The offshore financial services sector in Mauritius dates back to 1988 with the amendment of the Banking Act to provide for offshore banking. The objective of Government at that time was to capture regional business and support a forthcoming Freeport for regional trade with neighboring countries such as South Africa and Madagascar, which were undergoing political changes.
However, it was only in 1992, when Mauritius passed the appropriate offshore legislation to enable the setting up of offshore entities and trusts that the sector started to take off.
The launch of the Mauritius Offshore Business Sector in 1992 coincided with the liberalization of the Indian economy when the balance of payment crisis forced India to open her economy for foreign investments. Shortly after, the 1983 Double Taxation Avoidance Agreement (the ‘DTA’) between India and Mauritius was dusted off by international tax practitioners and the island country was quickly put on the map as the preferred jurisdiction for foreign investors investing in India. The aim to make Mauritius a platform for regional business and investments soon materialised but with the focus shifting to India and the Asian region with the signing of double tax treaties with countries like Malaysia (1993), China (1994), Singapore (1995) and Indonesia (1996).
The DTA has been instrumental in channelling foreign investments into India and in the development of Mauritius as an IFC thereby benefiting both countries. As more and more investors were choosing Mauritius to locate their intermediate holding companies, Mauritius had to gear up. Training from international practitioners was made available locally and best international practices were being adopted; legislations were passed/amended to enable new products and meet the growing demands of sophisticated investors; communication and internet upgraded and so on. Many job opportunities were created especially in the trust, legal and accounting professions. Many Management Companies (‘MCs’), also known as Trust Companies in other jurisdictions, were set up and licensed by the Financial Services Commission to service the offshore sector (later known as the global business sector).
The rapid growth of the sector in the early years also motivated many international players (banks, fund managers and trust companies) to establish a presence in Mauritius. In this context, international banks such as Standard Bank, Standard Chartered, Deutsche Bank, Investec and the State Bank of India have set-up branches/subsidiaries in Mauritius, joining Barclays and HSBC which were already present in Mauritius prior to the launch of the offshore sector. International law firms such as Conyers, Appleby and Bedell are also present in Mauritius
Today the financial services sector is one of the main pillars of the Mauritian economy contributing to 13 per cent per cent of GDP and directly employing over 30,000 people. The number of MCs as at August 2012 stood at 160 with most of them forming part of reputable international consultancy firms’ network.
History of the DTA between India and Mauritius
India and Mauritius shared a double tax avoidance treaty during colonial times - under the British Empire. However, Mauritius severed the tax treaty relationship when it became independent in 1968.
Acknowledging the strong ties between the two countries, a comprehensive double tax avoidance treaty was signed on 24 August 1982 and became effective on 1 April 1983. India also wanted to liberalise trade barriers and promote trade relations with neighboring countries, especially Africa via the preferential agreement that Mauritius had with African countries. Thus, the purpose of the treaty was to encourage mutual trade and investments. In the initial years, the treaty was used mainly for Indian outbound investments into Mauritius and a number of Indian companies set up operations in Mauritius.
A decade after, the situation reversed. By the year 2010, foreign direct investment in India from Mauritius crossed the US$50 billion mark and accounted for 42 per cent of the total FDI, followed by Singapore, USA, UK and Netherlands with nine per cent, seven per cent, five per cent and four per cent respectively. During the same period, India’s foreign exchange reserves grew steadily from a low US$5.8 billion at end of March 1991 to US$38 billion by the end of March 2000 and surged to over US$300 billion in 2008.
The Indian services sector is the highest FDI attracting inflows with 21 per cent of the total inflows, followed by computer software and hardware, telecommunication and housing and real estate with nine per cent, eight per cent, seven per cent and seven per cent inflows respectively.
The Indian Authorities acknowledge the benefits of FDI in the creation of employment in India, corporation taxes collected and development of infrastructure. It is said that some two million jobs have been created in the Indian Telecom industry as a result of Mauritian FDI for example.
The benefits afforded by the DTA between India and Mauritius have weighted in the investors’ decision making process. We will now see in detail the advantages of the DTA.
Typical Structures and Highlights of the Mauritius India DTA
Usually a special purpose vehicle (SPV) or a Collective Investment Scheme (CIS) / Fund will be set up in Mauritius for Indian direct investment and portfolio investment respectively. These vehicles will hold a Category One Global Business Licence and apply for a Tax Residence Certificate (TRC) in order to take benefits of the DTA.
Capital Gains Tax
The DTA transfers the taxing rights on capital gains to the country of residence of the seller, ie Mauritius. Mauritius having no capital gains tax, a complete exemption of capital gains tax is obtained on sale of shares of Indian companies by a Mauritius entity.
Dividend Withholding Tax
The Tax Treaty caps the dividend withholding tax for substantial shareholdings to five per cent. Although India has abolished dividend withholding tax, it should be noted that the Indian tax authorities have done so twice in the past decade and had re-introduced dividend withholding tax after a certain period.By structuring investments through Mauritius, the maximum dividend withholding tax for substantial shareholdings will be capped at five per cent in the event dividend withholding tax is re-introduced.
