"Many observers are also concerned that the sovereignty of the low tax jurisdictions is being threatened and that the interests of high tax countries are being prioritized. Also, questions are being raised as to whether a consistent approach is being applied to all countries with harmful tax practices. What does this mean for Mauritius?"
The OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) is driving changes to taxation regimes across the globe, including in Mauritius, and measures to counter harmful tax practices must be enforced upon member and non-member countries alike to ensure an international level playing field
In 2015, the Committee on Fiscal Affairs of the Organisation for Economic Co-operation and Development (OECD) delivered its final report on Action 5 (Countering Harmful Tax Practices more effectively, Taking into Account Transparency and Substance) of the BEPS (Base Erosion and Profit Shifting) Action Plan. Through the creation of the Forum on Harmful Tax Practices (FHTP or the Forum), the work under Action 5 was to a large extent to: “revamp the work on harmful tax practices with priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime.”
The Forum seeks to address concerns that some jurisdictions allegedly provide a conducive tax environment that is tailored to attract geographically mobile activities such as financial services and other service activities, and to erode the tax base of other countries. The Forum was mandated to develop measures to counter harmful tax practices with respect to these mobile activities.
The OECD’s position on preferential tax regimes is clear. It does not have the intention to create/promote a harmonized tax system within and outside the OECD or dictate any tax rate to any country. The scope under Action 5 is to counter harmful tax regimes through the identification of a harmful tax regime based on predefined conditions, the review of the regime and a commitment of the countries to take corrective actions.
A regime is deemed to be harmful if it offers significant benefit and preferential terms in comparison with the general principles of taxation in the relevant country. To assess whether a regime is harmful, the tax rates or regime in one country compared to another is irrelevant, and having a low/no tax rate in itself is not enough to constitute harmful tax competition. Therefore, if the standard rate of corporate tax in a particular country is 10%, taxing mobile activities at the same rate is not necessarily considered as harmful even though it may be lower than the rate applied in other countries.
Under Action 5, the tax rate is, however, used as a criterion to assess the status of a jurisdiction. A regime is potentially harmful if there is a low/no tax rate coupled with other factors such as ring- fenced taxation, lack of transparency, no effective exchange of information, artificial definition of the tax base, no adherence to transfer pricing and negotiable tax rate.
However, the report on Action 5 gives some clear indications that the OECD members have been reviewed on harmful tax practices. Action 5 also recognizes the need to develop a strategy to engage with non-member countries, to ensure a level playing field and avoid the risk of harmful tax practices being displaced to those non-member countries. While this may be more challenging, the FHTP has plans to communicate the purpose and objectives of its work as well as to increase the involvement of the nonmember countries in the BEPS Action Plan. For the fight against harmful tax practices to be successful, there should be commitment from not only OECD member countries but also from all countries across the world. A number of measures as suggested in the different reports under the BEPS Action Plan have been implemented since their publications in 2015. However, there is a sense that well developed and high tax countries are putting pressure on low tax jurisdictions with an aim to eliminate tax competition. Many observers are also concerned that the sovereignty of the low tax jurisdictions is being threatened and that the interests of high tax countries are being prioritized. Also, questions are being raised as to whether a consistent approach is being applied to all countries with harmful tax practices. What does this mean for Mauritius?
As a member of the BEPS All-Inclusive Framework, Mauritius has revisited its regime that was highlighted as preferential. Following the review by the Forum, the Deemed Foreign Tax Credit and the Freeport regimes, identified as harmful tax practices, have been abolished. The taxation of global banks and local banks has been aligned and the Category 2 Business Licences will be abolished as from 1 January 2019. Mauritius has taken proactive steps to reform its preferential tax regimes in order to comply with the BEPS standards. However, as other countries are yet to implement tax reforms in order to comply with BEPS, will Mauritius suffer from the first mover disadvantage?
The OECD has had a leading role in eliminating double taxation, and promoting cross border investment opportunities. But unless the different Action Points under BEPS are enforced on the OECD and non-OECD countries alike, unfair tax competition will continue and cause frustration among the compliant tax jurisdictions. It is now time for the OECD to take steps to establish a genuine level playing field, which takes account of the positions of both developed and developing nations, in an ever more globalised world.
Tax Partner, PwC Mauritius
Tel: +230 404 5079