Just as the talk of tax evasion by big corporates, kicked up by the leak of Panama Papers two years ago, had settled, a trove of fresh documents leaked from a Mauritius law firm revealed how companies were evading tax on capital gains in India and other countries.
The modus operandi — which may arguably be by the book — thrived on Mauritius' opaque financial laws devised to facilitate the State turning into a haven for offshore firms, the large amount of one-sided "tax treaties" the country enjoys with other nations, and its willingness to allow offshore firms even with little to no business interests in Mauritius to park their headquarters and shell companies in the island nation.
What is Mauritius Leaks?
Based on a cache of over 2,00000 confidential records from the Mauritius office of the Bermuda-based offshore law firm Conyers Dill & Pearman, accessed by the International Consortium of Investigative Journalists, the Mauritius Leaks shows how the former French colony has transformed itself into a thriving financial center, at least partly at the expense of its extremely poor African neighbors and other developing countries, including India.
The documents reveal a long list of financial entities and individuals who tried to exploit tax rules in Mauritius while avoiding taxes in Egypt, Mozambique, Uganda, and India among other nations. The names of global corporations like Walmart, Whirlpool, Apollo, Jindal Steels, Religare etc, come up in the records.
Conyers Dill and Pearman: The company at the heart of controversy
The law firm, which boasts of several Fortune 500 companies as clients, advertises to manage corporate tax concerns and protects private assets. Among the documents accessed by International Consortium of Investigative Journalists was a handy guide for anyone considering a scheme to avoid taxes using Mauritius' laws. The law firm claims to open a GBC1 (Global Business Company, tax resident in Mauritius) within 10 working days for an annual licence fee of $1,750, according to The Indian Express.
The firm’s three founders — James Reginald Conyers, Nicholas Bayard Dill and James Eugene Pearman — were all knighted and held public positions in Bermuda. The company runs offices across the world, including Cayman Islands, Hong Kong, London and British Virgin Islands. The firm is widely credited with creating the world’s first-ever offshore company.
According to the ICIJ report, in a history of Conyers published in 1998, one attorney is quoted as describing a typical client as someone “who would rather spend $10,000 on legal bills than pay $5,000 to Uncle Sam.”
Why Mauritius became the preferred tax haven?
The ICIJ investigation found that the island nation, which sells itself as a "gateway" to the developing world, has two main selling points: bargain-basement tax rates and, a battery of “tax treaties” with 46 mostly poorer countries. These tax treaties, the report states are heavily lopsided and favour mostly the corporates and Mauritius, which earns remittance by hosting more and more such companies.
As “resident” firm of Mauritius, several Western corporates take advantage of the country’s super-low tax rate — which gets as low as 3 percent — and receive special legal status from the government of Mauritius, allowing it to benefit from tax treaties between Mauritius and other countries.
The process of transforming Mauritius into a haven for offshore entities, which mostly set up base in the country for "tax reasons", started in the 1990s.
The then finance minister Rama Sithanen observed that Luxembourg, Switzerland, Hong Kong and other, more obscurely located states had grown into financial powerhouses by serving as low-tax gateways to wealthy nations nearby. He said Mauritius should do something similar, offering itself as a stable, corruption-free bridge to Africa and other less developed regions.
"The potential exists to explore new avenues and to look for new markets," he argued before the Mauritius Parliament in 1992, pushing a bill that would make possible the island’s first shell companies and allow some firms to pay zero taxes on profits and capital gains. An opposition member objected, saying the bill would create at least the appearance that Mauritius was benefiting at the expense of poorer neighbors, ICIJ reported. But the Bill laid foundation to several local laws and tax treaties, pushed by western lobbyists, that were signed by Mauritius' neighbouring nations in the hope of attracting foreign investment to create employment, even at the cost of crucial tax money that could be used to fund several welfare projects.
What are tax treaties?
Starting back in the 1920s, "double taxation agreements" or 'tax treaties' were adopted as a way to protect businesses with international operations from being taxed twice for the same transaction. However, with time, the nations have started pushing back against such treaties which largely favour the richer nations and have been pressuring Mauritius to amend its laws and rewrite these treaties
The India angle
Business Standard quotes ICIJ data to report that as many as 50 entities, or one-fourth of those named in the leaked documents, had India as their only country or one of the countries of activity. And yet these firms were based out of Mauritius. After adjusting the data for defunct entities, the share marginally fell to 22 percent of the total entities disclosed in the Mauritius leaks.
Some big names included GMR Holdings, Apollo Hospitals, Jindal Steel & Power (Mauritius), Kolte-Patil Developers. The documents show, that many of the 50 entities were listed for past transactions which gained tax relaxations in accordance with the Double Taxation Avoidance Agreement between India and Mauritius, signed in 1982. The pact allowed any Indian company to seek tax residency in Mauritius and thus pay zero capital gains tax. Under the treaty, India had granted Mauritius the sole right to tax capital gains when a Mauritius company sold shares in an Indian company. But Mauritius doesn’t tax capital gains, meaning companies avoided such taxes in both countries. The treaty also made Mauritius a suitable route for foreign funds looking to invest in India.
India had been trying to renegotiate the unfavourable treaty: the case in point being the notorious Vodafone-Essar merger where Supreme Court held that the tax office could not question UK telecom giant Vodafone’s $11 billion acquisition of Essar through a Mauritius company. This cost India $2.2 billion in lost tax revenue.
It took 20 rounds of negotiations over 20 years for India to prod Mauritius in 2016 to remove the abusive provisions of the original 1982 treaty, one Indian official told ICIJ.
Meanwhile, under pressure from allies and neighbouring nations, Mauritius too amended its law to fix some of the most glaring anomalies that virtually allowed companies to escape tax free. Gone is Global Business License 1, the form of shell company that allowed any company, whether or not having operations in Mauritius, to exploit nation's trade and tax treaties with other countries,who also ended up losing tax money.
Mauritius now requires investors to have reasonable local staffing and to spend money on the island that reflects the activities of a real office to benefit from tax treaties or low tax rates.
"Others, however, suggest that its reforms may be little more than box-checking designed to keep the country off international blacklists. Mauritius, they say, has already found ways to continue providing tax-avoidance opportunities," ICIJ reports.
Updated Date: Jul 24, 2019 16:13:03 IST