The 13th Africa / Asia Conference of the International Fiscal Association was held in Mauritius on 9 and 10 May 2019. Mr Jimmy Wong, Chief Executive Officer of DTOS, was invited to a panel discussion to share his insights and perspectives about the effects of the BEPS Action 5 substance rules in Mauritius. Other members of the panel consisted of Ms Grace Perez-Navarro, Deputy Director of the OECD’s Centre for Tax Policy and Administration, Mr Mario Hannelas, Director of the Large Taxpayers Department at the Mauritius Revenue Authority, Mr Jeremy Cape, Tax and Public Policy Partner at the London office of Squire Patton Boggs, and Ms Rita Da Cunha, Policy Researcher and Advisor at the Policy Institute, King’s College London.
Enhanced substance requirements
Many countries have traditionally held that tax incentives are necessary to spur foreign investments. However, given that many taxpayers are able to easily relocate several of their geographically mobile economic activities (such as headquarters, financing and leasing, insurance, distribution and service centres, holding companies, shipping, and fund management), and the holding of intangibles, it has been claimed that preferential tax regimes may sometimes lead to harmful tax competition if there is no requirement that the activities be substantial and if no or low effective tax rates are charged on those geographically mobile income. The BEPS Action Plan 5 has now elevated the substantial activities requirement for preferential tax regimes. A preferential regime that imposes no or low effective tax rates on income from mobile activities without any requirement for the activities to be substantial would be considered to be potentially harmful.
Mauritius has never been very competitive with regard to the licensing and incorporation of companies without any substance. Rather, Mauritius was more concerned with the potential economic multiplier effects generated by the global business sector. Over the years, Mauritius introduced more stringent substance requirements for the issuance of Tax Residence Certificates.
In response to the BEPS Action Plan 5, Mauritius has implemented several initiatives to further deepen substance requirements. The ability to obtain the appropriate licence and preferential tax benefits, including income tax exemptions and benefits under the Partial Exemption regime, is now conditional on complying with enhanced substance requirements. GBCs are required to have their core income generating activities in Mauritius, and GBCs holding IP rights have to demonstrate that they had previously incurred expenditure in Mauritius proportionate to the R&D of the relevant IP rights.
Migration of companies from no/only nominal tax jurisdictions
Recognising the risks that no or only nominal tax jurisdictions (such as the BVI) may continue to attract geographically mobile income without substantial local activities, and in an effort to level the playing field between those jurisdictions and those with preferential tax regimes, the Inclusive Framework on BEPS announced in November 2018 a new global standard resuming the application of substantial activities requirement for those no tax or nominal tax jurisdictions in respect of the relevant categories of mobile business activities.
Mr Wong pointed out that Mauritius, with its relatively diversified economy, is seen as more legitimate for business purposes. Given that it is not commercially feasible to meet economic substance requirements in many no and only nominal tax jurisdictions, the resumption of the substantial activities factor for those jurisdictions strengthens Mauritius’s competitiveness as a destination of choice for investment. Several entities presently operating in no and only nominal tax jurisdictions may consider transferring their operations to Mauritius where the substance requirements may be met more easily.
Mauritius retains several significant advantages
Mr Wong gave an overview of the several significant advantages that Mauritius provides to investors seeking business opportunities on the African continent. According to the latest World Bank annual ratings, Mauritius was ranked 20th among 190 economies in the ease of doing business, and Mauritius has consistently maintained its lead in Africa for ease of doing business. Mauritius is well-known for its social and political stability, its transparent regulatory system, its strong and independent judiciary, and has maintained the judicial committee of the Privy Council as the ultimate court of appeal. Furthermore, Mauritius is noted for the absence of foreign exchange controls, its attractive fiscal regime, its competitive operating costs, and the availability of professional skills in several specific sectors. Mauritius also forms part of the Southern African Development Community (SADC) and of the Common Market for Eastern and Southern Africa (COMESA), and is currently negotiating free trade agreements with China and India.
Moving up the value chain
Mr Wong remarked that Mauritius has over the years earned considerable experience in serving international and institutional investors, and has earned its reputation for the quality of its administrative services provided at competitive costs. Given the increased focus on substance, new GBCs will consist of bigger projects requiring broader and deeper skills, and business opportunities abound in services designed to support and accompany clients throughout the lifecycle of their projects.
Shift towards more business support services
With Mauritius moving further up the value chain, an increasing share of income is expected to come from business support and advisory services. Specifically, Mauritius can build up its competitive advantages in the provision of middle office support services such as financial and regulatory reporting, internal controls, cross-border tax compliance and documentation, e-marketing, website design and maintenance, technology, and also risks management, business advisory services, and assistance in navigating market and regulatory complexities in specific markets. Mr Wong added that R&D activities, such as in the field of mobile applications and fintech, are also possible with innovators able to achieve low unit costs by scaling up in the massive African consumer and business market.
Focus on human resources strategies
Boosting human capital has become vital to Mauritius’s competitiveness in the post-BEPS environment. With a greater proportion of services consisting of more knowledge intensive activities, human resources strategies are being readapted to the rapidly changing needs of the workplace. DTOS has put in place programmes to further develop and nurture its talent pool, including the offering of training schemes and assistance to employees with gaining immersive regional market exposure.
Mr Wong further noted that disruptive technologies are also leading to new types of businesses, new business models, and changing business needs. Business processes are also being progressively automated, while skills shortages exist in areas such as cybersecurity. Employees are increasingly required to be flexible and nimble, to upgrade their skills, and to be equipped with broad-based learnings and cross-sector skill sets.
Ecosystem of strategic partners
Among initiatives design to further expand on business capacity, an ecosystem of strategic partners spanning different skill areas and different geographical regions is being created in order to rapidly enhance on DTOS’s abilities to take on cross-functional and cross-geographical assignments.
Enhancing service quality
Recognising that service quality and reliability are important factors in maintaining competitiveness in the new post-BEPS era, there has been a renewed focus on maintaining client loyalty though constantly improving on service delivery. Technological advancements are being adopted to boost client experience and improve on efficiency. At the same time, several initiatives have been taken to enhance employee satisfaction and engagement, and to create a truly flexible work environment that support employees, while delivering on commitments to exceptional client value.
Growing into a new era
Radical changes in the international tax landscape, in addition to technological disruptions, are ushering in a new era for the Mauritius global business sector characterised by the provision of more substantive activities and additional value added services. Mr Wong observed that, in addition to a friendly regulatory environment, the growth of the Mauritius global business sector will increasingly be spurred by a combination of efficiency, reliability, constant improvement, and most importantly by the presence of a strong professional support base and a deep talent pool that keep abreast of innovative technology and changing client needs. DTOS has a proven track record that spans over two decades and has over the years diversified its products and expanded its global presence in countries like Uganda, Kenya, and the United Arab Emirates. By investing in its people and the capabilities that it needs, DTOS is in excellent position to accompany and support its clients as they face a period of rapid change.