Taxation of Mauritius Trusts: The Elephant in the Room

We found it peculiar that many Mauritius advisors decided to not advise their clients of this important development. In a previous article, we warned that South Africans with Mauritian trust arrangements ought to take cognisance of SOP24/21. Most appeared to have heeded this warning. We have started to see the correct type of tough questions now being asked by South Africans with Mauritius interests. Are they tax compliant from a South African perspective, and have they been receiving the correct South African tax advice when setting up Mauritius trust structures?   

THE CRIMINAL RISK ELEPHANT IN THE ROOM

While the Mauritius Revenue Authority has explained its position from its domestic perspective, South African taxpayers’ primary concern would normally be with SARS. It is SARS’ obligation to secure enforcement of the 24 Tax Acts under its administration, which includes criminal prosecution of tax offenders.

National Treasury and SARS’ appetite for criminal prosecution is perhaps best illustrated by the amendment to section 234 of the Tax Administration Act (TAA) that they pushed through in the 2020 legislative cycle. Taxpayers are now liable for criminal prosecution in South Africa, even where they had no intention to flout their tax obligations. National Treasury is on record to state that the amendment was introduced to make it easier for the National Prosecuting Authority (NPA) to obtain criminal convictions against taxpayers.

SARS confirmed that currently, they have over 500 cases referred to the NPA. SARS has correctly indicated that rogue tax advisors are also subject to criminal sanctions under the TAA. We eagerly await to see how many promotors of tax evasion schemes will form part of the prosecution, especially those who punted undisclosed offshore trusts. Many of these promotors are confident in making sales, but once the Hawks arrive with a notice to appear for prosecution, it is the substance that counts.  

In the same vein, National Treasury and SARS have been unequivocal in terms of their focus on wealthy taxpayers and those with offshore interests specifically. Stamping out non-compliance, fraudulent tax schemes and tax evasion is, of course, not only a South African initiative; but a global drive from the OECD.

SOUTH AFRICAN TAX LAW ON INTERNATIONAL TRUSTS

There are specific “anti-avoidance” provisions in South African law that are directed at foreign trusts, which again come with a criminal sanction if not observed. The main ones are sections 7(8), 25B(2A), 25B(2B) and paragraphs 72 and 80 of the Eighth Schedule to the Income Tax Act (ITA). The General Anti-Avoidance Rules (GAAR) under section 80A to 80L must also be noted, which can be invoked if the major objective behind the formation of a foreign trust is to obtain a tax benefit. Generally, our legislative framework contains very wide and engrossing provisions that may find application whether you are the beneficiary, settlor, protector, promoter, sponsor etc. of a foreign trust structure.

South Africans with an interest in a foreign trust structure, should at least be aware of these anti-avoidance sections. Where any interest in a foreign trust is not disclosed in a South African tax return, we recommend that the taxpayer should be very clear on their legal compliance position.  

WAS THE MAURITIUS REVENUE AUTHORITY WRONG IN ISSUING SOP24/21?

From a South African advisory perspective, we believe their publication was correct. Revenue Authorities have the right, if not the obligation, to issue statements of practice, rulings or interpretation notes. It is their mandate to create legal certainty, which establishes certitude for the fiscal system, thereby promoting Mauritius as an attractive destination. Naturally, however, it falls outside the Mauritius Revenue Authority’s purview to provide guidance on the South African perspective.

WHY DOES THE SOP24/21 CREATE EASY PICKINGS FOR SARS?

Your tax compliance obligation is primarily informed by your tax residency. Where you are a non-resident for South African tax purposes, your international affairs including those in Mauritius have, as a general rule, nothing to do with SARS.

On an overly simplified basis, for normal South Africans to become non-resident, this means that you have completed financial emigration (SARS and SARB process), or that you are exclusively resident of a country with which South Africa has concluded a Double Tax Treaty (DTA), which includes Mauritius. In the case of the latter, it means you hold a Tax Residency Certificate (TRC) in a DTA country, which is normally supported by a section 223 opinion that confirms the tie-breaker under article 4 of the DTA works against South Africa for the year of issue of the TRC.

Where you are a tax resident in South Africa, the anti-avoidance provisions are designed to bring your trust interests within the South African tax net. Under Article 25 of the DTA, SARS may ask the Mauritius Revenue Authority whether a Mauritian trust has its management and control in Mauritius. The SOP24/21 confirms that where management and control are in Mauritius, it will exercise its taxing right. But this will not be the end of the matter. The application of the South African anti-avoidance provisions is not necessarily limited by the DTA or the Mauritian tax code. Even where Mauritius taxes the trust, the connected South African tax residents must still fully comply with their South African tax obligations.

THE QUESTION DODGY ADVISORS WILL HATE TO ANSWER

Where a Mauritian trust is not managed and controlled in Mauritius, SOP24/21 explains the tax-exempt status under Mauritian law. This is the easy half of the coin. It still leaves the knotty question of where the trust is then managed and controlled? On this score, we must issue a reminder that the onus of proof rests with the taxpayer in terms of section 102 of the TAA. If a South African has a trust in Mauritius, which the Mauritius Revenue Authority has confirmed is not managed and controlled in Mauritius, we foresee difficulty in holding a defence that the management and control are not in South Africa.

QUALITY ADVISORS TEND TO GIVE STRAIGHT ANSWERS

When a Revenue Authority starts narrowing the law and enforcing legislation, it creates an uncomfortable narrative that may be difficult for taxpayers and their advisors to accept.

In saying that, open tax debates are for the benefit of all stakeholders, as they inform the market. The absence of substance in commentary from certain Mauritius advisors is arguably a tell that they have nothing of substance to add. Blanket censure of an opinion on the basis that it “creates confusion” does not serve anyone. Ironically, where such commentary is without substantiation, it exacerbates the confusion that it so “righteously” called out.

There is admittedly some amusement value in the sophistication of certain commentators. They appear to think it is good practice to label a view promoting tax compliance as incorrect, but no attempt is made to point out factual and technical reasons for their convictions. There are many examples of where rogue tax advisors disappear, leaving clients high and dry to clean up their messes of the past. Hold your advisor to account, and if you feel they are talking around issues, find an advisor who nails their colours to the mast. Otherwise, at least get a second opinion, as there are excellent Mauritius tax advisors that will not only ensure tax compliance but will also be invaluable where the legitimacy of your hard-earned wealth is being threatened by an in-depth SARS audit.

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