There’s been an interesting case recently which sheds some light on Section 5 of the Income Tax Act (“ITA”) regarding the derivation of income and its link with Section 73 of the ITA concerning the definition of tax residence for an individual. The case centered around the taxability of foreign sourced income derived by Mr. Dilloo (“the Taxpayer”), which he remitted to Mauritius. The Supreme Court (“SC”) judged that the Assessment Review Committee (“ARC”) was wrong in its initial interpretation that Section 5 should have been applied in insolation from other provisions of the ITA and that the definition of tax residence under Section 73 should not be linked to Section 5.
The case further confirmed that employment income maintains its character even when held for an extended period and cannot be reclassified as savings or capital.
Let’s delve deeper into this case!
Background
- The Taxpayer, a Mauritian national, was working in Saudi Arabia and he transferred funds derived from his employment to Mauritius over the three years ending 30 June 2018.
- The Taxpayer used part of these funds to acquire immovable property in Mauritius, from which he earned a monthly rental income.
- The Mauritian Revenue Authority (“MRA”) assessed him as a Mauritian tax resident arguing that he had a permanent home available in Mauritius and that the centre of his economic activity was in Mauritius.
- He was thus liable for tax on both the local rental income and the remitted foreign income in accordance with Section 5(3) of the ITA but he had not filed income tax returns during the years in question.
- Although the Taxpayer had paid expatriate tax under Saudi law, the MRA did not accept the documentation relating to the expatriate tax as it was not compliant with Regulation 8 of the Income Tax (Foreign Tax Credit) Regulations 1996 in Mauritius.
- The MRA issued a notice of assessment to the Taxpayer, against which he lodged an objection.
- However, the MRA reaffirmed the assessment raised and issued a notice of determination of objection as the Taxpayer had failed to prove his foreign tax residency following a request from the MRA.
- Being aggrieved, the Taxpayer lodged representations before the ARC. However, these were set aside and the determination of the MRA was maintained.
- The Taxpayer then escalated his appeal before the Supreme Court.
- Surprisingly, the MRA also appealed to the Supreme Court on the grounds that the ARC erred in holding that Section 5(3) should be looked at in isolation and without considering the tax residence requirements of an individual under Section 73(1).
MRA’s Position
The MRA assessed the Taxpayer as a resident liable for tax on his worldwide income, citing Section 5(3) of the ITA due to his failure to file income tax returns. Section 5(3) states that “Income derived by an individual from outside Mauritius shall be deemed to be derived by the individual when:
a) it is received in Mauritius by him or on his behalf; or
b) it is dealt with in Mauritius in his interest or on his behalf.”
The ARC had, at first instance, concluded that section 5(3) was a stand-alone provision. They also argued that, under Section 73(1)(a) of the ITA, which defined an individual as a tax resident being “a person who:
i) has his domicile in Mauritius unless his permanent place of abode is outside Mauritius;
ii) has been present in Mauritius in that income year, for a period of, or an aggregate period of, 183 days or more; or
iii) has been present in Mauritius in that income year and the 2 preceding income years, for an aggregate period of 270 days or more.“
As mentioned earlier, the Taxpayer was deemed a tax resident of Mauritius by the MRA since he had a domicile in Mauritius and the centre of his economic activity was there. Hence, he was liable to income tax on his worldwide income to the extent it was remitted in Mauritius, which was the case. This interpretation by the MRA was in line with Section 5(3) of the ITA as the resident Taxpayer remitted his foreign sourced income in Mauritius.
Taxpayer’s position
The Taxpayer claimed the ARC incorrectly concluded that he was tax resident in Mauritius for the relevant years of assessment and that the remitted funds were savings, not taxable income. He also submitted a letter from his employer indicating he had paid taxes in Saudi Arabia and that he did not perform his duties in Mauritius as a non-resident. Consequently, he argued that the income was derived outside Mauritius and should not have been subject to tax.
The Supreme Court’s findings
The Supreme Court found that the ARC erred in its interpretation of Section 5(3) as it should have been read in conjunction with Section 5(1)(b) which states that where “the income was derived at a time when the person was resident in Mauritius, whether the income was derived from Mauritius or elsewhere.” This clearly states that only residents of Mauritius are liable for tax on income derived from abroad when remitted to Mauritius. Thus, the ARC misinterpreted Section 5(3) as it was read in isolation without taking into consideration the definition of residence under Section 73(1) of the ITA. This is why it is important to consider the interrelation of relevant sections of the ITA. Therefore, the Supreme Court confirmed that the ARC incorrectly ruled that the residency requirement outlined in Section 73(1) does not apply when the deeming provision in Section 5(3) of the ITA is in effect.
When considering the nature of the remittance of foreign source income, the Supreme Court sided with the ARC judgment and referred to the UK HMRC International Manual on the remittance basis of taxation that the transaction does not change its status as income. Thus, employment income maintains its nature even when retained for an extended period and cannot be categorised as savings or of capital nature.
Furthermore, the evidence provided by the Taxpayer to the MRA, including the letter from his employer, does not sufficiently prove that the emoluments were taxed in Saudi Arabia. Although the Taxpayer paid expatriate tax under Saudi law, the MRA did not accept the documentation because it did not comply with Regulation 8 of the Income Tax (Foreign Tax Credit) Regulations 1996.
The ARC concluded that the Taxpayer qualified as a resident of Mauritius based on the evidence and arguments presented during the hearing. They determined that he met the first condition outlined in section 73(1)(a)(i) of the residency definition, as he maintained his domicile in Mauritius and did not have a permanent abode outside the country.
Since the Taxpayer’s challenge to the ARC’s decision did not dispute its validity or provide evidence to the contrary, the Supreme Court concurred with the ARC’s ruling regarding the Taxpayer’s residency status during the relevant period.
Finally, the Supreme Court sided with the MRA on the basis that the ARC made a mistake in its application of Section 5 of the ITA. The ARC was also wrong in stating that Section 73 is inapplicable and that it should be read independently from Section 5. On the Taxpayer’s side, the Supreme Court only upheld the claim that the ARC wrongly interpreted and applied Section 5 of the ITA, similar to MRA’s ground of appeal.
Comments
The surprising fact in this case is that even if the ARC had ruled in favour of the MRA initially, this did not stop the MRA from appealing against the ARC’s application of the law. They aimed to ensure the accurate interpretation of section 5 of the ITA, clarifying that foreign-sourced income remitted to Mauritius should not be taxable for non-residents. Additionally, they sought to provide clarity on the remittance basis and the definition of residence for tax purposes.
It is worth noting that the Taxpayer did not provide any strong evidence to suggest that his tax residency was not in Mauritius despite his employment in Saudi Arabia. We are not aware that the Taxpayer tried to demonstrate that “his permanent place of abode” was outside Mauritius. Of course, an in-force tax treaty between Mauritius and Saudi Arabia (still under negotiation) would have been useful with the application of the tie-breaker rules to determine the Taxpayer’s country of tax residence. In this case, the Taxpayer was tax resident under the domestic laws in both countries.
As a concluding note, it is important that taxpayers seek professional guidance when relocating abroad, as moving to another country does not automatically end their tax residency in Mauritius, nor their obligation to pay tax on worldwide income.
We hope that you found this newsletter interesting. If you have any questions or require any clarifications, please feel free to contact us.
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