Over the last week, our lovely little island has become the stage of much debate – at times very acrimonious – on the future of our global business sector, commonly referred to as the ‘offshore’ sector, against the backdrop of the double taxation avoidance agreement between Mauritius and India (the “Mauritius-India DTAA”). Whilst I shall not purport to comment on the re-negotiated terms, if any, of the Mauritius-India DTAA pending the disclosure of any such amended terms, it is nonetheless worth mentioning, at this stage, that any unfavourable change in the capital gains tax position and the withholding tax position under the Mauritius-India DTAA will undoubtedly call for a paradigm shift in the dynamics of the Mauritian global business sector.
 
The Mauritius-India DTAA: Current Uncertainties and Threats
 
a.     The position as regards capital gains tax
As several commentators have pointed out recently, if Mauritius loses its taxing rights on capital gains under the Mauritius-India DTAA, this is likely to lead to an inexorable erosion of the multitude of investment funds that seek to avail of the various advantages of the Mauritius portal to access the opportunities which the Indian market offers, including, to name but a few, in sectors such as infrastructure, oil & gas, real estate, I.T., healthcare & life sciences, leisure & hospitality, among others. Such investment funds typically pool capital from groups of investors located in countries such as the USA, the UK, France, Germany etc. to invest in the Indian companies which already operate in the above-mentioned sectors, and, after a few years, they seek to make an ‘exit’ by selling their shares in the relevant Indian companies in the hope to realise a capital gain for their investors who took the risks commonly associated with any such investments.
 
Under the current form of the Mauritius-India DTAA, any such gain would be taxable in Mauritius, which does not charge capital gains tax on such transactions, thereby making Mauritius a jurisdiction of choice for India-bound investments. If, as a result of any amendment to the Mauritius-India DTAA as has been reported in the press, the right to tax capital gains shifts to India, there would be no real advantage for promoters and investors to use the Mauritius platform to invest in India.
 
b.     The withholding tax regime
Another important feature of our investor-friendly tax regime which has contributed to the success of Mauritius as an international financial services centre has been the rate of withholding tax (being applicable to bank interest) which is currently at 0%. In effect, thanks to the nil rate of withholding tax, we have witnessed several large multinational groups servicing their multi-million, or even, multi-billion, dollar borrowing needs through Mauritius-incorporated entities as any interest on such borrowing is subject to a nil rate of withholding tax.  If, in the light of any revision to the Mauritius-India DTAA, this rate is increased to, say, 7.5% as currently seems to be reported in the press, Mauritius would lose its appeal as a jurisdiction of choice through which multinationals seek to access the debt markets.
 
Whilst it has been argued that any such increase would still maintain our competitive edge vis-à-vis Singapore, it is worth mentioning that there are other competing jurisdictions which would become more attractive than Mauritius for the incorporation of entities seeking to raise debt in India. For instance, payments of interest from Cyprus tax residents to non-residents are exempt from Cypriot withholding tax; a multinational group with subsidiaries incorporated in various jurisdictions may therefore find it more advantageous to raise debt from an Indian corporate banking institution through one of its Cypriot entities than through a Mauritian entity. Indeed, many global conglomerates operating in the Indian market and having entities incorporated in Mauritius also have Cypriot-incorporated entities as part of their organisational structure. Similarly, the British Virgin Islands (“BVI”) do not levy tax on interest income, giving them a competitive advantage over Mauritius.
 
c.     Limitation of Benefit
The attractiveness of Mauritius as a preferred gateway for India-bound investments may take a further blow if a limitation of benefit clause (“LOB Clause”) is introduced in the Mauritius-India DTAA. An LOB Clause would typically require that a company incorporated in Mauritius and seeking to access the benefits of the Mauritius-India DTAA has a minimum level of spending in Mauritius. Whilst this may be in line with evolving international trends and commendable from a ‘substance’ perspective, the introduction of an LOB Clause to the Mauritius-India DTAA, coupled with the loss of taxing rights in relation to capital gains and an increase in withholding tax rates, may well lead to a steady erosion of our position as the leading source of foreign direct investment into India.
 
Africa – The New El Dorado of the Global Business Sector?
 
