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.
We have for a while been sounding alarms about the emergence of (yet) another tax haven/secrecy jurisdiction in Kenya. A few months ago we quoted the newspaper African Arguments:
“Anti-corruption campaigner John Githongo has warned that in this setting, the NIFC “would be like a financial crime aircraft carrier, self-contained and able to cause considerable damage”.
We noted, too, the central role played by the Lord Mayor of the City of London Corporation and one of the City Corporation’s main lobbying bodies, TheCityUK. Now, via the Institute of Certified Public Accountants of Kenya, a new draft Nairobi International Financial Centre Bill, 2016, which we believe came out this month. Its preamble calls it:
“A BILL for an Act of Parliament to provide a framework to facilitate and support the development of an efficient and globally competitive financial services sector in Kenya . . “
India cracks down on a major tax evasion route
A guest blog by Abdul Muheet Chowdhary
My award winning essay, written for a competition jointly held by the Tax Justice Network and Oxfam International, focused on how India is unable to meet its child rights obligations as it loses a huge amount of tax revenue because of some policy decisions taken by the government. These decisions enable tax abuse, and as is being increasingly understood, tax abuse is a human rights issue.
One of these decisions is the Double Taxation Avoidance Agreement (DTAA) with Mauritius, a favourite tax haven for Indians. Under this, Mauritius based companies selling shares of Indian companies are effectively exempt from capital gains tax. This encouraged tax evaders to route investments into India through Mauritius based shell companies, leading to lots of tax revenue foregone. Official data states that over the 15 year period from 2000-2015, the highest amount (34%) of total FDI into India was from Mauritius, valued at US$ 93.6 billion.
Analysis: Can we beat tax avoiding multinationals? – Finance Uncovered/ Byline
How to lose $4billion Global Witness
New report, coming ahead of a pivotal meeting of the Extractive Industries Transparency Initiative (EITI). “Credibility test for global transparency standard as $4bn lost to anonymous oil and mining companies.”
New Delaware Freeport Offers New York Collectors an Art Tax Haven Close to Home artnet
For more on freeports, see our earlier blog Freeports: now Luxembourg adds to the sleaze
Can Stopping ‘Tax Dodging’ by Multinational Enterprises Close the Gap in Development Finance? Center for Global Development
Finance Uncovered reveals how Africa’s biggest cell phone firm shifts billions offshore
The Finance Uncovered global network of investigative reporters have today published a cross-border investigation into South African telecoms giant MTN exposing how billions of rand from its subsidiaries in Ghana, Nigeria and Uganda have been shifted to a shell company in the small island tax haven of Mauritius.
A report in Nigeria will follow shortly.