Deteriorating trade relations between India and Mauritius will cement China?s position as the island?s next big patron
Once a tropical isle known solely for its sugar cane exports and lavish resort vacations, Mauritius swiftly transitioned into a highly competitive market for financial services. Since 1992, it has registered 28,000 global business vehicles and 600 funds. In 2012, Mauritius ranked 12th in the Index of Economic Freedom published by the Heritage Foundation and placed first among African countries on the World Bank?s Ease of Doing Business Index. India, in particular, has benefited from the ascent of Mauritius ? the island alone is currently responsible for roughly 40% of India?s inbound foreign direct investment. However, allegations that Mauritius acts as a harbor for tax evasion and money laundering have prompted Indian authorities to strengthen regulations. The proposed General Anti-Avoidance Rules (GAAR) provides Indian tax authorities with the broad discretion to investigate any business structure suspected of tax evasion.
India has delayed the implementation of GAAR until April 1 next year and reined in the rules somewhat in response to industry criticism, but some damage has already been done. Many investors, spooked by the possibility of unfavorable Indian rulings in cases of tax evasion and fraud, have preemptively transferred their offshore investment vehicles from Mauritius into Cyprus and Singapore, according to Indian media reports.
With India tightening the leash on offshore investment, the conditions are ripe for the China to become Mauritius? next big customer. China has made typical efforts ? in particular financing major infrastructure projects ? to win favor with the East African island. Although some in Mauritius are suspicious of the deluge of Chinese goodwill, for now China appears to be drawing ever closer to the rising star of the Indian Ocean.
Geography favors Mauritius. At four hours ahead of Greenwich Mean Time, the island?s time zone allows financial service providers to conduct business with Asia in the morning, with Europe at midday and North America in the late afternoon. The island lies 550 miles off the coast of Madagascar in the Indian Ocean, so it is physically removed from the political strife that so often spills across African borders.
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Africa or bust
Mauritian policies have helped the island to develop into one of the most robust financial services sectors in Africa and helped attract a highly regarded labor force of bankers, accountants, lawyers and auditors. Mauritius has the traditional advantages of an offshore financial center ? such as confidentiality of information and free repatriation of profits and capital ? and also has a wide network of double taxation agreements (DTA), according to Malcolm Moller, managing partner of the Mauritius and Seychelles offices of Appleby Global.
Mauritius has agreed to 36 DTAs, most notably signing an agreement with China in 1994. That ties China into a treaty network with the potential to greatly reduce the tax liabilities of Chinese companies investing in more than a dozen African nations.
These advantages will work to China?s benefit while helping to avoid the same problems that India encountered. ?The China-Mauritius axis is used primarily by Chinese accessing Africa via Mauritius and not the reverse,? Soobramanien said. ?So under this route, China has everything to gain by allowing its local investors to use Mauritius as a platform.? China does not stand to lose much tax revenue through mostly outbound investment, unlike India which received substantial inbound investment from Mauritius. So even if China instituted rules cracking down on tax evasion, its relations with Mauritius would likely endure.
Soobramanien also said that since the Chinese investment in Mauritius is likely to take the form of trade into Africa, as opposed to mere holding companies without employees, there is little likelihood of a tax conflict arising between the two countries.
China and Mauritius have already shown their ability to work through their differences, Moller said. He cites the new protocols that Mauritius and China agreed to add to their DTA that designates a 10% capital gains tax on Chinese assets in Mauritius under certain circumstances.
China?s DTA with Mauritius is only one part of a collaborative effort to improve trade and political sentiments. China has aggressively pursued Mauritius through official visits, state-led initiatives and cultural engagements. It has also financed several large projects in Mauritius as tokens of friendship, including universities, research centers, sports stadiums and logistical hubs.
In return, Mauritius has acted as a platform for Chinese agriculture and mining companies to secure reserves of natural commodities, such as oil, timber, copper and diamonds in Africa. (Soobramanien notes that Mauritius? IPPA agreements also protect these types of investments from political risks in Africa.)
But Mauritius is more than just an oil field or a diamond mine to China. Chinese companies have used the capital raising and financial planning abilities of service providers in Mauritius to help expand their operations throughout Africa. This has helped drive sales of Chinese clothes, cars and telecommunications products in Africa.
Both Moller and Soobramanien expect trade and goodwill between China and Mauritius will continue to grow.
With such rewards, China would be wise to further exploit the exodus of Indian assets from Mauritius. The returns on China?s investment in the island have increased rapidly, with no signs of trouble on the horizon.
