Demystifying the Annual Allowance: Tips from Forvis Mazars in Mauritius

For tax purposes, depreciation is treated differently and is recognized as a tax allowable expense. Instead, tax law prescribes specific depreciation methods and rates—commonly referred to as annual allowances—which are based on statutory provisions and prescribed methods.

The Annual Allowance under Mauritian Tax Law

Under Mauritian tax law, the annual allowance serves as a pivotal mechanism that empowers businesses to recoup the cost of capital expenditures through systematic tax deductions. Governed by Section 24 of the Income Tax Act 1995 (ITA 1995) and elaborated in the Fourth Schedule of the Income Tax Regulations 1996 (ITR 1996), this provision enables taxpayers to deduct a portion of qualifying capital expenditure over the asset’s useful life. This alignment of tax relief with the asset’s economic utility ensures that businesses can effectively manage their financial resources while complying with statutory requirements.

Key Principles of the Annual Allowance

Under Section 24(3) of ITA 1995, the annual allowance functions as a tax-deductible expense for capital expenditures incurred exclusively in the production of gross income. Unlike accounting depreciation, which represents the reduction in an asset’s value over time, the annual allowance is a statutory deduction calculated based on prescribed rates outlined in the Fourth Schedule of ITR 1996. Its key features include:

• Asset-Specific Rates: The Fourth Schedule of ITR 1996 categorizes assets and assigns maximum annual allowance rates. For example:

• Tax Written Down Value (TWDV) Calculation: The annual allowance is calculated on the TWDV (cost minus allowances) for specific class of assets, ensuring total deductions never exceed the original expenditure.

In addition, Section 7(1) of the ITR 1996 further states that for the purposes of section 24 of the Act –

 (a) a person shall include a hirer; and

(b) the rate of annual allowance shall, in respect of each of the items specified in the table above, not exceed the rate corresponding to that item in that table.

This Section emphasizes that the rate shall not exceed those specified in the table above. From our point of view, the legislator has clearly stated that a taxpayer cannot claim annual allowance more than those specified in the regulations, yet it does not state clearly whether a taxpayer can claim less than those specified in the table above.

Moreover, Section 7 cannot be interpreted in isolation it should be read in conjunction with Section 24(1) of the ITA 1995, which states that where, in an income year, a person has incurred capital expenditure, they shall be allowed a deduction of the capital expenditure so incurred by way of an annual allowance in that income year and in each of the succeeding years at such rate as may be prescribed.

Our view is that where a taxpayer who has incurred capital expenditure in an income year, he shall be allowed to make a claim of the annual allowance in that income year, meaning they cannot postpone the annual allowance and claim same in the subsequent year. This now leads to the question of what rate of annual allowance the taxpayer can claim.

From our understanding the taxpayer can claim less than those prescribed but not more. This issue of interpretation of Section 24 of the ITA 1995 together with Section 7 of the ITR 1996 was raised in the matter of Director-General, Mauritius Revenue Authority (MRA) v. Mauritius Freeport Development Co. Ltd (MFD).

In this case, MFD, during a tax assessment, contended that the law does not specify a minimum rate for claiming annual allowances. Consequently, they argued that it was permissible to defer annual allowance claims to future years, even at a 0% rate, as part of strategic tax planning. The Assessment Review Committee (ARC) concurred with MFD’s position, leading the MRA to appeal to the Supreme Court.

The Supreme Court held that annual allowances should be claimed in the income years in which the asset is put to use to, and the specific rate prescribed under the Fourth Schedule of the ITR 1996 must be strictly applied. The Court emphasized that deferring claims to subsequent years is impermissible, and that the law must be interpreted in accordance with its plain language, leaving no scope for ambiguity.

This ruling signifies a significant paradigm shift in Mauritian tax law, emphasizing strict statutory interpretation over taxpayer flexibility. As a result, businesses are now required to align their annual allowance claims strictly with the year of asset acquisition. This decision has a profound impact on tax planning strategies and underscores the MRA heightened focus on compliance, as well as the risks associated with aggressive deferral practices.

Our views differ from that of the Supreme Court; however, we understand that the MFD will appeal to the Privy Council and we look forward for interpretation of Section 24 in this matter.

Addition of assets

Under the annual allowance mechanism, upon purchase of an asset, you spread the cost of the asset over several years depending on the class of the assets, reducing your taxable income each year by a set percentage according to the law, instead of claiming the full cost at once.

However, the recent ARC decision in the case of CDL Knits Ltd v. MRA clarified that the entitlement to claim annual allowances commences only when the asset is fully assembled and actively used in the production of gross income. Merely purchasing or importing individual parts does not suffice. The ruling further established that if an asset is brought into use as a complete, functional unit, the allowance can be claimed from that point onward.

To qualify for the annual allowance, the asset must be used exclusively for the purpose of generating business income. The deduction is then applied annually at the prescribed rate until the total cost of the asset has been fully depreciated. For small-value assets costing MUR 60,000 or less, the law permits the entire cost to be claimed as a deduction in the year of acquisition.

Disposal of an asset

When a capital asset subject to annual allowance claims under Section 24 (5) of the Income Tax Act (ITA) 1995 is disposed or transferred in Mauritius, the tax treatment involves recalculating the asset’s residual value and determining any balancing charge or balancing allowance. This process ensures that the total tax relief granted through annual allowances aligns with the economic use of the asset.

Tax Written Down Value (TWDV) and Disposal Proceeds

The TWDV of an asset is its original cost minus cumulative annual allowances claimed up to the disposal date. Upon disposal, the proceeds are compared to this TWDV:

• Balancing Charge: If disposal proceeds exceed the TWDV, the excess is taxed as income. The charge is capped at the total annual allowances previously claimed.
• Balancing Allowance: If proceeds are less than the TWDV, the difference is deductible as a loss.

Assets Written Off

Assets are usually written off when the assets are no longer of use to a company due to damage or wear and tears. In those events, analyzing the tax impact of such a write off is important.

From a tax perspective, upon being written off, the TWDV of the asset is analyzed such that the process of writing off is deemed to be a disposal, with a disposal proceed of Mur 0.Hence, where the disposal proceeds are  equal to the TWDV, there would be no tax adjustment, while if the proceeds are less than the TWDV, a balancing allowance (additional deduction) may be claimed. 

In a nutshell, the total annual allowances claimed over the asset's life cannot exceed the original capital expenditure.