On 19 July 2019, the Organisation for Economic Cooperation and Development (OECD) released its report on harmful tax practices across various jurisdictions. The report indicates that Mauritius which had previously been identified as a jurisdiction with harmful tax practices no longer has such harmful tax practices. Specifically, the Mauritian "Partial Tax Exemption Regime", which was introduced in 2018 to replace the harmful "Global Business Licence Regime" has now been declared not harmful.
In 2015, the OECD introduced the Base Erosion and Profit Shifting (BEPS) framework, which aims, among other things, to tackle international tax avoidance, which is facilitated by the shifting of profits from high paying tax jurisdictions to low paying tax jurisdictions. As part of the BEPS Project, the OECD periodically identifies tax regimes, which have features that can facilitate BEPS, and have the potential to unfairly impact the tax base of other jurisdictions. Such features are referred to as "harmful tax practices".
Prior to now, the OECD ruled certain Mauritian tax regimes as harmful and recommended the abolishment of such regimes. These regimes included the Global Business Licence Category 1 (GBL 1) companies and Global Business Licence Category 2 (GBL 2) companies. GBL 1 granted Holding Companies certain treaty benefits such as an 80% deemed foreign tax credit, which reduced the effective tax rate of such companies from 15% to 3%. On the other hand, GBL 2 granted tax exemption to companies.
A number of businesses had benefitted from the Mauritian tax regime by setting up Mauritian Holding Companies with little or no economic substance in Mauritius. Effectively, such companies were able to reduce their effective tax rates significantly because of the favourable tax regime in Mauritius.
To address the OECD's concerns, Mauritius abolished the GBL Regimes in 2018 and introduced a Partial Exemption Regime, which provides for an 80% tax exemption on specified passive income of Global Business Corporations (GBCs) in Mauritius. A tax credit is generally preferred to an exemption as this gives dollar for dollar savings in tax rather than tax savings at the effective tax rate. Thus, the new regime is less favourable and ensures that the GBCs paid some tax in Mauritius on their global income. Upon a review of the Mauritian Partial Exemption Regime, the OECD has now declared the Mauritian Partial Exemption Regime as not harmful as the regime complies with the OECD's standards.
Mauritius also introduced substance requirements for companies seeking to enjoy the 80% exemption. These requirements include that a GBC must, at all times, carry out its core income generating activities in, or from Mauritius by employing (either directly or indirectly) a reasonable number of suitably qualified persons to carry out the core activities and the GBC is expected to have a minimum level of expenditure proportionate to its level of activities.
However, despite the positive reviews of the OECD, the European Union Code of Conduct Group (EU COCG) had flagged the Mauritian Partial Exemption Regime as harmful in February 2019. According to the EU COCG, the Mauritian Partial Exemption Regime does not have adequate substance requirements in terms of treatment of outsourcing activities.
In response to the EU, the Mauritian Prime Minister, recently announced that the Mauritian tax laws would be amended to stipulate conditions that must be satisfied where a company seeking to enjoy the Partial Exemption Regime outsources its core income generating activities. These conditions include that the Company must 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 different companies when evidencing their own substance in Mauritius. However, these changes have not been passed into law yet.
With the recent report, Mauritius is no longer on the list of jurisdictions with harmful tax practices. However, given the EU's reservations on the Mauritian tax regime, Mauritius is still making amends to its legislation to eliminate harmful tax practices. Thus, companies with EU investments need to monitor the changes in the Mauritian tax and regulatory space to enable them make informed business decisions.
In addition to this, businesses that have traditionally used Mauritian companies for tax planning purposes should seek relevant professional advice, as there may be an urgent need to restructure their Mauritian entities to ensure that they meet up with the new substance requirements.
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