Dr Ludovic C. Verbist highlights how Mauritius has diversified into financial services and how this diversification has lead to an economic boom for the region.
Well known for its beautiful sandy beaches, Mauritius is a small island in the Indian Ocean with a population of about 1.2 million. Previously dependent solely on the sugar industry, the economy gradually diversified into textile, tourism and more recently, into information technology and financial services. The success of the diversification over the years has been remarkable with the first economic boom in the early 1980’s.
Today, the resilience and success of the Mauritius economy in view of the present worldwide economic crisis is being studied by many. The main drivers behind these achievements are:
Growing importance of the Financial Services Sector
An overview of the economy of Mauritius will show the growing importance of the country’s financial sector. The international financial services sector started in the early 1990’s and positioned itself as a major jurisdiction in the South African region. The continuous updating of the legislation in line with needs of investors and the continuous implementation of the recommendations of institutions like the OECD and FATF have enabled Mauritius to offer a wide range of attractive financial products.
To quote some figures, the financial services sector today represents 12 per cent of the Mauritian GDP. The regulatory authority, the Financial Services Commission (FSC) regulates more than 27,000 Global Business Licensees, including some eight hundred investment funds. The insurance sector is growing further with total assets evaluated at Rs 88.54 billion (US$3 billion). It also licenses two exchanges, namely the Stock Exchange of Mauritius and the Global Board of Trade Ltd. The sound financial health of banks in Mauritius is paving the way for them to move to Basel III requirements.
Mauritius, transparent jurisdiction
In line with its continuous ambition to be recognised as a well regulated and transparent jurisdiction, Mauritius has recently signed a Tax Information Exchange Agreement (TIEA) with Australia and protocols to its DTA with the United Kingdom and France. These protocols update the exchange of information article of the DTA signed with these countries, bringing them in line with the OECD standard.
Mauritius was among the first five countries selected to undergo the review by the Global Forum on Transparency and Exchange of Information for Tax purposes, hosted by the OECD. The assessment revealed that Mauritius has a satisfactory legal framework with a number of strong regulatory institutions in place to combat money laundering and fraud and an efficient exchange of information system. However, the report pointed out that Mauritius has not yet been tested in some aspects and the Global Forum will follow up on future developments.
The Limited Partnerships Act 2011 was enacted on 11 November 2011. It provides for the registration of limited partnerships. These will be structured to consist of general and limited partners.
Another similar attempt at modernising the legislation was apparent through the proposal of the Economic and Financial Measures Bill on 1 July 2011, which amongst others will refine legislation for the protected cell companies, the global business companies and the insurance sector. The Foundations Bill and a Bill on pensions are to be promulgated soon.
The Stock Exchange of Mauritius
The continuous efforts put in by the successive Governments and regulatory bodies over the last decade are bearing their fruits. On 31 January 2011, Her Majesty Revenue and Custom Services (HMRC) designated the Stock Exchange of Mauritius (SEM) as a recognized stock exchange under Section 1005 (1) (b) of the Income Tax Act 2007. This implies on one hand that the securities listed and trading on the official market of the SEM will meet the HMRC’s interpretation of listed as set out in Section 1005(3) (a) and (3) (b) of the Income Tax Act 2007. This further entails that the SEM will be regarded as a recognized Stock Exchange for Inheritance Tax purposes.
The designation reinforces SEM’s attractiveness as a listing venue for investment funds and specialised products as it confers several important benefits. Firstly, UK pension schemes are permitted to hold securities listed on the SEM. Such securities may be equally held through tax advantaged Individual Savings Accounts (ISA’s) and Personal Equity Plans (PEP’s) by UK investors. Holders of debt securities satisfying the Eurobond exemption and listed on the SEM are exempted from withholding tax on distributions underlying these debt securities. Inheritance tax advantages may accrue to UK holders of securities listed on the SEM.
In May 2011, SEM amended its Listing Rules to cater for the listing of specialist companies and specialist debt instruments, targeted at qualified investors. The aim is to make SEM become a multi-product-internationally-focused Exchange through the listing of international funds, international issuers, specialised debt instruments, Africa-focused Exchange-traded funds and other structured products.
As a recognition of these fundamental changes, SEM was named in September 2011 the “Most Innovative African Stock Exchange for 2011” at the Africa investor (Ai) prestigious annual Index Series Awards held at the New York Stock Exchange (NYSE). SEM topped the “Most Innovative Stock Exchange” category out of a group of eight African Stock Exchanges nominated, including the Johannesburg Stock Exchange.
