in the Netherlands, I would have had no doubt that the point was so finely balanced that it would not be reasonable to expect a commercial organisation to enter into arrangements which would lead, inevitably, to the need to test that point in litigation."

118. Sir Peter Gibson expressed no view on this point. We would merely comment that the court was facing an impossible task of determining as a factual issue what view an Indonesian court might take of POEM in hypothetical circumstances. We do not therefore obtain much assistance from these authorities apart from the "realistic, positive management" principle from Wensleydale.

Place of effective management – the OECD Commentary

119. We also consider the guidance from the OECD Commentary, which was the 1977 Commentary at the time of the Treaty. Paragraph 23 reads:

"23. The formulation of the preference criterion in the case of persons other than individuals was considered in particular in connection with the taxation of income from shipping, inland waterways transport and air transport. A number of conventions for the avoidance of double taxation on such income accord the taxing power to the State in which the 'place of management' of the enterprise is situated; other conventions attach importance to its 'place of effective management', others again to the 'fiscal domicile of the operator'. Concerning conventions concluded by the United Kingdom which provide that a company shall be regarded as resident in the State in which 'its business is managed and controlled', it has been made clear, on the United Kingdom side, that this expression means the 'effective management' of the enterprise."

120. The formula referred to in the last sentence was in fact used in the former treaty with Mauritius (1947), which provided:

"The terms 'resident of the UK ' and 'resident of the Colony' [defined as the Colony of Mauritius and its Dependencies] mean respectively any person who is resident in the United Kingdom for the purposes of UK tax and not resident in the Colony for the purposes of Colonial tax and any person who is resident in the Colony for the purposes of Colonial tax and not resident in the United Kingdom for the purposes of UK tax; and a company shall be regarded as resident in the United Kingdom if its business is managed and controlled in the United Kingdom and as resident in the Colony if its business is managed and controlled in the Colony."

121. The Commentary at the time of the treaty was therefore saying that POEM was a concept already used in treaties in connection with shipping and air transport, or in some countries as the domestic law and treaty definition of residence, and was the same as where the business was managed and controlled, the expression then used in United Kingdom treaties. Such treaties have nothing to do with the meaning of POEM in a tie-breaker. The former Mauritian treaty contained the opposite of a tie-breaker. The first part of the sentence quoted specifically says that the treaty applies only to a person resident in one and not the other party. The second part of the sentence explains the first and in doing so assumes that management and control can be in only one of the parties. The most one can read into this passage is that if dual residence was caused by different levels of management in each country then POEM looked at the same level of management as the United Kingdom's managed and controlled, or CMC.
122. The last sentence of the Commentary quoted above was deleted in 1992. Our recollection is that when the CFC legislation was being consulted upon there was a parallel proposal to redefine management and control to mean day-to-day management, in the course of which the Revenue said that they considered CMC to be different from POEM. Commentators pointed to the above passage in the Commentary. In the end the proposal to redefine company residence did not go ahead but Statement of Practice SP6/83 was issued containing the statement now in SP1/90 that the Revenue had revised their view that the two expressions were the same. Naturally, they were obliged to ask the OECD to remove the passage saying that they were the same.
123. Currently the Commentary, in an amendment made in 2000, says:

"24 As a result of these considerations, the 'place of effective management' has been adopted as the preference criterion for persons other than individuals. The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made. The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time."

