SARS makes U-turn on business tax location rules

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Cape Town - Taxpayers operating in other countries will be relieved to know that the South African Revenue Service (SARS) proposes to change its interpretation of the ‘place of effective management’ (POEM) concept in the recently issued draft interpretation Note 6 (IN 6), putting an end to much confusion.

The POEM concept is not defined in the Income Tax Act and its interpretation depends on the facts and circumstances of each particular case.

SARS's interpretation of the POEM, expressed in the current IN 6, has, since it was first issued, been the subject of scrutiny and criticism, primarily because it diverges from international precedent and interpretation.

When the POEM of a company is determined to be in South Africa it is, subject to treaty relief, taxable here on its worldwide income, capital gains and dividends tax, according to Daleen Malan, Senior Associate of Werksmans Attorneys.

She mentions that SARS' interpretation of the POEM concept in the draft IN6 is radically changed, for the better.

Current SARS rules

Formerly, SARS adhered to the idea that POEM was the place where a company was managed on a day-to-day basis.

This was contrary to the international view on this issue, and the approach adopted by the Organisation for Economic Co-operation and Development (OECD), in terms of which POEM means the place ‘where the shots are called’, according to comments made by Special Commissioner David Shirley in the case of Wensleydale’s Settlement Trustees v Inland Revenue Commissioner.

Implementation vs. decision-making

The fact that POEM is no longer to be determined by SARS where the company business is managed on a day-to-day basis, but where key management and commercial decisions are made for the company as a whole, is consistent with international jurisprudence, according to Malan.

In other words, operational management must be distinguished from key management and commercial decisions, according to Wilco Froneman, Manager (Transfer Pricing) at BDO South Africa.

In short, says Malan, SARS will now attach more weight to the location where the management and commercial decisions, that are necessary for its business as a whole, are in substance made as opposed to the location where those decisions are implemented.

Froneman comments that global telecommunications, information technology and global travel can complicate matters when trying to establish the POEM of a company.

But, says Malan, the POEM test will now be one of substance over form, and various factors would be taken into account when trying to identify the single dominant place where the effective management is actually located.

So does this mean that companies need to brace themselves for a coming change in the location of the POEM?

“Most likely not” says Malan. SARS’s approach is that the application of the draft IN 6 is unlikely to cause any changes in existing companies' POEM“ – the aim is rather to align SARS’ approach with international jurisprudence and convention, and to bring legal certainty to South African taxpayers.”

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