Throughout its post-dodo bird history – that is, roughly, 1662 onwards – the Indian Ocean island of Mauritius has relied in large part on its location to drive its industries, from the spice trade and sugar production through to cross-border financial services, including serving as a conduit for foreign direct investment in developing countries like India.
Here, Peter Body looks at the challenges it faces as it seeks to do for sub-Saharan Africa what it has over the last few decades for India, as a hub for FDI.
Mauritius, which has been called the “Key of the Indian Ocean” because of its location, sits prettily just 900km east of Madagascar, and strategically, directly between Africa and its major neighbours to the east: India, Asia and Australia.
A trading and shipping hub since the 19th century, the tiny, palm-fringed outcropping of 1.3 million people recently achieved the distinction of being the largest supplier of foreign direct investment (FDI) into India, after it contributed 21% of the total invested in that country from outside of it last year.
To put this in context, this was more than the FDI that flowed into India from any of the major global powers, including the US, the UK, Singapore and Japan.
All told, Mauritius has accounted for nearly US$96bn in Indian FDI in the past 15 years, while the comparable figure for the UK, of which it is a former colony, is only US$46bn.
There are strong suspicions that some of this total was “black money”, as a result of tax dodgers making use of a long-standing favourable tax treaty for “round tripping” their investment cash – in other words, Indian money that was moved to Mauritius on the quiet, where it was invested in a company that then “invested” it back into India as FDI, thus benefitting from a favourable tax treatment in Mauritius on the income from the Indian venture.
So in response to changing international attitudes to tax planning and avoidance, India and Mauritius have agreed to major tax treaty changes, which this year are expected to begin to stem this flow somewhat.
“Key of the Indian Ocean”
* GDP increased 3.7% in 2015
* GDP PPP per capita, 2015:
* Financial services growth, 2013 – 2015: 5% pa
* Tourism industry counted 1.2m arrivals in 2015
* 49th in the world for ease of doing business; 1st in Africa (World Bank)
* 1st in Africa for peace (Global Peace Index, 2014)
* 1st in Africa for economic transformation (African Center for Economic Transformation)
* 1st in Africa for governance (Mo Ibrahim Index 2013)
* Committed to participate in the OECD’s Common Reporting Standard by 2018
Sub-Saharan Africa FDI
Against this backdrop, Mauritius is now seeking to develop its role as a cross-border financial services hub, a key element of which would see it become a major source of FDI for the various emerging sub-Saharan nations that lie across the Indian Ocean from it, on the far side of its larger neighbouring island, Madagascar.
Such FDI is considered critical for these countries to reach their full economic potential.
MCB Capital Markets, for example, a Port Louis, Mauritius-based investment holding company that’s part of one of Mauritius’s largest financial services companies, the Mauritius Stock Exchange-listed MCB Group, has identified what it calls an “unparalleled untapped” range of natural resources in the sub-Saharan region, which it notes exist in many cases alongside relative political stability and a huge potential to expand infrastructure.
Such a combination of potential, it says, could result in a 3.8% annual growth in business and consumer spending over the next nine years, alongside of a doubling in manufacturing output, fuelled largely (75%) by domestic demand.
If, as many offshore finance experts contend, onshore economies actually benefit from having a tax-efficient offshore financial centre nearby, Mauritius is ideally placed to fulfil that role for a number of African countries, in the way that Hong Kong has done for years for China, Singapore for India and elsewhere in Southeast Asia, and Uruguay has for South America.
“Africa is the name of the game now,” Mauritius’s foreign minister, Vishnu Lutchmeenaraidoo, was quoted as saying recently.
The question, though, some observers are asking, is whether the global backlash against tax avoidance could pose a problem for Mauritius, and other centres like it, that have found their niche as a staging post for foreign direct investment in developing countries.
For now, though, an increasing number of Asian institutions, including the Bank of China, which obtained a Mauritius licence last March, are positioning themselves in Mauritius, in what observers say is a clear indication of their intention of using Mauritius as a lauchpad for its operations on the African continent.
And Mauritius, conscious of the global concerns about tax evasion and avoidance, has moved to ensure that companies looking to do business through it will also have to do more than they did before in terms of proving that they are genuinely based there, and meet global standards for such things as anti-money laundering.
It has even signed up to participate in the OECD’s Common Reporting Standard, which includes a commitment to automatically exchange information about banking details, by 2018.
Location location location…
(and tax benefits and DTAs)
Throughout its history, location has, as mentioned, been crucial in Mauritius’s development into one of the region’s most prosperous economies, along with a benign tax environment.
