Yesterday I noted the report from Action Aid on Deloitte's promotion of Mauritius as a 'tax efficient' base to invest in Africa because it reduced tax bills in places like Mozambique. As Action Aid reported:
As part of the presentation the document illustrates how tax can be avoided by giving the example of Mozambique. It shows how withholding tax can potentially be reduced by 60 per cent and capital gains tax by 100 per cent for companies that operate in Mozambique.
Mozambique is one of the poorest countries on the planet, where over 50 percent of people live below the poverty line and average life expectancy is only 49.
I have to say I was initially bored and then offended by the number of comments on this blog saying what Deloitte was doing was just fine. The anti-African sentiment was extraordinary. The immorality of much of the defence was brazen. Those comments were deleted: I have no time for such sentiments and do not have any obligation to afford them space here, but they made me reflect.
So let me be clear about why we attack Deloitte for promoting such action. First of all, despite claims to the contrary, tax is paid in Africa and it is used for the common good. Of course African tax systems are not perfect: we know that and no one has done more than the NGO community to tackle such issues. The Extractive Industries Transparency Initiative was an NGO initiative. So is country-by-country reporting. As is the international demand for automatic information exchange to tackle corruption. And the whole anti-tax haven campaign began with NGOs. But we also believe that unless tax is paid government is not supported, accountability within government is not created and the common good is not promoted by governments that are held to democratic account by their electorates. In other words: paying tax is key to reform. That is why we promote the idea of tax paying as a public good, especially in such countries. Deloitte undermine it. we consider that a fundamentally anti-democratic act.
Secondly, using such treaties is not like, as some have suggested, promoting the use of an ISA because both are legal. Lots of things are legal that I find utterly morally objectionable from nuclear weapons to cigarettes and payday loans at 5,000% apr. Legality is not the same as either ethical or moral. The argument that because something is legal it is acceptable is absurd: the consequences of an action have always to be considered by an ethical person whatever its legality. In this case people will die because of the denial of resources that Deloitte promotes. That is, I think, a fact. I consider that a wholly unacceptable, immoral, outcome of their action whatever its legality. I, and others, reserve our right to condemn them for it.
Thirdly, the argument that these treaties are legal is also on occasion open to doubt. I do not know the provenance of all African double tax treaties: what i do know is that many were imposed on these countries as a condition of the grant of aid and loans. The so called Washington Consensus demanded that they open their borders to foreign investment on a tax incentivised basis and the result is this abuse. So let's not pretend for a minute that these countries chose to be exploited in this way: it was imposed on them by a corrupt market ideology that Deloitte are now exploiting for their private gain at cost to the public good.
And yes, I do condemn Deloitte for doing just that. Their tax gain will cost lives. I presume they can live with that. I could not.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Whilst the Deloitte paper was almost certainly tax driven, their are also non-tax reasons to use a foreign entity for inward investment.
I have however seen in the past investment in countries with a less stable regime, for example Malawi, undertaken using a “foreign” company to provide protection from compulsory “acquisition” of land and property by the state.
In the circumstances I came across previously there was no tax motive for the structuring, and the investment (very modest) allowed employment of local people in a place with a very high unemployment and low life expectancy/mortality risk.
But that’s still trying to undermine a state
I would believe you more if there is less corruption in Africa.
The political corruption needs to be sorted first.
In another point, is it really necessary for a country to receive our money in form of aid. However allow their leaders to drive around in BMW’s and Mercedes.
You miss the point
If they got the tax due the need for aid would reduce, significantly
Yes, but to you use your words, just because something is legal doesn’t mean its not morally objectionable! or fundamentally an undemocratic act!
No – ethical judgement is required
I am suggesting Deloitte failed to exercise it
I’m slightly puzzled – if land and other assets are located in a particular country, how does locating their legal ownership offshore protect against their expropriation by the government of that country? The physical assets will still be lost, surely? I can understand how it might protect financial and possibly some moveable assets, but not sure about land and other immovable property?
It doesn’t….
In a number of countries, foreign investors are afforded more equitable treatment in compulsory acquisition transactions (for example) compared to local investors.
Also remember that local investors may be seen as a target for corrupt and other influences by those within the state.
There are a number of non-tax reasons why when investing in countries with a less developed legal and governmental system one may choose to make that investment indirectly.
Why don’t you try reading the DTA between Mozambique and Mauritius. Not only is it part of international law, it is also part of the domestic law of both countries.
This nonsense merely shows an inadequate understanding of double tax agreements and their consequences.
I have dealt with those issues in the piece I have written
You assume that there may have been choice in the process
I suggest not
Richard
Your point is that the Washington Consensus meant that pressure was brought to bear in the negotiation of DTTs between developed and developing countries so that developing countries gave away taxing rights in return for aid, loans etc.
If, and it is an if, the developing country had a democratically elected government that represented its people then wasn’t this a conscious decision and so what legitimacy is there in you criticising it?
If the government that made the decision wasn’t democratically elected then all of its policies, including those on tax, lack legitimacy.
So, isn’t it more than a little patronising to say that these developing countries were victims in this process – either they had a government expressing the will of its people or a government that lack legitimacy.
Also, in the example you gave of the Mozambique and Mauritius DTT – this was last negotiated in the 1990s between these two states. Where would pressure have been brought to bear and by who in these negotiations – I could accept your point if Mozambique had concluded a treaty with say the US or the UK which was heavily in favour of the other state but they didn’t.
