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Studies by the World Bank referred to the achievements of the Mauritian economy as the economic miracle. Exceptional circumstances have resulted to such achievements in a fairly short period of time to join the middle-income countries. Mauritius has been successful in achieving rapid growth and substantial diversification of a formerly mono-agricultural economy. Sound economic management and a far-sighted development strategy have permitted the country to diversify its export and productive bases from a sugar-based economy into one based on five pillars of development: agricultural, textiles, tourism, information and telecommunication technology and financial services. Against this background the corporate sector plays an important role in terms of, among others, investment, employment generation, export earnings, contribution to the cost of public services. Hence the need for a more competitive, fair, sustainable and stable corporate tax system that fosters business investment and economic growth.
3.1 Corporate Tax in Mauritius
The taxation of resident Mauritian companies is governed by the Income Tax Act 1995(a consolidating piece of legislation including the income Tax Act 1974 and several subsequent Finance Acts), as amended, which is substantially based on UK tax law. The rates of tax and of deductions available are fixed by a charging Act, the Finance Act, enacted annually. However, there are many special taxation regimes applying to particular types of company: companies operating offshore under the Financial Services Act 2007, supervised by the Financial Services Commission), freeport companies, and offshore trusts are governed by the Offshore Legal and Tax Regimes. Companies holding various types of certificate under the Industrial Expansion Act 1993 and companies that invest in 'incentive' companies are covered by the Invest Incentive Schemes.
A company is treated as resident in Mauritius if it is incorporated in Mauritius or if it is managed and controlled from Mauritius. A resident company is taxed on its worldwide income, which includes foreign-source income.
Taxable income includes rents, dividends, royalties and interest. However, dividends paid by 'tax incentive' companies, companies listed on the stock exchange, and companies which pay the full tax rate are exempt from tax in the hands of the receiving shareholder, whether resident or not. There is no capital gains tax. (Mauritus Domestic Corporate Taxation, 2011)
3.2 Evolution of Corporate Tax reforms
It is worth highlighting some important changes that took place in the corporate tax system prior to the major reforms of 2006.
In 1984-85, to boost investment and employment creation the system of corporate tax was fundamentally changed to bring it more in tune with the development needs. The tax, which was then charged only on retained profits of companies, was reduced from 55% for public companies and 66% for private companies to a uniform rate of 35 % applicable to all company profits before distribution of dividends. It was believed that the existing high rates of company taxation not only constitute a psychological disincentive to potential investors, but also encourage tax evasion. Furthermore, another type of tax incentive was introduced for the export-led sectors. A company would benefit by 2% reduction in the tax rate for each 10% of its turnover which was exported subject to a maximum benefit of 10 %. Thus any company exporting 50% or more of its turnover would pay tax at the rate of only 25%.(Budget Speech 1984-85)
In 1985-86 all companies holding an Export Enterprise Certificate, an Export Service Certificate, a Development Certificate, a Hotel Management Service Certificate, or an agricultural Development Certificate were required henceforth to pay at the nominal rate of only 15%. Previously an EPZ company was enjoying holiday tax for the first 10 years and was taxable at half the normal rate during years 11 to 15 and a quarter of the rate during years 16 to 20. Furthermore, a company exporting 100% of its turnover would get a 20% tax rebate and would pay the nominal rate of 15 %.( Budget Speech 1985-86)
In 1988-89 Housing Development Companies engaged in the construction of housing units for the lower and middle income groups were charged at the reduced rate of 15%. (Budget Speech 1988-89)
As announced in the budget speech 1990-91, companies engaged in the electronic sector were charged at the reduced rate of 15%. The scheme for the export -led sector was also improved. A company exporting would pay tax as follows:
Between 10% up to 30% of its turnover : 25%
Between 30% up to 50% of its turnover: 20%
More than 50% of its turnover: : 15%
Furthermore, to encourage companies to invest in capital intensive technology, all foreign exchange gains or losses on foreign loans used for the purchase of such equipment were allowed in the computation of capital allowances.
In 1992-93 the various packages of incentives available to the productive sectors of the economy were streamlined. The existing twelve different schemes which had evolved over the last two decades were grouped into only three categories as follows:
Category A: All companies mainly in the offshore sector were not liable to tax.
Category B: Companies with incentives certificate liable to corporate tax at the rate of 15%.
