A new trove of leaked documents from a Mauritius-based firm suggests that other African countries may be losing massive amounts of tax revenue as investors use the island nation’s attractive tax regime and the creation of shell companies to anchor investments elsewhere on the continent.
This is not a new issue. The government in Mauritius has been worried about global reputational fallout from being labelled a secrecy jurisdiction and has committed to implement the international BEPS convention.
But the 200,000 #MauritiusLeaks from the law firm Conyers Dill & Pearman released on 23 July now make the charge far harder to shrug off.
The papers of Conyers Dill & Pearman, which opened its doors in Mauritius in October 2009, were leaked to the International Consortium of Investigative Journalists (ICIJ). The ICIJ has previously covered leaks from other tax havens, including #PanamaPapers and #ParadisePapers.
- Conyers Dill & Pearman technically ended its operations in the island nation in 2017 after three directors bought the Mauritius unit. Even that purchase, according to draft communiques in the email leaks, was designed to reduce taxes paid in Mauritius.
As African countries struggle to meet revenue targets, many local and international investors choose to domicile their investments in Mauritius due to its low tax regime and tax treaties.
- To avoid taxes, companies open a shell company in Mauritius and apply to the government for a Global Business Company 1 certification. The certification serves no other purpose, anti-money laundering attorney Guy Christian Agbor told ICIJ, “but to take advantage of tax treaties and to avoid paying taxes”.
- Receiving a tax residency certificate allows companies to cut taxes under double-taxation avoidance agreements (DTAAs) Mauritius has signed with other African countries. According to a 2016 letter to the World Bank, the country has 19 DTAAs and 19 other treaties with other African countries. It has a total of 45 tax treaties.
In 2010, for example, Aircastle, the company that leases planes to many airlines including American Airlines and South African Airways, decided to avoid paying taxes in South Africa by creating an offshore company. The resulting company, Thunderbird 1, is one of six similarly named shell companies in different tax havens, all belonging to the same company. The ICIJ’s interactive graphic illustrates just how this works, with documents to prove it:
- Thunderbird then sub-leased its Airbus A330-200 plane to South African Airways, earning $772,725.60 in a sample month on the lease. The money was paid through Deutsche Bank, which ended operations in Mauritius in 2018.
- “Thunderbird paid only 1.5% tax on profits of $5.5m in its first year,” the ICIJ reports. For three years, the company made $24m in operating profits and only paid $382,600 in taxes.
The list of companies in the #MauritiusLeaks also includes 8Miles LLP, a private equity firm co-founded by musician and anti-poverty activist Bob Geldof. The firm has investments in seven African countries, four of which have a tax-treaty with Mauritius.
In the early 1990s, the small island nation of Mauritius transformed itself into a tax haven. Rama Sithanen, the finance minister at the time, looked at examples of other tax havens and realised that the country could offer something similar for African countries.
- The result was a flat 15% corporation tax rate which can go down to 3% with exemptions. Even more attractive is that it does not charge capital gains tax, even as other African countries introduce the tax to widen their tax bases.
- An industrious Indian lawyer, Nishith Desai, had found a dormant tax-treaty between India and Mauritius that allowed his clients to avoid paying taxes both in the United States and India.
- Mauritius then replicated it, signing multiple tax treaties in the next three decades as it marketed itself as a financial route, “the gateway to Africa”.
The small island of 1.3 million people has benefited from being a financial hub. It now ranks as one of the richest countries in Africa, and the number of individuals with assets over $1m has grown faster than in any other country on the continent. According to AfrAsia Bank’s Wealth Report, the total wealth in the country rose by 195% between 2007 and 2017.
- Mauritius is now the most competitive country in Africa, at 4th on overall GCI, and has a GDP per capita of $9,424.50.
- Most of this success has been built on financial services: financial and insurance activities, monetary intermediation, and financial leasing and other credit granting now collectively contribute 17% of Mauritius’s GDP.
While tax avoidance is legal, there are troubling moral and ethical questions of denying much-needed tax revenue to the countries that need it. Many countries are now reviewing their treaties with Mauritius, and the efforts are led by either governments, judiciaries, or civil societies.
- In March, a Kenyan judge struck down the country’s treaty with Mauritius. President Kenyatta signed a new one on his visit to the island the next month.
- In June, Senegal said it wants to cancel its tax treaty.
- Uganda is also reviewing its treaty.
It is not just international investors who are seeking out Mauritius’ low-tax regime. African elites, such as Ugandan tycoon Patrick Bitature, also used the law firm to organise their investments. In his response to the ICIJ, Bitature said: “All taxes, if any, were paid [and] there was no nefarious agenda.”
- Another big name on the list is Kenya’s cabinet secretary for information and communications technology, Joe Mucheru. One of the companies in which he is a significant shareholder, Umati Capital, was registered on 27 September 2012 in Mauritius.
The original tax treaty between Kenya and Mauritius, signed in 2012 and struck down early this year, never actually came into force but many investors had and still used the route to avoid taxes in Kenya before it was signed.
- A $62.5m real-estate deal for 10,000 acres of prime real estate just outside of Nairobi in 2010, for example, was transacted entirely in Mauritius and Luxembourg.
Due to pressure from other countries and the OECD, and the general frowning upon of tax havens, Mauritius has made some cosmetic changes to its tax model. In January, it replaced its Global Business License 1 with a one-size-fits-all Global Business License. Investors now require “enhanced substance” in the country to get tax benefits.