- July 26, 2019, 4:48 pm
What are the Mauritius Leaks?
At the heart of the 18-country collaborative investigation by the International Consortium of Investigative Journalists (ICIJ) and The Indian Express are data from Conyers Dill & Pearman, an offshore specialist law firm with several Fortune 500 companies as clients, which started operations in 1928 from Bahamas — and in 2009 from Mauritius for investments being routed to Africa and Asia.
Investments in India through Mauritius have been on the wane, but the tax haven has seen a sizeable amount of funds getting routed through by entities operating or investing in India. The data released by the International Consortium of Investigative Journalists (ICIJ) showed that as many as 50 entities, or one-fourth of those disclosed in the Mauritius leaks, had India as their only country or one of the countries of activity.
What is Conyers Dill & Pearman, the company at the centre of the leaks?
In 1998, Bermuda-based financial analyst Roger Crombie described the company in his book as a “full-service” law firm with an emphasis on corporate and commercial law, and offering property, trust and management services to companies and individuals.
The firm’s three founders — James Reginald Conyers, Nicholas Bayard Dill and James Eugene Pearman — were all knighted and held public positions in Bermuda. Over the decades, its Private Client department helped individuals minimise their exposure to taxation, and protect family assets, through various Trust structures. The company opened offices across the world — in Guernsey, Cayman Islands, Hong Kong, London and the British Virgin Islands (BVI) — with offshore entities incorporated at these sites under an affiliate company, the Codan Trust.
Why is the Mauritius connection important?
The Double Taxation Avoidance Agreement was signed between India and Mauritius in 1982. The pact allowed any Indian company to seek tax residency in Mauritius and thus pay zero capital gains tax. The treaty also made Mauritius a suitable route for foreign funds looking to invest in India.
Conyers Dill & Pearman was among those who benefited in the decades when there were tax breaks for companies and corporations routing their investments to India via Mauritius, among other offshore destinations. In 2016, India amended its Double Taxation Avoidance Agreement (DTAA) with Mauritius, and the new provisions — capital gains tax instance — are now fully applicable.
The challenges include the recent changes made to the double taxation avoidance agreement between Mauritius and India, which has brought uncertainty to the market. Furthermore, the advent of GAAR (General Anti Avoidance Rule) in India and CRS (Common Reporting Standard) across major financial centers are bringing the Mauritius corporate structure under more scrutiny.
What did the law firm do in Mauritius before the treaty was amended?
It offers to set up funds, supply local directors, registered local offices, secretarial and administrative services, and assist in bank account opening/government filing. A power-point presentation of the firm, which is part of the leaks, claims that it can set up a GBC1 (Global Business Company, tax resident in Mauritius) within 10 working days for an annual licence fee of $1,750. It points out that companies registered in Mauritius had to pay an effective income tax slab not exceeding 3% and no capital gains tax.
The presentation notes: “We act on a large number of inward and outward investment transactions involving India and Africa (as well as other jurisdictions) and are notably established in the traditional markets that invest in India and Mauritius.”
In offers attractive “tax benefits and favorable fiscal regime” from Mauritius. They claim to introduce clients and companies to a “low/zero tax regime” where no capital gains tax would be payable in Mauritius.
What are some of the “transactions” listed by the firm in the leaks?
Advised Vodafone Group plc on its $5.46 billion acquisition of a 33% stake in Vodafone Essar Ltd, a joint venture between Vodafone and Essar.
Advised on the formation of two Mauritius-domiciled investment funds (with a Swiss Bank as manager), which are both investing in India, in listed securities and fixed income products.
Advised a leading venture capital fund on restructuring its India-focused funds, which are domiciled in Mauritius and the Cayman Islands, and advising on the formation of new funds.
How did the tightening of rules in India affect the firm?
Leaked data show that before countries like India decided to rein in tax treaty benefits to increase their own tax base, bankers and companies like Conyers Dill & Pearman raised red flags over tightening regulations and compliance.
Mauritius has been a key cog in the international tax avoidance world, exploiting the same loopholes as OECD countries such as Ireland, Luxembourg, Netherlands, Switzerland, and even the UK.
OECD Inclusive Framework
Hence the importance of the recent proposal by the OECD Inclusive Framework – a body that is now involving 131 member states -that would allow countries to estimate taxes made by multinationals based on the business they do in their territories but also on the profit margins that the multinational make worldwide. A global minimum tax is also being discussed, something that would mitigate tax competition and the race to the bottom. This agenda has
been endorsed by the G20 in Fukuoka, Japan by the G7 Finance Minister in Chantilly, France. The OECD wants to come to a final agreement by early 2020. Here are, according to ICRICT, three ways to really tackle tax avoidance:
1. Tax multinationals on a global basis (unitary taxation)
The solution we have advocated within ICRICT is a global formula that would ensure that multinationals’ global profits - and hence the associated taxes - could be apportioned between countries according to objective factors. It is imperative that those should include not just sales, but also employment (at headcount, rather than at payroll level) to truly benefit low-income countries.
2. Introducing a global minimum corporate tax
ICRICT also supports the proposal for a global introduction of a minimum corporate tax, as endorsed by the G7. Any multinational that book its profits in a tax haven could therefore be taxed in its home country, up to this minimum rate. This would reduce its interest in transferring its profits to tax havens and put a brake to the race to the bottom. Nevertheless, it is essential that this is well designed, especially by setting a relatively high minimum rate, 20% or over. A global minimum effective rate of below 15% would only encourage a continued race to the bottom in corporate taxation.
3. A Global Asset Registry
The failure to force all tax havens to establish public registers of beneficial ownership of companies, trusts and foundations, allows the tax haven industry to keep on flourishing. However, the existing data-collection infrastructure includes potentially powerful tools for transparency, including the recent adoption of tax transparency measures, such as the automatic, multilateral exchange of bank accounts data at a global level between tax authorities, public registries of beneficial ownership and exchange between tax authorities of country-by country reporting from multinational companies.
This is why ICRICT advocates for the adoption of a Global Asset Registry that would prove a vital tool against illicit financial flows and tax avoidance and evasion, by ending impunity for hiding and using the proceeds of crime, and for removing legitimate income and profits from the economy in which they arise for tax purposes. Read more about it our report on Global Asset Registry.
The Independent Commission for the Reform of International Corporate Taxation aims to promote the international corporate tax reform debate through a wider and more inclusive discussion of international tax rules than is possible through any other existing forum; to consider reforms from the perspective of public interest rather than national advantage; and to seek fair, effective and sustainable tax solutions for development.
While there’s a need for comprehensive global solutions on tax avoidance regimes, governments could also take steps unilaterally or in regional blocs. This could include introducing a minimum tax for corporate profits or sign the Multilateral Instrument which allows signatories to amend DTAAs and curtail “treaty shopping” by limiting who can enjoy the treaty benefits.
In thinking about Mauritius, a “unitary approach” to allocating income and reducing revenue loss could be tried. This tax system, treats multinational corporations as single economic entities that “produce consolidated accounts and one income and profit statement.” The profit or loss—is then divided among the nations based on a pre-agreed formula designed to represent the contributions of the related entities to the profit or the economic activity or presence of the group activities in the taxing jurisdictions.
This approach, employs a formula for dividing the income of a multinational business among the locations in which it is earned. Ultimately, it would make redundant the residence of a company in nations like Mauritius thereby limiting the relevance of traditional tax havens.