Editorial

One recurring theme runs through the articles and news items published in this issue. That theme is the opening up of the economy, and it is indeed a compelling challenge for Mauritius, if we are to succeed in overcoming the difficulties inherent in the small size of our domestic market and in adapting ourselves to the exigencies of global competitiveness.

Such considerations are of direct interest to the financial services industry, particularly to its operators who have been engaged in global business for the past fifteen years or so. Theirs has been a pioneering activity, at times criticized through ignorance at home or through envy abroad, but now vindicated as an essential component of the tertiary sector of Mauritius.

In this context, the budget proposal to have a branding exercise carried out for Mauritius is very welcome. More often than not, Mauritius is perceived solely as a tourist paradise, which indeed it is proud to be. But such a description does not capture the whole truth about Mauritius, since it ignores several of its differentiating characteristics, ranging from its multiculturalism to the successful restructuring of its economy in the 1980’s and to its unique position as a bridge between Asia and Africa. It would be appropriate for the brand to focus on the quality of the services provided by Mauritius, where the aim must be to attain the highest possible international standards.

This is indeed the paramount objective of the financial services industry. Without any protection and in the teeth of scepticism in some quarters, that industry has managed to attract major cross-border investors. But this is bound to be a never-ending fight. It is to be hoped that the branding exercise will be helpful in this respect and will contribute to consolidate the position of Mauritius as a financial services centre of repute, open for sound and lucrative business from operators around the world.
Pierre Dinan
Independent Editor
July 2007

Mauritius Budget 2007/08

The Deputy Prime Minister and Minister of Finance, The Honourable Ramakrishna Sithanen, presented his budget for financial year 2007 – 2008 on 15 June 2007. The main theme of the budget is to accelerate the transition to global competitiveness, to secure full employment and improve the living standards for the whole nation. Below is a selective note on some announcements.

Financial Services

The Minister announced that a new Financial Services Bill, an Insurance (Amendment) Bill and a Securities (Amendment) Bill will be proposed for adoption. The main changes to be brought by the new legislation include:

  • Review of the licence fee structure on Global Business.
  • A comprehensive framework for Collective Investment Schemes which should encourage the setting up of more funds, both domestic and global, including Real Estate Investment Trusts and Foundations.
  • Allow for the development of Alternative Financial Services such as Islamic Financial Services.
  • The Stock Exchange of Mauritius to set up and develop derivatives market on underlying instruments traded in other markets and to start cross listings.

It is envisaged that Mauritius Telecom and SICOM should seek a listing on the Stock Exchange, and that Government should divest part of its shares in other stateowned companies.

Business Facilitation

The Minister announced that business facilitation measures in place since the last budget will be reinforced. For example, he mentioned that a new system will be introduced to provide investors with all the investment rules, regulations and administrative procedures in Mauritius. The Minister also mentioned that the Board of Investment (BOI) will set up a mechanism for businesses to report difficulties.

Mauritian Brand

To ensure greater visibility of the Mauritian brand worldwide, the Minister announced that a branding exercise will be conducted. It will be spearheaded by the Ministry of Tourism in collaboration with the Board of Investment, Enterprise Mauritius and other private and public sector organizations.

Opening up of the Economy

The Minister announced a series of measures to consolidate and make further progress on opening up the economy. These include:

  • All foreigners who have been working in Mauritius for at least 3 years and with a minimum basic monthly salary of MUR 150,000 will be eligible for Permanent Residence Permit and will be allowed to purchase property.
  • Business visas will be increased from 90 to 180 days.
  • Holders of Residence Permit under the IRS will be automatically eligible for an Occupation Permit.
  • A Short Term Residence Permit of up to 9 months will be given to foreigners who have to work in Mauritius for less than a year.
  • Appeals to the Privy Council will be facilitated through sittings of the Judicial Committee in Mauritius by mid 2008.

Corporate Tax Rates

The corporate tax rate will be at the flat rate of 15% as from 1 July 2007. The earlier than planned implementation of the single corporate tax rate for all sectors and activities in the economy will bolster our reputation as a low-tax jurisdiction. Global business companies are unaffected by this measure as they are already being taxed at 15% (before the application of Double Taxation Avoidance Agreements, where relevant).

Advance Payment System (APS) for Corporate Bodies

Corporate bodies will be required to make quarterly provisional tax payments under the APS based on their previous years taxable profits. The aim is to be in line with the PAYE system and CPS for individuals. This measure will be applicable as from 1 July 2008 for companies with an annual turnover above MUR 100 million (USD 3 million) and for other companies as from 1 July 2009. The full modalities of the APS will be laid down in the Finance Act.

Special Levy on Banks

A special levy will be introduced on banks. Applicable only to profitable banks, the levy will be computed on the basis of turnover and of accounting profits. The rates will be set at 0.5% of the turnover and 1.7% of the profits made. However, for the first year of application of the levy (i.e. in 2007/08) the amount payable will be 30% of the formula.

