safyr utilis mauritius budget 2016-17 tax highlights

MAURITIUS NATIONAL BUDGET 2016-17 TAX HIGHLIGHTS

MAURITIUS NATIONAL BUDGET 2016-17

TAX HIGHLIGHTS


EDITORIAL

Bold Enough?

This is the first budget of the Minister of Finance and Economic Development, Honorable Pravind

Kumar Jugnauth against a backdrop of economic uncertainty with global growth forecast being

revised downward almost on a quarterly basis and the far reaching ramifications of Brexit a long

way from being unravelled.

Oil prices are at an all-time low thus dampening inflation (sub 2% and trending down), USD 353

million windfall as grant from the government of India over the next 4 years, are some of the levers

that the Minister currently has at his disposal to implement the Government's economic manifesto.

This leads us to the political and social economic context. The Government's popularity is

undermined by the sluggish economic activity with current GDP growth (3.5% against 5.3%

forecasted) subdued job creation (unemployment rate stuck at around 8%), private sector

investment 12.7% of GDP (20.5% in 2008), dwindling FDI (Rs 9.6Bn from peak of Rs 20.4Bn in 2012)

whilst the unclogging of the bureaucratic machinery, is still a work in progress.

Although the elections are not expected for another 3 years, the Minister and the Government

can afford and indeed were expected to be bold. The budget is built on ten pillars however the

crux and the most tangible engine of growth remains the Government spending spree as a way

to jolt the economy with the much needed spark. Total capital expenditure including the light

metro project and heritage city is expected to be 21% of GDP whilst the public sector is expected

to contribute 14,000 jobs. These two facts sums up the essence of the budget.

There are a number of measures that are welcomed, most notably:-

1. The consolidation of a number of public sector bodies and enterprises. This can only bolster

efficiency and in a number of instances, reduce the financial drain and improve accountability.

The Government's divestment from some non performing investments is also judicious and mostly

overdue;

2. The continued stride towards the creation of a fully-fledged digital society both in terms of

interactions with and among the public sector, in addition to improving connectivity and access

to the digital world is crucial to our competitiveness;

3. Improving the business landscape and framework by strengthening and widening the concept

of silent approval with the overall objective of streamlining permits and further opening up to

foreigners; and

4. Those measures aimed at alleviating poverty and democratizing home ownership.

We believe that the private sector should have been more involved in driving the growth strategy

both in terms of financial involvement in the significant infrastructure pipeline and in the operation

of some of these landmark project like the light metro. We had also hoped that since the

Government still has the political capital, implementation of some of the politically sensitive

initiatives like benefits targeting that would have resulted in a more efficient use of resources, for

the health, education and transport. The significant hike in public sector employees is also likely to

exacerbate the current pension deficit, which is yet to be tackled.

As for the rest, only time would tell, whether he has been bold enough in the measures. Let us

hope for bold execution.


PERSONAL INCOME TAXATION

SALIENT MEASURES WHICH HAVE BEEN ANNOUNCED

Tax allowances

Income Exemption Thresholds (IET) have been increased by Rs 10,000 for all 6 IET bands

available.

Tuition fees deduction for a child attending tertiary education has been reduced from Rs

44,500 annually to Rs 34,800.

Interest payable on housing loans availed before 1 July 2006 would now be deductible.

Annual income limit to benefit from the tuition fee and interest deduction has been

increased from Rs 2 million to Rs 4 million.

Permanent exemptions

Emoluments derived by a seafarer employed on a local or foreign vessel would be

exempted from tax.

Temporary tax holidays

An Asset and Fund Manager (AFM) licensed by the FSC and managing a minimum asset

base of USD 100 million would be exempted from personal income tax for a period of 5 years.

A Foreign Ultra High Net worth individuals (UHNI) investing a minimum of USD 25 million in

Mauritius would be exempted from personal income tax for a period of 5 years.

