Aircastle Ltd., a Connecticut-based global company specialized in leasing airplanes, is not alone among large American companies lowering their taxes through creative accounting, which also include well-known giants such as Amazon and Apple. But the recent revelations on Aircastle´s use of Mauritius as a tax haven provide a helpful window into how such tax dodges can make use of off-shore companies set up primarily for that purpose.
An AfricaFocus Bulletin sent out earlier today, and available at http://www.africafocus.org/docs19/iff1908a.php) featured #MauritiusLeaks, the revelations published last month by the International Consortium of Investigative Journalists (ICIJ) based on the leak of more than 200,000 documents from the Mauritius office of a prestigious offshore law firm, Conyers Dill & Pearman
This AfricaFocus Bulletin goes beyond the news to provide analysis on the policy implications, which apply more generally than the role of Mauritius or the particular companies exposed in the ICIJ investigation.
First, AfricaFocus summarizes the case of Connecticut-based Aircastle Ltd. as a useful case study of how such tax avoidance schemes work. Also included are a brief summary from ICIJ on #MauritiusLeaks, and an analysis from the Tax Justice Network in London on the implications for international regulation of tax treaties and tax havens.
Other links helpful as background include a ICIJ explanation of what a tax treaty is and why they matter, and an article from the Institute for Strategic Studies in South Africa on the debate in Mauritius about its economic policy and relationship to other African countries in particular.
For previous AfricaFocus Bulletins on tax justice and illicit financial flows, visit http://www.africafocus.org/intro-iff.php
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Tax Avoidance 101: The Aircastle Model
Aircastle Ltd. is not a household name, but if you have flown on South African Airways, KLM, or any of more than 80 other airlines, you have probably traveled on an airplane the Connecticut-based company owns and manages. The company´s business model is based on buying, selling, and leasing airplanes worldwide. Its corporate structure minimizes the payment of taxes using a complex arrangement of subsidiaries, all managed from Connecticut, Ireland, or Singapore.
These arrangements, recently highlighted in the #MauritiusLeaks investigation by the International Consortium of Investigative Journalists (ICIJ), are legal. But they have allowed the company to pay minimal taxes, including no corporate taxes in the United States on income from their aircraft leases.
Aircastle, of course, is not alone among large American companies lowering their taxes through creative accounting, which include well-known giants such as Amazon and Apple. But the recent revelations on Aircastle´s use of Mauritius as a tax haven provide a helpful window into how such tax dodges can make use of off-shore companies set up primarily for that purpose. Getting to zero with tax avoidance became even easier with the new Republican tax cuts in 2017, but Aircastle was already well on the way to that objective.
Aircastle´s headquarters is located at 201 Tresser Boulevard in Stamford, Connecticut, in an office building also housing the headquarters of Purdue Pharma.
For example, when Aircastle decided to do business in South Africa in 2010, as the ICIJ and Quartz Africa revealed in July 2019, it turned to a Bermuda-based law firm to assist it in setting up six subsidiaries in Mauritius: Thunderbird 1 Leasing Ltd, and five other companies named Thunderbird 2 through 6 respectively. As was Aircastle´s common practice, in principle each company was to own a specific aircraft. South African Airways made their payments for the leases to the subsidiaries in Mauritius, each of which was owned by an Aircastle subsidiary in Bermuda or Delaware.
Since South Africa and Mauritius have a tax treaty allowing this, taxes were paid to Mauritius at the low Mauritius rates on the income from the leases ($772,735.60 a month for the first A300-200 leased by South African Airways from Thunderbird 1 beginning in 2011). From 2011 through 2014, according to documents leaked to ICIJ, Thunderbird 1 paid $382,600 in Mauritius taxes, a 1.59% tax rate on $24 million in operating profits. Aircastle paid no taxes on these profits either in South Africa or in the United States.
According to ICIJ, "Had Aircastle's Thunderbird 1 company alone reported the profits it made in Mauritius over four years in the U.S., it could have paid more than $5 million. Those taxes would just about cover the state of Connecticut's current budget for domestic violence shelters." Including other Thunderbird companies as well, Quartz calculated, Aircastle paid $1.5 million in Mauritius taxes on profits of $53 million, at an effective rate of 2.87%, thus avoiding $14.8 million in taxes if taxes had been paid to South Africa. This is equivalent to more than half the annual social housing budget of Johannesburg.
