I read with interest the criticism by the Tax Justice Network Africa (TJNA) of the use by various companies of the Mauritius treaty network for investment into Africa. They likened that activity to a robber using a getaway car. I think a better analogy might be to a company accepting an invitation to come and visit. Criticisms like this really miss the point. Countries negotiate tax treaties to try and encourage investment. They are not ignorant and are fully aware that the treaty could, and probably will, be used by non Mauritius investors. Does the TJNA really think that the various African countries negotiated a treaty with Mauritius purely to encourage the residents of Mauritius to invest? They surely all know very well that there are very few people in Mauritius and even fewer who have the necessary money and will to invest in Africa in a large enough way to make a significant difference to their economies. The whole rationale for these treaties is to encourage investment by providing tax breaks to investors. If they want to limit the use of the treaty it is perfectly possible for them to insert wording to that effect or police its use to stop third parties getting treaty benefits.

I am sure the TJNA do valuable work but it would not be a bad idea to let the African treaty partners play Mr and Mrs Outraged for themselves if they feel so inclined. Or let them re-negotiate or cancel the treaty if they so wish.

Of course, this type of commentary is nothing new. Many of the US multi-nationals, Amazon, Starbucks, Apple etc. have faced heavy criticism for utilising the UK treaties to their advantage. Clause 3 of the treaties signed by the UK make specific provision for a company to set up a distribution warehouse and fulfil sales orders from the UK without incurring tax there. Then there is outrage when Amazon do precisely that. Companies are encouraged to create employment and jobs in the UK on the basis of the treaty and then criticised for doing exactly what was intended.

Granted, in Amazon’s case they were using the Luxembourg/UK treaty or Ireland/UK treaty to obtain the treaty benefit but this does not cost the UK any tax. Those companies are American and if they invested direct they would be able to do so using the US/UK treaty. The tax result for the UK would be the same. It is only the US who are missing out by allowing the profits to remain untaxed offshore.

The hysterical outrage about the immoral tax avoidance is misplaced. It is US, not UK, tax which is being avoided.

It is long established that countries benefit from tax competition and create efficiencies by so doing. The US recognised this when refusing to endorse the OECD 1998 report on Harmful Tax Competition which sought to try and force the “tax havens” to increase taxation to levels equivalent to those charged by the OECD member states. The US said it would only support the report if its focus was to change to the effective introduction of exchange of information and transparency. That process is now complete with the introduction of the Common Reporting Standard (CRS) which forces all financial institutions – banks, corporate service providers, stockbrokers etc. to automatically report details of any structures or accounts they set up for non-residents to the home tax authority of the beneficial owner.

The argument of the TJNA seems to be that those nations who knowingly and willingly enter into tax agreements are being ripped off. That seems rather insulting. It rather accuses those nations of being too stupid to realise the effect of the agreements they sign and continue to respect. I don’t think the relevant government departments who negotiated these tax treaties would agree that they lack the intelligence to understand the agreements.

It could be argued that if no nation signed tax treaties, the investee would receive more tax. If so the investor would be worse off. Or if both got more tax it would likely not be worth investing. Presumably those nations have decided that if they sign tax agreements, they will receive more investment and therefore more tax even if their percentage take of the profits is less. It seems clear that Mauritius could not possibly force its treaty partners to enter into these tax treaties unwillingly. Nor can such a small nation offer the incentive of massive investment from its own citizens. It seems logical that the inducement to spend the time and trouble negotiating a treaty is the promise of it being used by other countries. It is noticeable that the African countries themselves are not screaming about this unfairness.

Over time the tax treaties will undoubtedly be subject to review. This normally happens when they have received the investment they want – partly because of the existence of the treaty – and then decide to alter the tax playing field once it is clear that the investors are too embedded to pull out. Maybe the treaty partners will do that. Maybe they want to respect the agreements they have signed, be happy that they have encouraged investment and have no need for the TJNA to be outraged on their behalf.

It might be argued that it is unfair and immoral for a country to encourage investment on the basis of certain promises and rules and when they have got the money accuse the investor of taking advantage by accepting the deal they offered. The message seems to be thanks for helping to create wealth by investing. As a thank-you we want taxes in excess of what was agreed.

As with the Amazon situation it is not the developing African nations who are losing out because of the Mauritius treaty. If the investment was made direct the tax result would likely be the same. It’s the rich countries who are getting less tax because the money is made in Mauritius rather than at home. Africa would likely get the same money if the rich boys invested direct using their own treaty.

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