August 19, 2013 3:32 pm

Offshore centres race to seal Africa investment tax deals

By Javier Blas in Dar es Salaam

Mauritius financial district in Port Louis, the capital of Mauritius.

The surge in foreign investment in Africa has triggered a race among offshore financial centres to sign deals to reduce the tax bills of overseas companies and protect their investment on the continent, with Mauritius, Singapore and Luxembourg rushing to secure agreements.

Last year, Africa received $50bn in foreign direct investment, more than double the level of 10 years ago, according to the UN. The surge comes as economic growth in sub Saharan Africa – forecast by the World Bank to be more than 5 per cent this year – accelerates, attracting global companies from Coca Cola to IBM.

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Africa-based officials and lawyers said offshore centres that typically channel FDI flows were seeking negotiations with host African nations to sign investor protection and promotion agreements, which can minimise the risk of nationalisation by forcing fair compensation and arbitration, as well as double taxation avoidance agreements, which reduce the tax bill that companies face.

The two types of international agreements are to FDI flows what the more widely known free trade agreements are to commerce, a crucial step for companies investing in emerging countries in which security of tenure and lower taxes are critical. “Countries are racing to sign agreements with African countries as FDI flows into the region pick up,” said Gerald Lincoln, managing partner at consultants EY in Mauritius.

“This is a critical trend,” said a London-based investment banker who specialises in sub-Saharan Africa deals. “Although the tax deals usually get more publicity, for investors [what is key] are the investor protection agreements,” the banker added.

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China and India saw a large increase in the number of double-tax and investor protection agreements with offshore financial centres in the late 1990s and early 2000s ahead of a big rise in FDI flows into both countries.

The rush could prove controversial as poverty reduction campaigners and others blame these kinds of deals for a loss of revenues for governments in Asia and Latin America.

Mauritius, the island nation in the Indian Ocean that boasts one of Africa’s largest offshore financial centres, is leading the way, officials say. The country, which over the past decade has accounted for 40 per cent of all FDI flows into India thanks to a favourable tax deal with New Delhi, has already signed 19 tax deals with African countries and it is negotiating another three. It is also in talks to conclude six investor protection agreements in Africa, on top of the 19 the island has already signed.

Singapore already has half a dozen tax deals and it is seeking more, lawyers said. The Seychelles, Luxembourg and the Netherlands all are playing catch up, but from a much lower base. International offshore centres are not alone seeking preferential deals with African countries to channel FDI, with South Africa and Botswana trying to play a similar role locally.

Double tax agreements allow companies to pay taxes in the country of legal residence, usually a low-tax jurisdiction such as Luxembourg, rather than in the country where the physical operations are based.

The Netherlands this year launched a review of several of its double-tax agreements with poor nations, including those already signed with Ghana, Uganda and Zambia, after pressure from anti-poverty and tax avoidance groups. It also plans to hold talks to sign new deals or revise old ones this year with Malawi, Tanzania and South Africa, the government said this year. The Dutch Centre for Research on Multinational Corporations, a think-tank, said this year that the use of the Dutch tax system by multinational companies had cost €771m in annual lost tax revenue in 28 developing countries.

The surge of FDI flows into Africa appears resilient in the face of the current economic slowdown in emerging markets and lower commodities prices. The United Nations Conference on Trade and Development estimates that while global FDI flows declined 18 per cent, those towards Africa increased 5 per cent.

Unctad said that the oil, gas and mining sector continued to dominate, but added: “Projects in manufacturing and services that aim at serving Africa’s growing consumer markets also registered investment increases”.

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ReportJohn Steed | August 19 9:37pm | Permalink
It's a bit naive to think that the money coming through these jurisdictions is their own domestic product. The amount of investment of China's, for instance, balance of payments surpluses, caused by excessive lack of domestic consumption, state not household, means that these flows have to go brought these jurisdictions, rather than through economies, such as the UK, or the labouring economies in the Eurozone. Would you want to invest in Africa via a European banking system that will threaten to confiscate banking deposits, so long as the Germans insist on maintaining their current account surplus to €veryone €lse's (dis)"advantage".