Treasury blocks Mauritian ‘tax haven’

2013-06-02 10:00

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Capital flight from South Africa was shot down midair this month as Finance Minister Pravin Gordhan signed a new treaty with Mauritius, long considered a tax haven.

The treaty will come into effect in 2015 and, beyond the expected corporate jitters, experts say its effects may be that corporations will in effect pay tax twice.

Oupa Magashula, head of the SA Revenue Service, moved swiftly to clarify this week.

He said the use of “a mutual agreement between two countries to resolve the question of dual residence is by no means unique”.

Magashula said the new treaty would weigh factors such as where meetings of a board of directors were usually held, and where the chief executive and other senior executives usually carried out their business activities. This will determine in which nation South African corporations operating in Mauritius will pay tax.

He warned that those who abuse the previous treaty between the two nations, which was initially drawn up in 1996, could fall foul of the law.

“The new treaty with Mauritius takes an internationally recognised step in this regard and brings exchange of information up to current international best practice,” he explainedÈ.

Under the current dispensation between South Africa and Mauritius, a company could be incorporated in South Africa and then open a division and register it in Mauritius too.

The company could then do business in a multitude of African and Asian nations, and declare their profit from these offshore operations in Mauritius, where the tax rate is under 3%, secrecy laws are stern, no capital gains tax applies and no exchange controls are in place.

South African companies that house their international wings in Mauritius include mobile telecommunication operators Vodacom and MTN, as well

as packaged goods company Tiger Brands and beverages giant SABMiller.

The new treaty comes as inadequate tax revenues are again in the spotlight after a report by the Africa Progress Panel, led by former UN general secretary Kofi Annan, found that the use of tax havens costs Africa $38?billion (R375?billion) a year in lost revenue.

The Africa Progress Report, which made waves at the recent World Economic Forum on Africa in Cape Town, and includes prominent figures like Graça Machel and former Bank of Botswana governor Linah Mohohlo, revealed that Africa lost close to $1?trillion of capital in the past three decades.

This pales in comparison with the muted $300?billion the Mother Continent has received in foreign direct investment.

South African financial authorities are insisting that companies manage their foreign expansion from home and are willing to make concessions to achieve that. Treasury has offered to relax foreign-exchange rules for JSE companies, but has also raised regulatory supervision.

Mauritius is popular with companies from the US, India and South Africa. South African companies make the nation the fifth-largest investor in that island nation.

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