Currently, in India there is a dividend distribution tax (‘DDT’), which ranges between 15 per cent and 25 per cent. DDT is a tax on the company distributing the dividend and not on the recipient. Under the Mauritian tax laws, a Mauritius company can claim underlying tax credit on the DDT if the Mauritius Company holds directly or indirectly at least five per cent in the Indian company.
Mauritius Remains Best Route for India Inbound Investments
The use of the DTA, however, has not been without controversy. The Authority for Advance Ruling (AAR) in India had, in the case of Natwest, denied treaty benefits on the grounds that the investment was routed through Mauritius prima facie for the avoidance of income tax advance rulings. However, the ruling was overturned in another case (commonly referred to as the AIG ruling) where the AAR upheld the availability of treaty benefits on the ground that structuring investment through Mauritius was based on genuine commercial reasons and not only as a means of avoiding taxes. In early 2000, the Indian Revenue Authorities once again sought to deny treaty benefits to some Mauritius entities and the response to this controversy, the Central Board of Direct Taxes in India issued a circular No 789 on 13 April 2000 to Tax Officers stating that a Tax Residence Certificate issued by the Mauritian tax authorities would be considered as prima facie evidence that the Mauritius company was a Mauritius tax resident and entitled to claim treaty benefits.
A company can apply for a Tax Residence Certificate (TRC) from the Mauritius tax authorities if certain conditions are satisfied namely, the company has a minimum of two directors resident in Mauritius; it maintains its principal bank account in Mauritius; all statutory and accounting records are maintained at its registered office in Mauritius; financial statements are audited in Mauritius and the board meetings must include at least two resident directors.
Mauritius as a route for Indian FDI
Over the years there have been negative comments about the Mauritius route for Indian FDI. The main concerns as reported in the Indian press are set out below
Allegations of Round Tripping and lack of Exchange of information
Press allegations against Mauritius are that the Mauritius IFC is a haven for Indian residents wishing to route gains made outside of India back into India by using shell structures in Mauritius or make an abuse of the Treaty by investing funds derived from India back into the country only to take benefits of the Treaty. In fact, there has been no proven case of round-tripping.
It is easy for a company to demonstrate commercial substance in Mauritius. The good repute of its IFC, the legal, regulatory, financial and technological facilities and expertise; the cost and ease of doing business and Mauritius as an ideal gateway to other markets namely Africa. A GBC1 can furthermore deal with Mauritius residents and the island’s diversified and open economy provides numerous investment opportunities in the country.More recently, the proposed introduction of General Anti Avoidance Rules (GAAR) in India has motivated many companies to enhance substance in Mauritius by doing more than just meeting the statutory requirements for tax residence.
Mauritius has been very prompt in addressing the various concerns. Measures taken include:
Stringent licensing conditions have been introduced to ensure that Indian sourced funds are not re-invested in India through Mauritius;
Indian auditors have been allowed to practice in Mauritius – Global Business Companies investing in India may use the services of Indian auditors to have their accounts audited for Mauritian regulatory purposes;
Mauritius law has been amended to provide for wider Exchange of Information with Indian authorities. A Mutual Assistance in Criminal and Related Matters Act has been introduced and provides for requests for judicial assistance;
The entering into an MOU with the Securities and Exchange Board of India (SEBI) providing for exchange of information. Mauritius has further agreed to the stationing of an officer from the Revenue Department of India at the High Commission of India in Port Louis for better exchange of information; and
Issuance of TRCs on an annual basis, upon the recommendation of the Financial Services Commission which will supervise full compliance with the undertakings provided by applicants for the TRC.
Amidst concerns and in view of increasing revenue collection, India publicly announced its intention to renegotiate the DTA with Mauritius. It has been observed that each time there has been talks of renegotiations of the DTA in India and loss of taxing rights by Mauritius, the Bombay Stock Exchange has experienced panic selling.
It is a fact that Mauritius has played a central role in fuelling India’s economy over the last two decades. The Indian Finance Ministry stated that India needs approximately US$1 trillion of new FDI up 2020 to finance its infrastructure development plans. The Mauritius IFC can help India in increasing the inbound investments and meet its objective.
India Outbound Investments
Current trends in foreign exchange movements in India show that capital outflows now exceed capital inflows. Indeed, in order to sustain India’s economic growth and meet the demand for raw materials, energy and commodities, India is investing outbound and particularly in Africa.
There is today a trend of Indian multinational companies using Mauritius as a platform for its outbound investments in Africa - leveraging on the regional membership of Mauritius (member of SADC, COMESA) and the fact that Mauritius has signed DTAs with a given number of African countries rich in natural resources.
Mauritius is now being called upon to play a critical role in facilitating Indian outbound investments.
Francoise Chan, Executive Director, Intercontinental Trust, Mauritius