Monday, June 15, 2009

Reshaping the Mauritian global business sector

K.C Li Kwong Wing

The year 2008 has been a fairly good year for global business, with new company set-ups reaching record level for GBL1 treaty-using companies and funds, surpassing for the first time the number of GBL2 companies created during the year. Until the collapse of the investment banking business in the United States in October last, leading to the credit crunch and the massive redemption of global equity funds, global business was enjoying another bull year on the back of an all-time high in India inbound and outbound investments coupled with a commodities boom in Africa, generating financial transactions of increasing volume and sophistication for our jurisdiction.

The acquisition of the Financial Services Commission of its brand-new ample Office Tower at the Cybercity in Ebene and the relocation of the major global banks and management companies into various owner-occupied and custom-designed houses in the Ebene business park are hallmarks of a vibrant bullish sector looking to expand and ascend new heights in the brave new world of services-exports.

However, challenges still abound for the sector and are rendered even more daunting by the global financial crisis which is currently wreaking havoc in our traditional and emerging markets and clogging the global economic machinery in deep recession, turning soon into deflation. What lies in store of the sector in this year 2009?

Product concentration conducive to rent-seeking

The weaknesses of the sector have in fact worsened with the rising economic might of India and China and the emergence of Africa as the last frontier for lucrative business developments. The huge business potential that remains to be tapped with regard to India and the unique advantages that Mauritius enjoys as an offshore tax-efficient centre for investments into Africa have increased the concentration of global business in a narrow range of products and services based mostly on the Non Double Taxation Agreement (DTA) with India.

While there is nothing wrong in optimising our use of that Treaty, it has called for such an attention to ensure its perennial nature as to neglect and under-rate other potentially beneficial products and services for development. It is even argued that there has been serious loss of business to other jurisdictions, especially in the case of private wealth management, as shown for example by the fall in new GBL2 companies in this year. This is likely due to our lack of competitiveness in terms of product licensing, regulations, fees and other service offerings.

While product concentration is unhealthy and unsustainable, conducive to rent-seeking from a Sugar Protocol-like mentality of dependence on the India DTA, the biggest challenge is to make that strategic shift from low-value, passive back-office administration of entities structured, designed and planned elsewhere to more knowledge-based, value-added and proactive treaty and wealth planning and management.

A Report by the Commonwealth Secretariat following a Symposium on Exports of Financial Services from Mauritius in January 2008 made the following apposite observations: “Mauritius needs to develop private banking, wealth management and asset management capabilities as a matter of urgency... Whilst banks are an important part of the industry, they still only provide basic services and support, and generally lack an understanding of the true nature and needs of the industry. PBWM and AM need a policy-cum-implementation push jointly from: (a) government–taking policy measures to facilitate the rapid emergence of specialised firms, private banks and asset managers; and (b) from private foreign and domestic participants in the financial services industry to upgrade and transform their presently limited capabilities for International Financial Services. It requires a concerted industry effort to realise the potential that exists.”

The Report also identified other areas offering potentials for development, such as Transfer Pricing and Global Tax Management to a larger universe of TNCs and MNCs, Risk Management and Complex Financial Engineering relating to M&As and PPPs (public-private-partnerships), especially for financing infrastructure in Africa.

Shortage of qualified manpower

Another weakness from which the industry has been suffering over the years is the shortage of qualified and trained manpower, which has severely limited the scope for expansion and upgrading of services. Though Mauritius claims to have 99% literacy and a large pool of graduates and professionals, it has always lacked the skills set and know-how to meet the world-class needs of the global business industry.

There has not been a concerted public-private effort to provide structured academic and skills training to newcomers and practising professionals in the industry. This has led to sporadic, ad-hoc short-course theoretical and practical training by a variety of providers, so that the inevitable outcome has been desperate salary hikes and wide-scale poaching by larger and multinational firms from domestic smaller ones which have been painstakingly building up their team.

The longer term effect of this malpractice is deleterious to the industry as it raises unreasonable expectations and perceptions of the financial services sector, which has now come to grief worldwide, with more scandals and excesses to unfold. The challenge for Mauritius is to devote more financial and human resources to develop training facilities at all levels and in practical terms to meet the increasing needs of the sector for multi-disciplinary and multi-lingual professional skills and knowledge. Otherwise, the image will linger of a glorified back-office sector speckled with flashy over-sized office towers harbouring a coterie of over-paid clerical elite, aided and abetted by the global professional firms to hoot.

