Sustaining our services sector despite unfair criticisms

Mauritius is not in the business of undermining other countries’ tax collections.

It sees itself more in the business of pooling and sending international investment resources to help spread out growth and development to a wider geography

Countries like Mauritius which do not have a large manufacturing base or mineral resources make a living by providing services. Indeed, services constitute two-thirds on our national product today. If the internal market were large enough, a huge amount of such services could be provided to the home market. This is not the case. Consequently, we have to go out to external markets to “export” services.

We have a natural berth in “export” of services in our tourism sector. As operators know all too well, this sector has its own booms and busts. Nevertheless, it may be said that, overall, we have managed to attract some amount of sustainable business in the tourism sector. We have attained a good scale but tourism alone cannot bridge the gap.

Addressing constraints to international fund flows

Besides, it is quite risky for a small island economy to depend on a single service export activity. That is why it was decided in the late 1980s that we should take up the provision of international financial services as part of an economic diversification drive.

It was observed that several “respectable” jurisdictions such as London, New York but also UK Crown dependencies like Jersey, Guernsey, British Virgin Islands (BVI), Caymans and Bermuda, have the lion’s share in the provision of international financial services for several decades – branded as tax havens by certain organisations. Switzerland, Singapore, Luxembourg, Ireland, the Netherlands, Hong Kong, Bahamas, Panama, Cyprus, Dubai, the Caribbean and specific locations in the US such as Delaware, have long been and are the principal other “exporters” of similar financial services to the world.

Mauritius is a small player in this league, having started much later than the others and not having their range, depth, sophistication and proximity to thriving economies in the neighbourhood as it is the case for the other established financial centres.

Opportunities created by companies’ tax optimisation drives

What do these providers of international financial services do? They “structure” finance in clever ways to help companies, especially multinational companies – taking into account distinct legal, tax and administrative setups in force across jurisdictions – improve their tax and other efficiencies in their bid to grow their business in an optimal manner. Likewise, holders of huge wealth are advised how best to invest their funds, given international global market opportunities and practices. Trade and similar facilitations are also provided. In return, fees are obtained for services provided.

As taxmen all over the world know, if they hound potential taxpayers too much or place the tax threshold too high, people and companies have an incentive to legally avoid tax payments. With personal/corporate tax rates in the 30-50% and equally high capital gains tax in several advanced countries, there has been a tendency worldwide for persons located in such high-tax jurisdictions to look for alternative means to minimize their tax payments. This is where practitioners in places like London, New York, Singapore, Hong Kong, etc., have devised alternatives by which taxpayers can minimize their tax bills under strong and studied advice from such international practitioners.

It is this kind of domestic pressure that sustains the activities of so-called “tax havens” or, what one would call in today’s language, smart international finance service providers of which the smartest, more wide-ranging and complex are places like Singapore, Hong Kong, the Netherlands, Luxembourg, etc., not so much Mauritius itself. They are typically countries which have relatively low tax rates.

A relaxation of excessive domestic tax and bureaucratic pressures, as it was seen in the case of Mauritius in the 1980s, not only makes more people comply with laws and rules but even increases what the Exchequer ends up collecting by way of direct and indirect tax revenues. Until that happens, international financial centres develop the scope to engineer suitable financial products to attract international financial business to themselves.

This is how we in Mauritius created substance for ourselves by providing international financial services as from the early 1990s. In our case, the speed, efficiency and lower cost of services, coupled with expert international association, proved to be the major ingredients supporting the growth of our international financial centre, principally as an intermediating driver of investments to other countries.

Giving Mauritius a bad name on a single criterion

Our non-bank financial services thus account today for roughly 6,500 jobs . Within this, our global business services around 20,000 international companies. This is small, nothing to do with the scale of the business in a place like BVI, for example, which hosts in excess of 200,000 offshore companies. However, pressure on governments in advanced and less advanced countries to increase their tax collections in order to finance welfare spending has led to the identification of “tax havens” allegedly undermining domestic tax collection efforts.

Not surprisingly, at a time world economic growth has slowed down considerably for almost a decade now, making it more difficult for individual governments to foot welfare expenditures, the onslaught against “tax havens” as the principal culprits for low government spending on domestic welfare has increased. This is how Oxfam, an international charity, in a report made public on 12th December, lists down 15 countries which, in its view, are the world’s worst “tax havens”, because by charging low tax themselves, they would be forcing other countries to drive down their own corporate and other taxes, causing governments in these countries to spend even less on the worse off sections of their populations.

Oxfam states: “ the full list of the world’s worst tax havens, in order of significance are: (1) Bermuda (2) the Cayman Islands (3) the Netherlands (4) Switzerland (5) Singapore (6) Ireland (7) Luxembourg (8) Curaçao (9) Hong Kong (10) Cyprus (11) Bahamas (12) Jersey (13) Barbados, (14) Mauritius, and (15) the British Virgin Islands”. According to it, Bermuda, a British territory, is the worst offender in this respect and Mauritius comes last but one on the list, most probably because of our very low rate of corporate tax.

Intermediating international finance for development

In the light of this kind of criticism, what should we do? We cannot drop dead a relatively new sector of activity which has helped us diversify the economy. Besides, we are a very small player in this field internationally, having just seen an important chunk of activity falling off after the recent revision of the India-Mauritius DTAA. If we have a clear conscience that we are honestly trying to put together international counterparties for the growth of countries which are in need of this kind of financial engineering – which is what it has been fundamentally – we should not be discouraged by such classifications which do not look at all aspects of the matter and rather make generalised judgements on single criteria that they pick up.

The local company, International Financial Services Ltd (IFS), appears to have given the signal last week as to where we should be going to. After a pioneering and successful track record, IFS was taken over by a UK international service provider, SANNE, whose activities span over a bigger international economic space and involve a larger number of products. This kind of reach out should give IFS and our other companies the breathing space to gather more expertise and international contacts but also the opportunity to help countries which have long been abandoned to their own fate of under-development, the chance to emerge and successfully connect and be able to stand up on their own feet.

Mauritius is not in the business of undermining other countries’ tax collections. It sees itself more in the business of pooling and sending international investment resources to help spread out growth and development to a wider geography. Our mission should be to export investments to where they are needed the most, without denying charities the opportunity to help out those who are suffering the most in these countries, trapped in under-development.

Anil Gujadhur

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