Decoded: What is the recent amendment in Mauritius' Income Tax Act?

Last month, Mauritius amended its Income Tax Act and inserted a clause to determine the place of effective management, in line with global best practices. Ashley Coutinho explains the impact of the amendment:  

What is the recent amendment in Mauritius’ Income Tax Act?
 

Mauritius has inserted a clause for determining the place of effective management (POEM), making it difficult to establish residency in the country. On 28 November 2018, the Mauritius Revenue Authority (MRA) issued a Statement of Practice (SOP) regarding section 73A of the Income Tax Act (the Act) on POEM. Section 73A of the Act effectively overrides the central management and control test for a Mauritian incorporated company and applies to a company that holds a global business licence as well as a domestic company.

What is a POEM?

A POEM is aimed at ensuring that sufficient economic activity takes place in a particular country and determining a foreign company’s residential status. It also helps to assess if companies are setting up shell subsidiaries abroad to evade taxes. 

What has changed under the new SOP?

Currently, Mauritius issues a Tax Residency Certificate (TRC) to companies incorporated and operating in Mauritius, based on criteria such as whether the company is managed by a board in Mauritius and whether the bank accounts and books of account are maintained in that country. According to experts, MRA is one of the more liberal authorities as its interest lies in getting more companies to use its jurisdiction. Typically, most professional service providers easily get TRCs for companies they service. This may change going forward. 

What are the new rules?

As per the SOP, for any Mauritian company to be considered to be tax resident in Mauritius, all its strategic decisions relating to its core income generating activities should be made in the country. Depending on the business activities of the company, it may have income generating activities in more than one country. Additionally, the majority of the board of director’s meetings should be held in Mauritius or its executive management should be regularly exercised in Mauritius. 

What are the anticipated challenges under the new regime?

There is subjectivity on what is meant by "taking strategic decisions on core income generating activity". If another country has a tax treaty with Mauritius, it is possible for both Mauritius and the other country to tax the profits of the company. So, in effect, any Mauritian sourced income may be subject to double taxation. Even the Indian tax authorities may ask Indian companies and/or investors to prove that the critical decisions pertaining to a particular investment or divestment have actually been made in Mauritius. This may lead to a tussle between Indian and Mauritius tax authorities on what constitutes POEM, and whose ruling should prevail.

That said, the SOP refers to the place of decision making and not the place of income earning activities. Tax consultancy EY does not foresee any practical challenges with the place of board meetings being in Mauritius. The fact that the requirement is for a majority of board meetings to be held in Mauritius implies that the tax residence of a company would not be jeopardised if, for example, it is compelled to have a board meeting outside of Mauritius for commercial reasons, says EY. 

Does India have its own POEM?

POEM guidelines in India became applicable from FY16-17 (assessment year 2017-18). The Central Board of Direct Taxes issued its final guidelines in January 2017, which came nearly two years after the government amended the provisions for tax residency of foreign companies in the 2015 Budget.

How does the Indian POEM impact companies? 
 

Until April 1, 2016, a subsidiary or a parent of an Indian company was not subject to income tax in India unless its affairs were “wholly controlled and managed” in India. So, there was no tax incidence here unless the entire decision-making team was in India. Now if a company’s POEM is in India, its global income will be taxable in the country. For Indian companies that have made outbound investments, there is a risk that POEM of such outbound investments could be considered to be in India in case the management of such overseas entities is determined to be in India. In case of foreign investments in India, there could be a risk that the entity from which the investment is made could have a POEM in India.