Mauritius Operates A Global System Of Taxation

As per section 3(2) of the MRA Act 2004, the MRA is responsible for the management and collection of tax as well as the enforcement of revenue laws in Mauritius. It is of utmost importance that the institution correctly computes the tax liability for individuals as well as companies so as not to under or over burden the tax payers. In addition, the government finances its policies through these taxes. It is worth highlighting that in Mauritius, the tax year is same as the fiscal year-from 1st July to 30th June. Income tax is charged on income derived in the preceding year. For example, the tax liability for 30th September 2018 is computed on the chargeable income for the prior tax year which runs from 1st July 2017 to 30th June 2018.

Taxation of Employment Income

Individuals constitute of employed persons and self-employed ones. To distinguish between them, reference can be made to the contract of service or contract for service, control test, integration test, economic reality test, mutual obligation and the possibility of substitution. Let us have a look at the computation of tax liability on employment income which refers to earned income of employed persons. It is calculated as follows:

RSGross Income (other than exempt income)

xxxLess:

Expenditure

(xx)Net Income

xxxLess: Allowable Deductions

(xx)CHARGEABLE INCOME

xxxi) Gross IncomeGross income refers to an amount of income obtained from a distinct source free from any deductions, that is the emoluments received by an employee. Section 10 of ITA 95 highlights all items from both present and past employments that should be included in the gross income of an individual. These briefly include salary, wages, leave pay, fee, overtime pay, allowance, bonus, gratuity, commission, pension, fringe benefits amongst others (summary 2). It has to be pointed that fringe benefits as per section 10(2)(d) to be added to gross income are given a monetary value in the 9th schedule of the Income Tax Regulation

. ii) Expenditure

As per section 17 of ITA 95, expenditure refers to any expense which is entirely, solely and inevitably incurred in the production of gross income should be deducted against such an income. To qualify as an expenditure, it must satisfy the WEN test, that is it must be wholly, exclusively and necessarily incurred in the creation of gross income. For instance, in the case of Pook v Owen (1970), the travelling expenses incurred by a doctor upon receiving a call to attend duty at the hospital was an allowable expense since the expenditure was directly related to the performance of his duty.

iii) Net Income

MRA charges individuals a flat rate of 15%. However, as from July 2018, the tax rate will be reduced to 10% for all individuals whose net income is less or equal to Rs650000. Net income which exceeds Rs650000 will be taxed at 15%.

iv) Allowable Deductions

These refer to all reliefs and exemptions enjoyed by an individual, thereby reducing his taxable income. The higher the amount of allowable deductions, the lower will be chargeable income and hence, the lower the income tax liability faced by the individual. The first example of allowable deductions, incorporated in section 27 of ITA 95, is the Income Exemption Threshold (IET). Any working individual resident in Mauritius, positioning in any one category provided in Table 3, can deduct this specific amount from his net income to arrive at the chargeable income. Furthermore, the act also provides for an additional exemption of Rs135000 for individuals whose children are undertaking undergraduate education, provided that the yearly tuition fee exceeds Rs34200 and it is a non-sponsored one. Another example is interest relief on securing a housing loan which will be employed in the purchase of an immovable property which will exclusively aid in the construction of the tax payer’s first house. This assistance can even be shared between couple as provided by section 27A of ITA 95. In addition, individuals also benefit from relief on medical insurance premium.

The tax payer can claim relief for his own self or dependents for medical insurance policy or for any fund whose principal objective is the provision of medical expenses. The maximum amount deductible is Rs15000 for self, Rs15,000 for first dependent, Rs10,000 for second dependent and Rs10,000 for third dependent. It has to be noted that no relief may be claimed if the individual has a combined life insurance scheme with his employee. Lastly, deduction for solar energy investment allowance is also a deductible expense. The total amount invested in such a unit can be subtracted from the tax payer’s net income. Return and Payment of taxAccording to section 112 of ITA 95, an annual income tax return should be filled in and submitted to the MRA not later than 30th of September and accordingly a remittance of the tax payable.

