Tuesday, January 28, 2014

Tax Avoidance via Mauritius

Mauritius’s population is just 1.3 million, yet the island boasts 21 banks, including such global names as HSBC, Standard Chartered, Barclays, Deutsche Bank and South Africa’s own Investec and Standard Bank.

The world’s largest reinsurance company, Munich Re, has a presence in Port Louis, Munich Mauritius Reinsurance Company (MMRC), which is a separate subsidiary to Munich Re of Africa, based in Johannesburg.

Mauritius has 26, 096 global business companies and 905 global funds in the country. The financial services sector, which contributes 10.3% to a GDP of $10.49bn, employs 13 000 people. The sector accounts for the third highest number of active occupation permits held by foreign nationals (12%) behind the media industry (18%) and hospitality and airline industry (16%). About 15,000 Mauritian accountants, lawyers and other professionals work with offshore companies.

Mauritius is consistently ranked by the World Bank as the easiest country in which to do business in the region, Mauritius ranks 19th out of 189 global economies for starting a business, in the World Bank’s ‘Doing Business 2014’. Mauritius offers one of the most advantageous offshore jurisdictions for tax structuring in Africa.

A Deloitte document, "Investing in Africa through Mauritius", passed on to the Observer, advises on investing in African companies via the island nation. A foreign company investing in Mozambique, where more than 50% of the population live below the poverty line and average life expectancy is 49 years. Normally, the foreign company could expect to pay a withholding tax on the dividends flowing back to it from Mozambique of 20%. A sale of its Mozambique investment would see the company liable for a capital gains tax bill of up to 32%.

However, the Deloitte document explains that, if the foreign company made its investment through a holding company in Mauritius, it could limit the withholding tax it would have to pay to just 8%, while capital gains tax would be reduced to zero. The potential value of capital gains tax to developing economies is considerable. An Italian oil company was recently required by the Mozambique government to pay $400m (£250m) in capital gains tax.

The document explains that Mauritius could tax the holding company's profits at 15%, but that this does not happen in practice. The firm explains that any tax liability in the island is wiped out by a foreign tax credit, issued because the company has been taxed in Mozambique.

Despite SABMiller, Africa's largest brewer and the second-largest in the world, making profits of more than £2bn ($3.1bn) a year, in 2010 the charity ActionAid found a woman who runs a shop just outside of its bottling plant in Ghana paid more tax than the multinational. United Kingdom-based SABMiller uses 65 tax haven companies: more than it has breweries and bottling plants in Africa. First it stores its 'local' brands – like Castle, Chibuku and Stone – in the Netherlands, where they collect royalties with a tax loss of £10m per annum. It pays management services fees to sister companies in Switzerland, avoiding a further £9.5m in tax in Africa and India. Then Mauritius comes in with a logistics role. The Accra brewery in Ghana sources raw materials from South Africa but routes them through Mauritius, losing Ghana about £670,000 in tax. Finally, using Mauritius in a 'thin cap' arrangement, the Accra brewery is kept artificially undercapitalised, in other words in debt to the Mauritian subsidiary MUBEX because interest payments can be offset against tax, losing Ghana a further £76,000 per year.

 Mauritius styles itself as a Cayman Islands to India, allowing investors to slash their tax bills by channeling money that is destined there. The result: 38% of all foreign direct investment in India, or $65.29 billion, traveled through the offshore center between 2000 and May 2012, including 6% that came directly from the U.S.  India loses $7 billion a year in taxes from offshore accounts, including many in Mauritius. A multinational company will typically set up a holding company in Mauritius that controls a particular investment in India. When the multinational later sells the investment, it benefits from the absence of a Mauritian capital-gains tax. And because it is based abroad, it pays no Indian capital-gains tax of up to 40%. The Mauritian holding company can also shield the multinational from India's tax on dividends, which is 15%, and its 20% tax on interest. Foreigners rushed to set up companies in Mauritius to benefit from a 1983 tax treaty with India that exempted Mauritius-based investors from capital-gains taxes. By the end of 2010, Mauritius hosted 27,500 holding companies controlling more than $400 billion in assets. Setting up a company there takes just two weeks and $10,000, and such companies as JP Morgan Chase JPM  Citigroup,  PepsiCo  and most private-equity possess a Mauritius subsidary. 

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