Corporate tax treaty may backfire
05 October 2015
Posted by: Author: Lesley Stones
Author: Lesley Stones (Financial Mail)
A government clampdown to prevent companies dodging tax by operating through the low tax base of Mauritius could be excellent for Mauritius — but not so great for the SA Revenue Service (SARS). More companies are now likely to move some of their operations permanently to Mauritius.
Some companies run "postbox" set-ups in Mauritius to benefit from the corporate tax rate of 15%, which drops to just 3% if they qualify for an 80% rebate on business conducted offshore. They must use a local management company to create that business presence, but there haven’t been many checks to make sure it was not a tax-benefiting sham.
Now the two governments have tweaked the Double Taxation Agreement and new rules come into effect on January 1 2016. But the new treaty is likely to backfire on SA and have a "go big or go home" effect. Instead of forcing more SA companies to pay 28% tax at home, they may decide to relocate more of their activities to Mauritius to prove they are based there and benefit from the lower tax rate.
The original tax agreement of 2013 allows companies to qualify for the island’s low tax regime if their "effective management" is based there.
"You could have a postbox here and pay tax in Mauritius and be sitting in Sandton," says Richard Robinson, president of the SA Chamber of Commerce in Mauritius. "Now there are a lot of boxes to tick. You have to have staff and management and decision-making based in Mauritius, so it’s not just a sham business trying to operate in a foreign jurisdiction to pay less tax." He believes thousands of companies were using Mauritius for tax evasion, but he expects most to beef up their presence rather than pull out.
The new agreement was ratified on May 22, and a key change is how to determine whether a company is based on the island. Now the place of residency — and taxation — will be determined by mutual agreement between the two country’s tax authorities.
Criteria include where the headquarters, CEO and other senior executives are based, where the board of directors usually meets, and where the senior day-to-day management is carried out. If SARS decides a company is really based in SA and is operating a tax dodge, it could apply the full tax of 28% on top of the Mauritian tax.
The SA Chamber of Commerce isn’t happy. "What we don’t like about it as corporates operating in Mauritius is that there’s too much subjectivity and SARS can disagree with the Mauritian revenue service," says Robinson.
"We want a hard and fast rule that if you have a management office and employees then you are taxed in Mauritius and that’s it. A lot of big corporations are nervous about setting up shop [in Mauritius] and getting taxed in both countries. We are comfortable that people need to show substantive presence and be in Mauritius for the right reasons."
Robinson says Mauritius doesn’t need to charge high taxes to survive. Unemployment is low, unlike in SA where a small percentage of taxpayers must support the majority of the population. It also has an extremely high rate of collection.
A KPMG report also cautions South Africans using Mauritius as the base for their overseas investments to look at the impact the new treaty may have on their investment structures. They should have "a more substantive presence" on the island to avoid potential risk, KPMG says.
The amendment is good for Mauritius. With "postbox" companies the government didn’t earn much tax. By ensuring companies have a serious presence, the island will benefit far more. SA companies that do bulk up their activities will also benefit from the island’s lack of exchange controls and highly qualified, low-cost workforce.
Graham Sheward, MD of financial services company Cim Global Business, says the new treaty makes no difference to large SA businesses using Mauritius as their gateway into the rest of Africa because they already have operations there. "If you are a small company setting up an operation here purely to take advantage of the favourable fiscal environment, you will be well advised to review how much substance you actually have here because your operations could be scrutinised by SARS. I think some will move their whole headquarters here."
- Stones was hosted by Air Mauritius, Indigo Hotels and the Mauritius Tourism Promotion Authority
This article first appeared on financialmail.co.za.