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Africa/Global: Tax Avoidance 101
AfricaFocus Bulletin
August 12, 2019 (2019-08-12)
(Reposted from sources cited below)
Editor's Note
Aircastle Ltd., a Connecticut-based global company specialized in
leasing airplanes, is not alone among large American companies
lowering their taxes through creative accounting, which also
include well-known giants such as Amazon and Apple.
But the recent revelations on Aircastle´s use of Mauritius as a
tax haven provide a helpful window into how such tax dodges can
make use of off-shore companies set up primarily for that purpose.
An AfricaFocus Bulletin sent out earlier today, and available at
http://www.africafocus.org/docs19/iff1908a.php) featured
#MauritiusLeaks, the revelations published last month by the
International Consortium of Investigative Journalists (ICIJ) based
on the leak of more than 200,000 documents from the Mauritius
office of a prestigious offshore law firm, Conyers Dill & Pearman
This AfricaFocus Bulletin goes beyond the news to provide analysis
on the policy implications, which apply more generally than the
role of Mauritius or the particular companies exposed in the ICIJ
investigation.
First, AfricaFocus summarizes the case of Connecticut-based
Aircastle Ltd. as a useful case study of how such tax avoidance
schemes work. Also included are a brief summary from ICIJ on
#MauritiusLeaks, and an analysis from the Tax Justice Network in
London on the implications for international regulation of tax
treaties and tax havens.
Other links helpful as background include a ICIJ explanation of what a tax treaty is and why they matter, and an
article from the Institute for Strategic Studies in South Africa on
the debate in Mauritius about its economic policy and relationship to other African countries
in particular.
For previous AfricaFocus Bulletins on tax justice and illicit
financial flows, visit
http://www.africafocus.org/intro-iff.php
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Break from Publication
Note to readers: AfricaFocus Bulletin will be taking a break
from publication for a few weeks, resuming in early to mid-
September. The AfricaFocus website and Facebook pages will continue
to be updated during the break.
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Tax Avoidance 101: The Aircastle Model
Aircastle Ltd. is not a household name, but if you have flown on
South African Airways, KLM, or any of more than 80 other airlines,
you have probably traveled on an airplane the Connecticut-based
company owns and manages. The company´s business model is based on
buying, selling, and leasing airplanes worldwide. Its corporate
structure minimizes the payment of taxes using a complex
arrangement of subsidiaries, all managed from Connecticut, Ireland,
or Singapore.
These arrangements, recently highlighted in the
#MauritiusLeaks investigation by the International Consortium
of Investigative Journalists (ICIJ), are legal. But they have
allowed the company to pay minimal taxes, including no corporate
taxes in the United States on income from their aircraft leases.
Aircastle, of course, is not alone among large American companies
lowering their taxes through creative accounting, which include
well-known giants such as Amazon and Apple.
But the recent revelations on Aircastle´s use of Mauritius as a
tax haven provide a helpful window into how such tax dodges can
make use of off-shore companies set up primarily for that purpose.
Getting to zero with tax avoidance became even easier with the new Republican tax cuts in
2017, but Aircastle was already well on the way to that
objective.
Aircastle´s headquarters is located at 201 Tresser Boulevard in
Stamford, Connecticut, in an office building also
housing the headquarters of Purdue Pharma.
For example, when Aircastle decided to do business in South Africa
in 2010, as the ICIJ and Quartz Africa
revealed in July 2019, it turned to a Bermuda-based law firm to
assist it in setting up six subsidiaries in Mauritius: Thunderbird
1 Leasing Ltd, and five other companies named Thunderbird 2
through 6 respectively. As was Aircastle´s common practice, in
principle each company was to own a specific aircraft. South
African Airways made their payments for the leases to the
subsidiaries in Mauritius, each of which was owned by an Aircastle
subsidiary in Bermuda or Delaware.
Since South Africa and Mauritius have a tax treaty allowing this,
taxes were paid to Mauritius at the low Mauritius rates on the
income from the leases ($772,735.60 a month for the first A300-200
leased by South African Airways from Thunderbird 1 beginning in
2011). From 2011 through 2014, according to documents leaked to
ICIJ, Thunderbird 1 paid $382,600 in Mauritius taxes, a 1.59% tax
rate on $24 million in operating profits. Aircastle paid no taxes
on these profits either in South Africa or in the United States.
According to ICIJ, “Had Aircastle’s Thunderbird 1 company alone
reported the profits it made in Mauritius over four years in the
U.S., it could have paid more than $5 million. Those taxes would
just about cover the state of Connecticut’s current budget for
domestic violence shelters.” Including other Thunderbird companies
as well, Quartz calculated, Aircastle paid $1.5 million in
Mauritius taxes on profits of $53 million, at an effective rate of
2.87%, thus avoiding $14.8 million in taxes if taxes had been paid
to South Africa. This is equivalent to more than half the annual
social housing budget of Johannesburg.
