Double taxation treaties or agreements between two countries prevent taxing the same income twice. For example, individuals or corporations that are resident in one country sometimes make a taxable gain by earning income in another.
This calls for taxation in the country where such taxable income is generated but could end up leading to double taxation of the same income when the persons concerned declare that income back in their home country. To avoid this tax injustice to the taxpayer, countries commonly conclude double taxation treaties.
While double taxation treaties work for individuals or corporations that find themselves earning an income in a foreign country, there are those who use the same tactics – with the help of professional services firms and investment professionals.
They simply register their companies in countries with the lowest tax rates, called tax havens. Nothing wrong with minimising one’s tax liability, but everything must have limits.
According to PricewaterhouseCoopers (PwC), corporations in Mauritius are “liable to income tax on their net income, currently at a flat rate of 15% and those engaged in the export of goods are liable to be taxed at the rate of 3% on the chargeable income attributable to exports, based on a prescribed formula”.
Compare the corporate income tax rate of 28% in South Africa and 30% in Senegal. Many companies – not owned by people of Mauritius – are keen to register their businesses there because PwC’s tax summaries remind us that this Indian Ocean island “has a credit system of taxation whereby foreign tax credit is given on any foreign-source income declared in Mauritius on which foreign tax of a similar character to Mauritian tax has been imposed”.
This is what probably led to Dakar tearing up its double taxation treaty with Mauritius so abruptly. Since it was declared in 2004, the government of Senegal reportedly lost about $257 million (R4.5bn) in tax revenue.
Magueye Boye, a Senegalese tax official, said to the International Consortium of Investigative Journalists (ICIJ) that “the problem with this tax treaty is that it was unbalanced”. All is about balance.
In 2015, the EU ranked Mauritius in its top 30 tax blacklist nations, while Oxfam labelled it among the world’s tax havens.
Mauritius has a population of under 2 million and its land mass of 2000 square kilometres goes nine times into Gauteng. It is a tourism, technology and services economy that cleverly worked hard to become the easiest place to do business in Africa. That is commendable, but not when it hobbles other countries’ efforts to collect due taxes to build social and other infrastructure.
Senegal might be the first to sever ties with Mauritius, but will not be the last.
Unless an equitable solution is found to rein in tax avoidance by corporations, over-indebtedness due to Covid-19 could intensify the pressure on others to act similarly.
* Kgomoeswana is author of Africa is Open for Business, media commentator and public speaker on African business affairs.
** The views expressed here are not necessarily those of IOL.