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International Regulation and IFCs

November 2015 - Finance. Legal Developments by BLC Robert & Associates.

More articles by this firm.

Doing business anywhere in the world has become more difficult in 2014. The international business community at large has felt the bite of regulations having cross-border reach. These have forever changed the way in which businesses are run, and this in turn amplifies the challenge for international financial centres (IFCs)

The survival of an IFC rests on its continued competitiveness in the face of increasingly tougher norms. An IFC tends to be rated by the ease of which international players can access its services, the safeguards it can provide, and the value it can bring to the transaction when structured thorough its jurisdiction. More prominently, centres characterised by low or zero taxation, light financial regulation, banking secrecy and anonymity have been favoured structuring jurisdictions. However, reforms undertaken by governments in response of initiatives of supranational organisations like OECD, FAFT, the World Bank and the like have meant that IFCs need to constantly evolve their product offering to continue to attract business.

Since the early 1990’s, the Mauritian government has been pro-actively adhering to international pressures to ensure the competitiveness of the financial sector so that it can continue to be an engine of national growth. This has meant that Mauritius is often the precursor of at times disquieting regulations, the latest additions have been like the Foreign Accounts Tax Compliance Act (FATCA) and the Alternative Investment Funds Managers Directive (AIFMD).

AIFMD – The Gateway to Fund Marketing in the EU

In a nutshell, the AIFMD is a European Directive framework which requires the European Commission to prepare detailed rules on various topics such as conditions and procedures for the determination and authorisation of Alternative Investment Fund Managers (AIFMs) in the European Union (EU). Currently, non-EU AIFMs are able to market the non-EU Alternative Investment Fund (AIF) through the private placement rules only, subject to satisfying the following three conditions-

  1. the requirement for a cooperation agreement;
  2. the exemption of Mauritius and the respective EU country from the list of non-cooperative country and territory by FATF; and
  3. compliance with disclosure and transparency requirements.

While condition (3) must be satisfied by the fund manager, conditions (1) and (2) stated above are under the responsibility of the non-EU fund manager’s jurisdiction. At the date of writing, Mauritius had diligently signed cooperation agreements with 23 EU countries, and is actively working with other EU regulators so that Mauritius funds continue to be marketable in the European space. Earlier this year, the Financial Services Commission of Mauritius (FSC) has signed a Memorandum of Understanding (MoU) with the European Securities and Market Authority (ESMA) on 30th May 2013 providing for the sharing of information and cooperation between regulators on regulated entities in our jurisdiction – a necessary inroad into confidentiality safeguards for the sake of the continued viability of Mauritius as a fund jurisdiction. It is increasingly clear that AIFMD is more than an information sharing instrument. It will become a major game changer for fund managers who,prior to the establishment of a fund, would send out ‘teaser’ documents and draft term sheets to present the prospect and get a feel of the demand market before embarking on establishment and full-fledged roadshows. Very often, at that time, the choice of a fund domicile would not have been made, and the decision would be taken after discussing investor preferences. However, after the coming into force of the AIFMD, such approach would be considered as marketing. Fund managers see themselves having to firstly set up the fund and obtain the relevant licences in Mauritius and, thereafter apply for authorisation with each EU regulator before being able to approach European investors. Further compliance hurdles are expected down the road as European Regulators move further along towards the ‘passport’ regime.

FATCA – International tax collectors

FATCA was enacted in 2010 and in essence, requires foreign financial institution (FFIs) to provide the US Internal Revenue Service (IRS) with information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest. The aim of FATCA is to establish and operate a system that collects information on US persons to facilitate imposition of US tax on such persons who invest abroad. FATCA has significant implications on non-US financial institutions given the penalty for non-compliance, a hefty thirty percent (30%) withholding on US sourced income. 

In an attempt to minimise the compliance burden on Mauritius financial institutions, the Government of Mauritius had, in December 2013, entered into the reciprocal Model 1 Intergovernmental Agreement (IGA) and a Tax Information Exchange Agreement (TIEA) with the US-IRS. As such, Mauritius-domiciled FFI report directly to the Mauritius Revenue Authority (MRA), which will then pass the information to IRS. Mauritius enacted the FATCA Regulations 2014 (the Regulations) to translate the provisions of the IGA and TIEA in Mauritius legislations. FATCA is not an isolated occurrence. It is anticipated that other countries feeling the sting of tax base erosion and tax evasion will be inspired by the model and implement their own versions of FATCA in the not-so-distant future.

Uncertainties remain

Despite the enthusiasm of the Mauritius government to cooperate with FATCA movement, uncertainties remain on critical definitions, for instance, whether the definition of FFI captures business entities which are merely trading or carrying out activities that would, under local legislation, not be considered as a “financial institution”; how far up in a structure do FFIs have to probe to track down potential US persons involvement; whether it is sufficient for an agent, like the local administrator of a business (a customary service offered by corporate services firm in all IFCs) may register with the IRS on behalf of the offshore entity instead of having each client individually register with the IRS. The local tax authority (the Mauritius Revenue Authority (MRA)) acknowledges the prevalent uncertainties amongst stakeholders regarding FATCA implementation in Mauritius and it is expected that guidance notes will be issued in this respect to address to any concerns regarding FATCA compliance procedures. However, it is unlikely that guidance from local administrators of FATCA would be persuasive in the absence of rulings and guidance from the designers of the model. One should expect that these will come in time, by trial and error, on case-by-case basis, and unfortunately not, to say the least, without feathers being ruffled.

The path forward

Adherence to international standards is a painstaking but necessary process. When IFCs join in the game, the attraction of their jurisdiction takes a blow especially for those whose decisions are swayed by low tax or light regulation on one hand, and on the other hand, the inherent uncertainties surrounding international regulations like the AIFMD and FATCA. However, loopholes are quickly filled and increasingly, enforcement actions have been unrelenting. Jurisdictions which show reticence in compliance quick fold to the flock when brandished an ‘uncooperative’ with the attendant sanctions and economic repercussions that come with being listed on some ominous ‘blacklist’. In the era of today, norms that require financial transactions to be fair and transparent are the sine qua non for survival and growth… as it should be. It would seem that there lies the future as well for IFCs.

Ambareen Beebeejaun, BLC Robert