For businesses rushing to Mauritius to benefit from their friendly tax policies, which used to be among the lowest in the world, EU has become the latest body (after OECD) to announce that this is no longer the case. European Union finance ministers have agreed to remove the United Arab Emirates, Switzerland and Mauritius from the bloc’s lists of countries deemed to be acting as tax havens, a move that activists called a “whitewash.”
Here Is All You Need To Know
The 28-nation EU set up a blacklist and a gray list of tax havens in December 2017 after revelations of widespread avoidance schemes used by corporations and wealthy individuals to lower their tax bills.
Blacklisted states face reputational damage and stricter controls on transactions with the EU.
As part of the regular review of the lists, the ministers decided to drop the UAE from the EU blacklist that covers jurisdictions that have failed to cooperate with the EU on tax matters.
The Marshall Islands has also been removed from that list, which still includes nine extra-EU jurisdictions — mostly Pacific islands with few financial relations with the EU.
The UAE, the largest financial center which was blacklisted, was removed because in September it adopted new rules on offshore structures, the EU said, giving it a clean-sheet on its tax practices.
The Gulf state charges no corporate taxes, making it a possible target for firms seeking to avoid paying tax in the countries where they actually operate.
The EU does not automatically add countries that charge no tax — a sign of being a tax haven — to its blacklist, but it requested the UAE introduce rules that would allow only companies with a real economic activity there to be incorporated in order to reduce risks of tax dodging.
“SWEET TREATS”
Under an initial version of the overhaul, the UAE exempted from the requirement “all entities in which the UAE government, or any of the Emirates of the UAE, had direct or indirect ownership (no threshold) in its share capital”, an EU document said.
That reform was deemed insufficient by EU states and prompted an amendment, adopted in September, that excluded from the requirement only companies in which the UAE government owns directly or indirectly a 51% share of the capital.
This reform was considered by EU ministers as sufficient to remove the UAE from the blacklist.
Jurisdictions that remain blacklisted are Belize, Fiji, Oman, Samoa, Trinidad and Tobago, Vanuatu and the three US territories of American Samoa, Guam, and the US Virgin Islands.
Major economic partner Switzerland was removed from the EU gray list covering countries that have committed to change their tax rules to make them compliant with EU standards. It has delivered on its commitments, the EU said, and therefore is no longer listed.
They also removed the Indian Ocean island of Mauritius, Albania, Costa Rica, and Serbia from the gray list, leaving around 30 jurisdictions on the list.
Countries in the gray list could be moved to the blacklist if they fail to deliver on their commitments.
“The EU has whitewashed two of the world’s most harmful tax havens,” Chiara Putaturo of Oxfam, an anti-poverty group, said in reference to the decision of delisting Switzerland and Mauritius.
“Despite recent reforms, both countries will continue to offer sweet treats to tax-dodging companies,” she said.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world
Mauritius is preparing for some radical reforms to its current tax regime. Its 2019–2020 budget proposal is saying so. Changes range from international tax reforms; value-added tax changes; new corporate tax relief measures, including a new patent box regime; a regime for peer-to-peer lending; individual tax breaks; and a tax amnesty scheme.
Below are some of the changes.
Companies or Startups Involved In Innovation Activities Would Get An Eight-Year Tax Holiday
Mauritian 2019–2020 budget is proposing a big incentive for highly innovative companies and startups. For newly established startups and companies, in innovation-driven activities, they stand a greater chance of benefiting from an eight-year tax holiday on income derived from their intellectual property assets which were developed in Mauritius. For existing startups or companies, the eight-year tax holiday would be on income derived from intellectual property assets developed in Mauritius after June 10, 2019.
The Budget also makes changes concerning loss carryforwards for companies. Presently, in Mauritius, the accumulated losses of a company lapse if there is a change in the ownership of the company. However, in the case of a manufacturing company, the Minister may allow the carry forward of the losses if he is satisfied that it is in the public interest to do so and provided conditions relating to the safeguarding of employment are complied with. This derogation will be extended, under the new rule, to any company facing the financial difficulty that is taken over by another shareholder provided conditions imposed by the minister are met. This amendment will be deemed to be effective as from July 1, 2018.
