Has Mauritius’ Offshore Financial Sector been Sacrificed Ultimately?

In answer to a question raised on 1st September by Hon Reza Uteem regarding a new Protocol said to have been finalized by the Minister of Good Governance & Financial Services, the Minister of Finance stated that the Mauritian offshore sector, as it is, can no longer survive for long, being perceived, he added, “as a destination where crooks hide their money”. He went on to add that the “financial sector (of Mauritius) should (now) become an international financial sector of repute”, given the bad perceptions generated about it in certain quarters in India.

No one should dispute the fact that the financial sector of Mauritius should always have a good international reputation. Unfortunately, reputations are made by others who can take the liberty to “give a dog a bad name and hang him for it”. We need not be swayed by them. The practitioners in the financial centre have no alternative than to stand up to the highest standards and requirements of their establishments and of regulators.

It must be said to the credit of Mauritius that despite our natural vulnerability as a small jurisdiction, we have spared no efforts to stand up to the highest standards of international practice in our financial sector. The rules have been so firmly applied locally that finance sector operators have often accused regulators of “over-regulating” the sector, frustrating business, etc., only to comply with them after all the grumbling.

But we have also stood up tests to which our jurisdiction has been put from time to time, confirming that we are actually abiding by international rules of best practice. As far back as 2003, both the IMF and the World Bank credited us with being largely compliant with core international financial principles, even better than several advanced countries hosting international financial activity. They have not marked us down since then. Recognized International oversight bodies, like the OECD and the Financial Action Task Force (FATF), have long placed us in white lists because we actually abide by rules of good conduct in the sector. We are members of some of the world’s leading regulatory groups, having worked up our way patiently to reach this kind of status.

Despite all the precautions – and regulatory over-burdening in place – however, the best jurisdictions do not escape abuse by certain individuals who distort financial systems for private advantage. For example, we do not until today know how and by whom the terrorists who hurled two planes against the World Trade Centre of New York in September 2001, killing thousands in the process, were financed. Despite the controls placed by the world’s most regarded banks, the LIBOR rate was only lately rigged by insiders from several of them. Once detected, action has been taken against its perpetrators. The banks involved however are not, due to such incidents happening from time to time, tainted for the entire range of activities they undertake in good faith.

Likewise, there are some chaps who have abused the most watertight financial controls all over the globe to varying degrees. No year has passed by, for example, when Swiss banks have not been accused of misfeasance of one sort or another due to the misdeeds of one chap or another – insiders and outsiders. One of the biggest financial scandals, notably the downing of the venerable Barings Bank in 1995, was caused by a single trader in Singapore. The authorities have tightened up controls in response. That’s all.

The international financial centres of Switzerland and Singapore have not, for reason of such mishaps occurring from time to time, been amputated of the mainsprings on which their financial centre rests. The authorities have, reasonably enough, refrained from generalizing such incidents to go as far as indicting their entire financial edifice for malpractice.

If some unkempt Indian businessmen would have abused of our financial sector, that would fall in the same chapter as the examples above involving the world’s highest regarded banks and jurisdictions. It is grossly unfair to ourselves bring ignominy on ourselves picking up some stray examples of financial misbehaviour. There are safeguards in place to deal with such abuses but they must be established clearly and not arbitrarily be generalized to keep the international trust and confidence in our financial centre.

The sooner the damage done to our reputation is repaired, the better it will be to make honest investors going through our jurisdiction – and, if they don’t go through us to India, they will keep doing so through Cyprus, Dubai, Singapore, Hong Kong, etc. – feel comfortable about us as a responsible authority of high standing that will not cast the slur upon them due to hearsays of all sorts. Mauritius doesn’t have to blush for channeling investment funds the way it has done all these years – they do the same all over the planet. If we manage to shoot ourselves in the foot, other rival jurisdictions will shift our business to themselves.

However, Hon Uteem raised another crucial question in the National Assembly during his intervention. He asked a question whether when it was said way back in July this year that a new Protocol amending the India-Mauritius Double Tax Avoidance Agreement (DTAA) had already been finalized, Article 13 of the DTAA as it stands had been disabled?

This Article deals with the taxation of capital gains by investors choosing to use the Mauritius financial sector to invest in India. It provides, as it is the norm for such treaties, that “residents of Mauritius” investing in India through this route will be taxed on the capital gains they realize on their investments in Mauritius, not in India. For this purpose, it has always been the case that the companies those investors have set up in Mauritius for the purpose are treated as “residents of Mauritius” for tax purposes. In other words, capital gains they realize have always been taxed in Mauritius, not in India.

It is the assurance provided to this effect by Article 13 of the DTAA that has been a major plank for investors to come over to Mauritius, plus the ease of doing business in a politically stable and affordable-cost financially literate centre. This has produced thousands of jobs in a whole new sector of economic activity of our country. Granted, we haven’t diversified enough our market’s reach (not always easy, given the tough international competition) but it is the launching pad for the future that doesn’t deserve to be destroyed at one fell swoop by obliterating Article 13 altogether and, contrary to international norms, making all those investors who have trusted us for our business sense and administrative rigour lose faith in us.

The Minister of Finance indicated that this issue was one of the matters he had raised in his correspondence with the authorities in India post the “finalisation” reached in July last regarding amending the DTAA. We hope that the Mauritian authorities will not allow the treaty to be fully diluted by the elimination of Article 13 as it stands, except if the same rule were to be eventually applied simultaneously to all other financial centres dealing with India on a par with Mauritius, should the change come over.

The safeguard of an important sector of our economic activity required that we should not have stirred up all this mud in the first place. As things stand, however, decades of arduous work risks being otherwise destroyed for Mauritius’ international financial services sector. We have little alternative than to restore our good name internationally and set aside the catastrophe brought upon us in July.

• Published in print edition on 18 September 2015