Search
Close this search box.
Africa Update

Firm Details

No data was found

SARS’ new draft interpretation note reflects 180 degree change on the place of effective management concept.

Many taxpayers who operate cross-border will be relieved to know that the South African Revenue Service (SARS) recently issued a draft Interpretation Note 6 (IN 6) in which its interpretation of the place of effective management (POEM) concept is radically changed, for the better.

Introduction
The POEM concept is often a vital consideration when determining an entity’s tax residence. For example, if a foreign incorporated company owned in South Africa, operating in a foreign country, is found to have its POEM in South Africa, it is taxable here (income tax, CGT and dividends tax). Likewise, a South African owned and incorporated entity operating abroad might not be taxable South Africa because its POEM is elsewhere. Moreover, as an entity can only have a single POEM at any one stage, it is also usually the tie-breaker that will tip the scale in favour of residence in a specific country under a double tax agreement, in the event of an entity being resident in both countries under their respective domestic tax laws.

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’ 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.

SARS formerly and incorrectly, stated that an entity’s POEM is at the place where the entity is managed on a day-to-day basis by the directors or senior management, irrespective of where the overriding control is exercised, or where the board of directors meet.

Court Ruling
A recent decision handed down by the High Court in Oceanic Trust Co Ltd NO v SARS, made it clear that our courts are applying international jurisprudence (and are thus not supporting SARS’ interpretation of the POEM concept), which necessitated SARS to revise its view.

The outcome, in the form of the new draft IN 6, seeks to locate the POEM of an entity to the place where key management and commercial decisions that are necessary for its business as a whole, are in substance made. This revised view is much welcomed by taxpayers and practitioners because it is, for the first time, consistent with international jurisprudence and the approach adopted by the Organisation for Economic Co-operation and Development.

To illustrate the revised view; if the decision-making takes place at a location that is different to where those decisions are implemented on a day-to-day basis, SARS will now attach more weight to the location of decision-making, as opposed to the location of implementation.

SARS emphasised that the POEM test is one of substance over form, and listed various factors that should be taken into account in applying this test. These factors attempt to keep up with the modern day way of doing business, for example, video conferencing, purport to identify the single dominant place where the effective management is actually located.

Conclusion
Taxpayers can rest assured that SARS’ approach is that the application of the draft IN 6 is unlikely to cause any changes in existing entities’ POEM (i.e. if an entity’s POEM was previously located outside of South Africa, it will not, solely as a result of SARS’ new approach, be relocated to South Africa, and vice versa).The objective of the draft IN 6 is rather to align SARS’ approach with international jurisprudence and convention, and to bring legal certainty to South African taxpayers.

Media

Explore our news articles, specialist publications and browse through our webinars and gallery

What We Do

Explore our range of expertise, and see how we can help you.
Banking & Finance, Investment Funds & Private Equity
Business Crimes & Investigations
Competition/Antitrust
Construction & Engineering
Corporate Mergers & Acquisitions
Cyber Law, Block chain & Technology
Dispute Resolution
General Business Law
Healthcare and Life Sciences
Infrastructure, Energy & Projects
Insolvency & Business Restructuring
Intellectual Property
Labour & Employment
Local Investment Laws and Indigenisation
Media, Broadcasting & Communications
Mining, Environmental & Resources
Property Law and Real Estate
Tax

Member Countries

Explore our member firms by country

Algeria
Angola
Botswana
Burkina Faso
Cameroon
DRC
Egypt
Equatorial Guinea
Eswatini
Ethiopia
Ghana
Guinea Conakry
Ivory Coast
Kenya
Lesotho
Malawi
Mali
Mauritius
Morocco
Mozambique
Namibia
Nigeria
Rwanda
Senegal
South Africa
Tanzania
Tunisia
Uganda
Zambia
Zimbabwe