Mauritius does not currently have any specific transfer pricing legislation in place. Nonetheless, Section 75 of the Income Tax Act 1995 (“ITA”) provides for the application of the arm’s length principle in assessing the reasonableness of commercial and financial terms in related party transactions.
The arm’s length provisions under Section 75 of the ITA applies to any business or other income earning activity carried on in or from Mauritius:
a. which is controlled by a non-resident; or
b. by a non-resident company or by a company in which more than 50% of the shares are held by or on behalf of a non-resident; or
c. where the person controlling that business or activity is not, in the opinion of the Director General of the Mauritius Revenue Authority (“MRA”), at arm’s length with any other person, either by reason of his relationship or otherwise, with respect to any commercial or financial transaction.
If it appears to the MRA that the business or income earning activity of a company carried out in or from Mauritius produces no net income or less than the net income expected to be derived in the opinion of the Director General of the MRA, then, in the context of an examination of tax returns, the net income may be adjusted to be the amount which the Director-General determines would have been derived by the company, had all its commercial and financial transactions been wholly at arm’s length.
While Section 75 of the ITA is not new, during the recent years, we have witnessed an increasing number of assessments being raised in respect of related party transactions, more particularly related-party loan transactions. For instance, in a recent Supreme Court Judgement delivered with respect to Section 75 of the ITA, the first judgement in a transfer pricing case in Mauritius, it was held that interest-free loans provided by a parent to its wholly owned subsidiary were not at arm’s length. Accordingly, the Supreme Court held that the MRA was right to challenge such loans under Section 75, impute a deemed interest on such loans and tax same at the level of the parent company.
Interestingly, the judgement did not take into consideration the repayment capacity of the subsidiary, its inability to secure a loan from a third party given it had no assets and was in financial difficulties, or even whether such loans should, in the first place, be considered as loans on a substance-over-form basis.
In view of the above, Mauritius-resident companies having related party transactions should ensure that appropriate transfer pricing policy documentation is put in place and such documentation should be adequately supported by scientifically performed benchmarking exercises to demonstrate the arm’s length nature of such related party transactions.
If you wish to discuss these topics, please contact:
WTS Tax Consulting (Mauritius) Ltd.
