Double Tax Avoidance Treaty

Overcoming the all-eggs-in-one-basket syndrome

By Murli Dhar

Singapore is ready to supplant Mauritius as the main avenue to channel investments into India. The only difference, as far as India is concerned, will be that the existing investors will change their domicile from Mauritius to Singapore. It doesn’t look like a big deal for India

The Double Tax Avoidance Treaty (DTAT) with India is likely to be deprived of its real content in favour of Mauritius once the tax proposals contained in the new Indian Finance Bill are given force of law very soon. Our Ministry of Finance has lately been making efforts to get us out of harm’s way. It has been reported that the Minister of Finance of Mauritius has had a brief meeting with the Indian Minister of Finance in Washington DC to ask that a meeting of the Joint Indo-Mauritian Commission be held at the earliest in a last ditch attempt to save whatever could be saved to continue giving the Treaty a further meaningful lease of life.

The threat from India has been inviting our attention since long. The political crisis ushered in by corruption scandals in India gave an excellent opportunity to those who have been historically bent on undermining the Treaty to neutralize it. They have pressed their point by giving powers to income tax officials to decide whether to allow a tax resident of Mauritius relief from India’s capital gains tax or not. From the Indian side, it looks like finished business. From our side, we appear to still entertain the hope that it’s not over yet.

However, even if we manage to have the matter reviewed by the Joint Commission, investors going through Mauritius will have to operate with a great degree of uncertainty. Singapore, which saw the edge the DTAT gave to Mauritius, has long wanted to operate its international financing of India on identical terms and conditions. However, the Indian side did not concede as liberal a regime to it as in the case of the India-Mauritius DTAT.

The bilateral agreement entered into between India and Singapore provided that incomes from investments routed into India through Singapore would be given relief provided the investors were in a position to demonstrate the “substance” of their business operations over there. This regime is what prevails currently for Singapore. Businesses based in Singapore wanting to qualify for Indian tax reliefs have to have some regular minimum amount of local expenses over there and prove that they are actually grounded in the local economy, e.g., through a listing on the stock exchange. In other words, they should not be passive investment vehicles made up solely for walking away with the tax reliefs.

The changed attitude of India with the recent budget proposals does not even give Mauritian investments going into India the comfort that Singapore-based companies currently have under the present bilateral agreement between India and Singapore. This is a weak position for us to operate with. Having foreseen this kind of attack coming since long, there was plenty of scope for Mauritius to adopt in parallel a Singapore-type deal without giving up altogether on the Treaty. Our policy makers chose not to proceed in this direction. It is not too late to develop the kind of foresight that Singapore has had and which, today, is ready to supplant Mauritius as the main avenue to channel investments into India. The only difference, as far as India is concerned, will be that the existing investors will change their domicile from Mauritius to Singapore. It doesn’t look like a big deal for India.

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Country’s Oil Supply: How about other alternative suppliers?

At some time, the State Trading Corporation (STC) decided to import all our oil requirements from the Mangalore Oil Refinery of India (MOR). In fact, the decision was made to go for a long term commitment to draw all our oil supply from Mangalore. This decision was tantamount to giving up its usual procedure to go for international tenders and obtain the best terms available on the market from time to time. Besides, it is known that most of the oil processed in India is imported from Iran which has been under the threat of international sanctions lately, which aggravates the all-eggs-in-one-basket case.

We were informed towards the end of last week that MOR was temporarily closing down as it did not have the necessary water to run its activity. This could have proved catastrophic in view of our complete dependency on imported oil from this source as the whole economy would have ground to a halt if we ran out of oil. The Minister came out with an assurance shortly after that there would be no disruption in our oil supply in view of our existing stocks that would last one month; he also stated that one cargo from MOR had just landed while another one was leaving Mangalore during the week. He added that the CEO of MOR had personally informed him that he had received instructions from Indian politicians to the effect that the supply of oil to Mauritius should not be disrupted despite the refinery ceasing operations.

We are informed that the STC has been looking out for other alternative suppliers. We hope and pray that a solution is quickly found in this direction.

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Cement Monopoly

Are we bound to go round in circles simply because some operators have too big an appetite for quick profits?

In the past, there used to be a sole importer of cement in Mauritius. The STC took over the import of cement for the country as a whole at a stage. The objective was to do away with the monopoly position in which the sole importer in the private sector had found itself so far, jacking up the price from time to time in view of its dominant position on the local market. Except when there was increase in international prices, the STC managed to give considerable stability to the price of cement in Mauritius over a fairly long period.

It was decided some time back that the STC should leave it to private sector operators to resume the supply of cement to the local market. Going by the vast local and residential real estate boom that was seen in past years, this decision for the STC to move out of the market must have contributed enormously to the profitability of the private sector enterprises which took over from the STC. If prices were also hiked from time to time due to a plethora of reasons (rising cost of freight, higher local transportation cost, debt servicing costs, running out of stocks, etc.) that are always available for this purpose, that would have added handsomely to the profits arising from scale.

There are two such cement importing and retailing enterprises today. Since December last, they have been jacking up the price of cement, taking turns alternately. The effect has been to escalate construction costs and make it even more difficult for households having moderate incomes to go for a house of their own. People suspect that the market structure has something to do with the present situation of rising prices.

If so, we are going back to square one, that is, the very reason that was put forward initially for setting up public trading enterprises, to beat down abuse of the market process by market dominant private operators. What then could have been the real reason for asking the STC earlier on to move out of the cement market altogether to make way for private operators on the cement market? Are we bound to go round in circles simply because some operators have too big an appetite for quick profits and to rig markets to their perpetual advantage?

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BoM & Corporate Good Governance

Interlocking decision-making has implications for price structures in a tightly controlled economy
like that of Mauritius

The Bank of Mauritius recently flagged out the issue about the need for financial institutions to renew company directors. This requirement may not be coming at the right time in view of changed political circumstances but this is an important issue to which the country needs to pay close attention.

The Mauritian economy is highly concentrated at the top. As a result, the top corporates of the country are governed through a web of interlocking directorships. The same persons who are decision-makers in the real business arm of related companies are also making decisions at the board level of related local financial enterprises.

This can give rise to a situation of severe conflicts of interest, inasmuch as directors may be able to shuffle around profits and losses from one set of operators they control to the other set depending on how they want to paint the economic conditions of particular segments of activities. They could, for example, raise substantial amounts of loans from financial enterprises they direct for channelling the same to their other enterprises in the productive sectors. While the financial institutions would show good amounts of income, the others which are deliberately saddled with debt would have to bear significant interest expenses. They will automatically throw up losses or weaker performance than their potential.

This kind of interlocking decision-making has implications for price structures in a tightly controlled economy like that of Mauritius. Loss-making units would find themselves justified in the circumstances to hike up prices because they are being made to have recourse to extensive borrowings. In turn, that might become the pretext for much bigger issues, such as asking the central bank’s MPC to reduce the country’s overall interest rate structure and or calling upon it to depreciate the rupee from time to time.

Decision-making would be different in the absence of such interlocking directorships. Seeing the problem coming up from this source, the Bank of Mauritius took up a pioneering position by issuing a guideline to the finance industry years ago to bring related party transactions under the scrutiny of the Bank and the public. It now makes sense that the Bank is taking the initiative to bring under its approval line the appointment of directors of financial institutions. They have to be fit and proper and seen to be acting independently of dictates arising from their interests in other business activities. One has to have the assurance of their complete independence of mind when directing financial businesses that have systemic implications.

* Published in print edition on 27 April 2012

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