Mauritius transfer pricing case: A new challenge for Multinationals

In recent years, transfer pricing has become a critical issue for multinational corporations (MNCs), especially those involved in the commercialisation of intellectual property (IP). The recent case of Avago Technologies Trading Ltd v/s Mauritius Revenue Authority (MRA) marks a significant development in the application of transfer pricing rules in lower tax jurisdictions like Mauritius. This case highlights the evolving landscape of international tax compliance and the increasing scrutiny faced by MNCs in managing their global operations.

On 04 July 2024, the Assessment Review Committee (ARC) delivered a ruling in favour of the MRA, focusing on the arm’s length nature of royalty fees paid by Avago Technologies Trading Ltd (ATTL) to its related entity, GEN IP, based in Singapore. ATTL, a Global Business Company in Mauritius, operates in the semiconductor industry and holds a portfolio of IP products under a License Agreement with GEN IP. This agreement allowed ATTL to act as an intermediary, sublicensing the manufacture of Avago products to both related and unrelated parties within the Avago Group.

The primary issue in this case was whether the royalty fees paid by ATTL to GEN IP were consistent with the arm’s length principle, a fundamental concept in transfer pricing that requires transactions between related parties to be conducted as if they were between independent entities. The MRA contended that the payments were not at arm’s length and constituted a tax avoidance scheme. Specifically, the MRA argued that the royalties were inconsistent with industry norms, suggesting a motive for profit shifting.

Comparing Matters in South Africa and Mauritius

The Mauritius case echoes similar challenges highlighted in the South African case of ABD Limited vs. The Commissioner for South African Revenue Service (SARS). In both cases, the courts examined whether the royalty rates charged for the use of IP were at arm’s length and consistent with market standards. The key difference lies in the methodologies used to determine the appropriate royalty rates.

In the ABD Limited case, the court considered two primary methodologies: the Transactional Profit Split Method (TPSM) and the Comparable Uncontrolled Price Method (CUP). The court ultimately favoured the CUP method, which compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction. This method was deemed more reliable due to its closer alignment with market-based arm’s length transactions.

Conversely, in the Avago Technologies case, the MRA criticised the use of the Transactional Net Margin Method (TNMM) employed by ATTL to justify the royalty payments. The MRA argued that the TNMM was faulty as it did not accurately represent the value of the IP provided by GEN IP. Instead, the MRA favoured the CUP method, similar to the approach taken in the ABD Limited case. The ARC upheld the MRA’s position, emphasising the importance of arm’s length transactions and rejecting the royalties as non-deductible due to their profit-shifting nature.

Implications for Multinational Corporations

The ruling in the Avago Technologies case marks a pivotal moment in Mauritius’s tax landscape, challenging the perception of the country as a safe haven from transfer pricing rules. This case underscores the growing trend among tax authorities worldwide to scrutinise transfer pricing arrangements, particularly those involving high-value transactions and intangibles. It serves as a stark reminder for MNCs that even in jurisdictions with less stringent transfer pricing regulations, compliance with the arm’s length principle is essential.

MNCs must ensure that their cross-border transactions are supported by robust transfer pricing documentation. This includes careful selection of appropriate methodologies, detailed benchmarking studies, and comprehensive economic analyses that accurately reflect the economic activities and risks involved. Failure to do so may result in significant tax liabilities and penalties, as demonstrated by the substantial USD 107 million (plus penalties and interest) adjustment in the Avago Technologies case.

Moreover, the case highlights the importance of proactive tax planning and compliance. MNCs should regularly review their transfer pricing policies and ensure they align with the latest regulatory developments. This includes staying informed about the evolving standards and practices in different jurisdictions, as tax authorities increasingly collaborate and share information across borders.

The Avago Technologies case sets a precedent not only for Mauritius but for all lower tax jurisdictions, signalling a shift towards stricter enforcement of transfer pricing rules. It reinforces the global movement towards greater transparency and compliance, particularly concerning the commercialisation of IP. As MNCs navigate this complex landscape, they must prioritise accurate and defensible transfer pricing practices to avoid the pitfalls of tax disputes and potential reputational damage. The lessons learned from both the Avago Technologies and ABD Limited cases serve as valuable guides for MNCs in managing their international tax obligations and ensuring fair tax treatment.

By Gaby Meintjes | Director