Tax Challenges For Mauritius Revenue Authority

Internet has been anticipated as a challenge for the 21th century. It represents a challenge not only for the government, but also for the businessman, for the consumer and for the law. One of the most controversial issues on Internet is taxation of e-commerce. E-commerce is not a theory of science, and no Mauritian tax provisions actually deal specifically with taxation of e-commerce. The current tax systems [1] seem outdated to face these technological changes. E-commerce makes the application of the principles of permanent establishment (to determine location of the company), point of sale (where the supply of goods and services take place), income classification (based on source of income), and product classification (intangible goods) complex.

Governments around the world are presently losing millions in tax revenue through the incursion of electronic commerce within their jurisdictions, and tax authorities are finding it increasingly difficult to find a specific solution to these problems. The transactions in goods and services over the Internet have basically modified the accepted boundaries and conventions.

In this chapter we will try to focus on the problems that the revenue authorities face and the deficiencies of the current principles of taxation in the context of electronic commerce.

The tax challenges for Mauritius Revenue Authority (MRA)

The Mauritius revenue authority was created in 2004 by an act of parliament [2] . It was set up with the objectives of collecting and accounting of all revenues that happen under the revenue law [3] . Likewise, the MRA acts as an agent of State for the management, operation and enforcement of Revenue Law [4] .

Like any particular institutions, it has a specific vision. The vision of the MRA is to be a world class revenue authority valued for its professionalism, efficiency, fairness, integrity, and its contribution to the economic and social development [5] . However, in the context of e-commerce, these visions are being jeopardised. In the e-commerce world, many internet transactions particularly the direct and indirect taxes are not being accounted for in Mauritius.

Fiscal Authorities around the world are innovating to face several challenges where they must act swiftly. The Mauritius Revenue Authority will have a key role to play in overseeing the growth of electronic commerce. The fiscal authority must promote a fiscal atmosphere within which electronic commerce can flourish. However, the most important objective is to ensure that electronic commerce does not become an obstacle for government to generate the revenues required to finance the public services

To achieve these objectives, it is important for the Mauritian government to recognise that there are generally two forms of electronic commerce:

business to business; and

business to consumers.

The business to business activities are the main part of e-commerce. The multinational companies are already using the cyberspace to expand their global networks. The small and medium enterprises started taking advantage of internet to have access to the international market. As such, tax authorities must consider the different types of businesses to develop a tax system for the new century.

Mauritian tax model

To better understand e-commerce tax characteristic for businesses and consumers, it is important to have a quick look at some Mauritian concepts of direct tax together with some concept of VAT. These concepts will be applied at a later stage in this chapter.

Direct tax

The taxation of resident Mauritian companies is regulated by the Income Tax Act 1995, which is essentially based on the UK Tax Law. A company will be considered as resident in Mauritius if it is incorporated in Mauritius or if it is controlled and managed in Mauritius [6] . The resident company is taxed on its world wide income and it includes foreign-source income [7] .

In 2007 the Deputy Prime Minister and Minister of Finance and Economic Development Dr Rama Sithanen implemented a flat corporate income tax [8] . The annual rate of corporate tax is 15 % on chargeable income [9] .

Indirect tax

Consumption Tax is an indirect tax on consumers. In Mauritius, it is regulated under the Value Added Tax Act 1998. Value Added Tax (VAT) is a tax on business supplies of goods and services and it is chargeable on all taxable supplies of goods and services made in Mauritius. VAT is also applied on the importation of goods into Mauritius, regardless of whether importer is a taxable person. The VAT rate is 15% on taxable person [10] .

If a person doing business has turnover exceeding the prescribed limits [11] , then he will be liable on his taxable supplies.

Once a person is registered for VAT, he must charges all the taxable supplies made to his customers. This is his output tax. Likewise, the VAT registered person will be asked for VAT on taxable goods and services supplied to him by his VAT registered. This is input tax.

Taxing e-commerce.

Electronic commerce has the potential to undermine the application of domestic tax rules. Tax planning for electronic business diverges from tax planning for a traditional company.

