Judgment summary
This appeal concerned the interpretation of item 7 of Sub-part B of Part II of the Second Schedule to the Income Tax Act 1995 and regulation 23D(2) of the Income Tax Regulations 1996, which grant a partial exemption from income tax for interest income where a company satisfies conditions relating to the substance of its activities, including that it 'carries out its core income generating activities in Mauritius' [1], [6]-[8].
The Board (Lord Leggatt giving judgment, with Lord Sales, Lord Hamblen, Lady Simler and Lord Doherty) held that the word 'income' in regulation 23D(2)(a) refers only to income of the type capable of benefiting from the relevant exemption (here, interest income), disagreeing with the Supreme Court's broader interpretation but agreeing with the position taken by both parties before it [16]-[21].
The Board rejected the MRA's argument that 'core' required the income generating activities to be the company's core business activities, central to its main operations. Instead, 'core' qualifies the income generating activities that must be carried out in Mauritius, without imposing any requirement about the nature of the company's principal business [22]-[29].
Applying this to the agreed facts, the Board found that, whether a narrower or broader view of the relevant activities was taken, Alteo carried out all its activities in Mauritius, so the condition was satisfied either way. The Board preferred the broader view [30]-[31]. The appeal was dismissed, for reasons differing from those of the Supreme Court but reaching the same result [32].
Background
In 1998 the OECD published a report on harmful tax competition, followed in 2013 by an Action Plan on Base Erosion and Profit Shifting, with Action 5 requiring 'substantial activity' for preferential tax regimes, meaning a link between core income-generating activities and the income benefiting from a regime [2]-[4].
Before 2019, Mauritius operated a preferential regime for global business companies. Following the 2018-19 budget speech, this regime was abolished and replaced with a harmonised fiscal regime including enhanced substance conditions, effective from 1 January 2019 [5].
Section 7(2) of the Income Tax Act 1995 exempts from income tax any income specified in Part II of the Second Schedule. Item 7 of Sub-part B of that Schedule, with effect from 1 January 2019, exempts 80 per cent of interest derived by a company (other than certain excluded companies), provided the company satisfies prescribed conditions relating to the substance of its activities [6]-[7].
Regulation 23D(2) of the Income Tax Regulations 1996, inserted in October 2018 and operative from 1 January 2019, prescribes three conditions: that the company carries out its core income generating activities in Mauritius, employs an adequate number of suitably qualified persons, and incurs minimum expenditure proportionate to its level of activities. 'Core income generating activities' is stated to include agreeing funding terms, setting terms and duration of financing, monitoring and revising agreements, and managing risks [8].
Alteo is incorporated and domiciled in Mauritius and is part of a global group operating mainly in the sugar industry. Its principal activity for the tax year 2019/20 was production of electricity, with 95.7% of its total income derived from sale of electricity to the Central Electricity Board. Alteo also received interest on certain loans, amounting to about 0.25% of its total income, incidental to its main activity [9].
Core dispute
The MRA issued a notice of assessment for the tax year 2019/20 assessing Alteo as liable to income tax on the whole of its interest income. Alteo objected, claiming entitlement to the 80% exemption under section 7(2) and item 7 [10].
The Assessment Review Committee upheld the assessment. Alteo appealed to the Supreme Court, which allowed the appeal. The MRA then appealed to the Privy Council [11].
The sole issue was whether the first condition in regulation 23D(2)(a), that the company 'carries out its core income generating activities in Mauritius', was satisfied, given that Alteo's lending activities generating interest income were not core business activities of the company but incidental to its principal activity of producing electricity [12]-[13].
The MRA argued that 'income' in regulation 23D(2)(a) meant income capable of qualifying for the exemption (interest income), and that 'core' meant the activities generating that income had to be core business activities of the company, central to its main operations. As Alteo's core business was electricity production, not money lending, the condition was said not to be satisfied [13].
The Supreme Court, without deciding the point on submissions from the parties, held that 'income' in regulation 23D(2) meant all income generated by the company, not just interest income, and ordered the case remitted to the Assessment Review Committee on that basis [14].
Alteo's primary contention before the Board was that, even if 'income' meant interest income, the condition required only that the core activities generating that interest income be carried out in Mauritius, not that those activities be the company's core business activities. As Alteo carried out all its activities in Mauritius, the condition was satisfied on any view [15].
Court findings
The Board held that the Supreme Court was wrong to interpret 'income' in regulation 23D(2)(a) as including all income generated by the company. The parties were correct that 'income' refers only to income of the type referred to in item 7, namely interest income [16]-[21].
Three reasons supported this: first, the function of regulation 23D(2) is to prescribe conditions for the exemption in item 7, so 'income generating activities' logically refers to activities generating income capable of benefiting from that exemption [17]. Second, this reflects the OECD's substantial activity requirement, which links income qualifying for exemption to the core activities necessary to earn it [18]. Third, the same phrase 'core income generating activities' is used in other items of Part II of the Second Schedule (such as items 42 and 44, concerning ship and aircraft leasing and reinsurance), using standardised wording that varies only in the specific listed activities, showing that 'income' takes its meaning from the relevant exemption rather than referring to the company's income generally [19]-[21].
The Board rejected the MRA's argument on the meaning of 'core'. The word 'core' qualifies the income generating activities that must be carried out in Mauritius; it does not require that those activities be the company's core business activities, central to its main operations [24]. This reading was consistent with item 7(b)'s reference to 'the substance of [the company's] activities' and with the purpose of ensuring that income qualifying for exemption arises from the core activities required to generate it, not from imposing a requirement about the nature of the company's principal business [25]-[26].
The Board noted that the list of activities in regulation 23D(2)(b) (such as agreeing funding terms and managing risks) was the only feature supporting the MRA's case, but concluded this could not displace the plain meaning of paragraph (a), particularly as item 7, unlike some other items, is not limited to companies engaged in a particular business but excludes only certain specified types of company (such as banks and other financial institutions) [27]-[29].
On the facts, the Board considered that either a narrower view (focusing on the loan agreements generating interest) or a broader view (considering the whole of Alteo's operations) led to the same outcome, since all Alteo's activities were carried out in Mauritius. The Board preferred the broader view, given that interest was a tiny proportion of Alteo's income and a by-product of its principal electricity business, and that Alteo's employment and expenditure supported this being genuinely met [30]-[31].
Outcome
The appeal was dismissed. Alteo was entitled to the partial exemption in item 7 for interest income received in the tax year 2019/20, on the basis that it carried out its core income generating activities in Mauritius. The Board's reasoning differed from that of the Supreme Court but reached the same conclusion [32].
Major issues / areas of contention
- Whether 'income' in regulation 23D(2)(a) of the Income Tax Regulations 1996 refers only to income of the type capable of benefiting from the relevant exemption (here, interest income) or to all income generated by the company.
- Whether the word 'core' in the phrase 'core income generating activities' requires the relevant income generating activities to be the company's core business activities, central to its main operations.
- Whether Alteo satisfied the first condition in regulation 23D(2)(a) despite its interest income being incidental to its principal business of electricity production.
- Whether the outcome differed depending on whether a narrower view (focusing on the loan agreements) or a broader view (considering the whole company's operations) was taken of the relevant income generating activities.