Africa: Lesotho seals new treaty with Mauritius, in hopes of curbing tax evasion

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Officials in Lesotho had joined a chorus of African authorities complaining that the Mauritius tax haven deals were draining their governments of much-needed tax revenue.

Lesotho has finalized a new tax treaty with Mauritius, allaying fears in the southern African country that multinational companies are dodging taxes through shell companies.

The new agreement, which sets out tax rules for companies running businesses in Lesotho from Mauritius, entered into force earlier this month. It replaces a 1997 treaty which, in recent years, authorities in Lesotho have complained about being unfair.

“The process of renegotiating the treaty was initiated by Lesotho in recognition that the old treaty compromised Lesotho’s interests and because some of the key elements of a modern tax treaty were missing,” according to a brief provided to the ICIJ by the Lesotho Tax Authority.

Lesotho, a small mountainous kingdom of 2 million people surrounded by South Africa, is rich in diamonds but has a stubbornly high poverty rate. Nearly half of the population lives below the poverty line, according to the World Bank.

The tax treaties signed between Mauritius and other countries, in particular those in Africa, were at the center of the 2019 investigation of the International Consortium of Investigative Journalists on Mauritius Leaks.

The survey, a collaboration of journalists from 18 countries, revealed how Mauritius has become the destination of choice for companies doing business in Africa seeking to reduce tax payments owed to some of the world’s poorest countries.

For decades, some of Mauritius’ most powerful tools in its arsenal as a tax haven were bilateral agreements signed with neighboring African countries. While the intention of such treaties is generally to ensure that businesses do not pay taxes twice on the same pool of money, savvy businesses have taken advantage of Mauritius’ tax rate – often as low as 0%. – to pay little or no tax at all.

Setsoto Ranthocha, an official with the Lesotho Revenue Authority, told ICIJ at the time that the country regretted signing the 1997 treaty. “Businesses are the winners,” he said. ” It is driving me crazy. “

Mauritius has denied having facilitated tax evasion that harms neighboring African countries.

Since the Mauritius Leaks investigation, Senegal and Zambia have torn up treaties with the island tax haven, calling them unbalanced and unfair. Senegal has alleged that its deal with Mauritius cost it $ 257 million in lost tax revenue over 17 years.

Lesotho officials hope the new treaty will increase tax revenue, including foreign companies that have chosen to form shell companies in Mauritius only to benefit from the island’s low tax rates, a process known as “Treaty shopping”.

The new treaty also introduces fees for technical services and allows Lesotho to request additional information from Mauritius on the income and taxes of companies with operations in Lesotho.

In its brief explaining the new treaty, the LRA said it is now in a better position to collect taxes owed by an anonymous telecommunications company that channeled investments through Mauritius. “Under the old treaty, it would be difficult for Lesotho to collect the tax,” the LRA wrote.

“In recent years, some mining companies in Lesotho have considered establishing headquarters and service centers in Mauritius in an attempt to take advantage of the old treaty,” the LRA wrote, explaining that the new treaty “would become useful in allowing “Lesotho to invalidate such regimes.

Several of the largest diamond mining companies in Lesotho, including those headquartered in Australia, Canada and France, use subsidiaries in Mauritius, according to financial statements.

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