International investors including South African businesses already use Mauritius as their base for their growth on the continent, but the proposed mutual agreement procedure will have to consider the OECD’s BEPS (Base Erosion Profit Shifting) initiative concerning taxes.
Following the signing of a revised double-tax treaty between South Africa and Mauritius in 2013, a Memorandum of Understanding (‘MoU’) was finalised recently between the authorities of the two countries to bring more clarity to the controversial issue of residence. The MoU is designed to give some insight into the process that will be adopted by the fiscal authorities of the two countries when assessing the tax residence of a ‘person’.
‘Mutual agreement procedure’ as a tie-breaker
The new treaty allows for the two tax authorities to come to a ‘mutual agreement’ to determine which state has the first right to tax by virtue of its tax residence. The inclusion of such a mutual agreement procedure is part of a larger trend which will see more treaties featuring such clauses because of the new issues championed by the OECD’s BEPS (Base Erosion Profit Shifting) initiative and widely followed by other similar organisations worldwide.
However, the proposed mutual agreement procedure has created uncertainty and concern for international investors and businesses already using Mauritius as their base for their growth into South Africa and elsewhere on the continent, as well as for South African businesses which have already chosen to base their international expansion in the island’s financial centre.
The MoU now signed by the two countries helps by stating the factors that would be used by the authorities in determining where the ‘person’ is fiscally resident, and thus which country has the first taxing rights.
Factors to determine state of tax residence
The factors listed in the MoU are the following:
(a) Where the meetings of the person’s board of directors or equivalent body are usually held;
(b) Where the Chief Executive Officer and other senior executives usually carry on their activities;
(c) Where the senior day-to-day management of the person is carried on;
(d) Where the person’s headquarters are located;
(e) Which country’s law govern the legal status of the person;
(f) Where its accounting records are kept;
(g) Any other factors listed in paragraph 24.1 of the 2014 OECD Commentary (Article 4, paragraph 3), as may be amended by the OECD/BEPS Action 6 final report; and
(h) Any such other factors that may be identified and agreed upon by the Competent Authorities in determining the residency of the person.
With this new procedure, when a person will be deemed fiscally resident in the two countries, the fiscal authorities will seek to reach a mutual agreement by using the above factors to determine which country should have the first taxing rights.The above-listed criteria may seem onerous for some entreprises on the face of it, but it gives a roadmap of what the authorities will be looking out for, and what entreprises should be aiming at in order to affirm their tax residence.
“The MoU brings more certainty to South African companies that wish to use the Mauritius financial centre to do business in Africa and globally. And given the business-friendly environment in Mauritius, they enjoy a significant cost advantage for their international business, coupled with financial and treasury facilities that are essential for their growth strategy.” Richard Arlove, ABAX CEO
The new treaty as a whole is favourable to inbound investors in South Africa while South African entreprises using the Mauritius jurisdiction for their international expansion will find it a little more onerous to satisfy. However these changes are in line with global trends and with the redefined requirements of the Mauritius financial centre as a jurisdiction of substance. The treaty brings additional reasons for South African entreprises to separate their international operations from their domestic ones and to set up their regional /international headquarters in Mauritius to fully benefit from all the advantages the island’s financial centre has to offer in terms of business facilitation.
In the long run, we believe that the new treaty will be seen as a step in the right direction and will reaffirm the Mauritius positioning as a financial centre of choice for the African continent.
Other salient points from the new treaty
• WHT on dividends capped at 5%/10% in SA, 0% in Mauritius
• WHT on interest capped up at 10% in SA, 0% in Mauritius
• WHT on royalties capped at 5% in SA, 0% in Mauritius
• CGT on sale of shares 18.65% in SA if 50% or more of the value of shares sold is derived from immovable property, otherwise 0% in SA, 0% in Mauritius