Aircastle did not respond to queries from ICIJ or Quartz, and data for a more comprehensive analysis of the company´s tax strategy is therefore not available. However, since it is registered on the New York Exchange and also traded on NASDAQ, its reports to the Securities and Exchange Commission are available. Its annual report to investors for 2018, for example, incorporates the 10-K report to the SEC.
There we learn that Aircastle Ltd is actually incorporated in Bermuda and thus pays no U.S. corporate income tax, except on the management services supplied by its U.S. subsidiary to the aircraft-owning companies. Bermuda has no corporate income tax. Thus, notes the company in its 10-K report, under the heading "risks related to taxation":
"If Aircastle were treated as engaged in a trade or business in the United States, it would be subject to U.S. federal income taxation on a net income basis, which would adversely affect our business and result in decreased cash available for distribution to our shareholders."
Given the lack of transparency in corporate reporting, it is hard to tell how Aircastle´s strategies compare to those used by other companies. The Institute on Taxation and Economic Policy (ITEP) reported in April, based on10-Ks submitted to the SEC, that sixty of the Fortune 500 companies had zero or negative federal income tax payments in 2018 . But more detailed analysis or estimates of tax revenue lost, in the United States and other countries, requires much more data than provided in almost all such reports.
The fundamental step needed to make accountability feasible is public country-by-country reporting, by which corporations would be required to provide for investors and the public a breakdown of revenues, profits, employees, and taxes paid by every country in which they do business. Both governments, investors, and even some businesses are increasingly accepting the need for such reports.
According to a report in April from the U.S.-based Financial Accountability and Corporate Transparency (FACT) Coalition, however, the trend is in the right direction. "The evidence suggests we are quickly reaching a turning point," said Christian Freymeyer, researcher and author of the report. "Investors see the value, policymakers see the benefits, and businesses see the inevitability of greater transparency. It's only a matter of time before tax transparency is accepted and expected of financial disclosure."
Freymeyer´s analysis may well err on the side of optimism, given the continued opposition from those with vested interests in tax avoidance. But it is certainly true that the argument is now finding new supporters far beyond the circle of tax justice activists who have been the leaders in demanding these reforms.
About The Mauritius Leaks Investigation
International Consortium of Investigative Journalists
July 23, 2019
Mauritius Leaks is a cross-border investigation into how one law firm on a small island off Africa's east coast helped companies leach tax revenue from poor African, Arab and Asian nations.
Led by the International Consortium of Investigative Journalists, the investigation is a collaboration by 54 journalists in 18 countries.
More than 200,000 documents from the Mauritius office of a prestigious offshore law firm, Conyers Dill & Pearman, are at the heart of the investigation. ICIJ corroborated company information from the leaked documents with data in the Mauritius corporate registry and the Financial Services Commission's register of licensees.
The documents offer a rare window into corporate tax avoidance in countries in Africa, the Middle East and Asia.
The documents include emails, contracts and business plans provided by some of the world's biggest players in finance and law, including KPMG and the London-based multinational law firm Clifford Chance.
Together, they reveal attempts by corporations and individuals to exploit tax rules that allow them to avoid taxes of such countries as Egypt, Mozambique and Thailand.
"Mauritius is a bit like the Luxembourg of Africa," said Tove Ryding, policy and advocacy manager for tax justice at the European Network on Debt and Development. Mauritius has "specialized as a gateway to Africa so we see a lot of corporations that come and set themselves up in Mauritius because it allows them to transfer money in and out Africa without incurring much tax."
Conyers sold its Mauritius business to three former employees in 2017.
Conyers told ICIJ that it "strictly adheres to the laws of all the jurisdictions in which we operate and is routinely reviewed by regulatory authorities and external auditors."
Mauritius Leaks exposes how anti-poverty crusader Bob Geldof's investment fund and household-name corporate titans such as Wal- Mart and Whirlpool discussed taxes and trusts as part of operations in Africa and Asia.
Known as the " Mauritian miracle," the island's economic success has been built on offering investors tax advantages through a Mauritian "double-whammy."
Offshore firms such as Conyers sell the former French colony, population 1.265 million, as the go-to-destination for multinational corporations seeking to create shell companies easily.
Many of those creations are what is known as "shell" or "brass plate companies," with no employees or offices and whose only tangible link to Mauritius is a postal address shared by dozens or even hundreds of similar firms.