124. We see no reason why this approach should not be adopted even though it is in the Commentary issued after the Treaty. It is not significantly different from the earlier Commentary saying that POEM was the same as the reference to management and control in old United Kingdom treaties, which meant CMC, or the top level of management. But it is really aimed at a different situation, that of different levels of corporate management, which is not relevant here.
125. For the sake of completeness we should mention that in February 2001, the Technical Advisory Group on Monitoring the Application of Existing Treaty Norms for the Taxation of Business Profits ("TAG") of the OECD publicly released for comments its discussion draft entitled "The impact of the Communications Revolution on the Application of 'Place of Effective Management' as a Tie Breaker Rule". (It is understood that the TAG consisted of OECD Government officials, non-OECD government officials and individuals from business and academics, but do not represent OECD proposals.^[1])
126. Part of the discussion draft was included in Mr Brennan's skeleton but we have attached as an appendix a longer extract, fully appreciating that this does not represent the official views of the OECD, and does not have the status of evidence, but because we found the views of informed commentators useful as background information, particularly on the use of the expression in domestic law in several countries. The TAG followed this up with a public discussion draft on 23 May 2003 which proposed changes to the OECD Commentary, on which comments were requested by 1 September 2003 (we should also mention that this was coupled with an alternative proposal that if place of effective management could not be determined (or was in neither state) a hierarchy, similar to that for the tie-breaker for individuals in article 4(2) might apply including such factors as the state with which its economic relations are closer; the state in which its business activities are primarily carried on; the state in which its senior executive decisions are primarily taken; followed by state in which it derives its legal status; and finally to be determined by mutual agreement.) We emphasise again that we appreciate that this has no official OECD status and it is as it states merely a recommendation to Working Party 1 which has responsibility for the Model. In the absence of any further statement by the OECD since 2003, and in the light of the fact that in the meantime an update making amendments to the Commentary was issued in July 2005, we deduce that the matter is not free of controversy within the OECD.
127. The changes to the Commentary proposed by the TAG were:

"Replace paragraph 24 of the Commentary on Article 4 by the following (proposed additions to the existing Commentary appear in bold italics; deletions appear as strikethrough):

"24. As a result of these considerations, the "place of effective management" has been adopted as the preference criterion for persons other than individuals. [the rest of the existing paragraph has been incorporated in modified form in the following paragraphs]

[Note. We have not shown the deleted part here]

24.1 An entity may have more than one place of management, but it can have only one place of effective management at any one time. [this corresponds to the last sentence of existing paragraph 24]

24.2 The place of effective management is the place where the key management and commercial decisions that are necessary for the conduct of the entity's business are in substance made The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined; however, no definitive rule can be given., i.e. the place where the actions to be taken by the entity as a whole are, in fact, determined and all. All the relevant facts and circumstances must be examined to determine the place of effective management. [this corresponds to the second and third sentences of existing paragraph 24].

24.3 The place of effective management will is ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, [this corresponds to the third sentence of existing paragraph 24] which normally corresponds to where it meets. There are cases, however, where the key management and commercial decisions necessary for the conduct of the entity's business are in substance made in one place somewhere by a person or group of persons but are formally finalized somewhere else by it or by another person or group of persons. In such cases, it will be necessary to consider other factors. Depending on the circumstances, these other factors could include:

--?Where a board of directors formally finalizes key management and commercial decisions necessary for the conduct of the entity's business at meetings held in one State but these decisions are in substance made in another State, the place of effective management will be in the latter State.

--If there is a person such as a controlling interest holder (e.g. a parent company or associated enterprise) that effectively makes the key management and commercial decisions that are necessary for the conduct of the entity's business, the place of effective management will be where that person makes these key decisions. For that to be the case, however, the key decisions made by that person must go beyond decisions related to the normal management and policy formulation of a group's activities (e.g. the type of decisions that a parent company of a multinational group would be expected to take as regards the direction, co-ordination and supervision of the activities of each part of the group).

-- Where a board of directors routinely approves the commercial and strategic decisions made by the executive officers, the place where the executive officers perform their functions would be important in determining the place of effective management of the entity. In distinguishing between a place where a decision is made as opposed to where it is merely approved, one should consider the place where advice on recommendations or options relating to the decisions were considered and where the decisions were ultimately developed."

