There was news this week that Mauritius has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). This is an initiative from the OECD to allow countries to take measures designed to stop tax avoidance by multinational companies and put them into their existing network of tax treaties without renegotiating those treaties.
This is a particularly important measure for a countries like Mauritius. Mauritius has a wide network of tax treaties with African and South Asian countries allowing it to act as a conduit for capital to slip tax freely between the West and the developing world. This is commonly called treaty shopping.
So, the signing of the MLI by Mauritius should be seen as good news. Well, not quite. The MLI does not change the relationship between the signatory and all other countries that have a tax treaty with the signatory. Jurisdictions which are not part of the MLI are not included, and even within the MLI jurisdictions can chose not to modify tax treaties with others in the system. This happens through the publication of each country’s ‘preferences’.
A closer look at Mauritius’s ‘preferences’ shows that a number of vitally important treaty relationships are not covered by the jurisdiction joining the MLI, leaving a number of developing countries vulnerable to companies using Mauritius to shift profits in an attempt to avoid tax.
We have been through the list of Mauritius’s ‘preferences’ in the MLI and Mauritius’s existing treaty network. The jurisdictions which currently have a treaty relationship with Mauritius but are not covered by the MLI are as follows:
Countries which are not covered by the MLI or do not match in terms of these preferences have to renegotiate their treaties on a bilateral basis to include clauses which prevent the tax abuse. Here things can get complicated too, as there are a range of anti-avoidance measures available to countries, some better than others. In one key area – the anti-treaty abuse rule – an effective option is to apply a “principle purpose test”. (PPT) This test denies the benefits of a tax treaty if one of the principle purposes of a transaction was to gain that treaty benefit. Mauritius has accepted this test as an interim measure in the countries it will implement the MLI with.
However, in bi-lateral negotiations it has said it prefers the limitation of benefit rule, which applies a large number of more technical criteria to the parties completing a transaction and denies treaty benefits to parties which do not meet those tests. Those tests can be a local ownership requirement, for example.
A limitation of benefits rule is much more complicated to administer than than a PPT test, which causes difficulties for developing countries.
Finally, through the MLI system a country does not need to implement all of the anti-avoidance provisions which form part of the MLI. As well as choosing which countries the MLI applies to, a contracting party can also express reservations on specific policy areas which it does not want to implement. Mauritius has a great deal of reservations about MLI provisions, including on measures such as strengthening capital gains tax from the sale of participations in domestic companies (article 9), the transfer of dividends (article 8), and provisions to prevent tax abuse of income from permanent establishments in third countries (article 10), and the artificial avoidance of permanent establishment status (articles 12 and 13).
So whilst Mauritius (and others) may celebrate the signing of the MLI as a great work of spin for this tax haven island, the weakness of the system still allows this jurisdiction to create significant problems for its neighbours in Africa and South Asia.
An interesting event has come to our attention that we’d like to share, taking place at Chatham House in London. Full event details here.
Recovering Africa’s Stolen Assets: Lessons from the Windward Trading Case
A report by the World Bank’s Stolen Asset Recovery programme found that, while nearly $1.4 billion in suspected corrupt assets were frozen in OECD countries between 2010 and 2012, less than $150 million was returned. Recovering stolen assets is of particular importance for sub-Saharan African countries, given the extent of the looting of public funds carried out by corrupt leaders and officials.
Prosecuting international corruption and recovering stolen assets has proved difficult and time-consuming. Both states from which assets have been stolen, and those where these assets are laundered or stored, have struggled to produce results.
From TJN’s Department of ‘You Couldn’t Make This Up’: the East African press is reporting that Uganda’s former Energy Minister, Syda Bhumba, has confirmed that she signed a tax waiver agreement with UK company, Tullow Oil, without reading the document. The waiver, which exempted both income and capital gains from tax, is being disputed by the Uganda Revenue Authority on the grounds that she had no authority to sign such a waiver since authority in this area lies with the Finance Minister.
Today the Plateforme de Protection des Lanceurs d’Alerte en Afrique (PPLAAF) will be officially launched during a press conference in Dakar. We’re sharing the details with you here:
Today the British Parliament will debate a Bill that tries to tackle unfair tax treaties between the UK and developing countries, some of which go back to the 1940s, sometimes when countries were still British colonies. It’s an initiative we very much welcome and we hand over to our friends at Action Aid UK to tell you more about it: