Foreign companies with an eye on Africa’s emerging markets are flocking to Mauritius to incorporate local subsidiaries in a move that could deny more than a dozen African governments billions of shillings in corporate taxes and position the island nation as the region’s economic hub.
Kenya, which has been eyeing the regional economic hub status, is one of the likely casualties of the migration to the Indian Ocean state, whose favourable tax regime and efficient judicial system have become popular with multi-nationals looking for a safe haven to anchor their expansion into Africa’s highly profitable but risky frontier markets.
In the past five years alone, more than four foreign firms have entered the Kenyan market using Mauritius-based subsidiaries threatening Nairobi’s ambition to become the business hub for the 15 nation Common Market for Eastern and Southern Africa (Comesa).
Waguthu Holdings (K) Limited, the company that is associated with the multi-billion shilling real estate project, Tatu City, is also owned by a parent company incorporated in Mauritius as MCIH.
Investment analysts said that though there has been a growing interest in Kenya as a business hub for the newly-created East African Community’s common market, pressure is mounting from Mauritius’ continued attractiveness as an operation base for foreign investors eyeing the region.
“Mauritius offers a lot of incentives in terms of favourable tax regime and asset protection mechanisms,” said Simeon Cheruiyot, a partner at consultancy firm, PriceWaterhouseCoppers (PwC).
The range of incentives available to foreign firms in Mauritius includes a 15 per cent charge on a company’s taxable income such as business or trading profits.
At 15 per cent, Mauritius’ corporate tax rate is half the 30 per cent rate that Kenya applies to similar income.
Kenya has also been rendered less attractive by the levying of a 10 per cent withholding tax on dividends for non-residents as Mauritius applies a zero rate for similar income.
Foreigners living in Mauritius are also spared royalties taxes compared to their Kenya-based counterparts who are taxed at the rate of 20 per cent.
James Kamau, a managing partner at Iseme, Kamau and Maema Advocates said Mauritius has spiced up its tax offers with a long list of double taxation treaties it has signed with more than 20 countries.
Double taxation treaties are inter-government agreements that protect transnational companies from being taxed twice for the same asset or income easing the flow of trade and investments.
“Double tax treaties have increased Mauritius’ attractiveness among multi-nationals sparing them the hustle of having to register subsidiaries in every locality where they have a presence besides helping them avoid paying taxes more than once,” said Richard Omwela, a managing partner at Hamilton, Harrison and Matthews – a Nairobi-based law firm.
“Such agreements make it easy for companies to move around capital, repatriate earnings and dividends at little or no cost across national borders,” he said.
Kenya has double tax treaties (DTTs) with a handful of nations including the United Kingdom, Canada, Denmark, Norway, India, Sweden, Zambia and Germany.
Mauritius has more than 30 double taxation treaties in Africa alone.
“The double tax treaties are critical to any country’s success in attracting foreign investments because convenience ranks highly among many investors,” Mr Kamau said.
More recently, Mauritius has also entered into Investment Promotion and Protection Agreements (IPPAs) with its double taxation partners.
The list includes 15 African countries of Benin, Botswana, Burundi, Cameroon, Chad, Comoros, Ghana, Guinea, Madagascar and Mauritania, Mozambique, Rwanda, Senegal, South Africa, Swaziland, Zimbabwe and Tanzania.
The agreements allow foreign investors to freely repatriate investment capital and returns, shields them from expropriation of their property and offers the signatories a most favoured trading partner status (MFN) with respect to treatment of investors.
Under the IPPAs foreign investors from signatory states are also guaranteed compensation for losses in case of war, armed conflict or riot and are offered clear arrangements for settlement of disputes with the contracting states.
Analysts said efficient judicial and dispute resolution mechanisms have also given Mauritius an edge over the competition in Africa.
“The judicial system in Mauritius is way above the competition,” said Mr Omwela. “For instance, disputes are resolved within an average four months from the time they are lodged in court compared to a period of up to 10 years in Kenya. “This kind of efficiency is what the business community looks for and will rush to where it is available,” he said.
The World Bank’s private sector-lending arm, the International Finance Corporation (IFC), has in its Doing Business 2011 report ranked Mauritius’ judicial system as the best in Africa in terms of reforms aimed at facilitating business and investment transactions.
“Mauritius made the resolution of commercial disputes faster by recruiting more judges and adding more courtrooms,” the IFC said in the report.
Influential Kenyan investment group, Transcentury Limited, is among firms that have opted to pursue justice in Mauritius’ judicial system.
The Kenyan firm moved to a Mauritius court early last year at the peak of its battle with Egyptian rival — Citadel Capital over the control of the Kenya-Uganda Railway concession.
It had sought ex-parte orders to stop the other shareholders in the concession deal from raising $10 million of fresh capital in a rights issue. RVR is registered in Mauritius.
The Commercial Court in Nairobi, which handles trade disputes, is currently overwhelmed by the large number of cases before it, causing cases to drag on for many years.
This forces most investors to unwillingly opt for costly out-of -court settlements to avoid losing their investment all together.
Industry operators said the favourable tax regime in Mauritius is likely to keep more investors trooping to the island nation as they expand their businesses in line with ongoing regional integration.