Mauritius allows multinationals to route investments through "resident" shell companies, which pay an effective corporate income tax rate of 3% or less, to avoid paying substantially higher taxes in other countries.
The second part of the "double whammy" is an array of what are known as double tax treaties with countries in South Asia, Southeast Asia, the Middle East and Africa.
Such treaties are intended to ensure that multinational corporations are not taxed on the same income twice. But every year, the world's poorest countries lose billions of dollars as those firms use treaties and other loopholes to route money through shell companies in tax havens.
Mauritius rejects criticism of its role as a tax revenue haven, but it has responded to increased pressure and introduced stricter rules to prevent tax abuse.
At the same time, the country is pursuing more than a dozen new tax treaties, involving some of the world's poorest countries, and it is resisting pleas from countries such as Uganda to overhaul their tax treaties.
The team behind the international investigation included the Quartz AI Studio, which helped mine the documents through the use of machine learning, a type of artificial intelligence.
#MauritiusLeaks primer: What to know about corporate tax haven Mauritius
The ICIJ's MauritiusLeaks has produced a series of revelations about the behaviour of international investors using the law firm Conyers Dill & Pearman in Mauritius, typically to hold their assets in other countries across Africa. But why Mauritius? Here we set out the key features of this small island in the Indian Ocean.
1. Mauritius is a leading corporate tax haven
The Republic of Mauritius lies around 2,000 kilometres to the east of Africa. A former British colony, Mauritius on its independence in 1968 relied on sugar production. But by the late 1980s, it had followed in the path of many UK dependencies and became increasingly captured by the lobbyists of offshore financial services, who bent its law and regulation to their own ends.
Mauritius ranks 14th on our recently released Corporate Tax Haven Index, because despite being a small player globally, its policies are very aggressively focused on undermining corporate taxation in other countries by attracting profit shifting.
Researchers at the International Monetary Fund estimate that the global revenue losses due to profit shifting amount to around $600 billion each year. We estimate a slightly more conservative $500 billion a year. The key drivers are the "conduit jurisdictions" such as Mauritius, that make themselves attractive for investors and multinational companies to shift profits out of the places where they actually make money.
Graph on left from: Where American Profits Hide, New York Times, Feb. 6, 2019
2. Mauritius is among the most aggressive corporate tax havens towards African countries
An important element in corporate tax havenry is the establishment of a network of bilateral tax treaties with other countries, which can reduce their ability to levy corporate tax before the profits are shifted away. The lower are the agreed rates of withholding tax, the less revenue a treaty partner can expect to hold onto.
Our research shows that the France and the UK have the most aggressive tax treaty networks worldwide, pushing treaty partners to accept worse terms. But in Africa, it is the United Arab Emirates and Mauritius which have the most aggressive treaty networks, and hence Mauritius is responsible for large revenue losses across the continent, as foreign investors channel their holdings in African countries through the island.
Following the publication of the Corporate Tax Haven Index in May 2019, the Senegalese government cancelled its tax treaty with Mauritius in June 2019.
3. Mauritius is one of the most financially secretive jurisdictions in the world
The provision of financial secrecy is central to "tax haven" success. This is the secrecy that allows the ownership of companies, trusts and foundations to be anonymous. That means, the holders of foreign bank accounts need not worry about information being provided to their home tax authorities, or that company accounts are hidden. The Financial Secrecy Index measures these policy failings and more, and Mauritius obtains an overall secrecy score of 72 out of 100 - one of the highest.
But Mauritius only ranks 49th on the Financial Secrecy Index, globally, because the volume of financial services that it provides to non-residents is relatively small in the grand scheme of things.
4. Globally, Mauritius is a small player and should not be singled out. Global solutions are needed.
In terms of corporate tax havens, the dominant players are UK overseas territories the British Virgin Islands, Bermuda and the Cayman Islands, followed by the leading European jurisdictions the Netherlands, Switzerland and Luxembourg. Among financial secrecy jurisdictions, Switzerland, the United States and the Cayman Islands dominate.
And so putting Mauritius up against a wall will not deliver the progress needed. Instead, raising global standards is key. We propose a UN tax convention which would require all jurisdictions to deliver, at a minimum, the ABC of tax transparency:
Automatic exchange of tax information between jurisdictions, to end the scourge of bank secrecy - and fully multilateral, as opposed to the OECD Common Reporting Standard which systematically excludes most lower-income countries.
