Updated: Sep 4, 2022
The only poetic thing about tax authorities views on POEMs is finding out whether a rose would smell just as sweet... This article is not about debating how Shakespearian the ATO can be.
Places of Effective Management (POEMs) have been a long debated issue in the OECD countries. The Australian Taxation Office (ATO) had released its views on situations where it considers foreign incorporated entities to be a tax resident in Australia. This was following the issue of taxation ruling TR2018/5 and Practical Compliance Guideline 2018/D3 while endorsing most elements of its draft ruling TR2017/D2 through four main concepts:
Carrying on a business in Australia
The ATO admits that a company may be carrying on a business in any jurisdiction outside Australia legitimately and has various forms of proof to substantiate this. However, where the Central Management and Control (CM&C) is deemed to be in Australia, the foreign company will be tax resident of Australia notwithstanding day-to-day administrative and operations of the business being entirely outside Australia.
What is CM&C from the ATO's view
The ATO views the CM&C of a company to arise where the making of high level decisions that set the company's general policies and operational procedures occurs, and the place where the determination of the direction of the company along with its strategies with respect to transactions parameters and conduct. This is viewed as separate from the daily management of the foreign company's administration, which itself is not CM&C.
Who really exercises CM&C
While it is generally understood until now that the directors of the company will exercise the CM&C, TR2018/5 strongly criticises any "rubber-stamping" function by directors who, within the context of the larger group or the overall company strategy, is merely following orders emanating from a different location. Some of the examples quoted in support of this argument is the Bywater case.
Where CM&C is exercised
The ATO is aiming to look through arrangements that appear to mask where "the shots are called from". To do so, they are looking into the substance of the decision making process and ability of the directors, as well as where the activities constituting CM&C are being performed from. This contrasts with a view that merely considers whether the directors are a tax resident or a given location where they ordinarily reside.
Implications from the PCG
These new concepts introduced may be a shake-up for many Australian groups and foreign groups with regional headquarters in Australia. It looks through the day-to-day operations to consider alternative evidence of CM&C being a business in its own right.
Practically, the PCG also allows a transitional relief period until 18 December 2018 for companies to review their current arrangements to the extent they have been compliant with the previous TR2004/15.
How we can help
Some of the commercial circumstances to be urgently reviewed include practically demonstrable measures within a company such as authority matrices, key decision process flows and the architecture, design and maintenance of company controls that are often set at a headquarter level. Additionally, we can assist with tracking mechanisms to demonstrate where directors and key decision makers perform activities amounting to CM&C.
Contact us for further assistance.