Category C: All companies which pay corporate tax at normal rate (i.e 35%)
The existing Investment allowance was increased from 20% to 25%. Enterprises were allowed to claim capital allowance up to 125% in industrial premises, new machinery and plant. Even the bus companies benefitted this allowance. (Budget Speech 1992-93)
In 1993-94 companies engaged in high technology activities were allowed to deduct from their chargeable income 100% of their pre-operational expenses. Wholly-owned subsidiaries were allowed to set off any loss they may incur against the profits of their parent company. (Budget Speech 1993-94)
In 1994-95 bus companies had their corporate tax reduced from 35% to 15% to be at par with the EPZ. The 10% tax credit was extended on capital expenditure under the Modernisation and Expansion Enterprise Certificate Scheme to cover investment on high-end software. (Budget Speech 1994-95)
In 1995-96 the tax differential between companies in the offshore sector and domestic companies were removed so that they were liable to the same rate applicable to incentive companies (i.e 15%). A uniform corporate tax rate of 15% was also set for manufacturing enterprises in replacement of the different rates which were previously ranging from 15% to 35%. (Budget Speech 1995-96)
In 1996-97 the 15% corporate tax on EPZ companies was abolished. As at that year Mauritius had signed 20 Double Taxation Agreements of which 14 had been ratified. (Budget Speech 1996-97)
In 1997-98 interests earned by offshore companies on call and deposit accounts with offshore and domestic banks were exempted from income tax. A Fishing Development Certificate Scheme was introduced and investors of this sector benefitted from reduced corporate tax rate of 15%. In the tourism sector the current rate of annual capital allowance was raised from 5% for small and 10% for large hotels to a standard rate of 20% to speed up the process of upgrading. Double deduction was allowed for expenses incurred on marketing and promotional activities abroad. (Budget Speech 1997-98)
In 1998-99 companies investing in regional member countries were allowed to benefit from fiscal incentives under the Regional Development Certificate Scheme. In view of the harmonisation of tax in the manufacturing sector ,as from 2000/2001 EPZ companies were required to pay 15% tax as applicable to other manufacturing companies. The rate of the Hotel and Restaurant Tax was reduced from 10% to 4% as from 7th September 1998 and 2% as from 1st July 1999 and was announced to be removed from 1st July 2000. To rationalise the investment incentive schemes, the 15% of corporate tax was extended to companies in the agricultural, manufacturing and hotel sectors, whether they are holders of incentive certificates or not. (Budget Speech 1998-99)
In 1999-2000 a 15% tax rate was allowed for all new companies, trusts and banks registered in our offshore jurisdiction. (Budget Speech 1999-2000)
In 2000-2001 the rate of corporate tax was reduced from 35% to 25%. Also, as from 1 July 2000 to level the playing field, the rate of tax for all offshore corporations including offshore banks was 15% like any other incentive company. The rate of corporate tax was reduced from 35% to 15 % for restaurants , for tour operators and for professional diving centres in addition to the removal of 2% hotel and restaurant tax. . (Budget Speech 2000-2001)
In 2004-2005 an Alternative Minimum Tax on companies was introduced. (Budget Speech 2004-2005)
In 2005-2006 the scheme of 10-year tax holiday and special tax credit of 60% of equity investments made in spinning companies was extended to cover weaving and dyeing activities. (Budget Speech 2005-2006)
The income tax system of Mauritius had become very complicated on account of its numerous tax breaks and exemptions and offered vast opportunities for abuse and tax avoidance. It led to inequity and inefficiency and was biased against small enterprises. Such system was unfair and it was also hindering the emergence of a fully-integrated economy. Moreover, some of the exemptions were not only perverting the tax regime but distorting resource allocation and leading to suboptimal uses of economic resources. This was leading to inefficiency in the economy that undermined over global competitiveness and depressed FDI which was flourishing elsewhere in the region. (Budget Speech 2007-08))
3.2.1 Mauritius Investment Incentive Schemes
Tax incentives are being phased out as part of a tax reform programme aimed at unifying and simplifying the Mauritian tax regime in line with the recommendations of the IMF. . Incentive schemes were initially set up by the Industrial Expansion Act 1993 for a number of sectors. Companies benefiting from such schemes are often known as 'incentive 'companies: Mauritian companies which invest in 'incentive' companies can treat part of their investment as an expense against tax. The incentives included mainly 15% corporate tax, exemption from customs duty and exemption from withholding tax. Some of the more important schemes have traditionally been as follows:
Pioneer Status Enterprise
Industrial Building Scheme
Hotel Development Certificate
3.2.2 Major Tax reforms 2006 onwards
The major tax reforms were brought following the passing of the Finance Act 2006. This Act provides for implementation of measures announced in the Budget Speech and for strengthening and streamlining of certain other provisions relating to revenue, public finance and banking and financial services. As part of the strategy to enhance the competitiveness of Mauritius, the tax system was revamped. These include, among others, the following:
Capital Allowances - Level playing field and improved governance/ less discretion.
