Global Business: An impending death?

The words of former governor of central bank, Dan Maraye, sums up the mood within the global business sector: “The offshore sector is mourning. The situation is not good at all. It is critical.” The reason for this state of mind is the revision of the tax treaty between Mauritius and India. These revisions, claim operators, spell Armageddon for the sector. The Double Taxation Avoidance Agreement (DTAA) has been signed between Mauritius and India in 1983 and has been the backbone of the burgeoning global business services since the 1990s when the government of Sir Anerood Jugnauth decided to transform the country into a financial platform. On Tuesday afternoon, minister of financial services Roshi Bhadain held a press conference and his announcement were a cold-shower for the sector. The reviewed terms of the treaty would, among others, allow India to impose capital gains tax on investments routed through Mauritius as from 2019. India has offered Rs 12.7 billion as a one-off grant, which is “unrelated to the revised treaty” according to Bhadain. The Indian government, through a communiqué following the signature of the protocol for the revised agreement, stated that: “In respect of such capital gains arising during the transition period from 1 April 2017 to 31 March 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfilment of the conditions in the Limitation of Benefits Article. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards.” Furthermore, regarding limitations of benefits, a resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than Rs 1.5 million over the preceding 12 months. Third point, interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31st March, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31st March, 2017 shall be exempt from tax in India. The Protocol also provides for updating of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes. According to the Indian authorities, “the Protocol will tackle the long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.”

Unavoidable situation?

According to minister Bhadain, these changes were unavoidable in the wake of the changes being brought on the international front. The OECD and G20 are considering implementing measures against BEPS – Base erosion and Profit Shifting. This new framework will allow all interested countries and jurisdictions to work jointly to this end. Added to that, India has announced the implementation of GAAR – General Anti Avoidance Rules as from 2017. The main objective is to curb tax evasion with the main backdrop being a $2 billion tax shortfall for the Indian government following the Vodafone case. On Thursday morning, financial secretary Dev Manraj stated that we should not rely on tax treaties and beg other countries. “We don’t have to survive on DTAs and beg (…) with other countries, give me your tax money, when we can produce our own wealth.” But the president of the Association of Trust and Management Companies (ATMC), Kamal Hawabhay, believes the government should have consulted operators before signing the protocol. These terms, he said, are not beneficial to Mauritius. “There is a risk that other countries with which we have treaties, would seek similar amendments to those granted to India. If this is the case, it will be the death of global business. Operators are pessimistic,” he stated. Economist Arvind Nilmadhub does not share this pessimism. “Sooner or later, India would have imposed this amendment. Having capital gains being taxed means many companies who chose to establish here solely for the purpose of avoiding taxes will now disappear,” he says. This will enable us to gauge how many companies have substance in their transactions, he adds.. “If too many companies are affected, then this will weaken our financial services centre. This might spillover other sectors as well,” says the economist. “Global business cannot rely solely on the DTAA for its survival. The sector should diversify its offerings. Mauritius has always overcome drastic changes. We will surely surmount this one also,” says Arvind Nilmadhub.

[[{"type":"media","view_mode":"media_large","fid":"17011","attributes":{"class":"media-image wp-image-28807 alignleft","typeof":"foaf:Image","style":"","width":"378","height":"250","alt":"Roshi Bhadain and Reza Uteem"}}]]Roshi Bhadain and Reza Uteem

The Minister of Financial Services, Roshi Bhadain, explained the protocol on Radio Plus on Thursday afternoon. “India has clearly stated that it is introducing the source-based taxation instead of residence pay taxation. India is negotiating with all the countries with which it has signed the treaties.” He reassured that the protocol will not harm our interests. The protocol he adds, will require more substance while enabling Mauritius to create more value-added. This is the best deal we could have got he said in the wake of impending changes being sought against global business worldwide. Including the G20 who want to curb tax evasion through BEPS. The decision to ratify the protocol has been collectively assumed by the Cabinet. India has approved for a period of Transition for Mauritius which will be between 1 April 2017 to 31 March 2019. “All the investments made during this timeframe to India through the Mauritian jurisdiction will be subject to an equal share of capital gains tax between both countries. The rate being zero in Mauritius, they will only pay on the remaining 50% at the current Indian rate. “Therefore no Capital Gains Tax will be paid in respect of 50% of the Mauritian party to the extent that this tax does not exist in Mauritius. The remaining 50% will be according to Indian law. For banks that have loans assigned to Mauritius, the interest will not be taxable in India until 1 April 2017.” Participating in a debate on Radio Plus on Thursday afternoon, the opposition MP argued that he cannot understand “why the government has killed livelihood of people.” Singapore’s treaty with India was less advantageous than the Mauritian one, but with the new protocol, both countries will be on equal footing. “Many people will lose their jobs and the government without any consultation went to India for negotiation.” Reza Uteem added it is not the first time India has proposed money in exchange of a revised DTAA. “The compensation received should be used to help management companies and prevent job losses.”

[[{"type":"media","view_mode":"media_large","fid":"17012","attributes":{"class":"media-image wp-image-28808 alignleft","typeof":"foaf:Image","style":"","width":"214","height":"206","alt":"Rama Sithanen:"}}]]Rama Sithanen: “It is the end”

For the former finance minister, it is the end of the Mauritian global business sector. Rama Sithanen added he never thought “such an important sector would be sold off for so little money against investment in speculative and real estate projects [Heritage City]. The global business sector is worth much more than $350 million. We have to trade not aid.” For him, the revised agreement is political irresponsibility. “It is the end. Now we have to bare the consequences. If it was a good deal, why has India granted compensation? It is a very bad strategic choice.” Several international banks will close down their local operations. Rama Sithanen met with minister Bhadain prior to the signing of the protocol. “My opinion was sought by the Minister on three specific points. First, my views regarding the current negotiations. Second, the alternative to signing this agreement. Finally, the future of offshore in view of new challenges.”

Dr Ludovic Verbist: “Things do not look too good”

Things do not look too good with these new provisions, according to Dr Ludovic Verbist, managing director of AAMIL, a historical global business operator with offices around the world. He adds that we could have waited for the introduction of GAAR in April 2017 to have similar effects, but then applicable to all countries, and it would have left our DTAA as it is. “It is quite a surprise for me to learn from Rama Sithanen, in his interview, that India had already proposed some ten years ago to give US$ 200 million to Mauritius in exchange for changing Clause 13.4 of the DTA, which he refused. Apparently, India is now giving over US$ 300 million,” he adds. “What strikes me, is that according to information made available, this Protocol to the DTAA was already signed last year, but kept secret. One can only ask whether some investors were already aware of the agreed changes, as we saw a large drop in Mauritius sourced investments in India as compared to Singapore. From July 2015 to December 2015, statistics show that for the first time, some 35% of new inbound investments into India came through Singapore and only 15% from Mauritius, while these figures were the opposite during the fifteen previous years,” Dr Verbist claims. According to the operator, we will face a substantial drop in activity in the global business sector towards India, which will only compound the fragility of the sector these days, with the various initiatives having taken place internationally.