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Budget Measures

Kitty Miv, Editor
12 August, 2019

Having looked last week at indirect taxes, this week we will be focusing on budgets and direct tax reforms, as this week was a busy one for governments seeking to release, consult on, or legislate their national budgets. (And why not? It's not like there's much else going on, is there?!)

At the start of August, the Indian authorities published in the country's official Gazette the measures announced in the July 5 budget, which have since received Presidential Assent. Among the key measures contained in the budget were provisions to ensure that the scope of the lower 25 percent corporate income tax rate will be expanded to cover the vast majority of Indian businesses, with a figure of 99.3 percent having been mooted.

Previously, the lower 25 percent rate is levied on those businesses with turnover not exceeding INR2.5bn (USD36.5m), and on manufacturing firms. This threshold is being raised to INR4bn.

Other salient tax measures in the Budget, in addition to measures impacting individual taxpayers, included the launch of a new dispute resolution service to resolve legacy service tax and excise duty-related disputes; confirmation that there will be a single monthly GST return along with other administrative simplifications; and confirmation that India will roll out an electronic invoice system, to eventually replace the e-way bill system and enable returns to be pre-filled.

Also in early August, the Canadian Government announced a consultation on draft legislative proposals to implement a number of tax measures announced in the 2019 Budget.

The proposals would implement measures to:

  • Improve the transfer pricing rules that apply in transactions occurring across international borders by persons who are not dealing at arm's length;
  • Better target the foreign affiliate dumping rules to counter erosion of the tax base that can result from transactions in which a corporation resident in Canada controlled by a non-resident invests in a foreign affiliate;
  • Ensure that the appropriate tax consequences apply to cross-border share lending arrangements that are being used to avoid Canadian dividend withholding tax;
  • Improve the consistency of the tax treatment of owners of multi-unit residential properties with that of owners of single-unit residential properties;
  • Improve the rules meant to prevent taxpayers from using derivative transactions to convert fully taxable ordinary income into capital gains;
  • Provide greater flexibility in managing retirement savings by permitting two new types of annuities under the tax rules for certain registered plans;
  • Bring the specified multi-employer plan rules into line with the tax rules that apply to other defined benefit registered pension plans; and
  • Improve the "allocation to redeemers" methodology used to allocate capital gains to redeeming unit holders of mutual funds.

The consultation will close on October 7, the Canadian authorities revealed.

Then, shortly thereafter, Mauritius published legislation in its official Gazette to enact measures announced in the territory's latest Budget. Mauritius has been busy recently, and a multitude of changes to all areas of its tax regime were announced in its 2019-2020 Budget, including international tax reforms; value-added tax changes; new corporate tax relief measures, including a new patent box regime; a regime for peer-to-peer lending; individual tax breaks; and a tax amnesty scheme.

In terms of corporate tax measures, our main focus for this week, as previously mentioned, the Budget included a proposal for a generous patent box regime. A newly set-up company involved in innovation-driven activities will benefit from a tax holiday for eight years on income derived from its intellectual property assets developed in Mauritius. Existing companies may benefit from the eight-year income tax holiday on income derived from intellectual property assets developed in Mauritius after June 10, 2019.

In addition, a five-year tax holiday will be introduced for a company setting up an e-commerce platform, provided the company is incorporated in Mauritius before June 30, 2025.

The Budget also announced a five-year tax holiday for peer-to-peer lending operators, provided the company commences operations prior to December 31, 2020.

Interest income received by an individual from peer-to-peer lending will be subject to income tax at the rate of three percent. Any bad debt and fees payable to the peer-to-peer operator will be deductible from taxable interest income. No tax deduction at source will be applied to peer-to-peer interest income.

The Budget also made changes concerning loss carryforwards. The accumulated losses of a company presently lapse if there is a change in the ownership of the company. However, in the case of a manufacturing company, the Minister may allow the carry forward of the losses if he is satisfied that it is in the public interest to do so and provided conditions relating to safeguard of employment are complied with. This derogation will be extended to any company facing financial difficulty that is taken over by another shareholder provided conditions imposed by the minister are met. This amendment will be deemed to be effective as from July 1, 2018.

However, the Budget also included numerous measures to foster the development of new international financial services niches, setting out measures the territory will take to establish Mauritius as a hub for Fintech in the region. Accordingly, the Financial Services Commission will:

  • establish a regime for Robotics and AI enabled financial advisory services;
  • introduce a new licence for Fintech Service providers;
  • encourage self-regulation for Fintech activities in consultation with the United Nations Office on Drugs and Crime;
  • introduce the use of e-signatures and e-licences on a pilot basis; and
  • create crowd funding as a new licensable activity.

It further announced plans to fine-tune the taxation of banks, including provisions that: income derived by banks from Global Business Companies will be exempted from the levy under the Value Added Tax Act; the rate of the levy will be increased from four percent to 4.5 percent of operating income for banks having operating income exceeding MUR1.2bn in a year; a cap will apply on the increase in levy payable by a bank in order to ensure that no bank is burdened by an excessive levy amount; it will be clarified that the levy is not a deductible expense under corporate tax; and that no foreign tax credit will be allowed.

A reduced tax rate of five percent is applicable on the chargeable income of a bank in excess of its chargeable income in the base year (year of assessment 2017/2018) if the bank grants at least five percent of its new banking facilities to any of the following categories of businesses: SMEs in Mauritius; enterprises engaged in agriculture, manufacturing, or production of renewable energy in Mauritius; or operators in African or Asian countries.

And last but not least, especially from a BEPS perspective, it was announced in the Budget that the Income Tax Act would be amended so that a company will not be considered as tax resident in Mauritius if it is centrally managed and controlled outside Mauritius (per the recommendation of industry stakeholders in this regard.)

Various changes will be made to address the deficiencies identified by the EU in the territory's partial exemption regimes, including defining the detailed substance requirements that must be met in order for a taxpayer to enjoy the partial exemption benefit; and laying down the conditions that must be satisfied where a company outsources its core income generating activities – namely:

  • the company must be able to demonstrate adequate monitoring of the outsourced activities;
  • the outsourced activities must be conducted in Mauritius; and
  • the economic substance of service providers must not be counted multiple times by multiple companies when evidencing their own substance in Mauritius.

Mauritius also intends to introduce controlled foreign company rules, and the legal provisions relating to the arm's length test for transfer pricing purposes will be fine-tuned, the Budget says, "to remove any doubt or uncertainty about its application."

Various other measures were outlined by the Mauritian authorities, including , as stated, VAT reforms, tax perks for marinas, a tax amnesty for disclosures made before the end of March 2020, and tweaks to allowance and exemption levels for personal income tax payers.

However, I think that's enough to be going on with for one week. (And we haven't even touched on the tax relief measures announced by Croatia as part of its ongoing tax reform program.)  Maybe next week! Until then...

About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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