Double taxation

By Miss. Uttra Devi Boodan 8TH APRIL 2011 Explain how does double taxation arise and the laws regulating it for tax subjects in Mauritius. The one word having a very evil connotation and soaring complaints among people is “tax”. Nevertheless in every civilized society there exists a system of taxation which recoups a percentage of all taxable income to fund public expenditure. In the legal jargon, a tax is a mandatory fiscal burden thrust on tax subjects by the government. Tax subjects, as per the Income Tax Act, 19951 (ITA) can be persons (Part III) or corporations (Part IV). Taxes equally have economic influence whereby they derive variation in terms of causes and effects. For instance a tax may be levied on personal property (NRPT 2), or on environment abuse. Napoleon Bonaparte believed that “no one cent should be raised unless it is in accord with the law.” Yet, often adding to the frustration of people, taxes happen to be claimed twice on the same income. This occurs primarily in crossborder transactions. Tax Subjects and Rules In the words of Prof. Roy Rohatgi3, “The current economic turmoil is creating new challenges for the existing worldwide financial architecture and one of the themes has the growing size of the deficits of the developed and developing countries to fund their fiscal stimulus packages.”As barriers to international trade lift, global trade turns a new leaf boosting exchange of goods and services worldwide. Unfortunately even here conflicts arise. The following is a brief illustration of my point: X Co. was incorporated in the United Kingdom (U.K). It sets up a subsidiary in Mauritius, and makes profit. To which state should the tax be paid, - U.K, Mauritius or both? The company ends up paying double tax on the same income. This situation develops a threat to overseas trade and inter-state relations. Domestic laws claim tax based on the two concepts: the residence rule and the source rule. In Mauritius, we apply the Residence Concept in most4 circumstances. S73 of the ITA 1995 requires a person to be domiciled in Mauritius permanently, or present in the country for 183 days or more in the income year for which tax will be claimed. It is also applied on a person who holds a Tax Residence Certificate5. In Union of India v. Azadi Bachao Andolan 2003, the Indian Supreme Court quashed an earlier Delhi Court decision to re-affirm that the Tax Residence Certificate is a conclusive evidence of abode in Mauritius. As such the “personal attachment” characteristic of the individual allows Mauritius to tax his/her worldwide income. Same applies to companies incorporated, or having central management and control in Mauritius. Nonetheless, there are different types of businesses which escape tax in the country. A Category 2 Global Business License (GBL 2) is a company incorporated in Mauritius under the Companies Act 2001 but does not conduct business with persons resident in Mauritius, and does not conduct any dealings in Mauritian currency. It is hence exempt from the ITA 95, and 1 As amended till 29th of January 2011 (MRA) National Residential Property Tax (NRPT) introduced on 1st July 2006 in Mauritius as per the Mauritius Revenue Authority (MRA) 3 Visiting Prof. at Vienna University of Economics and Business (WU), Austria and the brainchild of the Foundation for International Taxation (FIT) [Pg 23, Mauritius Business Law Review, Vol. 01, September 2009] 4 Eri Neu a er … De elopi g ou tries fa our Residence- ased DTTs as the ge erall are et apital i porters…a d it i reases FDI… 5 Tax Residence Certificate: s73 (2) ITA 1995 Where a person wishes to be certified as a resident in Mauritius in respect of an income year, he should apply to the Director-General for a Tax Residence Certificate. 2 declared as a non resident for income tax purposes6. It is also not covered by any Double Taxation Agreement (DTA) concluded by Mauritius. Tax subjects act as a pivot for the taxation mechanism to function. Subject to the Companies Act 2001, corporations and individuals can be variable. Persons include trusts7 while corporations include domestic companies, offshore (GBL1) and international companies (GBL2). Moreover, even agents (including trustees) as abiding to S 79, 80 and 81 of the ITA 1995 are subject to tax. Concomitantly, taxes can be based on the source rule whereby the “economic attachment” of tax subjects is considered. Income derived from activities within the country’s territory is taxed. S5 (1) ITA 1995 equally requires income from operation in Mauritius by resident or non-resident to be duly taxed. This elucidates the legitimacy of non-resident traders in Mauritius. Such observance, nonetheless, is subject to the provisions of specific treaties concluded by different nations. Provided in the ITA definitions section, a non-resident is a person who lives outside Mauritius, or his centre of economic interest lies outside Mauritius, or a company incorporated in Mauritius but whose banking transactions take place abroad. This practice is common in countries like Japan, Puerto Rico, and the United States of America (U.S.A). As per the OECD committee on fiscal Affairs, tax evasion takes place when treaty benefits overflow to third parties and the