Located in the vast stretch of ocean between Africa and India, the tiny island nation of Mauritius has made a name for itself as a financial centre and an important channel for foreign investment. According to the Indian Ministry of Commerce, Mauritius was responsible for 42 percent of foreign direct investment worth some $55bn into India between 2000 and 2011, despite only having a population of 1.3 million people. The country is increasingly funnelling investment into Africa from Europe through public-private funds operating within its borders.
Mauritius’ success as a channel for foreign investment stems from its attractive tax rates and a series of Double Tax Avoidance Agreements (DTAAs); currently, it has a low corporate tax rate of 15 percent and a capital gains tax rate of zero. With the signing of a new agreement with Nigeria in 2012, the country also has 36 DTAAs. Crucially, this includes agreements with India and 13 African nations. Businesses can set up shop fairly quickly in Mauritius with the government claiming registration only takes two to three days.
Investing in India
Financial service firms investing in the Indian stock market have been major beneficiaries of this system as it has allowed them to escape paying capital gains tax. By contrast, setting up in India would result in a tax of 15 percent on short-term investments in the stock market. This has led to allegations of ‘round tripping’, where an Indian company sends money through Mauritius back to India in the form of foreign investment for the purpose of tax avoidance.
In response, the Indian government announced plans to introduce anti-avoidance rules into its tax code. But the plans drew the ire of investors and were first delayed until April 2014 before being pushed back further to 2016. Various exemptions allowing many companies to avoid them altogether were also added.
Mauritius actively denies being a tax haven for foreign companies, citing its adherence to international standards set by organisations such as the OECD, the Basel Committee on Banking Supervision, the International Association of Insurance Supervisors and the Internal Organisation of Securities Commissions. The country also asserts that it maintains stringent requirements for Global Business Companies (GBCs), not required in other jurisdictions, in order to prevent so-called ‘mailbox companies’.
GBCs must be set up and administered by licensed management companies, and have resident directors in Mauritius. Board meetings must also be held in the country and all
banking transactions should be routed through it. The government argues that other countries with which India has agreements also offer similar provisions for capital gains tax, but Mauritius has become the investment platform of choice because of the quality of its service, its pool of professionals, its regulatory framework, geographical proximity, and long-running cultural and historical ties.
Nonetheless, Mauritius has agreed to negotiate on changes to the DTAA with India, setting up a joint working group in 2006. The talks have so far failed to come to a solution, with India insisting on linking amendments to the DTAA with a wider trade liberalisation agreement, while Mauritius believes in separating the two issues.
With the future of Mauritius-based investment into India looking increasingly uncertain, the country has begun to diversify, becoming an increasingly important platform for foreign companies eager to tap into the African market. The government touts the same line when luring companies to base their African operations in Mauritius: business-friendly legislation, close cultural ties, a robust banking system, a highly qualified and bilingual talent pool, as well as the all-important DTAAs. As an added bonus, Mauritius belongs to every major African regional organisation.
Mauritius-based investment in Africa has not been without controversy however. A report by London charity War on Want entitled ‘The Hunger Games’ has claimed that much of the UK’s foreign aid budget for Africa passes through public-private funds based in Mauritius, depriving other African nations of important tax revenue.
UK foreign aid is managed by the Department for International Development (DfID), which has sponsored a network of offshore investment funds and trusts based in Mauritius for aid spending on infrastructure and agribusiness projects on the African continent. The DfID has spent £102.5m on its Mauritius registered Emerging Africa Infrastructure Fund (EAIF) to attract private investors looking for investment opportunities in African agribusiness, water, energy and transport projects. The EAIF itself is managed by Mauritius incorporated Frontier Markets Fund Managers Ltd, despite both the fund and the management company being run by staff from London.
The UK government has defended its choice of Mauritius as a base for foreign investment into Africa with a DfID spokesman telling The Guardian that tax was “not a primary driver in considering the location for funds” because any profits made would be reinvested in development once taxes were paid. “By 2015, our hunger and nutrition programmes will help more than six million of the world’s poorest people escape extreme poverty and stop 20 million children going hungry,” he added.
Overall, Mauritius’ strategy of low taxes and DTAAs appears to be paying dividends to the national economy. By 2011, financial services constituted 15 percent of its GDP and employed 15,000 people. Global business accounted for five percent of the total amount. The country also managed to successfully navigate the financial crisis, with GDP growth averaging about four percentage points.
Mauritius’ status as a foreign investment channel marks the latest way the country has reinvented itself, having previously focused on sugar, textiles and tourism in succession to drive its economy. Disagreements with India may persist, but with Africa opening up to overseas ventures, Mauritius’ position as a base for foreign investment is likely to continue.