At their closest point, Europe and Africa are just eight miles apart. That’s the inspiration for the name of Sir Bob Geldof’s private equity firm, 8 Miles, set up to channel investment into successful businesses in Africa.
But we learned last week that 8 Miles’ cash travels considerably further than this on its way from one continent to the other. It has established a cluster of companies in Mauritius, in the Indian Ocean, which funds pass through.
Geldof is an outspoken champion of African countries, and has raised millions of pounds for the continent through Band Aid and other initiatives. That he sees no contradiction in this type of corporate structure shows how depressingly routine the use of jurisdictions like Mauritius has become.
Mauritius is the tax haven of choice for companies investing in Africa. That’s why this story by the International Consortium of Investigative Journalists (ICIJ), has made front pages in Africa. A key ingredient in Mauritius’ success is the special tax treatment given to foreign firms, combined with a network of bilateral treaties with African countries that limit the taxes investors pay on the continent. An 8 Miles business plan that ICIJ claim to have obtained states: “Mauritius is an offshore jurisdiction with a wide network of double taxation treaties in interesting markets.” The government of Mauritius have issued a vigorous defence of their tax laws in response to the reports.
For developing countries, tax treaties are supposed to attract investors by restricting how much and in what circumstances they can be taxed, though economists disagree on whether they really affect foreign investment.
Tax treaties with Mauritius reduce African countries’ tax revenues considerably. When I analysed the impact of treaties, I found that African countries’ treaties impose more limits on their ability to tax investment than they need to, and recent research published by the Tax Justice Network points to Mauritius as one of the most aggressive negotiators. For example, Mauritius’ treaty with Uganda, where 8 Miles has investments in poultry and banking, allows investors to avoid paying capital gains tax altogether, despite “realizing capital gains” being one of 8 Miles’ principal objectives. Uganda is already embroiled in a dispute with mobile phone company Zain over its use of a tax treaty.
In conversations with African tax officials over the past 10 years, I’ve heard many lament their tax treaties. “They ask for an arm and a leg, and you give them both legs,” an official in Zambia told me. “Nobody comes to invest because you have a tax treaty,” said another from Uganda. “When you see the rationale to attract investment, it sounds laudable. But when you look at the evidence, it’s not the case.” Mauritius looms large in these discussions, as ICIJ found in its own reporting.
Although there are issues with the tax treaties between African countries and their major sources of investment, such as the UK and China, what makes Mauritius especially problematic is that it’s a haven for “treaty shopping”. Its treaties with African countries don’t just prevent them from taxing investments originating in Mauritius, but also those made by firms, such as 8 Miles, that are based elsewhere but structured through it. Over the past few years, the OECD, EU and G20 have taken steps to make this harder, blacklisting countries whose tax regimes are deemed harmful, and writing treaty clauses to prevent treaty shopping.
Mauritius has continued to play the system, adapting its tax laws just enough to comply with the blacklist criteria, and responding reluctantly to requests from developing countries to renegotiate their treaties.
But there are signs that the tide is turning: Rwanda and South Africa have negotiated new, stronger treaties with Mauritius; Senegal, unsatisfied with Mauritius’ attitude to renegotiations, has decided to terminate its treaty altogether. Kenya’s treaty with Mauritius was recently struck down in the Nairobi High Court. Other countries are considering renegotiations.
A spokesperson for 8 Miles said: “8 Miles invests in African businesses to create jobs and improve communities, using high environmental, social and governance standards and generating tax revenues which support the governments where we operate. The companies we invest in pay all taxes in their home jurisdiction in Africa. Only when we sell a company will the sale proceeds be paid back into the fund in Mauritius.”
They added: “Any double tax agreements are a matter between the governments who sign these agreements and we comply with such agreements but we do not make them.”
This is true, but one of the major reasons governments feel compelled to enter into tax treaties, and are reluctant to terminate those that are harmful, is their anticipation of reactions from investors. As a former negotiator from Zambia told me: “There’s empirical evidence that [tax treaties] have no effect on investment, but the reality country-to-country is that there’s a bluff going on, and countries don’t want to take the risk of losing big investments.”
8 Miles needs to bring its market power to bear, with a clear commitment to stand by countries that negotiate less damaging tax treaties, and to reconsider its reliance on Mauritius, unless the country gets its house in order.