128. We consider that this should be treated with considerably more caution because it has not been adopted by the OECD. But, as with the 2000 Commentary, it is mostly aimed at the problem of comparing different levels of corporate management, which is not relevant here.
129. The Commentary is mainly dealing with the level of management that is relevant to the place of effective management, which is of no assistance here.
130. Accordingly, there is nothing in this additional material that changes our initial view that, having regard to the ordinary meaning of the words in their context and in the light of their object and purpose, we should approach the issue of POEM as considering in which state the real top level management (or the realistic, positive management) of the trustee qua trustee is found.

Place of effective management – application to the facts.

131. We now turn to apply that principle to the facts we have found and ask in which state the real top level management, or the realistic, positive management of the Trust, was found between 19 December 2000 and 2 March 2001.
132. We first find that there was no doubt that all the actions of PMIL in Mauritius were carried out correctly and were well documented. The appropriate meetings were held; the appropriate resolutions were taken, the Trust was registered in the Register of Offshore Trusts, a bank account was opened, a tax residency certificate was obtained, and income tax was accounted for and paid. All the administrative matters were well attended to.
133. Nevertheless during the Mauritius period the influence of Mr Smallwood, who was the settlor and who alone had the power to appoint new trustees, and the guiding hands of Mr Gadd and Mr Turbervill of KPMG Bristol, were evident throughout. We first consider the evidence about the role of KPMG Bristol.

The role of KPMG Bristol

134. Mr Gadd's evidence was that KPMG Bristol were purely acting in the capacity of tax advisers and they were not able to tell the trustees what to do. Initially they had been engaged by Lutea as tax advisers to the Trust and Mr Gadd saw an ongoing role as UK tax advisers to the Mauritius trustees as well although there was no formal engagement letter with PMIL. At the time, as both KPMG Bristol and KPMG Mauritius were "under the KPMG umbrella" it was not strictly necessary to have a formal engagement letter. However, that procedure had now changed and engagement letters would now be in place. KPMG Bristol were providing tax advice throughout the tax planning exercise. Any contact that KPMG Bristol had with Mauritius was to make sure that what was going on fitted within the tax planning exercise. The purpose of the exercise was to sell the shares without paying capital gains tax and there were particular aspects of the exercise that he needed to ensure happened in the right order so as to fit in with the plan.
135. Mr Turbervill's evidence was that his role was to give UK tax advice to the trustees which he did but what the trustees did with the advice was a matter for them. Once the Mauritius trustee had been appointed on 19 December 2000 his [Mr Turbervill's] only role was to maintain a watching brief in the background. There was an expectation that the tax planning scheme would be followed through but it was no more than an expectation, albeit a confident expectation. The Mauritius trustees could have decided not to sell the shares and there would have been nothing that he or anyone could have done to make them sell them. Mr Turbervill accepted that on occasion he prompted the Mauritius trustees to take certain actions but these were primarily of an administrative nature.
136. We accept the evidence of Ms Taher that there was no formal appointment by PMIL as trustee of the Trust for KPMG Bristol to advise PMIL "but then they were all part of the KPMG network, and they had introduced the [Trust] client to us, so it was normal practice for us to deal with another KPMG office; it was normal practice for us to take some advice from the other KPMG offices who were dealing with the particular company or trust". Mr Jingree told us that it was normal practice within his firm to get in touch with the person who had introduced a client and to keep the introducer briefed about progress.
137. In the light of this evidence we find that KPMG Bristol saw themselves as tax advisers to the trustees of the Trust, being first Lutea and then PMIL. There was no formal appointment by PMIL but that was not regarded as necessary as both KPMG Bristol and KPMG Mauritius were "under the KPMG umbrella". With that conclusion in mind we turn to examine the facts relevant to the place of effective management.

