16 September 2015

Debate No 30 - 15 September 2015: Mauritius & South Africa - Double Taxation Avoidance Convention


(No. B/496) Mr R. Uteem (First Member for Port Louis South & Port Louis Central) asked the Minister of Finance and Economic Development whether, in regard to the new Double Taxation Avoidance Convention between Mauritius and South Africa, he will state –
(a) in what respect it will be more beneficial to Mauritius, and 
(b) if any study has been carried out to assess the impact thereof on the Mauritian economy.
The Minister of Financial Services, Good Governance and Institutional Reforms, Minister of Technology, Communication and Innovation (Mr R. Bhadain): Madam Speaker, the new Double Taxation Avoidance Agreement with the Republic of South Africa was signed by the previous Government on 17 May 2013.

The Republic of South Africa ratified the new Double Taxation Avoidance Agreement on 10 October 2013. Subsequently, Global Business Operators in Mauritius expressed their concerns on the revised Article 4 subsection (3) which deals with the determination of the place of residence through the mutual agreement procedure for dual resident companies. The revised Article 4 subsection (3) did not provide a defined criteria to determine residency status through mutual agreement, thus created confusion and uncertainty.

The operators were of the view that companies using the Mauritius South Africa DTA could be denied treaty benefits unilaterally in the event, mutual agreement was not reached between the South African Revenue Services and the Mauritius Revenue Authority on cases referred to them.

A draft MoU detaining the process to be followed by the competent authorities to settle cases of dual residency was sent to the South African Authorities on 26 August 2014. Counter proposals were received from the South African Authorities on 22 October 2014. The South African Minister of Finance subsequently sent a letter to the Ministry of Finance and Economic Development on 10 March 2015 stating and I quote –

“It is imperative that Mauritius ratify the DTA as soon as possible to eliminate uncertainty for cross border investment clause as well as to prevent abuse of a treaty and Double Non-Taxation of Income. The continued delay in the implementation of these DTA will, unfortunately, leave our authorities with no other option, but to explore alternative unilateral options to curb the abuse of these DTA which will render the current DTA redundant.”

Madam Speaker, this Government was already put before a fait accompli. A meeting of the Financial Services Consultative Council was convened on 27 March 2015 with representatives of the Global Business Sector. After discussions, the FSCC agreed on a revised Memorandum of Understanding which sets both qualitative and quantitative criteria to determine the residency status in cases of companies having dual residence.

Madam Speaker, with regard to part (a) of the question, on 19 and 20 May 2015, representatives of the Mauritius Revenue Authority and the Ministry of Finance and Economic Development met their counterparts in South Africa with a view to finalising the MoU. During the meeting, the South African counterparts made it clear that the DTA should be ratified by Mauritius first and only then the MoU could be discussed, subsequently, to clarify Article 4 subsection (3).

On 21 May 2015, together with the Financial Secretary, I met with the South African Minister of Finance. After negotiations, the latter agreed that Mauritius would ratify the DTA after the MoU is finalised. The South African Minister of Finance also agreed to our proposed changes to paragraphs (g) and (h) of the MoU which read at follows
paragraph (g) –
“any other factors listed in paragraph 24.1 of the 2014 OECD commentary Article 4 paragraph (3) as may be amended by the OECD BEPS Action 6 Final Report.”
So, what we did was we aligned that paragraph with international best practice and what BEPS was proposing.
Then, paragraph (h) – 
“Any such other factors that may be identified and agreed upon by the competent authorities in determining the residency of the person.”
The MoU was signed on 22 May 2015 and within six days, Madam Speaker, the double Tax Avoidance Agreement was finally ratified by Mauritius on 28 May 2015.

Madam Speaker, the revised treaty with the MoU will bring the following advantages to Mauritius –