Investment allowances on capital expenditure were abolished.
Annual allowances were extended to expenditure incurred on the acquisition, construction or construction of clinics, shopping malls, offices and showrooms, restaurants and entertainment premises, in line with Government's strategy to move towards a services economy.
Businessmen can claim full deduction of capital expenses that do not exceed Rs. 30,000, such as a personal computer .Previously that figure was Rs.10,000.
Allowable deductions and tax holidays - Level playing field
Deductions, apart from the normal expenses linked with production of income, were removed, except for the 200% deduction for marketing and promotional expenses granted to a company in the tourism sector or engaged in export activities. However, as announced in the budget speech 2012, this double deduction was abolished with effect from 1st January 2012.
All existing provisions relating to tax credits (investment, export, etc.)and tax holidays were eliminated. However, it was announced in the budget speech 2012 that the income tax exemption to Freeport operators would continue to be granted indefinitely.
In the context of the Empowerment Programme, a new four- year tax holiday scheme for small businesses converted into a company and which register for the first time with the Mauritius Revenue Authority was introduced.
Tax losses : Jobs and fairness
Only losses that are attributable to claims under the new regime of annual allowances could be carried forward.
For other types of losses, a time limit of 5 years was allowed to carry forward and set-off against net income.
Losses accumulated as at 30 June 2006 were allowed to be carried forward and set off against chargeable income for a maximum period of 5 years, that is, up to June 2011.
Flat corporate tax rate
In line with international trend and to be globally competitive, the corporate tax rate was revised downwards to a single rate of 15%. Before 2006, tax incentive companies were taxed at the rate of 15% and other companies at 25%.
3.2.3 Special levies on profitable firms
A Temporary Solidarity Levy at the rate of 0.85% was charged on profitable hotels, hotel management companies and tour companies and tour operators. Only companies with profit before tax to turnover ratio of 5% and above based on the available audited accounts were required to contribute to the levy. This levy was an allowable deduction for income tax purposes (Finance Act 2006).
Receipts from the Solidarity Levy introduced in 2006-07 grew by 30% to reach Rs 202 million (in 2007-2008). The solid growth is attributable to the exceptional increase in tourist arrivals in the second half of the calendar year. However, an amount of only Rs 101 m was collected in respect of the first six months of financial year 2008-09.This was mainly due to the suspension of the temporary levy on account of the impact of economic recession on tourism sector.
In addition to income tax, underlining the importance of solidarity, Government introduced a series of new levies .These were imposed on affluent sectors intended to mobilise resources with effect from Ist July 2009 to combat the effects of the global economic crisis . The new levies applicable to only profitable companies comprise:
Special Levy on banks
Following announcement made in the budget speech 2007/2008, Government introduced, as a "bridging measure" in order to avoid a sudden drop in Government revenue, a special levy on banks at the rate of 0.5% on their operating income and 1.7% on their book profit. Only 30 per cent of the levy was payable in the first year of application. This levy is applicable to only profitable banks. In 2009 the rate was increased to 1% of turnover plus 3.4% of profits over the course of the next two financial years. In 2011, the doubling of the special levy was maintained for the next two years. Moreover, an additional one-off charge from Segment A banking activities has been added to provide seed capital to the Equity Fund ltd.
During the year 2007-08, 12 banks paid the special levy, which raised Rs 67 million. In 2008-09 the amount stood at Rs 333 million which was paid by 16 banks.
Solidarity levy on telephony service providers
Providers of fixed and mobile telephone services were liable to pay a solidarity levy for the next two years. The applicable rate was as follows:
For the years of assessment commencing on July 1 2009 and January 1 2010: 5% on the book profit and 1.5 % on turnover.
Further changes in solidarity levy
The following announcement was made in the budget speech 2012:
Abolition of solidarity tax on dividends and interest with effect from 1st January 2012.
