Tax haven label and Mauritius: Is there some hypocrisy in all this?

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Mauritius is being excoriated within the international press as a ‘tax haven’ and the paradise papers have shed an unflattering light on some companies within its offshore sector. Mauritius has also been accused of ‘rising at Africa’s expense’ in the international media. But is there not just a whiff of hypocrisy in all this? Here is why, when it comes to Mauritius’ offshore sector, things are not so black and white.

Is Mauritius rising at Africa’s expense? The accusations follow the Paradise Papers leaks that seem to be confusing Mauritius’ offshore business with the actions of a few companies and actors within the jurisdiction. But questions need answers. And in this particular case, the answer must not only address the facts of Mauritius’ offshore sector and whether or not Mauritius’ low-tax regime is beggaring Africa, but also, significantly, address the inconsistencies in the case of the country’s critics.

Since the foundation of the offshore sector in 1989, Mauritius has positioned itself as a “gateway to Africa” for foreign investors. In 1992, it passed key legislation to allow foreign corporations to base themselves in the country, while at the same time slashing taxes and signing tax treaties with other states, preventing Mauritius-registered companies from being taxed twice. This bedrock for the industry turned the offshore sector into a behemoth and, by 2000, Mauritius was hosting companies with assets valued at $630 billion, or 50 times the country’s own GDP. Critics of this model, however, argue that Mauritius’ low tax rate and tax treaties with other states are being used by companies to avoid paying taxes where they do business by pretending to be Mauritian entities. In official parlance, this is called ‘treaty-shopping’. The crux of the case against Mauritius is the sheer level of illicit financial flows out of Africa, in which Mauritius’ offshore sector is supposed to be playing a part, thus depriving African states of much-needed taxation revenue. A high profile 2015 report commissioned by the African Union and chaired by ex-South African President Thabo Mbeki on illicit financial flows out of the continent, estimated that Africa loses at least $50 billion each year via such financial flows.

The report went on to state that the continent was exposed to such flows essentially because of “the high exposure of individual African countries, most notably Mauritius. Its operation as a relatively financially secretive conduit results both in high exposure for itself, but also for other countries across the region”. Indeed, just to take one example, the United Nations Conference on Trade and Development reported that financial flows out of South Africa to Mauritius between 2006 and 2009 went from 35.5 billion South African rands to 53.5 billion rands. But there is a problem with just going by the numbers: in its definition of illicit financial flows, the AU report defines it as “money that is illegally earned, transferred or utilised”, clubbing together with a broad brush everything from tax evasion, dodgy invoicing, the drug trade, black market arms dealers and proceeds of political corruption.

Nowhere is the distinction made between a company legally (even if unethically) domiciling itself in another country to pay lower taxes and the fruits of crime and corruption. Nor indeed between companies hiding money abroad or setting up headquarters somewhere else to gain a comparative tax advantage. This broad brush allows critics to segue quite effortlessly from decrying a race to the bottom amongst states when it comes to taxes (distasteful, but legal) to mixing this with crime and corruption.

The Mauritian case has traditionally been that bringing investments in this way actually helps other countries develop by channelling in foreign investments and calming jittery businesses, a case that Rajiv Servansingh, chairman of MindAfrica projects adumbrates: “We do have lower taxes than many states in Africa, but there is the flipside as well. Mauritius is a credible jurisdiction that attracts investors wanting to go into Africa.” For him, the question is: “If Mauritius were not there, would these investments go into Africa? We cannot deny that companies going via Mauritius would not give as much to these states in terms of taxes, but if this service did not exist, those investments perhaps would not arrive at all.” In other words, the benefits from foreign investment – jobs, technology, skills and manufacturing infrastructure – far outweigh the costs in terms of lost taxation revenue.

Different priorities

But this case has increasingly been falling on deaf ears as developed and emerging states crack down on tax avoidance, with countries such as Mauritius coming to be projected as the pantomime villain of the piece. That ‘tax havens’ and low tax jurisdictions will see the going getting tough is inevitable. Perhaps. But there is more than a hint of hypocrisy in the way that states like Mauritius are being projected.