The nefarious effects which such changes may potentially have on our domestic economy are beyond the scope of this article as commentators have already addressed the issue in sufficient detail. Nonetheless, it is undeniable that our global business sector seriously needs to look into new opportunities. Since a few years, in the wake of the General Anti-Avoidance Rules (“GAAR”) in India, ‘Africa’ seems to have become the new buzz-word in the Mauritian global business sector, to the point of starting to sound like the new El Dorado of the industry. Whilst Africa is indeed a land of opportunities and challenges, is it really the boon of our global business sector?
 
Arguably, Mauritius offers various advantages as a portal for Africa-bound investments – we boast of an extensive network of double taxation avoidance agreements (15 treaties with African countries and more in the pipeline) offering fiscal efficiency, possessing a pool of highly qualified and bilingual professionals and the jurisdiction’s recognition as a business-friendly environment (the World Bank in its latest “Doing Business Report” ranks Mauritius 1st in Africa and 23rd globally for ease of doing business; the Mo Ibrahim Index on Good Governance positions us 1st in Africa as does the Index of Economic Freedom). Mauritius is also the only international financial services centre that is member of all major African regional organizations (COMESA, SADC, African Union, IOR), allowing preferential access to an immediate market of over 600 million people.
 
However, these factors alone do not suffice to position Mauritius as an outright leader in relation to Africa-bound investments, nor are they enough to make Africa the ‘new India’ of our global business sector. In fact, certain recent developments may even jeopardise our position as a preferred portal for investments into Africa.
 
a.     The Mauritius-South Africa DTAA – Recent Amendments and Looming Uncertainties
As one of the leading economies of Sub-Saharan Africa, South-Africa is of key importance to Mauritius. Under the previous version of the Mauritius-South Africa DTAA, where the tax residency of an entity was in dispute because of the possibility that the entity’s “place of management” be considered to be in both states (i.e. Mauritius and South-Africa), the concept of “place of effective management” would come into play as the determining factor. This has now been removed, leaving any conflict on this matter to be determined by both States by mutual agreement; in the event of disagreement, the entity shall be considered to be outside the scope of the DTAA except for ‘exchange of information’ on the entity between the two countries.
 
This seemingly minor amendment may have potentially far-reaching consequences for a multinational group headquartered in South-Africa and/ or which takes decisions in South-Africa, albeit that such multinational group may have a Mauritian entity whose board of directors sits in Mauritius, in that they may face lots of uncertainties and may get caught in lengthy discussions as to “place of management”, which may well prompt them to move their Mauritian subsidiaries to a jurisdiction which offers them greater certainty and fiscal efficiency.
 
From another perspective, an amendment to Paragraph 4 of Article 13 of the Mauritius-South Africa DTAA now allows South Africa to tax capital gains on the sale of shares if at least 50% of the value of such gains are derived, directly or indirectly from immovable property in South Africa. “Immovable property” includes mining rights and properties – this may leave a Mauritian global business company investing in mining companies in South-Africa in a position where it has to pay capital gains tax on the disposal of its shares in the South-African entity, which, again, makes Mauritius a less attractive jurisdiction for South Africa-bound investments, the more so, as mining and natural resources are key target sectors for Mauritius-incorporated global business companies investing in South-Africa.
 
Further, under the revised Mauritius-South Africa DTAA, both States can now levy tax on fees for technical or management services (“FTS”), whilst under the previous version of the DTAA, only the state in which the entity is resident was entitled to tax the FTS. South Africa has recently introduced a withholding tax of 15% on such FTS payable to non-residents, which will potentially have an impact on Mauritius resident companies earning income of a technical or managerial nature from their South African operations. Again, this is an erosion of our competitive edge in relation to South Africa driven investments from Mauritius.
 
b.     Growing Competition from other International Financial Services Centres
The wealth of opportunities which the African continent offers has kept our competitors on their toes as they also seek to access the African market. The BVI, for instance, in seeking to position itself as a premier offshore financial services centre and as a jurisdiction of choice for Africa-bound investments, has recently created two new fund products to complement its very popular existing funds offering with the firm intention of remaining at the forefront of the financial services market. The ‘incubator fund’ and the ‘approved fund’ are two new lightly regulated fund products which are primarily aimed at start-up emerging managers and those managing funds for smaller groups of closely connected investors.
 