Aircastle did not respond to queries from ICIJ or Quartz, and data
for a more comprehensive analysis of the company´s tax strategy is
therefore not available. However, since it is registered on the New
York Exchange and also traded on NASDAQ, its reports to the
Securities and Exchange Commission are available. Its annual report to investors for 2018, for example,
incorporates the 10-K report to the SEC.
There we learn that Aircastle Ltd is actually incorporated in
Bermuda and thus pays no U.S. corporate income tax, except on the
management services supplied by its U.S. subsidiary to the
aircraft-owning companies. Bermuda has no corporate income tax. Thus, notes the
company in its 10-K report, under the heading “risks related to
taxation”:
“If Aircastle were treated as engaged in a trade or business in
the United States, it would be subject to U.S. federal income
taxation on a net income basis, which would adversely affect
our business and result in decreased cash available for
distribution to our shareholders.”
Given the lack of transparency in corporate reporting, it is hard
to tell how Aircastle´s strategies compare to those used by other
companies. The Institute on Taxation and Economic Policy (ITEP)
reported in April, based on10-Ks submitted to the SEC, that sixty of the Fortune 500
companies had zero or negative federal income tax payments in 2018
. But more detailed analysis or estimates of tax revenue lost,
in the United States and other countries, requires much more data
than provided in almost all such reports.
The fundamental step needed to make accountability feasible is public country-by-country reporting, by which
corporations would be required to provide for investors and the
public a breakdown of revenues, profits, employees, and taxes paid
by every country in which they do business. Both governments,
investors, and even some businesses are increasingly accepting the
need for such reports.
According to a report in April from the
U.S.-based Financial Accountability and Corporate Transparency
(FACT) Coalition, however, the trend is in the right direction.
“The evidence suggests we are quickly reaching a turning point,”
said Christian Freymeyer, researcher and author of the report.
“Investors see the value, policymakers see the benefits, and
businesses see the inevitability of greater transparency. It’s only
a matter of time before tax transparency is accepted and expected
of financial disclosure.”
Freymeyer´s analysis may well err on the side of optimism, given
the continued opposition from those with vested interests in tax
avoidance. But it is certainly true that the argument is now
finding new supporters far beyond the circle of tax justice
activists who have been the leaders in demanding these reforms.
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International Consortium of Investigative Journalists
July 23, 2019
https://www.icij.org/investigations/mauritius-leaks/
Mauritius Leaks is a cross-border investigation into how one law
firm on a small island off Africa’s east coast helped companies
leach tax revenue from poor African, Arab and Asian nations.
Led by the International Consortium of Investigative Journalists,
the investigation is a collaboration by 54 journalists in 18
countries.
More than 200,000 documents from the Mauritius office of a
prestigious offshore law firm, Conyers Dill & Pearman, are at the
heart of the investigation. ICIJ corroborated company information
from the leaked documents with data in the Mauritius corporate
registry and the Financial Services Commission’s register of
licensees.
The documents offer a rare window into corporate tax avoidance in
countries in Africa, the Middle East and Asia.
The documents include emails, contracts and business plans provided
by some of the world’s biggest players in finance and law,
including KPMG and the London-based multinational law firm Clifford
Chance.
Together, they reveal attempts by corporations and individuals to
exploit tax rules that allow them to avoid taxes of such countries
as Egypt, Mozambique and Thailand.
“Mauritius is a bit like the Luxembourg of Africa,” said Tove
Ryding, policy and advocacy manager for tax justice at the European
Network on Debt and Development. Mauritius has “specialized as a
gateway to Africa so we see a lot of corporations that come and set
themselves up in Mauritius because it allows them to transfer money
in and out Africa without incurring much tax.”
Conyers sold its Mauritius business to three former employees in
2017.
Conyers told ICIJ that it “strictly adheres to the laws of all the
jurisdictions in which we operate and is routinely reviewed by
regulatory authorities and external auditors.”
Mauritius Leaks exposes how anti-poverty crusader Bob Geldof’s
investment fund and household-name corporate titans such as Wal-
Mart and Whirlpool discussed taxes and trusts as part of operations
in Africa and Asia.
Known as the “
Mauritian miracle,” the island’s economic success has
been built on offering investors tax advantages through a Mauritian
“double-whammy.”
Offshore firms such as Conyers sell the former French colony,
population 1.265 million, as the go-to-destination for
multinational corporations seeking to create shell companies
easily.
Many of those creations are what is known as “shell” or “brass
plate companies,” with no employees or offices and whose only
tangible link to Mauritius is a postal address shared by dozens or
even hundreds of similar firms.