Taxation of profits

If an e-commerce business is running within the medium of a Mauritian resident company, the first tax to be considered is the corporation tax. The tax authorities must have the legal authority over the taxpayers to have the power to tax the profit made by the businesses. The physical presence is required in a country where the tax authority has a jurisdiction. However, in e-commerce the physical presence is less important because it is not possible to know where the business is located.

Generally, the revenue authorities have jurisdiction to tax companies that are resident in their jurisdiction (country of resident) or income generated in their jurisdiction (the country of source).

The country of residence

A company is treated as resident in the country in which it is incorporated or has the central management and control is situated. It is only then that the tax authority will have the right to tax the company on its world wide profit.

In a case, a US company had both UK and American directors. The company produced and sold cotton in US. The management of activities of the company was done by the UK resident directors. It was held that the company was a resident of the UK and was liable to assessment under the first case of schedule D [12] .

In Bolton v Graham, Lord Denning said ‘A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represents the mind or will. Others are directors and managers who represent the directing mind an will of the company and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such [13] ’

In addition, a UK company removed its control and management to Egypt. Afterward, the directors lived in Egypt and board of meetings was held there. It was concluded that the company was no longer a resident of England [14] .

If a person is capable of operating a business in Mauritius without establishing an office in Mauritius, then the profit will escape the Mauritian tax.

The source country of source

A company will be taxed only if the source of the trading profit is located in the country [15] . It can be an item of income which has the closest connections. An example can be the intellectual property rights that are licensed to generate royalties. Instead, the connection may be a foreign company which is carrying on business activities in the country though an agency or a branch. It is in this particular area that e-commerce is likely to affect the source base of taxation.

The case in US involving radio transmission gives an idea on how the US tax authority was unsuccessful in taxing the radio company because the company had no capital, labour found in the US. The fact that the audience was in US was not enough to enable the US authorities to impose tax on a source basis [16] .

Furthermore, under the contract law, the place of contract is where there is acceptance of an offer. Where there is rapid communication (for example a telex) the place of agreement is the place where the agreement is received. If we apply these principles to the internet transactions, the place of the acceptance will depend on whether the page of the web site establishes an offer for sale. It is an importance factor for cross border transactions, for instance, where the customer is in a Country Y and the company is in Country Z.

If the agreement is received in country B therefore the contract is situated in Country Z. Subsequently Country B can argue that it has the right to tax the profit made from the electronic transaction. On the other hand, if the agreement is received in Country Y, then country has the right to tax the income from e-commerce transaction. If income tax is higher in Country Y than the income tax in Country Z, then the internet business will have the incentive to manipulate the wording of the web so that the contract is located in country B and therefore it would be subject to lower tax jurisdiction. This can lead to tax avoidance and tax evasion.

Furthermore, there are many UK cases that made analysis on whether the sale contract was made in UK or elsewhere, in the context of Internet transactions, where solution to this problem can easily be anticipated or foreseen, the courts are unlikely to give explanation on whether the sale contract was "made" in the UK or not.

The application of these tax principles of Mauritian income taxation to electronic commerce creates a number of problems. As long as e-commerce transactions are within the boundaries of Mauritius they do not have any influence on the Mauritian direct tax. Their transactions will be like any traditionally businesses within Mauritius. These transactions will have to be recorded and tax on profits will be calculated. However, when there is cross-border transactions, international tax issues take place and affect the principle of taxation.

The concept of a Mauritian business entity is developed for conventional commerce, which has typically been conducted through identifiable physical locations. As noted above, electronic commerce may operate through telecommunications and computer links that have no physical connection to the jurisdiction of income tax. From a general point of view, e-commerce does not appear to occur in any physical location but it takes place in the imprecise world of the internet. Consequently, a person may involve with huge amount transaction but it cannot be clearly stated whether the person is doing business in Mauritius.

It may be difficult to suggest that such a person has a "permanent establishment" in the Mauritius. Since electronic commerce is usually conducted without a fixed place of business, income that might have been subject to Mauritian tax if it were earned through more traditional commerce may escape taxation when earned through electronic commerce.

