The Mozambique Hidden Loans Case: Securing Fiscal Legitimacy in developing countries

By Mary Ongore

In 2016, it was revealed that three semi-public entities had illegally taken on debts of over USD 2 billion that were backed by government guarantees. The borrowing companies were Mozambique Asset Management (MAM) (USD 535 million), ProIndicus (USD 622 million), and Empresa Moçambicana de Atum (Ematum) (USD 850 million) which had all been incorporated between 2012 and 2014. All three entities were linked to Mozambique’s state security and intelligence services (SISE) and shared a common CEO, a director of the SISE.

The loans were purported to have been taken in order to establish tuna fishing and maritime security businesses and the lenders were Credit Suisse, VTB Bank, and the European bond market. The basis for such loans was the need for Mozambique to secure assets of oil and gas firms operating in Mozambique waters. The repayment of the debt was meant to be from revenues raised from annual fees oil and gas firms transiting the Mozambique channel would pay for security services. Additionally, revenues from tuna fishing would also assist in the repayment of the loan. No such payments had however been received and the main oil and gas firms in Mozambique had signed no contracts with the semi-public entities. Although future revenues from oil and gas extraction did not act as collateral for the loans, the lenders generally believed that these future revenues would increase the likelihood that these loans would be paid. It is largely believed that these funds were pocketed by politicians and politically exposed persons.

These loans, however, violated paragraph 2 of Article 179 of Mozambique’s Constitution in that they had not been submitted to the National assembly for assessment, approval, and monitoring. They also breached the domestic annual budget appropriation bill which put a top limit on government borrowing.

In 2015, Mozambique approached the IMF for the emergency balance of payments assistance. Following the first disbursement of the IMF loan, during debt restructuring, in 2016 the IMF discovered the loans and suspended general budget support. This move was followed by the World Bank which suspended aid disbursements. G14 donors also suspended general budget support while the US placed its annual aid allocation under review. The country is now deemed to be in public debt distress.

These loans illustrate how illicit financial flows not only flow from developing countries but also allow these flows to return to developing countries. These debts met the description of odious debts as they were illegally gained without the consent of the public and failed to provide any tangible benefit. In 2020, the Mozambique constitutional court ruled that the loans were illegal and unconstitutional and as a result, the government was not obliged to pay them back.

This case illustrates the role constitutional and legal safeguards can be used to protect developing countries from taking on excessive levels of debt. This is mainly achieved by ensuring fiscal legitimacy in debt taking by requiring accountability and transparency in borrowing. It also shows the importance of having widely available published information on debt taken on by both the state as well as its publicly owned entities. The Mozambique ruling also shows that there should be better governance of financial institutions in developed countries to ensure that they do not issue odious debt without following proper procedures and conducting due diligence. Although illicit financial flows move from developing to developed countries, this case shows that developed countries also have a role to play in governing lending institutions in their jurisdictions in order to combat Illicit Financial Flows. The key to tackling this problem is the issue of access to information both by developing and developed countries. Fiscal legitimacy can, therefore, only be attained where citizens of developing countries have access to information. Without cooperation from developed countries, it would be difficult to govern borrowing in developing countries which would allow for corruption and revenue loss that will further plunge developing countries into poverty.

A Developing Country Perspective on the 2017 Review of Irish Tax Law

I write in reference to the call for views globally on the review of the Irish Income Tax Act. I recently looked into Irish tax law and its effects on developing countries with particular focus on Africa. Although I have not published on this as yet I have compiled data that I believe will be of interest to the Irish government as it goes through its decision-making process.

Pattern of International Financial Flows Between Ireland and African Countries

Together with my colleagues we looked into the issue of flows out of Ireland using IMF data between 2009 and 2013 and what we see form an African perspective is while there was initial investment in Uganda, Kenya, Tanzania, Mauritius, Mozambique and South Africa, in reality this seems to have decreased throughout other African countries and by 2013 the only countries predominantly receive flows are South Africa and Mozambique. This data would need to be cross referenced as against the Double Taxation Agreements in place between Ireland and African countries: Botswana, Ghana, Zambia, Ethiopia, Morocco, South Africa. This list does not include Uganda, Mozambique or even Mauritius where the flows seem to be predominant. In addition, there are Irish business associations in the following African countries: South Africa, Zimbabwe and Kenya. In addition, there is also Irish business in Ghana that does not show up at all. There is a disconnect between the flows of finance and the treaty base in place as well as potentially actual support on the ground.

