What you need to know about company taxation in the time of Covid-19 lockdown

A number of potential complexities could arise for Corporate South Africa amidst the country’s Covid-19 lockdown period, according to Jared Waters a principal at investment banking firm, Bravura Structured Solutions.

President Cyril Ramaphosa announced South Africa’s nationwide lockdown for a period of 21 days in an effort to slow down the spread of the coronavirus (Covid-19).

He has since extended it by an additional two weeks to the end of the month.

Both international and local travel restrictions had previously been put in place on 15 March.

Corporate South Africa must now consider the myriad knock-on effects that this will have on business. Among these is the critical question of what the tax implications may be for companies with international or dispersed operations, said Waters.

In the South African taxation context, a person is taxed where they are “resident” as defined in section 1 of the Income Tax Act, 58 of 1962, as amended (“Act”).

In respect of companies, there are two tests to ascertain residency, namely the place of incorporation (POI) and the place of effective management (POEM).

If a company’s POI or POEM is in South Africa, it will be considered resident here and will be taxable in South Africa on its worldwide income and capital gains.

“There is one exclusion, which applies to any person who is deemed to be exclusively a resident of another country for purposes of a relevant double taxation agreement.

“The act does not explicitly define POEM and the term has been the subject of debate both in the South African context and internationally,” said Waters.

It could be presumed that POEM would be determined by the courts while taking into account international precedents and the SARS interpretation note on the matter, namely Interpretation Note 6 (IN 6), he said.

The SARS IN 6 states that POEM will be at the key place where management and commercial decisions which affect the business are made either primarily or predominantly.

“The place where operational management of the company’s day-to-day business takes place is of less significance than the place where the company’s strategic and policy decisions are being made by directors and senior management.

“As the South African Institute of Chartered Accountants (SAICA) writes, this will be where “the shots are called” and most likely where the managing director sits and makes strategic decisions,” Waters said.

He said that SARS IN 6 falls in line with the Organisation for Economic Co-operation and Development (“OECD”) interpretation of POEM which states, “The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made.

“The place of effective management will ordinarily be the place where the most senior person or group of persons (for example a board of directors) makes its decisions, the place where the actions to be taken by the entity as a whole are determined.”

The OECD interpretation does, however, go on to state that no definitive rule can be given and all relevant facts and circumstances must be examined to determine the “place of effective management”.

An entity may have more than one place of effective management at any one time.

This fluidity of definition complicates matters from a double taxation agreement (“DTA”) perspective. A DTA between two countries regulates how one of the contracting states will impose tax on income derived by residents of the other state, and vice versa.

The purpose of DTAs is to resolve double taxation by providing comprehensive taxing rights on worldwide income of each entity to only one country to a DTA, and limited source taxing rights to the other country party to that DTA.

“The two contracting states generally aim to resolve an entity’s tax residency by virtue of the country in which its place of effective management is located, but each DTA may have a different definition of what this place of effective management entails,” said Waters.

In the constant effort to improve tax revenue, SARS and other tax collection authorities around the globe may well wish to scrutinise the minutes and/or recordings of company board and shareholder meetings, especially those in the public space, during the Covid-19 lockdown, but their approach still remains to be seen.

“The more detailed and nuanced implications of the Covid-19 lockdowns across the world, will no doubt be more clearly articulated in the coming weeks and possibly months.

“While there are no clear solutions at present given that best efforts to slow down virus infection may create longer-term restrictive measures, it will be important for businesses to consider those future scenarios that could pose a threat to residency and thus taxation consequences,” Waters said.

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What you need to know about company taxation in the time of Covid-19 lockdown