Mauritius allows multinationals to route investments through
“resident” shell companies, which pay an effective corporate income
tax rate of 3% or less, to avoid paying substantially higher taxes
in other countries.
The second part of the “double whammy” is an array of what are
known as double tax treaties with countries in South Asia,
Southeast Asia, the Middle East and Africa.
Such treaties are intended to ensure that multinational
corporations are not taxed on the same income twice. But every
year, the world’s poorest countries lose billions of dollars as
those firms use treaties and other loopholes to route money through
shell companies in tax havens.
Mauritius rejects criticism of its role as a tax revenue haven, but
it has responded to increased pressure and introduced stricter
rules to prevent tax abuse.
At the same time, the country is pursuing more than a dozen new tax
treaties, involving some of the world’s poorest countries, and it
is resisting pleas from countries such as Uganda to overhaul their
tax treaties.
The team behind the international investigation included the
Quartz AI Studio,
which helped mine the documents through the use of machine
learning, a type of artificial intelligence.
#MauritiusLeaks primer: What to know about corporate tax
haven Mauritius
https://www.taxjustice.net/2019/07/23/mauritiusleaks-primer-what-
to-know-about-corporate-tax-haven-mauritius/
The ICIJ’s
MauritiusLeaks has produced a series of revelations about the
behaviour of international investors using the law firm Conyers
Dill & Pearman in Mauritius, typically to hold their assets in
other countries across Africa. But why Mauritius? Here we set out
the key features of this small island in the Indian Ocean.
1. Mauritius is a leading corporate tax haven
The Republic of Mauritius lies around 2,000 kilometres to the east
of Africa. A former British colony, Mauritius on its independence
in 1968 relied on sugar production. But by the late 1980s, it had
followed in the path of many UK dependencies and became
increasingly captured by the lobbyists of offshore financial
services, who bent its law and regulation to their own ends.
Mauritius ranks
14th on our recently released Corporate Tax Haven Index, because despite being a small player globally, its policies
are very aggressively focused on undermining corporate taxation in
other countries by attracting profit shifting.
Researchers at the International Monetary Fund estimate that the
global revenue losses due to profit shifting amount to around $600
billion each year. We estimate a slightly more conservative $500
billion a year. The key drivers are the “conduit jurisdictions”
such as Mauritius, that make themselves attractive for investors
and multinational companies to shift profits out of the places
where they actually make money.
Graph on left from: Where
American Profits Hide, New York Times, Feb. 6, 2019
2. Mauritius is among the most aggressive corporate tax havens
towards African countries
An important element in corporate tax havenry is the establishment
of a network of bilateral tax treaties with other countries, which
can reduce their ability to levy corporate tax before the profits
are shifted away. The lower are the agreed rates of withholding
tax, the less revenue a treaty partner can expect to hold onto.
Our research shows that the France and the
UK have the most aggressive tax treaty networks worldwide, pushing
treaty partners to accept worse terms. But in Africa, it is the
United Arab Emirates and Mauritius which have the most aggressive
treaty networks, and hence Mauritius is responsible for large
revenue losses across the continent, as foreign investors channel
their holdings in African countries through the island.
Following the publication of the Corporate Tax Haven Index in May
2019, the Senegalese government cancelled its tax treaty with
Mauritius in June 2019.
3. Mauritius is one of the most financially secretive jurisdictions
in the world
The provision of financial secrecy is central to “tax haven”
success. This is the secrecy that allows the ownership of
companies, trusts and foundations to be anonymous. That means, the
holders of foreign bank accounts need not worry about information
being provided to their home tax authorities, or that company
accounts are hidden. The Financial Secrecy Index measures these
policy failings and more, and Mauritius obtains an overall secrecy score
of 72 out of 100 – one of the highest.
But Mauritius only ranks 49th on the Financial Secrecy Index,
globally, because the volume of financial services that it provides
to non-residents is relatively small in the grand scheme of things.
4. Globally, Mauritius is a small player and should not be singled
out. Global solutions are needed.
In terms of corporate tax havens, the dominant players are UK
overseas territories the British Virgin Islands, Bermuda and the
Cayman Islands, followed by the leading European jurisdictions the
Netherlands, Switzerland and Luxembourg. Among financial secrecy
jurisdictions, Switzerland, the United States and the Cayman
Islands dominate.
And so putting Mauritius up against a wall will not deliver the
progress needed. Instead, raising global standards is key. We
propose a UN tax convention which would require all jurisdictions
to deliver, at a minimum, the ABC of tax transparency:
-
Automatic exchange of tax information between jurisdictions, to end
the scourge of bank secrecy – and fully multilateral, as opposed to
the OECD Common Reporting Standard which systematically excludes
most lower-income countries.