A Five-Year Tax Holiday For E-commerce Startups, Peer-To-Peer Lending
The Budget also proposes a five-year tax holiday for a startup or company setting up an e-commerce platform provided the company is incorporated in Mauritius before June 30, 2025.
Also within the five-year bracket are peer-to-peer lending operators, provided the company starts its operation prior to December 31, 2020.
All interest income received by an individual from peer-to-peer lending will be subject to income tax at the rate of three percent (3%). Any bad debt and fees payable to the peer-to-peer operator will be deductible from taxable interest income. No tax deduction at source will be applied to peer-to-peer interest income.
Also, Mauritian businesses spending on capital goods, which are goods that are used in producing other goods, rather than being bought by consumers, would now breathe some relief. This is because the Budget also improves tax relief for expending on capital goods. Presently, capital expenditure incurred on plant or machinery may be fully expensed in the year incurred if the amount does not exceed MUR30,000 (USD835). The threshold will be raised to MUR60,000 under the new regime.
Four Year Tax Holiday For Oil Bunkering
The new budget also places a four-year tax holiday on all income derived from bunkering of low Sulphur Heavy Fuel Oil.
Under Its Tax Amnesty Rule, Small and Medium Enterprises Will Be Given An Opportunity To Regularize Their Tax Default
To this effect, Small and medium enterprises (with a turnover not exceeding MUR50m) will be given the opportunity to regularize any undeclared or underdeclared income with the Mauritian Revenue Authority free from penalty and interest, provided payment is made on or before March 31, 2020.
The proposed tax amnesty scheme also allows a person making a voluntary disclosure on or before March 31, 2020, to be subject to tax on the disclosed chargeable income at a rate of 15 percent, free from any penalty and interest. However, criminal proceeds are excluded from this grace.
The GDP in Mauritius expanded 4.1 percent year-on-year in the last quarter of 2018, following a 3.3 percent growth in the previous period. Manufacturing rebounded (2.3 percent compared to -1.2 percent) and faster increases were seen in financial and insurance activities (5.2 percent compared to 5.1 percent); real estate (3.1 percent compared to 2.6 percent); and construction (10.1 percent compared to 6.8 percent). Wholesale rose 3.7 percent, the same as in Q3 and agriculture went up 1.7 percent, also the same as in Q3. Considering full 2018, the economy expanded 3.8 percent, the same as in 2017. GDP Annual Growth Rate in Mauritius averaged 3.89 percent from 2001 until 2018, reaching an all-time high of 9.80 percent in the first quarter of 2003 and a record low of -0.80 percent in the first quarter of 2005.
Value-Added Tax (VAT) Also Saw The Greatest Reforms
Under the new VAT regime, cooking gas for domestic use by households in cylinders of up to 12 kg is being made zero-rated for VAT, and certain foodstuffs, including bread, will be newly exempt.
The Budget also says that a wholesale dealer in liquor and alcoholic products will have to be registered with the Mauritian Revenue Authority as a VAT-registered person. The Budget also provides that where there is a splitting of a business entity into different entities to avoid registration for VAT purposes, each entity will be required to be compulsorily registered for VAT.
Consequently, with a view to expediting the processing of VAT refunds, all VAT-registered persons will have to file their VAT return and pay VAT electronically as from March 1, 2020.
As it stands now, a VAT-registered person in Mauritius may claim repayment of input tax in respect of capital goods such as building, plant, machinery, or equipment. The Budget also proposes for provisions to be made to allow repayment of VAT paid on goodwill on acquisition of a business; and the acquisition of intangible assets such as software, patents, or franchise agreements.
Mauritian Banks Who Grant Loans And Other Credit Facilities To Startups, Agric and Renewable Energy Businesses Would Receive 5% Less Tax On Their Taxable Income
Under the new arrangement, a reduced tax rate of five percent (5%) is applicable on the chargeable income of a bank in excess of its chargeable income in the base year (year of assessment 2017/2018) if the bank grants at least five percent of its new banking facilities to any of the following categories of businesses: SMEs in Mauritius; enterprises engaged in agriculture, manufacturing, or production of renewable energy in Mauritius; or operators in African or Asian countries.
