Is Mauritius Still Better Than South Africa For Headquarters Purposes?
04 October 2011
Posted by: Author:Michael Honiball and Ryan Killoran
Is Mauritius Still Better Than South Africa For Headquarters Purposes?
The total amount of off shore capital invested in Africa is relatively small but is growing rapidly. Setting up an optimal holding structure to facilitate such investment has become a key area of focus in recent times.However, before considering the manner of entry into a particular African jurisdiction, the costs of doing business need to be measured.The starting point is inevitably the amount and nature of taxes levied and, in particular, the potential cost of income being subject to tax twice.
It is clear that the potential for double taxation constitutes an obstacle to the expansion of cross-border activities, there by discouraging international trade. However, what causes double taxation and is relief available? The answer, although not always simple, is found in the co-existence and interaction of the various tax systems.Differing definitions of residence, differing source and attribution rules, and differing interpretations of the same tax terms and provisions can all increase the risk of double taxation.Cross border trading in an international arena, therefore, always has the inherent risk of double taxation, categorised either in an economic or juridical sense. Juridical double taxation refers to the same income being taxed in the hands of the same taxpayer in two different countries.Economic double taxation arises where the same income is taxed in the hands of two different taxpayers.Relief from double taxation may be granted unilaterally under domestic tax rules, or bilaterally in terms of a tax treaty.
As a general rule, tax treaties (also called double taxation agreements) are aimed at relieving juridical, and not economic, double taxation.Consequently, a strong treaty network is crucial to the attractiveness of a particular intermediary holding company (IHC) jurisdiction, especially when investing in African jurisdictions which are known for imposing high with holding taxes on cross-border payments.Whether a treaty, in fact, provides the relief intended is an altogether different question and can only be answered on a case by case basis.
Currently, Mauritius via its Global Business Licence Company regime is considered to be one of the most attractive jurisdictions in which to set up an African IHC.This is due to its low over all effective tax rate, lack of with holding taxes, absence of capital gains tax, relatively wide treaty network, and absence of exchange controls. Crucially, the absence of CGT facilitates the possibility of a tax-free exit for the IHC at a later stage. It is important to note that in its capacity as a SADC member, Mauritius has signed the SADC Tax Harmonisation Agreement.The agreement has not been ratified and is not yet in force.Once it has been ratified, the agreement will facilitate collective harmonisation of tax collection. It also encourages the introduction of similar tax types by all members, but does not extend to tax rate harmonisation.Accordingly, Mauritius will remain attractive on this basis.However, it may mean that, in the longer term, Mauritius will come under pressure to broaden its range of taxes (by introducing, for example, capital gains tax, transfer pricing and controlled foreign company rules).
In order to compete with Mauritius, South Africa’s new Head Quarters Company (HQ) legislation was implemented effective 1 January2011.This HQ legislation is aimed at positioning South Africa as an IHC gateway for foreign multinationals into Africa.In introducing the regime, National Treasury stated that South Africa was recognized as the economic powerhouse of Africa due to location, sizable economy, political stability, overall strength in financial services and strong network of tax treaties.National Treasury identified three sets of South African tax rules as significant barriers, namely, the controlled foreign company rules, dividends tax and thin capitalisation rules.These barriers were overcome by specific exclusions for HQ companies. While these barriers are removed, income will remain fully taxable at normal company rates, making the HQ regime anything but a tax haven-type regime.
It is clear that the potential for double taxation constitutes an obstacle to the expansion of cross-border activities, there by discouraging international trade.
Before analysing whether the HQ regime proses a genuine challenge to the Mauritian regime, the importance of a strong and extensive treaty network needs to be considered.In this regard, South Africa’s eagerness to become the IHC Jurisdiction of choice is recognised by its efforts to expand its tax treaty network, particularly in respect of African countries.South Africa has 19 tax treaties with African states, with a further seven treaties in the pipeline. In comparison, Mauritius only has 13 treaties with African states with a further seven either awaiting ratification or signature.Outside of Africa and the SADC region, South Africa has 51 treaties in force with a further 13 awaiting final signature or ratification. Mauritius only has a further 23 with an additional seven being negotiated. Clearly, then, South Africa currently has a much better tax treaty network than that of Mauritius.
South Africa’s eagerness to compete with Mauritius has extended to a re-negotiation of the South Africa-Mauritius tax treaty in an attempt to make it less attractive for South Africans to use the Mauritian regime.Though not yet available to the public, we understand that the changes include the deletion of the tax-sparing clause, a 10% interest with holding tax, a 5% with holding rate on royalties, an OECD exchange of information clause, and the insertion of a clause in the capital gains Article which will allow South Africa the right to tax Mauritian residents on disposals of interests in ‘property rich’ companies.This latter amendment will have a negative impact on South African inbound investments held via Mauritius, especially in respect of South African mining interests where the assets comprise almost solely (80%) of immovable property (of which mining rights would be included).Accordingly, structuring an investment into South Africa via Mauritius may no longer be the most ideal option, but using Mauritius for investment into other African countries remains an attractive option.
The 2010 HQ initiative is clearly a positive step.However, submissions to National Treasury at the time of its introduction expressed reservations over the reliability of the regime due to the withdrawal of a similar regime (introduced in 2002 and withdrawn in 2003).Consequently, recommendations were made that the duration of the new regime and its certainty be guaranteed due to the perception that such a regime may be similarly withdrawn on short notice or that the rules be adversely amended.The first draft 2011 proposed tax legislation has confirmed these initial reservations through the introduction of a new annual pre-approval process, requiring the approval of SARS and National Treasury before availing of the HQ status.These amendments have the potentially anomalous result that a South African company will be an HQ company for one year and not necessarily for the next.
Following detailed discussions with National Treasury, this pre-approval process is likely to be deleted.The most recent proposed amendments to the regime serve as a warning to potential users that the certainty of its provisions is by no means guaranteed.As mentioned in the context of Mauritius, it is a common attribute of most holding company regimes that the investment may be exited in a tax-neutral manner or, at worst, with a low tax cost. Currently, the most appropriate mechanism to achieve such exit is the CGT participation exemption found in paragraph 64B of the Eighth Schedule.While the 2011 draft legislation has sought to amend the CGT participation exemption such that CGT relief will not apply when making a transfer to an HQ company, relief is similarly not available where an HQ company disposes of its investments in its off shore companies.Consequently, we are awaiting revised rules to remedy this position.
While it is clear that South Africa has a strong and growing treaty network, other factors count against South Africa acting as an attractive intermediary holding jurisdiction, like the uncertain labour markets and perhaps perceived political instability of the country,uncertain tax legislation as evidenced by the sudden recent ban imposed on intra-group roll-over relief, a previously failed HQ regime and, last but certainly not least, the presence of onerous exchange controls even if of limited application to an HQ company.In fact, from a tax avoidance point of view, when deciding on aparticular jurisdiction vis a vis South Africa, South Africa’s onerous exchange control rules provide a handy non-tax commercial reason for deciding on an alternative jurisdiction.On balance, South Africa has clear potential as the IHC jurisdiction of choice for the region, provided the recently proposed negative amendments are addressed in the next round of legislative drafting, and provided further that the remaining exchange control restrictions are abolished.
Source: By Michael Honiball, Webber Wentzel, Ryan Killoran (Tax Professional)