Mauritius leaks: Big firms leveraging legal loopholes to save taxes can cost developing countries $100 bn every year

Representatives of western companies, accustomed to sailing around the Cape of Good Hope, have few reasons to be hopeful. For decades, multinational corporations have flocked to Mauritius in droves, seeking to exploit the island nation’s lax corporate tax regime. Local subsidiaries incorporated in Mauritius are eligible for tax exemptions in countries with high corporate tax on account of double tax avoidance agreements (DTAA) with the Mauritian government. But with other countries wising up to the loopholes in such treaties, the protracted tax holiday enjoyed by large corporations could soon come to an end.

Investments in India via companies registered in Mauritius have shrunk since the government renegotiated the terms of the bilateral double tax avoidance treaty in 2016. However, the tax haven continues to be a hub for capital flows fueled by companies which operate in India. According to tax records accessed by the International Consortium of Investigative Journalists (ICIJ), as many as a fourth of all companies named in the leaked documents had India as their country of activity.

The tranche of documents, collectively called the Mauritius Leaks, have one underlying theme: Large corporations bypassing tax on profits accrued in poor countries by leveraging legal loopholes. The ICIJ estimates that such stratagems cost developing countries around USD 100 billion every year. However, initiatives proposed at the recently concluded G20 Summit in Japan could stem the outflow of capital from countries where they were realized.

The finance ministers of the world’s leading economies have been at work to thrash out a global tax system since 2013. Subsequently, in 2015, at a meeting of the Organization for Economic Cooperation and Development (OECD), it was agreed that multinationals will be required to disclose their earnings in each country to avoid tax evasion through subsidiaries registered in low-tax dominions. But more radical reforms were stonewalled by the OECD, the preserve of the world’s richest nations.

But the proposals made at the G20 Summit by India’s Finance Minister Nirmala Sitharaman could alter the stasis between large corporations and tax havens. Developing countries have rallied behind India’s efforts at the forum to formulate legislation that requires companies to pay taxes in places where they generate profits, and not where they are domiciled. To circumvent resistance from the OECD, India has made overtures to individual countries to amend skewed double taxation avoidance agreements.

Other developing countries could follow suit, threatening the straitjacket system for taxing companies with a global presence. The impact of such a move could impact the bottom lines of companies that currently shift profits to tax havens. Moreover, tax disputes could increase if every country framed its own rules for taxing multinationals. For developing countries, the flip side to taking unilateral measures would be to forfeit the inflow of foreign investment. Tax disputes would increase, and consequently, the ease of doing business, suffer.

However, India isn’t the only country framing unilateral measures to tackle profit shifting. France and the United Kingdom also have their own tax laws pertaining to revenue generated by foreign companies in their domestic markets. India has argued that the universal tax legislation framed by the OECD is biased towards the interests of members– mostly rich countries where these multinationals are headquartered.

If developing countries were to frame their own tax rules, the OECD would stand to lose its status as the arbiter of global trade norms. The grouping seems to have heeded India’s exhortations. The proposals made by 90 non-member countries, including New Delhi’s, will be considered when the OECD frames its “road map” for tax reform by the end of 2020.