With ongoing economic globalisation, intergroup cross-border transactions are becoming increasingly important and transfer pricing is now the key issue for profits allocation among multinational group companies. Transfer pricing (TP) is the pricing of transactions between associated enterprises. Tax authorities require such transactions to be on an arm’s length basis, that is, the price that would be set between unconnected parties.
Currently, the Tax Authority in Mauritius applies the arm’s length test under Section 75 of the Income Tax Act 1995 to ensure that related party transactions are conducted on a commercial basis. The Government has, in prior year’s national budget, announced its intention of formalising the TP framework in Mauritius. In the Finance Act 2021, Section 75 was amended to specifically apply to Global Business Licence companies (GBL).
Intra-group financial transactions are widely popular within structures involving Mauritius GBL companies. The OECD has now issued its guidance concerning the TP aspect of intra-group financial transactions as a follow-up work to the G20/OECD Base Erosion and Profit Shifting (BEPS) Project reports.
OECD Financial Transaction Report (FT Report)
The FT Report provides specific guidance on the TP aspects of financial transactions which is a common area of conflict between taxpayers and tax authorities. Mauritius is no exception; this is an area of high scrutiny by the tax authority. The FT Report covers various topics such as the TP framework to analyse risk, guidance for performing functional analysis and pricing guidance for intra-group loans etc.
In Mauritius, group companies often enter into inter-group loan agreements.
What does OECD’s new guidance mean for intra-group loans?
The FT Report sets out that intra-group debt transactions must, at first instance, be accurately delineated. In other words, the terms and conditions of the intra-group debt must be considered for TP purposes before evaluating correct arm’s length prices for those transactions. In practice, this means that the terms and conditions of the loans should reflect conditions that make commercial sense from both the perspective of a hypothetical third-party lender as well as from that of a third-party borrower, taking into account their specific economic circumstances and business strategies.
Accompanying you on your TP journey
IQ-EQ Mauritius, together with Taxand Mauritius, has launched its Transfer Pricing line of service. Watch out for our up-coming webinar in January 2022 to find out more.