How BEPS impact treaties - a Mauritian perspective
On 19th July 2013, the Organisation for Economic Cooperation and Development (OECD) issued its Action Plan on Base Erosion and Profit Shifting (Action Plan). Base erosion has been described as the use of legal arrangements by members of multinational business groups to shift income from business units located in jurisdictions where the group conducts business activities to business units in low or zero tax jurisdictions where the group conducts relatively little, if any, activity. These may include but are not limited to payment of interest, royalties, management and service fees resulting in the erosion of the tax base of the country where the activity occurs.
The Action Plan contains 15 actions that are regrouped under four headings:
The recommendation may have a significant impact on international financial centres, as it looks at both consolidating existing anti-avoidance provisions already in place in some countries to become international standards and instigating legal changes. An example of the consolidation would be the controlled foreign company (CFC) rules as there are varying application and varying exemption by various countries. Other action points relating to tax aim at addressing the issue of double non taxation through the use of tax treaties and domestic tax rules. But there are other points which are more to do with the administration such as making dispute resolution more effective, requiring tax payers to disclose aggressive tax planning arrangements, re-examination of transfer pricing documentation as well as the development of a multilateral instrument for amending bilateral treaties. Tax planning would still be around despite the measures enunciated, however one has to ensure that one looks at the risk and rewards when shifting profits from one jurisdiction to the other. There should be enough economic and commercial rationale and these need to be documented to ensure that a bona fide commercial activity is being carried out. The commercial reality of the activity must be transcended in the structure. An illustration would be if a company is holding investments, a one person with an equipped office might be justifiable with extensive use of digital communications, whilst if one is engaged in trading or marketing activities, then the activities in the company will dictate the manpower required to justify a commercially viable operation. Other justifications of moving to another jurisdiction would be the legal and regulatory environment, availability of investor promotion and protection agreements, foreign exchange restrictions, literacy rate in terms of skill sets required to carry out one operation.
One of the criticisms leveled by the OECD is treaty abuse with the use of shell or conduit companies. There has been an attempt by the OECD to address the issue in the commentary, but no conclusive action has been taken. Unless more substance is inserted in structures to demonstrate that the company has not been set up with the aim of only benefiting from tax advantages, this will be subject to challenges from tax authorities. One possibility is a limitation of benefit clause (LOB), whereby it is clearly spelt out that in the event, the company does not comply with the LOB, then it would be deemed to be carrying out abusive tax practices, thus treaty benefit be denied. The OECD’s Action Plan will assist both the Mauritian and Indian governments in the context of the renegotiation of the Double Taxation Avoidance Agreement. It is likely that the Mauritian government would accept an LOB clause in the treaty. The form of the LOB is not yet known, whether it will be a monetary amount ascribed or whether it is more of a commercial and economic rationale. In terms of substance, there has been a shift in the mindset and the government as well as the private sector is facilitating same.
Mauritius has taken steps to facilitate greater substance for entities utilizing it as an investment platform for both Asia and Africa. This includes, the ability for foreign owned entities to bring expatriate staff to the jurisdiction, information and technology infrastructure, space to carry out the activities, universities and tertiary institutions are producing graduates with the required skill sets be it in finance, legal, banking or engineering and so on. Connectivity to the island has greatly improved, with daily flights to Africa, Asia and Europe.