Other developing countries are also at risk of losing huge amounts of tax revenue to big companies using tax havens, new research from ActionAid has revealed.
The world has been watching with shock as the International Consortium of Investigative Journalists (ICIJ) continue to release revelations about the worldwide use of tax havens helping the very rich to avoid paying tax, exacerbating global inequality. More information has just been released today.
Ugandans were, yet again, saddened when the Panama Papers investigation revealed how international oil company Heritage Oil tried to avoid more than US$400 million of capital gains tax partly by using Uganda’s tax treaty with the island tax haven of Mauritius. But what most people do not know is that other countries also have tax treaties with Mauritius which contain similar capital gains rules, leaving them exposed to the risk of corporate tax avoidance.
According to news reports by African Network of Centers for Investigative Reporting (ANCIR) and the BBC, leaked documents, part of the ‘Panama Papers’, show that Heritage had anticipated a big tax bill when the company sold its stake in an oil field in Uganda. Following advice from tax accountants, Heritage changed the country where the company was registered from the Bahamas to Mauritius due to Mauritius’ tax treaty with Uganda, in an attempt to avoid paying the capital gains tax. To put the money at stake in perspective, it is more money than my government’s annual spending on primary school education.
ANCIR reports that Heritage has stated that the process of re-domiciliation began “long before the completion of the transaction [in Uganda] … [and] for a variety of business reasons”. There is no suggestion that Heritage’s actions were unlawful.
Tax treaties that governments have signed with other governments divide the right to tax, and these tax treaties can also make corporate tax avoidance possible. Researchers working with ActionAid have scrutinised the details of Uganda’s treaty with Mauritius, along with 11 other treaties that other African countries have signed with Mauritius.
ActionAid can reveal that Congo (Rep.), Madagascar, Mozambique and Senegal’s tax treaties with Mauritius also contain rules making the type of corporate tax avoidance that Uganda experienced possible. If Kenya and Nigeria let their pending agreements with Mauritius enter into force, they’ll add their names to the list.
Around the world, developing countries are giving up billions in revenue due to tax treaties with wealthier countries. This is depriving them of money desperately needed to fund health, education and other essential services that fulfil the rights of women and girls. Multinational companies are using this global web of tax treaties to cut their tax contributions.
The Panama Papers show how the use of tax havens by multinational companies rob poor countries of desperately needed tax revenue, that could help fund critical services like schools, roads to help the world’s poorest citizens, particularly women and girls. They show that the global tax system is riddled with holes, and is worsening global inequality. Other governments should take warning from this case in Uganda, and urgently revise their tax treaties with Mauritius to stop the corporate tax dodging.
There’s some good news. Tax treaties can be renegotiated or cancelled by our governments. None of these countries have to agree to rules that risk leaving them open to aggressive tax planning and undermine the fight against poverty and inequality. It’s time to demand a better deal, to ensure multinational companies pay their fair share of tax in lower income countries.
In the Heritage Oil case, a series of complex and exceptional tax disputes between Heritage Oil, the buyer Tullow and the Uganda Revenue Authority went on for several years in courts in Uganda and Britain. Uganda eventually collected its capital gains tax. But eventual collection of the tax may not always occur in future similar cases.
I want to caution governments to immediately review tax treaties with tax havens and conduit countries such as Mauritius.
The details: Capital gains clauses in Uganda’s tax treaty with Mauritius
Uganda’s treaty with Mauritius contains rules that give Mauritius the exclusive right to tax capital gains when assets in Uganda are sold, if these assets are sold through shares held in Mauritius. Both the United Nation’s (UN) and the Organisation for Economic Co-operation and Development (OECD) - two main authorities on tax treaties - propose much better capital gains rules, where the right to tax immovable assets such as oil fields is protected.
Treaties with Mauritius repeatedly deny this right. The same problem is also evident in several other tax treaties that lower income countries are bound by. Even though Uganda is formally blocked from taxing these gains to avoid double taxation – corporations or individuals paying tax twice on the same income or transaction – Mauritius chooses not to tax this type of income anyway. Refusing Uganda the right to tax these gains thereby facilitates double non-taxation – tax not being paid in either jurisdiction.
Uganda’s treaty with Mauritius was signed in 2003 came into force in 2005. It has not been renegotiated.