(i) the MoU, on the mutual agreement procedure on the determination of residency status for dual residence companies now brings more certainty, predictability and also clarity to the process bringing thus, more substance to the Mauritian jurisdiction; 
(ii) Action 6 of Base Erosion and Profit Shifting (BEPS) preventing treaty abuse is of particular importance to our financial services sector, as has been explained on so many occasions by my colleague, the hon. Minister of Finance and Economic Development and the MoU prevents treaty abuse and brings new substance requirements which is now more than ever of importance in the light of the BEPS initiatives. Mauritius has taken thus, a further step as compared to its competitors in this regard; 
(iii) if we look at clauses 2 (a) and 2 (h) of the MoU from an alternate perspective, it is interesting to note that South Africa has effectively given the biggest boost to Mauritius Regional Headquartering proposals for South African corporates, thus, making us that gateway for Africa; 
(iv) with the new MoU it now makes sense for South African multinationals to segregate their non-domestic business and house their whole entity or their headquarters in Mauritius; 
(v) the duration for a construction site, for example, building site, installation or assembly project to constitute what is defined as permanent establishment, has been revised from nine months to 12 months. The longer period, Madam Speaker, is more convenient for investors to qualify as permanent establishment. 
(vi) Profits from the operations of ships or aircrafts will now be taxed in the country where the enterprise is situated as compared to the place of effective management in the previous treaty. This, Madam Speaker, is in line with the OECD model Convention and brings Mauritius forward as a jurisdiction of substance; 
(vii) the taxing rights on dividend income is shared between both countries. The tax rate in the country of source is limited to 5% in case of a holding of at least 10% and in other cases, the tax rate is limited to 10%. Under the previous agreement, Madam Speaker, the tax rate was 15%. Taxing rights on interest is now shared by the country of residence and the country at source. The tax at source is subject to a cap of 10 percent. Even though there was no tax on interest under the previous DTA, the current tax rate of up to a maximum of 10% is still better than the 15% domestic tax rate on interest which is prevailing in South Africa. 
(viii) Lastly, the taxing right on royalties is also shared between the country of residence and the country of source up to a maximum tax rate of 5% in the country of source which is much better than the domestic South African tax rate of 15%.
Madam Speaker, with regard to part (b) of the question, in the case of a new DTA, the treaty was already signed as far back as May 2013. The MoU which was renegotiated in May 2015 now brings clarity, predictability and much-needed certainty to investors.

Madam Speaker, I am informed that there have been no studies undertaken at the time the treaty was signed in 2013. Nevertheless, I am pleased to inform the House that the ratification of this new treaty and the MoU is already now yielding benefits to our global business sector. I am informed that one regional bank in South Africa has already registered two structured products on the Stock Exchange of Mauritius. Two GBC1 companies, one exchange traded fund and one structured product from an international bank have already made request to list on the Stock Exchange of Mauritius with dual listings on other African exchanges.

I am further informed by the….

Madam Speaker: Hon. Minister, I think you have already replied to your question. Would you, please, allow the Opposition to put their supplementary questions?


Mr Uteem: Thank you, Madam Speaker. It is one of these questions where no one wants to take the paternity. The hon. Minister of Finance and Economic Development is not answering this question, he answered for the DTA with India. Today, the hon. Minister says that it is not his doing. In 2013, when I asked hon. Xavier-Luc Duval, he said to me that was before he joined his Ministry in January 2011, saying in effect that it is hon. Pravind Kumar Jugnauth who took the decision.


In 2013, when I asked the hon. Minister about this treaty, this is what he said –
“We are not happy at all with the agreement as it stands. There are various things we can look at, grandfathering being one of them, as I mentioned, a greater clarity between the two revenue authorities. The other thing, Mr Deputy Speaker, Sir, is a most favoured nation clause.”
So, my question is: why is it that when in 2013 the Ministry of Finance had already stated that we were not happy with the treaty and we were going to renegotiate at least these things, this Government has gone along and ratified the South African treaty with all the flaws that had already been identified back in 2013?

Mr Bhadain: Madam Speaker, let me first start by saying that teamwork is something that needs to be understood and people, on this side of the House, work as a team. Both me and the hon. Minister of Finance and Economic Development work as a team. I mean the team over there has been split into two and we can see it!


To answer the questions of the hon. Member, of course negotiations have taken place, of course the interest of Mauritius has been looked at and I was, in fact, reading the results of what has been achieved. If we go into the detail that the hon. Member wants to go to, previously paragraph (g) stated, and I quote –
“Whether determining that the legal person is a resident of one of the contracting States but not of the other for the purpose of the agreement, would carry the risk of an improper use of the provisions of the agreement.”
This has been changed, Madam Speaker, after negotiations, to any other factors listed in paragraph 24 of the OECD commentary. So, what we have done is we have, in fact, aligned it to international best practice. Also, paragraph (h) -
“Any other factors that may be deemed relevant by the competent authorities in determining the residency of such person (…)”
That has now changed to –
“Any such other factors that may be identified and agreed upon before by the competent authorities in determining the residency of the person (…)”
I think my hon. friend should relook at the definition of “flaw” in the dictionary.


Madam Speaker: Yes, hon. Leader of the Opposition!

