Mauritius: Multiconsult Newsletter, April 2007

Small offshore jurisdictions are sometimes subject to negative public comments. One of the criticisms levelled at them is that they are tax havens, a term loaded with many undertones, such as being an ideal location for money launderers. Mauritius has had its share of such accusations, in spite of its having signed 34 avoidance of double taxation agreements (DTA) with other countries. It is common knowledge that tax havens do not sign DTA’s, since they do not charge income tax.

Mauritius, along with other small offshore jurisdictions, is expected to be whiter than white in order to try and rebut unfair accusations, coming mainly from large countries which are unfortunately oblivious – or ignorant – of what is taking place in their own backyard. The Economist magazine (February 24, 2007) recently recalled that a federal government agency had reported that few of the US states "collect information on the true owners of companies set up within their borders", with Delaware and Nevada being "particularly l ax".

It is also well-known that Britain is a major personal tax -haven, thanks to the principle of resident non-domiciliation whereby some people may live in Britain but claim domicile abroad, thus avoiding to pay tax on offshore income.

Such practices as those highlighted above are not being criticised per se. They are mentioned only to show that it is perfectly legitimate for Mauritius to be equally inventive in devising attractive packages for corporate and individual cross-border operators. What hurts, however, is that we are being too often pressurized to prove that we are not acting illegally or unethically, whereas the larger jurisdictions have rarely a finger pointed at them, even where it might be justified to do so.

Mauritius has, of course, done its utmost to comply with the toughest international standards set up by the OECD and the Financial Action Task Force. High money costs have been incurred, estimated by the Commonwealth Secretariat at US$40 million, equivalent to about half of one per cent of Gross Domestic Product. It is hoped that such efforts will be widely recognized and that the Mauritian jurisdiction will be able to recoup such an "investment" by continuing to attract genuine crossborder operators, comforted by a wellregulated system and environment.
Pierre Dinan
Independent Editor

A recent report entitled, "Developmental Implications of Anti-Money Laundering and Taxation Regulations" was commissioned by the Commonwealth Secretariat’s Economic Affairs Division to assess the impact of recent multilateral regulatory initiatives on small Commonwealth International Financial Centres (IFCs). Mauritius, Barbados and Vanuatu were used as case studies. In the three IFCs under consideration, it was noted that the cost of meeting new multilateral regulatory standards exceeded the short-to-medium term benefits.

The majority of the private firms and banks operating in the International Financial Services sector in all three countries have experienced a significant increase in compliance costs, in some instances sufficient enough to threaten the future business viability of small firms.

According to the report, the single most important factor explaining the adoption of these new international standards in the three IFCs under consideration has been fear of the consequences of being blacklisted by international organisations for non-compliance.

Mauritius has always sought to be compliant with these new international standards. It has never been blacklisted by the FATF, and has adopted quite promptly its recommendations. It has been among the first six countries to have taken commitments to the OECD after its report on Harmful Tax Competition and is now a participating partner at the Global Tax Forum.

Mauritius has always participated in the worldwide effort to combat money laundering and terrorist financing, thus enhancing its reputation as an IFC. Yet, the report reveals that in each case, the significance of this benefit of enhancing reputation has been undermined by the inability of respondents to identify any associated increase in competitiveness or other tangible benefits. Compliance costs have substantially outweighed any benefits.

The Mauritius International Financial Services Sector suffered a substantial contraction following these reforms. In the last few years, growth has resumed but at a slower pace than previously and has been uneven. Management companies have struggled to cope with the demanding and expensive new due diligence and other regulatory requirements.

In net terms, direct costs (i.e. excluding revenue forgone because of the decline in business) of the new regulatory regimes imposed on management companies were estimated at US $ 27.3 million for the period 2002-2005, while the costs to the banks over the same period stood at US $ 7.9 million.

The public sector’s net direct costs for the period 2002-2005 were estimated at US $ 4.8 million.

The greatest cost to the private sector has been the setting up of the Know Your Customer (KYC) mechanisms, costs of recruiting staff, training and investment in new technological tools.

