Tax puppeteering is out of fashion
South African tax residents are subject to tax on worldwide income. A company is tax resident in South Africa, regardless of where it is incorporated, if it “has its place of effective management in” South Africa. There is no statutory definition of the term “place of effective management“. Many other countries, including Australia, have similar taxation provisions.
SARS has adopted the approach:
“A company’s place of effective management is the place where key management and commercial decisions that are necessary for the conduct of its business as a whole are in substance made.”
There is support for SARS’ approach in Bywater Investments Ltd v Commissioner of Taxation (Australia), a judgment of the Australian High Court (their apex Court) on 16 November 2016.
We provide a very simplified version of the facts, as this tax structure was vast. Over several years, Bywater earned substantial profits from share dealing on the Australian Stock Exchange. The Commissioner issued tax assessments (for almost 15 million Australian dollars) regarding the profits, and Bywater objected.
Bywater was incorporated in the Bahamas. The directors of Bywater were a company in the Bahamas and a married couple Mr and Ms Borgas, residents of Switzerland. All board meetings had been held in Switzerland. Bywater averred that its place of effective management was in Switzerland, and relied on the Australian/Swiss double taxation agreement.
Ms Borgas travelled to Australia to give evidence in the Court of first instance, but to no avail. The judge held:
“I am satisfied that Mr Borgas’ evidence about this [letters signed by Mr Borgas for transactions] was false and that the document trail generated by Mr Borgas is false too. …. The documents which have been generated to corroborate Mr Borgas’ evidence are designed to give the impression that Mr Borgas was the decision-maker and that impression is false.”
The Court found that one Mr Gould, a resident of Sydney, Australia, was the “main man” conducting the share dealing by Bywater (and ultimately owned Bywater), and the “central management and control” of Bywater was therefore situated in Australia. Bywater appealed to the Full Federal Court, and lost again.
Bywater then appealed to the High Court, and lost again:
“… a company has its central management and control where the central management and control of the company actually abides, that being a question of fact and degree to be determined according to the facts and circumstances of each case.”
“Ordinarily, the board of directors of a company makes the higher-level decisions which set the policy and determine the direction of operations and transactions of the company. Ordinarily, therefore, it will be found that a company is resident where the meetings of its board are conducted. But, contrary to the [Bywater’s] submissions, it does not follow that the result should be the same where a board of directors abrogates its decision-making power in favour of an outsider and operates as a puppet or cypher, effectively doing no more than noting and implementing decisions made by the outsider as if they were in truth decisions of the board.“
On the same facts, the result would have been the same in a South African Court.