By Sushil Khushiram
Since October this year, a number of offshore management companies have been celebrating their 20th anniversary. For those too young, though not less wise, to have witnessed the development of the offshore sector from its early beginnings, it is a remarkable story of bold endeavour and genuine accomplishments. In these days of nagging doubt, a retrospective glance may well serve to raise our spirits and restore our confidence in the future.
The initial phase
The first steps in offshore banking were taken in 1988 through amendments in banking legislation, mainly to offer low taxation and exemption from exchange control. Exchange restrictions would be lifted later in 1994. The inspiration came largely from Cyprus, a rising offshore banking centre. Two offshore banks were set up, followed by the formation of four offshore companies, in the wake of changes in company legislation to create a new category of international companies.
In promoting the offshore initiative, the then Minister of Finance, Vishnu Lutchmeenaraidoo, took no heed of the initial resistance of the Bank of Mauritius or of negative views expressed by IMF staff, who argued that the prospects for offshore business was limited by the downward trend in tax rates globally. Even the private sector cold-shouldered the idea at first.
A series of developments imparted a decisive impetus to the launch of the offshore sector in 1992. A Euromoney Conference on Offshore Business was held in April 1992, followed by a meeting of potential players at Government House to mobilize support for the new offshore strategy. Dev Manraj, then Financial Secretary, and Sunil Banymandhub, who was to become Managing Director of the first licensed offshore management company, canvassed actively for the private sector’s ownership and participation. Legislation on offshore business activities, modelled partly on Malta’s experience, and an Offshore Trusts Act, were introduced in mid-1992 by the then Minister of Finance, Rama Sithanen.
In August, the first roadshows were conducted in several Asian countries, and in October 1992, MOBAA, the offshore licensing authority, was up and running, headed by Iqbal Rajahbalee, who, as Assistant Solicitor General, had been closely involved with the drafting of offshore legislation. Later in 1996, a deemed foreign tax credit was conceived as a simple and practical approach to the domestic fiscal treatment of foreign investment returns.
At the time, the focus was on South Africa, and one strong hope was that a trickle of the huge wealth held by South Africans in the Channel Islands could be attracted to our island instead. These were still the days of apartheid, and Mauritius had already established itself as a favourite destination for South African tourists. As it turned out, Mauritius became a preferred foreign investment route into India by virtue of the highly beneficial tax treaty between the two countries. The tax treaty was signed in 1983, but remained mostly dormant until India liberalized its economy in 1991, and a suitable offshore regime was introduced in Mauritius in 1992.
Offshore activities grew by leaps and bounds over the years, and Mauritius emerged as a major source of investments into India, while also contributing to channel capital to some other Asian countries. Our skilled professionals produced legal and accounting services of high value for global clients, mainly by administering their funds, companies, and trusts. Mauritius thus became increasingly recognized as a credible offshore financial centre. Looking back on our successful journey over the last 20 years, the ingenuity and determination of all those Mauritians who played a part in building the offshore industry, deserve our unqualified respect and admiration.
A new orientation
Offshore business experienced steady and relatively unimpeded progress until 1998, when pressures began to mount from two directions. The OECD embarked on a campaign against offshore financial centres because of their potential for harmful tax competition, while there was a growing sentiment in India, especially among the bureaucracy, but also in the wider public, that investments under the treaty undermined and even represented an abuse of Indian tax sovereignty.
Both challenges came to a head in the year 2000. Mauritius narrowly averted OECD blacklisting by making changes and taking commitments for greater transparency and exchange of information. Indian tax officials also created an unnecessary scare for investors, which led to a sharp stockmarket downturn and a saving Indian tax circular 789 in April 2000 that reaffirmed the validity of the Mauritian Tax Residence Certificate (TRC). The TRC remains to this day vital for eligibility to treaty benefits. Shortly after, a retired Indian tax officer entered a public litigation case in Indian courts to challenge the legitimacy of circular 789.
It was a seminal moment in 2000, when it became clear that offshore activities could no longer continue under the same business model. Mauritius thus embarked on a second period of development to orient offshore business more firmly towards standards and activities associated with an advanced and reputable financial centre. That needed a wholesale transformation of the financial sector landscape.
As from 2001, a new legal and institutional framework was put in place, with the creation of the Financial Services Commission, the Financial Intelligence Unit, and the Financial Reporting Council, the introduction of new legislation on companies, securities, banking, insurance, insolvency, and anti money laundering, and the issuance of a corporate governance code. The new banking legislation was especially forward-looking in going beyond the offshore concept, by integrating domestic and international activities.
The measures taken by Mauritius to overhaul its financial business framework and the decision of the FSC to sign an MOU with SEBI, the Indian securities regulator, addressed a number of Indian concerns on the use of the treaty. There is reason to believe that the Indian supreme court was not indifferent to these measures in validating circular 789 in October 2003. OECD pressures were also addressed, and became less prominent as offshore jurisdictions organized themselves to claim a more level playing field vis-a-vis more advanced centres.
The offshore financial sector was thus able to enjoy a period of rapid growth in line with the robust expansion of the Indian economy, until the global financial crisis of 2008-09. Since then, both the OECD and Indian perception issues have surfaced again with renewed vigour. In response to its fiscal and sovereign debt problems, the OECD, with the support of the G20, started a new initiative as from 2009 to tackle offshore tax evasion, and is seeking through a global forum to review policies relating to transparency and exchange of information for tax purposes.
The principle of business and even bank confidentiality is no longer considered as sacrosanct and continues to evolve in line with increasingly higher standards of transparency and exchange of information between countries. What was earlier deemed to be a fishing expedition may now be accepted as an automatic exchange of information.
India, for its part, showed a growing preoccupation with the Mauritius investment route, which it has looked upon benevolently so far. Public concerns about corruption and black money, round tripping practices, as well as tax sovereignty issues, are some key factors driving the Indian authorities to consider possible changes in the tax treaty, and curtail the relevance of the Mauritius route.
Mauritius has recently agreed to revisions in the treaty to introduce new provisions that limit treaty benefits to entities that demonstrate substance, and to sign a new exchange of information agreement. The general anti-avoidance rules and the retrospective taxation on indirect transfers passed in the Indian Budget earlier this year have further clouded the climate for foreign investment into India, but will hopefully be resolved soon in the light of the Shome reports.
Whatever the final outcome on tax treaty negotiations, there is no uncertainty about our options. Mauritius must press ahead beyond the offshore concept and develop into an international financial centre of substance and integrity, providing a deeper and more diversified range of activities and services. Mauritius should learn from Dubai and Singapore, and overhaul its business model for the financial sector once more, especially towards greater openness in order to attract world-class players and skills.
These are challenging days for the offshore industry. We will need to make changes in the way of doing business in a changing environment. Growth is essential, and must come from all current and future opportunities in the global marketplace, including Africa, the rising continent. Mauritius can foster a competitive global platform for outward Indian investments, and Indian financial firms are already partnering with domestic investment managers to supply services to Africa and Asia.
In advancing financial services development to the next stage, the Mauritian authorities would be well advised to promote a new and resourceful structure for shaping vision and strategy, and for providing cogent stewardship, jointly with the industry. Sustaining offshore financial flows has also become an important macroeconomic imperative, at least in the short term, since the balance of payments is heavily dependent on sizeable net capital inflows to offset a gaping current account deficit. A sudden and unexpected withdrawal of offshore-related investments could have dire consequences for the Mauritian economy.
Sushil Khushiram is a non-executive Director of Cim Financial Services Ltd