Bobby Yerkiah: A Mauritian perspective on tax anti-avoidance provisions
In its August 2020 magazine issue, Global Finance Mauritius spoke to Bobby Yerkiah, our Tax Partner, about "A Mauritian perspective on tax anti-avoidance provisions". Here is the article:
Introduction
As India, the UK and EU take steps to clearly define tax avoidance and codify it through relevant principles, it is becoming increasingly incumbent on Mauritius to follow in their footsteps and crystallise its own anti-avoidance rules.
Tax anti-avoidance has been placed in the limelight by the government, media, and the public at large. Tax avoidance is viewed by some as effective in securing the tax benefits sought and the term ranges from permissible tax avoidance to impermissible tax avoidance. The main difference between permissible and impermissible tax avoidance is that the first is legal while the latter is illegal.
Under the Mauritian Income Tax Act, tax avoidance includes, directly or indirectly -
(a) altering the incidence of income tax;
(b) relieving any person from liability to pay income tax; or
(c) avoiding, reducing, or postponing any liability to pay income tax.
There are several interpretations by courts regarding tax avoidance and courts have come up with some case laws and practices that may be classified as tax avoidance.
What does the Mauritian legislation state?
The Income Tax Act includes some anti-avoidance provisions, more specifically in Sections 84 to 90. The main intention behind the anti-avoidance provisions in Part VII of the Income Tax Act of Mauritius is to address tax avoidance arrangements that are found to be abusive. Taxpayers who are subject to the above-mentioned provisions are liable to tax assessments in the form of payment of additional tax liability that would have been due in the absence of the avoidance arrangement.
The Income Tax Act 1995 (ITA) provides for the following anti-avoidance provisions:
a) Interest on debentures issued by reference of shares as per Section 84 of the ITA;
b) Excess of remuneration or share of profits under Section 85 of the ITA;
c) Excess remuneration to shareholder or director as per Section 86 of the ITA:
d) Benefit to the shareholder under Section 86A of the ITA;
e) Excess Management expenses as per Section 87 of the ITA;
f) Leases for other than adequate rent under Section 88 of the ITA;
g) Rights over income retained as per Section 89 of the ITA; and
h) Transactions designed to avoid liability to income tax as provided in Section 90.
What is the stance of Mauritian Case Law?
In the case MRA (“Appellant”) V EAL MAN HIN & SONS LTD (“Respondent”), the respondent and Cleefoon Properties Ltd (“CPL”) dealt in different commercial activities but had the same common directors and shareholders.
The respondent was advancing loans to CPL over the years and the latter became insolvent and unable to repay its loans to the respondent. The part of loans due by CPL to the respondent was later converted into shares in CPL.
The MRA challenged whether the conversion of loans into shares constituted a tax avoidance scheme carried out for the sole or dominant purpose of obtaining a tax benefit under Section 90 of the ITA.
The Assessment and Review Committee (“ARC”) concluded that the appellant (“MRA”) had failed to discharge the burden showing that the conversion was entered solely for obtaining a tax benefit. It found that the commercial viability of CPL was at stake and conversions of its debt into shares was a normal commercial transaction. The conversion did result into a tax benefit for the respondent, but the dominant purpose of the conversion was not tax avoidance but corporate rescue.
What do international laws prescribe?
The general anti-avoidance rules (GAARs) of UK and India as well as EU directives contain some important aspects of international anti avoidance rules.
UK
It is important to note that the UK has relied heavily on judicial doctrines that give rulings on antiavoidance transactions to curb impermissible tax avoidance. The Case of IRC V Duke of Westminster sets the principle that a taxpayer has a right to order
the form of his affairs and not the substance in a taxefficient manner. However, the form over substance approach was rejected by the Ramsay principle developed in the case of WT Ramsay Ltd v. CIR. The Ramsay principle had since then been set as a precedent for courts to adopt in cases involving tax avoidance schemes.
