Lesotho has finalized a new tax treaty with Mauritius, alleviating fears in the southern African nation that multinational corporations were dodging taxes through shell companies.
The new agreement, which sets out the taxation rules for companies that run Lesotho businesses from Mauritius, came into effect earlier this month. It replaces a 1997 treaty that, in recent years, the Lesotho authorities complained was unfair.
“The process for renegotiating the treaty was initiated by Lesotho in recognition that the old treaty was compromising Lesotho’s interests and because some of the key elements of a modern tax treaty were missing,” according to a brief provided to ICIJ by the Lesotho Revenue Authority.
Lesotho, a tiny, mountainous kingdom of 2 million people surrounded by South Africa, is rich in diamonds but has a stubbornly high rate of poverty. Almost half the population live below the poverty line, according to the World Bank.
Tax treaties signed between Mauritius and other countries, especially those in Africa, were the focus of the International Consortium of Investigative Journalists’ 2019 Mauritius Leaks investigation.
The investigation, a collaboration of journalists from 18 countries, revealed how Mauritius became the go-to destination for corporations doing business in Africa and seeking to reduce tax payments due to some of the world’s poorest countries.
For decades, some of Mauritius’ most potent tools in its arsenal as a tax haven were bilateral agreements signed with neighboring African nations. While the intention of such treaties is generally to ensure companies do not pay taxes twice on the same pool of money, savvy firms took advantage of Mauritius’ tax rate — often as low as 0% — to instead 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. “The companies are the winners,” he said. “It makes me go mad.”
Mauritius denied facilitating tax avoidance that harms neighboring African countries.
Since the Mauritius Leaks investigation, Senegal and Zambia have torn up treaties with the island tax haven, describing them as unbalanced and unfair. Senegal alleged that its agreement with Mauritius cost it $257 million in lost tax revenue over 17 years.
Officials in Lesotho hope that the new treaty will increase tax revenue, including from foreign corporations that chose to form shell companies in Mauritius solely 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 about the revenue and taxes of companies with operations in Lesotho.
In its brief explaining the new treaty, the LRA said that it is now better placed to recoup taxes owed by an unnamed telecommunications company that routed 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 from Lesotho have contemplated establishing headquarters and service centres in Mauritius in an effort to capitalize on the old treaty,” the LRA wrote, explaining that the new treaty would “become handy in allowing” Lesotho to invalidate such schemes.
Several of the largest diamond mining companies in Lesotho, including those with headquarters in Australia, Canada and France, use subsidiaries in Mauritius, according to financial statements.