CHANGES AFFECTING NATURAL PERSONS

SUMMARY OF TAX CHANGES

ANNOUNCED IN THE BUDGET SPEECH 2016


OUR POINTS OF VIEW

Our income tax rate of 15% remains relatively low and very

attractive compared to our neighbouring countries. In its recent

publication in April 2016 on Taxing Wages 2016, the OECD noted

that the average tax and social security burden in its member

countries was 35.9% in 2015 for a childless single worker. The

highest average tax burden for a childless income earner was

Belgium (55.3%) according to the same publication.

The African average individual income tax rate is 33.3% for 2016

which is more than the double of the Mauritian income tax rate.

It clearly positions Mauritius as a jurisdiction of choice to

welcome foreign talent and high net worth individuals.

The income tax exemption to seafarers is not novel. It was

removed in 2006 and is now being reintroduced to encourage

employment in the fishing industry.

The introduction of tax holidays is a strong call from the

Government to encourage AFMs and UHNIs into Mauritius. Our

income tax rate is already very low compared to other

jurisdictions and tax incentives coupled with other business

facilitation measures would help to convince high caliber AFMs

and UHNIs to be in Mauritius.

The provision of the Income Tax Act should clearly define the

asset base and investment threshold test. It is still uncertain

whether the tax holiday would be extended to officers of AFMs

which are structured as a company and also whether the tax

holiday would apply only to newly registered persons or would

be extended to existing AFMs and UHNIs. It is likely that a

business plan should be provided by the AFM or the UHNI to

benefit from the tax holiday. We believe that the asset and

investment threshold should be extended over a period of at

least three years, with may be a relaxed condition in the first year

of operation, to allow their businesses to take momentum.


PROPERTY TAXATION


ANNOUNCED IN THE BUDGET SPEECH 2016 (Contd.)

CHANGES AFFECTING NATURAL PERSONS (Contd.)


Exemption from registration duty on acquisition of a new dwelling costing less than or Rs 6

million during the period from 1 September 2016 to 30 June 2020. The exemption would not

apply to properties on Pas Géométriques, Integrated Resort Scheme (IRS), Real Estate

Scheme (RES), Property Development Scheme (PDS) and Invest Hotel Scheme (IHS).

The land value threshold for first time buyers to benefit from registration duty exemption is

extended from Rs 1.5 million to Rs 2 million; there would be no age restriction as from now.

VAT refund scheme available to Mauritian buyers is being reviewed as follows: VAT refund

capped based on floor area, refund scheme extended beyond apartments, cost of

construction raised to Rs 4 million without restriction on size, refund amount increased to Rs

500,000, annual income threshold to benefit from the scheme now extended to Rs 2 million;

construction on top of existing dwelling falls within the scheme; construction must be

completed by 30 June 2020; scheme is not extended to properties on Pas Géométriques,

IRS, RES, PDS, IHS and Smart City Scheme.

Exemption from registration duty on secured housing loans below Rs 2 million.


OUR POINTS OF VIEW

The above measures are aimed to give a boost

to the real estate sector in Mauritius. The

outcome of the measures announced may be

hindered however by unregulated real estate

agent fees and also notary fees (which are

capped under the Notaries Act) plus charges.

The VAT refund scheme seems to have a sunset

provision of up to 30 June 2020.


OTHER INDIRECT TAXES



CHANGES AFFECTING NATURAL PERSONS (Contd.)


Reduction in customs tariff rates on 24 items to nil (See Annex).

Increase in customs duty on sugar and spirituous drinks by 15%.

Increase of nearly 10% in excise duty on alcoholic drinks and 25% on tobacco products.

Excise duty of 3 cents per gram on milk based products with sugar content.

25% levy on energy inefficient appliances.

15% levy on pesticides.

CO2 levy/rebate scheme is suspended on motor cars.

Changes to excise duty rates on motor cars (See Annex); electric cars of up to 180 KW is

exempt from excise duty.

Changes in the basis of import value of second hand cars; adjustment factor to market price

now 5% instead of 25% and depreciation allowance is lowered from 56% to 50%.

Lowering of registration duty on electric cars except for those above 180 KW.

VAT is removed on some 12 items (See Annex).


BUSINESS INCOME TAX



CHANGES AFFECTING LEGAL PERSONS


Temporary tax holidays

Global Business

An 8 year tax holiday to Global Headquarters Administration companies subject to

employment and substance conditions being met.

