The GAAR
guidelines have clarified a number of pending objectionable issues. An
Impermissible Avoidance Arrangement is defined to involve (a) a tax benefit as
a main purpose, and (b) one of four elements: no arms length transactions, tax
misuse or abuse, lack of commercial substance, no bona fide purpose. Substance over form is of fundamental
importance, and a company with commercial substance is described as one that
has "a Board of Directors that meets
in the country and carries out business with adequate manpower, capital and
infrastructure of its own". Also, illustratively, "a company shall not be deemed to be a
shell/conduit company if its total annual expenditures is at least INRs 10
million in the immediately preceding period of 24 months", under a tax
treaty clause.
The GAAR
guidelines have received a mixed reaction from the markets in India. Some
operators have responded favourably to the proposal for a tax benefit
threshold, yet to be quantified, for exempting smaller transactions from GAAR,
and also to the option of safe harbour for Foreign Institutional Investors
(FIIs) to be exempted from GAAR, provided they relinquish treaty benefits and
pay Indian tax. Others are totally
distrustful of the Indian taxman, and are insisting on a further, or even
indefinite, deferral of the effectiveness of GAAR provisions, which are already
part of the finance legislation, beyond 2013.
The Indian
economic team has expressed its willingness to entertain further suggestions to
improve GAAR provisions. A high exemption threshold, the extension of the
conditional exemption for FIIs to private equity and other investors, all
subject to a token domestic tax rate, greater independence of the appellate
body, and more accompanying safeguards for investors, could be among the
acceptable fine-tuning proposals. As
matters stand, to expect a major roll-back on GAAR would be tantamount to
wishful thinking. Although the unknown unknowns may nevertheless hold sway, the
retrospective application of new tax provisions on indirect transfers, which
was passed along with GAAR provisions, is far more likely to be reviewed to
restore investor confidence.
The implications
of GAAR for the continued relevance of the India-Mauritius tax treaty call for
a strategic re-assessment of the global business sector, and of our official
stand on treaty review. The safe harbour
provision undermines the scope for new FIIs to use Mauritius to invest into India. Existing FIIs based in Mauritius may still
find some certainty and escape from GAAR by agreeing to pay tax in India, but
by making the treaty irrelevant. New FIIs can still invoke the treaty benefits,
and hopefully clear the GAAR test by demonstrating commercial substance. The safe harbour provision does seem to
obliterate our hopes for GAAR exemption under the treaty, and leaves Mauritius
with no option but to wish for a treaty revision that includes a commercial
substance requirement, better known as a limitation of benefits clause, as in
the Singapore amended treaty protocol.
It is a supreme irony that Mauritius should now be chasing what it has
steadfastly sought to avoid for many years.
Foreign investors and even Mauritian management companies are currently
tempted to gravitate to Singapore, because of the relative ease in
demonstrating substance there.
The stonewalling
tactic on treaty revisions in response to persistent Indian requests has
reached its inevitable conclusion, by driving India to put a final stop to the
untrammelled use of Mauritius as a solely tax-driven conduit for investments
into India. It is only another episode
in the catalogue of past actions taken by several other partner countries to
check misuse of their respective tax treaties by Mauritian offshore vehicles.
The U.K. amended its tax treaty more than once; China also made critical
amendments; South Africa applied blocking domestic measures; while Indonesia
terminated its treaty with Mauritius.
And, unless we tread carefully, our tax treaties with a number of
countries in Africa, the object of our future hopes, will not be spared from
similar action. Offshore business is fraught with heavy risk, and offshore
financial activities are continually subjected to international scrutiny.
India's patience
with the tax treaty has worn thin, and its frustration with Mauritian
reluctance to review the tax treaty was publicly vented in the Indian Parliament
last April. Mauritius has undeniably contributed to the tax efficiency of
global investments, and thus to attract more capital to India than would
otherwise be the case. But, over time,
India has come to place far greater weight on its tax sovereignty, as well as
the avoidance of risks of potential misuse, and has developed a growing
confidence that it can attract substantial capital flows directly from foreign
investors without recourse to the Mauritius route. But, all is far from lost,
and Mauritius can confidently aspire to a financial services centre of greater
substance, oriented to more value addition, than a mere adjunct of the global
tax avoidance industry. Some twenty years ago, Singapore embarked on developing
substantial investment activities, and implemented a clear and decisive
strategy to achieve this objective- for instance, by offering the right
incentives, including a USD 100 million individual investment mandate, to
attract foreign investment firms to set up business in Singapore. There is
already an increasing number of funds being established by Mauritian corporate
groups to invest into India, Africa and elsewhere, some in conjunction with
Indian investment managers. The
India-Mauritius route, which has traded spices, human labour, and now capital,
is certain to extend well into the foreseeable future.