The OECD stated that in return for compliance, small countries will be able to participate in global financial services on a level playing field, yet this is not happening. The efforts of small countries for complying with multilateral regulatory initiatives are not being recognised. On the contrary, small states are in fact losing business to offshore centres in large countries that have failed to raise their own standards.

In July 2006, the Financial Action Task Force (FATF) reported that virtually every US State still permits tax-free companies with secret ownership.

The FATF revealed that US service providers have successfully lobbied against raising standards, while Delaware actively promotes itself as more secretive than the so-called offshore centres.

The report concluded that small and large countries must make equal efforts to raise their standards in order to achieve the level playing field advocated by OECD. Dominant countries, including those in the Commonwealth, must also share market access opportunities with those small states that meet higher standards.

The Banking sector has been an important player in the development and growth of the Global Business industry in Mauritius. In the past few years, the Banks have seen a quantum growth in the demand for products and services from international investors, mainly linked to the investment opportunities associated with high growth markets of India, China and Africa. Banks routinely deal with customers based in various time zones demanding services that are ‘best in class’ – which is why in many ways the local Global Business sector is on the forefront of innovation and upskilling resulting in improved customer service and enhanced productivity.

It is said that no man is an island – this is also true for a jurisdiction like Mauritius! Increasingly linking up with the international investors and spreading the awareness of the benefits of Mauritius as an attractive offshore jurisdiction is the responsibility of every player in this sector. HSBC, which is a dominant player in the sector, has taken the view that the most efficient way for us to grow our business is by helping to grow the market place, rather than attempting to win business from the competition (tempting as it is)! To execute this new strategy, we have implemented two initiatives.

The first was to incorporate a local bank in Mauritius - HSBC Bank (Mauritius) Ltd, which gives us Mauritius ‘tax resident’ status. This is important for those offshore entities that wish to borrow from us, and benefit from Zero withholding tax on interest payments – benefits available from selected DTAs. There is a strong demand for Offshore borrowing by Corporates based in countries in the Asia Pacific region and Africa which has helped us to expand our business footprint.

Our second initiative has been to feed the benefits of using Mauritius as an investment holding destination to our colleagues, especially in key markets like US, UK and Middle East. Given the international reach of the HSBC Group (312,000 employees in 82 countries and territories, servicing over 125 million customers), we bank many of the world’s top multinationals, funds, and Institutional investors – entities which potentially have business that can be done in Mauritius. Senior personnel have been brought on board in Mauritius to ensure that the ‘Mauritius Advantage’ message reaches the highest levels of these important clients through the wide network of Corporate Relationship Managers. We will also be conducting roadshows in the major ‘Money Centres’ such as London, Paris, New York and the UAE to market our services directly to potential clients.

Investments into India continue to be the mainstay for most Banks operating in the Global Business sector, though investments into China, Thailand, and selected countries in Sub Saharan Africa are increasing. Banks are also diversifying the service offering to include Private Wealth Management, Trust accounts and services and proprietary back office operations. Sustainable growth will depend on the competitive advantage of Mauritius as a jurisdiction, on the back of DTA benefits , progressive regulatory environment, lower cost and superior service.
Rohit Joshi
Senior Vice President
& Head of Global Business
HSBC Bank (Mauritius) Limited

India’s Finance Minister, Mr. P. Chidambaram, presented the Indian Union Budget for the financial year 2007 – 2008 on 28 February 2007. Below is a selective note on some announcements, which may have an impact on the Mauritian entities investing in India.

The corporate tax rates have been maintained at the same rate as last year (30% for domestic companies and 40% for foreign companies). However, the rate of the education cess has increased from 2% to 3% on the corporate tax and the surcharge thereon. With the surcharge on corporate tax at the rate of 10% and the education cess at the rate of 3%, the effective corporate tax rate would be 33.99% for domestic companies. For foreign companies the effective corporate tax rate would be 42.23% (surcharge of 2.5% and education cess of 3%).

The DDT rate has increased to 15% from 12.5% for domestic companies and 25% for money market mutual funds and liquid funds. DDT is a tax on the company distributing the dividend and not on the shareholder.