A 5 year tax holiday to Treasury Management Centre service companies subject to

employment and substance conditions being met.

A 5 year tax holiday to UNHI.

A 5 year tax holiday to law firms setting up their regional offices in Mauritius to provide legal

advisory and international arbitration services to global business clients.

A 5 year tax holiday to investment banks.

A 5 year tax holiday to Overseas Family Corporations.

Non Global Business

8 year tax holiday to SME newly registered businesses.

4 year tax holiday to existing SME businesses with a turnover of less than 10 million.

An 8 year tax holiday to Industrial Fishing companies.

Tax credits

An investment tax credit of 5 % per annum over 3 years on new plant and machinery

acquired by manufacturing companies: no limit on investment, no year restriction on carry

forward of unused tax credits, investment window is extended to income year 2019/2020.

An enhanced investment tax credit of 15% per annum over 3 years would apply to

manufacturing companies engaged in specific activities and to companies investing in a

subsidiary company engaged primarily in the setting up and management of an accredited

business incubator capped at Rs 20 million investment.

Tax losses

Transfer in losses on takeover or merger of a manufacturing company would now be

available even if the acquiree company remains in operation and the takeover is deemed

to be of public interest under the Land (Duties and Taxes) Act.


OUR POINTS OF VIEW

A general perspective on tax holidays and investment tax credits

Tax incentives on their own sometimes can prove to be inefficient. They may contribute to poor investment climate, damage a country’s revenue base and erode resources for real drivers of economy.

In the Investor Motivation Surveys done by the World Bank Group in 2013, it was highlighted that in Tanzania, Rwanda, Uganda, and Burundi, over 90 percent of investors would have invested even if tax incentives were not provided.

According to the Financial Times, the $1.1 billion granted in tax exemptions in Tanzania in 2012 was the same amount which the country borrowed from China to build a 500 km gas pipeline.

In 2006, Mauritius made significant reforms in its tax system by removing many tax holidays, investment tax credits and incentives. However, according to the IMF, FDI and corporate tax revenue still experienced a strong growth.

It is apparent from the measures announced that Mauritius is once again having recourse to traditional tax measures to encourage investors.

Measures affecting the global business

The attractiveness of tax holidays for Global Business Companies may be marginal given that the fact the maximum rate of taxation for a Category 1 Global Business License is 3% and Mauritius has a generous foreign tax mechanism which may eliminate any residual taxes in Mauritius.

In the light of various changes happening globally in the tax environment in the likes of the OECD Base Erosion and Profit Sharing (BEPS) Action plans, the call for substance is becoming increasingly more important. Tax holidays are not necessarily well viewed and non-double taxation may exist whether benefits of tax holidays are passed through to the parent company and not consumed in the residence country’s tax system. In the light of the BEPS Action 3, it is expected that countries would adopt a tighter CFC legislation which would curb the benefits of tax holidays should there be inadequate substance. It is

worth noting at this stage that Uganda recently changed its income tax legislation effective as from 1 July 2016 to allow treaty benefits only to those who satisfy substance requirements.

Law firms setting up regional offices in Mauritius, to provide legal advisory and international arbitration services, would be exempt from tax on their net income for a period of 5 years. They should also have access to tax treaties signed by Mauritius which stand at 42 (partial DTA with Australia not included) so far provided that they hold a Category 1 Global Business License (Category 2 Global Business Licensees do not have access to treaty benefits).

Holders of Category 1 Global business license are also allowed to do business in Mauritius to some extent. This measure should allow more competition locally and also give access to greater international exposure to our local legal advisers. However, to allow those regional offices to give legal services locally, there may be some amendments to be made to current legislations.

In its 2016 budget , Singapore has reduced its concessionary tax rate for Financial Treasury Centres from 10% to 8% and extended its sunset clause for this concession from 31 March 2016 to 31 March 2021 to increase its competitiveness in that space. Singapore hosts more than 4,000 corporate treasury centres; the tax incentives and also its extensive DTA network has greatly helped to boost this product offering. In addition to providing qualifying services, an approved Financial Treasury Centre has a minimum turnover threshold to achieve and employs at least 3 professional staff.

