Offshore Business is increasingly gathering momentum in the world nowadays. With globalisation, many countries are opening themselves and are starting conquering the world, more precisely the business world. Double Taxation Avoidance Treaties (DTTs), which is an important element of Offshore Business, is also on the rise - meaning that they contribute highly and positively to the Offshore Sector. Offshore financial centre (OFC) is defined by IMF (2000) as:
'A centre where the bulk of financial sector activity is offshore on both sides of the balance sheet, (that is the counterparties of the majority of financial institutions liabilities and assets are non-resident), where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by non-residents.'
Errico and Musalem (1999) made a list of 69 jurisdictions which correspond to the definition of an OFC. The list is given in Appendix 1.
Different countries follow different rules for income taxation. This often results in the problem of double taxation, which is taxation of the same income of a person in more than one country. To avoid this problem, double taxation agreements are concluded. As a result, tax is paid in the country of residence and is exempted in the country where the income is earned. But sometimes, these treaties can be misused to evade taxation.
Mauritius has concluded considerable number of double-tax treaties. This is believed to be quite unusual for such a low-tax jurisdiction. Indeed, in June 2000, Mauritius might well have been on the black list of the OECD, but worked out its way off the list by agreeing to certain compromises. Theoretically, tax incentives such as low corporate taxes are important determinants in attracting investments. In practice, the Mauritius offshore trades with big Asian markets and is therefore a large driver of investment and hence growth. The sector happens to be solid, lucrative and well regulated. Mauritius has been able to take advantage of its fiscal motivation as a path of investment for emerging regions such as India, China and South Africa. Using tax rates in order to influence the choice of investors towards Mauritius as an offshore destination is what the government has been trying to do.
However apart from fiscal incentives, Mauritius has a sound and attractive investment climate for foreign investors. Mauritius is among the top countries when it comes to the ease of doing business and has a one stop shop for investment opportunities which is the Board of Investment of Mauritius. This institution considerably facilitates the investment process for investors. Furthermore, Mauritius has a strong financial market, fine political stability, entertains good international relations and an efficient banking system.
The purpose of this dissertation is to analyse the offshore sector of Mauritius by first showing the significance of tax incentive in attracting FDI and private investment in Mauritius, secondly by demonstrating the effect and the impact of Double Taxation Treaty (DTT) on the FDI in Mauritius, thirdly by presenting Mauritius as the ideal jurisdiction to facilitate Afro Asian trade and last but not least, focusing on the DTT with India to show how tax evasion was taking place, how India was losing money and an analysis of the proposed solution to this problem.
2.1 Offshore Finance
The topic of offshore finance is vast and treats many issues related with this sector. R. Mc Ghee (1996) suggested that there is no uniform definition of an offshore financial center. Park Y.S (1994) described three main criteria that differentiate an offshore financial center from its domestic equivalent. Firstly, he pointed out that those centers deal in foreign currencies. Secondly, that they are generally free of the taxes and exchange controls that are imposed on domestic financial markets. Finally, all the services provided in such centers are reserved for non-residents. John Christensen and Mark Hampton (2000) add to Park's non exhaustive list of characteristics of an offshore financial center, secrecy and confidentiality. Effective secrecy conceals the nature of the business undertaken and does not permit inquiry by recognized authorities while confidentiality's goal is to ensure security and allows rightful investigation as compared to secrecy.
2.2 Double Taxation and Double Taxation Treaty
Patterson & Scholz (1948) stated "When the same taxable item is taxed more than once by either the same or different agencies, there is said to be double taxation."
To avoid double taxation, many countries make use of tax treaties on a bilateral basis. It is common for a local company or person to generate a taxable gain (earning, profits) in another foreign country. This person, bound by domestic laws, may be liable for a tax charge on that gain in the home-country and pay again in the foreign country where the gain was made. Since this is unfair, many countries agree to sign up a double taxation treaty in which it states that tax charge is only liable in the residing-country and not in the country in which the income was generated. To be eligible, the taxpayer must assert that he is not a resident of the foreign country. After which, the two countries involved will exchange information to check the legitimacy of the party involved and may investigate any irregularity that might give sign of tax evasion
Tax evasion occurs when individuals, firms, trusts and other entities evade taxes by the illegal means. It usually involves taxpayers to fake on purpose or cover up the actual status of their dealings to the tax authorities in order to reduce their tax liability. It comprises, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions). People committing this crime, are subject to fines or imprisonment in almost all countries. But Switzerland is a partial exception. This is because many actions that would normally lead to illegal tax evasion in other countries are accounted as civil matters in Switzerland apart from deliberate falsification of records.
