We cannot continue to ignore the intensifying challenges facing emerging financial centres, and keep doing business as usual, by relying mainly on tax-centered policies for attracting global business
By Rattan Khushiram
Mauritius narrowly avoided inclusion in the European Union’s tax haven blacklist of March 2019 by committing to address, by end 2019, “identified deficiencies” in the Partial Exemption Tax (PET) Regime introduced in 2018 to replace the Deemed Foreign Tax Credit (DFTC).
The DFTC entitled Global Business Companies (Category 1) to a tax credit of 80% on foreign source income, effectively reducing their tax rate in Mauritius from 15% to 3%. The newly PET regime exempts from tax 80% of specified income of global business and other Mauritian companies, which also reduces the effective tax rate to 3%. Although the exempted income categories under PET are more limited than under DFTC, the two tax measures are broadly similar.
The EU Code of Conduct Group carried out an assessment of the new PET regime and concluded that “it maintains similar benefits under a different name”, and “provides for a significant lower level of taxation and is therefore potentially harmful”. For the EU, a harmful tax regime is a gateway criterion for potentially listing a country as a tax haven, denoted as a non-cooperative jurisdiction for tax purposes.
Under the specific EU criterion of substance, the PET regime needs to be properly contained by appropriate anti-abuse measures, such as CFC rules and a switchover clause, in order to tackle tax planning. CFC (Controlled Foreign Corporation) rules effectively raise the tax rate of Mauritian companies on their foreign income, by reattributing foreign income of foreign subsidiary companies to the parent companies. A switchover clause also achieves the same objective by replacing partial exemption with a foreign tax credit, while charging foreign income at the full domestic tax rate.
Both anti-abuse measures reduce the tax attractiveness of Mauritius as a platform for cross border investment. Mauritius did not agree to introduce these measures. The EU therefore recommended in early 2019 that Mauritius be included in the tax haven blacklist, unless it made a commitment to amend the new PET regime by end Dec 2019.
Moreover, the EU also examined whether PET targets non-residents and the tax advantage is ring-fenced from the domestic market. While the EU did not explicitly consider the PET regime as harmful on these criteria, it expressed concerns that, de facto, “the Partial Exemption regime will mostly benefit companies not doing business in Mauritius”. The EU noted that there are more than 21,000 GBCs, but less than 1,000 domestic licensed companies that benefit from PET. The EU see PET as a convoluted tax scheme to favour GBCs by the back door.
The smart alecks who thought they could dupe the EU with their usual half-baked and duplicitous schemes, with ad-hoc nominal changes to our tax regime to stay off the EU blacklist, are now wiping egg off their faces. They have misread the OECD BEPS initiative, and miscalculated the determination of the EU to deal with profit shifting to low tax jurisdictions. As a result, the global business sector in Mauritius is saddled with continued uncertainty, which is impacting adversely on business opportunities, and ultimately damaging the growth prospects of the Mauritian economy.
The Minister for Financial Services in Parliament on Tuesday last erroneously stated that the EU did not consider that the PET regime as harmful. The EU official communique of 26 March 2019 clearly says that “The following jurisdictions are committed to amend or abolish harmful tax regimes by end 2019: Antigua and Barbuda, Australia, Curacao, Mauritius, Morocco, Saint Kitts and Nevis, Saint Lucia and Seychelles.” We are in good company here, on a EU grey list of tax havens, along with notorious comrades like Seychelles, St Kitts and St Lucia.
The Minister further added that Mauritius will make some “refinements” to the PET regime to meet EU concerns. Addressing identified “deficiencies” now means making “refinements”. Are we living in cuckoo-land? Does one seriously believe that we can keep fooling around with the EU?
It certainly smacks of renewed imperialism for the EU to ride over our sovereignty, and force major amendments on our tax regime, while a number of EU financial centres and property markets are themselves recipients of illicit funds originating from tax evasion in the rest of the world, including Mauritius. But, can we stand up to the EU’s demands, when we still rely heavily on trade preferences under EPAs (Economic Partnership Agreements) to export to EU markets? Mauritius critically depends on exports to the EU, especially for sugar, textiles and clothing, and seafood.
We cannot continue to ignore the intensifying challenges facing emerging financial centres, and keep doing business as usual, by relying mainly on tax-centered policies for attracting global business. Singapore is now the topmost investor in India, and is already channeling more than twice our share of FDI into India, in a reversal of roles within a short span of 2 years.
In an international ranking of competitiveness of global financial centres, Mauritius only ranks third, (49 overall) among the four listed African financial centers, behind Casablanca (28 overall) and Cape Town (38 overall). Johannesburg is fourth and last in Africa (57 overall), most probably for security and safety reasons. Cape Town is a new entrant to the listing, but is already ranked ahead of Mauritius, despite being subject to exchange controls.
A revised strategic approach in line with the Government’s own Blueprint for financial services is warranted instead of tax tweaks and twiddles. Fantasizing about fintech and cryptocurrency and blockchain appears to be no more than a delusion. The Blueprint only makes a cursory reference to fintech and a cryptocurrency exchange, while highlighting serious challenges.
Among other more important priorities, radical improvements are needed in the business and regulatory environment, professional skills and talent, infrastructure and connectivity, and in the depth and breadth of financial activities. The sooner we acknowledge our weaknesses and squarely confront them, the faster we can chart a more diversified and sustainable course of development in financial services.
* Published in print edition on 19 April 2019