The Irish Spillover Report and Impact in Africa

Last year, the Department of Finance released “spillover” analysis of the potential impact of Irish tax policy, including the 12.5 per cent corporate tax rate, on developing nations. In the report, Michael Noonan commended the State for “taking a lead” in such research and thus showing its “full commitment” and fostering “a trusting relationship between the developed and developing world”. However, this document failed to analyze the implications of the State’s 12.5 per cent corporate tax rate not only through the lens of globalization but also through human rights. As a result, it did not unpack the subsequent knock-on effects that Ireland’s tax laws, policies and regulations are having on the on people in developing nations. As the figure below illustrates there are interlinkages between actions and laws in one states with inevitable spillovers in others and all states going forward should be at minimum aware of this.

Traditionally, the IMF [International Monetary Fund] and the World Bank have always recommended between 20 and 25 per cent corporate income tax. The World Trade Organization recommends 15-20 per cent and has since revised upwards to 20 per cent. But in Ireland your rate is at 12.5 per cent. If you sign agreements like DTAs with African countries based on residence then the taxes you will collect are 12.5% but the amount lost in developing country from the Irish business that is operating is 30%. However, this minimum recommended rate is based on the economics principle of cost-benefit analysis and the idea is that on average the amount you’re taking is enough to maintain the services that you’re granting, and 12.5 per cent doesn’t cover that. In addition, in a globalized world, by having a tax rate of 12.5 per cent, you are destroying the potential of developing countries to maintain their 25-35 per cent rates so that they can start becoming financially self-sufficient as businesses compare tax rates instead of the real competition which includes: political stability,

Philip Alston, UN special rapporteur on extreme poverty and human rights, last year also warned of the human rights implications on developing nations of excessively low corporate income tax rates. Speaking at a Christian Aid conference in Dublin, he warned that the State’s 12.5 per rate had descended into a type of mantra and that “mantras are simply slogans that are repeated unthinkingly”. He said policies that gave large multinationals “a free pass on tax” were especially damaging to developing countries which rely heavily on investment from multinational corporations.  “The 12.5 per cent corporate tax rate and the willingness of Ireland to countenance a wide array of special arrangements designed to attract inward investment and make itself an attractive financial hub have become almost a defining characteristic of the society,” said Alston.

A Developing Country Perspective on the 2017 Review of Irish Tax Law

I write in reference to the call for views globally on the review of the Irish Income Tax Act. I recently looked into Irish tax law and its effects on developing countries with particular focus on Africa. Although I have not published on this as yet I have compiled data that I believe will be of interest to the Irish government as it goes through its decision-making process.

Pattern of International Financial Flows Between Ireland and African Countries

Together with my colleagues we looked into the issue of flows out of Ireland using IMF data between 2009 and 2013 and what we see form an African perspective is while there was initial investment in Uganda, Kenya, Tanzania, Mauritius, Mozambique and South Africa, in reality this seems to have decreased throughout other African countries and by 2013 the only countries predominantly receive flows are South Africa and Mozambique.

This data would need to be cross referenced as against the Double Taxation Agreements in place between Ireland and African countries: Botswana, Ghana, Zambia, Ethiopia, Morocco, South Africa. This list does not include Uganda, Mozambique or even Mauritius where the flows seem to be predominant. In addition, there are Irish business associations in the following African countries: South Africa, Zimbabwe and Kenya. In addition, there is also Irish business in Ghana that does not show up at all. There is a disconnect between the flows of finance and the treaty base in place as well as potentially actual support on the ground.

The Irish Spillover Report and Impact in Africa

Last year, the Department of Finance released “spillover” analysis of the potential impact of Irish tax policy, including the 12.5 per cent corporate tax rate, on developing nations. In the report, Michael Noonan commended the State for “taking a lead” in such research and thus showing its “full commitment” and fostering “a trusting relationship between the developed and developing world”. However, this document failed to analyze the implications of the State’s 12.5 per cent corporate tax rate not only through the lens of globalization but also through human rights. As a result, it did not unpack the subsequent knock-on effects that Ireland’s tax laws, policies and regulations are having on the on people in developing nations. As the figure below illustrates there are interlinkages between actions and laws in one states with inevitable spillovers in others and all states going forward should be at minimum aware of this.

Traditionally, the IMF [International Monetary Fund] and the World Bank have always recommended between 20 and 25 per cent corporate income tax. The World Trade Organization recommends 15-20 per cent and has since revised upwards to 20 per cent. But in Ireland your rate is at 12.5 per cent. If you sign agreements like DTAs with African countries based on residence then the taxes you will collect are 12.5% but the amount lost in developing country from the Irish business that is operating is 30%. However, this minimum recommended rate is based on the economics principle of cost-benefit analysis and the idea is that on average the amount you’re taking is enough to maintain the services that you’re granting, and 12.5 per cent doesn’t cover that. In addition, in a globalized world, by having a tax rate of 12.5 per cent, you are destroying the potential of developing countries to maintain their 25-35 per cent rates so that they can start becoming financially self-sufficient as businesses compare tax rates instead of the real competition which includes: political stability,

