Tax: Distressed Kenyan firms find safe haven in Mauritius

Troubled Tuskys Supermarket is now among a growing list of Kenyan firms with links to one of the world’s most notorious tax havens. 

This is amid concerns that local and multinational companies are increasingly registering subsidiaries offshore in Mauritius to use as investment vehicles into Kenya and the region, a financial manoeuvre known as round-tripping.

The tiny Indian Ocean nation is a tax haven hosting scores of equity and debt investors – real and on paper – eyeing deals across Africa.

As a secrecy jurisdiction, it is also where the world’s super-rich stash their wealth, and shell companies are in plenty.

The Mauritius links, which lessen firms’ tax burdens, have raised concerns of an uneven playing field where local tax compliant businesses are forced to operate under unfair competition.

The tax avoidance tricks are, however, not illegal but translate into huge tax revenue losses for many economies that are now being hammered by the coronavirus pandemic, with governments sweating to bridge widening budget deficits.

In the last few years, at least four top Kenyan supermarkets have been linked to Mauritius.

The ties include ownership, acquisition or financing by Mauritius-based private equity funds.

Last month, debt-saddled Tuskys revealed that it had secured a Sh2 billion loan from an unnamed Mauritius fund hoping to lessen cash flow problems.

This is as it actively pursues a strategic investor after the sibling shareholders agreed to sell a majority stake.

Speculation is rife that the strategic investor might be the Mauritius fund, with the loan part of an acquisition deal that is being ironed out.

Tuskys is sitting on pins and needles due to debt running into billions owed to suppliers, staff, landlords, among other creditors. A petition to wind it up is currently at the High Court.

Last year, Adenia Partners, a Mauritius-based private equity firm operating in sub-Saharan Africa acquired Quick Mart.

The firm announced that the transaction had been structured through the Adenia Capital (IV), a €230 million (Sh29.4 billion) fund.

The same company had acquired second-tier Tumaini Supermarket in 2018.

This saw the merger of the two trading under the Quick Mart brand and resulted in the creation of Kenya’s third-largest supermarket chain with a combined  network of 25 stores as of last year.

The retailer's branch network is now almost 30 in an aggressive expansion race to take up the title of Kenya’s retail king.

Of the top three Kenyan supermarket chains, only Naivas is yet to have links to Mauritius.

In a deal announced this year, French Private Equity fund Amethis became the first external investor in Naivas alongside its partners DEG, MCB Equity Fund and International Finance Corporation, a member of the World Bank Group.

This deal has seen Naivas, now valued at Sh20 billion, expand rapidly to become Kenya’s biggest supermarket in branch network with 65 stores and more planned this year.

Amethis acquired a 30 per cent minority stake from the Mukuha family, pumping in Sh6 billion for scaling up the business.

In 2017, a bombshell was dropped on creditors of collapsed retail giant Nakumatt.

It emerged that Nakumat, which went under with a Sh38 billion debt, was almost wholly owned by a Mauritius-registered company belonging to the retailer’s chief executive Atul Shah.

Since its fall, creditors have been trying to attach assets but have had a hard time locating them.

In June, the National Treasury gazetted the Double Taxation Agreement (DTAA) signed between Kenya and Mauritius last year in April.

The Tax Justice Network (TJNA), a tax lobby in 2014 sued the Treasury and the Kenya Revenue Authority (KRA) in 2014 over the DTAA Kenya had signed with Mauritius in 2012.

And last year, the High Court ruled it was unconstitutional based on the lack of public participation in its drafting, while the National Assembly hadn’t also ratified it.

However, a few weeks later, President Uhuru Kenyatta during a four-day visit to Mauritius resigned the treaty.

The 2012 agreement offered firms the option of paying taxes in one legal jurisdiction so as to make Kenya more attractive to external investors.

The present DTAA applies to all income taxes and persons who are residents of Kenya and Mauritius or both countries.

TJNA Executive Director Alvin Mosioma argued that DTAAs often result in non-taxation and are abused by investors.

“There are inherent loopholes in their design and can be exploited resulting in huge revenue losses for governments,” he said.

Zambia and Senegal are some of the African countries that have in the recent past terminated their treaties with Mauritius.

Zambia is one of the biggest recipients of investments in Africa from Mauritius, with the value of the investments as of June last year valued at $1.9 billion (Sh205 billion), according to the Financial Services Commission.

However, Zambia said the treaty was unbalanced leading to a staggering loss of tax revenue.

Top accounting and tax firm KPMG last month described the DTAA as a “welcome boost” to the established business relations between Kenya and Mauritius. 

“The favourable tax rates under the DTAA are likely to increase trade and investments between the two countries,” said the firm. 

According to government data, exports trade between the two countries – which are part of the Common Market for Eastern and Southern Africa trading bloc – has been rising steadily, although in favour of Mauritius. 

Mauritius is one of the richest countries in Africa in terms of per capita wealth. 

In the last four years, Kenyan exports to Mauritius rose by Sh183 million to Sh1.26 billion last year. 

Following President Kenyatta’s visit last year, a ban on Kenya’s avocados and other produce was lifted. Kenya can now also export baby carrots, baby beans and broccoli. 

Kenya also hopes to cash in on the blue economy as both countries have long coastlines and share proceeds of the Lamu Port-South Sudan-Ethiopia-Transport corridor project. 

Imports to Kenya from Mauritius rose in the same period by Sh5.1 billion to Sh7.8 billion in 2019. 

Kenya imports items such as sugar confectioneries, vinegar and articles of apparel, among others. 

Data on Mauritius inspired investments into Kenya was not immediately available.

The DTAA is also for individual residents and corporates where 50 per cent or more of the underlying ownership is held by an individual or individuals who are residents of the other treaty state. Listed firms are, however, exempt from this requirement.

“This requirement will limit the number of persons who can benefit from the DTA,” said a KPMG analysis. 

TJNA's Mosioma further confirmed that Kenyan companies are establishing subsidiaries in Mauritius, a country that touts itself as an international financial centre. 

Such an arrangement sees the foreign firm owning the brands charge the local subsidiary a fee for the use of the brands. 

This might mean that the parent company is able to determine how expenses and profits are booked in the various countries in which operations are spread so as to lessen the tax burden. 

This is also known as tax planning, which is not illegal but an ability to find loopholes in tax treaties.

"This creates an uneven playing field because if you are a Kenyan company operating here and registered here, you pay full taxes, but if you are an entity benefiting from the Mauritius treaty, there are a number of incentives that you have significantly reduce tax... it means you’re able to beat your competition flat," said Mosioma.

He said such competition is what is driving Kenyan companies to Mauritius.

"Those profit ranges really matter because that's how you also bring in investors who want to see your profit margins are sizeable."

He noted that Kenyan firms in the “Fire” economy, which refers to finance, insurance and real estate, are moving there. 

Kenyan firms that have been identified by TJNA as having such links include Centum, Britam and Jubilee Insurance.?

Popular bread maker Superloaf also moved there a few years back.

Companies don’t move to tax havens such as Mauritius necessarily for tax reasons.

Other factors include strict banking secrecy and being able to do business without close government supervision, according the International Monetary Fund.

Last year, the “Mauritius Leaks” released by the International Consortium of Investigative Journalism exposed an intricate financial web based in Mauritius where tax revenue from poor nations is siphoned by multinationals and Africa’s super-rich, with Mauritius getting a cut. 

Kenya has inked over 20 DTAAs, including with other tax havens such as Singapore. The government has also invited views for a treaty with Barbados, another notorious tax haven.  

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