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The place of effective management for taxation during COVID-19 lockdown

By April 17, 2020June 19th, 2023Economy, News, Structured Solutions, Taxation

What are the tax implications for companies with international or dispersed operations outside of South Africa during the COVID-19 lockdown? Kemp Munnik, Head of Structured Solutions at Bravura, discusses the challenges with the place of effective management for taxation in an interview on Classic FM Classic Business with Michael Avery.

Michael Avery: Kemp Munnik,  Bravura’s Head of Structured Solutions has considered this – welcome to the show Kemp. It’s a little convoluted, but it really is important to understand and all boils down to how travel restrictions might impact the place of effective management for taxation of a company. So let’s just start with how SARS ascertains residency.

Kemp Munnik: I think what’s quite important to understand is that for international operations it’s normally where the business is situated; that’s where they manage, and that’s where they get taxed on the profits. And a lot of these transactions or businesses do operate internationally and with a lock-down period a lot of management are now stuck in a country. They can’t actually go and operate or manage business effectively in a specific jurisdiction.

There are possible problems with ascertaining the place of effective management for taxation. For example, if I can determine that if I’m now sitting in South Africa although essentially running the business in the UK, the international revenue authorities may decide that business in the UK is being run from South Africa and therefore must pay tax in South Africa.

It will be quite interesting to see how they’re going to treat the Lockdown periods where management are stuck in different countries, in order to determine where the tax revenues are from a business perspective.  This could actually have a huge impact, because there’s going to be a huge fight about whether revenue streams in country X are actually taxable in South Africa – that’s the dilemma we might be facing going forward.  It’s a very unclear situation, at the moment.

Avery: It’s fascinating. It all boils down to the so called place of effective management, the poem, but this is not one with a sweet lyrical ending. It’s certainly one that is not easily understood either because the act as it stands doesn’t seem to explicitly define what a place of effective management is.

Munnik: Correct. The place of effective management is a term and definition used by the international revenue authorities and those teams.   There is no specific act governing data interpretation by different countries and it always goes into huge debate when it happens.

This has always been a grey area; even before the lockdown period. During the global lockdown period it’s actually more  effective to say ok, Mr. X actually ran his business in another country. There have always been a lot of court cases internationally that govern this and lots of rules. And as you say, there’s no clear definition in the any act in an international sense and the grey area is a very difficult concept to understand or manage, especially in this current environment.

Avery: And, you know, if directors can’t travel that clearly has an impact of where the meeting is held and where one could argue the place of effective management for taxation purposes is, but in this world where you can zoom in from wherever you are, I suppose that just adds another layer of complexity as well. And there’s also something to do with exit taxes that will now come into the pot as well. Just explain how exit taxes will work in this environment?

Munnik: If we get to the point where it is a determination that the company is actually managed from South Africa as an example, and then they exit the UK from that perspective, because they’ve agreed now that the company is taxable in South Africa; a lot of these a lot of countries have exit taxes and what does it mean.

If you move your company residence from one jurisdiction to another, there is sometimes a capital gains tax charge where they work out the potential capital gain, or there is a dividend charge that they calculate based on your ready reserve that’s available. For example, if a company or an individual leaves South Africa there is an exit charge, and that means that you calculate your capital gains tax on the assets that you’ve got or the revenue reserves in the company. From the next day they say ok, you’re now based in the UK, so you have to pay an exit tax in South Africa when you leave . That creates a huge tax implication because a lot of the time there is no cash available to do it, especially on the capital gains tax side, and then companies get into trouble and that might be the dilemma that affects companies adversely.

Avery: I think these are the more sort of detailed and nuanced implications of the COVID-19 lockdowns across the world that no doubt will become far more clearly articulated in the coming weeks and possibly months.

Listen here: Classic FM