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We need to determine a company’s tax jurisdiction if we are to calculate its tax obligations.

An entity’s tax jurisdiction is usually the country or area in which the entity is domiciled, i.e. the so-called place of tax residency.

Consider the following example:

Example:

NYPC and MA are two companies that operate in two different tax jurisdictions, A and B (two different countries). They are both subsidiaries of the same parent company i.e. they belong to the same group of companies. Both companies report under IFRS and the consolidated financial statements are also prepared under IFRS.

The table below provides all the details in relation to the taxable profits of the companies for the year ended 31 December 20X7 and the applicable tax rates at the reporting date for each jurisdiction as at 31 December 20X7.

 Taxable profit and applicable tax rate
  NYPC  MA
  Jurisdiction A    Jurisdiction B   
Taxable Profit          $900m $600m 
Applicable tax rate    20%  25% 

What is the current tax liability of each company for the year ended 31 December 20X7?

The current tax liability of NYPC is $180m ($900m x 20%). This was calculated using the applicable tax rate of the tax jurisdiction of NYPC. Similarly, the current tax liability of MA is $150m ($600m x 25%). This was calculated using the applicable tax rate of the tax jurisdiction of MA. 


It may be the case that a company’s tax jurisdiction is the place of management or more correctly stated, the place of effective management. What does this mean? 


The place of effective management will ordinarily be the place where the most senior person or group of persons (for example, a board of directors) makes its decisions and the place where the actions to be taken by the entity as a whole are determined. Determining the place of effective management is a process of substance over form. 

Consider the following example.

The board meetings of a German entity are conducted via electronic facilities (rather than physical attendance) in the UK. In these meetings, high level decisions are taken by the members of the board, who are undertaking their company duties from the UK.

How can we determine the “place of effective management”?

The focus is on where the participants contributing to the high-level decisions are located. In this example, the fact that a majority of these high-level decision makers regularly participate from a jurisdiction other than Germany would support a conclusion that the place of effective management is not located in Germany.  

Generally speaking, cases where there is a range of locations using electronic facilities, make this judgement difficult. 

A number of other factors have to be taken into consideration for the determination of the place of effective management. For example, consideration is given to the locations where the key functions of the board are undertaken, the places where decision makers usually undertake their company duties and participate in the company's high-level decision-making processes, as well as the locations where the high-level decision-makers are resident and where the secretariat is located.

To take a closer look at taxable profit and its difference from accounting profit, read more here.


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