Have we entered the era of the “Offshore Shell Games 2016[i]”? Make no mistake, we are not going off-track and this is not a new perplexity proposed by offshore jurisdictions. Rather, it is the name of a report that is published on an annual basis authored by three non-governmental organizations namely Citizens for Tax Justice, the US Institute for Taxation and Economic Policy, and the US Public Interest Research Group Education Fund.
The report examines a global phenomenon that affects all the developed countries housing the largest multinational companies in the world. It discusses the excessive and abusive use of tax havens by some 367 companies of the Fortune 500 to park some USD 2.5 trillion through at least 10,366 offshore subsidiaries. Among these companies, are some household names which require no introduction; for example Apple, Google, Nike, Coca-Cola, Goldman Sachs, among others, engaging in tax treaty shopping which, in turn, giving way to the facilitation of practices like tax avoidance.
To address the ubiquitous issue of tax avoidance versus tax evasion, the Organisation for the Economic Cooperation and Development (OECD) has come forward with the Base Erosion and Profit Shifting (BEPS) project. After implementing Action 13[ii] (Country-by-Country Reporting through the Common Reporting Standards) of the BEPS project, the OECD is now in the process of introducing Action 15[iii] of the BEPS project, the Multilateral Instrument (MLI).
Action 15 collectively addresses Action 2[iv] on hybrid mismatch arrangements, Action 6[v] on treaty abuse, Action 7[vi] on the artificial avoidance of the Permanent Establishment status; as well as Action 14[vii] on dispute resolution.
It is in this context that the 7th of June 2017 marked a historic day in the international taxation landscape whereby representatives of 70 countries gathered in Paris for the ceremony of the signing of the multilateral instrument that will regulate the system of transferring profits and taxing the profits of multinationals.
Known for being an early adopter of international initiatives, Mauritius however did not participate in the signing ceremony though the jurisdiction has pledged to do so on 30 June 2017. Subsequently, following the signing of OECD Multilateral Instrument, this convention will have to be ratified by the Mauritian parliaments so that it has a force of law.
MLI, The Rule Changer
The Multilateral Agreement or the Multilateral Convention for the implementation of tax treaty measures is designed to prevent the erosion of the tax base and the artificial transfer of profits. This project is part of the ongoing OECD to initiatives to counter tax evasion, tax avoidance and related practices. The MLI offers concrete solutions to governments to address existing deficiencies in the various international tax regulations. It ultimately aims to align all treaties of non-double taxation with a minimum standard and to modify the implementation of several thousand bilateral tax treaties, including double taxation treaties. As such, a breathtaking 3500 bilateral tax treaties between countries will need to be modified and upgraded.
The introduction of the MLI brings with it some technical details which are far from established and whose effects are uncertain. The OECD proposes three methods of membership, namely
1) the adoption of a Principal Purpose Test (PPT),
2) a simplified limitation of benefits clause, and
3) a detailed limitation of benefit clause.
It is to be noted that companies having opted to be located in Mauritius only for the purpose of benefitting from tax advantages, and not having any economic substance will not pass the PPT. Each of the methods of membership which were highlighted above can be expected to have a different impact on the global business sector, depending on the path chosen by the government.
An interesting side observation is regarding the great absentee at this signing ceremony. The United States of America has not signed the convention on the 7th of June 2017 and has not even undertaken to sign the same. Ironically, the United States of America is among the developed countries which are the most heavily impacted when it comes to the tax base erosion and the profit shifting of its multinationals. Despite pioneering such commendable initiatives as the infamous Foreign Account Tax Compliance Act (FATCA) the U.S. State of Delaware, in a brazen demonstration of dual standard displays the very characteristics of a tax haven, which current OECD initiatives are seeking to stomp out.
Challenges For The Jurisdiction
It is not a secret that the MLI’s ripple effects will bring profound changes to Mauritius as an international financial centre and we will have serious consequences to contend with as a result. Our financial services sector, more specifically the Global Business segment, will no longer be operating as ‘business as usual’, but will instead by propelled into actively reinventing itself.
By bringing reforms, this will not only consolidate the Global Business sector and put Mauritius on the world map of International Financial Centre of substance, but also to safeguard employment and its status as being the preferred IFC towards investment into Africa.
Mauritius as an international financial centre has been proactive enough address the issue of substance. For instance, as budgetary measures for the financial services sector, Global Business companies are now required to satisfy two of the six measures which were brought forward by the Financial Services Commission. This means that the players evolving in the financial services sector will have to invite the multinationals already present in Mauritius to relocate a greater part of their activities in Mauritius.
Furthermore, being at the crossroads of such an important international change, it is high time for Mauritius to refine its business model by insisting on more economic substance. This should allow the Global Business sector to contribute more to the Mauritian economy, not only in terms of fiscal revenue, but also terms of job creation, amongst others.
Speaking of overhauling the business model, the uniform 15% corporate tax presented a highly appealing system not only because of its simplicity but also due to its competitive nature. However, bearing in mind the current tax regime, and the concept of Deemed Foreign Tax Credit (DFTC), Mauritius faces enormous international pressure from the EU and the OECD, among others.
Whether we like it or not, our tax system is being called upon to change, and sooner rather later. The 80% DFTC, applicable to foreign income and granted only to GBC1, has a very limited life expectancy today, and it gives way to the concept of ring fencing. A probable solution remains in the standardization of the effective tax rate for both onshore and offshore companies, hence abolishing the preferential 80% DFTC and putting all the companies on the same level playing field.
That being said, the jurisdiction is also required to diversify and improve its existing products and services to ensure the sustainability of the sector. As such, multinationals will look forward to investing in a sophisticated jurisdiction which offers them access to several markets with financial products bearing high added value. Fund management seems to offer a deeply needed form of resilience to face this wind of change.
To be the international financial centre of excellence, the government will need to step up. Not only with regards to devising a more adapted and competitive tax framework which succeeds the BEPS balancing act, but also to look to the other facets of our economy which promote the ease of doing business.
On a concluding point, it is worth mentioning that the financial services sector contributes to some 12% in the gross domestic product of Mauritius. Moreover, only for the fees related to the licensees of the FSC, the latter, in a communiqué dated 25 May 2017 declared public revenue of MUR 1,395 million. Therefore, whatever be the stance of the government of Mauritius, the stakes are high and it would be desirable that the government acts as quickly as possible to avoid the placing the jurisdiction in jeopardy. The time is upon us to come forward with a long term strategy, if not the blueprint, to sustain the financial services sector which absorbs approximately some 20,000 direct and indirect jobs.