Thoughts on Deloitte and the China-Mauritius-Mozambique route

Sunday’s Observer carried a story, prompted by ActionAid, based on a presentation given by Deloitte to a group of Chinese investors. The presentation explained how to avoid withholding tax and capital gains tax in Mozambique by routing the investment through Mauritius. It’s great to see this kind of common or garden tax arbitrage highlighted and controversialised.

What caught my eye was Deloitte’s response. The company said:

It is wrong to describe applying double tax treaties, such as the treaty between Mauritius and Mozambique, as tax avoidance. Such treaties are freely negotiated between the Governments of the countries involved.

Double tax treaties exist to enable the countries concerned to strike a balance between the need to encourage investment, including cross-border investment, to raise tax revenue, and to work together with other countries who have the same legitimate concerns to raise revenue and promote business.

The absence of such treaties could result in a reduction of investment, and less profit subject to normal business taxes in the countries concerned.

Any discussion of tax treaties by tax professionals would typically be around the technical and administrative aspects of the treaties and not an expression of favour of any particular country at the expense of any other country.

Leaving aside the questionable empirical basis of the tax treaties-investment link, what interests me is the way the statement completely glosses over the difference between “applying double tax treaties”, and treaty shopping, i.e. structuring investments through an intermediate jurisdiction like Mauritius in order to obtain more preferential treaty benefits. It raises a couple of questions for me.

First, is that obfuscation just a good PR strategy, or is it the case that tax advisers don’t see this distinction as valid? Is advice on tax treaties always aimed at getting the best treaty rates available, with no conceptual (or ethical) difference between a direct investment and one via a tax treaty conduit?

Second, how can we say whether this is tax avoidance or not? At first sight, I’d argue that the intention of the Mozambique-Mauritius treaty is to provide benefits to Mauritian investors in Mozambique, and vice versa, while the absence of a Mozambique-China treaty reflects those governments’ intention that a Chinese firm investing in Mozambique should incur taxes at the non-treaty rates. In that interpretation, tax treaty shopping contravenes the intention of the treaties and is tax avoidance.

But it’s more tricky than that. It’s technically fairly easy to include an anti-abuse clause in a treaty, to spell out this intention. If there isn’t one, it might be because of poor negotiation by Mozambique, or Mauritian unwillingness to renegotiate, but it might also be that Mozambique intends investors from other jurisdictions to use Mauritius as a route to invest, since this reduces the perceived need to negotiate treaties with every potential source of investment. After all, Mozambique only has a handful of treaties, and its Mauritius treaty was signed just after Mauritius adopted the offshore regime that creates the problem. Meanwhile, China is a pretty aggressive negotiator, and those African countries that have signed treaties with China seem to have ended up with less taxing rights than Mozambique has from its treaty with Mauritius. So Mozambique may actually be better off letting Chinese investors exploit its treaty with Mauritius, rather than negotiating a treaty with China. Though it would be better off still in terms of taxing rights if it had neither!

And what about China? It only has a few treaties with African countries, but it does have a treaty with Mauritius. China has foreign tax credits, so the less its multinationals pay abroad, the more revenue it gains (of course a lot of its overseas investment is by state-owned enterprises, and there again, tax savings abroad go straight into government coffers). So maybe China doesn’t see any urgent need to change the status quo. That said, at least half of the African countries with which it has signed tax treaties also have treaties with Mauritius, which suggests a preference for its multinationals investing directly.

One of the main issues in all this is that we don’t know what developing countries intend when they negotiate treaties. To make matters worse, in many developing countries, including (I think) Mozambique, the executive has historically had the power to ratify treaties. So there’s no ‘will of parliament’ to look for, and no public record of any debate among decision-makers. Mozambique’s treaty was signed almost 20 years ago. If my experience talking to officials in other countries is anything to go by, it will be hard to find anyone who can remember how and why this treaty came about. The tax landscape has changed in the meantime, as has the economy, not least with the growth of cross-border services. This would be a good time for Mozambique to review its treaty network.

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