We are already labouring under poor physical and electronic connectivity with the rest of the world, with telecommunications and air-connection costs still far too high by international standards, or at least compared to other established jurisdictions like Jersey and Singapore. The traffic congestion to reach central business district, the slack-days required to get flight connections to Asian and African capitals, the infrastructure and bureaucratic bottlenecks and other market failures are all overwhelming signs of a Third World island struggling to play in the uneven field of First World operators.

These are challenges that need to be embraced without any more delay for creating the right environment to attract the niche and chosen markets for making more substantive, higher value and optimum use of our competitive advantages. This will hopefully dispel for good the trite image of Mauritius as a laid-back destination for high-end tourism and not for 24/7 financial services, which we are finding difficulty to stave off in our roadshows.

The need to make Mauritius tax and regulatory regime more attractive

The year 2009 will be the year of great dangers but tremendous opportunities for our sector owing to the “economic hell” banged up by the global credit crisis and its systemic implosions relentlessly sparked off by financial scandals unfurling one after another, with Madoff scam rivalling Satyam fraud. On the one hand, IPOs, M&As, FDIs and portfolio investments in our traditional markets are dwindling, while the global scene is set for more State control, more government equity participation and more regulation, which all hamper private initiatives for crossborder investments. On the other hand, this presents a rare opportunity for Mauritius to be ahead of the curve by taking innovative steps to make its domestic tax and regulatory regime more attractive, while remaining compliant with the recommendations of the Organisation for Economic Cooperation and Development (OECD) on transparency and exchange of information.

A comparative study is being planned to assess the global competitiveness of Mauritius so as to decide upon the adoption of a partial or full territorial tax system within a tax treaty network, or a participation exemption system for foreign dividends and foreign-source interest and royalties, or a regulatory framework for transfer pricing management. In the same breath, the opportunity should be seized to upgrade Mauritius to the status of a full-fledged established financial centre by amending existing regulations and introducing new legislation for promoting E-business and developing new products, like limited partnerships, shariah-compliant trusts, tax-exempt (non-Treaty driven) funds, headquarters and principal companies, foundations (for Civil-Code based clients) and other ISDA-related products & services. The Association of Trust and Management Companies (ATMC) has set up a Working Committee that is contributing valuable suggestions to Government on making this qualitative jurisdiction shift.

There are looming risks of the United States and European Union financial centres to look for scapegoats in their current quagmire and start branding smaller jurisdictions like Mauritius as tax-haven or secretive offshore centres for allowing tax fraud and eroding their tax base. Following the OECD Conference on the fight against international tax evasion in October 2008, Mauritius was not named as tax haven, but was cited an example of a jurisdiction which has accepted official commitments in 2000 but failed to carry them out. This is being strongly disputed by the Mauritian government, as there is adequate regulation and enforcement of control by an independent regulator under our Financial Services Act.

The ATMC unreservedly supports the stand of our government on affirming the integrity of our jurisdiction as no evidence has ever been proved to find Mauritius at fault in any form of tax evasion or money laundering. However, this unblemished track record does not deter us from entering into any Convention or implementing any requirements to meet the OECD standards on transparency and exchange of information.

The ATMC is of the view that it is in our broad interest to sign Tax Information Exchange Agreements with the US and other EU states and, by the same token, develop as many Non Double Taxation Agreements with them. Mauritius must aim at being a treaty-planning base in the region and expanding its treaty network to cover all Africa and Asia. This will give our jurisdiction the breadth and substance to serve the region with tax effectiveness in full transparency.

In this context, the ATMC is revamping its Code of Conduct to further professionalise the industry and ensure integrity within the profession. In the same spirit, it has also formalized a collaboration with the University of Mauritius and the Human Resources Development Council to launch training courses in Global Financial Services for staff in the industry.

The current turbulence in the global financial world may be a godsend for fundamental and innovative rethinking and reshaping of our global business sector.

K.C Li Kwong Wing is the president of the Association of Trust & Management Companies (ATMC)

Copyright © Mauritius Times.