In fact they have a very limited treaty network with a handful of countries, none of who really fit the bill as rapacious first world exploiters.
I think there is disconcerting undercurrent here, normally completely absent in your views, of knowing better than the parties involved and I think that does a disservice to your arguments.
A bankrupt democratic government does what its creditors want
And what I am saying is no more than that
On debt we have recognised governments acted inappropriately with a legacy that was costly
I am saying this may be the case on tax too. Is that argument so surprising?
Re Mauritius – the pressure to create deals has been considerable, I think, and the lobbying likely to have been intense. Such structures do not happen by chance
Justin, it’s not simply a case of looking at the single treaty provision but looking at the intention of the treaty – it is to relieve double taxation and to share taxing rights between two countries. They’re not intended to be used for ‘treaty shopping’.
And so the issue to my mind is group’s using ‘brass plate’ companies in Mauritius when they have no ‘real’ substance there – i.e. they are treaty shopping.
India has been the main protagonist in attacking these structures and demanding real substance before granting treaty relief. Mozambique and others should take note and follow suit.
I think many treaties now have anti treaty shopping rules and so easier to attack, but for older one’s they will have to rely, as India does, on general principles.
Bear in mind that if the recipient of the payment is paying tax, then withholding tax is merely a cash flow issue and since the cash flow is often insignificant if you’re paying tax instalments, the effort involved in setting up a treaty shop is normally too much. So it’s only if the recipient is not paying tax that treaty shopping is of real interest – And typically that means the recipient is in a tax haven or tax avoidance structure. QED.
Indeed, Richard. Duress was certainly involved in the setting up of these agreements – the well known “Oliver Twist” freedom of choice = “Take it or leave it!”
Also, people keep harping on about “corruption” in Africa, as indeed there is. However, it should be ABUNDANTLY clear that there is MASSIVE corruption in the UK, the only difference being that we are cleverer at making it look like something else. Didn’t the Tax Justice Network issue a report a few years ago to that effect, naming the UK as FAR more corrupt than many developing countries? Could you point us to it? It would certainly cause those whose racist comments you deleted as being both “anti-African and brazenly immoral” to choke on their cornflakes!
And of course, if the Con-Dem Coalition IS different from its predecessors, it is precisely in this respect – that it no longer seems bothered about cloaking its nefarious activities with any semblance of a fig leaf, other than a direct untruth. Consider the shameful lies of Iain Duncan Smith, for a start!
Justin try reading Richard’s blog again.
“Secondly, using such treaties is not like, as some have suggested, promoting the use of an ISA because both are legal……..”
He quite clearly acknowledges the legality of treaties. He does not show an “inadequate understanding of double tax agreements and their consequences.”
Richard confines his comments to the morality of the arrangement.
What your comments appear to reveal is that you are incapable of seeing the bigger picture, a not uncommon shortcoming of many a tax practitioner!
Should not Africans stand up for themselves? There are countries in Africa that have huge resources that could be used to help countries that have not. My African friends say do not be patronising to Africans, corruption is wrong and should be sorted out by Africans- we should not treat them like children. How Deloitte operate is up to the countries concerned. OK always fine to comment, but there is a bigger picture e.g.how China is colonising Africa.
You assume that the countries and Deloitte are equal opponents
What if they are not?
Its interesting that people on this blog are constantly referring to corruption, but seldom mentioning that it is the “Pin Stripe Mafia” who have done so much to facilitate it in their offshore secrecy jurisdictions.
Having helped make corruption rife, they say, “well, you can hardly expect our clients would pay tax to such a corrupt country!”.
You almost have to admire their sheer effrontery.
This is a slightly simplistic approach on the reasons foreign investors use Mauritius to invest in some Southern African countries.
I have been involved in an specific investment project in the “extractive industries”. I think that, except for fraudsters and other unrepresentative people, everyone agrees that the resources in the ground belong to the African countries.
But they do require capital and expertise for the extraction of the resource.
If I take the example of the project I was working on, the local government was taking 12.5% of the topline as royalty. Next to that, it required a free 20% share of the business in exchange for granting the licence.
Corporate profits were taxed at 25% and, if profits were taken out, or consultants paid or interest paid, there was a further witholding tax of 25%.
The Mauritius setup allows to lower this last number to 15%. There is so much tax and related expenses paid on many of these projects that a lowering of the witholding tax often makes the difference between investable and non-investable projects.
Moreover, nothing of this is done in hiding. The local government is fully aware of the structure and of the taxes which will be raised through the investment in case of success. The full legal structures are openly known at the moment of the negotiations of the licences.
In most cases, Mauritius is not abused as a treaty country, when related to Africa. Whether there is an issue with the Mauritius-India DTA is a totally different question…
And I disagree
As do very large numbers of well in formed people
We do think these deals are abusive
That’s because they are: tax is not paid in the right place at the right time
Lucas
As you’ve said, the Mauritius setup allows you to lower the tax taken by a poor country from 25% to 15% (or, I suspect, lower). You say that a lowering of the with-holding tax often makes the difference between investable and non-investable projects, but don’t provide any accounts to show how much your foreign shareholders make, what bonuses your foreign Directors get, nor, indeed, what you reckon to pay out in the bribes you claim to abhor but find, in reality, a quick, easy way to a fortune.
I’m sure none of this is done in hiding because, as has been said above, the local government has really very little choice in these regards. That doesn’t make them alright.