Mauritius Leaks: Leak Reveals How Mauritius Siphons Tax from Poor Nations to Benefit Elites (2)

Eric Mutema, Africa. Com

As a “resident” firm of Mauritius, Sustainable Luxury could take advantage of the country’s super-low, effective maximum corporate tax rate: 3%. Sustainable Luxury also applied for — and received — special legal status from the government of Mauritius, allowing it to benefit from tax treaties between Mauritius and countries where Six Senses had spas and hotels. Treaties allow companies to reduce or entirely avoid common taxes received on cross-border payments, including interest, dividends and royalties.
Sustainable Luxury listed Oman among 11 countries where the company had investments and wished to apply for a special status and document issued by the government of Mauritius, according to company board meeting minutes. That document would allow the company to cut taxes paid to countries around the world that signed treaties with Mauritius. The leaked files don’t say whether the company ever received the document.
Linda Ambrosie, a researcher at the University of Calgary in Alberta, told ICIJ that shunting money through tax havens to avoid local taxes doesn’t square with the idea of “care for hosts and local communities” mentioned in corporate literature.
“Sustainable’ Pffff,” scoffed Ambrosie, author of “Sun and Sea Tourism: Fantasy and Finance of the All-Inclusive Industry,” a study of how cruise ships and the multinational travel and resort industry in the Caribbean avoid taxes while exaggerating their contributions to employment, public revenue and environmental protection.
“Sustainably is, first and foremost, a tax issue,” she said, “because whatever you try to do to make a destination more sustainable, like providing fresh water or good roads, needs taxes to pay for it.”
Pegasus and Cogut did not respond to requests for comment.
From sugarcane to shell companies
A longtime possession of the Dutch, French and then the British, Mauritius was for centuries a poor agrarian society with an economy based mostly on sugarcane. Its economic prospects seemed forever limited by its location, 1,250 miles east of the African coast, and tiny size, smaller than Rhode Island.
Then in the early 1990s, Rama Sithanen pushed an idea.
The Mauritius finance minister at the time, Sithanen observed that Luxembourg, Switzerland, Hong Kong and other, more obscure jurisdictions had grown into financial powerhouses by serving as low-tax gateways to wealthy nations nearby. He said Mauritius should do something similar, offering itself as a stable, corruption-free bridge to Africa and other less developed regions.
“The potential exists to explore new avenues and to look for new markets,” he argued before the Mauritius Parliament in 1992, pushing a bill that would make possible the island’s first shell companies and allow some firms to pay zero taxes on profits and capital gains. One parliamentary colleague called the bill “a wonderful tax tool.”
An opposition member objected, saying the bill would create at least the appearance that Mauritius was benefiting at the expense of poorer neighbors.
“It is a tough world,” retorted another government minister in support of the law. “We cannot waste time.”
Within weeks of the bill’s passage, Mauritius officials were off on marketing trips to Asia. In the law’s first year, 10 offshore companies incorporated in Mauritius. Two years later, that number had passed 2,400.
Tax treaties proliferate
A key part of the island’s strategy: tax treaties, lots of them.
Starting back in the 1920s, “double taxation agreements” were adopted to protect businesses with international operations from being taxed twice for the same transaction. Two nations simply agreed on dividing one set of taxes between them. To encourage investment, tax treaties also limited the tax rate governments could apply to certain cross-border transactions.
Tax treaties surged as global trade blossomed after World War II; a second wave came during decolonizations in the 1960s and 1970s. Under the umbrella of the Western-dominated Organization for Economic Cooperation and Development, richer countries pushed for treaties that awarded most of the tax revenue to themselves, not the poorer countries where the business activity took place.
Officials in some developing countries sensed early on that the system was tilted against them. Among their complaints: Western companies were shifting income out of developing countries by inflating “expenses” and “fees” paid to the home office, reducing local taxable income. “They have taken out of Zambia every ngwee [penny]” owed in taxes, Zambian President Kenneth Kaunda fumed in 1973.
Developing countries believed they had to enter into treaties to attract foreign investment, even if it meant signing away tax revenue that could fund education, health care and other vital government services.
Many experts say that treaties often aren’t even necessary. Western governments can, and often do, solve the double taxation problem by granting credits or other relief to domestic companies with overseas operations.Zoom

Aid from poor to rich

By 1974, an academic paper was already warning that the treaties in effect represented “aid in reverse – from poor to rich countries.”
Nonetheless, the number of treaties surged again in the 1990s as Western corporations and their advocates within international institutions pushed them as a requirement for attracting foreign investment. Meanwhile, tax havens, seeing an opportunity, dropped their tax rates, encouraged corporations to set up shell “headquarters” in their countries, and promoted tax treaties as a way to avoid paying taxes.
For Mauritius, a big breakthrough came in the early 1990s when an enterprising lawyer in Mumbai discovered that a then-dormant 1982 India-Mauritius tax treaty would allow his Western clients to avoid paying taxes in both the United States and India. Western money poured into the newly liberalized Indian market – after first passing through Mauritius.
“Success has many fathers,” said the lawyer, Nishith Desai, in an interview with ICIJ. “People didn’t even know where Mauritius was located. People mixed things up between Mauritius, Maldives, Malta . . . a lot of small islands starting with the letter ‘M.’ ”
Gushing press releases and news articles suggested that Mauritius was on a path to becoming the Hong Kong or Singapore of the Indian Ocean. “We avoid stacks of tax,” one fund manager told Toronto’s Financial Post in 1994.
Mauritius introduced a flat corporate income tax rate of 15% with foreign tax credits that can drive that down to an effective rate of 3%. Mauritius rolled out Global Business Licence 1, which allows companies with operations elsewhere to be “resident” in Mauritius for tax purposes and pay its low rates. It went on to sign dozens of tax treaties with countries around the world, including 15 in sub-Saharan Africa.

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