Seeking Substance
Investors hate uncertainty, and those investing through Mauritius, an island nation more than 500 miles off the east coast of Africa, are no exception. Mauritius is a conduit for nearly 40% of India’s inbound investments, a major boon to an island with little else other than tourism. But India introduced General Anti-Avoidance Rules (GAAR) in March that would allow tax regulators to more thoroughly scrutinize cross-border deals in order to strike down those structured solely to avoid tax. The question of how the rules will be enforced on Mauritius, where many companies are suspected of operating in-name-only to avoid taxes, is leading many fund managers to consider changing domiciles, particularly to Singapore.
Under the current tax treaty, companies that pay ultra-low capital gains tax in Mauritius are exempt from the higher Indian tax rate. The new rules, which are set to be implemented in April 2013, could supersede that treaty and require companies to show that they have “substantive operations” in Mauritius to obtain tax benefits.
That’s not easy in a tiny and remote island nation like Mauritius, said Vishal Negandhi, India-based commercial director with service provider TMF Group. There is a limited pool of financial talent to hire if a company wants to set up an office. Using the third-party service providers on the island, as is typically done, would fail to meet substance requirements.
Furthermore, financial professionals do not want to move to a place like Mauritius, Negandhi said. Singapore already has a large skilled workforce to hire from and has a highly developed economy, allowing it to more easily attract new talent.
In the months since GAAR was introduced, Negandhi said he has already seen funds begin to go to Singapore, solely to avoid the uncertainty of how GAAR will be implemented.
“A lot of US-based or European private equity investors that have already set up structures in Mauritius and Cyprus, they are still waiting and watching [the finance bill] for whether to move their structures or no,” he said. “But in the case they have a new investments coming up, new structures are being set up straight away in Singapore.”
Whether Singapore becomes the new investment portal into India will remain unclear until the GAAR goes into effect and investors see how the rules will be interpreted. The rules themselves could still be changed as the initially planned 2012 implementation was delayed for a one year and some in the finance industry lobby for weaker rules. But with the US and Europe also combating tax evasion through regulations of their own, Mauritius and other traditional offshore financial centers face an uphill fight on many fronts to remain relevant in cross-border investment. Under the guise of onshore legitimacy, the future of Singapore seems, at the very least, more certain.