Permanent Establishment (PE)

PE [17] is a notion used by OECD model treaty to decide if a business is within the jurisdiction of a tax authority. A PE is defined as a ‘fixed [18] place of business [19] through which the business of the enterprise is wholly or partly carried on’. It includes a place of management, a branch, an office, a factory and a workshop. Under the treaty, the business profits of a non-resident can be taxed only if the notion of PE is satisfied in the tax authority’s country.

The main interrogations about PE in the framework of e-commerce are whether a website can be taken as a PE and whether an Internet Service Provider (ISP) can give rise to a PE for businesses which utilize their services to start e-business.

Can a website be a permanent establishment?

The notion of PE is not consistent with electronic business because the principle was drafted in 1963. There is a lot of international debate about whether a web site can be regarded as a permanent establishment for determining which country has the right to tax the income from companies. Internet website could be seen as a combination of software and electronic data that is stored on and operated by a server. According the OECD proposal [20] , a website stores on a server should not be considered as a permanent establishment because an Internet web site is an amalgamation of software and electronic data operated on a server and therefore it does not in itself represent a tangible property. However, a server on which the web site is stored and which it is accessible to a piece of equipment having a physical location and such location may thus constitute a 'fixed place of business' of the enterprise that operates that server as long as the server is fixed at a certain place for a sufficient period of time.

Can an ISP or telecommunication company create a PE?

A server in a foreign country can make a PE for the ISP because of the setting up of equipment in that country. However, it is improbable that the ISP will make a PE for web site clients.

A telecommunication company that provide internet access may have a PE of its own in a foreign country; nevertheless, it is impossible that a simple information that go though the telecommunication company’s infrastructure would create a PE for companies that uses the telecommunication company.

The notion of Income

Normal tax rules normally differentiate between different types of income and profits, and frequently apply different rules to calculate the amount of that income that is subject to tax. The characteristic of income is fundamental to calculate the amount of tax on profits. For example, profits generated from a transaction are differentiated from income obtained from the use of property rights like royalties. These differences between goods, services and intangibles products are important to assess the nature of the tax liability. There are basically three types of income receivable:

from sale of goods

from the use of assets, for example, land or intangible software

from provision of services

The present tax law necessitates a distinction to be made as the tax treatment of transactions in most states depends on what is being taxed. For example, profits from the sale of goods will be not taxable in the country of sale unless the business has a permanent establishment in the country. On the contrary, if there is any presence of the business in the country, the profits obtain from exploitation of property tend to be taxable in the country of source


In Mauritius royalties is defined as ‘payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience’ [21] . The problem is there are different jurisdictions that are being used to what does or does not constitute a royalty. For instance, the sale of software may be considered as a receipt of royalty in the buyer’s country whereas in the seller’s country, it is considered as a sale of goods and is subject to full taxation. The tax treatment of royalties that are related to electronic commerce is under the international debate. The OECD is proposing amendments to the definition of royalties for the characteristic of computer software. The nature of payments as either profits or royalties would vary on the characteristic and extend of the rights obtained by the purchaser. The right to copy software for internal purpose would be considered as profits not royalties. These adjustments are important for electronic commerce because of the capacity to use the internet to send digital products.


The most serious difficulties of tax authorities related to taxation of e-commerce are those raised by consumption taxation rather than income taxation. As the number of consumers that have accessed to the internet is increasing significantly, and with more and more products (tangible or intangible) being sold throughout the internet, the challenges for tax authorities are real and immediate, because the transactions that are conducted by consumers tend to be the weakest part of tax administration. Therefore, the OCED has evaluated the difficulty of applying consumption tax in e-commerce environment and recognized as having more importance than direct taxation [22] .

The consumption taxes of e-commerce can be classified in to three broad categories of transaction:

Supplies of physical goods to both business and private consumers.

Supplies from business to business of services and intangible property.

Supplies from business to private consumers of services and intangible property.

The third category of transactions represents a challenge to the taxation of e-commerce particularly when the products are delivered online across international borders.

Mauritius has implemented the VAT Act 1998 where the place of consumption principle is applied to determine the tax on good and services. Section 9 states ‘VAT shall be charged on any supply of goods or services made in Mauritius, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him’ [23] .

