Mauritius: Offshore on the radar
Pristine beaches and murky accounting have long been associated with the Indian Ocean nation of Mauritius, and so it was that the transparent waters of Balaclava Bay provided a gentle reminder of what was at stake as representatives of the government launched a new blueprint for the offshore financial centre at a major conference on 19-20 September.
Improving the image of the financial services sector and driving its expansion are high on the government’s agenda for growth. Announcing plans to double the sector’s size by 2030, Prime Minister Pravind Jugnauth said: “The sector continues to face its share of challenges both locally and internationally. As an innovative and forward-looking nation we have to demonstrate our capabilities in turning these challenges into opportunities, while ensuring economic resilience.”
The financial sector is at a crossroads: changes to a treaty with India mean that it has to look to new markets in Africa; African governments want to protect their tax bases; and campaigners continue to criticise the country as a tax haven that hides beneficial owners of companies and allows firms to avoid paying tax in their own countries.
‘Mauritius International Financial Centre – Forward Looking’ was the name of the two-day conference at the InterContinental Mauritius Resort, organised by the industry regulator, the Financial Services Commission (FSC).
Prime Minister Jugnauth’s government says it wants to support the growth of the financial sector while responding to its critics and increasing transparency to meet rising international standards. The government’s plans include signing more double taxation avoidance agreements (DTAAs) in Africa and beyond, abolishing a class of companies that attracted international criticism (for allowing shell companies and companies that do little more than move money around the world) and focusing on three main subsectors – namely cross-border investment; corporate banking and finance; and private wealth. Mauritius currently has 44 DTAAs around the world and is zlooking for new business partners.
Mauritius’s top banks all have a role to play if the sector is to double in size by 2030. According to Bank of Mauritius figures, total deposits from global business banking at the end of June 2018 represented 14.4% of total deposits, or Rs544bn ($15.7bn). The country’s biggest bank, Mauritius Commercial Bank, reports that 40% of its net profit for the first half of 2018 – Rs7.2bn – came from foreign sources. Meanwhile, HSBC Mauritius is using the country as a platform for renminbi operations capitalising on China’s One Belt, One Road initiative, and AfrAsia Bank’s global business operations represented 71% of non-interest income for the 2017/2018 financial year.
The government’s blueprint lays out several targets. The main centre of activity will be corporate banking and finance, which the government hopes to see grow at a rate of 9.6% per year over the next decade. That is to be followed by cross-border investment, which could grow at 5% per year. And private wealth is a nascent subsector that the government argues can grow at 6.7% per year from its current low base.
Some influential people do not agree with the government’s rosy projections. Sunil Benimadhu, chief executive of the Stock Exchange of Mauritius and chairman of Global Finance Mauritius – the apex body of private-sector financial operators – says that to double the size of the sector in 12 years will require each of those pillars to grow at a compound rate of 6%. “When we take a step back and look at the current growth rates of these pillars, it would seem that one of them, namely the cross-border investment, has over the last four years grown at around 2%. This is quite far from the 6% target,” he says.
There has been an uptick in deals recently, with international firms buying up companies to get a presence in Mauritius. In April 2018, Ocorian bought Abax Corporate Services to help it target businesses in the Middle East and Africa. Also, SGG Group acquired Cim Global Business in May 2017, and Sanne Group bought Mauritius-based International Financial Services in early 2017.
Elections in 2019 are unlikely to mean much change for the country’s financial sector, which has support from across the political spectrum. Indeed, the left-wing opposition says the government is not doing enough to support the industry. At a 6 October press conference, Mauritian Militant Movement leader Paul Bérenger criticised the September conference: “These two-day meetings have not brought anything concrete. There is zero strategy. Already the Mauritian jurisdiction has been outpaced by the jurisdiction of Singapore concerning investment in India. And things will get worse because of the lack of strategy from the government to help a sector which is to become the most important one of our economy,” he said.
Politicians point to the financial sector as evidence of the country’s continuing ability to adapt to changing economic circumstances. At independence in 1968, the sugar industry enabled Mauritius to move from a low-income, agricultural economy to a middle-income, diversified one. From the 1980s manufacturing – mainly textiles – took over. Now, with the weakening of Mauritian export revenue, it is the turn of financial services.
Mauritius is among the few countries that have witnessed a sustained growth of its financial sector after the global financial crisis, with an average of 5% growth over the past 10 years. The government predicts that it will account for 11.6% of gross domestic product in 2018, compared to 13.1% for manufacturing.
It will not be smooth sailing, however. Jurisdictions that provide levels of secrecy and compete with other countries by allowing foreign investors to pay lower, or even no, taxes are under fire from tax-justice campaigners and intergovernmental groups like the Organisation for Economic Cooperation and Development (OECD). Alexander Ezenagu, a researcher at the International Centre for Tax and Development, told journalists last year: “Some of the most important ways of stripping profits from African countries are done through offshore jurisdictions, including Mauritius.”
While denying that Mauritius is a tax haven, the government is making moves to improve governance and address the detractors’ concerns. Harvesh Seegolam, chief executive officer of the FSC, tells The Africa Report: “The main factor that is impacting directly on the way we operate as a financial centre is to do with international developments.”
Toeing the line
With US companies like Google and Amazon in the headlines in Europe for the low levels of corporate tax that they pay, tax is rising high on the international agenda. The OECD and G20 have rolled out the jargon-filled Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which the OECD elucidates as ‘tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.’
With the threat of being blacklisted by the OECD and the European Union if Mauritius does not sign up to the BEPS agreement, Jugnauth said earlier this year that the government will harmonise its fiscal regime for domestic and global business companies. “We have also brought changes to our legislative framework to combat money laundering and the financing of terrorism”, he told attendees at the September conference.
Mauritius has three types of companies: domestic, Global Business Company 1 and Global Business Company 2. Previously, GBC1s, like domestic companies, were taxed at 15% on their chargeable income but could claim foreign tax credit of 80%, thus resulting in a maximum effective tax rate of 3%. GBC2s were exempt from tax. With the harmonisation of the fiscal regime, all companies in Mauritius will now benefit from 80% tax exemption on specified income like foreign dividends, interest and royalties. The government also plans to abolish the zero-tax GBC2 regime in January 2019. According to official statistics from the FSC, as at end of July there were 12,039 GBC1 companies and 10,400 GBC2s in Mauritius.
For decades, Mauritius’s financial centre focused on the Indian market. But the government there complained of too much opacity and the loss of revenue from companies domiciling themselves in Mauritius to pay less tax, so the two sides agreed to renegotiate their double taxation avoidance agreement (DTAA), making Mauritius a less attractive hub for investors looking for opportunities in India.
Shift to Africa
The bourse’s Benimadhu argues that India could still be an important market for Mauritius because of the knowledge developed and relationships formed: “In the light of the amended DTAA with India, there is a need for Mauritius to sit down and come up with a new value-added proposal for India.”
The government says it is currently in talks with Algeria, Burkina Faso, Comoros, Mali, Sudan and Tanzania on tax treaties. And Mauritius should, according to Parik Tulsidas of AfrAsia Bank – a regional bank headquartered in Mauritius –now focus more specifically on how to become more relevant to Africa. “Having advantages is certainly a must but I believe that in many ways, we have reached a ‘mature’ stage in our development as a financial jurisdiction. Hence how do we get to the next level and up our game? This for me is more topical, especially with the recent renegotiation of the DTAA treaty with India, the decision taken in the recent country budget to discontinue GBC2s, as well as unwarranted negative press on the Mauritian jurisdiction,” he says.
This article first appeared in the November 2018 print edition of The Africa Report magazine