Trouble in Paradise? Mauritius/India Double Tax Arrangements under Threat

In the last decade or so, Mauritius has gone from being an Island known predominantly for its tourism, to one which has established a thriving finance industry business which has attracted to its shores many thousands of companies, including global banks. 

The banks and trust companies which have set up shop in the Island have been attracted partly by the availability of a well educated but relatively inexpensive work force, but also by its long-standing double tax treaty with India.  Indeed, according to official figures released by Delhi’s Ministry of Commerce, a whopping 42% of India’s foreign direct investment from 2000 to 2011 came from Mauritius. 

However, as many offshore territories have found to their cost in the past, enormous success in attracting business often causes an unwelcome spotlight to shine on the territory, and it seems that this is now a real threat for Mauritius.  India, which has been taking a number of well publicised measures to try to prevent tax leakage as its economy slows, is currently reviewing the DTA between the two territories, and it is widely expected to propose changes that will hamper the Island’s attractiveness as an offshore location for Indian clients or Indian investment.  Mauritius is reportedly trying to step up its business links with African countries with which it has DTAs in place in a bid to replace work that it anticipates losing from India.

Threats to the Mauritian finance industry are perhaps less of a fundamental threat than in some of the other offshore Islands.  The industry accounts for only about 5% of GDP, whereas in some of its competitor jurisdictions  the percentage is more than 10 times that level.  Nevertheless, it will be a worry for the Island’s government at a time when the tourism industry is being hit by global financial problems. 

Proposal made for UK to introduce FATCA-equivalent legislation

Whilst many in the finance industry are bemoaning the administrative burden that FATCA will bring in its wake, it seems that some UK politicians are keen to follow in the footsteps of the US and impose a similar requirement for the automatic disclosure of information on UK citizens by foreign institutions and tax authorities.   

The International Development Committee, a cross-party committee of British politicians, has recommended that the UK government should take the steps in order to stem global cross-border tax evasion.

Under Europe’s Savings Directive, if an EU resident holds an account in another member state, the home tax authorities must be notified.  The IDC has now suggested that if the UK went further and required tax authorities everywhere automatically to exchange information related to British citizens or corporations with overseas interests, it would establish a standard of transparency and reduce tax evasion.

The IDC has also recommended the UK government should use its influence "to persuade other governments to follow suit". 

From a political perspective, it would be surprising if the UK government agreed to the proposals unless a significant number of other key financial centres do so at the same time, because it has always been wary of anything that may harm its own lucrative financial services sector.  Furthermore, the proposals come at a time when a number of major financial institutions have withdrawn services to US persons in order to avoid the administrative burden of complying with FATCA, and some experts are questioning whether the cost of compliance will exceed any additional tax revenue generated in the US.  Nevertheless, the report will be an unwelcome development for the UK’s already beleaguered banking industry.

JTC snaps up Latin American team from TMF

When CBPE, the private equity house, announced its investment in JTC earlier this year, Nigel Le Quesne, JTC’s CEO, made it clear that the plan was to put the cash to use in expanding the JTC group internationally.  It seems that they are not wasting any time in achieving that aim. 

JTC have recently snapped up a team of Latin American trust, corporate and fund experts from larger rivals TMF.  The team will focus on business development in Brazil and Argentina, and will aim to feed work to JTC’s existing offices in Jersey, Guernsey, Luxembourg, Switzerland, the British Virgin Islands and the United Kingdom.

The team is headed up by two Argentine corporate lawyers, Emilio Miguel and Pablo Tedin, who are joined by fellow Argentines Elisa Lambre, Belen Suarez and Nicolas Recondo, as well as a Brazilian team, which comprises Luciana Fernandez, Gabriela Wimber and Marisa Carvalho.  The experienced team should leave JTC in a strong position to tap what one of the fast growing markets at a time when many are experiencing sluggish growth in the more mature traditional markets.

