Is Mauritius a tax haven?
Charity Action Aid found that bottling and breweries major SABMiller is ripping off poor countries in Africa to the tune of $32 million (Rs 974.40 million) a year by routing profits to tax havens (Source: Action Aid)
In light of the Indian government accusing Mauritius of being a tax haven and the Mauritian government insisting that it is just a low-tax jurisdiction, it is time to ask ourselves the uncomfortable question: Is Mauritius really a tax haven? Sarah Bracking and Gemma Ware explore this proposition on behalf of The Africa Report and take stands for and against the argument.
Yes. Mauritius gains at the expense of countries where economic activity actually takes place.
Tax havens compete on cutting tax rates. Some simply collect company registration fees and no tax at all.
So, to understand why Mauritius is accused of being a tax haven in the first place, we must first take a look at the tax structure prevalent in Mauritius. The island has a corporation tax of 15%, but tax credits for global business companies mean an effective rate of 3%. There is no capital gains tax and no withholding tax on dividends.
Seychelles is another example, where there is absolutely no tax on income or profits for international companies. There is no capital gains tax, and the government does not tax interest payments from abroad.
Tax structures are one crucial piece of the puzzle which allow companies to fragment themselves and register ‘shell companies’, companies only in name with no operations in the tax haven. Then, the company sends profits made through actual economic activity in a higher-tax regime to the shell company in a low-tax jurisdiction in order to avoid tax.
So, what does make a country a tax haven is if it creates legal loopholes to allow organizations to register their shell companies without due diligence. The country where the actual economic activities take place is then unable to collect taxes commensurate with the economic activity and reward nationals with better public services.
Take the example of SABMiller, Africa’s largest brewer and the second-largest in the world, which makes profits of more than $3.1 billion (Rs 94.39 billion) a year. In 2010, the charity ActionAid found that 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 its breweries and bottling plants in Africa combined.
First it stores its ‘local’ brands – like Castle, Chibuku and Stone – in the Netherlands, where they collect royalties with a tax loss of Rs 489.39 million per annum.
It pays management services fees to sister companies in Switzerland, avoiding a further Rs 464.92 million 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 Rs 32.79 million in tax.
Finally, the Accra brewery is kept in a situation of debt to the Mauritian subsidiary MUBEX because interest payments can be offset against tax. This slaps Ghana with a loss of a further Rs 3.72 million per year.
Overall, Action Aid claimed that bottling and breweries major SABMiller is ripping off poor countries in Africa to the tune of $32 million (Rs 974.40 million) a year by routing profits to tax havens.
No. Mauritius keeps tax rates low to create jobs and root out tax avoidance.
Mauritius’s vice prime minister and finance minister Xavier-Luc Duval is emphatic that the island is not a tax haven because there is no secrecy. A bank account cannot be opened here without giving full details. Besides, the island is happy to exchange tax information with all its partners.
Duval defends Mauritius’s right to be a low-tax jurisdiction, explaining that every time tax rates have been lowered, tax revenues have increased. Further, with no large government expenditure on the military, there is no need to overburden the population with taxation, he argues.
Comparing Mauritius to Singapore, which is today serving as the conduit for most investments into India, we find that while the headline corporation tax in the sub-continental island is 17%, effective rates are much lower. A 75% exemption on the first S$10,000 (Rs 243,150) of income and 50% on the next S$290,000 (Rs 7.05 million) successfully keeps the effective tax rates low.
So, on an apples-to-apples comparison, it does not appear that Mauritius can be fairly accused of being a tax haven, even as there are no talks of Singapore being brought into the net.
Furthermore, the argument against Mauritius being a tax haven is strengthened by actual numbers. To obtain a certificate of tax residency, a Global Business Company 1 must have two local directors, a local auditor, a principal bank account in Mauritius and board meetings held and chaired in Mauritius. So, with the stringent rules around Global Business Companies (GBC) obtaining tax residency certificates in Mauritius, there are only 25,000 GBCs registered in Mauritius.
Compares this to the 125,000 in the Seychelles, 375,000 in the Cayman Islands and more than 1 million in the British Virgin Islands, and Marc Hein, chair of the Financial Services Commission, rightly argues that if Mauritius wanted to look at quantity rather than quality, they could easily have been at 250,000.
Hein goes on to emphasize the government’s policy push for companies registered on the island to have ‘substance’: to bring more to the economy of the island, to open substantial offices there and employ Mauritians.
Rama Sithanen, a former finance minister who was responsible for the reforms that introduced global business into Mauritius in 1994, says this push for substance is important for Mauritius’s reputation.
Sithanen argues that Mauritius is quite unique, and must not be confused with small island economies that rely for 90% of their business on global business.
In a move to assuage Indian claims that companies are just doing ‘brassplate’ operations in Mauritius because of the low-tax regime, there is now a tax official sitting in the Indian embassy in Mauritius who facilitates the exchange of information.
Hein insists that this exchange of information is of paramount importance. However, he concludes on a note of compromise, saying that concessions had to be made along the way on a journey which began more than 15 years ago with the 1994 reforms.
Source: The Africa Report