The incubator fund is aimed at fund managers who do not necessarily have the benefit of seed investor capital but who wish to set up quickly and establish a track record with minimal set-up costs and without having to comply with onerous regulatory obligations. The product is therefore expected to be very attractive to start-up managers who are seeking the best environment to grow their assets under management in the most cost-efficient manner. The approved fund is aimed at fund managers who wish to establish a fund for a longer term, but on the basis of a more private investor offering, which may appeal to family offices or an investor base of close connections. These two new products are particularly suited for Africa-driven investments as investors seeking to tap into the opportunities offered by the African market may either not be in a position to, or may not be willing to, invest significant amounts of capital and the incubator fund and the approved fund give them the opportunity to do so. It is anticipated that these two new products will be hugely popular among Africa-focussed fund managers.
 
High Time for a Paradigm Shift in the Global Business Sector – Looking Beyond Tax-Driven Considerations
 
In the light of the above and taking into account international developments (namely, the development of the Gujarat International Finance Tec-City in India, and the increasing pressure by the Organisation for Economic Co-operation and Development (« OECD« ), which has G20 support, to clamp-down on low-tax jurisdictions through its Action Plan on Base Erosion and Profit Shifting), it is clear that the Mauritius global business sector is at a critical juncture where it is most urgently called upon to experience a paradigm shift. It is perhaps high time for us to look beyond tax-driven considerations to attract investors and, instead, to focus on more substantive advantages which our jurisdiction can offer to preserve its competitiveness as a premier international financial services centre.
 
For example, it is perhaps time to start looking at ways and means to encourage the development of a sophisticated market for derivative instruments. We are fortunate enough to have an incredibly flexible insolvency legislative framework which provides for the recognition and enforceability of netting and collateral arrangements in accordance with their respective terms in the insolvency of a Mauritian counterparty. Indeed, the ability to enforce a derivative contract in the insolvency of the counterparty is one of the key concerns of derivative and other swap providers; given the flexibility which our insolvency regime offers, our decision-makers may wish to capitalise on this advantage to showcase the attractiveness of the Mauritian international financial services centre to multinational groups which regularly raise finance through derivative instruments.
 
From another perspective, it is also perhaps time to lay more emphasis on the various advantages of the Mauritius International Arbitration Centre (“MIAC”), run in collaboration with the London Court of International Arbitration (“LCIA”), which is universally recognised as one of the world’s leading arbitral institutions, through the LCIA-MIAC arbitration centre. The recent LCIA-MIAC conference held in Mauritius in December 2014 was no doubt a step further in this direction and the successful bid made by Mauritius in 2012 to host the 2016 congress of the International Council for Commercial Arbitration next May will indeed help us in promoting the Mauritius jurisdiction. In addition, the decision of the Supreme Court of Mauritius in Cruz City 1 Mauritius Holdings v/s Unitech Limited & Anor (2014 SCJ 100) has also been heralded by practitioners and commentators in the international arbitration community as signalling a pro-enforcement attitude of the Mauritian Courts, which would further enhance the appeal of the LCIA-MIAC arbitration centre in the eyes of international players.
 
These are but a few examples of initiatives which, in my view, the Government should consider taking with a view to preventing the erosion of our competitive edge as an international financial services of choice. As a young professional who has chosen to join the Mauritius global business sector after having worked in London and Paris respectively, I trust that our leaders will make the most of all the opportunities available to us not only to restore our threatened competitive edge, but also to ensure a sustainable development of the financial services sector, so as to encourage our youngsters who find the grass greener abroad to move back to, and, indeed, to prevent any further brain drain from, our paradise island!
 
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VITHIL DABEE
Barrister-at-Law – Madun Gujadhur Chambers
Graduate in Law of the University of Cambridge
Post-Graduate Diploma in Legal Practice – The College of Law, London
Corporate lawyer specialising in offshore-driven finance and capital markets transactions, investment funds and corporate restructurings