The Uneven Offshore World

Mauritius, India, and Africa in the Global Economy

Justin Robertson, Michael Tyrala

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000547917
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Wirtschaftspolitik

Informed by world-systems analysis, this book examines the shifting patterns of accommodation and resistance to the offshore world, with a particular focus on Mauritius as a critical but underappreciated offshore node mediating foreign investment into India and Africa. Drawing on a large pool of financial data and elite interviews, the authors present the first detailed comparative study of the Mauritius–India and Mauritius–Africa offshore relationships. These relationships serve as indicative test cases of the contemporary global tax reform agenda and its promise to rein in offshore finance. Whereas India's economic power and multilateral track record have enabled it to actively shape this agenda and implement it in a robust manner, most African countries have found themselves either unable to meet its stringent criteria or unwilling to do so out of fear that it might discourage investment. Its impact on offshore financial centers has likewise been limited. A few of the least sophisticated ones appear to have fallen by the wayside, but the rest have either remained largely unaffected, or, like Mauritius, succeeded in consolidating their operations and surviving the current round of regulatory headwinds. The findings suggest that the contemporary global tax reform agenda has thus far not only failed to make good on its promise but also actually reinforced numerous existing power hierarchies. The Uneven Offshore World is written in an accessible style and aimed at readers without specialized knowledge of tax issues.

1 Introduction

DOI: 10.4324/9781003161011-1

“What Mauritius is providing is not a gateway but a getaway car for unscrupulous corporations dodging their tax obligations.”

– Alvin Mosioma (Executive Director of Tax Justice Network Africa)

Mauritius has served as the central financial entry point to India for over 20 years, largely because of its tax advantages. By structuring inward and outward investments through Mauritius, individuals and businesses have been able to eliminate capital gains liabilities and lower other forms of taxation, such as withholding taxes on dividends, interest, and royalties. Due to the significant offshore role that Mauritius serves in the Indian economy and the global economy in general, companies registered in Mauritius hold over US$774 billion in assets according to the island state’s own Financial Services Commission ([FSC], 2020a; 2020b). The offshore relationship between Mauritius and India, although emblematic of the financially unregulated offshore world, has been unfamiliar to many students of the global political economy.

Following the global financial crisis of 2007–2008, there has been a renewal of efforts to regulate the offshore economy, with prominent action taken at the level of both policy and discourse by the newly empowered Group of Twenty (G20)¹ and the Organization for Economic Cooperation and Development (OECD). As with the response to any financial crisis, it is worth asking whether such attempts of structural financial reforms will persist once the crisis conditions abate. One of the surprising and under-reported outcomes of the global financial crisis has been the manner in which India seized this moment to undertake significant reforms in the area of taxation. The country’s dealings with Mauritius, which had long been criticized by social forces within India but never substantially altered, were drastically rewritten under a 2016 bilateral agreement that removed many of Mauritius’s special tax benefits. The reaction by investors and the financial press was swift, typified by a headline that declared “Mauritius Is Now a Tax Paradise Lost for Investors in India” (Shrivastava & Beniwal, 2016). In the wake of India’s tougher stance on Mauritian offshore structures, Mauritius has aggressively sought to market itself as the financial gateway to Africa, replete with slick advertising campaigns in global media outlets such as CNN and on social media platforms. As was the case with India in previous decades, significant tax advantages can still be obtained by using offshore vehicles registered in Mauritius to conduct business in many African countries.

Larger debates and research questions

These developments form a part of a larger debate in the International Political Economy (IPE) research area focused on the trajectory of the post-crisis world. Specifically, it is contested whether the global financial crisis has led to continuity or change in global economic processes (Grant & Wilson, 2012; Helleiner, 2014; Mackintosh, 2014; Keaney, 2017). The question examined in this book is whether the number of offshore routes and the volumes of capital flowing through them are substantially decreasing.