The relevant facts

138. The tax planning scheme was devised by KPMG Bristol as tax advisers to Lutea, the previous trustee of the Trust. Mr Smallwood had retired as Chairman of FirstGroup and any restrictions on the sale of the FirstGroup shares had been lifted. A tax efficient way of diversifying the portfolio of investments held for the Trust was needed. The appointment of trustees in Mauritius had been the idea of Mr Turbervill and the details were described to Mr Smallwood as early as August 2000. Mr Smallwood had the power to appoint new trustees. It was Mr Turbervill who approached PMIL and told them about the tax planning proposals and set out the basis of their appointment in the email of 24 November 2000. That made it clear that the confident expectation was that the shares would be sold before 5 April 2001.
139. We accept the evidence of Ms Taher that she did not understand "the basis" referred to in the email of 24 November 2000 as to mean that the sale of the shares was a condition for PMIL to accept the appointment as trustee; her evidence was that the trustees would wish to receive appropriate advice and recommendations. However, she accepted that eventually as part of the tax planning exercise the shares would be sold at some time. We accept the evidence of Mr Jingree that there was no agreement that PMIL would behave in a certain way or make certain decisions as a quid pro quo for the introduction of the Trust. PMIL's duties as trustee were laid down in legislation and in the trust deed and PMIL would only act within the context of what it was allowed to do. We also accept the evidence of Mr Jingree that the whole point of the tax planning exercise was to sell the shares and to realise the gain and to avoid tax on the gain.
140. The facts surrounding the appointment of PMIL lead us to the view that the real top level management, or the realistic, positive management of the Trust, remained in the United Kingdom. We accept that the administration of the Trust moved to Mauritius but in our view the "key" decisions were made in the United Kingdom.
141. This view is confirmed by subsequent events. The sale of the FirstGroup shares was not an isolated decision taken by PMIL on 10 January 2001. It had been carefully arranged beforehand by the transfer of the shares to Quilter to be held in their nominee account. Further, Mr Bazzone of Quilter had been told of the tax planning exercise and that Quilter would be asked to dispose of the holding of FirstGroup shares after PMIL had been appointed. It was when Mr Bazzone of Quilter told Mr Gadd on 4 January 2001 that he needed instructions from the new trustees that Mr Turbervill prompted PMIL to get on with what they should be doing. At no time did Mr Bazzone recommend the sale of all the shares but the sale of all the shares fitted in with the tax planning scheme. When Mr Bazzone wrote on 6 January to PMIL about the sale of the shares Mr Jingree was away from the office and Mr Shah asked Mr Turbervill for advice. There was then a delay in PMIL receiving the deed of indemnity and Mr Turbervill sent his email of 8 January to PMIL, Lutea and Mr Bazzone that no instructions to sell the shares should be given until the deed had been received. PMIL also asked Mr Turbervill to help with the opening of the account with Quilter and Mr Turbervill suggested an investment objective of capital growth with medium risk. Even on the date of the decision to sell Mr Bazzone had to remind PMIL how many FirstGroup shares were to be sold. Mr James Baxter of Merchant took the initiative in obtaining a set of account opening forms for Merchant.
142. We accept the evidence of Mr Jingree that the sale of the shares was motivated by United Kingdom tax planning reasons. The purpose of selling all the shares was to ensure that the tax planning which had been put in place worked to the best advantage of the Trust and it was vital that all of the shares were sold prior to the end of March in order to achieve this. The decision to sell all the shares was made in the hope that all the shares could be sold before the end of March. However, if it had not been in the interests of the beneficiaries and the Trust, the trustees would not have sold the shares; "if the funds which had been realised had to go away in taxes then it would not have been in the best interests of the beneficiaries". Also, if the share price dropped dramatically, and if the fund manager had advised against a sale, then the trustees would not have decided to sell. We also accept the evidence of Ms Taher that the decision to sell all the shares was based upon tax planning and the need for the shares to be sold by a particular date. The fact that the share price had gone up was not the "driver" for the sale of the shares.
143. We fully accept that the decision to sell the shares that day was taken by the directors of PMIL at the telephone meeting on 10 January 2001. We also accept that if, for example, the price of the shares had fallen to a level that meant that no gain would be realised on their disposal, the shares would not have been sold but would have been retained and perhaps sold later. Nevertheless, in our view this was a lower level management decision as there was no doubt that the shares would be sold; the real top level management decisions, or the realistic, positive management decisions of the Trust, to dispose of all the shares in a tax efficient way, had already been, and continued to be, taken in the United Kingdom. The "key" decisions were made in the United Kingdom.
144. Finally the events after the sale of the shares confirm our view. The tax planning exercise was completed by the appointment of United Kingdom trustees. We remark that PMIL's fee note was approved by Mr Turbervill.
145. We conclude that the state in which the real top level management, or the realistic, positive management of the Trust, or the place where key management and commercial decisions that were necessary for the conduct of the Trust's business were in substance made, and the place where the actions to be taken by the entity as a whole were, in fact, determined between 19 December 2000 and 2 March 2001 was the United Kingdom .
146. That means that the appeal is dismissed.
147. We should also deal in the alternative with the argument that residence in Mauritius was for the period 1 July 2000 to 30 June 2001. The table then becomes:

