Economist K.C. Li Kwong Wing shares with Investor’s Mag the genesis of Mauritius Financial Centre. The former Chairman of the Stock Exchange Commission and the Association of Trust & Management Companies, believes that Mauritius IFC will only survive if it becomes a very dynamic and proactive fintech hub.
Featured in Investor’s Mag, 23rd Edition, Dec 22 – March 23
You are amongst the pioneers of the Global Business sector which celebrated its 30 years of operation this year. How do you rate its progress since its inception?
For the benefit of all those who are reflecting on our global business sector and hoping for a better future, it is useful to look at the inception phase of what is currently a performing economic sector. The idea of an offshore centre was mooted at a time when the economy was booming and we had almost eliminated unemployment thanks to the textile boom and a growing tourism sector. We were relaxing exchange controls and repaying in advance loans from the IMF. We were already looking for new growth drivers. We identified a few emerging sectors that could propel Mauritius to a higher level of development, which we dubbed as the second industrial revolution or the second economic miracle at that time.
We had then a rapidly expanding tuna fishing and transhipment business, and the harbour was jammed with hundreds of Japanese, Korean, and Taiwanese fishing vessels, while containerised cargo vessels were saturating the port. At the same time, Air Mauritius was expanding its wings in the region and the airport was being modernised to enable the transshipment of goods towards South Africa inspite of economic sanctions. So we were seeing the growth of a modern sea-air connectivity which would enable us to play the role of a transhipment and distribution hub for the region.
It was thought that these activities could extend to light assembly and processing and create the need for a permanent Trade Fair for Africa. The natural next step was to integrate the idea of a regional trade hub with an offshore banking centre to facilitate non-rupee cross-border trade transactions and safekeeping and custody of money flowing in the region, when the harbour was already replete with foreign exchange brokers, gold traders, moneylenders, pawn brokers and other commodities traders.
So, the original idea of offshore business was first put into effect by an offshore banking legislation in 1988, which was to create a banking services centre on the solid foundation of a potentially thriving trade and transshipment hub. Hence, an offshore centre of substance, with the potential to develop specialised financial services for the region.
So how did the offshore sector emerge from a project mooted principally on a growing regional trade centre to a pure tax planning jurisdiction?
The creation of a so-called offshore sector, based on offshore banking, free of tax and protected by secrecy law, was meant to facilitate cross-border trade and financial transactions not involving residents. But as regional trade did not pick up fast enough through lack of proper infrastructure and incentives, and it even came to be taxed later at the same rate as domestic trade, the development of the offshore banking sector took place independently to serve the international firms that look for a tax-light centre to carry out their global business and also the non-resident high net worth individuals who need a tax-beneficial shelter to park and manage their assets and wealth. Hence the offshore sector gradually assumed a classic role of a tax haven for international firms and individuals not dealing in any transactions with residents of Mauritius.
How then did the financial centre change course?
Conditions were thus created for the development of financial services with no physical substance but on paper and booking transactions, and hence the need for structures, entities and vehicles to facilitate such tax planning. A slew of new offshore laws, including legal innovations such as trust law, were enacted to cater for activities that would attract business from more established financial centres, like Jersey, Cyprus, Bermuda, BVI, and others teeming with business and wealthy tycoons in search of more friendly and competitive jurisdictions.
The early beginning of the offshore business sector was quite arduous and challenging in the face of more established competitors with better tried and tested legislation and also more experienced and knowledgeable professionals and practitioners in that sector. It was a hard struggle for Mauritius to compete as a new kid on the block. The professional world in Mauritius was still steeped in traditional business like audit and accounting. Management consulting and tax advisory activities were in their very early beginnings. I remember those days when it was very difficult to convince professional firms like the law and accounting firms to invest in new skills, new staff, new offices, to travel and market to potential clients around the globe. So, it was a very slow and arduous beginning and it took all the efforts of the offshore business authority to really kickstart the sector with most operators new in the business and engaging only half-heartedly in developing that sector.