The aim of tax justice, a cause which has in recent years risen to the top of the global policy agenda, is to ensure that individuals and firms are held accountable for their economic behavior. A major facet of this is to challenge offshore tax evasion and avoidance, and the offshore secrecy they so frequently rely on, within and across borders, to support a fairer international tax system. More stringently regulating the offshore system is a key objective in the global pursuit of tax justice. OECD officials maintain that the reforms undertaken following the global financial crisis, namely the Common Reporting Standard (CRS), the Base Erosion and Profit Shifting (BEPS) project, and the ongoing BEPS 2.0, have begun to constrain the offshore system (OECD, 2021a). Similarly, we have attended a range of international conferences in Europe, and in the China Offshore series and the Asia Offshore series in Mainland China and Hong Kong, at which tax practitioners from the “Big Four” accounting firms (Deloitte, EY, KPMG, and PricewaterhouseCoopers [PwC]) have consistently affirmed that the new standards negotiated at the OECD are reframing the terms of global business. However, other observers are unconvinced that any truly substantive change has taken place (Johannesen & Zucman, 2014; ActionAid, 2015; BEPS Monitoring Group [BMG], 2015; Avi-Yonah & Xu, 2016; Trade Union Advisory Committee to the OECD [TUAC], 2016a). Picciotto (2019, p. 29) calls the BEPS project an important starting point but states that it contains no more than “temporary palliatives.” The BEPS project, coordinated by the G20 and the OECD, stipulates that signatories will aim to legislate domestically and internationally broadly agreed-upon minimum standards in over a dozen areas to counter the profit shifting of multinational enterprises (MNEs).

Christensen and Hearson (2019a) propose that a new political economy of global tax governance has arisen in the wake of the global financial crisis. The previously unchallenged autonomy of the tax policy expert community has been reduced. It is no longer isolated from the pressures of international negotiations and the concerns of a much broader segment of societal actors. Moreover, the greater willingness of governments to act unilaterally has created conditions for a sovereignty-constraining cooperation, and that has led to the adoption of new global tax rules. In short, these authors believe that a decisive move has been taken against offshore financial centers (OFCs), which had been tolerated for many years. This contention is examined throughout the remainder of the book. As such, the economic relationships between Mauritius and India and between Mauritius and Africa are studied, as the nature of these relationships is indicative of the extent of changes in tax rules and practices in the post-crisis global political economy.

In this context, the following questions are addressed:

• What do India’s actions tell us about the gathering resistance to the outsized role played by the offshore system in the global economy? Is there a new role for emerging markets to provide global tax policy leadership?
• Does the Mauritius–Africa relationship exhibit continuity, suggesting that there is still significant space for offshore transactions, or does it have similarities with the Mauritius–India relationship?
• Can small states, such as Mauritius, stabilize their financial sectors by moving beyond the provision of basic offshore incorporations and the exploitation of a few loopholes?
• What are the broader implications of these developments in the study of global political economy, especially as it relates to Africa?

Argument and significance

The evidence presented in the seven chapters of this book shows that the global offshore economy has been inhibited but certainly not eliminated. It seems unlikely that tax reform will be truly comprehensive and will result in the offshore path becoming inaccessible to all countries equally. Instead, it is more likely that the patterns of offshore engagement will vary according to a country’s level of power and development. This is reflected by the fact that the Mauritius–India pairing has undergone deeper restructuring than the Mauritius–Africa pairing. These comparative differences underscore the need for a holistic analysis that takes into account both historical and systemic considerations, while also incorporating global, regional, and national influences. The space that is available for global offshore activity is undoubtedly shrinking because of the international consensus that offshore structures must be better regulated. Yet, it is premature for the OECD’s top tax official, Pascal Saint-Amans (as quoted in the Economist, 2018), to declare that the OECD’s new agreement on tax treaties means that “treaty shopping is dead.” The financial playing field remains uneven. Core OECD members have signed on to more stringent global standards and norms, which could create more offshore financial opportunities for clients doing business in emerging and developing markets. Accordingly, Mauritius is still able to intermediate investment in Africa, albeit in a more constrained fashion.