Dates	6 April 2000 to 1 July 2000	1 July 2000 to 19 December 2000	19 December 2000 to 2 March 2001 ("the Mauritius Period")	2 March 2001 to 5 April 2001 ("the UK Period")	6 April 2001 to 30 June 2001
Residence of trustee	Jersey [not accepted by the Revenue]	Jersey	Mauritius	UK	UK
Domestic law residence of trustee	Not relevant	Mauritius	Mauritius	UK and Mauritius	UK and Mauritius
Chargeability of trustee to UK CGT and UK treaty residence for article 4(1) of the Treaty	Yes	Yes	Yes	Yes	Yes

148. Applying the tie-breaker separately to these periods, there is no difference in the result for the Mauritius Period. For the two right-hand columns covering the period from 2 March 2001 to 30 June 2001 there was no Mauritius connection and so the United Kingdom would clearly win the tie-breaker. For the first two columns on the left covering the period 6 April 2000 to 19 December 2000 there was no effective management in either the United Kingdom or Mauritius and so POEM does not resolve the dual residence. Accordingly the Treaty does not prevent either the United Kingdom or Mauritius from taxing and each would have to give credit for the other's tax. But since no Mauritian tax was paid for this period the issue does not arise.

Decision

149. Our decisions on the questions raised by the arguments of the parties are:

(1) that the trustee was not resident for the purpose of the Treaty solely in Mauritius when the gain was made but if it had been Article 13(4) of the Treaty would have prevented the United Kingdom from taxing the gain; and

(2) that the place of effective management (POEM) of the Trust under Article 4(3) of the Treaty was situated in the United Kingdom.

150. That means that the Treaty does not prevent the United Kingdom from taxing the gain and the appeal must be dismissed.

DR NUALA BRICE

DR J F AVERY JONES

SPECIAL COMMISSIONERS

RELEASE DATE: 19 February 2008

SC/3144/2006

SC/3145/2006

12.02.08

APPENDIX

Extract from the OECD Technical Advisory Group TAG Report of February 2001

16. In the absence of any specific definition of "place of effective management", many commentators have been influenced by concepts used in domestic tax law residence rules, such as "central management and control"^[2] and "place of management"^[3], when considering the meaning of the term "place of effective management".

Guidance from "Central Management & Control" (CM&C)

17. CM&C is one of the residence tests adopted in a number of different countries^[4] for non-individuals. For example, under Section 6(1) of Australia's Income Tax Assessment Act 1936, a company is a resident of Australia if:

-- It is incorporated in Australia; or

-- It carries on business in Australia and is centrally managed and controlled in Australia; or

-- It carries on business in Australia and its voting power is controlled by shareholders resident in Australia.

18. Understanding the factors which determine a place of CM&C may provide assistance in determining a place of effective management.

