Eric Mutema, Africa. Com
Lately, tax treaties have begun to fall out of favor. A growing chorus of government officials, academics and international institutions have concluded that the treaties are responsible for siphoning vital tax revenue from the world’s poorest nations and are a key driver of global wealth inequality.
Research on 28 treaties signed with the Netherlands found that they cost poorer countries collectively at least $1 billion a year in lost tax revenue, and probably much more. Another study found that 40 treaties Belgium signed with former African colonies and other countries cost them a total of $44 million in 2012, while providing only modest increases in investment. Studies of Austria, Finland, Switzerland and Denmark also showed that treaties exacerbated tax avoidance in poorer countries.
By 2013, almost half of all foreign investment in India could be traced to companies in Mauritius, according to the United Nations. Under its treaty, India had granted Mauritius the sole right to tax capital gains when a Mauritius company sold shares in an Indian company.
The problem? Mauritius doesn’t tax capital gains, meaning companies avoid such taxes in both countries.
In a 2018 study, Tsilly Dagan, an Israeli law professor, flatly called the common justification for tax treaties “a myth.” “Developing countries … have to sacrifice more to become members of the ‘treaty club.’”
Poorer countries push back
Some countries have tried fighting back – but it’s not easy. Renegotiations can take years. Political leaders often seek to avoid the diplomatic fallout.
South Africa signed a new treaty with Mauritius, which first ignored South Africa’s requests to modify the 1997 text and then resisted for years, according to people involved. Western corporations lobbied the South African parliament to reject the renegotiation and threatened to move their offshore operations to Dubai. The new treaty took effect in 2015.
“The old treaty basically gave the store away,” said Lutando Mvovo, a former South African treasury official who took part in the negotiations.
Successive Indian governments for years challenged the legality of the Mauritius 1982 treaty. And they kept losing. In a landmark 2012 case, India’s Supreme Court held that the tax office could not question U.K. telecom giant Vodafone’s $11 billion acquisition of an Indian rival through a Mauritius company. The decision cost India $2.2 billion in lost tax revenue.
It took 20 rounds of negotiations over 20 years for India to prod Mauritius in 2016 to remove the abusive provisions of the original 1982 treaty, one Indian official told ICIJ.
In separate interviews with ICIJ, tax officials in Egypt, Senegal, Uganda, Lesotho, South Africa, Zimbabwe, Thailand, India, Tunisia and Zambia all said their treaties with Mauritius were crippling.
“Personally, we regret signing the treaty,” said Setsoto Ranthocha, an official with the Lesotho Revenue Authority, now involved in a renegotiation effort. Lesotho’s treaty with Mauritius dates to 1997.
“The companies are the winners,” Ranthocha said. “It makes me go mad.”
Namibia is reviewing its treaty with Mauritius, officials told ICIJ partner The Namibian. In March, Kenya’s high court struck down that country’s treaty with Mauritius for technical reasons. Tax Justice Network Africa filed the complaint, arguing that the treaty would allow companies to abusively “siphon” money out of Kenya. In June, Senegal announced that it would seek to cancel its tax treaty with Mauritius, claiming that the agreement cost it $257 million over 17 years.
“It is the most unequal treaty for Senegal of all the treaties we have signed,” Magueye Boye, a tax inspector and Senegal’s lead treaty negotiator, told ICIJ. It is an “enormous pipeline for tax avoidance,” he said.
Another country reviewing its treaty with Mauritius is Uganda.
In July 1984, Geldof witnessed the famine then devastating Ethiopia and returned home to co-write the song “Do They Know It’s Christmas?” He persuaded Phil Collins, Boy George, Bono and more than a dozen other rock stars to record it, creating one of the best-selling hits of all time. “And in our world of plenty, we can spread a smile of joy,” they sang.
In 1985, Geldof launched the Live Aid concert of top-tier rock stars held in London and Philadelphia that raised more than $140 million for famine relief. He received an honorary knighthood the next year at age 34.
Geldof has continued to speak publicly in support of African economic development. In 2004, he joined then-British Prime Minister Tony Blair to launch an anti-poverty Commission for Africa, singling out Uganda as a particular case of blight and misery.
In a later interview, Geldof discussed the importance of growing small and medium-sized businesses and an expanding middle class on the continent. “Once the state can tax proper income, it can begin to cohere, it can pay its police, its courts, its army,” he said.
In 2008, two decades after Live Aid, Geldof co-founded 8 Miles, the Africa-focused private equity firm that bought a majority stake in the Ugandan chicken farm.
Named after the shortest distance between Europe and Africa – at Gibraltar – the firm said it aimed “to deliver improved environmental, social and governance outcomes in the creation of market-leading African companies.”
On its website the for-profit firm says it aims to “contribute to the economic development of the countries in which the Fund invests.” It promotes investments in “companies to inspire Africa” and hopes to make substantial returns for investors, according to a confidential memorandum. It has signed the U.N.-supported Principles for Responsible Investment, which commit companies to respecting environmental, social and other corporate standards.
But in an annual financial report filed with U.K. regulatory authorities, the firm says its “principal objective” is “creating capital growth and realizing capital gains.” The fund raised about $150 million and by 2017 had invested nearly all of it in eight companies, according to an 8 Miles financial statement for that year filed in the United Kingdom.
8 Miles has taken stakes in an Ethiopian wine company, a Ugandan bank and an Egyptian manufacturer of resins for lacquer, varnishes and plastics. Among the investments in 2014 was $9 million in Biyinzika Poultry International Ltd., Uganda’s leading chick producer. The company’s name means “With God, all things are possible.”
Leaked Conyers Dill and Pearman records reveal that 8 Miles spent thousands of dollars on advice and services that might reduce taxes. Advisers repeatedly raised tax issues, including discussions on investment vehicles preferable for “tax reasons,” according to emails.
Under “taxation implications” in a business plan dated March 2013, Conyers employees wrote that the partnership “may require a tax residency certificate” to “benefit from the double tax agreement network.” Four of the seven African countries in which the fund’s companies operate had a tax treaty with Mauritius at the time of the fund’s investments.
The partnership eventually set up a Mauritius management company, Eight Africa Management (Mauritius) Ltd., which received a Global Business License and became eligible for Mauritius tax rates, according to the 8 Miles 2017 annual report.iWill Fitzgibbon / ICIJ
The 8 Miles spokesman told ICIJ that: “The companies we invest in, pay all taxes in their home jurisdiction in Africa” and sale proceeds are paid back into Mauritius only after a company’s sale.
The fund declined to provide financial records from Mauritius that could detail management fees and other money flows.
8 Miles said tax treaties “are a matter between the governments who sign these agreements and we comply with such agreements but we do not make them.”
Ugandan tax officials say that corporate abuse of the treaty with Mauritius has been rampant. In December 2018, Uganda sent four officials to Mauritius to renegotiate the agreement. Mauritian officials resisted changes to the most troublesome elements of the treaty, one participant told ICIJ.
“It’s a very bad treaty,” a Ugandan tax official told ICIJ. “Lots of problems.”