Foreign Tax Credit Provisions
In Mauritius, residents who earn income from foreign sources in countries without a tax treaty with Mauritius can claim foreign tax credits to avoid double taxation. This mechanism allows Mauritian taxpayers to offset foreign taxes paid against their Mauritian income tax liabilities, subject to certain conditions and limitations.
Key Features
1. Offsetting Foreign Taxes:
- When a Mauritian resident earns income from a foreign country without a tax treaty, and foreign income tax has been paid on that income in the foreign jurisdiction, the resident can claim a credit for the amount of foreign tax paid against their Mauritian income tax liability.
2. Source-by-Source Basis:
- The credit is applied on a source-by-source basis, meaning each specific type of income (e.g., dividends, interest, royalties) is considered separately for the credit calculation.
3. Cap on Credit Allowed:
- The credit allowed is capped at the lesser of the foreign tax paid on the income in question or the Mauritian income tax payable on the same income. This ensures that the credit does not exceed the actual tax liability that would have been incurred in Mauritius if the income had been earned domestically, preventing overcompensation and maintaining fairness.
Specific Limitations on Dividends
1. No Credit for Underlying Foreign Corporate Income Tax:
- In the case of dividends received from foreign corporations, Mauritian tax law does not provide credit relief for the foreign corporate income tax (underlying tax) paid by the company on the profits out of which the dividends are distributed. This means that Mauritian residents receiving foreign dividends cannot offset the foreign corporate tax paid by the distributing company against their Mauritian income tax liability on those dividends.
2. Rationale:
- This restriction on underlying tax credits aims to prevent double tax relief from being applied twice—once at the corporate level and again at the individual shareholder level. It aligns with international tax norms and ensures that tax credits are applied appropriately to avoid excessive tax reductions that could undermine the integrity of the tax system.
Benefits and Impact
1. Relief from Double Taxation:
- Mauritius’ foreign tax credit provisions provide relief to residents earning income from countries without tax treaties, ensuring that they are not subject to double taxation on the same income.
2. Fairness and Encouragement of Investment:
- These provisions promote fairness and encourage international investment by mitigating tax barriers and fostering a conducive environment for global business operations from Mauritius.
3. Alignment with International Norms:
- By adhering to international tax norms and maintaining a balanced approach to foreign tax credits, Mauritius ensures that its tax system remains competitive and attractive to both individual taxpayers and businesses.
Conclusion
Mauritius’ foreign tax credit provisions are designed to provide relief from double taxation for residents earning income from non-treaty countries. By allowing taxpayers to offset foreign taxes paid against their Mauritian income tax liabilities, while maintaining caps and limitations to ensure fairness, Mauritius fosters a favourable environment for international investment and business operations. These measures reflect the country’s commitment to maintaining a robust and fair tax system that aligns with global standards and practices.