SISM was established by a Deed of Settlement dated 31 October 2000 entered into between The Oceanic Trust Co Ltd and Monument Trust Company Limited, acting in its capacity as trustees for the International Investment Trust. The agreement provides that The Oceanic Trust Co Ltd is the original trustee of SISM and (in clause 23) that the proper law of the deed of settlement is that of Mauritius, that the Laws of Mauritius govern the validity of the settlement, its construction, effects and administration and (in clause 24) that the trustees shall maintain their principal place of business at, and shall conduct their affairs from premises in Mauritius.
SISM conducted business as captive reinsurer to mCubed Life Limited (formerly mCubed Capital Life Limited) (‘mCubed Life’) from its inception in 2000 until 2006, when its reinsurance agreement with mCubed Life was terminated and it thereafter transferred the reinsurance business to Emerald Insurance Company. The premiums of the policies of reinsurance by mCubed Life with SISM were transferred to SISM and constituted assets invested by SISM in South Africa and elsewhere in a variety of investments. SISM utilised an asset manager in South Africa to manage the assets invested in South Africa. When any policy came to an end, SISM was obliged in terms of the agreement with mCubed Life, to return the assets to mCubed Life, together with any growth thereon, less the fees to which it was entitled and all expenses incurred by it in terms of the policy.
During the period of its business operations, SISM prepared financial accounts and rendered income tax returns to the revenue authorities in Mauritius. SISM considered throughout that it only had tax obligations in Mauritius and that it did not have any tax obligations in South Africa.
On 4 March 2008 SISM received a notice of audit in terms of section 74A of the Income Tax Act, 58 of 1962 (the Act) from SARS informing it that SARS intended conducting an audit/inspection of SISM and requesting certain information from SISM.
The Oceanic Trust Co Ltd as the sole trustee of SISM responded and correspondence ensued pursuant where to SISM, without conceding that SARS was entitled thereto, provided certain information to SARS. SARS thereupon issued a letter stating that it believed that it had a tax claim against SISM and asked for reasons why SISM should not be taxed. The Oceanic Trust Co Ltd responded with detailed reasons.
After some further delay, on 20 July 2009, SARS issued an assessment wherein it raised an assessment of income tax, additional tax and interest for the tax years 2000 to 2007 for R1 506 900 973,10 (the R1,5 billion). One of the bases for the assessment was that SISM was a ‘resident’ in the Republic because it had its ‘place of effective management in the Republic’ and that it derived income from a South African source which was not exempt from tax. A further, alternative basis for the assessment was that SISM derived income from a South African source and that it carried on business through a permanent establishment in the Republic, within the meaning of section 10(1)(h) of the Act.
An appeal was filed by Oceanic Trust Co Ltd.
Judgment of Court
The Court dismissed the appeal and issued a decision in favour of the tax authorities.
Excerpt
“[54] In my view, the key features of Smallwood relating to the POEM of an entity relevant to this case are:
1. The POEM is the place where key management and commercial decisions that are necessary for the conduct of the entities business are in substance made;
2. The POEM will ordinarily be the place where the most senior group of persons ( e.g. a board of directors) makes its decision, where the actions to be taken by the entity as a whole are determined;
3. However, no definite rule can be given and all relevant facts and circumstances must be examined to determine the POEM of an entity;
4. There may be more than one place of management, but only one POEM at anyone time;
5. The decision was based not only on the general test for POEM but also on the specific section of the UK legislation which provided that the trustees be treated as a single and continuing body of persons who shall be treated as resident in the UK unless the general administration of the trusts is ordinarily carried on outside the United Kingdom and the trustees or the majority of them for the time being are not resident or not ordinarily resident in the United Kingdom; and
6. The court undertook a painstaking analysis of the facts and the way the scheme was set up and was implemented in order to come to the conclusion on where the POEM of the trust in that case was.
[55] The statements of fact set out by the respondent in the letter of assessment form part of the facts in this application. The respondent alleges not only that on the facts known to it, SISM generated its entire income from business activities conducted in South Africa, that SISM held its bank account with Standard Bank in South Africa and that its bank statements show that throughout the period that SISM was conducting business in South Africa, SISM did not transfer any money to Mauritius from the bank account in South Africa, and vice versa; but also that the instructions on reinsurance premiums, policies and maturities emanated from mCubed Life and sometimes from mCubed Holdings Limited in South Africa; that mCubed Life made decisions in accordance with the re-insurance agreement on how all the premiums were to be handled (Le. invested and disinvested) by SISM; that all investments of SISM were made in South Africa; that while CMM was appointed as SISM’s asset manager and investment advisor for its South African investments, CMM regularly received instructions from mCubed Holdings Limited and its operating division Asset Management Outsourcing (AMOS) on SISM’s investments and that the respondent has the names of individuals from mCubed Holdings who were giving such instructions; that both mCubed Life and CMM were wholly owned subsidiaries of mCubed Holdings Limited, a JSE Limited listed company and that mCubed Holdings is a beneficiary of International Investment Trust which is itself a beneficiary of SISM; that SISM was formed and the reinsurance agreement was concluded, inter alia, as part of a scheme to enable mCubed Life to escape the provisions of section 34 of the Long Term Insurance Act which prohibited mCubed Life from encumbering any of the assets held by it, by making use of the fact that re-insurance companies conducting business outside of South Africa are not subject to any restriction on the encumbrance of their assets equivalent to section 34 of the Long Term Insurance Act; that although SISM claimed that its business was in fact being managed by its trustee the applicant, in Mauritius, SISM did not provide the respondent, as requested, with any documentation or with any minutes of trustees meetings of SISM in Mauritius, to substantiate that claim, showing that the applicant did take management decisions regarding SISM in Mauritius.
[56] I do not think that on the Smallwood test, the applicant has made out a case for declaratory relief in this court.
[57] First, in my view, for this court to declare that SISM was not a resident of the Republic, will require this court to enquire into the facts and to make factual findings, inter alia on the question where, in South Africa or in Mauritius, SISM’s key management and commercial decisions that are necessary for the conduct of SISM’s business were in substance made during the years in question. All the material facts relating to the management of SISM have not, in my view, been ‘fully found’, and are not ‘sufficiently clear’ in order to simply pose the question whether the facts are such as to bring this case within the definition of ‘resident’ properly construed. In my view the question whether SISM was a resident of South Africa is not at this stage, simply a question of law. This court is not entitled even if this court were able to do soon the facts in this case, to enquire into and make the required findings of fact. The legislator has entrusted the making of such decisions to the Tax Court.
[58] Secondly, even if the facts are sufficiently clear to make a decision the place where key management and commercial decisions that were necessary for the conduct of SISM’s business, were in substance made, has, in my view not been established tp be outside South Africa. It would appear to me that at least some key management decisions and at the very least, key commercial decisions necessary for the conduct of SISM’s business were in substance made in South Africa. Therefore, applying the Smallwood test, the facts to the extent that they have been established, do not, in my view, establish that the POEM of SISM was in Mauritius, and not in South Africa.”