Relevance of POEM

Relevance of POEM

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Place of Effective Management (POEM) is a significant concept in taxation, and it is defined differently under various jurisdictions. In the context of the Income Tax Act and the South African Revenue Service (SARS), POEM refers to the location where the company's key management and control is exercised. In the Income Tax Act, the determination of a company's POEM is crucial for establishing its tax residency. Place of Effective Management as per the Income Tax Act takes into account factors such as board meetings, where important decisions are taken, and where the central administration and control of the company's affairs are located. The objective is to ascertain the jurisdiction that has the most substantial influence on the company's operations.

SARS, the tax authority of South Africa, follows a similar approach in determining POEM. SARS considers factors such as the location of board meetings, where the company's executive decisions are made, and where the senior management is located. SARS Place of Effective Management also takes into account the place where the company's books and records are kept. SARS emphasizes that POEM should reflect the reality of where effective management is exercised, rather than being artificially structured to minimize tax liabilities.

The analysis of POEM involves a comprehensive examination of the company's operations, decision-making processes, and control mechanisms. Place of Effective Management analysis requires a holistic review of factors such as the composition of the board of directors, the frequency and significance of board meetings, and the involvement of key decision-makers. Additionally, the location where strategic decisions regarding the company's operations, finances, and business plans are made plays a crucial role in the POEM analysis.

The OECD guides the determination of POEM through its Base Erosion and Profit Shifting (BEPS) project. The BEPS project aims to address tax avoidance strategies used by multinational enterprises. The OECD's guidelines emphasize that the determination of POEM should be based on an analysis of all relevant facts and circumstances. It highlights that the mere formalities may not be sufficient to establish POEM if substantive decision-making is taking place elsewhere. The OECD Place of Effective Management guidelines also emphasize the importance of avoiding conflicts or overlaps in determining POEM between different jurisdictions. They promote coordination and cooperation among tax authorities to ensure consistency and fairness in the application of POEM rules.