Reciprocity element of the treaty is breached. This is also why residence for treaty purposes extends well beyond the narrow scope of “place of abode”. In the U.S.A. Green card holders, wherever living, are subject to taxation as residents. In Mauritius the Tax Residence Certificate (supra) serves similar purpose. The ITA S75 (1) (b) provides for the Arms Length Test conducted by the Director General (DG) which regards non residents. It enables the DG to decide whether income is taxable or not. Double Taxation Treaties (DTT) The Law is a constructive device. The very crux of taxation is derived from protection of a jurisdiction. However, double tax on the same income is counterproductive. It causes international trade to shrink and hampers flow of capital. Relief from double taxation can be unilateral, i.e. relieved from one country’s laws. On the other hand, tax implications in two or more countries are regulated by a Taxation Avoidance Treaty. It may be bilateral or multilateral depending on the number of contracting states. For example Mauritius and Germany agreed through the Double Taxation Agreement (Germany) Regulations 1978 Art 8 (1) that profits from operation of ships and aircraft in international traffic will be taxable only in the state where effective management control lies, be it Germany or Mauritius. 36 such treaties have been concluded till date by the Mauritian authority in accordance with the other contracting states. Double Taxation Agreements (DTAs): (1) endorse economic ties, (2) purge obstacles to international trade, (3) provide for cooperation and allotment of tax revenue, (4) reduce tax evasion, (5) provide certainty to applicable tax regime (6) create reciprocity and (7) eliminate discriminatory taxation. Prior to 1992, such treaties were meant to enhance bilateral trade. This came up through the Export Processing Zone (EPZ) when Mauritius shifted from its sugar-based economy to an export oriented economy. Today, again the paradise island is on the verge of becoming a regional offshore centre. This gives rise to more treaties. Actually DTAs (S76 ITA 1995) indicate the categories of incomes to be taxed, how and where to tax them; this causes incomes to be shared between the contracting states. DTAs may be based on Model Conventions 6 MRA Defi itio s se tio of ITA 99 : person shall be deemed to include a trust” 7 By Miss. Uttra D. Boodan, University of Mauritius (MCs): the United Nations8 (UN) Model or the Organisation for Economic Cooperation and Development (OECD) Model. Mauritius which prefers the residence concept follows the OECD9 model. It is a tailor made structure that facilitates common cognizance of regulations between partner countries. MCs are not binding but mere documents concluded by organizations. Fraudulent Behaviour through occurrence of DTT Sunil Benimadhu, Chief Executive of the Mauritius Stock Exchange quoted that Mauritius acts as a “springboard” for China and India. Indeed, this is where Mauritius follows the traits of heaven to become a Tax Haven. Similar to the Netherland Antilles for Netherland, Mauritius is a tax haven for the Indian Ocean rim countries. In IRC v. Duke of Westminster2 Lord Tomlin declared that “Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.” 15% tax is imposed on taxable income in Mauritius. This amounts to only a minimal figure to be paid from significant profits that offshore companies make through Mauritius. Previously 0 to 35% taxes were claimed nevertheless today this section applies only to offshore companies registered before 1st July 1998. In the same vein, fraudulent (supra) practices tend to arise. DTAs provide a platform for Tax Shopping which is the complete opposite of treaty abuse. While Tax shopping is some sort of manipulation of company income derivation, it still remains a legitimate tax planning issue. Treaty abuse on the other hand occurs when sham operations and artificial devices without commercial significance but mere tax evasion purpose are used. Tax evasion is hence a criminal offence. This explains our concern over Tax Shopping, Tax Evasion, Treaty Abuse and the degree of acceptance of Tax Mitigation10. Denis Headley claims that the difference between tax avoidance and tax evasion is the thickness of a prison wall. In Cheney v. Conn, U.K. a taxpayer challenged the Finance Act 1964, U.K. contending that it went against the Geneva Convention 1957. He hence objected to pay tax. It was held that “What the statute itself enacts cannot be unlawful, because what the statute says and provides is itself the law, and the highest form of law that is known to this country." He was hence obliged to pay tax. Interpretation of DTT In Labuan, the main island in the Malaysian territory, no corporate tax is claimed and this is an opportunity for international companies. However, Mauritius being a tax haven still imposes a negligible tax level. Moreover, so as not to end our economic performance into a dilapidated system, the ITA 1995 specifies in S76 (1) (b) that taxation agreements may also play the role of information exchange tools rather than to mandatorily provide relief from tax. This enables the Mauritian Authorities to claim foreign tax recovery. Foreign Tax as per the ITA 1995 definitions