Mauritius Revenue Tribunal Clarifies Limits of Capital Allowance Planning under Section 24

In a recent decision of the Revenue Tribunal in CMT Spinning Mills Ltd v Director General, Mauritius Revenue Authority, the Tribunal considered whether a taxpayer’s approach to claiming annual allowances under section 24 of the Income Tax Act constituted legitimate tax planning or impermissible tax avoidance under section 90 (the General Anti-Avoidance Rule or “GAAR”).

The case is particularly relevant for taxpayers benefiting from tax holidays or incentives and addresses the extent to which flexibility in capital allowance claims may be exercised.

Key Facts

The taxpayer operated a yarn spinning business and benefited from a 10-year tax exemption. During this exempt period, it claimed very low annual allowances (as low as 0.5%) on its capital expenditure. Following the expiry of the tax holiday, the taxpayer increased the rate of annual allowance claimed, thereby utilising the remaining tax base to reduce taxable income.

The Mauritius Revenue Authority (“MRA”) challenged this approach on the basis that:

• the pattern of claims resulted in a postponement of tax liability; and
• section 90 should apply to counteract the resulting tax benefit.

Assessments were raised substituting the taxpayer’s claimed rates with accounting depreciation rates, resulting in significant additional tax, penalties, and interest.

Taxpayer’s Position

The taxpayer argued that:

• section 24 of the Income Tax Act and the Income Tax Regulations allow annual allowances at any rate up to the prescribed maximum, without requiring consistency or linkage to depreciation;
• the legislation provides an intended degree of flexibility to taxpayers in determining the rate of claim;
• varying the rate of annual allowance is an accepted feature of capital allowance systems; and
• there was no “transaction” within the meaning of section 90, but rather a lawful computation under the statute.

In essence, the taxpayer relied on the principle that taxpayers are entitled to arrange their affairs to minimise tax within the framework of the law.

MRA’s Position

The MRA contended that:

• the taxpayer’s approach lacked commercial rationale and was driven by the objective of obtaining a tax benefit;
• claiming a 0.5% allowance implied an unrealistic asset life (approximately 200 years), inconsistent with the financial statements;
• the taxpayer effectively shifted deductions from a tax-exempt period to a taxable period; and
• the pattern of behaviour constituted a scheme to obtain a tax benefit, falling within the scope of section 90.

Tribunal’s Analysis

The Tribunal framed the issue as a tension between:

• the taxpayer’s statutory entitlement to claim capital allowances under section 24; and
• the MRA’s power under section 90 to counteract tax avoidance.

1. Interpretation of Section 24

The Tribunal acknowledged that:

• section 24 permits annual allowances at prescribed rates, subject to maximum limits under the Regulations;
• the legislation does not expressly require the taxpayer to apply a consistent rate year-on-year; and
• there is no explicit statutory requirement that annual allowances align with accounting depreciation.

However, the Tribunal emphasised that:

• annual allowance is intended to be claimed in the income year in which the expenditure is incurred and in each of the succeeding years; and
• where the rate applied is so low that it effectively results in a negligible allowance, this may, in substance, amount to a deferral of the claim.

In this regard, the Tribunal referred to the principle confirmed in Director General, MRA v Mauritius Freeport Development Co Ltd (2025 SCJ 153), namely that a taxpayer is not free to defer the benefit of annual allowances to a later period of its choosing.

2. Application of Section 90 (GAAR)

The Tribunal confirmed that section 90 may apply where:

• there is a transaction, operation, or scheme;
• a tax benefit arises, including the avoidance, reduction, or postponement of tax; and
• the sole or dominant purpose of the arrangement is to obtain that tax benefit.

The Tribunal adopted a purposive, substance-over-form approach, allowing it to consider the overall pattern of conduct rather than isolated steps.

In this context, the Tribunal treated the taxpayer’s pattern of applying very low rates during the exemption period followed by higher rates thereafter as capable of constituting a “scheme” within the broad definition of section 90.

3. Key Considerations

In assessing whether section 90 applied, the Tribunal had regard to:

• the pattern of minimal claims during the tax holiday and increased claims thereafter;
• the absence of a clear commercial rationale for the very low rates applied;
• the disconnect between the rates used and the economic reality of the assets’ useful life; and
• the resulting postponement of tax liability.

The Tribunal’s reasoning indicates that, while flexibility exists under section 24, that flexibility does not extend to arrangements which, in substance, undermine the timing and operation of the allowance mechanism.

Key Takeaways

• Flexibility under section 24 is not unfettered: while the legislation allows variation in rates (within prescribed limits), this does not extend to rates that effectively defer the allowance.
• Extremely low rates carry risk: applying rates that are not commercially supportable or that are inconsistent with the economic life of assets may attract scrutiny.
• GAAR has a broad reach: section 90 can apply to a pattern of conduct or overall scheme, even where each individual step appears to comply with the literal wording of the statute.
• Substance and commercial rationale are critical: the Tribunal will consider whether the taxpayer’s approach reflects genuine commercial considerations or is primarily tax-driven.
• Tax holiday planning requires caution: attempts to preserve or shift deductions from an exempt period to a taxable period may be challenged where they lack a defensible commercial basis.

Conclusion

The Tribunal’s decision suggests an important boundary in the application of section 24. While taxpayers retain a degree of flexibility in determining the rate at which annual allowances are claimed, that flexibility must be exercised in a manner consistent with the purpose and structure of the provision.

In particular, the use of very low rates during tax-exempt periods, followed by increased claims once the taxpayer becomes taxable, may be viewed as giving rise to a tax benefit capable of being counteracted under section 90 where it lacks commercial justification.

Taxpayers should therefore ensure that their capital allowance policies are both technically compliant and commercially supportable, particularly where tax incentives or exemption periods are involved.

If you would like to discuss the implications of this decision for your structure or capital allowance policy, please contact your usual Regan van Rooy advisor.