“the road was bumpy, the start was very laborious but then we found the right niche and growth pole…”K.C. Li Kwong Wing | Economist & Economic Advisor
But the déclic came when India liberalized its economy and opened its frontiers for foreign investments. The taxes in India were very prohibitive, reaching even 60% on dividends, profits and capital gains. It was then that the professional tax world looked for jurisdictions that had a favourable tax treaty with India to reduce or even avoid those taxes. They discovered that Mauritius had one of the best tax treaties to allow them to invest in India with minimal tax possible, even to the extent of paying no tax at all. So, the Mauritius offshore business centre suddenly emerged as a perfect jurisdiction for investment into India absolutely tax free and the country became a tax-treaty planning centre par excellence. It was even abused by the global tax professionals who used Mauritius as a paper conduit for investment from the U.S and Europe into businesses and stock exchanges in India. This abuse of the treaty was a sore point but those were the days when tax planning was more liberal.
How did that India treaty planning business impact on the economy?
Two phenomena emerged which transformed and democratised the economy of Mauritius to such an extent that it took by surprise the traditional oligarchic private sector in Mauritius.
Firstly, Mauritius which is only famous as a tourist destination became really notorious in all the financial centres of the world and used by all global professional firms, international banks, investment fund managers, or multinationals and their tax advisors. This created a massive exposure of our professionals to the real world of international finance.
Secondly, our professionals were compelled to match global standards, develop new skills, undergo training and compete internationally. Hence, emerged a new class of professional entrepreneurs and the development of a whole new category of labour, the nimble, tech-savvy, numerate and educated youth. This phenomenon of a knowledge-based entrepreneurial class would never have come out under the traditional model of a land-based rent-seeking private sector. One wonders what would have happened to the mass of young graduates and educated youth, had it not been for the emergence of the offshore sector.
The rapid progress achieved by the global business sector contributing close to 10% of our GDP on the back of a single product and market namely the India tax treaty and the India market was phenomenal as Mauritius for the first time opened up a new opportunity of economic diversification, democratisation and modernization, not based on traditional private sector growth.
So as I said, the road was bumpy, the start was very laborious but then we found the right niche and growth pole and we developed a path-breaking sector into what is embodied today by Ebene Cybercity, the new business centre of Mauritius. Though chaotic in its jungle-like development without even proper planning of parking space, it is a good reflection of our offshore sector quite decoupled and lacking in linkages with the domestic heartland, but slowly buzzing its way in digital connection with main street.
What is the future of this tax-treaty planning niche service and market?
We have milked the sacred cow of the India treaty to the point of exhaustion, and India, having developed its own offshore financial center in Gujarat and its own economic muscles as an emerging regional power, inevitably revoked the treaty, causing a deep structural rethinking of our sector, which is quite salutary for our intellectual good.
We must now return to our original mission of creating substance for our global business sector, rather than trying again to ‘beggar my neighbor’ and finding new cows to milk after India, i.e. trying to bite the lunch of emerging countries in the region that are fast attracting foreign investments. This “beggar my neighbor” policy is counter-productive. The world of international taxation is continuously changing and we are now seeing the end of global tax arbitrage, as a global deal has been reached to impose a 15% global minimum corporate tax on multinationals.
Tax treaty planning is also severely hampered as countries keep uniformising their taxing rights and the big bullies of the developed countries can simply take away your business if they find that you are benefiting too much from their tax treaties. We have a new world order, which they call “rules-based order” in the financial and commercial fields, but it is a bullying order in which sanctions and clampdowns are imposed on smaller, weaker countries that lack the resources to achieve sustainable development.
So the heyday of growth through tax treaty planning is over and the name of the game now is service, competence, cost efficiency and ease of doing business.
What do you expect of the development of the Global business sector in the years to come?
