Page 197 - SAIT Compendium 2016 Volume2

IN 6 (2) Income Tax acT: InTeRPReTaTIon noTes IN 6 (2)
Overseas court cases in the context of tax treaty interpretation have provided useful interpretations on the meaning of the place of effective management. For example, in Wensleydale’s Settlement Trustees v Inland Revenue Commissioners,* Special Commissioner David Shirley made the following comment on the ordinary meaning of place of effective management:
‘I emphasise the adjective ‘effective’. In my opinion it is not suf cient 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.’(Emphasis added.)
In Smallwood’s case† the court held that determining the place of effective management required the court to determine where, based on the facts presented, the real top level of management or realistic, positive management of the taxpayer, a trust, was exercised. Although this case dealt with the determination of the place of effective management in the context of a trust, the court’s decision is considered useful because the principles and the type of facts that were considered are equally relevant in the context of companies. The court found that there was a distinction between the scheme of management (which constituted the key management and commercial decisions) and day-to-day management exercised by the trustees from time to time with the former determining the place of effective management.
A company may have more than one place of management but it can only have one place of effective management at any one time.‡ If a company’s key management and commercial decisions affecting its business as a whole are made at a single location, that location will be its place of effective management. However, if those decisions are made at more than one location, the company’s place of effective management will be the location where those decisions are primarily or predominantly made.
Experience has shown that the application of these principles does not present serious problems in the majority of cases. For example, it is relatively easy to determine a company’s place of effective management if that company operates in several countries through branches with local managers, but has its head of ce in South Africa where most of its senior management are located and where most, if not all, of its board meetings take place. In contrast, the determination in the case of a company that is part of a global group that operates on a divisional as opposed to a separate legal entity basis with senior management teams that are responsible for different aspects of the business being based in different locations, and whose senior management teams travel frequently, would be more complicated. This complexity can be compounded when overlaid with modern technology such as video- conferencing and electronic mail. Notwithstanding the potential levels of complexity, the determination of the place of effective management still involves an application of the same core principles.
4.2 Key facts and circumstances
There are normally multiple facts that need to be taken into account, often involving multiple locations, and from those facts and locations it is necessary, as noted above, to determine a single dominant place where effective management is located. The determination looks at where the key management and commercial decisions are regularly and predominantly made. It is not a snapshot requiring an assessment at a particular moment in time.
Although the determination of the place of effective management is not based on a snapshot at a particular moment in time, when a company changes its place of effective management the change in residence§ occurs on a particular date and is not in relation to a year of assessment.
Example 1 – Time period
Facts:
Company A is a listed South African-incorporated multinational company with branches operating in Africa, Europe and America. Its head of ce is based in South Africa and the quarterly board meetings are generally all held in Cape Town.
During the 2015 year of assessment Company A held the 3rd of its quarterly meetings in London to coincide with its secondary listing on the London Stock Exchange and the related interactions with nancial advisors and media.
Result:
One meeting of the board of directors in London will not result in the effective management of the company temporarily moving to the United Kingdom. The senior management team and the board of directors regularly and predominantly make the key management and commercial decisions in South Africa and South Africa is accordingly Company A’s place of effective management.
De nitive rules cannot be laid down in determining the place of effective management and all relevant facts and circumstances must be examined on a case- by-case basis. Although it is not possible to provide a detailed list of all the factors that must be considered, some of the key facts and circumstances that must be examined in determining a company’s place of effective management are discussed below. This list is not intended to be exhaustive but serves merely as a guideline.
* [1996] STC (SCD) 241 at 252.
† Trevor Smallwood Trust v Revenue and Customs [2008] UKSPC SPC00669 in 112 & 114 at 30 and in 130 at 35 and the subsequent appeal in the Court of Appeal, Her Majesty’s Revenue & Customs v Smallwood & another [2010] EWCA Civ 778 in 48.
‡ This is consistent with paragraph 24 of the Commentaries on the Articles of the Model Tax Convention on Income and on Capital, Condensed version, dated 15 July 2014 at 91.
§ Ignoring for the moment its place of incorporation, establishment or formation.
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