Beneficial ownership transparency - public registers of the real owners, as standard for companies, trusts and foundations.
Country by country reporting, publicly, by multinational companies to reveal misalignments between the location of their real economic activity, and where they declare their profits for tax purposes.
In addition, the current reform process for international tax rules must ensure, finally, that profits are apportioned between countries according to the location of real activity - that is, where companies have their employment and where their sales take place. At a stroke, this would eliminate much of the current incentives for profit shifting that Mauritius and other conduit jurisdictions exploit.
As immediate steps, African governments should consider revoking abusive tax treaties with Mauritius, the UAE, and other jurisdictions that consistently undermine their corporate tax base.
Mauritius should take the leaks as a last, clear signal: if it wants to be seen as a responsible neighbour in the world, rather than damaging all around it, the island must act now.
Court Declares the Kenya-Mauritius DTA Unconstitutional
A win for Kenyans in keeping more revenues from bilateral treaties
Tax Justice Network Africa
Press Release, March 15, 2019
[Background paper by TJN-A from 2018 available here.]
Nairobi March 15, 2019, The Kenya High court today declared void and unconstitutional the Double Tax Avoidance Agreement (DTAA) between Kenya and Mauritius. In reading the Judgment, Justice W. Korir granted Tax Justice Network Africa's (TJNA) submission by declaring void Legal Notice No. 59 of 2014 which renders the Kenya/Mauritius DTAA void and unconstitutional. The long-awaited judgement is in reference to TJNA's challenge of the onstitutionality of the Kenya-Mauritius DTAA signed in May 11, 2012 on the following grounds:
• The government failed or neglected to subject the Kenya-Mauritius Double Taxation Avoidance Agreement to the due ratification process in line with the Treaty Making and Ratification Act 2012 as a contravention of Articles 10 (a), (c) and (d) and 201 of the Constitution of Kenya
• That Legal Notice Legal Notice 59 of 2014 is therefore invalid and that the Cabinet Secretary for Treasury should immediately commence the process of ratification in conformity with the provisions of the Treaty Making and Ratification Act 2012.
The high court ruled that due process as laid out in the Kenya Constitution was not followed and hence the Kenya Mauritius DTA 'ceased to have effect and became void in accordance with the Kenyan law.'
Mr Alvin Mosioma the Executive Director of TJNA said 'This ruling is ground breaking not just for Kenya but other African countries. We welcome this ruling as a validation of our argument that requires all DTAA's to be subject to the constitutionally required ratification process as enshrined on Articles 10 (a to c) and 201 of the Constitution of Kenya. The ruling is a first step in the right direction in ensuring proper and wider stakeholder consultations on matters of national interest.' This judgment validates our call for African countries to review all their tax treaties particularly those signed with tax havens. Evidence has shown that contrary to their objectives, these DTAs have led to double non-taxation and resulted to massive revenue leakage for African countries. The ruling further underscores our position that DTAs signed especially with tax havens have been avenues of tax avoidance practices denying African countries the much sought-after revenues to finance development.
TJNA's Policy Lead-Tax and Investments, Jared Maranga said of the ruling ''This ruling affects not only the Kenya Mauritius DTA, but also has legal implications for all other treaties signed under the Constitution. It rightly pushes us to rethink the costs, benefits and motivations around signing DTAs in the first place. We should therefore set up a DTA policy framework - which sets out the basic minimums the country should consider while signing bilateral tax agreements.
Double Tax Agreements have a direct bearing to the taxing rights of states. The governments should therefore put in place mechanisms to ensure effective public participation as part of the treaty ratification process."
TJNA calls on the Kenya government to revisit all other recently signed DTAs including those with UAE, Netherlands, China and South Korea and those under negotiation to ensure that they are compliant with this new ruling. The role of parliament is not only critical but also constitutionally mandatory in the treaty ratification process. We call upon the Kenyan parliament to rise us to this opportunity and play their legislative role in scrutinising future DTAs to ensure that they do not undermine domestic resource mobilisation efforts. DTAs that are not well thought out have been a subject of abuse by multinational corporations especially through treaty shopping and round tripping which impact on the revenues that countries realise out the associated investments.
"TJNA intends to ensure that all recently signed treaties and future similar tax negotiations are consistent with this ruling and are not in contravention with the laid down laws and procedures" added Mr Mosioma.
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