Close this search box.
News Images 2

Firm Details

LEX Africa Logo
+ 27 11 535 8000
The Central, 96 Rivonia Road, Sandton, 2196, Johannesburg, South Africa

The bonfire of the tax treaties

In Tax

Senegal and Zambia unilaterally scrapping tax treaties with Mauritius has shaken up the African investment and legal landscape.

Senegal and Zambia have blamed “unbalanced” and “unfair” treaties for their surprise decisions to terminate double-taxation agreements with Mauritius.

Tearing up a tax treaty is highly unusual in the circumspect world of international diplomacy and several other African countries with pacts have now gone back to the small print and are carefully weighing their options, including Namibia, Uganda and Lesotho.

Announcing its decision in January 2020, the Senegalese government said it had lost US$257-million in the 17 years since its agreement with Mauritius was signed in 2004. When Zambia followed suit in June, a government official in Lusaka told media the country was still calculating how much tax revenue its 2012 deal had cost it.

It is understood that both countries are trying to negotiate new treaties on more favourable terms with Mauritius, but no public statements have been made by any of the parties.

These developments come in the wake of various activist groups – including Oxfam and the International Consortium of Investigative Journalists – campaigning internationally against what they see as iniquitous deals that favour so-called “tax havens”.

For its part, Mauritius says its tax regime operates openly and above-board and such tax treaties are common throughout the world. Indeed, treaties are designed to benefit both signatory parties.

At the core of the disputes are companies registered in Mauritius that operate in other countries. Tax pacts allow them to pay tax on profits in their “residence”, Mauritius, rather than where they are actually making the money. Mauritius levies tax at between 3% and 15%, whereas the rate is 30% in Senegal (28% in South Africa and 35% in Zambia).

The flip-side of the tax haven scenario has long been that countries seeking foreign direct investment (FDI) are reconciled to foregoing tax revenue because of the huge advantages – job-creation, infrastructure development and improved standards of life – of investment lured by tax benefits, albeit from a third party.

A recent webinar with participants from the Lex Africa community discussed the matter to try to clarify issues at stake.

Celeste Oates, LEX Africa Manager, was joined by Dev Erriah, Head of Erriah Chambers, Mauritius; Mamadou Mbaye, Legal Advisor at  SCP Mame Adama Gueye & Associes, Dakar, Senegal; and Jackie Jhala, Partner, Corporate Advisory Department, Corpus Legal Practitioners, Lusaka, Zambia.

The first question asked was: What is the purpose of a double-taxation treaty, or a double-taxation avoidance agreement, or a non-double taxation treaty (variously known as a DTT, a DTAA or, most commonly, a DTA)?

Before World War 2, international business and investments involved difficult and protracted legal processes. This cross-border interaction has been significantly eased by bilateral and multilateral trade agreements – among which are DTAs.

Specifically, such treaties are intended to avoid “double taxation”, in other words, income being taxed twice – in the “home” jurisdiction and in the foreign country where a company is operating and generating profits. The DTA is enforceable in both countries under their separate legal systems and is usually ratified by the respective parliaments.

The legal principle is pacta sund servanda, which refers to a contract or pact between two parties that has the effect of a law – with non-fulfilment of obligations constituting a breach.

There are two models for tax treaties, one developed by the United Nations (UN) and the other by the Organisation for Economic Co-operation and Development (OECD). The former is designed to help developing countries while the latter focuses on issues facing developed economies.

Inevitably, companies seek to become “resident” in countries with low tax rates – rather than where they might be earning money. As mentioned, developing countries have opted into this environment, with FDI seen as offsetting tax “losses”.

However, changed circumstances – often years or decades after the signing of a DTA – can result in countries taking a closer look and deciding the terms are not in their favour.

This is the case with both Senegal and Zambia, who believe they are losing unacceptable amounts in tax and want greater equity in any agreements with Mauritius.

Dev Erriah explained that Mauritius had become something of a DTA hub for countries seeking ways to draw in FDI. The country has 46 DTAs, including 16 with African countries. He added that the background to this scenario dates back to 1981, when Mauritius signed a bilateral tax agreement with India, which proved very useful in the latter country attracting massive FDI as it embarked on its well-documented modernisation and infrastructure-build drive. Treaties with African states have been based on this model.

Dev Erriah pointed out that low-tax jurisdictions are used all over the world. Also, Mauritius was not pocketing revenue not being paid in other countries; any “lost” money was going to company shareholders, who naturally seek to maximise their tax savings.

He added that treaties with African countries might well need updating and it was important for all parties to review long-standing arrangements periodically.

In 2018 Mauritius became part of the OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), aimed at updating international tax rules and lessening the opportunity for tax avoidance by multinational enterprises. As part of this association, Mauritius listed several countries with which it has tax treaties, in order to improve bilateral equity. Senegal and Zambia were not initially listed.

Belatedly Mauritius did add them, but by then the bilateral treaties had been torn up.

The use of global business companies (previously called ‘offshore companies’) in Mauritius – with no real administrative presence/real substance there at all – is particularly galling to African countries. The case of a Canadian engineering giant that avoided paying $8.9-million to Senegal has been a cause celebre.

Mamadou Mbaye commented that, when its DTA with Mauritius was signed in 2004, Senegal might have envisioned more companies based in its territory doing business in and with Mauritius and the tax-take between the two countries balancing out. “But this has not been the case.”

Mr. Mbaye speculated that in 2004 Senegal was not an oil and gas producer, as it is now, and revenues from these highly profitable sources were not taken into consideration. Other mining activity in Senegal has also grown rapidly so far.

Senegal would certainly prefer to receive direct investment from those oil and gas and mining parent companies rather than through Mauritius not only because of the tax matter but because of the collateral positive impact they may have on various sectors of activities turning directly or indirectly around locally registered oil and gas and mining companies   

From Zambia, Jackie Jhala agreed that the landscape had changed: “A lot has transpired in the eight years since the treaty was signed. Zambia does need to attract FDI, but this agreement has not worked out as envisaged.”

She noted that not much information was available publicly on why Zambia terminated the DTA. “But, informally, there is a sense that the treaty was being abused. Zambia was not getting what it wanted from it and it heavily favoured residents of Mauritius over those of Zambia.

“Discussions had started on formulating a new arrangement, but they never progressed further,” said Jhala.

She revealed that diplomatic negotiations had since resumed and breakdowns in communication were being addressed.

Dev Erriah suggested greater pan-African co-operation on the subject, with an “African model” to be aimed for. The African Union might co-ordinate such an initiative.


Explore our news articles, specialist publications and browse through our webinars and gallery

What We Do

Explore our range of expertise, and see how we can help you.
Banking & Finance, Investment Funds & Private Equity
Business Crimes & Investigations
Construction & Engineering
Corporate Mergers & Acquisitions
Cyber Law, Block chain & Technology
Dispute Resolution
General Business Law
Healthcare and Life Sciences
Infrastructure, Energy & Projects
Insolvency & Business Restructuring
Intellectual Property
Labour & Employment
Local Investment Laws and Indigenisation
Media, Broadcasting & Communications
Mining, Environmental & Resources
Property Law and Real Estate

Member Countries

Explore our member firms by country

Burkina Faso
Equatorial Guinea
Guinea Conakry
Ivory Coast
South Africa