Extension of solidarity levy on telecommunication companies up to 2013
Imposition of Solidarity levy on management companies in the Global Business Sector at the rate of 10 % of chargeable income and applicable for two years ending in 2013
Corporate Social Responsibility (CSR)
Firms are required either to spend 2% of their profits on government approved CSR Schemes or to transfer these funds directly to the government to be used in the fight against poverty. As announced in the budget speech 2012, CSR will now be computed as 2% of chargeable income instead of 2% of book profits. Corporate social responsibility does not apply to global business companies.(Budget Speech, 2009 and 2012 and Mauritius Domestic Corporate Taxation,2011)
3.3 Change in method of collection of CIT revenue
A new payment system known as Advance Payment System (ADS) for companies was introduced on 2007. This strategy requires them to effect quarterly provisional tax payment on the basis of the chargeable income of the preceding tax return. Final reconciliation of tax liability is done when the annual tax return for that year is submitted. This system which is considered to be in line with best international practice is thought to bring the tax payments flow of a company closer to its profit flow.
In addition, all companies with an annual turnover above Rs 30 million or more than 50 employees were required with effect from 1 July 2007 to submit their income tax returns electronically and make e-payment of Tax. The number of E-Filers companies rose from 1182 in 2007-08 to 12,853 in 2010.
In an effort to get more businesses to pay taxes, the government introduced two special schemes: Voluntary Disclosure Incentive Scheme (VDIS) and a Tax Arrears Payment Incentive Scheme (TAPIS). VDIS allowed companies to come forward and make voluntary disclosure of undeclared earnings with only 25 per cent of the penalty and interest that would have been imposed under normal provisions. The second one aimed at mopping up outstanding tax arrears and clams under litigation. .( Budget Speech,2007/2008 )
3.3.1 Global Business Sector
Mauritius as a low tax jurisdiction, building on its 36 Double Taxation Avoidance Treaties(DTAs), benefits to many types of businesses when it comes to tax planning through the Mauritius offshore companies. There are two types of Global Business Companies (GBCs) based on the category of licence - GBC 1 and GBC 2..These companies as well as trusts can be set up as part of group of companies trading globally and same can be used to buy and sell goods between the group's companies by establishing the right strategy. Professional Service Companies such as lawyers, consultants and Computer programmers can enjoy considerable tax savings by dealing with clients outside their country of residence and deriving income low of tax in Mauritius.
A GBC1 is liable to corporate tax at 15% but may claim a foreign tax credit in respect of the actual foreign tax suffered or 80% presumed foreign tax credit, whichever is higher. As such, a GBC1 has a maximum effective tax rate of 3%. A GBC2 is exempt from tax in Mauritius and cannot benefit from the DTAs.(Source : (Mauritius : A guide to Global Business , Deloitte ,November, 2010)
3.4 Business Facilitation Policy
The Finance Act 2006 and the Business Facilitation Act 2006 set the legal framework, along with the Board of Investment as facilitator, to support Government's commitment to make Mauritius a globally competitive nation capable of reaching greater heights of success without trade preferences and for implementing one of the most comprehensive sets of reforms the country has witnessed in many years. Investment incentives are applied uniformly to both domestic and foreign investors. Mauritius offers a low jurisdiction as set out below:
a flat corporate and income tax rate of 15%,
up to 100% foreign ownership,
exemption from customs duty on equipment,
free repatriation of profits, dividends and capital,
no minimum foreign capital required,
50% annual allowance on declining balance for the purchase of electronic and computer equipment; and
An extensive tax treaty network with several countries.(As at November 2010, Mauritius had 36 Double Taxation Tax Treaties(DTAs) in force and is currently negotiating others)
(Source: 2011 Investment Climate Statement- Mauritius, Bureau of Economic, Energy and Business Affairs, March 2011)
3.4.1 Effects of Tax Reforms on Business Facilitation
Mauritius is among the most competitive and successful economies in Africa and actively seeks foreign investment. The World Bank's 2010 Doing Business report ranks Mauritius 17th among the 183 economies covered by the report and first in Africa for the second year in a row in terms of overall ease of doing business. In three years Mauritius has moved from the 49th (2006) to the 17th place (2009). Mauritius is praised in the report for its continued efforts in the past year to improve the business climate with the adoption of a new insolvency law, the establishment of a specialized commercial division within the courts, the easing of property transfers, and the expediting of trade processes. The government's objective is for Mauritius to rank among the top 10 most investment and business friendly locations in the world.
The World Economic Forum's 2009-2010 Global Competitiveness Report places Mauritius second in Africa (after South Africa) and 57th in the world in terms of competitiveness. The report lauded Mauritius as "a country characterized by strong and transparent public institutions, with clear property rights, strong judicial independence, and a security that is good by regional standards." (Bureau of Economic, Energy and Business Affairs, March 2011
This chapter has provided an overview of the tax regime in Mauritius . The next chapter explains the methodology to conduct the study