Conduits of Capital

in absolute terms, or relative to the non-poor to decrease
inequality. 42 As noted by the Organisation for Economic Cooperation
and Development (OECD), “[d]evloping countries
with similar rates of economic growth have experienced
quite different levels of economic poverty reduction, due to
initial conditions and whether growth occurs in areas and
sectors where the poor live and are economically active.” 43
Because job creation driven by PE domiciliation primarily
requires skilled labour—such as accountants, lawyers, fund
administrators—and focuses on a small subset of financial
activity (PE and venture capital), it largely bars the poor
from participating in and benefiting from the growth. While
the development of a skilled labour force could indirectly
benefit the poor through increased remittances or unskilled
jobs, we suggest that the extent would be modest.
One may suggest onshore financial centres have the
potential advantage of being near larger pools of capital
than offshore centres. Funds, however, typically have
both an onshore component for domestic investors and an
offshore component for foreign investors. While domestic
investors often cannot escape regulatory and tax issues by
going offshore, international investors typically favour the
offshore vehicles for their regulatory and tax advantages.
In addition, the speed with which global capital now moves
in many cases reduces the impact of geographic barriers
between limited and general partners.
Another question must address the feasibility of creating
an onshore financial hub for PE in Africa. In the following
section, we explore how Mauritius came to its present
dominance as a PE domicile and the strategies another
country would have to pursue to compete with it.
5. THE SPECIAL CASE
OF OFFSHORE FINANCIAL
CENTRES – MINI-CASE:
AFRICA-FOCUSSED FUNDS
AND MAURITIUS
In this section, we focus on the specific decision drivers
for Africa-focussed PE funds. Experts suggest Mauritius is
the domicile of choice for African PE funds, 44 and thereby
serves as a fitting case study to understand the incentives
behind domicile decisions.
5.1. Drivers for Mauritius Domiciliation for
Africa-focussed PE Funds
In a review of practitioner opinions, we identify a number
of key attributes leading private equity fund managers
to domicile Africa-focussed funds in Mauritius. These
include tax, legal, and financial incentives, geography and
organisational memberships, political stability, and local
professional service providers. We discuss each below.
1. Tax incentives
In response to a surge in foreign direct investment (FDI)
investment from Mauritius-domiciled investment funds
in 2010, Trident Trust—admittedly not the most objective
source because it offers fund administration services there—
examined the PE industry’s attraction to the jurisdiction.
The study found that PE funds capitalised on Mauritius’s
own low tax environment and its network of DTAAs (Double
Taxation Avoidance Agreements):
Mauritius is party to 34 [note: 39 have entered into force
to date 45 ] tax treaties. Most of these treaties exempt
from capital gains tax the profit realised on the sale
of shares of companies based in a treaty partner – a
key private equity consideration. In addition, many of
these treaties also exempt—or apply a lower rate—
from withholding tax payments of interest, dividends
and royalties. A further attraction for private equity is
that Mauritius does not itself have a capital gains tax
and does not impose a withholding tax on dividends
paid by Mauritius companies to foreign shareholders.
Funds are subject to a local 3% [effective] tax [rate] on
ordinary income. 46
Most other African countries typically levy substantial
withholding taxes on dividends paid to nonresidents
(generally between 10% and 20%) and also impose capital
gains taxes at a rate between 30% and 35%. As a result,
Mauritius-domiciled Africa-focussed funds can create
material tax savings. 47
2. Other financial / legal incentives
Mauritius also reduces investment risks associated
with Africa-focussed funds through its African network
of Investment Promotion and Protection Agreements
(IPPAs). 48 Broadly speaking, IPPAs are bilateral treaties
between governments designed to attract investment in
each other’s territory. IPPAs in Mauritius typically give
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