McKeeva Bush forced to scrap payroll tax proposals

Cayman Premier McKeeva Bush shocked the financial community recently when he announced an unexpected proposal to introduce what was effectively a payroll tax for expat staff.  Following an outcry about the damage this could cause to the Islands’ economy, he has now been forced to back-track and has scrapped the proposal.  Instead he now proposes a plan to make up the budget shortfall with a combination of increased work permit fees and a number of other revenue raising measures including stamp duty on certain insurance policies, an increase in the annual registration fee payable for exempted limited partnerships and changes to master hedge fund registration fees.

Under the new proposals, work permit fees will rise between 5% and 35% (with the largest rises coming for permit fees from $15,000 to $24,000).  They still therefore represent a considerable extra cost for businesses employing expats, but without the severely negative connotations of the previously proposed payroll tax, which would have represented a huge departure for Cayman from its dedication to the principle of no income related taxes.

Mr. Bush said “In aggregate, the proposed alternative revenue measures proposed by the private sector group are expected to generate $44.3 million in 10 months and $53 million in the full year.”

The Cayman Islands government has been battling a difficult financial situation under pressure from the United Kingdom Foreign and Commonwealth Office to get its financial affairs in order and operate a surplus.  The Island was forced to implement a two-month temporary spending plan in July to keep the public sector operating in the short term, but Bush is confident that the new budgetary proposals will do what is necessary to generate a surplus of some $70 million. 

The financial community, which employs a significant proportion of the Islands’ expat workers, will no doubt be relieved at the change of heart, but there are fears that the simple fact that McKeeva Bush had proposed it will have spooked some businesses.  It is perhaps surprising that a politician of his experience would make what seems to have been a serious error of judgment.

EU targeting non-EU financial centres?

There is an old saying that if you are not seated at the table, you’re on the menu for lunch.  One of the problems that some of the smaller international finance centres have struggled with for many years is that for the most part they do not sit on the big powerful decision-making bodies such as OECD and the G20 which take the key decisions regarding international initiatives impacting the finance industry.  The upshot is often that those around the table at those decision-making fora pass resolutions which suit themselves, and often seem to unfairly target those jurisdictions which are unrepresented.  How else can you explain the fact that Delaware, for example, does not seem to be a target of all of the anti-tax-avoidance initiatives we have seen recently, when it is in essence one of the biggest tax havens in the world?

Another example of this now seems to be under way.  The taxation and customs department of the EU civil service (TAXUD) is currently working on a strategy on tax havens and unfair tax competition, which it hopes to release by the end of this year. The report is looking at issues arising from both double taxation and double non-taxation, and is likely to propose both the introduction of automatic information exchange at EU level and concrete measures which can be taken against non-cooperative tax jurisdictions and aggressive tax planning.

As an EU initiative, of course, many of the international finance centres (such as the Cayman Islands, Jersey and Switzerland) are not participating in the discussion, whereas countries such as Netherlands, Luxembourg and Ireland are very much involved as EU member states.   Whilst these latter 3 countries try very hard to avoid the tax haven label, it is inescapable that the large part of their financial business derives not from domestic companies, but from corporations using those locations as a place of convenience specifically for their tax advantages.  By my definition, this means they are in effect tax havens, despite the fact that they find the label distasteful.  The consequence of them being involved in the strategy decisions is that the TAXUD Communication focuses on non-EU countries and territories, and largely ignores those within its own boundaries.  If, as appears likely, the final report proposes measures which apply to centres outside of the EU but not to those within it, then the likely outcome is a relocation of financial flows from international to European tax havens.

It is likely ever to remain thus within the EU, so long as the rule remains that all tax decisions to be taken at European level require the unanimous support of the members.  There is little point in TAXUD proposing measures which target Luxembourg, Netherlands and Ireland’s finance industries, as they would simply veto the proposals.  The result is unfortunate.  The EU makes much noise and posturing about the morality of tax avoidance, but at the same time is both unable and unwilling to start by putting its own house in order.