Mauritius Tourism Promotion Authority (MTPA)- Greater
accountability required
Indeed,
a recent assessment of competitiveness of tourism destinations carried out by
the IMF shows that Mauritius is on par with major destinations in the Caribbean
(The Bahamas and Jamaica) but is slightly behind regional competitors –
Maldives and Seychelles.
Table I : Tourist arrivals: Percentage difference v/s
Mauritius
Courtesy: Mauritius:
2012 Article IV Consultation—Staff Report.
Table II : Mauritius
Tourism Promotion Authority (MTPA)
Service Standards
(Indicators)
|
2010 Actual
|
2011Targets
|
2012 Targets
|
|
S1: Campaigns in source,
niche and emerging markets
|
SS1: Marketing campaigns
to be carried out in
existing, emerging and new
markets
|
13
|
14
|
14
|
SS2: Number of fairs,
workshops, exhibitions &
roadshows conducted in
target countries (France,
UK, Germany, Italy, India,
Russia, China & South
Africa)
|
20
|
21
|
24
|
The Moody's Investors Service upgrade!!
Mauritius was upgraded one notch in the ratings on the
basis of its strengthened institutional framework, increased diversification of
the economy and the government's significant progress in reducing its debt
load. Moody also believe that Mauritius has made progress in diversifying its
economy, in part through foreign-direct investment from multiple sources and
is actively transitioning the economy
from a comparatively low-skilled exporter to that of a highly-skilled,
service-based economy.
However, a rudimentary examination of the economy reveals a
totally different picture. The structure of the economy has remained
more or less the same over the past five years with services sector representing
some 60-62 % of total GDP. The transition to a highly-skilled, service-based
economy is still in the making. Surprisingly on the issue of diversification of
the economy, the 2011 Article IV Report on Mauritius arrives at a totally
different conclusion. “Until the mid-2000s, Mauritius made progress on all
export fronts—value, diversification, and sophistication. The stagnation since
2004–05 points to important constraints faced by the traded goods sector. These
could probably be traced to bottlenecks in infrastructure
...”. As for the sources of foreign capital inflows, they have not changed
much ; over the past five years FDI from Europe as a % of the total FDI has averaged around 54 % , more or less the same as in
2007; FDI from Asia was on average 19 %
of the total, marginally higher than the
17% in 2007.
As to the economy’s resilience
to external shocks the World Bank’s Public
Sector Performance Development Policy Loan document is more realistic; it
posts a 3.7% growth for the economy in
2012 under its it baseline scenario which may fall to 1.7 % under the alternative scenario should the economic
shocks from the global economy materialize.
In the first quarter of 2012 the economy has begun to show signs of strain;
it is already feeling some of the slumping export demand.
Domestic exports increased nominally by just 1.4%
in the 1st quarter of 2012 relative to the same quarter in 2011 but
in real terms it showed a decrease of 5%. The overall index of industrial
production decreased by 14 % compared to the previous quarter and by 0.3 %
compared to the same quarter of 2011. Tourist arrivals for the first three months of
2012 decrease by 0.2% over the the first quarter of 2011. Tourist arrivals from
Europe decreased by 2.7% with a 2.7% fall in arrivals from France, the leading
market. More worrying is the Balance of Payments which has turned negative.
Balance of Payments : First Quarter 2011 &2012
(Rs million)
|
2011
1st Quarter
|
2012
1st Quarter
|
Current Account
|
-4,139
|
-4,260
|
Goods and Services
|
-6,910
|
-7,680
|
Capital And Financial Account
|
6,624
|
2,329
|
BOP
Balance
|
1,797
|
-1,614
|
There
is a misplaced optimism in the finance ministry which seems to be out of touch
with the opinion among private economists, investors and even the Central Bank
about the increasing risks to the economy; this is a good time as any to step
on the reforms and pro-growth pedals to restore confidence in the Mauritian economy
which has been losing its shine for quite some time now.
