Our neighbour, South Africa, is enthusiastically chasing investors and capital out of their country with the assistance of Julius Malema, head of the ANC Youth League, and the Congress of South African Trade Unions (COSATU). Malema is supporting Mugabe style land grabs and nationalisation of mines. Cosatu also supports the nationalisation of mines.
We in Mauritius have not been very clever either.
The following items are top of my pile of disappointments:
- Promises to give foreign investors permanent residence have failed to materialise.
- A negative campaign against South Africans has been waged in the press over the last few years, with many either choosing to leave or being forced to leave due to visa cancellations, or non renewal. Due to this, there is a feeling amongst South Africans that they are being discriminated against particularly when it comes to the following item.
- The criteria for approval of visa’s has been fudged, with the introduction of a committee at the Board of Investment to vet applications on individual merit, creating uncertainty and frustration.
- Capital Gains Tax and Tax on Dividends was introduced earlier this year.
For two countries that depend on foreign investors the way fish depend on water, these
moves are suicidal.
I am not going to explain why the SA proposals are so stupid, as this is outside the scope of this blog. Instead, I want to expand on the dangerous path the Mauritian government has taken.
Potential investors into our region (Africa and South Western Indian Ocean) are principally concerned about the reliability of our various governments. Africa has a sad history of despotic and kleptocratic leadership. If rulers in our region show signs of being inconsistent in their introduction and application of their laws, this insecurity will chase any investor away.
Mauritius has pursued a path of building a framework of enabling, tax friendly legislation. It started with the introduction of Export Processing Zones and expanded to the creation of the International Financial Sector in the early nineties. These changes lead to a reduction in the unemployment rate and remarkable economic growth, both in volume and diversity.
But in 2011 Mauritius seems to have changed her mind and is busy reversing the effects of all this hard work. The positive image we have built over the last twenty years has been tarnished, if not quite destroyed.
Mauritius needs a strong, technocratic, and imaginative Minister of Finance. We are a small country and the effects of any change are immediately felt. I like to think of us as Mauritius Limited and we will only be as good as our financial governance lets us be.
In the past, we have had magnificent ministers of finance. I can name two that really made a positive difference to Mauritius: Rama Sithanen and Vishnu Lutchmeenaraidoo both deserve a place in my Financial Hall of Fame.
Now we have a new Minister of Finance, Xavier Duval. He was a partner at audit firm Coopers (now PWC) when I arrived in Mauritius. PWC has an associated trust company that competes with our company. Since then, he followed his late father, Sir Gaetan Duval, into politics and has been a minister in various portfolios including tourism and social responsibility.
- Xavier Luc Duval
Following a recent rupture in the Ramgulam – Jugnaut alliance, a few Ministerial vacancies emerged. Minister of Finance was one of them, and Xavier Duval has been given this most senior of portfolios. He is technically qualified and has the intelligence, communication skills and physical presence to sell his ideas at home and abroad. I hope he surrounds himself with hard working experts to give him the muscle to do the job well.
The opportunity is here. The image must be repaired. There is a flood of capital waiting to leave South Africa, and a lot from the rest of the world that is looking for alternative investments in the region.
Mauritius needs to get its act together right now or become a fish out of water.
Post Script: Why I think a tax on dividends is not very clever:
Some people think that by taxing dividends, companies are encouraged to retain the profits for growth rather then pay these out. Others are simply looking for another way to collect money for the expenses of Government.
But what happens when dividends are taxed in Mauritius?
The first thing any Mauritian shareholder should do is sell his shares to an entity in another jurisdiction that does not charge tax. Try Seychelles or New Zealand, for example. What happens now is that not only is the tax lost, but the dividends themselves leave the country. Oops.
The next silly step would be to change the basis of taxation to either withholding tax, or something else. Suddenly the corporate tax rate is not an appealing 15% but goes up to 25% (the tax on dividends is 10%). Investors will now sell their shares and go elsewhere. And would-be investors simply would not pitch up to the party. Oops again.