Determining corporate residence - The concept of 'place of effective management' in a shifting domestic and international fiscal landscape

• Jurisdiction: South Africa
• Author: Lisa Brunton
• DOI: 10.10520/EJC172221
• Published date: 01 June 2015
• Date: 01 June 2015
• Pages: 13-37
• Published By: Siber Ink

13

© SIBER INK

Determining Corporate

Residence

THE CONCEPT OF ‘PLACE OF EFFECTIVE

MANAGEMENT’ IN A SHIFTING DOMESTIC AND

INTERNATIONAL FISCAL LANDSCAPE

LISA BRUNTON1

ABSTRACT

Determining corporate residence is critical to revenue collection in a juris-

diction that operates on the residence basis of taxation. This paper charts

the evolution of the South African Revenue Service’s (‘SARS’) interpretation

of one of the domestic tests for corporate residence, namely the ‘place of

effective management’ (‘POEM’), within the context of apposite international

commentaries and case law, as well as domestic case law. In particular, it

considers the arguments for and against day-to-day operational manage-

ment as opposed to strategic management as the overriding criteria; given

that the inter pretation of the POEM tie breaker in cases of dual residence, as

expounded inter nationally, determines corporate residence with reference to

top level, strategic management.

INTRODUCTION

The potential manipulation of the tax residence of persons other than indi-

viduals has long vexed tax authorities. Several tests are applied by inter-

national jurisdictions with which South Africa trades and has economic

relations, such as, the place of an entity’s incorporation, an entity’s POEM,

its place of central management and control,2 its place of management,3

an entity’s place of seat,4 its head office, place of principal activity or

main business; or in default position, the residence of the controlling

1

BA LLB, B Comm Hons, LLM; Tax Department, Cliffe Dekker Hofmeyr Inc.

2 The place of central management and control is the test applied in Australia,

Ireland and the United Kingdom for purposes of determining corporate residence.

3 Used in Germany and the Netherlands.

4 Siège social is an international law concept used for determining corporate resi-

dence. According to the criterion of siège social, a company’s residence derives

from the place where the legal entity’s judicial and economic integration is situ-

ated; or put differently, where the company’s principal place of establishment is

located. An entity’s siège social is determined by election and often coincides with

its place of incorporation.

14 VOLUME 6 • ISSUE 2 • JUNE 2015

Business Tax & Company Law Quarterly

© SIBER INK

shareholder(s) of an entity in circumstances where, for instance, one

encounters a puppet board directed by the controlling shareholder(s).

As such, it is not uncommon for the interjurisdictional application

of different domestic corporate residence tests resulting in an entity

potentially having dual residence. However, within the context of the

Organisation for Economic Cooperation and Development’s (‘OECD’)

Model Tax Convention on Income and on Capital (‘MTC’), and double

taxation agreements (‘DTA’) formulated in accordance with the OECD’s

MTC; an entity can only have one residence. Where the prospect arises for

an entity to be a resident of both Contracting States under a DTA by virtue

of the domestic provisions of each Contracting State the traditional tie

breaker test5 for determining corporate residence is the POEM on the basis

that an entity can have only one POEM.6

While it may well have been that an entity could have only one POEM at

the time when the POEM concept was developed, is this still the case given

the advances in modern technology, the ease of mobility and the decon-

struction and evolution of the traditional hierarchical corporate manage-

ment structure? The exponential digitisation of the global economy has

clearly given tax authorities the world over POEM whiplash.

In addition, assuming that it is possible to settle upon a unanimous

interpretation of the POEM concept; which would be a feat in itself, is the

test still viable for purposes of determining corporate residence? Certainly,

determining corporate residence has become increasingly important as the

interjurisdictional battle for fiscal revenue takes centre stage politically in

the bid to galvanise the ailing global economy; and for a residence-based

tax regime such as ours, that seeks to tax its residents on their world-wide

income, determining a corporate entity’s residence is indubitably pivotal

to revenue collection.

PROVENANCE OF POEM IN SOUTH AFRICA

To contextualise the POEM concept within South African tax law, it is

necessary to consider its South African provenance; and its interpretational

evolution as moulded, albeit reluctantly, in part by SARS, by international

commentary, and by legal precedent on point.

The POEM concept made its first South African appearances of conse-

quence in the Fifth Interim Report7 of the Katz Commission of Inquiry

into Certain Aspects of the Tax Structure of South Africa, which dealt with

the proposed transition from a source- to a residence-based tax regime for

5 Article 4(3) of the OECD MTC; the other tie breaker being the mutual agreement

procedure.

6 By contrast, a place of central management and control may, depending on the

circumstances under consideration, involve two or more loci.

7 ‘Basing the South African income tax system on the source or residence prin-

ciple — options and recommendations’ 7 March 1997.