Mauritius under supervision by EU’s Code of Conduct Group

Economic Outlook

By Rattan Khushiram

Barbados, Belize, Curaçao, Mauritius, Saint Lucia and Seychelles have been warned by the European Union (EU) that some of their tax policies are “harmful” and must be updated to comply with best practices by the end of this year.

Indeed, the EU’s Code of Conduct Group (CCG) has informed the governments of these six countries that recent changes made to their laws do not go far enough to avoid the EU’s blacklist of non-cooperative tax jurisdictions. Most international financial centres (IFCs), including Mauritius, have rushed to amend their rules on preferential treatment by the end of 2018.

The CCG has written to each, asking them to make a high-level commitment to abolish or amend the relevant preferential regimes, without introducing any grandfathering mechanisms to water down the impact on non-resident businesses. Some of them have already announced extensive revisions of their corporate tax regimes to meet the EU’s demands, but have included some grandfathering provisions. The CCG’s letters suggest that it will consider recommending the jurisdictions for inclusion on the EU’s soon-to-be-revised list of non-cooperative jurisdictions for tax purposes, if the measures are not removed.

The Criteria: The list of non-cooperative jurisdictions in fair taxation matters was adopted on the basis of the following criteria:

• Targeting non-residents – whether advantages are accorded only to non-residents or in respect of transactions carried out with non-residents.
• Ring fencing – whether advantages are ring-fenced from the domestic market, so they do not affect the national tax base.
• Substance – whether advantages are granted even without any real economic activity and substantial economic presence within the Member State offering such tax advantages.
• Internationally accepted – whether the rules for profit determination in respect of activities within a multinational group of companies departs from internationally accepted principles, notably the rules agreed upon within the OECD.
• Transparency – whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way.

The Warning: To remain off the blacklist, countries should apply “fair taxation” standards by not offering harmful preferential regimes or facilitating structures that attract profit without real economic activity. According to the letter addressed to Mauritius, “the council criticized the partial exemption system for foreign-source dividends, profit attributable to a foreign permanent establishment, interest and dividends from local or foreign sources, and the grandfathering provisions.” Certain companies pay a maximum effective tax rate of 3 per cent because they can claim a “deemed” tax credit equivalent to 80 per cent of their Mauritian tax, the exemption provides for a significant lower level of taxation – compared to the 15% tax rate — and is therefore potentially harmful.

What does it entail? If commitments to further changes are not made, the jurisdictions risk being blacklisted. The Code of Conduct Group has requested that further changes be made by the end of 2019, with no grandfathering.

The financial services sector is likely to go through a challenging period. Some of the effects of the April deadline for the India-Mauritius tax treaty are already visible. It will become increasingly difficult for the financial sector to double its size by 2030 with its contribution to GDP in real terms attaining US$1.9 billion , employment to 17,000 while revenue to US$0.3 billion in real terms. But the Minister of Financial Services is confident that we can make it happen given that there are “positive signs that funds domiciled in Mauritius which predominantly targeted India for investment are diversifying into Africa.”

Let us hope that with the help of the forthcoming report of the IMF on the competitiveness of the sector and the working group comprising the UK Department for International Development (UKDFID), Mauritius-Africa Fund, the EDB and officials of concerned ministries, the authorities will soon come forward with the appropriate strategies and measures to counter the negative impact of international pressures on the development of our financial sector.

* Published in print edition on 22 February 2019