Mozambique’s Tax Treaties Allow Multinationals to Dodge Capital Gains Tax

A loophole in Mozambique’s tax treaties with other countries is allowing multinational corporations to avoid paying capital gains tax on lucrative assets such as mining licenses.

Offshore Indirect Transfers (OITs)

Offshore indirect transfers (OITs) are a technique used by companies to sell shares in a holding company that owns valuable assets, rather than selling the assets directly. This allows them to avoid paying capital gains tax, which would be due if they sold the assets outright.

Tax Treaties and Capital Gains Tax

Mozambique’s domestic legislation does allow for the taxation of OITs, but its tax treaties need to include specific provisions to enable this. Article 13(4) and article 13(5) of the OECD model treaty and UN models provide a framework for taxing capital gains on offshore indirect transfers if at least 50% of the value of the shares is derived from immovable property.

Mozambique’s Tax Treaties

However, Mozambique’s tax treaty with Mauritius does not include such provisions, allowing companies to use holding companies in Mauritius to avoid paying capital gains tax. The treaty with the United Arab Emirates includes both provisions, but only for movable property.

Anti-Abuse Measures Fall Short

Mozambique could challenge treaty shopping through anti-abuse measures, which deny treaty benefits to companies that engage in abusive practices. However, only two of Mozambique’s 10 tax treaties contain such measures: those with India and Ethiopia.

• The Multilateral Instrument (MLI) provides a framework for countries to modify their tax treaties to include anti-abuse measures.
• The MLI allows countries to opt in to specific provisions, including capital gains tax on immovable property and mandatory binding arbitration.
• However, the MLI is limited in scope and only takes effect if both treaty partner countries have signed on and ratified it.

Conclusion

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Mozambique’s tax treaties are allowing multinational corporations to avoid paying capital gains tax on lucrative assets. The country needs to strengthen its tax treaties by including specific provisions to enable the taxation of offshore indirect transfers. Anti-abuse measures are also necessary to prevent companies from exploiting loopholes and engaging in treaty shopping. Signing up to the Multilateral Instrument could be a step forward, but its limitations need to be considered.