2464. Place of effective management


Earlier this year, the South African Revenue Service (SARS) released issue 2 of Interpretation Note 6 (the draft Interpretation Note) on the “place of effective management” (POEM). Comments were due by 31 July 2015. POEM is often of critical importance in determining the tax residency of an entity. 

Editorial comment: Issue 2 of Interpretation Note 6 was published by SARS on 3 November 2015.

The interpretation previously put forward by SARS in terms of Interpretation Note 6 issued during 2002 (IN6) in this regard, did not accord entirely with international precedent and the approach followed by SARS was that the POEM is:

2011 Discussion Paper
During 2011, SARS released a discussion paper (Discussion Paper) to invite taxpayers and tax practitioners to comment and raise any concerns in relation to the concept of POEM in South Africa, so as to provide a potential framework for possible amendments to IN6.

The Discussion Paper noted that IN6 had been subject to criticism in a number of areas. In particular, the ‘general approach’ followed therein, namely to focus on the place where strategic decisions and policies are executed and implemented, as opposed to the place where those decisions are taken or adopted, was criticised.  It was acknowledged in the Discussion Paper that IN6 had caused uncertainty by “adopting an approach that appears to conflict with the weight of international authority insofar as the general approach focuses on the place where strategic decisions are ‘executed and implemented’ rather than on the place where the decision-making, in substance, takes place.”

Draft Interpretation Note
The draft Interpretation Note provides that since POEM is not defined in the Income Tax Act of 1962 (the Act), the ordinary meaning must be ascribed to the phrase, taking into account international precedent and interpretation. The draft Interpretation Note purports to be in line with the Organisation for Economic Cooperation and Development (OECD) principles and guidelines for the determination of the POEM when used as a tie-breaker rule in a double taxation agreement (DTA).

The draft Interpretation Note confirms that a company may have more than one place of management, but it can only have one POEM at any one time. The POEM will be at the place where key management and commercial decisions affecting its business as a whole are primarily or predominantly made.  In our view, this approach is consistent with the OECD’s guidance provided in paragraph 24 of the Commentaries on the Articles of the Model Tax Convention on Income and on Capital (OECD Commentary).

In determining a single dominant POEM, the draft Interpretation Note provides for certain facts and circumstances that need to be taken into account. The determination looks at where the key management and commercial decisions are regularly and predominantly made. According to SARS, some of the facts and circumstances that should be considered on a case-by-case basis include the following:

The move by SARS of its focus away from the execution and implementation of strategic decisions is welcomed. Since determining the POEM of an entity is a fact-specific enquiry, it is useful that there should now only be one test, namely to identify the place where the key management and commercial decisions are, in substance, made. SARS’ statement that it does not anticipate that the application of the second issue of the Interpretation Note (as opposed to IN6) should result in many, if any, companies previously having had their POEM outside South Africa now being effectively managed in South Africa, or vice versa, is also encouraging. 

SARS: Issue 2 of Interpretation Note 6, Discussion Paper: Interpretation Note 6 – Place of Effective Management, Issue 1 of Interpretation Note 6
OECD: Paragraph 24 of the Commentaries on the Articles of the Model Tax Convention on Income and on Capital (OECD Commentary)