Page 201 - SAIT Compendium 2016 Volume2

IN 6 (2) Income Tax acT: InTeRPReTaTIon noTes IN 6 (2)
4.2.8 Economic nexus
The extent of a company’s economic nexus with a country is generally irrelevant in the determination of its place of effective management. However, this factor may be considered circumstantial and given some weight in cases where other factors are inconclusive.
Example 3 – Place of effective management
Facts:
Bigco is a multinational company, incorporated under the laws of the United Kingdom, with substantial operations in South Africa, the United Kingdom and the United States. Its shares have a primary listing on the JSE, a secondary listing on the London Stock Exchange and are also traded on the New York Stock Exchange through American Depository Receipts.
The company’s head of ce is located in South Africa and its Managing Director, Financial Director and Chief Operating Of cer are based in South Africa. The divisional managers who are responsible for the company’s operations in the United Kingdom and the United States are based in those countries, as are several non-executive directors.
Bigco’s board makes the key management and commercial decisions for the conduct of the company’s business as a whole. It generally holds three meetings each year, one in each of the countries where Bigco operates. Bigco’s Managing Director, Financial Director and Chief Operating Of cer typically attend all of the company’s board meetings and use the trips to meet with the company’s operational managers in the United Kingdom and the United States as well as to meet with investors or investment analysts in those countries.
All of the ‘board packs’ are prepared by personnel at Bigco’s head of ce, which may include information sent to the head of ce by the divisional managers. Head of ce personnel, including the Managing Director, Financial Director and Chief Operating Of cer, and their direct staff, are also responsible for developing and formulating proposed strategic plans for consideration and action by the board. The board actively reviews these plans before taking a decision and, from time to time, either rejects or requires modi cations to those proposals
Result
Under the circumstances, Bigco’s place of effective management is South Africa. Amongst other things, one of the three board meetings where decisions are made is held in South Africa with a majority of board meetings not being held at the other locations. In addition, its head of ce and highest level of senior management are both located in South Africa. The fact that Bigco is incorporated in the United Kingdom is irrelevant. Any circumstantial evidence related to the company’s economic nexus with any of the countries in question would also be of limited or no probative value in this instance.
4.2.9 Support functions
It is not uncommon for a multinational company to centralise certain support functions such as data management, human resources, customer support or accounting, and to locate those services in countries that offer advantages such as superior infrastructure, lower costs or a highly skilled workforce. A group of companies may house these services in the group’s ultimate holding company or in a separate subsidiary which provides the services to all the members of the group.
In these situations, the locations where those services are primarily performed and where the senior managers responsible for them are based may be different to the location of the company’s head of ce where the top senior management and the senior management’s direct support staff are located. Although such support services may be essential to a company with support service related policies and procedures having a company-wide effect, the managers in charge of those services are often not involved, or only secondarily involved, in making key management and commercial decisions that affect the conduct of the company’s business as a whole (outside of the area of the speci c support functions that they are responsible for). Consequently, the location where such support services may be located is generally of limited relevance to the determination of a company’s place of effective management.
The location where a company’s accounting records are retained will generally not be indicative of the place where the key management and commercial decisions are made and in these circumstances would therefore be irrelevant in determining a company’s place of effective management.
5. Effective date
SARS does not anticipate that the application of this Note, as opposed to its predecessor (Issue 1 of this Note), will result in many, if any, companies previously held to have their place of effective management outside South Africa now being held to have it in South Africa, and vice versa. However, if a company feels it is in this position, SARS would welcome the opportunity to discuss the facts of the case with the company concerned.
This Note is effective for years of assessment commencing on or after the date of publication.
6. Conclusion
A company’s place of effective management is the place where key management and commercial decisions that are necessary for the conduct of its business as a whole are in substance made. This approach is consistent with the OECD’s commentary on the term ‘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. There are normally multiple facts that need to be taken into account, often involving multiple locations, and from those facts and locations it is therefore necessary to determine a single dominant place where effective management is located.
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