section is similar to income tax but is imposed by the laws of the foreign country and hence DTAs apportion a part of the foreign tax to Mauritius and prevents foreign fiscal offences and sheds light on Foreign Tax Credits (infra). Mauritian laws reveal how much they despise money laundering through S 76 (1) (b) (ii) of the same Act which shows that relevant treaties between contracted states are to decrease fraudulent behavior. To amend or support a treaty, protocols may be initiated. Interpretation of the Double Taxation Treaties 8 Previously known as the League of Nations http://www.lowtax.net/lowtax/html/jmu2tax.html Global tax and business portal 10 “a e as ta a oida e a d legal utilizatio of ta regi e’s for o e’s o e efit. 9 By Miss. Uttra D. Boodan, University of Mauritius (DTTs) is based on the Vienna Convention of Law of Treaties (VCLT) like any other international treaty. It is binding on treaties among states. The basic rule is, as per Art 31 (1) VCLT, that a treaty will be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. The VCLT adopts a holistic approach. Other extrinsic materials for interpretation are mutual agreement procedures, unilateral material, judicial decisions, parallel treaties, and OECD MC Art 3 (2)11. Criticism Assistant Professor of Law at Bar Ilan University Law School, Israel, Tsilly Dangan, seems to be against DTT, as he contends that “These ubiquitous treaties are not necessary for preventing double taxation. Rather, they serve much less heroic goals, such as easing bureaucratic hassles and coordinating tax terms between the contracting countries, and much more cynical goals, particularly redistributing tax revenues from poorer to richer signatory countries.” Moreover, there often seems to be confusion over tax credits and double taxation relief. Foreign Tax Credits12 are provided by S77 of the ITA 1995 as amended till 29th of January 2011. However previous sections about Tax Credits have been deleted. Double taxation regards same income taxed twice while tax credits13 consider whatever income taxed and simply reduce the tax amount. From my opinion, Double taxation relief is a right while Tax credits are privileges. From a lesser negative standpoint, I find DTTs as legal instruments to fortify economic and trans-border relations. It is a fair view upon all. Abraham Lincoln once averred that it is our (the government) obligation to make the poor richer and not to make the poor richer by making the rich poorer. Nevertheless the havens are far from becoming real heavens since the world is more or less growing blind to corruption practices and where opportunity of economic excellence looms, threats over fiduciary fabric percolates in. Through the fast pace of economic development and the necessity of international collaboration, we cannot overlook the importance of bilateral or multilateral agreements. Double Taxation automatically arises as world shrinks into a global village. The more treaties Mauritius involves in, the richer its network of economic tissue becomes. The anatomy of Mauritian laws needs to respect global conventions for uniform treatment of states. Hence, we adhere to the VCLT and the OECD MC. Tax will perhaps remain an issue of debate among common man but is a vital element of our world. Franklin D. Roosevelt averred that “Taxes are the dues that we pay for the privileges of membership in an organised society.” 11 It provides for interpretation if not provided in the MC, to be as per the domestic laws of the Contracting state. Also pro ided i the defi itio s se tio of the ITA 99 : …a ou t dedu ti le fro i o e ta … 13 http://www.businesstaxrecovery.com/articleupdates/definition-tax-credit 12 By Miss. Uttra D. Boodan, University of Mauritius BIBLIOGRAPHY  PROFESSOR ROY ROHATGI (2009) Tax Treaties, The Legal Framework. Mauritius Business Law review, Vol. 01, p. 23.  SOBRUN T. (2007) Contribution of Double Taxation Treaties to the Mauritian economy: an emphasis on the state’s FDI, p. 5-12.  JEETOO A. K. (2002) To what extent the tax structure of Cyprus has contributed to its offshore sector, p. 9-12.  GOPAL T. (1998) To what extent has the network of double taxation treaties contributed to the growth of the offshore sector in Mauritius, p. 18-45.  MITTAL D. P. Indian Double Taxation Agreements and Treaties.  As amended up to 29th January 2011, Income Tax Act 1995, Mauritius. WEBSITES  www.Tax-News.com, (n.d.) Accessed 2011  Gray’s Inn tax Chambers London available at: www.taxbar.com  Tax Avoidance (n.d.) by David J. Way in Morgan Lewis & Brockius, registered foreign lawyer and solicitors available at: www.morganlewis.com  www.lowtax.net  International Tax Planning and prevention of abuse by Luc de Broe available at: Books.google.mu  Cases By M. Souper, (2008) available at: http://Sixthformlaw.info  Supreme Court of Mauritius available at: http://www.gov.mu/scourt/home/welcome.do  Mauritius Revenue Authority available at: http://www.gov.mu/portal/sites/mra/index.htm  OECD MC available at: http://www.oecd.org/dataoecd/50/27/35363892.pdf  http://ec.europa.eu/taxation_customs/taxation/company_tax/double_taxation_conventions/index_en.htm Author can be contacted on: [email protected] By Miss. Uttra D. Boodan, University of Mauritius