Why Mauritius Should Now Focus on Tourism

BEPS stands for Base Erosion and Profit Shifting, what happens to economies when global businesses resort to what is called tax planning, avoiding paying tax, taking advantage of loopholes in the law. Suppose a US company develops some intellectual property and sells it to a well-funded, wholly owned subsidiary in a low- or no-tax jurisdiction, say Cayman Islands. The IP is then licensed for deployment in global sales of a wildly successful range of, say, phones, the biggest element of whose cost is not the manufacturing in China or the declared profit margin but the licence fees and royalties accruing to the holder of that IP in Cayman Islands, effectively shifting profits and eroding the US tax base.

Taxing Job

The original OECD campaign was to put an end to double taxation, and this proved to be successful, perhaps too successful, says Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration. Now, the new effort will be to put an end to the double avoidance of taxation by global companies. India, too, will be an active participant in this campaign.

"Today, there is no pie to share. Taxation is a sovereign right, but our concern is tax avoidance. We will plug gaps in bilateral tax pacts that allow income from cross-border deals to go untaxed", says Saint-Amans. The former French civil servant has been in the forefront in the fight against global tax evasion after the financial crisis in 2008. The effort is to get global corporations to pay taxes, in ways that are mutually agreed upon by the home country and the country where the profits are generated, cutting out intermediate locations.

Saint-Amans and his team are working on a plan that should be completed in two years. It sets 15 proposals to block gaps in the tax system that allow BEPS. This includes proposals to tackle misuse of tax treaties, to deal with challenges of a digital economy and to prevent tax avoidance by shifting, say, patents or trademarks between group companies. Off-setting the impact of "hybrid" structures used to save billions of dollars of tax and having robust dispute settlement mechanisms also feature in the plan.

Beached Mauritius

"I would say all this is not good news for Mauritius," says Saint-Amans, a history graduate who went to the French National School of Admin-istration. But the good news is that the island nation has shown progress in sharing information on tax evaders, thanks to another OECD initiative on peer reviews of countries.