Conduits of Capital

centres provide efficiency, as they have (a) the ability to
offer proven and reliable tax transparency, and (b) a good
BOX 1: FACTORS IMPACTING CHOICE OF DOMICILE
Legal Framework. A country that wishes credibly to position itself
as a domicile for international funds will need a legal and regulatory
framework that recognises the various types of funds, whether they
are to be publicly offered collective investment schemes or more
specialised professional schemes such as private equity funds or
hedge funds. The importance of a steady regulatory regime and an
efficient, trusted and rational regulator cannot be overemphasised.
Partnership law provides for the formation of partnerships and
governs the relationship between partners as well as with third
parties. Limited partnerships are regarded by most tax authorities
as ‘fiscally transparent’ or ‘pass through’ provided that they
pass certain tests, that is to say that, unlike a corporation, the
partnership entity is not subject to tax but that it is its partners that
are subject to tax on the income or profits they receive at whatever
rate is appropriate to them. This is a very useful way of enabling
a partnership to attract a wide diversity of limited partners, each
of which may have a different tax status, since, for example, a
limited partner, like a pension fund that is tax exempt, will not suffer
unnecessary tax.
Role of Custodians. In the context of recent legislative changes
the role of custodian is an increasingly important one. Keeping
assets safe and separate from the assets of other clients ensures
that the limited partners are able to enjoy their contractual rights
and benefits by minimising potential conflicts of interest, which are
potentially great. The opportunities for managers of any type of
collective or pooled fund to maximise their profits at the expense
of outside investors (limited partners, shareholders, unit holders
or other kinds of beneficiary) are considerable. These include fair
allocation, allocation of losses, affiliated and personal dealings,
costs of execution, payment of fees to external advisers.
Administrative Capacity. Any kind of investment fund requires a
sophisticated administrative backup. Typically for a private equity
fund the services required would include:
• Set up and registration of a fund
• Fund launches
• Customer due diligence and anti-money laundering checks
• Receipt and administration of commitments and calls
• Fund accounting
• Valuation of enterprise assets
• Corporate and secretarial services
• Investment processing
• Investor relations and reporting
• Regulatory reporting
It is a precondition for any country that wishes to attract private
equity funds that it be able to offer a good choice of administration
companies to carry out the functions listed above. Indeed many
fund domiciles insist that some or all of these functions are carried
out locally, where the fund is based and registered in order to
ensure that employment is created locally.
range of legitimate double tax agreements 4 with relevant
jurisdictions into which investments are to be made, thereby
avoiding eventual double taxation.
It should be pointed out that almost all investment funds,
wherever they are domiciled, are ‘tax transparent.’ This
means that the tax point is moved from the fund (where no
tax is levied) to the end investor in the fund. The investor
will pay tax due in the country of tax residency. The fund
is just a convenient vehicle for pooling investments and
transmitting revenues. 5 It is also questionable whether
there would be any fiscal gains, as PE funds, often
established as limited partnerships, are generally fully tax
transparent. 6 Altogether the motivations for onshoring PE
funds due to lack of transparency and harmful tax practices
appear weak.
It is important to note that in becoming attractive venues
for foreign-based investors onshore jurisdictions would
need to build the same tax arrangements (tax transparency
and double tax agreements) as provided by offshore
jurisdictions.
In addition to the factors outlined above an important
consideration is that the viability of offshore centres,
such as Mauritius, depends on economies of scale
in providing processing capacity to a large number
of funds. Any new centre will have to overcome this
scale factor which in effect constitutes a serious barrier
to entry.
In this context, one comparative advantage of onshore
centres could be that they provide access to local
authorities and decision-makers, whereas offshore centres
are distanced by their nature. However, due to their small
size financial systems in Africa are highly fragmented,
and the platform provided by aspirant onshore centres,
such as Rwanda or Botswana with small local financial
systems, has limited value. 7 In effect funds that decide to
shift their domicile to these smaller countries would benefit
only marginally from local access, as for all intents and
purposes, they will continue to invest predominantly outside
their country of domicile.
4
One of the reasons that the UK is such a popular investment destination for both direct and portfolio investment is one of the world’s most extensive
range of double tax agreements.
5
In this respect an ‘offshore’ fund is no more a tax avoidance scheme than a UK unit trust or a Luxembourg SICAV. It is interesting to note that the UK
has recently legislated for a new type of fund, the ‘contractual’ fund, which is designed specifically to attract a certain category of investor that requires
an absolutely transparent tax regime.
6
This does not mean that investors always pay tax. Unrelated to the domicile of the PE fund or any other fund, investors may invest through a pension
fund (which are tax exempt in most countries) or establish vehicles that make tax avoidance possible. The latter is an arrangement the end investor
may choose to make and has no connection with the domicile of the fund in which the investment is made.
7
This could change if and when integration efforts within the EAC and SADC take on a more meaningful dimension, e.g., by introducing sub-regional
currencies and free trade in financial services, including lifting of any exchange controls or limits of repatriation of profits.
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