Once a tropical isle known solely for its sugar cane exports and lavish resort vacations, Mauritius swiftly transitioned into a highly competitive market for financial services. Since 1992, it has registered 28,000 global business vehicles and 600 funds. In 2012, Mauritius ranked 12th in the Index of Economic Freedom published by the Heritage Foundation and placed first among African countries on the World Bank?s Ease of Doing Business Index. India, in particular, has benefited from the ascent of Mauritius ? the island alone is currently responsible for roughly 40% of India?s inbound foreign direct investment. However, allegations that Mauritius acts as a harbor for tax evasion and money laundering have prompted Indian authorities to strengthen regulations. The proposed General Anti-Avoidance Rules (GAAR) provides Indian tax authorities with the broad discretion to investigate any business structure suspected of tax evasion.
India has delayed the implementation of GAAR until April 1 next year and reined in the rules somewhat in response to industry criticism, but some damage has already been done. Many investors, spooked by the possibility of unfavorable Indian rulings in cases of tax evasion and fraud, have preemptively transferred their offshore investment vehicles from Mauritius into Cyprus and Singapore, according to Indian media reports.
With India tightening the leash on offshore investment, the conditions are ripe for the China to become Mauritius? next big customer. China has made typical efforts ? in particular financing major infrastructure projects ? to win favor with the East African island. Although some in Mauritius are suspicious of the deluge of Chinese goodwill, for now China appears to be drawing ever closer to the rising star of the Indian Ocean.
Geography favors Mauritius. At four hours ahead of Greenwich Mean Time, the island?s time zone allows financial service providers to conduct business with Asia in the morning, with Europe at midday and North America in the late afternoon. The island lies 550 miles off the coast of Madagascar in the Indian Ocean, so it is physically removed from the political strife that so often spills across African borders.
[video=youtube_share;VaQEzSnX_dY]
Mauritian policies have helped the island to develop into one of the most robust financial services sectors in Africa and helped attract a highly regarded labor force of bankers, accountants, lawyers and auditors. Mauritius has the traditional advantages of an offshore financial center ? such as confidentiality of information and free repatriation of profits and capital ? and also has a wide network of double taxation agreements (DTA), according to Malcolm Moller, managing partner of the Mauritius and Seychelles offices of Appleby Global.
Mauritius has agreed to 36 DTAs, most notably signing an agreement with China in 1994. That ties China into a treaty network with the potential to greatly reduce the tax liabilities of Chinese companies investing in more than a dozen African nations.
These advantages will work to China?s benefit while helping to avoid the same problems that India encountered. ?The China-Mauritius axis is used primarily by Chinese accessing Africa via Mauritius and not the reverse,? Soobramanien said. ?So under this route, China has everything to gain by allowing its local investors to use Mauritius as a platform.? China does not stand to lose much tax revenue through mostly outbound investment, unlike India which received substantial inbound investment from Mauritius. So even if China instituted rules cracking down on tax evasion, its relations with Mauritius would likely endure.
Soobramanien also said that since the Chinese investment in Mauritius is likely to take the form of trade into Africa, as opposed to mere holding companies without employees, there is little likelihood of a tax conflict arising between the two countries.
China and Mauritius have already shown their ability to work through their differences, Moller said. He cites the new protocols that Mauritius and China agreed to add to their DTA that designates a 10% capital gains tax on Chinese assets in Mauritius under certain circumstances.
China?s DTA with Mauritius is only one part of a collaborative effort to improve trade and political sentiments. China has aggressively pursued Mauritius through official visits, state-led initiatives and cultural engagements. It has also financed several large projects in Mauritius as tokens of friendship, including universities, research centers, sports stadiums and logistical hubs.
In return, Mauritius has acted as a platform for Chinese agriculture and mining companies to secure reserves of natural commodities, such as oil, timber, copper and diamonds in Africa. (Soobramanien notes that Mauritius? IPPA agreements also protect these types of investments from political risks in Africa.)
But Mauritius is more than just an oil field or a diamond mine to China. Chinese companies have used the capital raising and financial planning abilities of service providers in Mauritius to help expand their operations throughout Africa. This has helped drive sales of Chinese clothes, cars and telecommunications products in Africa.
Both Moller and Soobramanien expect trade and goodwill between China and Mauritius will continue to grow.
With such rewards, China would be wise to further exploit the exodus of Indian assets from Mauritius. The returns on China?s investment in the island have increased rapidly, with no signs of trouble on the horizon.