India
In India, with the introduction of GAAR in 2017, the anti-avoidance principles were codified. The provisions intend to incorporate the ‘Substance over form’ doctrine in Indian tax law. Broadly speaking, the anti-avoidance law will be applicable to arrangements which are regarded as ‘impermissible avoidance arrangements’ and can enable authorities to re-characterise such arrangements and deny tax benefits / treaty benefits so as to curb any means of tax avoidance.
Pursuant to Section 96 of the Indian Income Tax Act, an Impermissible Avoidance Arrangement means an arrangement whose main purpose is to obtain a tax benefit and it:
(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm's length;
(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of Act;
(c) lacks commercial substance partly or wholly; and
(d) is entered into or carried out by any means or in a manner not ordinarily employed for bona fide purposes.
In India, if the Commissioner of Income Tax (“CIT”) is of the opinion that GAAR provisions can be invoked, he will then issue a notice to the assessee setting out the reasons and basis of such an opinion. The assessee can object to the assessment and if the CIT is not satisfied with the explanation of the assessee, the case will be referred to an Approving Panel (composed of 3 members including the chairperson who is/has been a judge of a high court, one member of the Indian Revenue Service not below the rank of Chief Commissioner of Income Tax, and one member who is a scholar/academic on tax matters) to declare whether the arrangements constitute an Impermissible Avoidance Arrangement.
The directions issued by the Approving Panel shall be binding on the assessee and the CIT.
EU
The EU Anti-Tax Avoidance Directive (ATAD I & II "ATAD") form part of a larger anti-tax avoidance package adopted by the European Union (EU) in response to the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan. Designed to tackle tax avoidance practices, ATAD lays down minimum standards for EU Member States, requiring them to change their corporate tax laws in certain areas and within specific timelines.
In brief, the ATAD lays down the following de minimis rules against corporate taxation avoidance:
- Interest deduction limitation to, in principle, 30% of the EBITDA of a company;
- A general anti-abuse rule (GAAR);
- Controlled foreign company (CFC) legislation applicable to both EU and third countries;
- Anti-hybrid mismatch rules applicable to both EU and third countries;
- Most ATAD rules must be implemented as of 1 January 2020.
Is anti-avoidance clearly defined in Mauritian law?
Penalties normally help to discourage taxpayers from entering transactions that lack commercial rationality. But, before imposing any penalties, one must be able to clearly define impermissible tax avoidance. As of now, there is no clear demarcation in the Mauritius legislation as to what constitutes permissible and impermissible tax avoidance.
A Company which is in a tax loss position may not claim its capital allowance in Year 1 during a tax holiday. After the tax holiday, the Company may then start to claim capital allowance on its assets at the prescribed rate in the Income Tax Regulations. The question remains whether this will be considered as tax avoidance by the MRA or tax planning by the taxpayer?
The tax system in Mauritius has no built-in checks and balances to enable the taxpayer to justify why the arrangements may not constitute tax avoidance, nor is there any board to rightly assess the same at the point of assessment.
Way forward: A clearer definition of anti-avoidance schemes
Tax avoidance is so broad that it includes both permissible and impermissible forms. The Mauritian legislation does not clearly define impermissible tax avoidance as compared to other jurisdictions. The three perquisites before terming a transaction as impermissible are the existence of a scheme, tax benefit and a tax purpose. Thus, we are of the view that the above guidance must also be present in the Mauritian legislation before the motive of entering tax avoidance is considered by the MRA.
The Authority must provide the opportunity for the taxpayer to object to the basis on which anti-avoidance provisions have been invoked. An assessment panel, constituted of independent members, will most likely be suitable for this purpose. Furthermore, the burden of proof is on the assessee to prove that the objective behind entering into a transaction or an arrangement is not to obtain tax benefit for which the assessee will have to maintain proper business rationale and document the evidence to avoid tax assessments.
With the advent of OECD BEPS Action Plan and EU Anti-tax Avoidance Directives, it is high time for the Mauritian legislation to provide greater certainty to taxpayers through a clearer definition of anti-avoidance schemes.