Mauritius was once celebrated as the “star and key of the Indian Ocean” for its strategic position on the maritime spice route. Several hundred years later, the phrase — now inscribed in Latin on the country’s coat of arms, along with palm trees and an indigenous dodo — still resonates for policymakers.
They see Mauritius as a hub for global trade and investment, built on more than two decades of expertise in cross-border finance. Located between Asia and Africa, Mauritius has evolved into an “international financial centre of excellence and repute”, says Pravind Jugnauth, the finance minister.
The most striking feature of Mauritius’s financial industry is its outsize offshore sector, which it built on a low tax regime and extensive treaty network.
The sector, which the IMF describes as “enormous”, accounts for more than $630bn of assets, some 50 times the level of GDP. Only Luxembourg has a bigger stock of foreign direct investment relative to the size of its economy.
Even though the offshore industry accounts for only a few thousand jobs and just under 7 per cent of tax revenues, it is critical to the economy, playing a vital role in the balance of payments.
Yet its future is now in question, amid a global backlash against tax avoidance. Offshore hubs such as Mauritius facilitate investment but are also responsible for developing countries losing $100bn a year in revenue, according to the United Nations.
New rules have been agreed by finance ministers from around the world to stop companies moving profits to low tax centres. India — which has seen a third of its foreign direct investment flow through Mauritius this century — revised its tax treaty with the island in May. As a result, the traditional tax advantages of using Mauritius to invest in India will not exist by 2019.
While tax planners are already eyeing new ways to make use of the India treaty, the offshore sector is reorienting itself to channel investment into mainland Africa as part of a wider attempt to build up the country’s links. Vishnu Lutchmeenaraidoo, Mauritius’s foreign minister, says there is a need to focus on strengthening ties with Kenya, Mozambique, Zambia, Tanzania, Madagascar, Senegal and Ghana. “Africa is the name of the game now,” he says.
But African nations are growing warier of offshore centres. A report commissioned by African finance ministers last year described Mauritius as “a relatively financially secretive conduit” that exposes the rest of the continent to illicit financial flows. Mr Jugnauth says the island is “continuously working” to prevent such activities and points out that international regulators dub it “largely compliant”, which he says allows Mauritius to push back against being “unfairly tagged as a tax haven”.
At the same time, the government is being forced to rethink its tax-centred approach to attracting capital inflows. An international crackdown on “treaty shopping” — routing income through shell companies in low tax countries — means that multinationals will have to show they have genuine activities in those places. While Mauritius always insisted that companies had more than just a ‘brass plate’ on the island — by, for example, employing two local directors — they will now be required to do more.
Companies are being encouraged to put down more roots in Mauritius with the help of tax incentives designed to attract regional headquarters, treasury management centres, international law firms, funds from wealthy families and asset managers. The new measures were unveiled in the recent budget by Mr Jugnauth, in what he said was “a new thrust to the development of our financial services sector”.
The plan is to create services that add value to the finance industry, which is already much more than the offshore sector. Employing more than 12,500 people, it includes banking, insurance, global business, capital markets and other support services. Having grown at about 5.5 per cent a year over the past four years, it now accounts for more than an eighth of the economy.
Future success will depend on improving skills, infrastructure and institutions. Last year’s collapse of BAI, a financial conglomerate, exposed regulatory failings and there are frequent allegations of corruption among the political elite.
While the island is less vulnerable to changes in global tax rules than smaller, less diversified financial centres, the international crackdown on tax abuses presents big challenges to the offshore finance industry. Those shaping it agree it is time to focus on more than tax.
“This is an opportunity to reinvent the [financial services] sector and give it substance,” says Ravi Yerrigadoo, the island’s attorney-general.
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