I recommend Mauritius…

Date: 7 September 2012

… No, not for its white sandy beaches and clear blue water, but for stashing millions in its growing offshore sector.

Tax avoidance is a serious problem that is costing governments trillions, with benefits going largely to private companies. These countries, like Mauritius whose tax rate is a negligible 3 per cent, enable multinational companies to siphon profits out of developing countries. According to Nicholas Shaxton, the author of Treasure Islands “tax havens aren’t just about tax; They are about escape – escape from criminal laws, escape from creditors, escape from tax, escape from prudent financial regulation – above all, escape from democratic scrutiny and accountability”.

The campaigning group Global Financial Integrity estimated the “total illicit outflows from the continent across the 39 years at some $1.8 trillion”, while “developing countries lost between US$723 billion and US$844 billion per annum on average through illicit flows over the decade ending 2009”. This loss is equivalent to 10 times the amount of aid they receive.

Tax avoidance by companies in tax havens also causes losses for the UK. ActionAid’s research shows that companies in the London FTSE 100 index had 8,492 offshore subsidiaries, causing the UK losses of about £1 billion.

How this happens is generally that a company creates a subsidiary company in a tax haven that collects profits made in other countries, including developing countries. Typically, that tax haven will charge little or no tax on these profits. The identity of the company is also kept secret, so that the true extent of profits made and taxes dodged remains hidden.

My home country Mauritius styles itself as a Cayman Islands for Indian businesses. Mauritius opened its financial gates in 1990s, when the island sought to develop its economy by supplementing its sugar, textile and tourism industries. Foreigners rushed to set up companies in Mauritius to benefit from a 1983 tax treaty with India that exempted Mauritius-based investors from capital-gains taxes. By the end of 2010, Mauritius hosted 27,500 holding companies controlling more than $400 billion (about £250 billion) in assets, while 38 per cent of all foreign direct investment in India between 2010 and 2012 travelled through our offshore centres.

The influx of revenue from this corporate hub has boosted employment and living standards in Mauritius; 15,000 Mauritians work in offshore companies and the sector makes up 5 per cent of our GDP. And so I understand why many in Mauritius may be wary of moving away from the current ‘tax haven’ economic model, which is perceived to have brought wealth to our small island – even if I know the huge cost for the rest of the world this foreign investment comes with.

As such I do not wish to present an excuse for what my country is doing as tax avoidance harms the global economy by enslaving developing countries and perpetuating their dependency on aid. But in order to rein in tax-avoidance, we should realise that it is the continual push of the IMF, World Bank and WTO to liberalise trade across the world that leaves nations like Mauritius with few options for economic development. Fledgling businesses are vulnerable to international competition, and a small island nation like Mauritius has to join the race to the bottom if it is to survive.

When companies pay less tax, ordinary people either end up paying more, or public services get cut. In this case, the developing countries from which multinationals are diverting their funds are increasingly impoverished. Considering that more than half of world trade passes through tax havens, it is not surprising that the circle of dependency of developing countries on aid funds is perpetuated, as they cannot raise enough funds from their taxes. Chris Jordan, tax justice expert at ActionAid, said: “Tax havens have a damaging impact on the UK exchequer, the stability of the international financial system, and vitally on the ability of developing countries to raise tax revenues which would lift them out of poverty and make them less dependent on aid”.

So would I want to see Mauritius rein in tax avoidance? Ideally yes. But unless it came with other protection against the international trade system which favours the established hegemonies of the world, Mauritius would risk a fall back into the deadly trap of increasing poverty. Tax-avoidance like so many other problems is perhaps best seen as a symptom of international economics, not a cause. And digging down into the root cause is a messy debate about the market, free trade and development economics.

Shall we get started?