Implications of the MoU on the DTAA between South Africa and Mauritius
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The renegotiated Double Taxation Avoidance Agreement between South Africa and Mauritius has been ratified by both countries and will be in force from 1stJa-nuary 2016. The underlying change concerns the application of Mutual Agreement Procedure (MAP) between the two competent authorities to determine the state of tax residence of companies. The criteria relating to the MAP have now been clarified by a Memorandum of Understanding (MoU).
The MoU is a welcome support to the renegotiated treaty and provides guidance to the two competent authorities – namely the South African Revenue Service (SARS) and the Mauritius Revenue Authority (MRA) – on how to apply the MAP. The starting point is to determine the place of effective management and the following criteria have been set out in the MoU to clarify same:
(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 governs 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.
The competent authorities will use these criteria to establish a mutual agreement to decide in which country the company will be taxable. However, it is still unclear how the factors that will be used to determine the country of fiscal residence will apply. The modus operandi will be more tangible when the two competent authorities resolve one or two concrete cases.
Other key changes in the renegotiated treaty concern withholding tax rates on dividend, interest and royalties which have been reviewed as follows.
| New rates | Old rates |
Dividend | 5% if holding is more than 10%, otherwise 10% | 5% if holding is more than 10%, otherwise 15% |
Interest | 10% | 0% |
Royalties | 5% | 0% |
Additionally, a new provision has been introduced in the capital gains article; where a company in which there is a disposal of shares also has underlying assets of more than 50% of immoveable property, the taxing right is given to the country in which the immoveable property is located. The amendment should be noted by companies that hold mining rights, agricultural and forestry assets.
The renegotiated treaty supported by the MoU provides a new dimension in the way South African multinationals use Mauritius as a jurisdiction of choice to operate from.
The mindset around plain vanilla structures may need to change. Companies that wish to set up in Mauritius will have to demonstrate commercial rationale and complement this with appropriate substance. We need to bear in mind that Mauritius is not the only country impacted by increasing global political scrutiny. There is a lot of pressure from the OECD through the Base Erosion and Profit Shifting (BEPS) initiative, where structures are required to demonstrate more substance.
Mauritius remains a jurisdiction of choice to assist South African multinationals to set up their operational, administrative and financial base in the country.
In the last budget, the Mauritian government showed its vision to boost the economy through the extension of the port and Freeport zone. These high-investment projects will create the right platform for South African companies to set up their Regional Headquarters and Regional Treasury Centres in Mauritius. There are other distinct benefits that the Mauritian jurisdiction offers, including no exchange control, proven and efficient regulatory system, access to internationally-known service providers, availability of highly efficient professionals, and the English Privy Council as the ultimate Court of Appeal.
Other propositions geared towards the creation of additional substance are currently being implemented by the Government, including negotiating with the Johannesburg Stock Exchange (JSE) to offer dual listing on the Stock Exchange of Mauritius (SEM).
Over and above the setting up of Category 1 Global Business Company, fund/asset managers can use the tried and tested Mauritius experience to establish a Collective Investment Scheme; whether mutual fund hedge fund or pension fund to tap into the burgeoning African middle-class.
Mauritius definitely ticks all the right boxes as an international jurisdiction of choice. It is a business-friendly jurisdiction with good infrastructure, a well-qualified labour force as well as the will from government to constantly improve the country’s attractiveness to foreign investors.