Beyond OFCs, many recipient countries in emerging markets are likely to accommodate offshore capital in the belief that such a choice is necessary to attract foreign capital, particularly given local capital deficits. An important facet in analyzing the approaches of economic elites to offshore politics is to determine their dominant ideologies on foreign investment. Historically, many key elites from emerging markets accepted the “aspirational propositions” of neoliberalism (Bracking, 2012, p. 628), which emphasized the necessity of offshore structures in the development process. Such governing elites believed that it was imperative to attract highly competitive foreign investment to their economies. Obtaining offshore capital entails a trade-off between the anticipated gains from higher foreign investment and losses of tax revenue, primarily from missed capital gains taxes and the inability to effectively impose withholding taxes (Mehta, 2014). As Moore (2014a, p. 2) notes, “virtually all governments compete heavily for investors and investment, and are willing to forego quite a lot of their potential tax revenue in the process.” Sometimes this entails tax incentives but often it also means allowing offshore finance. India is an exemplar of a country that has accommodated the demands of offshore capital in recent decades. In defending India’s determination to continue its offshore relationship with Mauritius, a Minister in the Indian government, Yashwant Sinha, was explicit that the inflow of Mauritius-registered foreign investment outweighed any tax revenue losses (Union of India v. Azadi Bachao Andolan, 2003).

What are the mechanisms through which national elites facilitate foreign investment via offshore channels? Two frameworks are pivotal: double taxation agreements (DTAs) and bilateral investment treaties (BITs). DTAs mandate how a corporation’s taxable income is treated, while BITs outline the principle of nondiscrimination and protect against expropriation. BITs offer investors certainty, setting out clear rules and dispute settlement procedures for use in the case of expropriation for instance. These treaties are therefore technical but vital texts for foreign investors because they provide a legal framework and enhance the confidence of foreign investors seeking to allocate capital. Moreover, because these agreements largely follow OECD principles, which tend to represent neoliberal orthodoxy, they have thus far overrepresented the interests of investors and have been subject to very little societal scrutiny.

DTAs and BITs are pro-investment tools that give investors confidence and underpin the flows of capital in a global economy. In signing DTAs, countries are necessarily negotiating away some part of their economic sovereignty. ActionAid (2016, p. 5) concludes that countries have signed away their rights to tax capital gains in nearly half of the DTAs that exist. DTAs between Mauritius and African countries deliver lower tax rates than would be the case if foreign entities invested into African countries directly. The outlier – but possibly the model of the future – is India, which has been able to fully reacquire from Mauritius its right to tax capital gains. The analysis in this book seeks to delineate the understudied phenomena of DTAs and BITs.

Much of Africa has been following in the footsteps of India in seeking to attract investment flows by means of advantageous tax terms. Nonetheless, expectations of these flows approaching the levels reached in the Mauritius– India case should be tempered. Using FSC (2020a; 2020b) data, we calculated that Mauritius-mediated foreign investment into Africa is significantly lower than that into India. In 2019, the latest available year, Mauritius-mediated direct investment into India was worth over three times all Mauritius-mediated direct investment into African countries, and when portfolio investment was added to the tally, it was worth over five times that. Moreover, African economies, on balance, represent a more challenging business environment for foreign firms, especially because many new entrants lack the experience of doing business in Africa, whereas returnees and non-resident Indians have guided investment projects into India via Mauritius. The staggering volume of capital that has flowed to India via Mauritius represents a unique chapter in the period marked by ascendant globalization. The extent to which India’s actions constitute a decisive shift in the global political economy of development needs to be carefully examined.

Will Africa’s approach to Mauritius reverse faster than was the case in India? Many African countries have a shorter history with attracting offshore-mediated capital, and their national political economies feature limited resistance to and less experience with the multilateral system as well as less competent governments and administrations. Still, as Chapter 6 demonstrates, there is change afoot domestically and regionally within the African continent. Moreover, global reform efforts, largely pushed by the European Union (EU) and several major emerging markets, including India, are intensifying. Because of these factors, it is doubtful that the Mauritius–Africa story can run as long as the multi-decadal Mauritius–India story. Still, African economies generally hold less negotiating power with Mauritius than India ever did as a large emerging market. Larger emerging markets hold leverage over global capital in ways that smaller ones do not (Walter, 1998). This pattern is also perceptible within Africa, as evidenced, for example, by larger African countries negotiating somewhat more favorable DTAs with Mauritius.

