As published on icij.org, Monday 6 July, 2020.
Zambia has torn up its tax treaty with Mauritius, the latest African nation to cancel an agreement with one of the world’s leading offshore havens.
President Edgar Chagwa Lungu’s cabinet terminated the 2012 treaty and will soon start to negotiate a new deal, according to a statement obtained by the International Consortium of Investigative Journalists.
The cabinet highlighted the southern African country’s inability under the current treaty to tax payments from certain operations that happen in Zambia but that are paid to companies in Mauritius.
Many Mauritius companies exist only on paper with no full-time employees and were created, at least in part, to avoid paying taxes, ICIJ revealed in its 2019 Mauritius Leaks investigation.
International Centre for Tax and Development lead researcher Martin Hearson said Zambia’s decision was “surprising” because Zambia and Mauritius have recently renegotiated other treaties. “It illustrates that there is a real case for countries to re-examine whether some of their tax treaties can realistically be renegotiated in a way that creates more benefits than costs,” Hearson said.
Speaking on the condition of anonymity, a senior Zambian official told ICIJ the treaty was “not balanced or fair.” Most firms that use the treaty “are not undertaking actual commercial activities in Mauritius and could be referred to as shell companies,” the official said. Zambia will now try to estimate the value of revenue lost under the deal, he said.
For decades, Mauritius has positioned itself as the “Gateway to Africa,” encouraging foreign companies to set up cheap, no frills companies on the island. Under bilateral tax treaties signed with Mauritius – also known as double taxation agreements or DTAs – countries, including more than a dozen in Africa, agreed to reduce or entirely scrap taxes that would otherwise be paid by corporations to treasuries such as that in Lusaka. Zambia was one of a small handful of African countries that agreed with Mauritius to give up receiving taxes on common cross-border payments, including interest and royalties.
The Mauritius Revenue Authority did not immediately reply to requests for comment.
A second Zambian tax official, who was also not authorized to speak publicly, told ICIJ that the decision to cancel the treaty with Mauritius was “very important.” A new treaty, the official said, is “one of the top priorities for putting resource mobilization back on track.”
Zambia is the second African country this year to unilaterally cancel its treaty with Mauritius. In January, Senegal tore up its deal with the island tax haven following government estimates that the West African country had lost $257 million since 2004 under what officials called an “unbalanced” agreement.