Using Big brother to thrash Mauritius
— B. DHAR
In 1990, Mauritius began its offshore financial activities. It did not particularly have India in mind at the time. It was just an effort to broaden the economic base on much the same lines as jurisdictions like Jersey, Guernsey, Singapore, BVI, Caymans, Cyprus, Ireland, the financial centres of London and New York, etc., had been undertaking for ages before us. Our strength lay in the availability of an educated workforce backed by capable professionals. Our weakness was our relative isolation from major North Atlantic financial centres which were formed by the string of countries providing such international financial services. It turned out that we had Double Tax Avoidance Treaties (DTA) — the purpose of which is to avoid the same income being taxed again in another jurisdiction after it had been subjected to tax in one of the DTA member countries — with Germany (1978), France (1981), the UK (1981) and India (1983). These DTAs were hardly being put to much use in those days of rather stringent exchange controls in various countries. Neither was international capital flowing that easily. One would recall how India had to pass the Foreign Exchange Restrictions Act (FERA) in those days to impose severe controls on the outflow of foreign exchange out of India. Intense and protracted work was done over years by Mauritian authorities and professionals in the markets of industrialised countries to promote the flow of capital to India in view, amongst others, of the favourable clauses contained in the India-Mauritius DTA. This effort paid off. Mauritius gradually asserted itself as a major conduit for the flow of much needed capital to upcoming and liberalising India. As expected, success brought in its wake a lot of jealousy, including from rival jurisdictions that did not have the same favourable terms in their DTA as in the India-Mauritius DTA.
Mauritius has had to live with it. Domestic quarrels in India started being exported to undermine the standing of the Mauritius offshore centre. Certain Indians were suspected by some in the Indian tax department of unlawfully transferring their money out of India to other places in order to avoid paying tax. Up to this point, it was an internal matter and for the Indian authorities to stop the unlawful transfer of funds. That the people concerned were beating the system existing in India to get the money out has nothing to do with Mauritius. It is a matter of internal control in India. Once this money has found its way out of India, it can find berth in any place: Dubai, Singapore, UK, USA, etc. Mauritius has no say on the offence originally committed in India. It could not sort out issues like the mixing up of good and bad money in those jurisdictions. Again, Mauritius could not by any stretch of imagination have a say in those matters. It could not also pose as a dispenser of right and wrong over there by shifting the wheat from the chaff. The only one who could do that was the foreign country where legal and illegal funds were allegedly being amalgamated.
But that was without reckoning with a clever juxtaposition made by certain officials in India. It went like this: the money that would have been originally unlawfully diverted out of India (i.e., by defeating Indian controls) was coming back into India as investment routed through Mauritius, a practice referred to as “round-tripping” in the legal jargon. Henceforth, all the guns were directed against Mauritius from those official quarters. It was the ideal scapegoat, the more so as it was proving to be contributing to between a third to 40% of the annual FDI inflows into India going towards financing of major infrastructure projects in the country. How dare it? No one was paying attention to the fact that small jurisdictions like Jersey and Guernsey were even more significant providers of capital to the UK and, through it, to the whole world. This is a fact of life because it is a specialisation of such financial centres to provide the necessary professional back-up and certainties to investors as well as excellent tax planning (not evading) opportunities. Why will you pay more tax going another route when you can pay less? In any event, efficient tax planning is not a proscribed practice, although some would have you believe the contrary to be true.
This is the context in which one has to see an article which appeared in the Times of India (ToI) of 29 January 2011 based on a report said to have been issued by the OECD (a club of rich countries of the world). According to the article, the OECD would have remarked that (i) India’s DTA with Mauritius had gaps that needed to be filled, (ii) Mauritius would be having lax norms providing room for routing of funds from one country to another, (iii) a nominee could register a company with the Mauritian Registrar of Companies who did not check whether shareholders mentioned in the application were actual shareholders, (iv) a nominee could register a company with the Registrar of Companies and that only a shareholder, officer, Management Company or registered agents of offshore companies could access the Registrar of Companies, which, allied with a low tax regime, would be acting to attract global investors to pass through Mauritius, (v) the India-Mauritius DTA would be allowing disclosure of information to the persons in respect of whom information or documents were being sought, (vi) the Mauritian authorities would not have been able to make use of existing guidelines to track investors and details of their wealth, and (vii) Mauritius would not have informed countries with which it has DTAs of an amendment to the domestic law which allows for sharing of information on non-residents and offshore companies that do not pay tax in Mauritius.
We observe first that Mauritius has been brought before the high court of the OECD for the latter to bring into the limelight the so-called shortcomings of a DTA between the two countries.
As regards the points made, the answers are: (i) identify the so-called gaps because Mauritius for one has always been ready to act and do its part to help the treaty partner directly; (ii) this is highly subjective and typical of those who give a dog a bad name and hang him for it; our financial institutions are required to abide by the same rules of fund transfers as those of any OECD country and they abide by them; regulatory norms have been up to the highest standards of international compliance here, even doing better than some of the OECD countries in practice; (iii) due diligence of beneficial owners of companies is a must in Mauritius, not only at the level of the banks testing the means of investors and the Management Companies which host the companies but also at the level of the Financial Services Commission which will not license a company, whether or not benefiting from DTA provisions, if actual beneficial owners are not disclosed beforehand; (iv) is totally unfounded and not based on actual practices; (v) third parties seeking information from Mauritius should be aware of the necessary involvement of the parties about whom extraordinary information (which is not routinely available with authorities in any country and has to be obtained by calling for the information) is being sought by those third parties; (vi) the fact that as a rule-of-law country, Mauritius has to provide information to the relevant foreign parties entitled to the information and not to parties purporting to act as surrogates, does not mean that the authorities in Mauritius are unable to track down investments as provided for in guidelines; (vii) it is unfair to shift one’s burden onto others.
There is currently an atmosphere of corruption due to some scams involving politicians in India. It would be most unfair to try to tilt the burden of this internal situation onto Mauritius simply because we have a DTA with, amongst others, India. It would also be unfair for officials to settle scores with their politicians by targeting Mauritius through the OECD. Mauritius has been a high performer as regards compliance with international norms of financial regulation and this has been the case for a long time (See the Financial Sector Assessment Programme reports of the IMF and the World bank since 2003, for instance, which show that Mauritius has complied with all but a few of the international standards that are not applicable to it specifically, anyway). Mauritius has gone out of the way to pass legislations to promote effective lawful exchange of information with other jurisdictions in a timely manner when the occasion called for it; the OECD is aware of the same. No self-respecting jurisdiction will act on the basis of mere “fishing expeditions” unsupported by even an iota of prima facie evidence of misdemeanour; this does not qualify it as unwilling to exchange information; if you go through the proper channel, not only in Mauritius, but in any other jurisdiction worth its name, you’ll get to your objective. But that is not sufficient ground to try to torpedo a long-standing arrangement (i.e., the DTA) that has been adding a lot to India’s GDP since the days when India was not part of the shining club of the high and mighty to which it recently got admitted.