It is important to note that under the Mauritian tax laws, Mauritian entities would be able to claim underlying tax i.e. the DDT and the Indian corporation tax on the profits out of which the dividend was paid, as long as they hold directly or indirectly at least 5% of Indian companies.

There is no change in capital gains tax and STT.

The capital gains tax on sale of equity shares are presently as follows:

Under Article 13 of the Double Taxation Avoidance Agreement between Mauritius and India (‘DTAA’), capital gains are taxable only in Mauritius according to Mauritius tax laws and are not subject to tax in India. Under Mauritian tax laws, any gains derived by Category 1 Global Business companies from sale of shares and other securities are exempt from income tax.

On sale of securities on stock exchange, STT rate payable on gross value of transactions is as follows:

Note that there would be no relief in respect of securities transaction tax under the DTAA since it is not a tax on income.

The service tax rate remains the same. Hence, the existing service tax rate of 12% will continue to apply on custodial services.

Capital Markets

• The Budget has provided simplicity to participants in the capital markets by making Permanent Account Number (PAN) to be the sole identification number for all operations on the capital market.

• Institutions allow short selling settled by deliveries, and securities lending and borrowing to facilitate delivery.

Under the current tax regime, Indian VCF registered with the Securities Regulator of India (SEBI) are treated as pass through entities. However, this exemption will no longer be available except to funds investing in specific sectors. The tax neutrality afforded to the investors investing through such VCFs may be lost, especially where the VCFs are structured as companies. No additional details are available at this stage.

Readers can obtain a detailed analysis on the Budget prepared by BMR & Associates, member of Taxand Global Alliance, on the following link: http://presentation.bmrtax.com

Opening of Overseas Offices of Multiconsult in Mumbai and London Multiconsult has recently opened overseas offices in Mumbai and London.

This initiative is part of the Multiconsult’s strategy to reach out to its major markets and build the Multiconsult brand internationally. With the existing operation in Singapore, the two new offices will give Multiconsult the spread to cover the geographical area from UK, across to the South East /Far East markets. We intend to cover the US market through our London office.

Our overseas offices will further increase the visibility of the Mauritius jurisdiction and that of Multiconsult as a Global player. The overseas offices will also be instrume ntal in strengthening our relationship with Clients and Intermediaries both existing and potential. They together with our membership of Taxand Global Alliance will allow us to offer alternative structures as per client needs.

The Bank of Mauritius (BoM) has a new Governor since 15 February 2007. Mr Rundheersing Bheenick (a former Minister of Finance) is the new Governor of the BoM, replacing Mr Ramesh Basant Roi who retired at the end of 2006. This position is seen as highly important on the financial scene in Mauritius. The nomination of Mr Bheenick at the head of BoM has happened at a time when all attention is focused on the exchange rate of the Mauritian Rupee. The market expects the initial decisions of the new Governor to work towards stabilising the exchange rate, without adversely affecting the major economic parameters.

A Monetary Policy Committee (MPC) has also been set up in April 2007, under the Chairmanship of the Governor of the Bank. The membership comprises top bank officials as well as three independent members. The main focus of the MPC will be on the interest rate.

The Mauritius Financial Services Commission (FSC) issued a Circular Letter on 29 January 2007 announcing that as from 2 February 2007 new application procedures for a Category 1 Global Business Licence (C1GB Licence) would become effective.

Under the new application procedures, a C1GB Licence may be issued without going through the process of issuing a Letter of Intent, subject to the FSC being satisfied with the application documents submitted.

These procedures are in line with FSC’s commitment to further streamline the application process for the issue of a C1GB Licence.

Appleby Hunter Bailhache, a law firm, has opened a new office in Mauritius in view of providing greater access to, and options for, African and Asian Markets. The Office has started its operations in February 2007 and is the first international, offshore law firm with a foothold in Mauritius. The Office has two partners, Mr Malcom Moller, the Managing Partner and Mr Gilbert Noel, as well as two associates and support staff.

The Appleby Group will advise clients in Europe, Asia, North America on the opportunities presented by the Mauritius Office.