Global businesses based in Mauritius have assets valued at $630-billion — 50 times the tax haven’s GDP. Little wonder its African neighbours have complained that the island’s gains have come at their expense.
The Paradise Papers have shone an unforgiving spotlight on how Mauritius, an island nation with a population of 1.3-million, plays an outsize role in offshore business dealings with Africa.
Central to it all is Appleby, the global offshore law firm which kept a staff of more than 40 people on the island which, until fairly recently, was more commonly known for its pristine beaches than its tax structures.
But as thousands of leaked e-mails, bank account applications and PowerPoint presentations on tax avoidance from Appleby reveal, Mauritius is a pivotal hub in the secretive offshore financial network that shields the wealthy’s assets and profits from tax.
“Some of the most important ways of stripping profits from African countries are done through offshore jurisdictions, including Mauritius,” says Alexander Ezenagu, an international tax researcher at the International Centre for Tax & Development.
Though the use of tax havens is often legal, the practice has come under an unprecedented degree of fire, with critics claiming it helps impoverish African governments and widens the global wealth gap.
Mauritius, in particular, has become a springboard for many SA banks and companies seeking to launch into other parts of the continent.
One such company was the Shanduka Group, founded by Cyril Ramaphosa in 2001, which makes a cameo appearance in the leaks in connection with an opaque Mozambican energy development project.
Shanduka ploughed $2-million into the project, which was structured through Mauritius, but then pulled out. Its place was eventually taken in the deal by one of SA’s top banks: Investec.
There is no suggestion Shanduka did anything wrong, and Ramaphosa sold his stake in Shanduka in November 2014.
Quite why Mauritius is so attractive to multinationals eager to hide their profits from the taxman becomes clear in e-mails between Appleby employees and lawyers for Cargill, the US-based agriculture conglomerate.
Cargill is the largest privately held company in the US, with revenues of $109-billion last year.
In 2014, Cargill’s lawyer wrote to Appleby to ask about the tax implications of setting up a Mauritian company to invest in SA.
An Appleby employee responded, saying “the process takes up to four weeks, but can be completed in less than 12 working days … The cost is usually in the range of $6,000”.
Appleby highlighted some of Mauritius’s selling points: an effective tax rate of between 0% and 3%; the ability to freely repatriate profits; and no withholding tax on capital gains, dividends or interest.
So Appleby got working to establish the Mauritian company — “Black River Food 2 SA Holding Company Ltd”.
There would be no need for an office or any physical presence in Mauritius, Appleby makes clear. The Mauritian shell company would be owned by a Cayman Islands entity in which Cargill’s subsidiary, Black River Asset Management, would hold a stake.
Ultimately, it was this Cargill subsidiary that was used to buy 20% of the JSE-listed Country Bird Holdings for R202-million — the poultry company that owns Supreme Chicken.
Contacted this week, Cargill denied the structure was mainly about tax dodging.
“The fact that the Mauritius company was used to make the investment does not create any tax savings for Cargill, because Cargill pays US tax on its share of the income earned by the fund in the year [that] income is earned.”
It says it complies with “all of the laws that apply to our businesses”.
But Cargill did not explain why it set up the Mauritian company in the first place. Cargill did, however, make use of another feature that makes Mauritius attractive to firms with an eye on Africa: double tax treaties with a range of African countries, including SA.
There are similar echoes elsewhere. In a brochure for clients, Appleby boasts about its role in “advising Standard Bank on a $70-million facility for the purpose of refinancing Zambia Sugar, a subsidiary of Illovo Sugar”.
That loan to Illovo Sugar, which was listed on the JSE at the time, was the subject of a tax avoidance scandal after a report by the nonprofit ActionAid exposed how Illovo used artificial structuring to dodge Zambian taxes, depriving government of $3m in taxes.
ActionAid estimated this meant Illovo paid an effective tax rate of 0.5% while Zambia has a corporate tax rate of 35%.
ActionAid also exposed how Illovo shifted millions of dollars to Mauritius through transfer pricing. Illovo’s Zambian arm would pay vast amounts in “export agency commission” to its Mauritian company that had no permanent employees.
The Paradise Papers show that Portuguese construction company Mota-Engil, which has a large footprint in Africa, was interested in pursuing a similar route.
In 2014 a lawyer at the Johannesburg office of Bowman Gilfillan wrote to Appleby on behalf of Mota-Engil, which was interested in the “possibility of interposing a South African and/or Mauritian company between its Portuguese/Dutch companies and its African subsidiaries/branches, with a view to achieving a more efficient tax outcome”.
Responding to questions this week, Mota-Engil said the structure was never implemented.
Nonetheless, Appleby supplied a detailed memo outlining, among other things, the implications of transfer pricing through Mauritius.
In theory, double tax agreements are meant to help companies avoid being taxed twice on the same activity. In practice, signing a double taxation agreement with a low-or no-tax country means some taxes are never levied.
Companies take advantage of tax treaties between Mauritius and other countries — a practice known as “treaty shopping”. Research shows companies are more likely to use questionable tax avoidance schemes when operating in developing countries than in rich ones.
In 2013, Appleby created a PowerPoint presentation about a hypothetical company operating in Mozambique, with $10-million in interest payments to be paid to a parent company in Singapore.
If the money went from Mozambique directly to Singapore, the presentation said, Mozambique would take $2-million in taxes.
But if the payments were routed through Mauritius, tax treaties would slash the tax owed by more than half. In that scenario, Mozambique gets $800,000 and the company saves $1.17-million (assuming the Mauritian operation costs $30,000).
In recent years, Mauritius’s African neighbours have complained that the island’s gains have come at their expense — and they have taken their case to the international community.
As a result, in 2015, the European Commission placed Mauritius on a Top 30 blacklist of tax havens. Last year, Mauritius made Oxfam’s list of the world’s 15 worst tax havens.
“While the full scale of tax losses from treaty shopping is shrouded in secrecy, countries in Africa are potentially losing a fortune,” said Dr Attiya Waris, a tax law expert at the University of Nairobi.
Government agencies in Mauritius responded to questions from the International Consortium of Investigative Journalists with an 11-page statement that denied the island was a tax haven, or secretive.
Where necessary, they said, Mauritius will continue to enhance its transparency and strengthen rules against tax evasion, terrorist financing, money laundering and corruption.
Mauritius does not intentionally deny taxing rights to other African countries, the agencies said; some countries choose to forgo taxes to attract foreign investment.
* Written in collaboration with the Financial Mail (RSA)