Mauritius revises tax credit rules for foreign cos

Mauritius, in its recent budget tabled in the parliament on June 14, has modified the mechanism for granting foreign tax credit (FTC) in the hands of Mauritius-resident foreign portfolio investors (FPIs). FTC refers to the availability of credit for foreign taxes (such as taxes paid in India) against the tax payable in Mauritius on the same stream of income.

The deemed FTC mechanism, available to companies holding a category 1- Global Business License (GBC-1), will be abolished from December 31, 2018 and will be replaced by a partial exemption mechanism. Mauritius-resident FPIs, including those investing into India, typically register as GBC-1 companies as this enables them to take advantage of the applicable tax treaties. Nearly 34% of foreign direct investment (FDI) inflows — nearly Rs 6.72 lakh crore — into India was from Mauritius during the period April 2000 to December 2017.

The move proposed in the budget does not alter the tax outgo in Mauritius, but may result in having FPIs to provide greater evidence to prove that they are not post-box entities. Anish Thacker, tax partner at EY India, says, “Mauritius also intends to provide for greater substance requirements, as and when these are introduced. FPIs will need to take a relook at what they need to do to meet these conditions. If not met, the partial exemption could be denied.”
Thacker explains the rationale for the proposed move, “After its recently conducted review, the Organisation for Economic Co-operation and Development (OECD) identified the deemed FTC mechanism as a harmful tax practice. As Mauritius was committed to be in conformity with globally accepted practices, the requisite change has been introduced in the budget.”
Shefali Goradia, tax partner at Deloitte India, says, “Moving away from the deemed FTC was expected. Investment holding companies are not likely to be impacted as the impact of the proposed change is tax neutral.”

Here is how it pans out. Currently, in Mauritius GBC-1 companies are taxed on their chargeable income — including foreign dividends, interests and other income less expenses — at a corporate rate of 15%. No tax is imposed on capital gains. A GBC-1company can claim an FTC is the actual foreign tax incurred, or a deemed FTC, equivalent to 80% of the Mauritius tax payable, which results in an effective tax rate of 3%. Under the proposed regime, 80% of chargeable income — such as foreign source dividend, interest, etc — will be exempt. Assuming income is Rs 100, the balance Rs 20 will be taxed at 15%. This also brings the effective tax rate to 3%.

Source:The Economics Times