It was once predicted that Mauritius, the tiny island in the middle of the Indian Ocean, would always be poor. Lacking natural resources, such as oil or minerals, economist James Meade, who would later win the Nobel Prize, concluded that its development prospects were basically nil before its independence from the United Kingdom in 1968. Located 2,000 kilometers from the east coast of South Africa, is far from other countries and markets, and its economy depends largely on the export of a single product: sugar cane, first introduced in the 17th century by the Dutch East India Company (another of those companies privileged that helped expand and cement empires) and cultivated by slaves.
The UN opened an office in the capital, Port Louis, shortly after its independence. At that time “economists said that Mauritius could not survive as an independent nation,” Simon Springett, UN resident coordinator on the island, tells us some 50 years later. “Basically, it was about figuring out how to diversify an economy based on monoculture.” We met with him in an office near the city’s waterfront, where streets with poorly paved roads alternated with more modern ones that showed the shiny glass of new, well-kept office buildings. There, above restaurants and cafes serving gourmet salads and freshly made smoothies, we find numerous specialized investment banks and financial firms serving the world’s elites. Its omnipresence is a reflection of what happened after independence in the history of Mauritius: the transformation of the island into a tax haven.
Mauritius is now experiencing a tourism and financial services boom. It is known, especially among the international elite, for its white coral beaches, luxury honeymoons, extremely low taxes and high levels of financial secrecy. In 2017 it welcomed 1.3 million tourists, exceeding its 1.2 million residents. Meanwhile, its financial industry had more than 21,000 registered companies. But they didn’t take up much space; many existed only formally, perhaps created to benefit from the country’s low taxes and “no questions asked” policy.
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Development economists were fascinated by the Mauritius figures. GDP per capita of the island went from less than $2,000 in the early 1980s to $9,600 in 2016, a figure higher than that of Russia or Brazil. Life expectancy also increased, while infant mortality fell and homeownership rose to an extraordinary 90%. The “Maurice miracle,” as it was sometimes called, seemed like a kind of development fairy tale. The island had reinvented itself, but it had done so at the cost of joining a controversial international network of secret jurisdictions where companies and upper classes can hide their money, as well as limit the payment of taxes and contributions to public infrastructure. We wanted to know more about how it happened.
The Commercial Activities Law offshore of Mauritius of 1992 generated a system of “global trading companies” that allowed non-nationals to open businesses quickly, without needing to reveal much information to authorities, let alone the public. In addition, the country reduced its tax rates and signed a series of “international tax treaties” with other countries. Since then, its industry as a tax haven is booming.
By 2015, international companies based in Mauritius had assets worth more than $630 billion, fifty times its GDP. Much of the initial growth of these businesses offshore was linked to a unique tax treaty signed with India that, among other incentives, exempted legal residents of Mauritius who invested in India from capital gains tax, making the island an attractive location for Indians. wealthy and corporate India. India finished renegotiating this treaty with Mauritius in 2016 – after years of debate over its costs –, eliminating the capital gains tax exemption. However, these changes did not apply retroactively to already established corporate structures.
Meanwhile, Mauritius is attracting more and more multinationals investing in sub-Saharan Africa, thus promoting itself as a “gateway” to the continent, while capturing a greater share of the global wealth management business, among other things, making it extraordinarily easy for foreigners rich people buying property and establishing their residence on the island. In 2017, almost 60% of investments by companies registered in Mauritius went to Africa, according to the magazine African Business Review. Vishnu Lutchmeenaraidoo, then foreign minister of Mauritius, declared in a press conference: “Everything is about Africa now.” Mauritius also joined the main African trading blocs, including the Common Market for Eastern and Southern Africa, positioning itself as an alternative venue to Washington for international arbitration between investors and States. This completes the range of services for international capital.
The negative side is shown in the accusations that Mauritius receives from some African governments and civil society groups. They complain about the massive flight of public resources from poor countries, while multinationals transfer their profits there without paying the corresponding taxes on the continent.
At the heart of this industry was the so-called “global business system,” through which companies could be created. offshore with very low levels of taxes or public information. They were used to channel investments to other countries, receive benefits and preserve assets. In addition to India, Mauritius had signed tax treaties with the governments of more than 40 countries, a third of them African. The function of these treaties was supposed to avoid the collection of double taxes, although it ended up giving rise to what was called “treaty marketing,” in which companies structured themselves to take advantage of the best conditions offered in order to pay as little as possible.
The island became famous for facilitating “round-trip transactions,” a practice of taking money abroad and then repatriating it disguised as “foreign investment,” likely resulting in double tax cuts. Between 2000 and 2015, 34% of total investment in India came from Mauritius, much of which is believed to have been “round-trip”. (…)
The United Nations Economic Commission for Africa estimated that illicit financial flows from Africa could reach $50 billion annually (double the international cooperation budgets for the continent), with serious negative consequences for development, such as the depletion of foreign exchange reserves and the worsening of poverty. (…) The secrecy that places like Mauritius provide to companies can mask illegal practices, in addition to the aggressive – although legal – tax evasion, declaring profits not where they are generated, but where they are least recorded.
Even the IMF recognizes it (…). In 2015, its then president, Jim Kim, warned that “some companies use elaborate strategies to avoid paying taxes in the countries in which they work, which is a form of corruption that harms the poorest. “More equitable tax payments could eclipse international development aid.”
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