The key factors for consumption taxes are to identify what is being supplied, when does the supply take place and to whom it is supplied. To have a better understanding of the topic, it is important to understand the element of a transaction that are subject to VAT.

What is supply?

According to the VAT Act 1998, supply ‘includes all forms of supply, but not anything done otherwise for a consideration [24] ; anything which is not supply but is done for a consideration (including, if so done the granting, assignment or surrender of any right) is a supply of services [25] . In the case of goods, the transfer for consideration of the right to dispose of the goods as the owner or; in case of services, the performance of the services for a consideration’ [26] .

VAT on e-commerce.

It is important to identify the different categories of transaction of e-commerce so that we can analyze the implication of e-commerce on consumption tax. There are four types of transaction namely:

transactions involving business-to-business (B2B). Sales of tangible assets concluded through electronic method (e.g., the acquisition over the Internet of a car by a business taxpayer from a car seller);

transactions involving B2B sales of digital products (e.g., buying over the Internet of an accounting software by a business taxpayer from a software seller);

transactions involving business-to-consumer (B2C) sales of tangible assets concluded through electronic means (e.g., buying over the Internet of pair a shoes by an individual from a seller); and

transactions involving B2C sales of digital products (e.g., the acquisition over the Internet of a downloadable movie by an individual from a seller).

VAT issue

The VAT procedures will apply as normal if the transactions are done wholly within Mauritius. However, the risk occurs [to the VAT rules happens] when cross-border and international transactions are taken in to consideration.

If we apply the VAT principles, taxation of consumption for e-commerce transaction should occur in the country where the consumption takes place [27] . While the place of consumption can still operate in the situation of an international cross-border e-commerce in physical goods to both business and private consumers, the major difficulty is the treatment of cross border trade in services and intangible goods.

In situation where supply is delivered online, for instance, a software package, matters are not simple. The consumption place of cross border supply for traditional products is found on the recipient’s address for delivery. If conventional tax does not apply then the customs union can collect the tax on the importation of physical goods [28] without affecting revenue collection and the delivery of the product to consumers. However, if the products are digitally downloaded or delivered electronically by mean of the internet, there are no delivery addresses to depend on and thus it set up difficulties for revenue authorities. Even thought a solution can be found in taxing the physical goods for both businesses and consumers, uncertainties will still exist regarding the taxation of supplies from business to business of services and intangible property and supplies from business to private consumers of services and intangible property.

Indirect tax treatment of services.

The VAT treatment of supply depends on where the supplies of services takes place or are supposed to take place [29] . The guidelines to determine precisely where the supply is considered as taking place are flexible but are difficult in reality.

The main principle is where the services are supplied and where the supplier has a fixed establishment from which the service is supplied. This rule has been subject to some controversy about whether the supplier has a fixed establishment in a specific country and whether that specific supplies have their source from the particular country. However, we should bear in mind that the principle of fixed establishment is not the same as the principle of permanent establishment that is use to find out if the direct tax is applied in a country. Some types of service can be considered as supplied where the customer is established, that is, where the services are received. For instance, the sale, transfer, assignment, or licensing of patents, copyrights, trademarks, software, and other proprietary information are considered as supply of services in the VAT act 1998 [30] .

The place of consumption for tangible services can be described where services are actually performed. Some services, however, cannot be noticed to be physically performed or to occur in a specific location and are usually consumed where the buyer is located. Any services that are delivered electronically are normally intangible and as a result it is a challenge in defining a consumption test.

If the pure consumption test is applied, intangible services will be defined as the place where the buyer consumes the services. Using the pure definition of consumption, taxation should be paid to the country in which the consumption takes place. But with the characteristic of e-commerce that is combined with modern technologies, many observers doubt the application of the pure test consumption. Consequently, the difficulty determining a proper place of consumption for intangible services suggest that revenue authorities should look for an approach that take into account the place of consumption principle and at the same time avoiding the loss of revenue in the context of e-commerce.


Undoubtedly, e-commerce is a new and exciting development for Mauritius. Yet, there is no international report which proposes that the characteristic of electronic commerce should be kept out from the normal rate of taxation. To conclude, transactions undertaken in the world of Internet are not as different from traditional forms of commerce as to require a whole new system of taxation.