The growth in the number of African regimes being accommodative of Mauritius as an offshore financial gateway has not been linear, nor has it been without political conflict. Opponents such as Picciotto (2019, p. 16) have been direct in their criticisms of Mauritius’s role in the global political economy:

Any benefits to Mauritius are also highly disproportionate to the damage they cause to other countries. Essentially, this amounts to providing facilities that enable an MNE to avoid tax in countries such as Kenya where they have substantial activities, in exchange for the creation of a few relatively well-paid professional service jobs in Mauritius. This can fairly be described as a beggar-thy-neighbour policy.

Difficult negotiations, renegotiations, and even terminations of existing bilateral agreements have taken place and some African countries have opted against signing new DTAs and BITs with Mauritius. Nevertheless, the trend has been one of opening up to economic transactions with Mauritius. This outcome is surprising in light of several other trends: the global financial crisis has led to pressures for regulatory change; tax collection has become a political issue in both developed and emerging markets; potential fiscal resources have been foregone by governments that accommodate offshore finance; and a diminished corporate tax base is especially worrisome for developing countries, which are more dependent on these revenues as compared to developed countries. Corporate income tax generates twice as much tax revenue in developing countries as in developed countries (United Nations Conference on Trade and Development [UNCTAD], 2015, p. 181). Moreover, taxes paid by foreign affiliates in Africa are significantly more important to total government revenue than even in other developing economies (UNCTAD, 2015, pp. 184–187).

This leads to the broader question of domestic resource mobilization in Africa and other developing regions, the vital importance of which has also been confirmed by its inclusion in the UN’s 2015–2030 Sustainable Development Goals. Forstater (2018) argues that the problem of far lower tax revenues as percentage of Gross Domestic Product (GDP) found in Africa and most developing countries as compared to developed countries is nowhere near as much caused by corporate tax avoidance and the OFCs that enable and facilitate these practices as it is by the inability of developing countries to tax their domestic tax bases. While this is technically true, such a superficially narrow, purely domestically focused approach ignores a range of crucial historical and systemic power dependencies that influence developmental outcomes, especially in Africa.

To begin with, the offshore world enables and facilitates not only corporate tax avoidance but also tax evasion, money laundering, corruption, regulatory arbitrage, capital flight, and numerous other illegal, illicit, and/or immoral practices that undermine developmental efforts. Therefore, the problem is considerably more multifaceted. Compounding it are the still all too present legacies of colonialism, with the offshore world itself argued to serve as a direct extension of colonial control and exploitation, contributing not only to the arrested development in many African and other developing countries but also to global inequality. It is important to note that the ultimate beneficiaries of these practices are some of the wealthiest individuals and MNEs in the world. These foreign individuals and entities, still more often than not Western ones, have naturally benefited the most from the offshore world, as it was essentially built and maintained for them by the developed countries from which they originate, the very same ones that now claim to be serious about clamping down on these exploitative practices. Aside from that, effectively taxing domestic tax bases is a considerably more difficult task for most developing countries than it is to compel foreign MNEs to act more responsibly with regard to their tax obligations. After all, even many emerging economies have not been able to effectively tax their domestic tax bases. It is a complicated matter of state building that requires ample state capacities and even then it can take a long time, especially in a region that is still feeling the impacts of colonialism and the ethnic conflicts the colonizers either themselves created or at least exacerbated, whether through arbitrary placement of borders, displacement of populations, or other catastrophic interventions. Finally, there is also the question of fairness. Foreign MNEs do not operate in developing countries out of charitable concerns, but first and foremost because it is profitable for them. They are there to extract resources and expand their customer bases and are certainly better placed than regular African citizens to afford to pay their share of taxes.

In terms of the larger significance of developments in India and Africa for Mauritius, this case directs attention to ...