Just when you think you know all there is to know about a tax topic, a rude awakening comes along. This was definitely the case with the latest ruling issued by the Assessment Review Committee (“ARC”) in Mauritius.
The ARC is an independent dispute resolution body that resolves disputes between taxpayers and the Revenue authorities in Mauritius, so basically acts as a facilitator for those oh-so-dreaded tax disputes. And on 9 March this year, the ARC issued a ruling in the case of Mauritius Freeport Development Co. Ltd (“The Applicant”) v The Director General, Mauritius Revenue Authority (“MRA”).
Interestingly, the ARC ruled in favour of the Applicant by allowing them to claim annual allowances on capital expenditure below the maximum allowable rate mentioned in the Income Tax Regulations 1996 (“ITR”).
Why does this matter? Well, this ruling allows taxpayers to explore new tax savings avenues (and what taxpayer would say no to that!) The ruling seems to suggest that taxpayers can claim a lower annual allowance rate in the low profit-making years to maintain a relatively high asset value. You can then take advantage of the full annual allowance rate on those asset values in highly profitable years to lower your taxable profits. So, good news all round!
Breaking the case down:
- The Applicant is a third-party Freeport developer and claimed annual allowances of MUR 84 698 483 in the income tax years 1995 to 2005;
- The MRA denied the claim arguing the allowances should have been claimed in the year the assets were used;
- Consequently, this resulted in a chargeable income for the year 2006 as less tax losses were carried forward from 2005.
- However, for assets acquired between the years 2006 to 2010, the Applicant did not claim annual allowance as it was less profitable in these years;
- The MRA was adamant that the Applicant was deliberately claiming lower annual allowances to avoid paying higher taxes in the years it would eventually become profitable;
- According to the MRA, this practice was a clear form of tax planning and they adjusted the Applicant’s tax computation to reflect the “correct” amount.
The ARC’s verdict on the MRA’s approach – Not so fast!
The law states that the “rate of annual allowance shall not exceed the rate corresponding to the capital expenditure specified in the tax regulations”. Rightly so, the ARC applied the literal rule which is the primary rule to be applied and is aptly termed as the “first rule of interpretation”.
In applying this rule, the ARC pointed out that the annual allowance rate that can be claimed “shall not exceed” the maximum rate as the Applicant was well within its right to claim the annual allowance at a rate below the maximum rate.
The ITR does not preclude a taxpayer from claiming a lower rate than the maximum prescribed if the maximum rate is not exceeded. Remarkably, the MRA failed to realise that the legislator did not impose any minimum rate of annual allowance that can be claimed on capital expenditure incurred. In practice, a taxpayer has the flexibility to claim annual allowances at any rate ranging from 0% up to the maximum rate.
Besides, it is a common practice in other countries such as the UK and Canada, where there are no restrictions from claiming lower annual allowance rate.
All in all, this ruling allows taxpayers to claim annual allowance at a rate which they consider appropriate for the best interest of the business. And in these troublesome economic times who can blame them? For more information on the nitty gritty of allowances, disputes and tax savings contact us today.
About the author:
Today’s article was written by Jayesh Ramloll. Jayesh is in our Mauritius office and specialises in Mauritian domestic and international tax and can be contacted via email at firstname.lastname@example.org