19. In Australia, the expression "centrally managed and controlled" is not defined in the domestic tax legislation. However, there are a number of court cases which provide some guidance on how the place of CM&C is to be determined.

20. According to a number of court decisions, while determining a place of CM&C is a question of fact, it ordinarily coincides with the place where the directors of the company exercise their power and authority (which will generally be where they meet).^[5] A leading case establishing this is De Beers Consolidated Gold Mines (1906) AC 455. In that case a company registered in South Africa worked diamond mines, had its Head Office and held its general meetings of shareholders all in South Africa. Its Directors held meetings both in South Africa and in the UK , but the Directors' meetings held in the UK were found to be those where real control of the company was exercised. Accordingly the company was found to be UK resident.

21. In a number of Canadian cases,^[6] the courts, relying on the statement of the Lord Chancellor in the De Beers case, have found that the place of CM&C was where the company "really keeps house and does business". Some of the factors taken into account in determining this place include:

-- Place of incorporation.

-- Place of residence of shareholders and directors.

-- Where the business operations take place.

-- Where financial dealings of the company occurred; and

-- Where the seal and minute books of the company were kept.

22. However, this general rule is by no means conclusive. The courts have also taken certain other factors into account when determining the place of CM&C. In North Australian Pastoral Co Ltd v FCT (1946) 71 CLR 623, the taxpayer company was regarded as a resident of the Northern Territory where the actual business operations were located, notwithstanding that the directors meetings were held in another State. This conclusion was reached based on the fact that:

-- The company's whole undertakings, being, incorporation, registered office, public office and full books of account were located in Northern Territory.

-- The directors met in Brisbane, Queensland, as a matter of convenience.

-- The manager of the property in the Territory took the responsibility for the success or failure of the venture; and

-- Visits to the property by the directors and consultation with the manager were acknowledged to be of importance in reaching policy decisions.

23. However, in Malayan Shipping Co Ltd v FC of T (1946) 71 CLR 156, the court held that the company was a resident of Australia because the managing director exercised from Australia complete management and control over the business operations of the company, notwithstanding that the trading operations were conducted abroad.

24. In certain exceptional circumstances, the place where a controlling shareholder (such as a parent company) makes its decisions may be relevant in determining where the central management and control is located. In Unit Construction Co Ltd v Bullock (Inspector of Taxes) (1959) 3 ALL ER 831, three wholly owned subsidiary companies were incorporated in Kenya. By their articles of association, powers of management were vested in the directors who were located in Kenya and who could not validly hold meetings in the UK . However, these management powers were not in fact exercised by the local directors who stood aside in all matters of real importance, so that it was the board of directors of the parent company in the UK which effectively made all the decisions. This resulted in the subsidiaries being held to be UK residents.

Guidance from "place of management"

25. Place of management is another residence test adopted by a number of treaty countries^[7] to determine residence of non-individuals. Some countries, e.g. Switzerland, use the concept of "place of effective management" in their domestic law.

26. In Swiss practice, a distinction is drawn between the place of effective management and merely administrative management or decision making by executive bodies (e.g. Where the decisions of a board of directors are limited to control of the company and to basic decisions). Although there are no court decisions on the meaning of the term "place of effective management", it would be expected that the same interpretation would apply to the term as used in Swiss treaties and its domestic law.

27. In describing the meaning of "place of effective management", Professor Vogel^[8] suggests that it is similar to that of "place of management" used under the German domestic law.

28. According to the German case law, a place of management is regarded as the place where the management's important policies are actually made. Vogel states that "what is decisive is not the place where the management directives take effect, but rather the place where they are given."^[9] It is the centre of top level management, i.e. the place at which the person authorised to represent the company carries on his business managing activities. If a controlling shareholder does in fact manage the conduct of the company's business, then that shareholder may be regarded as being in charge of the top level management, and the place where those decisions are made would appear to be the centre of management. However, Vogel indicates that a place from which a business is merely supervised would not qualify.