-
Beneficial ownership transparency – public registers of the real
owners, as standard for companies, trusts and foundations.
-
Country by country reporting, publicly, by multinational companies
to reveal misalignments between the location of their real economic
activity, and where they declare their profits for tax purposes.
In addition, the current reform process for international tax rules
must ensure, finally, that profits are apportioned between
countries according to the location of real activity – that is,
where companies have their employment and where their sales take
place. At a stroke, this would eliminate much of the current
incentives for profit shifting that Mauritius and other conduit
jurisdictions exploit.
As immediate steps, African governments should consider revoking
abusive tax treaties with Mauritius, the UAE, and other
jurisdictions that consistently undermine their corporate tax base.
Mauritius should take the leaks as a last, clear signal: if it
wants to be seen as a responsible neighbour in the world, rather
than damaging all around it, the island must act now.
A win for Kenyans in keeping more revenues from bilateral treaties
Tax Justice Network Africa
https://taxjusticeafrica.net
Press Release, March 15, 2019
[Background paper by TJN-A from 2018 available here.]
Nairobi March 15, 2019, The Kenya High court today declared void
and unconstitutional the Double Tax Avoidance Agreement (DTAA)
between Kenya and Mauritius. In reading the Judgment, Justice W.
Korir granted Tax Justice Network Africa’s (TJNA) submission by
declaring void Legal Notice No. 59 of 2014 which renders the
Kenya/Mauritius DTAA void and unconstitutional. The long-awaited
judgement is in reference to TJNA’s challenge of the
onstitutionality of the Kenya-Mauritius DTAA signed in May 11, 2012
on the following grounds:
• The government failed or neglected to subject the Kenya-Mauritius
Double Taxation Avoidance Agreement to the due ratification process
in line with the Treaty Making and Ratification Act 2012 as a
contravention of Articles 10 (a), (c) and (d) and 201 of the
Constitution of Kenya
• That Legal Notice Legal Notice 59 of 2014 is therefore invalid
and that the Cabinet Secretary for Treasury should immediately
commence the process of ratification in conformity with the
provisions of the Treaty Making and Ratification Act 2012.
The high court ruled that due process as laid out in the Kenya
Constitution was not followed and hence the Kenya Mauritius DTA
‘ceased to have effect and became void in accordance
with the Kenyan law.’
Mr Alvin Mosioma the Executive Director of TJNA said ‘This ruling
is ground breaking not just for Kenya but other African countries.
We welcome this ruling as a validation of our argument that
requires all DTAA’s to be subject to the constitutionally required
ratification process as enshrined on Articles 10 (a to c) and 201
of the Constitution of Kenya. The ruling is a first step in the
right direction in ensuring proper and wider stakeholder
consultations on matters of national interest.’ This judgment
validates our call for African countries to review all their tax
treaties particularly those signed with tax havens. Evidence has
shown that contrary to their objectives, these DTAs have led to
double non-taxation and resulted to massive revenue
leakage for African countries. The ruling further underscores our
position that DTAs signed especially with tax havens have been
avenues of tax avoidance practices denying African countries the
much sought-after revenues to finance development.
TJNA’s Policy Lead-Tax and Investments, Jared Maranga said of the
ruling ‘’This ruling affects not only the Kenya Mauritius DTA, but
also has legal implications for all other treaties signed under the
Constitution. It rightly pushes us to rethink the costs, benefits
and motivations around signing DTAs in the first place. We should
therefore set up a DTA policy framework – which sets out the basic
minimums the country should consider while signing bilateral tax
agreements.
Double Tax Agreements have a direct bearing to the taxing rights of
states. The governments should therefore put in place mechanisms to
ensure effective public participation as part of the treaty
ratification process.”
TJNA calls on the Kenya government to revisit all other recently
signed DTAs including those with UAE, Netherlands, China and South
Korea and those under negotiation to ensure that they are compliant
with this new ruling. The role of parliament is not only critical
but also constitutionally mandatory in the treaty ratification
process. We call upon the Kenyan parliament to rise us to this
opportunity and play their legislative role in scrutinising future
DTAs to ensure that they do not undermine domestic resource
mobilisation efforts. DTAs that are not well thought out have been
a subject of abuse by multinational corporations especially through
treaty shopping and round tripping which impact on the revenues
that countries realise out the associated investments.
“TJNA intends to ensure that all recently signed treaties and
future similar tax negotiations are consistent with this ruling and
are not in contravention with the laid down laws and procedures”
added Mr Mosioma.
For more information please contact Farah Nguegan on
fnguegan@taxjusticeafrica.net ,Tel: +254 754 526126
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providing reposted commentary and analysis on African issues, with
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