Personal Income Tax Rates

All individual taxpayers will face a single flat rate of 15% as from 1 July 2007 instead of 1 July 2009 as provided in the Finance Act 2006.

Tax Compliance and Collection Special Schemes

Two special schemes will be introduced – Tax Arrears Payment Incentive Scheme (TAPIS) and Voluntary Disclosure Incentive Scheme (VDIS). TAPIS aims at collecting outstanding tax arrears whilst VDIS aims at encouraging taxpayers to disclose underdeclared or undeclared income. The schemes will be terminated by 31 December 2007 (i.e. they will operate for only 6 months) and they will cover Income Tax as well as VAT. Under both schemes, 75% of the penalty and interest will be waived. They also provide for immunity from prosecution.

Electronic filing

All companies with an annual turnover above MUR 30 million or more than 50 employees will be required to submit their income tax and VAT returns electronically. The budget proposals are subject to amendments during parliamentary debates and will be introduced by the Finance Act 2007. To obtain a broader appreciation, readers can access the full budget speech on http://mof.gov.mu

India Real Estate - An Update & A Window of Opportunity

Introduction

The Indian economy has been witnessing an unprecedented growth with the GDP growth averaging 8% over the last three years, up from an average of around 6% during the 1990s. The principle drivers of India's GDP are changing demographics, rising levels of foreign investment, a vibrant services sector powered by the IT and ITES sectors and buoyant exports. Notwithstanding concerns over lack of structural reform, these factors are likely to be sustained in the foreseeable future, resulting in continued strong GDP growth.

This economic growth has, in turn, stimulated demand for real estate to help meet the needs of business, such as modern offices, warehouses, hotels and retail shopping centres. It has also boosted housing demand as a wealthier populace seeks upgraded accommodation. Moreover, shrinking household size and improved access to housing finance have boosted the demand for residential property. Tax incentives have also been granted to interest and principal paid on home loans, which has made owneroccupied property more attractive.

According to research estimates, the Indian real estate market is expected to grow from US$ 14 billion in 2005 to US$ 45-50 billion in 2010 and reach US$ 90 billion by 2015.

Regulatory and Taxation Landscape

Historically, the Indian real estate market has been disorganized, fragmented and governed by archaic laws; the liberalization of real estate industry lagged other sectors. However, during the last few years, the Indian real estate industry has been gradually transforming. What was once a highly fragmented business, dominated by regionally based private entrepreneurs is gradually becoming a national and global business.

This makeover has been fostered by significant growth in capital formation in the real estate industry and rise of more sophisticated real estate capital markets. This has been primarily driven by listed/unlisted real estate companies, private real estate funds and heightened focus on Indian real estate by leading international property consultants and commercial banks.

The partial relaxation of Foreign Direct Investment ("FDI") regulations in February 2005 permitting foreign investment in the real estate sector subject to certain guidelines has acted as a major catalyst resulting in significant foreign investment in the Indian real estate market. Leading private equity players and property funds have since raised/allocated significant amounts for investment in the Indian real estate market.

While the foreign investment guidelines have been partially relaxed there continue to be several restrictions on foreign investment in the real estate sector. For instance, the current FDI regulations only permit investment in certain specified projects in the real estate sector in India. Further, the regulations contain various conditions to be satisfied in respect of such investments such as minimum investment, minimum area, lock in period of the investment etc. Further, foreign debt is currently completely prohibited in the real estate sector and the use of convertible instruments has also been recently blocked.

Further, the tax regime in respect of the real estate sector in India is bogged with various taxes which include income tax (on business income and on capital gains), indirect taxes (includes Value Added Taxes and Service tax) and other transaction taxes (property tax and stamp duties). In fact, as per reports, India has one of the highest levels of Property Taxes and Stamp Duty among the major countries in Asia.

Special Economic Zones ("SEZ")

The boom in the Real estate sector has also been recently fueled by the fiscal incentives package offered by the Government in the recently introduced policy on SEZs.

SEZs aim to provide an internationally competitive duty-free environment for exports, supported by world-class infrastructure, to achieve a quantum jump in exports.

As per the SEZ policy, an SEZ would be a specifically delineated duty-free enclave that is deemed to be outside the customs territory of India. Further, the policy is a comprehensive legislative framework in order to meet the long-standing industry demand for a single enabling legislation for SEZs and provides various tax concessions, including concessions in respect of taxes on income and indirect taxes, to the Developer of the SEZ and to the units located in the SEZ.

The SEZ initiative of the Government, though marred with political controversies, has been received with significant enthusiasm by the Industry and has caught the fancy of foreign investors.