Mr Bérenger: May I ask the hon. Minister - he told us that this new Government was faced with a fait accompli. Indeed, in 2013 - the then Government, with hon. Xavier-Luc Duval as Minister of Finance responsible, he was Minister of Finance when it was signed - it was ratified by Parliament in South Africa and here, unfortunately, such documents are ratified by Cabinet, it was not ratified. Has the Minister had time to discuss with the then Minister of Finance? Secondly, what happened exactly in 2013? How is it that it was signed and then it was discovered that it is not a good treaty, it cannot be ratified? What had happened in 2013?

Mr Bhadain: I did discuss the matter with the hon. Deputy Prime Minister and, in fact, what had happened, Madam Speaker, was after having signed the agreement, there were certain representations which were made by operators in the sector in Mauritius and they expressed certain concerns to the fact that the residency status, the criteria as I have explained in my answer before, was not clearly defined. So, they wanted more clarity. And as a result of this, the Ministry of Finance, I understand, then drafted an MoU and sent it to South Africa to bring clarity to Article 4 (3). Then, of course, they replied, we came in and sorted out the matter and it is now history.

Mr Bérenger: But, it is worth for the future to learn from past mistakes. What happened in 2013? Was it that there were not proper consultations with the operators, with the result that a Double Taxation Avoidance Agreement was signed and then discovered to be faulty according to the Mauritius side?

Mr Bhadain: Well, what I understand, Madam Speaker, is that the operators made their representations after the signature of the agreement then, and then of course, it went on to be ratified by South Africa. But Mauritius did not ratify because they wanted clarity through the MoU. We went, finalised the MoU and ratified the treaty.

I would also say, Madam Speaker, when you look at Global Finance Mauritius report which was issued after the treaty was signed, it goes on to say, GFM’s views –
“The MoU brings more certainty and predictability.”
It goes on to say that if we view the MoU clauses (a) to (h) below from an alternate perspective, it would be interesting to note that South Africa has effectively given the biggest boost to Mauritius Regional Headquarters proposition for a South African Corporate. It is not me saying this! It is the GFM, the operators!

Mr Bérenger: If we come to the present, can I get it very clearly. An agreement, a Double Taxation Agreement was signed, not ratified by Mauritius, ratified by South Africa. Now, the same Double Taxation Avoidance Agreement has been signed and ratified. Then I’ll come to the Memorandum of Understanding, but the fact is: will he agree that the same Double Taxation Avoidance Agreement that was found to be faulty has been ratified by Mauritius? Now, added to that the treaty has stayed exactly the same. Added to that is the Memorandum of Understanding. Can I know whether legally that Memorandum of Understanding has to be ratified by the South African side and, if yes, has it been so ratified?

Mr Bhadain: Madam Speaker, I don’t know whether the hon. Leader of the Opposition does not understand or whether ...


Or he is confused by the time.


Madam Speaker: Hon. Minister please! Don’t provoke!


Order please! Hon. Minister, please don’t provoke. Don’t make comments, reply exactly to the questions which are being asked, please.

Mr Bhadain: It is very simple for anybody who wants to understand to understand, Madam Speaker. So, the agreement was the treaty, the MOU is the MOU, it is very clear. Now, the treaty has been signed, ratified by South Africa under the previous Government which the hon. Leader of the Opposition was going to go and be in bed with. 

Now, the MOU ....


Madam Speaker: Allow the hon. Minister to reply please! Allow him to reply and we will see afterwards.

Mr Bhadain: The MOU is a document which ...


Madam Speaker: Hon. Mohamed! Don’t make comments from a sitting position. Please! Don’t make comments from a sitting position!

Mr Bhadain: The MOU, Madam Speaker, brings clarity to clause 4 sub section 3 of the treaty. The treaty was never faulty, the treaty was unclear as to the residency status which is stated in article 4, sub section 3. That is why, following representations made by operators, an MOU was sent to South Africa to say please clarify what are the criteria to define this. Now, what we’ve done, is we’ve seen that what was defined as criteria in the treaty was not in the best interest of Mauritius with regard to paragraphs ‘g’ and ‘h’ and we went to South Africa, we explained that to the Minister of Finance, it was negotiated, it was discussed, it was agreed and the MOU was signed. Now, when the MOU is signed, it becomes part of the treaty, we all know. Of course, it does. Then the treaty was ratified by way of regulations in Mauritius. That is simple as that. Anybody who wants to understand will understand.

Madam Speaker: Is there any other question on this issue. New question, hon Uteem!

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