How Mozambique
is missing out on
1.4 billion dollars
In 2010, there was a discovery of LNG Liquefied Natural Gas reserves in the north of Mozambique. The discovery brought a huge influx of Foreign Direct Investment into the country over the past 10 years. Multinational enterprises (MNE) from all over the world (such as the USA, China, and India) have been investing billions of dollars into these reserves in Mozambique. However, most of these foreign investors in Mozambique use letterbox companies in tax havens (such as the United Arab Emirates and Mauritius) to take advantage of the tax treaties that Mozambique has with these countries. These treaties were signed before the discovery of the LNG reserves and contain very unfavorable conditions for Mozambique. Because of this, Mozambique’s ability to tax the income generated by these investments is being threatened.
What are tax treaties, tax havens and letterbox companies?
A tax treaty, also called double tax agreement (DTA) is a treaty or agreement between two countries in which those countries agree on how to coordinate the levying of their taxes with the main objective of preventing international double taxation as well as tax avoidance. Tax treaties are part of tax law and, more specifically, international tax law.
A tax haven is a country that offers foreign businesses minimal or no tax liability for their bank deposits in a politically and economically stable environment. In these tax havens it is very easy to set up letterbox companies; these letterbox companies take advantage of the tax treaties that are signed with the tax havens they set up in.
A letterbox company is a company that usually only exists on paper. This means that there is a letterbox at the specified business location, but no office or business premises can be found there. This letterbox company is managed in a completely different place. You won’t find most letterbox companies in Germany or the USA. Rather, in most cases they have an address abroad like Luxembourg, The Netherlands or countries outside of Europe.
What is going on?
MNE’s are always looking for a way to make money, rather than spend it. A way in which money can be saved is by playing with tax, either trying to pay less or to avoid it at all. Some countries have a beneficial tax treaty with Mozambique. They do not need to cheat with their numbers, they already get the gas at a low price. The countries that do not have that tax treaty also want to profit.
If there were only a few countries profiting from the beneficial tax treaties, Mozambique would still make a lot of money from all the other countries that are buying goods from them. But since more and more countries are avoiding paying that tax, Mozambique misses out on a lot of money. That is why this problem needs to be solved.
In this graph you can see the tax treaties Mozambique has with different countries. The tax treaty discusses 3 different components.
Royalties: a payment to the owners of a property, for the use of that property
Interest: the price you pay to borrow money, or the cost you charge to lend money
Dividends: a sum of money a company pays regularly (often annually) to its shareholders, out of its profits
With a fair tax treaty, you have to pay 20% tax over these 3 components. However, with these tax treaties some countries do not even have to pay at all (0% tax).
Countries that take advantage of
Mozambique's tax treaties
How much money is Mozambique missing out on?
Mozambique is missing out on 1.4 billion dollars over the course of the last 10 years! A total of 583 hospitals could have been build with the 1.4 billion dollars.
Mozambique currently has 1597 hospitals. This means that if 583 more hospitals had been built with the money they have been missing, the amount of hospitals to be found in Mozambique could have increased by more than 33%.
What do we do?
You can do your part by sharing this website with your friends. Even just by simply raising awareness of this problem to others, a lot can be achieved!
It is important that the Government of Mozambique immediately renegotiates its treaties with the UAE and Mauritius. Should renegotiation fail to increase Mozambique’s taxing rights, the Government of Mozambique should unilaterally cancel the two respective treaties. The Government of Mozambique should include in its current and new tax treaties the following measures:
- Pause any current or future DTA negotiations
- Design a clear DTA policy
- Conduct a full review of current DTA network
- Renegotiate unfavourable DTAs
- Include strong anti-abuse provisions
- Carefully consider signing up to the Multilateral Instrument
- Do not opt in to the provision regarding dispute resolutionor mandatory arbitration
In conclusion
Mozambique’s tax treaty network is a major tax leak for the country. Mozambique has signed tax treaties with two of the world’s most notorious tax havens: Mauritius and the United Arab Emirates. In the years 2015 to 2020, Mozambique lost overestimated $1 billion in withholding taxes on interest payments and dividends as a result of its tax treaties. This is much needed tax revenue that the country can really use.
The advice to the Government of Mozambique is to immediately renegotiate the treaties with the UAE and Mauritius (and other countries to). The tax treaties need to be beneficial for both sides. This way, Mozambique gets the money that it deserves. Money that can be spend wisely, on hospitals, schools and other public infrastructure.