On 22nd May 2015 SARS signed a Memorandum of Understanding (MOU) with the Mauritius Revenue Authority (MRA).
David Warneke, Tax Director at BDO South Africa, explains that the background to the MOU is that a new Double Taxation Agreement (DTA) between South Africa and Mauritius was signed in Maputo on the 17th of May 2013. This new DTA has now been ratified by both countries and is expected to enter into force with effect from 1 January 2016.
“Whereas the current DTA states that the so-called ‘place of effective management’ will be the tie-breaker to determine the residence of a juristic person, the new DTA states in Article 4(3) that if a juristic person is a resident of both Contracting States, the Competent Authorities will settle the question of residence by mutual agreement,” says Warneke.
“They will also determine the mode of application of the Agreement to such person. In the absence of such an agreement, this person will be considered to be outside the scope of the DTA except for the provisions of the Article dealing with Exchange of Information. In Mauritius the term ‘Competent Authorities’ means the Director General of the Mauritius Revenue Authority or an authorised representative of the Director General. In South Africa it means the Commissioner for the South African Revenue Service or an authorised representative of the Commissioner.”
According to Warneke, the MOU deals with the factors to be taken into account by the Competent Authorities in determining the residence status of a juristic person. It states that the ‘place of effective management’ is only one of a number of factors to be considered in deciding on the residence status of a juristic person. If agreement cannot be reached on the residence status, then the person will be unable to access the benefits of the DTA except to the extent and in such manner agreed upon by the Competent Authorities.
“One fears that SARS may misinterpret the tie-breaker clause in the new DTA. It should be recognised that the tie-breaker clause does not affect the principle from South Africa’s domestic law that if a juristic person is incorporated, established or formed outside SA and if its place of effective management is situated outside of SA then it is not a resident as defined.
Importantly, the new tie-breaker provisions are described in the MOU as factors to be taken into account in addition tothe place of effective management and the place of incorporation to determine the residence status of a juristic person for purposes of the DTA. The determination of the ‘place of effective management’, vital in determining the residence status of a juristic person in terms of our domestic Income Tax Act, is therefore a separate enquiry from that of determining the residence status in terms of the DTA,” says Warneke.
The term ‘place of effective management’ is not defined in our Income Tax Act. It has however been the subject of many tax cases internationally. The Commentary on the OECD Model Tax Convention on Income and on Capital (OECD Commentary) states that 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 as a whole are in substance made.
Warneke explains that SARS has recently released, in draft form, a second issue of its Interpretation Note 6 dealing with the meaning of the term ‘place of effective management’. The interpretation given to the term in this second issue appears not to vary significantly from the interpretation contained in the OECD Commentary. The draft states that:
‘The term ‘place of effective management’ is not defined in the Act and must be ascribed its ordinary meaning, taking into account international precedent and interpretation. It does, however, not have a universally accepted meaning and various countries, including members of the OECD, continue to attach different meanings to it.’
“Therefore, if a juristic person which is neither incorporated in nor which has its place of effective management in SA earns income which is not from a South African source, the company is not a ‘resident’ as defined and no South African income tax liability arises, regardless of the factors additional to the place of effective management that are contained in the MOU,” says Warneke, who goes on to clarify that if a company is incorporated in South Africa but has its place of effective management in Mauritius, then it would be a resident in terms of our domestic income tax law.
Assuming that the central management and control resided in Mauritius, it would also be a Mauritian resident in terms of Mauritian domestic tax law. In such circumstances Article 4(3) of the new DTA would apply and the Competent Authorities should determine the residence status of the company taking into account the contents of the MOU. The same would apply if the company were incorporated in Mauritius but had its place of effective management in South Africa.
“One hopes that SARS will not misinterpret the effect of the tie-breaker clause as in effect overriding the definition of ‘resident’ in terms of our domestic law – in other words in interpreting the other factors in the MOU as tests for determining the place of effective management of a juristic person. Certain of these other factors may be relevant in determining the place of effective management but it is a separate enquiry.”
“It would appear that SARS and the MRA will have to agree on the place of residence for purposes of the tie-breaker on a case by case basis,” advises Warneke.
The other factors listed in the MOU that are to be taken into account in addition to the place of effective management and the place in which the juristic person is incorporated, in determining the residence status for purposes of the DTA, are the following:
· Where the meetings of the person’s board of directors or equivalent body are usually held;
· where the Chief Executive Officer and other senior executives usually carry on their activities;
· where the senior day to day management of the person is carried on;
· where the person’s headquarters are located;
· which country’s laws govern the legal status of the person;
· where its accounting records are kept;
· any other factors listed in paragraph 24.1 of the 2014 OECD Commentary
(Article 4, paragraph 3), as may be amended by the OECD/BEPS Action 6 final report; and
· any such other factors that may be identified and agreed upon by the Competent
Authorities in determining the residency of the person.