Generally, a new taxation system for banks will be re-modeled as follows:
income derived by banks from Global Business Companies will be exempted from the levy under the Value Added Tax Act;
The rate of the levy will be increased from four percent to 4.5 percent of operating income for banks having operating income exceeding MUR1.2bn in a year;
a cap will apply on the increase in levy payable by a bank in order to ensure that no bank is burdened by an excessive levy amount;
it will be clarified that the levy is not a deductible expense under corporate tax; and
no foreign tax credit will be allowed.
Mauritians Will Become Increasingly Tax-Free Under The New Proposal
The new tax regime also sees major changes to personal income tax, including increases to tax-exempt allowances and relief for carers for persons with disabilities.
The Budget that as it concerns inheritance tax, the lump-sum income received by a person by way of payment of pension before the legal due age, death gratuity, or as compensation for death or injury will be excluded from the computation of the solidarity levy. This change will be backdated to take effect as from July 1, 2017, the date the solidarity levy was introduced.
The law will, however, be amended to clarify that an individual’s share of income in a society or succession will be taken into account in the computation of the solidarity levy.
There Would Be Major Changes In The Way International Taxes And Transfer Pricing Are Done In Mauritius
The budget also seeks to amend the Income Tax Act of Mauritius. The amendment of the Income Tax Act would be to implement the recommendation of industry stakeholders regarding the determination of tax residency for companies so that a company will not be considered as tax resident in Mauritius if it is centrally managed and controlled outside Mauritius.
The budget will also address the deficiencies identified by the EU in the territory’s partial exemption regimes.
To this effect, the Income Tax Regulations 1996 will be amended to:
define the detailed substance requirements that must be met in order for a taxpayer to enjoy the partial exemption benefit; and
lay down the conditions that must be satisfied where a company outsources its core income generating activities — namely:
the company must be able to demonstrate adequate monitoring of the outsourced activities;
the outsourced activities must be conducted in Mauritius; and
the economic substance of service providers must not be counted multiple times by multiple companies when evidencing their own substance in Mauritius.
Mauritius also intends to introduce controlled foreign company rules, and the legal provisions relating to the arm’s length test for transfer pricing purposes will be fine-tuned, the Budget says, “to remove any doubt or uncertainty about its application.”
Mauritius is ranked 20 among 190 economies in the ease of doing business, according to the latest World Bank annual ratings. The rank of Mauritius improved to 20 in 2018 from 25 in 2017
Mauritius Would Soon Be A Regional Hub For Fintech
The budgets are not taking the disruptive and profitable nature of Fintech for granted. It sets out measures the territory will take to establish Mauritius as a hub for Fintech in the region. Accordingly, the Financial Services Commission will:
establish a regime for Robotics and AI enabled financial advisory services;
introduce a new license for Fintech Service providers;
encourage self-regulation for Fintech activities in consultation with the United Nations Office on Drugs and Crime;
introduce the use of e-signatures and e-licenses on a pilot basis; and
create crowdfunding as a new licensable activity.
Development of Real Estate Investment Trusts
The Budget announces proposals for new rules and an attractive tax regime to promote the development of Real Estate Investment Trusts (REITs); an “umbrella license” for wealth management activities; and a scheme for headquartering of “e-commerce” activities.
Tax Break For Electric vehicles
The Budget proposes improvements to tax breaks for electric vehicles, including a double deduction for businesses investing in a fleet of eco-friendly cars.
The Gross Domestic Product per capita in Mauritius was last recorded at 10186.10 US dollars in 2017. The GDP per Capita in Mauritius is equivalent to 81 percent of the world’s average.
Gaming Tax Enforcement
The Budget says appropriate amendments will be made to the Income Tax Act to reduce the possibility for a casino or a gaming house to split payment to winners in order to avoid the 10 percent tax on winnings exceeding MUR100,000.
Tax Perks For Marinas
The Government has announced incentives for the development of marina, including new regulations for marinas and a yacht code; an eight-year income tax holiday for a newly set-up company developing a marina; and a VAT exemption will be provided on the construction of marinas.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.
Until recently, Mauritius used to be the tax haven where all businesses flock to. But that is about to change. The Mauritius government’s proposal to amend tax residency rules for companies is giving jitters to foreign funds operating from the tax haven. The current order is that companies set up their corporate offices in Mauritius while having their business operations overseas, in other countries.