An extended delay up to 15 October is provided to tax payers who file return and pay tax electronically. It is worth highlighting that a separate assessment is required for working couples. In the case Jauffur v Commissioner of Income Tax (Mauritius) (2006), the appellant had failed to make proper tax returns for 13 consecutive years. Court held that the authority had to apply standard techniques to compute the tax payer’s taxable income which he would have to pay. In case of late submission of return, Rs2000 per month has to be paid as penalty up to a maximum of Rs20000. Late payment of tax entails a penalty of 5% of the amount of the tax, excluding any penalty and an interest at the rate of 0. 5% per month or part of the month during which the tax remains unpaid. To ensure tax efficient planning and to reduce the burden upon tax payers, the employer withholds monthly tax charges under the Pay As You Earn (PAYE) system and remit them directly to the MRA. All income not subject to PAYE is self-assessed and hence the individual must make quarterly payments.

Corporate Taxation

Section 2 of ITA 95 defines a business as any trade, profession, vocation or occupation, manufacture or undertaking, or any other income earning activity, carried on with a view to profit. There are different types of business organisations, namely sole proprietorship (self-employed individuals), partnerships and companies. Businesses are taxed at 15%. Let us examine the components required for the computation of tax liability for corporations:

Business Income

As per section 10 of ITA 95, it includes any income received from the sale of product, rent, royalty, premium, other income derived from immovable property, dividend, interest, charges, annuity or pension. In fact, business income refers to any gross income acquired by any business through trade which stands for any isolated transaction with no real business connection. In the case of Rutledge v CIR (1929), the taxpayer had bought 1million toilet paper rolls from Germany which he sold at a profit in the UK. Consequently, given the nature of the product and the tax payer’s intention, he was liable to taxation on such a profit. The existence of conflicting interests led to the development of badges of trade. These are features which determine whether an income is a business income or not. They are basically in terms of modification of asset pending resale, acquisition method, underlying nature of an asset, repetition or relative frequency, interval between purchase and resale, how the transaction is financed, interest in the same field, ultimate motive and sales organisation. Characteristics inherent to some badges of trade may be taxable.

Expenditure

These are expenses incurred by the business in the production of gross income. It includes cost of sales among others.

Allowable Deductions

They are exemptions and reliefs that reduce taxable income. They include expenditure incurred in the production of income, losses, bad debts, annual allowance clearly explained through sections 18-24 of ITA 95.

• As per section 18, if an expenditure is exclusively incurred in the production of income, that is it is not subject to the duality of purpose nor remoteness principle, it can be deduction from net profits.
• Any interest paid on capital employed whose sole purpose is to create income is an allowable deduction in accordance with section 19. The interest can be partially allowable and is calculated as follows, provided that the expenditure is used to produce both an exempt income such as dividend and gross income:

Exempt Income

x 100 = … %Total Gross Income

• According to section 20, losses may be carried forward for 5 consecutive years, except for losses arising from annual allowance on capital expenditure incurred from 1st July 2006. After the 5th year, any relieved loss is deemed to be lapsed.
• Section 21 stipulates that bad debts incurred is an allowable expense while bad debt recovered is not an allowable one. It has to be noted that provision for bad debt is an unauthorized deduction as per section 26 of ITA 95 (Table 4).
• As per section 22, a pension or retirement allowance or medical expenses of employees under a superannuation fund can be deducted from net profits.
• Section 23 clearly states that pensions to former employees are allowable expenses.
• According to section 24, annual allowances such as scientific research, acquisition of plant and machinery, extension of restaurants/clinics among others can be deducted from income as a compensation for depreciation which is a taxable expense, stipulated in section 26 (Table 4). Tax-Adjusted ProfitCompanies are liable to income tax on their tax-adjusted profit at a flat rate of 15%.