There is likely to be an acceleration of the two types of development already in action. On the one hand, we will see large global professional firms in Mauritius that can provide multi-jurisdictional seamless services across all sectors with business efficiency expanded by acquisition and merger. As a result, many of the local service firms will continue to be purchased by big international players as they will use Mauritius as a low-cost efficient back office administration and accounting center to process transactions. In some ways, a significant portion of our business will move down the value chain as we are reduced to a lower-cost, back office processing center for large multi-jurisdictional groups. But this will also allow Mauritian professionals to operate globally, learn new skills, and gain agility and mobility to seek employment in international markets.
On the other hand, local players will need to develop niche services, skills, and expertise to service smaller and mid-sized regional firms, particularly emerging African business and investment corporations, by leveraging on our local laws, incentives, and innovative products. This is a new development that has big potential.
But the big problem will be the banks, especially international ones. We can’t blame the big international banks because they face a high risk of doing business in the region and care little about providing substantive value added banking services because all decisions are made at headquarters. If they can no longer get the easy business of routing huge investments from the West to India, by using Mauritius as a low tax booking center, they will run out of business and have no interest in serving only the back office global players. International banks may leave Mauritius at any time.
However, local banks are still mostly stuck in the comfortable past. They face numerous challenges in terms of new compliance requirements and skill shortages, but we now have a window of opportunity because local banks are still well capitalized and have good liquidity, even excess liquidity, as well as massive foreign exchange deposits from global business. If they are unable to support and accompany local professional firms in developing new services such as investment banking, wealth management, corporate structuring and finance, infrastructure financing, climate change financing, and so on, global business will become a low-end processing business, and such activities will soon be relocated to a less expensive location such as Rwanda, Madagascar, or Morocco.
Mauritius was well-known and highly developed as a front end tax structuring centre, even if with the stigma of being a small India-driven tax planning center. But the risk today is to have to fight down the value chain for continued business.
There is also a third dimension to the future growth of the sector.
The offshore financial business sector grew phenomenally on the back of the India treaty and had not developed in support of regional trade and other commercial activities, which could have made Port Louis fulfil its vocation of a maritime and commercial hub between Asia and Africa, and the commercial capital in the region. We missed that integration between trade, industry and financial services.
“But the big problem will be the banks, especially international ones. We can’t blame the big international banks because they face a high risk of doing business in the region…”K.C. Li Kwong Wing | Economist & Economic Advisor
Now, the global clamp down on tax competition, tax loopholes and fiscal arbitrage between competing jurisdictions has created the need for a new model of development based on substance, transparency, disclosures and domestic linkages with real physical activities in the home country.
So our global business is called upon to reinvent itself in order to survive.
But what have we got to offer apart from our few natural advantages, like favorable time-zone, multilingualism, social stability, lower costs and business-friendly environment? If Mauritius ticks all the boxes, we can see the development of the offshore industry as a cost efficient back office center for global financial players. The trend is already there and this has created a new class of global educated labour, climbing the skills ladder and leaving a gap for the lower skills and less trained new entrants in the labor market, but more importantly, opening the possibility of employment for administrative labor from the region with better prospects than in their home countries, especially with possibilities of academic, tertiary and skills training here.
We are already seeing an influx of African students coming to Mauritius getting internship, training and work in our offshore financial services sector. Lots of the people investing and moving into Mauritius are also adding to our professional competencies, e.g. the digital nomads and retired self employed professionals who will need co-working spaces, business parks, centers, and hotels. These developments are already taking place in the North and West of the island, and there is a massive market to be tapped, not only in Europe which is haunted by insecurity and tax persecutions but also nearer us where high-net worth business tycoons are looking for friendlier locations for their businesses.
I have seen such a development in Singapore which is a clean, strict and controlled economy, but opened up proactively to attract new financial services, relaxing its work permits and entertainment rules,, and catering for new sports and cultural needs, to the extent of opening casinos and attracting all-nite beach parties and Formula One there.
Mauritius has all that it takes to promote such financial developments, specially with the new wave of decentralised finance, fintech and digital services, blockchain, robotics, artificial intelligence and regional e-trading. The professional financial services are being revolutionalize with new skills and technology and Mauritius will only survive if it becomes a very dynamic and proactive fintech hub for the region. That is the third dimension we need to aggressively open up.