Mauritius is well positioned to host regional headquarters and treasury management companies servicing Africa in view of its extensive treaty network (15 DTAAs and 8 IPPAs with African countries). Singapore has only 5 tax treaties so far with Africa. South Africa still has the most extensive of tax treaty network in Africa but its regional head quarter regime is still limping.

It is expected that in terms of substance and employment conditions, Mauritius would most likely follow the Singapore model.


PROPERTY TAXATION



CHANGES AFFECTING LEGAL PERSONS (Contd.)


The upper property value limit to benefit from exemption from land transfer tax is increased

from Rs 4 million to Rs 6 million.

Exemption from land transfer tax for employer providing free social housing not exceeding

7 perches to his employee.

The exemption would not apply to properties on Pas Géométriques, IRS, RES, PDS and IHS.


OTHER TAXES



CHANGES AFFECTING LEGAL PERSONS (Contd.)


A supply of goods or service for VAT purposes would occur at the earlier of issue of invoice,

receipt of payment or at the time the supply occurs.

List of items under the VAT refund scheme to small planters has been extended (See Annex).

A 2% levy would apply on net stakes of all licensees regulated under the Gambling Authority

Act.

A 30% levy would apply on online betting for non-residents and foreign punters.

The betting duty for bookmakers operating outside the racecourse is increased from Rs

16,000 to Rs 30,000.


OUR POINTS OF VIEW

The change in the determination of the tax point

for VAT purposes would mainly affect

intercompany transactions which are often booked

as accruals in the financial statements at year end

without issuing invoices even if the supply of goods

or services have already been made.

As from now, intercompany charges would be

subject to VAT at the time the services or supply of

goods are made.

The time at which a service is performed or a

transfer of ownership in case of a supply of goods

would therefore be relevant. We recommend that

proper documentation be kept to support the time

of supply for example service agreements or Goods

Received Note. It should not be expected to see a

change in the time of supply for hire purchase

agreement and continuous supplies like rent.


ADMINISTRATION



TAX ADMINISTRATION


Consolidation of social security contribution collection under the Mauritius Revenue

Authority (MRA).

Integration of the Registrar General with the MRA.

An Alternative Dispute Resolution (ADR) mechanism would be introduced for appeals

against assessments exceeding Rs 10 million; the panel is expected to be comprised of

independent persons and the applicant would follow the ADR route simultaneously with

appeals made to the ARC, the Supreme Court or the Privy Council.

The term “fraud” would be defined to include non-submission of tax returns.

A tax clearance certificate would now be issued by the MRA to contractors bidding for

government contracts exceeding Rs 5 million.


OUR POINTS OF VIEW

The choice to have recourse to the ADR route seems to be at

the discretion of the Director General of the MRA and the

established criteria to use the ADR route should be awaited.

This process should reduce the amount of tax cases at the

ARC and the Courts and possibly the time and costs incurred

by the MRA and the taxpayers to reach an agreement on

contentious issues.

The extension of the term “fraud” to non-submission of tax

returns in our tax legislation is a strong message to tax payers

who fail to submit their tax returns. We believe that late filing

of returns should not be included in the said definition unless

there is clear evidence that the late filing has been done in a

view to deceive.

Tax fraud would usually occur in the following situations:

Intentionally fails to file an income tax return;

Willfully fails to pay taxes due;

Intentionally fails to report all income received;

Makes fraudulent or false claims; and

Prepares and files a false return.

A clear distinction should be made between negligence and

fraud so that careless errors fall outside the scope of fraud

and such errors would still be subject to penalties and

interests.


INCOME TAX



TAX ADMINISTRATION (Contd.)


Deduction of Tax at Source (DTS) would apply on payments made to accountants, tax

advisers and management fees paid to individuals.

A final tax of 10% would apply on payments to non-resident entertainers and sportspersons.

The obligation will also extend to an individual.

The MRA would be allowed to request a Statement of Assets and Liabilities from high net

worth individuals with assets exceeding Rs 50 million or net income exceeding Rs 15 million.