The new proposal by the Mauritius government is that any moment from now, a company will not be considered tax resident in the country if it is centrally managed and controlled outside Mauritius. In other words, the era of tax haven in Mauritius is crawling to an end. Consequently, funds may lose tax benefit after the rule amendment.
To Understand The Implication of This, Here Is A Quick Recap of Ways of Taxing Foreign Companies In Mauritius
Under the Mauritian Global Business sector, a foreign company can fall in either one of two categories: GBC1 or GBC2.
A Global Business Company (GBC 2)
A Global Business Company (GBC 2) is a company that has its office in Mauritius but does business outside Mauritius. At all times, the company has the Management Company acting as Registered Agent in Mauritius. The GBC 2 is non-resident for tax purposes and therefore is a tax-exempt entity and cannot avail itself of the relief under the Double Taxation Treaty in force in Mauritius. Thus, a GBC2 company pays no corporate tax; no withholding tax on dividends; no interest and royalties; no Capital Gains tax; and has no access to the Double Taxation Avoidance Treaty.
The proposed amendment announced in the latest budget said that the Partial Exemption Regime under the Income Tax Regulations 1996 will be amended to define the detailed substance requirements that must be met in order for a taxpayer to enjoy the partial exemption benefit.
A Global Business Company 1(GBC 1)
A Global Business Company 1(GBC 1) can be in the form of a Trust, Sociéty and Partnership. This includes small and medium scale businesses. A GBC 1 is considered to be tax resident in Mauritius and is subject to corporate tax at 15%. Tax advantages for GBC 1 in Mauritius are that there is no capital gains tax and also no withholding tax on dividends, interest, and royalties paid or estate duties.
The expanding network of Double Taxation Treaties has further reinforced Mauritius as a tax efficient jurisdiction and is also one of the prime reasons explaining the growing investment in GBC 1. Activities commonly undertaken by a GBC 1 requiring no specialized license are Investment Holding, Trading and International Consultancy and it normally takes an average of 3–4 weeks to incorporate a GBC 1 with such standard activities.
Interpretation of The Intended New Rule
From the above, only the GBC 1 has access to Double Taxation Treaties between their countries and Mauritius. That is, where the business is run in South Africa and Mauritius at the same time. South Africa is a party to a Double Taxation Treaty with Mauritius. And as such, the business in Mauritius would be considered tax resident in Mauritius and is subject to corporate tax at 15%. Tax advantages for GBC 1 in Mauritius are that there is no capital gains tax and also no withholding tax on dividends, interest, and royalties paid or estate duties.
Example of the benefits derivable from a double taxation treaty arrangement
Should this new rule come into effect, hundreds of similar offshore funds operating out of the island nation would be heavily hit.
The question now, therefore, will be what operations are centrally managed and controlled?
The general rule is that a company will have to demonstrate that its entire management resides in Mauritius and if it is centrally managed and controlled outside, then it may not be entitled to it.
“If the authorities find that it is not in Mauritius, then the entity is not a tax resident at all, and if it’s not a tax resident, then the treaty benefits it gets with other countries will not be available to it,” experts said.
This change would hit hundreds of offshore funds operating out of the island nation and invest in their countries to take advantage of the double taxation treaties between their countries and Mauritius.
As An Example
In determining what operations of a company are centrally managed and controlled, let’s study this scenario.
A South African company may have its board of directors in Mauritius while it is managed from South Africa. In this case, the authorities could say the company is not eligible for tax residency. They will now look at the substance on the ground in Mauritius.
In many cases, the board meetings happen in Mauritius, directors are in Mauritius but the control and management are actually not in Mauritius. This would no longer be the case under the new arrangement.
The fallout of this move will be that many of the structures currently set up in Mauritius and claiming treaty benefits on the basis that they have tax residency certificates may now have to take a look at the structures again.
So, many of the Mauritius structures may get challenged in Mauritius itself and several existing structures will be forced to increase the substance requirements within Mauritius for them to continue getting the tax benefits, experts said.
In simple terms, the consequence of not being considered tax resident in Mauritius is that the company would not benefit from the numerous tax advantages that obtainable from running its business in Mauritius. So, it is not a case of claim benefit from Mauritius, but do business in your home country. You have to manage your business in Mauritius before you claim the benefits.
Mauritius is a tax treaty jurisdiction and has so far concluded more than 42 tax treaties which are in force with the countries listed above.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.
