Mauritius’ First Transfer Pricing Case

Well, dear reader, this is not a newsletter title many would’ve expected. Lower tax jurisdictions, such as Mauritius, have traditionally been perceived as safe havens from transfer pricing (“TP”) rules. However, Mauritius has this month had its very first TP case, drum roll please, Avago Technologies Trading Limited (“Avago”) vs. Mauritius Revenue Authority (“MRA”), and today we tell you all you need to know about this seminal case.

Let’s break the case down

The USD 107 million (plus penalties and interest) case focussed on whether the royalty fees paid by Avago to its related entity, GEN IP (based in Singapore), were arm’s length for the assessed years 2011 – 2015. The MRA argued that:

• The royalty payments were inconsistent with industry norms in the semiconductor sector, indicating a profit shifting motive;
• While Avago used the Transactional Net Margin Method (“TNMM”) to justify the royalty payments, the Comparable Uncontrolled Price (“CUP”) method would more accurately reflect valuations of intangibles;
• The royalty payments were not linked to the actual Intellectual Property (“IP”) provided by Gen IP and were instead solely based on the residual profits after Avago’s profit allocation.

The verdict of the Assessment Review Committee (“ARC”)

The ARC’s main findings are summarised below:

• The ARC upheld the MRA’s determination that the arrangement was primarily aimed at tax avoidance and confirmed the adjusted assessments for the relevant years and that the MRA’s adjustments regarding the royalty fee deductions were grounded in a reasonable interpretation of the Mauritius Income Tax Act (“ITA”);
• The ARC underscored that the TNMM could only produce reliable outcomes if all payments to related parties were made at arm’s length and for services rendered to Avago was used. The ARC concluded that Avago’s application of the TNMM was faulty, as it did not accurately represent the value of the services and intellectual property provided by Gen IP.

Why is this case significant from a TP perspective?

Mauritius testing a TP case and using pretty sophisticated arguments is a big deal! And such a resounding TP win for the revenue authority now sets a precedence, not only in Mauritius, but for all low tax jurisdictions that your cross-border intracompany transactions should be conducted at arm’s length regardless of whether the region has adopted formal TP legislation. This case serves as yet another stark reminder of the worldwide shift towards TP compliance and the prevention of cross-border profit shifting (especially when it comes to high-value transactions, intangibles and intracompany loans). Companies must provide strong commercial justifications that accurately reflect the economic activities and risks involved.

Companies engaged in cross-border transactions must carefully navigate the regulatory landscape in order to avoid tax liabilities. Essentially it is critical to prepare appropriate TP Documentation, including careful selection of an appropriate TP method, detailed benchmarking studies and economic analysis to evidence the arm’s length nature of the transactions. Otherwise, may as well let the tax authorities decide what’s what.

Please contact us if you require further insight.