Mauritius: a Strategic Refocus

Mauritian businessmen mastered diversification long ago.

With a foresight and momentum similar to that which drove the country's economy away from its reliance on sugar and into textiles, tourism and financial services in the 1990s, so the financiers who flocked to Mauritius in recent years are readjusting their strategies away from India and towards the African continent.

"We think we are positioned to become the preferred gateway for investment from the rest of the world into Africa," says Rama Sithanen, a former finance minister who now chairs local firm International Financial Services.

In 2012, 51% of investments made by global business companies (GBCs, the name given to shell companies) registered in Mauritius went to Africa, up from 31% in 2010, according to the Financial Services Commission. India's share dropped from 32% to 16%.

While a key driver of this geographic shift has been the continent's steady economic growth, there is a quiet admission from bankers that uncertainty caused by negotiations to amend a 30-year-old double taxation avoidance agreement (DTAA) between India and Mauritius has played its part.

Standard Chartered Bank's Mauritius chief executive Sridhar Nagarajan says the issue "was a consideration" during the bank's decision to focus its strategy on Africa four years ago.

Before 2009, 95% of the bank's business was India-centric, explains Nagarajan. "Today, 40% of our business would be India-centric, 30% would be Africa- centric and the rest all over Asia," he says. "We are actually de-risking our model."

A POLITICAL ISSUE IN INDIA

2014 is an election year in India, and there are many political attacks on Mauritius's role as a financial intermediary.

An estimated 40% of India's foreign direct investment transits through Mauritius, and any mention of changes to the DTAA causes jitters in Mauritius and on the Bombay Stock Exchange.

A joint working group last met in April 2013 – its tenth meeting – but there is still little sign of an agreement.

Mauritius has proposed introducing a limitation of benefits (LOB) clause, which would impose new rules on a company before it could earn a tax residency certificate to benefit from Mauritius's lower tax regime.

Despite uncertainty over India, Mauritius is building its Africa strategy on similar pillars, having signed DTAAs with 19 African countries, most recently with Gabon in July.

Some of the DTAAs, including with Nigeria and Kenya, await ratification. In South Africa – which is competing with Mauritius to attract the headquarters of multinational companies – there has been a mounting unease among politicians about the tax benefits Mauritius gives companies.

In May, South Africa's finance minister Pravin Gordhan announced proposed changes to the 1996 DTAA that would alter rules on dual residency, capital gains tax and withholding taxes on interest, dividends and royalties.

South Africa's parliament has not ratified the new deal, and Mauritius's finance minister Xavier-Luc Duval told The Africa Report that both sides should look at the agreement again.

Local politicians and bankers insist Mauritius is not a tax haven, yet in the next breath they often compare the island's competitive advantages to those of the Cayman Islands, the British Virgin Islands and Jersey.

The corporation tax is 15%, but tax credits for GBCs mean the maximum they pay is 3%.

The contribution of financial services to gross domestic product (GDP) remains relatively low because of the island's economic diversification. The sector accounted for 10.3% of GDP in 2012, with 5% coming from the global business sector.

Tax revenue is much higher, and according to Sithanen, a quarter of the government's corporate tax take comes from management companies and GBCs.

The Mauritian government appears unfazed by the Group of Eight's (G8) June push for more transparency and substance from companies operating in tax havens.

The country has already implemented strict anti-money-launder- ing laws and tax-information-exchange agreements, and rules that require GBCs to conduct more business in Mauritius.

The push for substance dovetails with the government's strategy to increase the sophistication of the products and services in the financial sector.

"We want to capture more value in the revenue chain. Move up the supply chain, like we have done in sugar, like we have done in textiles, like we are doing in ICT [information and communications technology]," says Sithanen.

Since introducing new rules on protected cell companies in 2005, Mauritius has passed regulations on a range of new financial instruments.

In 2012, the government passed three acts to regulate limited partnerships, pensions and foundations. New rules to allow limited liability partnerships are likely.

The government is generally responsive to proposals from the financial sector for new reforms, most recently on suggestions to position Mauritius as a regional treasury centre for Africa.

Standard Chartered's Nagarajan, who chaired a working group on the issue, says the bank already has five clients doing cash pooling from Mauritius.

STOCK EXCHANGE BOOST

While the managers of the Stock Exchange of Mauritius are trying to attract more listings from Africa-focused investors, in 2010 India's Financial Technologies Group set up the Global Board of Trade (GBOT) there.

Initially trading futures contracts for currencies and commodities, in May it introduced contracts for difference on gold, oil and some currencies, which chief executive Rinsy Ansalam says has "given us a lot of traction".

Trade has risen from around $30m to $40m per day.

Despite this move up the financial value chain, Mauritius still has work to do on changing perceptions. "I keep teasing my friends," says Sithanen. "We don't lie down under coconut trees and indulge in financial malfeasance."

However, a series of Ponzi schemes uncovered earlier in the year were particularly damaging for the island's reputation and regulators.

"Definitely, if Mauritius wants to position itself as a platform for financial services, we should be able to act very fast and in a coordinated manner," says Raj Makoond, director of the Joint Economic Council, an umbrella group for private-sector bodies.

Meanwhile, the Mauritian economy remains heavily dependent on Europe for trade and tourism revenue. Statistics Mauritius predicts a growth rate of 3.5% for 2013, up from 3.3% in 2012.

Unemployment is hovering around 8% but is 27% for 16-25 year olds, says Makoond.

"There's a major paradigm shift in the economic structure of Mauritius," he says, and the country is moving from a low-skill to a high-skill economy.

Some in the private sector are concerned what this shift towards a service-led economy may do to the island's labour force.

Gilbert Espitalier-Noël, chief executive of the property wing of conglomerate ENL, says the island has lost its competitive advantage in the manufacturing industry.

While he says the financial services sector creates "fantastic high-level jobs [...] it creates a different problem [...] which is what do you do with unskilled labour."

Mauritian policymakers do not want to put all their eggs in one basket, especially just two years away from elections in 2015.

The next hot sector is the "ocean economy" – a catch-all title designed to incorporate everything from financial services for shipbuilders to seafood exports and marine biotechnology.

Some financiers believe Mauritius is well placed to become a key Indian Ocean hub, providing break bulking services and manufacturing capacity.

"Manufacture it here. You sell it to COMESA [Common Market for Eastern and Southern Africa] and SADC [Southern African Development Community], and you get [the waiver of ] a 22% customs duty," says Standard Chartered's Nagarajan.

"Do the maths. Overnight it will become a hub." ?