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.
Today sees the signing ceremony of a new multilateral instrument (MLI) to limit the extent to which bilateral tax treaties create the conditions for large-scale multinational tax avoidance. The OECD’s Pascal Saint-Amans told the Financial Times (£) that “treaty shopping will be killed”. Treaty shopping describes the practice of multi-national companies in comparing and selecting which jurisdictions offer them treaties with the greatest possibilities for minimising their tax bills and maximising other sweeteners, thereby pitting one nation against another, driving a race to the bottom that harms everyone. It allows them to route investments through third countries to acquire the protection of investment treaties that investors would not otherwise have in their home state jurisdiction.
Deloitte’s Bill Dodwell called this new multilateral instrument “a big deal”, predicting that companies would see tax rises of 8-10%. The Financial Times article quotes our Alex Cobham who welcomes it while expressing some caution. Here’s the full statement:
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:
From the United Nations General Assembly, the fifth report of the Independent Expert on the promotion of a democratic and equitable international order. The summary goes like this:
“The report focuses on impacts of taxation on human rights and explores the challenges posed to the international order by widespread tax avoidance, tax evasion, tax fraud and profit shifting, facilitated by bank secrecy and a web of shell companies registered in tax havens. The Independent Expert calls for resolute action by the international community, including through the creation of a United Nations tax cooperation body, the adoption of a United Nations tax convention, the phasing out of tax havens, the revision of the Guiding Principles on Business and Human Rights to include the obligation of corporations to pay their fair share of taxes and the adoption of a financial transactions tax.”
As you can imagine with an introduction like this, here’s a lot of tax justice stuff in here, and TJN gets a number of mentions. It follows our earlier blog on calls by Rafael Correa, head of the G77 group of developing countries, for an international tax body. Among other things, the UN Independent Expert on the promotion of a democratic and equitable international order discusses the definition of ‘tax havens’ and refers to TJN’s alternative term ‘secrecy jurisdiction’ while providing further details on TJN’s Financial Secrecy Index (FSI) and the top listed jurisdictions on the FSI 2015 here (p9 and in the annex).
We’ll highlight only this section below for now, which is a recommendation for the following:
Updated with additional information about Correa’s administration and exposés in the Panama Papers scandal; scroll down.
Ecuador’s president Rafael Correa has published a significant statement about international tax governance, and specifically the prospect of creating a global tax organisation. This is particularly important, given that Ecuador has just assumed the presidency of the G77 group of developing countries.
“A rapidly growing global web of tax havens is one of the key drivers of this inequality . . .
No one country can tackle this complex, secretive global financial conspiracy alone. Coordinated and comprehensive global action is needed. Current moves towards greater transparency about the initial owners of money held in shell companies can be part of the solution, but modest efforts at achieving greater transparency are not enough. We need to scrap tax havens altogether.