Integritax (SAICA) revisited for Int'l Tax Planning LLM Course
Non-residents 599. Mauritius tax opportunities August 1998 From a South African tax perspective, Mauritius has particular significance. Mauritius is in close proximity to Southern Africa, is a member of SADC and of Lomé, has strong ties with Africa and Asia and is a preferred location with the South African Reserve Bank.
In addition, it has a well-developed double taxation agreement (DTA) network - quite unusual for a country regarded by many as a tax haven.
The tax sparing article in the new South African-Mauritius DTA offers interesting planning opportunities for South African corporates. This article allows for a tax credit for Mauritian tax, at their standard rate of 35%, against the South African tax liability of a South African resident. What is interesting about this is that the actual rate of Mauritian tax paid is ignored for purposes of calculating the credit. Instead of a South African investor receiving a credit against its South African tax liability for Mauritian tax at the incentive rate of, say, 0,5%, he is given a credit at the normal tax rate in Mauritius, i.e. 35%. Without the tax sparing provision, the tax liability may simply be moved from the country of source to the country where the recipient resides. The tax sparing provision allows the recipient to retain the benefit of the incentive rate given to him in Mauritius. He is thus spared from paying a higher tax than the incentive tax rate, and it therefore remains an attractive option for him to invest in Mauritius.
An example illustrates the benefit. A South African company registers a branch as an offshore company (OC) in Mauritius. The effective rate of tax is 3%. It earns investment income from various sources. Assuming that such income is also taxable in South Africa (in terms of section 9C, for example, because the branch does not meet the requirements of being a "substantive business enterprise") the benefit of the Mauritian tax incentive would, in the absence of the tax sparing provisions, be lost. The tax sparing provisions in the SA-Mauritius treaty provides for a tax sparing credit equal to 35% of the Mauritian income which can be used to offset the SA tax liability in relation to such income.
The same would apply to any income liable to tax in terms of section 9D (being the anti-avoidance legislation taxing controlled foreign entities (CFE) and foreign trusts in certain circumstances).
It should he noted that an OC will no longer be able to select its own tax rate. Instead income will be taxed at an effective rate of 3%.
As an alternative to relying on the tax sparing provision, a South African company could incorporate a subsidiary as an OC in Mauritius to co-ordinate and manage its trading operations in African or Asian countries, which have DTAs with Mauritius. By extracting profits from the foreign trading companies into Mauritius by way of interest, royalties and management fees, the overall tax burden of the group may be substantially reduced. It is important that the Mauritius subsidiary has sufficient substance to fall outside the scope of the South African CFE legislation.
In the absence of a DTA between South Africa and the People’s Republic of China, only unilateral double taxation relief measures are available for transactions directly between these countries. By interposing Mauritius, which has DTAs with both South Africa and China, favourable withholding tax rates are available for extracting dividends, interest and royalties, while effective relief is given for Chinese capital gains tax. Similarly, Mauritius might be used effectively in international structures involving South Africa and India, even though South Africa itself has a treaty with India.
As with a number of other tax havens, Mauritius offers the more general benefits of no capital gains tax, no exchange controls and no VAT. It also has incentives for expatriates working in Mauritius. Unlike the more traditional tax havens, freeport facilities arc available to further enhance an international structure.
IT Act:S 108
IT Act:S 9C
IT Act:S 9D