The days of COVID restrictions applying to foreign travel almost seem to be part of a bad memory. However, such travel restrictions may have had corporate tax consequences.
Travel restrictions basically became effective around March 2020. If we assume a 30 June year end of a foreign company that had several directors stuck in SA due to COVID travel restrictions from July 2020 to June 2021, this may arguably have resulted in the company becoming a SA tax resident for its 2021 year of assessment. Potentially, the company’s 2021 tax return needs to be submitted soon.
Unfortunately, the restrictions and difficulty in travelling overseas continued for at least a year and a half, raising the risk for various onshore and offshore companies for this period.
Let’s start at the beginning, and not where/when did COVID begin but rather when, in terms of SA tax law, does a company becomes a SA tax resident?
A company is a SA tax resident if its place of incorporation or place of effective management (POEM) is in SA. However, a company is deemed not to be SA tax resident if it is exclusively resident of another country in terms of a double tax treaty between SA and the other country.
Generally, most of SA tax treaties provide that if the company is dual resident i.e, resident in a foreign country in terms of the foreign country’s domestic provisions and resident in SA in terms of SA’s domestic provisions, then in terms of the so called “tie-breaker” treaty provisions, the company will ultimately be deemed to be resident where its POEM is.
The question is then - what is POEM?
In terms of the 2014 OECD Commentary on the Model Tax Convention the following definition was provided:
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. All relevant facts and circumstances must be examined to determine the place of effective management.
Unfortunately, in my view, the above tie breaker clause was removed from the OECD 2017 Model Tax Treaty. The new tie breaker clause essentially states that in the case of a dual residency scenario, the two states must agree where the company is resident and that in arriving at such decision,
In terms of both the 2014 and 2017 Model Treaties, one issue which is consistent, is the place of effective management. As mentioned above, SA’s double tax treaties generally have regard to POEM as the relevant tie-breaker criterion.
For approximately the last two years, due to COVID many board meetings for offshore companies were simply held in SA. The obvious reason being that the directors could not travel abroad due to COVID restrictions: in any event, it was difficult to comply with requirements in order to travel abroad. Somewhat more disturbing (for tax reasons), due to the past two years of travel restrictions, people have found that it is actually very easy to simply use technology and have the board meeting from the comfort of one’s home.
Further, even after the restrictions were lifted, it is still much easier to have board meeting from one’s home, or possibly the office down the road.
However, the problem with this is that if the board members are making their decisions from their homes in SA, or if the important decisions are effectively being made from SA, the company may arguably be a SA tax resident.
The situation could also apply in the reverse scenario. If board members were stuck in a foreign country, the POEM of the company may have shifted to the foreign country.
In addition to the above, while not as extreme as changing a company’s tax residency, employees who were stuck in a country may have created a taxable presence for their employer in that country.
Due to the travel restrictions, people may have been forced to remain in a particular country for longer than expected. While they were in such country, they would have continued working for their employer.
Often when an employee works in another country for a significant period (usually more than six months) they create a presence for their company in such other country. Technically speaking this presence is called a permanent establishment (PE). What this then usually means is that the company has to register for tax in that country and potentially pay income tax and other taxes such as employees’ tax there.
Even if no additional tax ultimately has to be paid in the foreign country, at the very least there may be an administrative burden and associated costs of registering for tax and submitting tax documents to the foreign tax authorities.
This issue was recognized by the OECD, and it issued a statement in this regard on 3 April 2020 and another on 21 January 2021 – both statements provided similar comments.
In essence the OECD expressed the view that changes of residency and the creation of a permanent establishment should not follow purely from COVID forcing persons to remain in a country.
In my view there are some good reasons to follow the OECD approach, but one needs to understand all the facts, and of course the risks.
A final issue, not mentioned by the OECD, revolves around SA offshore companies which are mainly owned or controlled by SA tax residents - controlled foreign companies. Without going into much detail, often an important issue for the controlled foreign company is whether it had, and whether its employees used, their offshore office. During COVID numerous countries forced employees to work from home and/or ceased having an office. In other words, no employees were working at the office, if there was an office!
What are SARS’s views?
SARS’s view of POEM is contained in Interpretation Note 6 (November 2015) with which I am basically in agreement with.
SARS was obviously fully aware of COVID and provided some amendments to the Income Tax Act in this regard. These amendments mainly dealt with the taxation of individuals who were physically outside of SA while rendering services to an employer. SARS has to date not provided any views on the potential corporate issues raised above. It remains to be seen whether SARS will apply the views of the OECD discussed above.
Companies should ascertain if there are any risks relating to the above issues, especially since tax returns for the above periods are about to be submitted or will soon be submitted. Companies should check for what reasons their employees were physically offshore and document these reasons and whether they were forced to be there. Conversely, if employees were in SA, the reverse risks should be addressed and reasons documented.
Going forward, our final word of caution is, assuming COVID did prevent you from travelling – this restriction should no longer be applicable, so ensure that care is taken with regard to the place of decision-making and where work is performed!
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