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Mozambique’s Extractive Industries Haunted by Tax Evasion Schemes

Rapid expansion of Mozambique’s extractive industries has brought unprecedented levels of investment, but it has also been plagued by widespread tax evasion.

Study Reveals Extent of Tax Evasion

A recent study found that five gas and mining companies - including TotalEnergies, Eni, and Vale - are expected to evade paying between $1.4 billion and $2.1 billion in taxes to the Mozambican government. These companies have taken advantage of tax treaties with Mauritius and the United Arab Emirates (UAE) to avoid paying their fair share of taxes.

Tax Treaties Exploited for Tax Avoidance

By setting up mailbox companies in these jurisdictions, corporations can gain access to lower tax rates, leaving Mozambique to lose out on much-needed revenue. This lost revenue could be used to fund essential public services such as healthcare and education.

Link between Tax Evasion and Conflict

The study also highlighted the link between tax evasion and violent conflict in Mozambique’s northernmost province of Cabo Delgado. Research suggests that increasing inequality arising from gas extraction and ruby mining projects contributed to the conflict’s eruption.

Government Action Needed

Mozambique’s government has the power to stop this widespread tax evasion, but it must renegotiate or terminate its tax treaties with Mauritius and the UAE. The country should also establish a transparent tax treaty policy that protects its taxing rights in treaty negotiations.

Study Exposes Specific Cases of Tax Avoidance

The study, conducted by SOMO, exposed how Mozambique loses hundreds of millions of dollars in tax revenue annually through the abuse of its tax treaties with Mauritius and the UAE. It also highlighted specific cases of tax avoidance by gas and mining companies operating in Mozambique.

Examples of Tax Avoidance

• Gemfields, a ruby mine operator, owns its Mozambican subsidiary through a mailbox company in Mauritius, giving it access to a lowered dividend tax rate enshrined in the double taxation agreement between Mauritius and Mozambique.
• Kenmare, another mining company, avoids incorporating a Mozambican subsidiary altogether, instead controlling its operational asset through a branch of its Mauritian subsidiary.

Estimated Losses

The study estimates that these companies have lost approximately $117 million in tax revenue due to their tax avoidance structures. This sum could have been used to construct eight general hospitals or 3,000 classrooms.

Limited Data Availability

Data availability regarding extractive industry investments in Mozambique is limited, with many companies not required to publish annual accounts and significant investment routed through secrecy jurisdictions. The study found that it likely only scratched the surface of tax avoidance by extractive industries operating in Mozambique.

Recommendations for Government Action

Mozambican government has the tools to stop this widespread tax evasion, but it must renegotiate or terminate its tax treaties with Mauritius and the UAE and establish a transparent tax treaty policy. Additional measures to stop the abuse of its tax treaties and limit corporate tax avoidance are outlined in the study’s reports.