2.2.1 REASONS FOR DTT
International tax lawyers such as Dagan (2000), Radaelli (1997) and Gravelle (1998) point out that Double Taxation Treaties have their role in reducing tax evasion. MNEs have an outstanding skill to escape taxes through the manipulation of domestic prices, a practice known as transfer pricing. In this course of transfer pricing, firms inflate costs in high-tax locations and shift profits to low-tax locations. How to regulate this practice is a major concern for tax authorities. For instance, when one country implements anti-tax avoidance measures, this could result to higher tax receipts for the other country and losses for itself. As such, even if such a policy were attractive from a global point of view, it would not be put into practice independently. Since bilateral implementation or income transfers through withholding tax manipulation can be executed by tax treaty, they can realise performance levels greater than those that are possible when countries act unilaterally.
Ronald Davies(2003) Tax treaties tackle the problem of transfer pricing in 3 ways. First, they identify the ideals techniques by which internal prices are to be computed. Since this can be different from the firm's favoured method, this can decrease FDI. Secondly, treaties address to set up dispute resolution mechanisms. While these mechanisms develop the tax certainty of the firm, they can also coordinate the tax authorities, dwindling the firm's position vis-à-vis the tax authorities. Finally, treaties encourage the exchange of tax information.
Eric Neumayer (2006) Developing countries and developed countries agree over double taxation treaties (DTTs) and also reckon that that the treaty gives preference to residence-based taxation over income source-based taxation resulting in a loss of tax revenue and in most cases, developing countries are found to be the net capital importers. The costs of these transactions can only be recovered if the Foreign Direct Investment (FDI) of the developing countries is more substantial. When signing DTTs, the investing countries are provided with security and stability as regards the issue of taxation in addition to the relief from double taxation. By signing treaties, countries commit themselves to granting certain relative standards such as national treatment (foreign investor may be treated better than national investors) and most-favoured nation treatment (privileges granted to one foreign investor must be granted to all foreign investors). They also agree to guarantee certain absolute standards of treatment such as fair and equitable treatment for foreign investors in accordance with international standards after the investment has taken place. Treaties typically ban discriminatory treatment against foreign investors and include guarantees of compensation for confiscated property or funds, and free transfer and repatriation of capital and profits (UNCTAD 1998).
Diane Ring (2006) Developing countries go for tax treaties for a number of reasons. The main reason is a provision of comfort to the new investors. Treaties smooth the progress of the intersection of the two countries' taxation scheme and offer a structure for resolving conflicts. Treaties can also be an indication to investors to create awareness that a country is part of the "international" organisation and that one can be comfortable in doing commerce and investment there. Various promising market countries believe that a treaty is an essential indicator to potential investors about the grade and consistency of the country.
2.2.2 PROBLEMS WITH DTT
According to Tsilly Dagan, the existing taxation treaties are not used only to prevent double taxation, they are utilised to ease the paper work process and matching up the tax terms between the trading countries and also serve cynical purpose such as redistribution of tax revenues from poorer to richer signatory countries.
Policymakers take it for granted that tax treaties are advantageous to everybody who is concerned. By sinking the tax weight of double taxation, the treaties aid the free movement of capital, goods and services and help in achieving allocation inefficiencies. The article of Professor Tsilly Dagan demonstrates that the traditional view of tax treaties is wrong. The benefits the countries obtained from lessening the double taxation burden on their residents overseas are enough to persuade them to ease double taxation on a unilateral basis. Treaties are not the only solution.
In treaties amid developing and developed countries, frequently host and residence countries in that order, reallocating tax revenues signifies regressive redistribution, which is to the advantage of the developed countries at the cost of the developing ones.
2.3 Overview of the Mauritian tax system
Taxation of both companies and individuals is governed in Mauritius by the Income Act of 1995. This is the principal tax legislation present in the country. When the legislations have to be amended, it is generally done through the Finance Act after the Budget speech.
The main taxes present in the country are:
Individual income tax
Individual income tax is payable by all residents of Mauritius. Taxes shall be levied on their non exempt income derived from Mauritius and if income is from outside Mauritius, it will be subject to tax only if the latter is received in Mauritius. Income is taxed at a rate of 15%, but exemption thresholds exist as shown in Table B in Appendix.
Corporate income tax
Under the Income Act, a company is defined as "a body corporate, other than a local authority, incorporated in Mauritius or elsewhereâ€Ÿ. Companies in Mauritius will be subject to a flat tax rate of 15% on their worldwide income as from July this year. Given that a non resident company, has a branch that operates in Mauritius then it is liable to pay taxes on the income the local branch has generated.
There are tax incentives companies such as Freeport companies and Information and Communication Technology companies. There are also companies that engage in offshore activities. GBC1 companies are at present subject to a tax rate of 15% and have a tax credit up to 80%, which make up an effective tax rate of 3%. GBC2 companies are exempt from paying taxes.
Value added tax
VAT is charged on goods and services at a rate of 15%.