The 2012 Budget reinforced the long run objective of modernisation and of enhancing the flow of inward investment. It set the framework to balance growth, enhance productivity and consolidate social justice. A major amendment was brought to the law to expand the scope of operations of corporations holding a Category 1 Global Business Licence companies (GBL1) to domestic operations, which were until then limited solely to international activities. The foreign operations will still benefit from foreign tax credits while the domestic activities will be entitled to the tax rates levied on domestic companies.
In order to encourage investment in the property development sector, the budget provided for the abolition of tax on capital gains from the sale of immovable property. There was also the abolition of municipal tenant's tax. The abolition of the capital gains tax will make the residential real estate sector comprising of the Integrated Resort Scheme (IRS) and Real Estate Scheme (RES) more liquid and an attractive asset class for institutional investors, it will also exempt from tax small landowners transferring their property to a company for a RES project.
The budget also allows holders of a permanent residence permit to buy an apartment. The central task of this measure is to lift the construction industry and to attract more FDI.
Mauritius leading the way in the African region
The country’s stance in the region is growing all the more pervasive. The International Monetary Fund (IMF) has found Mauritius the ideal location for setting up its fourth Africa Regional Technical Assistance Center (AFRITAC). The latter officially opened in October 2011. AFRITAC offers capacity building services to thirteen countries across Southern Africa and the Indian Ocean, namely Angola, Botswana, Comoros, Lesotho, Madagascar, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Zambia and Zimbabwe.
This is in line with IMF’s Africa Capacity Building Initiative launched in 2002. These countries will have access to IMF’s expertise in their initiatives to design and implement their poverty-reducing strategies as well as access to its topical trust funds designed to provide technical assistance globally on specialised topics. The areas targeted include financial sector supervision, monetary policy and operations, tax and customs administration, public financial management, and macroeconomic statistics.
Mauritius and India DTA concerns
India and Mauritius have always maintained close ties and strong diplomatic relations. These relations have always received large media attention owing to the India Mauritius DTA in place. To put it in perspective, over US$50 billion have been invested in India through Mauritius, which represent over 40 per cent of all Foreign Direct Investment (FDI) in the country. Such flows are important for India, also for the financial sector in Mauritius. Challenges have regularly been brought to the Courts of India by the tax authorities or by investors in reaction to their rulings. Repeatedly, the sovereignty of Mauritius in issuing Tax Residency Certificates and the right of taxpayers to do “treaty shopping” have been upheld, most recently in the Ardex Investments Mauritius Ltd.
Calls to review the DTA have been heard regularly in India in the past. Negotiations are currently under way, in a very open and cordial atmosphere, to possibly add clauses to the DTA enabling more information to be exchanged for tax purposes. It appears that India would like the DTA to include specific provisions of sharing of banking information and also an article on assistance in the collection of taxes.
In its efforts to monitor foreign direct investments flowing into India, India's Central Board of Direct Taxes (CBDT) has set up an Indian Income Tax Overseas Unit in Mauritius and Singapore. The Unit in Mauritius is already in operation and is used as a platform for the exchange of information, to speed up the resolution of tax disputes and to provide assistance in cases of transfer pricing. Similar offices are expected to be opened in Germany, United States, Britain, the Netherlands, Japan, Cyprus, France and the Middle East.
Clearly, over the past twenty years, Mauritius has succeeded in expanding and consolidating its activities as a well regulated and respected international financial centre. Its strategic location, outside of Europe and close to Asia and Africa will ensure its further success in years to come.
Dr Ludovic C. Verbist
PhD, LLM, TEP, Managing Director of AAMIL (Mauritius) Ltd. Ludovic has contributed to a number of articles and interviews, including: Prudence et Préservation du Capital - Business Magazine (October 2017); Guaranteed Real Estate Investment – Cap Sur Maurice Magazine (October 2018); Luxury Property Market in Mauritius – Cap Sur Maurice Magazine (October 2019); Vendre Maurice comme une destination refuge – Le Mauricien Newspaper (May 2020); Jouer à fond la carte africaine dans l’ère post-Covid-19 – Business Magazine (May 2020); Global Business « Désamorcer la Bombe » - Business Magazine (June 2020); Liste Noire – La bataille se jouera sur le terrain diplomatique - Business Magazine (July 2020); Interview – « Parlons économie » - Radio Lac (October 2020); «Maurice face à la menace d’un maintien prolongé sur la liste noire » - Business Magazine (February 2021).