Will the blueprint etch its mark?

The 2017/18 Budget attempts to give a new impetus to the financial services in order to address the daunting challenges stemming from the international community. Wind of change or much ado about nothing?

A few measures were enumerated in the 2017/18 Budget to bolster the financial services sector in the light of the new challenges it is facing, but a lot lies on the shoulders of the blueprint announced to bring back investor confidence. The aim of the blueprint is to focus on the vision for the sector over the next 10 years and also take on board the forthcoming international requirements with regards to taxation without undermining the competitiveness of the jurisdiction.

The continuing success of this sector will be hugely dependent on the specific measures and initiatives to be developed as part of this plan, the Managing Director of Cim Global Graham Sheward observed in the company’s post-budget memo. The elaboration of a blueprint for the industry is something he had been vouching for since two years through Global Finance Mauritius. It is no surprise then that GFM is particularly appreciative of this measure, which will be enunciated with the collaboration of all stakeholders in the industry.

Samade Jhummun, CEO of GFM, stated that he was looking forward to contributing to this exercise. GFM is also supportive of the initiative to boost Mauritius as a FinTech hub for Africa with the setting up of a Regional FinTech Association. “We would urge the government to move quickly on this front by appointing international experts to help with the regulations to ensure that Mauritius is not overtaken by competing jurisdictions,” Samade Jhummun said.

While the blueprint comes as a breath of fresh air for the industry, the fact remains that it might perhaps not be enough to counterbalance the various challenges the sector is dealing with right now. Insufficient consideration has been given in the 2017/18 Budget to an industry which contributes to more than 12 per cent of Gross Domestic Product (GDP), said Samade Jhummun. Another voice of the financial services sector, the Association of Trust and Management Companies (ATMC), through its president Kamal Hawabhay, is of the opinion that the Budget was lac-king in worthwhile measures for the industry. While the Finance Minister recognized the daunting challenges that the Organisation for Economic Co-operation and Development (OECD) and the European Union are heaping onto our jurisdiction, he however did not announce anything tangible to counter the harmful effects of these challenges.

The impact of the multilateral instrument

Kamal Hawabhay admitted having expected a much bolder statement coming from the Finance Minister to weather the storm given the forceful pressures which OECD and the European Union have been exerting on Mauritius to enter into the Multilateral Instrument (MLI) “which will have a damning impact on the industry and the India Protocol which has kicked in since April 1, 2017,” stated Kamal Hawabhay. Measures should have been proposed for the short, medium and long term, instead of the current timid ones, stated Kamal Hawabhay, who does not expect any beneficial impact on the sector as a result. He also commented on the new rule for GBC1 companies introduced in the Budget demanding they fulfil at least two of the criteria established by the Financial Services Commission (FSC) instead of one currently. This is being done in a bid to further enhance the reputation of Mauritius as a jurisdiction of substance.

While enhanced substance is indeed the new normal, Kamal Hawabhay also wonders why Mauritius should always be first in complying with international initiatives. Mauritius was the first in Africa to sign up for the Foreign Account Tax Compliance Act (FATCA) and signed up to be among the early adopters of the Common Reporting Standard (CRS) although government stepped back through industry pressure. The new criteria, according to him, will drive up compliance cost, add to hurdles to do business here and make Mauritius look petty. “All this would have been fine if we would have gotten anything tangible by doing so. I don’t see the OECD/EU relenting because GBC1s will have to comply with one more substance condition,” he highlighted. Moreover, no such measures were announced in the Budget to properly put the industry in gear to meet up to the challenges of the international context.

The president of the ATMC would have liked to see the introduction of a product to keep the lucrative fund administration business that we have developed over years in Mauritius, given that the capital gains benefits under the India treaty are ebbing away and all taxing rights will accrue to India as from 1^st April 2019. “As we will not be able to use the tax treaty soon and India will tax at source, a vehicle which does not hinge on tax considerations is needed. Hence we proposed that a tax exempt fund product be introduced. This would allow funds to be administered in Mauritius, flow through a Mauritius entity into India, pay taxes in India so no complaint from India and we get to keep our India business to a certain extent. However, our proposal was not retained,” he commented.

Threats on local resident directors

Certain proposals to make fund management attractive to foreign skilled managers to entice them to Mauritius were also made, as well as requests for changes to the Income Tax Act to limit the liability of directors. Kamal Hawabhay voiced out that the Mauritius Revenue Authority (MRA) is threatening local resident directors with attachment of their personal property and with objections to departures should a GBC1 not pay its taxes. Local directors are non-executive and are not the principal agents of such GBC1s yet we are being harassed, he stated. Such actions should apply to the foreign executive directors who run the business of the GBC1. At this rate, it will be difficult to find local directors to act as directors on the boards of GBC1s. “The irony is that having two resident directors on the board of a GBC1 is a regulatory condition to a GBC1 license to enhance substance but at the same time such MRA actions are to the detriment to such directors! We explained to the FSPA which transmitted our proposals to Government that a policy decision is needed to counter the negative effects of the recent JP Morgan case which held that common expenses attributable to capital gains should be disallowed,” he explained.

This means, inter alia, that the Rs 1.5 million that a GBC1 should incur in order not to be considered a shell company and hence benefit under the India Protocol during the next two years, would also be disallowed as they are attributable to capital gains which are exempt. Capital gains tax will thus be paid in India but no deduction of related expenses will be allowed in Mauritius. “This is a double whammy to the detriment of a GBC1 sending the IRR of the GBC1 fund crashing! Where is the incentive to use Mauritius in such circumstances? Government turned a deaf ear to this problem as well,” he lashed out.

Samade Jhummun, for his part, with regards to the future taxation reforms announced for the global business sector, said that GFM considers it important for government to finalise its position at the earliest opportunity to avoid being included on the EU Blacklist. Furthermore, the continuing uncertainty can be harmful for the sector.