A time limit of 2 years would apply to submit an amended tax return.

PAYE returns should include National Identity Number and should include exempt

employees as well. DTS returns should include Business Registration Number or National

Identity Number of the payee.

A penalty would be introduced for losses and tax refund over claimed.

A reduced penalty provision for late submission of tax return and payment of tax would

apply to individuals not in business.

Disclosure of genuine point of law uncertainties can be disclosed in the tax returns to

mitigate penalties and interest.

Only a declaration would be required from companies not in operation instead of an

income tax return submission. This would not apply to companies holding a Category 1

Global Business License and a Trust.

Businesses will be required to contribute at least 50 percent of their CSR money to a National

Foundation which would be jointly managed by the public and private sector. The

contribution of 50% will be increased to 75% in the following year.


OUR POINTS OF VIEW

The Deduction of Tax at Source (DTS) rate on accountants

and tax advisers is likely to be 3% which would be aligned to

the current rate applicable to providers of services such as

architect, legal consultants and land surveyors. In cases

where the accounting and tax services are ancillary to a

service for example in cases of management companies

providing services to Global Business Companies, we are of

the view that the DTS should not apply. This needs to be

clarified once this measure is enacted.

The time limit of 2 years to amend a tax return is welcomed

and is aligned to international practice. It should be expected

that a submission of an amended return would extend the

time bar limit of 3 years to raise an assessment as from the

date the amended return is submitted.

The disclosure of point of law uncertainties in the tax return

would allow better communication between tax payers and

the MRA. The point of law should be genuine and should in

our view only apply in cases where the law is silent or matters

which the MRA has not issued a ruling or a practice note. We

believe that the level of information which should be

provided be similar to that as an application for a ruling made

to the MRA for e.g. the tax payer should state the reason

motivating his position. However clarity needs to be obtained

in cases where the MRA does not respond to the disclosure;

would that be a deemed agreement to the position taken by

the tax payer and/or can this position be relied upon by

another tax payer in similar circumstances?

The penalty for over claimed losses should in our view only

apply if the said losses reduce the chargeable income in the

subsequent years and therefore less tax would be paid.


VALUE ADDED TAX


Non VAT registered would be required to collect VAT on services received abroad and remit

same to the MRA. Banks dealing wholly and exclusively with non-residents and licensees

under the Financial Services Act would be excluded from this requirement.

A penalty of 20% on over claimed input VAT would be introduced. The penalty cannot

exceed Rs 100,000.



TAX ADMINISTRATION (Contd.)


OUR POINTS OF VIEW

Businesses engaged in exempt supplies (i.e. those which

cannot register for VAT) and those businesses whose

turnover is below the VAT registration threshold would now

be required to collect this VAT on services received from

abroad and remit same to the MRA. It would appear that

even businesses engaged in zero rated supplies and who

chose not to register for VAT would also be caught by this

provision. We believe that the VAT Act would be amended to

allow exempt businesses to register for VAT so that the VAT

can be remitted to the MRA.

The amount paid to the MRA would not be deductible for

VAT purposes and would therefore be a cost to the business.

However, where the VAT relate to a recurrent business

expense, the VAT should be allowed as deduction in

computing the business income tax payable.

We believe that a turnover threshold should be introduced

in the application of this measure. This principle would be

aligned to the UK VAT provisions which require a person

paying services abroad above a defined threshold to be

mandatorily required to register for VAT. This proposal would

reduce the administrative burden on small businesses and

those engaged in zero rated supplies.


DISCLAIMER

The information presented in this note does not constitute and should not be construed as

accounting, legal or tax advice. It is intended to provide a general overview of the subject which

it treats. We recommend that your accounting, legal or tax expert be consulted for any specific

advice which you may require in light thereof.

The source of information remains largely the announcements made by the Minister of Finance

and Economic Development in his budget speech. The measures announced may however

change upon enactment.

SAFYR UTILIS 7th Floor, Tower 1, NeXTeracom

Cybercity Ebene

Republic of Mauritius

Tel: +230 403 4250 | Fax: +230 468 1178

Web: www.syul.mu

Email: [email protected]

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