Mauritius – Preferred Jurisdiction for Investment Flows

One of the critical elements for structuring foreign investment into Indian real estate companies is the choice of the jurisdiction for routing such investment into India. Historically, Mauritius on account of the favorable Double Taxation Avoidance Agreement ("DTAA") with India and its favorable tax and regulatory regime has been the preferred choice of jurisdiction for routing investments into India. In fact till date, Mauritius accounts for the maximum FDI into India. The story has been no different in the real estate sector and Mauritius continues to account for a significant proportion of the foreign investments in the real estate sector.
Abhishek Goenka & Kalpesh Maroo BMR & Associates, India Member of Taxand Global Alliance

News

Budget Update – Review of the IRS Scheme

The revised scheme as proposed in the Budget will mainly provide for the following new measures and features:

  • Provision of social amenities and community development where IRS promoters will be required to make a financial contribution of USD 6,000 per residential property.
  • Contributions may be in the form of:
  1. Training facilities
  2. Social amenities, community development
  3. Other facilities to be developed by the IRS promoters
  4. Cash to fund social projects (e.g. scholarships).

  • Ensuring that the project involves the participation of the local community through outsourcing to small entrepreneurs.
  • Development of any mix of residential property besides villas.
  • Allowing sale of non-residential components, including spa, restaurant, golf course and commercial space.
  • Flexibility of payments in Euro and British Pound as well as US dollars.
  • Allowing a company, trust or société to acquire an IRS residential property and authorising them to nominate a non-citizen to obtain a residence permit.
  • Allowing buyers of residential properties to borrow in foreign currency from local banks for the purchase of property; and
  • Providing the opportunity for IRS buyers to obtain an occupation permit without renouncing their residence permit.
  • The new IRS regulations will enhance the attractiveness, competitiveness and flexibility of the scheme.

Central Board of Direct Taxes

The Central Board of Direct Taxes (CBDT) in India issued a Circular on 15 June 2007 on the tests for making a distinction between shares held as stockin- trade and shares held as investment.

The tests outlined in the circular can be summarised as follows:

  • Verification of how the shares were valued/held in the books of accounts i.e whether they were valued as stock-in-trade or held as investment in capital assets. This would serve as a good guide in making a distinction;
  • Substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;
  • Ordinarily the purchase and sale of shares with the motive of earning a profit would result in the transaction being in the nature of trade/adventure in the nature of trade. But where the object of the investment in shares of a company/trust is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gains and not business income.

It is important to note that no single test would be decisive and the total effect of all the principles mentioned above would be considered in determining whether the shares held by taxpayers are held as stock-in-trade or as investments.

Implications for a Mauritian Holding company/Fund ('MCo') investing in India

The characterization of income in India from sale of shares held in Indian entities by MCo would be determined by the Indian Tax Authorities based on the above tests.

Classification of income as capital gains would not result in taxation in India as provided by Article 13 of the Tax treaty between Mauritius and India.

Classification of income as business profits would result in taxation in India only if MCo has a Permanent Establishment in India to which the income is attributable.

Our Independent Editor joins the Monetary Policy Committee

Mr Pierre Dinan has been appointed as an external member of the Monetary Policy Committee of the Bank of Mauritius. The Monetary Policy Committee which was launched on 23 April 2007 by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, is responsible for the formulation of national monetary policy.

Mr Dinan is currently an independent Consultant. He has been, from 1985 to 2004, a Senior Partner of De Chazal Du Mee (DCDM), Chartered Accountants, in Mauritius and from 1992 to 2004, a Director of Multiconsult Ltd. He started his career in 1964 as an Investment Officer at the Development Bank of Mauritius and has held a number of executive positions during his long and fruitful career.

Mauritius – Korea IPPA

Investment Promotion and Protection Agreements (IPPAs) have proved to be useful policy tools for governments who wish to ensure sound treatment and protection for FDI. An IPPA is essentially a bilateral agreement which protects investments of nationals and companies of contracting states from expropriation measures and also allows for unimpeded repatriation of investment funds and capital. By signing these agreements, countries show their commitment to provide a stable, transparent and predictable investment climate.

In the case of Mauritius, in addition to ensuring a sound treatment of FDI, it is believed that an IPPA is an important tool in that it contributes in providing additional advantage to invest from Mauritius into other contracting states and as such creates a right environment for the development of our global business sector.

Mauritius has concluded a number of IPPAs with different countries. The latest IPPA was signed with the Republic of Korea on 18 June 2007 in Port Louis. Hon R Sithanen, Deputy Prime Minister and Minister of Finance & Economic Development signed the Agreement on behalf of the Government of Mauritius while Mr Yum Ki-syub, Ambassador of the Republic of Korea, was the other signatory.

It should be pointed out that following the signature of this agreement, certain legal procedures have to be completed in the contracting states for the IPPAs to enter into force.

It is hoped that this agreement may lead to a Double Taxation Avoidance Agreement between the two countries. This would enhance the position of Mauritius as a platform for the region and a bridge between Asia and Africa.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.