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AfricaMay 2 2017

Mauritius sets out stall to become go-to southern IFC

Despite its major business partner India renegotiating a tax agreement, and mutterings of tax haven status, Mauritius has thrived as a regional financial centre. Now it is positioning itself as the southern hemisphere’s IFC of preference. James King reports.
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Port Louis

In the realm of international financial centres (IFCs), Mauritius’s star is rising. Strategically located in the Indian Ocean – well positioned to capture business flows between Asia and Africa – the island nation’s attractive mix of business-friendly regulations and stable political environment mark it out as something of an anomaly in the region.

Today, it has harnessed these advantages to develop a constellation of high-end industries including finance, management and law. The authorities tasked with spearheading the country’s IFC ambitions are now looking to the next stage of its development, with designs to be a truly global hub.

“Mauritius has developed a world-class IFC over the past few decades,” says Samade Jhummun, chief executive of Global Finance Mauritius, the apex representative body of the financial services sector in Mauritius.

DTAA blow

The country’s rise as an IFC owes much to the double taxation avoidance agreement (DTAA) signed with India in 1983. The DTAA, which provided an exemption on tax in India on capital gains by a tax resident of Mauritius, swiftly established the country as the go-to destination for doing business with the world’s biggest democracy.

However, in recent years the Indian government’s approach to international tax policy has changed to favour source-based taxation. This has led to the renegotiation of a number of bilateral tax treaties, including that with Mauritius.

In May 2016 the two governments signed a revised protocol on the treaty, reinstating capital gains for Mauritian tax residents that own shares in Indian companies, among other changes. Losing this privileged tax status was a source of anxiety regarding the future of the Mauritian economy, as well as the outlook for its IFC ambitions.

Between 2000 and 2015, Mauritius was the source of about 34% of total foreign direct investment (FDI) inflows into India. Moreover, about 20% of foreign portfolio assets in India are channelled through Mauritius, according to US-based law firm Pepper Hamilton. While these numbers obviously represent big business for India, the ancillary benefits for Mauritius have been extensive.

Confidence prevails

Nevertheless, concerns over the treaty change have so far proven unfounded. The deposits of global business companies – entities conducting international business but based in Mauritius – increased from MRs320bn ($9bn) in March 2016 to MRs350bn in September of the same year. In addition, the headline acquisition of two of Mauritius’s leading management companies over the past six months by international groups suggests that confidence in the country’s IFC status is high.

“I am confident that Mauritius could become the southern hemisphere’s leading IFC within the next 10 years,” says Nigel Green, founder and chief executive of the deVere Group, one of the world’s largest independent financial services organisations, which recently received an investment banking licence from the Financial Service Commission of Mauritius.

Indeed, several market players are now looking at the treaty change as an opportunity to transform their relationship with India. “When it comes to India, Mauritius has mainly targeted equity-based investments in the past. We haven’t been doing much on the debt structuring side, but the debt market in India is four times bigger than its equity market so this represents a big opportunity moving forward. This will require, to some extent, the reinvention of Mauritius as a financial centre,” says Mr Jhummun.

New relationship

But, perhaps more significantly, the revised treaty is being considered as an opportunity to recalibrate the country's relationship with Africa. By capitalising on Mauritius’s natural advantages, there is a genuine push to position the country as the pre-eminent investment platform for the continent.

“Due to its strategic location and African ties, Mauritius is the natural choice for investors targeting Africa, which has huge potential as a market for the future. Mauritius has signed a lot of investment promotion and protection agreements with African jurisdictions and to some extent we offer a risk mitigation platform for investing in the continent,” says Mr Jhummun.

Among other things, this is likely to include the development of regional treasury centres and the positioning of Mauritius as an attractive, multi-asset listing and trading platform for African businesses. This point is particularly salient: as neighbouring jurisdictions contend with their own challenging political and economic problems, Mauritius’s value proposition is on the rise.

“Our country also holds ample potential to provide more sophisticated investment structuring solutions, relating to project deal identification, research and analysis, valuations, due diligence, as well as legal corporate and merger and acquisition advisory,” says Raoul Gufflet, deputy chief executive of Mauritius Commercial Bank. “In addition, there is further latitude to boost our appeal for the provision of private wealth management services.”

Generating new business

In the wealth management space, certain global trends linked to the higher cost of compliance and know your customer (KYC) requirements are pushing new business in the direction of Mauritius.

“Rising compliance and KYC costs are forcing the bigger global banks to terminate relationships with some of their smaller wealth accounts. I believe many of these clients may now be looking to Mauritius as a jurisdiction with the requisite skill set and attractive cost base to handle their activities,” says Sanjiv Bhasin, chief executive of AfrAsia Bank.

But Mauritius’s rise as an IFC has not been problem free. In particular, the country continues to face threats to its reputation, having been labelled by some as a tax haven. A report published by Oxfam in December 2016 identified Mauritius as the world’s 14th ‘worst’ corporate tax haven. In its research, Oxfam cites low corporate income tax, a 0% withholding tax and a "lack of participation in multilateral anti-abuse and transparency initiatives".

Similarly, the EU is expected to publish its own list of blacklisted tax havens by the third quarter of 2017. But, as Oxfam notes, the bloc will only assess countries outside the EU, meaning that many of the jurisdictions listed by Oxfam – such as the Netherlands, Cyprus, Luxembourg and Ireland – will not be included. The Mauritian government, led by its finance minister, has been communicating its commitment to transparency and to combating cross-border tax evasion.

Prioritising transparency

There can be little doubt that Mauritius is wholly committed to the introduction of transparent, globally recognised regulatory norms. “Mauritius is at the forefront of global efforts to promote greater transparency among IFCs. We are the first jurisdiction in Africa to have adopted the US Foreign Account Tax Compliance Act as well as the Common Reporting Standard, which has been effective since January 2017. We are also a signatory to the Organisation for Economic Co-operation and Development’s inclusive framework on base erosion and profit shifting,” says Mr Jhummun.

Private sector leaders in the country note that criticising the island’s tax policy is problematic, since numerous other jurisdictions, including advanced economies, utilise their tax regimes to gain business. Meanwhile, compliance and disclosure standards are comparatively lower in some other higher profile markets. Though Mauritius has had its share of scandals, market participants are quick to point out that these occur no more or less than in any other major business hub.

“In terms of challenges, we are confident that Mauritius will not be included in the EU’s blacklist of global tax havens, and the government is prepared to bring in the necessary changes to align to international norms. There are many dimensions to Mauritius and its economy. Efforts to paint the country as a tax haven are very unfair,” says Mr Jhummun.

Backed by a far-sighted and globally aware leadership, Mauritius is expected to shoulder these challenges, and others, moving forward. For now, the biggest vote of confidence, and perhaps the only one that matters, is coming from the market itself.

“The northern hemisphere’s powerhouse IFCs such as London, New York, Hong Kong and Tokyo will maintain their dominant position in the world for decades to come,” says deVere Group’s Mr Green.

“However, the southern hemisphere’s IFCs such as Sydney, São Paulo and Johannesburg will need to up their game in order to compete with Mauritius as global financial hubs, and to attract international financial services firms.”

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