29. Vogel also states that, under German law, if the place of management cannot be determined by the application of these criteria, the top manager's place of residence may determine the residence of the company.

30. The analysis in this section is based on the experience of a limited number of countries. Comments are particularly invited on the experience in other countries which use the central management and control or place of management concept, or other similar concepts which may provide guidance on the meaning of place of effective management.

Summary of key factors in determining a place of effective management

31. A place of effective management will generally be where key management and commercial decisions necessary for the conduct of a business are in substance made and given. This will ordinarily be where the directors meet to make decisions relating to the management of the company, but the determination of a place of effective management is a question of fact and other relevant factors taken into account by the courts have included:

-- Where the centre of top level management is located.

-- Where the business operations are actually conducted.

???Legal factors such as the place of incorporation, the location of the registered office, public officer, etc.

-- Where controlling shareholders make key management and commercial decisions in relation to the company; and

-- Where the directors reside.

32. It should be noted, while the guidance from Central Management & Control and the Place of Management indicates the place of effective management will ordinarily lie with the directors, in certain circumstances these strategic decisions and powers may be exercised by others. For example, the guidance provided in paragraph 24 of the Commentary on Article 4, makes it clear that the relevant consideration is where the high level decision making occurs. If this function is performed by persons other than the Board of Directors, then the relevant consideration is the place where those other people make their decisions.

33. In the past, in an environment where the most senior manager or managers tended to operate from and meet in a single location such as a head office, determination of the place where key management and commercial decisions were made was not too difficult. The place where the top level management activities occurred would mainly coincide with the place where the company was incorporated and had its registered office, where the business activities were conducted and where the directors or senior managers resided. It was therefore, as the Commentary states "rare in practice for a company, etc. to be subject to tax as a resident in more than one State."^[10]

34. However, the communications and technological revolution is fundamentally changing the way people run their business. Due to sophisticated telecommunication technology and fast, efficient and relatively cheap transportation, it is no longer necessary for a person or a group of persons to be physically located or meet in any one particular place to run a business. This increased mobility and functional decentralisation may have a significant impact on the incidence of dual resident companies, and the application of the place of effective management tie-breaker rules.

Note 1   This statement is taken from John F Avery Jones “Place of Effective Management as a Residence Tie-Breaker” Bulletin for International Fiscal Documentation (2005) vol 59, No 1, p 20 (footnote 2).    [Back]

Note 2   See Hamilton, R and Deutsch R, Guidebook to Australian Taxation, Legal Books Looseleaf Service, Paragraph [6.140]. [Note. In this extract the footnotes have been renumbered starting from 2 to fit the footnote numbering of this decision.]    [Back]

Note 3   See Vogel, K, Klaus Vogel, Double Taxation Conventions, 3rd edition, Kluwer Law International, page 262.    [Back]

Note 4   For example, Australia, Ireland and the UK.    [Back]

Note 5   See Waterloo Pastoral Co Ltd v FCT (1946) 72 CLR 262, Capitol Life Insurance Co v R (1984) CTC 141 and Gurd’s Products Co v R (1985) CTC 85.    [Back]

Note 6   Birmount Holdings Ltd v R (1978) CTC 358, Tara Exploration & Development Co Ltd v MNR (1970) CTC 557 and Capitol Life Insurance Co v R (1984) CTC 141.    [Back]

Note 7   For example, Germany and the Netherlands.    [Back]

Note 8   See Vogel, K, Klaus Vogel, Double Taxation Conventions, 3rd edition, Kluwer Law International, page 262 in which he states “The German domestic term ‘place of management’ is very similar to the treaty term ‘place of effective management’, and even more so because the former term is interpreted by the courts to refer to the factual conditions.”    [Back]

Note 9   Supra at page 262.    [Back]

Note 10   Paragraph 21 of the Commentary on Article 4 of the Model Tax Convention.    [Back]