Page 200 - SAIT Compendium 2016 Volume2

IN 6 (2) Income Tax acT: InTeRPReTaTIon noTes IN 6 (2)
In Unit Construction v Bullock,* the subsidiary companies’ constitutions required that they be managed by their own boards. The court, however, found that in all matters of real importance affecting central management and control, the real management and control was exercised by the board of the parent company. The House of Lords agreed that although the parent company’s actions were arguably unlawful, it did not override the factual reality of by whom and from where the subsidiary companies were managed and controlled.
Shareholders sometimes limit the authority of, or provide guidelines for, the board and senior managers of a company. For example, a parent company may set limitations of authority or guidelines for a subsidiary company. These limitations of authority or guidelines must, in conjunction with all the other facts and circumstances, be reviewed in detail to determine whether the effect is that the shareholder is actually making the key decisions or whether the company, although receiving guidance or some input, is still making them. It is quite common for a parent entity of a multinational group to set guidelines and policies for the group as a whole in order to direct, coordinate and monitor activities of the group as a whole. This does not necessarily mean, and often does not mean, that the subsidiary company is not making its own decisions, but all the facts must be considered when making this assessment.
Example 2 – Limitation of authority
Facts:
Company A concludes long-term contracts with clients which extend over a number of years. A single contract can have a signi cant effect on the nancial viability of Company A and as a result Company A’s senior management team sign off on all contracts. The conclusion of sales contracts represents a predominant key commercial decision for Company A.
Under a limitation of authority, the company’s senior management team is restricted to concluding contracts not exceeding a contract value of R10 million. For contracts exceeding this value, the company must submit its recommendation to the parent company and the parent company makes the decision whether or not the contract may be accepted. The company must implement the parent company’s decision.
90% of contracts have a value that exceeds R10 million.
Result:
Although more detail would be required and all the facts affecting all the key management and commercial decisions of the company as a whole would have to be taken into account, the facts suggest that the effective management of the company may have been usurped by the parent company. The limitation of authority in this case has effectively removed the company’s real authority to make decisions and has gone beyond a mere monitoring mechanism or information-reporting requirement.
Limitations of authority and guidelines are common in multi-national groups of companies. The details are critical in assessing who is, in substance, making the company’s key management and commercial decisions.
4.2.6 Operational management versus broader top level management
Operational management decisions are generally of limited relevance in determining a company’s place of effective management and must be distinguished from the key management and commercial decisions.
Operational management generally concerns the oversight of the day-to-day business operations and activities of a company. Key management and commercial decisions are concerned with broader strategic and policy decisions and tend to be made by members of the senior management team. For example, a decision to open a major new manufacturing facility or to discontinue a major product line would be examples of key commercial decisions affecting the company’s business as a whole. By contrast, decisions by the plant manager appointed by senior management to run that facility, concerning repairs and maintenance, the implementation of company- wide quality controls and human resources policies, would be examples of operational management.
What constitutes a key management or commercial decision as opposed to an operational management decision is critical since it is the former that is relevant in the context of establishing the place of effective management. Again, determining what constitutes a key management or commercial decision is an aspect that can be determined only on a case-by-case basis. For example, in some businesses the conclusion of each and every contract will be a key commercial decision while in other businesses the setting of standardised pricing will be a key commercial decision but the conclusion of individual contracts will not be.
Depending on the particular case, the person responsible for operational decisions may be the same as the person responsible for the key management and commercial decisions. In this situation it is still necessary to distinguish between the two types of decisions and to assess where the key management and commercial decisions are made. The location of this decision-making is critical.
4.2.7 Legal factors
Legal factors such as a company’s place of incorporation, formation or establishment, the location of its registered of ce and the location of its public of cer are generally not relevant in the determination of a company’s place of effective management.
* [1960] AC 351, [1959] 3 All ER 831, [1959] 3 WLR 1022, 38 TC 712, 38 ATC 351, [1959] TR 345, 52 R&IT 828. See also Laerstate v The Commissioner For Her Majesty’s Revenue & Customs [Corporation Tax] [2009] UKFTT 209 (TC), Wood & another v Holden (HMIT) [2006] EWCA Civ 26 and Commissioner for Her Majesty’s Revenue and Customs v Smallwood & Another [2010] EWCA Civ 778.
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