South Africa Revenue Service Publishes Guideline on Place of Effective Management Criterion based on OECD Approaches and Practices of Other Countries

South Africa continues its pursuit of transparency and fairness in its tax system. In this regard, the South African Revenue Service has recently published a guideline focused on the Place of Effective Management (PEM) criterion. This guideline is based on the approaches of the Organization for Economic Cooperation and Development (OECD) and the best practices of other countries, providing guidance for determining a company’s place of effective management.

One key principle outlined in the guideline is that the management and commercial decisions of a company whose board of directors meets only once a year should be made more frequently than once a year. Consequently, the place of effective management should not be tied to the location where board meetings are held.

The guideline also addresses situations where senior management operates from different locations on a relatively permanent basis. In such cases, the members may participate in meetings through telephone or video conferencing, commonly known as virtual meetings, rather than physically being present at a central location. In these situations, the head office would typically be considered the location, if any, where the highest level of management (e.g., the Managing Director and Financial Director) and their direct support staff are based.

The introduction of the guideline on the Place of Effective Management criterion will enable South Africa to enhance its tax system and provide clearer rules for determining the tax liability of companies, particularly in cases where executives operate from different locations. This will also help prevent abuse and unfair tax optimization practices.

The South African Revenue Service encourages companies and taxpayers to familiarize themselves with the new guideline and adhere to its recommendations when determining the place of effective management. This is an important step towards a more transparent and equitable tax system that promotes the development of South Africa and ensures a level playing field for all market participants.