Knocking on haven’s doors: Inside Mauritius where companies go for tax holidays

Mauritius, better known for its coral-rimmed shoreline, is a popular destination among tourists with deep pockets. A pinprick in the Indian Ocean, the littoral nation has been an outlier to the wider economic narrative in the African mainland. With a population of only 1.3 million – a tenth of that of Chennai – Mauritius boasts a burgeoning economy, the proceeds of which bankrolls the government’s populist manifesto – free public services including education and healthcare.

However, the restive calm prevailing in the idyllic holiday destination may be at the expense poor countries. Leaked documents from a Mauritius law firm, published by the International Consortium of Investigative Journalists (ICIJ), reveal that many large corporations might have migrated to Mauritius to bypass paying billions in tax on profits generated in third world countries. Under the country’s extant rules, such transactions, however questionable, qualify as being legally sound.

In 1969, Mauritius gained independence from British rule. The country’s first government inherited a flagging economy that was unduly reliant on agriculture and tourism. The first step towards diversification was taken in 1989, when a blueprint was formulated to help the country become the principal destination for multinational companies looking to invest in Africa. In 1992, the government enacted the Mauritius Offshore Business Activity Act to streamline the country’s economic ambitions with its limited resources and manpower.


Under the new rules, foreign companies could incorporate local subsidiaries with restricted public disclosure and negligible taxation. Moreover, the legislation allowed such entities relative anonymity and freed them from the obligation of paying high taxes in other countries. This has been facilitated by Mauritius’ double tax avoidance agreements (DTAA) with other countries, many of which are lucrative markets for multinational corporations.

Mauritius has ratified DTAA with 46 countries, 18 of which are from Africa. India is a signatory to a bilateral tax avoidance agreement with Mauritius. Such intergovernmental deals are typically meant to spur investment by ensuring that businesses from either country can operate in each other’s jurisdictions without being taxed twice on the same income. But the downside of such arrangements is that multinationals can hide assets and profits from officials in countries with high corporate tax.

The UN World Investment Report estimates that lower-income countries cumulatively lose around USD 100 billion every year to tax treaties detrimental to their interests. Many such deals are signed to boost investment or enhance diplomatic relations. Many countries also accept bad deals to avoid missing out on big-ticket foreign investment.


Beggar Thy Neighbour
The fruits of Mauritius’ economic policy have borne rich dividends: the country has a stable democracy, a robust economy, and a contended populace. According to the United Nations Development Programme’s report for 2018, Mauritius was ranked among countries with ‘high human development’, outperforming the likes of China, Brazil and India on this metric. However, it can be argued that the positive social outcomes in Mauritius have come at the cost of pauperizing other African countries.

The ranks of the wealthy have swelled in Mauritius. A report by the AfrAsia Bank reckons that the number of millionaires in the island nation increased by over 20 percent in the past couple of years. The disproportionate rate at which Mauritius has grown over the past few decades even drew censure from the United Nations Economic Commission on Africa in 2013. It was rapped for acting as a conduit to illicit financial flows, helping corporations siphon tax money from the treasuries of other African countries. The European Union (UN) blacklisted Mauritius in 2015. Oxfam named it a tax haven in 2016.

Bilateral tax avoidance treaties have come under the legal scanner, especially in cases where governments have lost out on windfall tax gains. The Indian government was denied USD 2.2 billion from Vodafone’s acquisition of the erstwhile telecom operator Hutchison-Essar. Hutchison International had routed the transaction through its Mauritius-based subsidiary, thereby helping it dodge taxes in India. Kenya, too, has faced losses over such deals as the existing laws mandate that the sale of shares in a company will be taxed in the country where the transaction happened, not where the company operates its business.

A key argument used by advocates of Mauritius’ tax framework is that it protects their financial interests in African countries where political uncertainty could scupper operations. Others argue that the tax policies in most African countries are not on par with international norms, thereby adding to the allure of Mauritius as a viable destination, both in terms of geography and favourable tax levels.

In a written submission to the ICIJ, the Mauritian government said that tax accords signed with different countries factored in global norms within a UN-approved framework. It conceded that 60 per cent of all such deals were renegotiated since 2009, and that it is in the process of revising the terms of bilateral deals with six countries.

However, it would be difficult to estimate the extent to which Mauritius has drained wealth from other countries as data on royalty payments, dividends, and long-term capital gains are all shrouded in secrecy. The only means of ensuring equitable distribution of tax would be to renegotiate double taxation agreements so that companies are required to file tax returns where they make money, and not where they are domiciled.