Tax Treaty Issues

The Minister of Finance should finalize the MLI position of Mauritius, and ensure its entry into force at the earliest

By Sushil Khushiram

The press has widely reported the reply of the Minister of Finance this week to a parliamentary question relating to the recent cancellation of the Mauritius double taxation treaty with Senegal. In his response, he sought to draw a parallel with the termination of another double tax treaty, namely with Indonesia, in 2004.

Indonesia treaty

In early 2004, Indonesia wrote to the Government of Mauritius to invoke the termination clause of the tax treaty, which became effective for Indonesian investors at end June 2004, and for Mauritian investors in Jan 2005. No reasons were advanced for treaty termination. A report commissioned by Mauritius from a leading Asian consultancy firm pinpointed some likely causes of the Indonesia treaty termination.

Following the 1997/98 Asian financial crisis, Mauritius had become one of the leading foreign investors in Indonesia. Indonesia became ill disposed towards the use of Mauritius as a base by wealthy Indonesians, mostly of the Chinese minority, to invest back in Indonesia. These so-called “flight capitalists” were allegedly repurchasing assets, which they had previously forfeited to the Government, at discounted prices under the Government’s asset disposal program.

A major controversy also arose in Indonesia around the use of a Special Purpose Vehicle (SPV) in Mauritius by a Singapore-based entity to acquire shares in Indosat, one of the leading Indonesian telecoms providers. The sale of key national strategic assets to foreign investors became an electoral issue, as Indonesia conducted its first-ever direct parliamentary elections in April 2004, and its first direct presidential elections in two rounds in July and Sep 2004.

Caught in electoral rhetoric, Indonesia did not entertain Mauritian requests for engaging in discussions to resolve any contentious treaty issues. The unilateral revocation of the Indonesia tax treaty cannot be attributed to any inappropriate handling or failure to negotiate by the Mauritian Government. The then Minister of Finance, who is also the current one, was squarely responsible for tax treaty issues, but cannot be taken to task for the termination of the Indonesia tax treaty. Nor the Minister of Financial Services.

Global Standards

Mauritius has faced tax treaty issues in the past with its partner countries, notably India and South Africa, but reacted appropriately by making the required fiscal, legal and regulatory adjustments. Today, even more resourceful policies are needed to adapt to the new international standards governing global investments, which are increasingly inimical to tax-driven and non-transparent financial centres.

Mauritius has unfortunately been lagging in the implementation of global financial standards. Compared to our major competitors in financial services, Mauritius is still on the EU grey list of tax havens, is poorly compliant with FATF effectiveness standards (more than just technical compliance) on money laundering, and falling behind in the observance of OECD BEPS tax treaty standards.

OECD MLI

The Minister of Finance should focus on the OECD Multilateral Convention (MLI) for swiftly amending our bilateral tax treaties to best conform with OECD BEPS standards. This multilateral instrument, signed by 89 jurisdictions including Mauritius, and which entered into force in July 2018, provides a process for renegotiating bilateral tax treaties and modifying their application, mainly to eliminate double non taxation and counter treaty abuse.

Many of our major competitors in financial services, including Singapore, Malta and the Channel Islands, have not only signed the MLI, but also ratified and put it in force. Mauritius has only signed so far, and is still to provide its definitive MLI position, including on the partner countries to be covered by the MLI. Countries that agree to be covered by the MLI automatically apply minimum BEPS treaty standards, subject to any specific reservations.

Senegal

Both Mauritius and Senegal signed the MLI in July 2017. However, Mauritius did not designate Senegal for MLI coverage, whereas Senegal did include Mauritius among its MLI-covered countries. Only later in Oct 2018, Mauritius included Senegal in a still interim list of MLI-covered African countries, which was increased from 6 to 16.

It is an open question whether the failure of Mauritius in July 2017 to include Senegal in MLI coverage, and to respond to Senegal’s persistent recent requests for treaty renegotiation, may have contributed to Senegal’s decision in June 2019 to terminate its tax treaty with Mauritius.

Action

The Minister of Finance should finalize the MLI position of Mauritius, and ensure its entry into force at the earliest. Without quibbling whether the responsibility for tax treaty issues belongs to the portfolio of the Minister of Finance, or of Financial Services.


* Published in print edition on 20 September 2019

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