Globalisation has led to an increase in the number of multinational enterprises (MNEs). In light of high-profile public scrutiny of MNEs, a greater focus was placed by governments, tax authorities and the media in the area of transfer pricing. In particular, the profile and somewhat sedate pace of the Organisation for Economic and Co-operation Development’s (“OECD”) output on transfer pricing changed dramatically with the launch of their Base Erosion and Profit Shifting Project (“BEPS”) in July 2013. Transfer Pricing has therefore never been higher on the agenda of tax authorities globally.
The words – Transfer Pricing is a fundamental process to determine the price of transactions between different segments within an organisation. Transfer pricing, from a tax perspective, has been controversial since a number of years. The recent public and media concerns have fuelled the debate with critics about the existing transfer pricing rules and its combat against the shifting of profits. As a defensive response, the OECD has been updating its Transfer Pricing Guidelines with the agreement of its members countries which should be used by MNEs groups and tax administration. Subsequently, an individual member country may amend its governing transfer pricing rules and regulations with regards to key transfer pricing principles.
The arm’s length principle is the basis of the tax transfer pricing and is constantly used to compute the financial transaction of related parties at arm’s length. The arm’s length price is understood as the price which is charged in a comparable transaction between unrelated parties, that is, at market rate.
Mauritius does not have any prevailing transfer pricing legislation. Nevertheless, it does have an Arm’s Length Test (“ALT”) under the provisions of the Income Tax Act 1995. The ALT specifies that in the event that the Mauritius Revenue Authority (“MRA”) determines that the commercial or financial transaction between related parties is not at arm’s length due to an existing relationship, the MRA shall recompute the financial transaction as it deems appropriate. The taxpayer will be liable to an additional tax liability on the amount calculated at arm’s length by the MRA. Moreover, penalties and interests will also be applicable.
Transactions commonly subject to a tax audit by the MRA are loans contracted or management fees between related parties. Mauritius, emerging as one of the leading Global Business Hub in the Indian Ocean, offers a platform for several MNEs to set up their headquarters or even relocate their headquarters. Recently, the Finance Act 2021-2022 has amended the provision of ALT in the Income Tax Act and now includes the transactions of the companies in the Global Business sector.
Moreover, companies are required to declare on their income tax return, whether the transactions with related companies or individuals are based on an arm’s length price. Country-by-country (CbC) reporting requirements, relating to transfer pricing documentation, have also been introduced in Mauritius, following Action 13 of the BEPS action plan. Based on a self-assessment process, this information is remitted to the MRA.
Transfer pricing is now considered as a board level issue. Companies are strongly recommended to conduct a transfer pricing study and documentation to ensure that appropriate considerations are given to transfer pricing requirements in countries where there are governing transfer pricing regulations. The transfer pricing documentation is considered a good practice and additionally it will provide reasonably assurance to tax authorities that the transactions follow the arm’s length principle and will also minimise the risk of double taxation.
Contributed by –
Oudai Mohun
Supervisor
Mazars – Tax and Accounting
*The views expressed are personal.