One need look no further than the revision of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius last year, after India too accused the treaty of depriving it of tax revenue. It was signed in 1983 but utilised little. After all, at that time, India was a closed shop under the sway of Nehruvian state capitalism that shielded its indigenous corporations through tariffs and dissuading foreign investment. After 1992 and the economic liberalisation, however, Mauritius and the DTAA figured prominently in channelling investments in. As the Indian economy progressively opened, more and more investments started coming in via Mauritius. These included foreign investors looking to go into the Indian market as well as Indian companies wanting to take advantage of the DTAA to reduce their tax bill by round-tripping via Mauritius. Between 2000 and 2015, more than one-third of all FDI going into India was coming through Mauritius.

“India was quite happy with this and did not raise an issue as it was hungry for investments at the time,” Servansingh observes.

In other words, so long as the cash was coming in, they were willing to ignore the odd Indian firm round tripping. A decade on, beginning in 2002, with its investment credentials firmly established, the Indian state now turned its attention to tax. And following unfavourable rulings in Indian courts against tax claims by its exchequer, New Delhi now looked to amend the DTAA itself. And thus began the long war between Mauritius and New Delhi over the treaty. “Perhaps they felt that they didn’t need Mauritius anymore,” Servansingh opines. In the 2014 election in India, the BJP government raised Mauritius’s round tripping as an issue, clubbing it all under the rhetorical flourish of “black money” and promised to bring it all back home and give every Indian $24,200. Also, the BJP planned to make Narendra Modi’s home-state of Gujarat a financial centre of its own. Following a change in government in Mauritius too, Port Louis then pulled a volte-face and agreed to amend the treaty: a decision that ex-Finance Minister Rama Sithanen in May 2016 termed “a poor strategic choice” given that the amendments gave taxation rights to New Delhi rather than sharing taxation rights with Mauritius, which Port Louis was pushing for. “The treaty with India accounts for almost 75% of the value addition of global business. For the high-income generating funds (essentially private equity and real estate funds), India represents 73% of total investment,” Sithanen then wrote.

Much the same logic can be seen at play when it comes to charges coming from African states. The more developed states that feel that they are sufficiently attractive enough for investors have started bringing up taxation – such as South Africa that amended its own DTAA with Mauritius in 2015, while the less attractives ones eagerly signed new ones with Mauritius. So it seems, the rhetoric about ‘beggaring’ Africa has as much to do with the confidence of the state making the claims as anything Mauritius does.

Lacklustre crackdown

And then there is the Organisation of Economic Cooperation and Development (OECD). Its own efforts to combat tax havens have been paltry at best. It’s targeting of ‘tax havens’ have stopped at just securing ‘commitments’ from territories in its sights to become more transparent. Such was the case with the ‘blacklists’ of tax havens it came up with in 2012 and 2015, which saw Mauritius temporarily included and then taken out again. One issue with following the OECD’s lead is that while it actively targets small island states, it largely ignores its own much larger members such as the US – some of whose states rely on the same tactics to attract investments – as well as others such as the UK. And with one-tenth of the world’s GDP held in ‘offshore tax havens’, the problem is not one that Mauritius created, nor one it is exclusively responsible for. Naming and shaming jurisdictions seems to be a substitute for aggressively tackling what the OECD sees as a massive problem.

This curious approach plays well with tax justice activists – they get targets – but any concerted lack of follow-up ensures that nothing is really accomplished as far as taxes are concerned. Aside from, of course, reputational damage to states such as Mauritius. It is in all this confusion that Mauritius can be labelled as a tax haven creaming off Africa, and recent moves by the Mauritian government to defang regulators such as the Financial Services Commission (FSC) and the Board of Investment (BOI) to facilitate shady characters such as Álvaro Sobrinho or risk-addicted offshore firms such as Appleby, only further blur the lines in the debate.

Nevertheless, the rhetoric may be simplistically black and white, but the reality – with the sector itself, the government’s faux pas and motivations and circumstances behind the criticism – is grey. And that is what merits more attention in this debate.

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