Global Business under pressure

A lot of confusion surrounds the global business sector in the face of the changing landscape. Market players will have to reengineer their business in order to comply with the new benchmark set by the international community in terms of best practices. The goodwill of our financial sector is at stake.

The global business sector is feeling the heat. The impending changes on the fiscal front worldwide call for a remodelling of its structure. The renegotiation of the tax treaty with India that came into force on April 1, 2017, has been a wake-up call for operators. The Mauritian jurisdiction had, for the major part, positioned itself as an India-centric model for the past 25 years or so. More than 60% of investment routed through Mauritius is into India. They accounted for over 33% of foreign direct investment (FDI) into the country.

Other global pushes are also inching Mauritius towards a more globally acceptable model. After the implementation of the Foreign Account Tax Compliance Act (FATCA) introduced by the US to combat tax evasion by improving exchange of information, Mauritius has now committed to sign by June 30, 2017, the Multilateral Instrument (MLI) to implement the tax treaty measures in the OECD/G20 BEPS Action Plan. These measures have stemmed from the need for International Financial Centres (IFCs) to demonstrate more transparency, generating volatility in markets. Jurisdictions around the world, including Mauritius, are under pressure to comply while continuing to function but also battle against the negative perception about tax evasion, round-tripping and money laundering associated to them.

BEPS’s implementation will be costing the global economy trillions of dollars while in the meantime requirements such as FATCA and the report of foreign bank and financial accounts (FBAR) has caused as many as 40% of Americans living outside the US to consider renouncing their citizenship, according to US firm Greenback Expat Tax Services, which surveyed 2,100 US expats.

The commitment to the signature of the MLI by Mauritius is in a bid to demonstrate the country’s dedication towards curbing base erosion and implementing minimum standards. As a sove-reign island State, Mauritius is currently identifying a list of treaty partners with which it has significant dealings as an IFC. Countries identified under this list will not be covered under the MLI, but would however have their bilateral double taxation avoidance agreements continue to prevail, notified the ministry of Finance via a communique recently.

While many operators view these changes with some cynicism, the best way is to take it with a pinch of salt as several have resolved to do. There was a lot of scepticism when the Indo-Mauritian DTAA was revised, observes Global Finance Mauritius (GFM) Chief Executive Officer (CEO) Samade Jhummun, but it is a bit too late to comment on what could have been. The industry is now coming to terms with the realisation that it has to move away from the ingrained model that had settled in over the past 25 years and seek new avenues of growth.

“These are challenging times, especially with the new tax treaty with India. We however still have some limelight regarding the debt structuring,” he stated. Under the new tax protocol, existing investments will be grandfathered and India will exert the right to tax capital gains on transfer of Indian shares acquired on or after April 1, 2017. It also provides for a two-year transition period up to March 31, 2019, during which the tax rates will be 50% of the prevailing domestic tax rates, subject to a Limitation of Benefits clause. After March 31, 2019, tax will be charged at full domestic tax rates. Capital gains on derivatives and fixed income securities will continue to be exempted.

Recruitment impacted?

The Indian debt market, Samade Jhummun pursues, is four times bigger than the equity market in India. Consequently, Mauritius should be able to emerge once more if we manage to come up with products such as the Masala Bonds on the Stock Exchange of Mauritius or the Masala loans from AfrAsia Bank which were launched recently.

Mauritius will always have an advantage going forward on the debt platform and still is a jurisdiction for investment into India; investors who are already here might continue to use this, observes Amit Gupta, director of AMG Solutions. In his opinion, it is now time to start to look at the country “as a base and not just a location for the creation of a company. The idea is to make sure you have commercial substance and then operate without fear,” he added.

There is a universal line of action coming into play with FATCA, the Common Reporting Standards of the OECD and very soon BEPS and so, India was not left as an exception, highlights Sarika Subdhan, director of ADS Consulting. It is all about bringing everyone on a level playing field. “Even if Mauritius did not have an offshore sector, the whole panoply of all these actions would have existed throughout. We are not the exception,” she stated.

The overhaul of the international landscape with additional changes in the pipeline did not leave insensitive the offshore sector in Mauritius. A survey carried out by GFM in early 2016 revealed that it would be having consequences on recruitment. All the planned recruitment had been either cancelled or delayed while 96% of those who had more than 50% of revenue coming out of India had cancelled their planned recruitment. This state of panic was particularly linked to the fact that India had not, at that point, yet renegotiated its treaties with Singapore and Cyprus. This uncertainty is present even now regarding the post April-2019 situation. “Having said that, as a business, you need to find remedial ways to sustain your business and operators are already trying to find new avenues of sustaining this growth, either by finding new markets or trying to bring new products on the market,” Samade Jhummun pointed out.

Aside from the stress emerging on the Indo-Mauritian DTAA front, operators are also showing signs of being weary about the upcoming dénouement on the forefront of the international arena especially with BEPS and the EU blacklist. The main impact would be on the way we do business in the future. “The deemed foreign tax credit is going to affect the market further and we have to be careful with the changes because we don’t want to be on the EU blacklist, while remaining competitive in order to be able to attract new business,” Samade Jhummun added.

Going forward, could Africa emerge as the new hinterland? The buzz has already started in the global business sector about the continent positioning itself like India 25 years ago. Caution is however required on this field as well: Africa could be a tricky option without a presence already on that market. The financial sector, states Amit Gupta, has started moving towards Africa and Mauritius is now substantially used by African clients. However, in order to fully tap into that potential, the Mauritian labour laws have to be reviewed while the country will have to open up the economy to the expat community as well.