But its proponents insist that there’s more to it than just a geographically convenient location, if one is regularly commuting between Hong Kong or Singapore and Johannesburg, for example, and low taxes.
They point to the fact that Mauritius currently has double taxation agreements (DTAs) with some 37 different African countries alone, as well as 38 bilateral investment protection treaties.
In addition, they note, the island state, which next year celebrates 50 years of independence from Britain, has many of the same features that such well-established international offshore financial centres (IOFCs) as the Cayman Islands, British Virgin Islands, Bermuda and the Crown Dependencies have successfully used to create safe havens for foreign investors in a complex and often unsettled world.
These includes a British-based legal system – although Mauritius is more multi-cultural than some former British colonies, retaining, for example, a strong French influence that reflects its pre-British colonial days as a French colony – as well a relatively high degree of political stability, by modern standards, and respect for the rule of law.
It also has a head start on some of its rivals in that it currently enjoys a well-diversified economy which includes everything from sugar cane production – once its dominant industry, and still its major agricultural product by far – and tourism to clothing manufacturing, film production, fish processing and even medical tourism.
Services account for roughly 74% of its GDP, but financial services, for now at least, accounts for only around 6% of total workforce employment, according to CIA World Factbook data. That said, though, the financial sector accounts for more than US$630bn of assets held on the island, around 50 times GDP, according to the IMF – a whopping figure.
‘Global Business Category’ Licence
A key source of Mauritius’s economic dynamism, those familiar with it say, is something called its “Global Business Category” licensing structure, which involves companies obtaining a licence from the island’s Financial Services Commission in exchange for being able to meet certain requirements, such as being able to show that the company, and at least a certain number of its executives, are based in Mauritius, and that it holds or expects to hold within a certain time period a certain minimum in total assets on the island.
It is this structure that lies at the heart of its financial services sector, and it also said to have helped it to weather the recent global financial crisis, as well as to win praise from the International Monetary Fund recently.
In the wake of one of its routine reviews of the jurisdiction, the IMF commented on how it had managed to maintain financial stability “even under challenging circumstances”, helped by its “careful macroeconomic response…[to] the global financial crisis.”
Five-year tax holiday
Mindful of the need to keep innovating, though, particularly now, Mauritius’s finance minister Pravind Jugnauth – who has been tipped as a likely candidate to succeed his octogenarian father as prime minister – recently announced a package of generous incentives aimed at boost the financial services sector. These included a five-year tax holiday for asset and fund management licensees that manage assets of at least US$100m.
The five-year tax holiday will also be extended to ultra-high-net worth individuals investing at least US$25m in the country, as well as to “overseas family corporations”, as part of a new family office drive.
In a recent interview with the Financial Times, Jugnauth explained how these and other the measures he’s introducing are aimed at “ushering in a new era of development for Mauritius, by fostering a new economic cycle”, and then admitted that he was inspired in part by Singapore, the creation of that city-state’s late prime minister, Lee Kuan Yew.
“They have made a lot of progress,” he was quoted as saying. “We can learn from them.”
Room for growth: funds
One area that a number of financial services executives currently doing business in Mauritius believe is ripe for rapid growth is the fund and asset management sector.
Among them is Graham Sheward, managing director of fund administrator and corporate services providers CIM Global Business, a Mauritius-based fund administrator and corporate services provider.
Major banks and auditors already have a considerable presence on the island, he says, “but if Mauritius wants to compete with more sophisticated markets like Singapore or Hong Kong, it will need to encourage the development of home-grown fund managers”.
Such thinking may have been partly behind the acquisition, announced last year, of a Mauritius-based provider of outsourced corporate, fund and private client reporting and fiduciary services firm – International Financial Services Ltd, or IFS – by the Sanne Group, an LSE-listed, Jersey-based company in the same business sector.
IFS currently administers assets totalling more than US$82bn for more than 1,000 global entities, particularly those investing into India and Africa, according to a statement announcing that deal.
Meanwhile, a survey of southern Africa-based independent financial advisers, carried out last year by the Mauritius-regulated international life company, Providence Life, found these advisers genuinely predisposed to work with Mauritius-based providers of funds and investment products, were such products to be offered to them.
Some 65% of the more than 200 IFAs surveyed said they would either definitely be willing to recommend a Mauritius-based provider to their clients or neutral to the idea – in other words, open to consider it, depending on the specific opportunity they were given.
Around 13% of those surveyed said they already saw Mauritius as a trust domicile, with an additional 49% viewing it as a second choice for trusts.