Philip Alston, UN special rapporteur on extreme poverty and human rights, last year also warned of the human rights implications on developing nations of excessively low corporate income tax rates. Speaking at a Christian Aid conference in Dublin, he warned that the State’s 12.5 per rate had descended into a type of mantra and that “mantras are simply slogans that are repeated unthinkingly”. He said policies that gave large multinationals “a free pass on tax” were especially damaging to developing countries which rely heavily on investment from multinational corporations.  “The 12.5 per cent corporate tax rate and the willingness of Ireland to countenance a wide array of special arrangements designed to attract inward investment and make itself an attractive financial hub have become almost a defining characteristic of the society,” said Alston.

A Developing Country Perspective on the 2017 Review of Irish Tax Law

I write in reference to the call for views globally on the review of the Irish Income Tax Act. I recently looked into Irish tax law and its effects on developing countries with particular focus on Africa. Although I have not published on this as yet I have compiled data that I believe will be of interest to the Irish government as it goes through its decision-making process.

Pattern of International Financial Flows Between Ireland and African Countries

Together with my colleagues we looked into the issue of flows out of Ireland using IMF data between 2009 and 2013 and what we see form an African perspective is while there was initial investment in Uganda, Kenya, Tanzania, Mauritius, Mozambique and South Africa, in reality this seems to have decreased throughout other African countries and by 2013 the only countries predominantly receive flows are South Africa and Mozambique.

This data would need to be cross referenced as against the Double Taxation Agreements in place between Ireland and African countries: Botswana, Ghana, Zambia, Ethiopia, Morocco, South Africa. This list does not include Uganda, Mozambique or even Mauritius where the flows seem to be predominant. In addition, there are Irish business associations in the following African countries: South Africa, Zimbabwe and Kenya. In addition, there is also Irish business in Ghana that does not show up at all. There is a disconnect between the flows of finance and the treaty base in place as well as potentially actual support on the ground.

The Irish Spillover Report and Impact in Africa

Last year, the Department of Finance released “spillover” analysis of the potential impact of Irish tax policy, including the 12.5 per cent corporate tax rate, on developing nations. In the report, Michael Noonan commended the State for “taking a lead” in such research and thus showing its “full commitment” and fostering “a trusting relationship between the developed and developing world”. However, this document failed to analyze the implications of the State’s 12.5 per cent corporate tax rate not only through the lens of globalization but also through human rights. As a result, it did not unpack the subsequent knock-on effects that Ireland’s tax laws, policies and regulations are having on the on people in developing nations. As the figure below illustrates there are interlinkages between actions and laws in one states with inevitable spillovers in others and all states going forward should be at minimum aware of this.

Traditionally, the IMF [International Monetary Fund] and the World Bank have always recommended between 20 and 25 per cent corporate income tax. The World Trade Organization recommends 15-20 per cent and has since revised upwards to 20 per cent. But in Ireland your rate is at 12.5 per cent. If you sign agreements like DTAs with African countries based on residence then the taxes you will collect are 12.5% but the amount lost in developing country from the Irish business that is operating is 30%. However, this minimum recommended rate is based on the economics principle of cost-benefit analysis and the idea is that on average the amount you’re taking is enough to maintain the services that you’re granting, and 12.5 per cent doesn’t cover that. In addition, in a globalized world, by having a tax rate of 12.5 per cent, you are destroying the potential of developing countries to maintain their 25-35 per cent rates so that they can start becoming financially self-sufficient as businesses compare tax rates instead of the real competition which includes: political stability,

Philip Alston, UN special rapporteur on extreme poverty and human rights, last year also warned of the human rights implications on developing nations of excessively low corporate income tax rates. Speaking at a Christian Aid conference in Dublin, he warned that the State’s 12.5 per rate had descended into a type of mantra and that “mantras are simply slogans that are repeated unthinkingly”. He said policies that gave large multinationals “a free pass on tax” were especially damaging to developing countries which rely heavily on investment from multinational corporations.  “The 12.5 per cent corporate tax rate and the willingness of Ireland to countenance a wide array of special arrangements designed to attract inward investment and make itself an attractive financial hub have become almost a defining characteristic of the society,” said Alston.

A Developing Country Perspective on the 2017 Review of Irish Tax Law

I write in reference to the call for views globally on the review of the Irish Income Tax Act. I recently looked into Irish tax law and its effects on developing countries with particular focus on Africa. Although I have not published on this as yet I have compiled data that I believe will be of interest to the Irish government as it goes through its decision-making process.
Pattern of International Financial Flows Between Ireland and African Countries
Together with my colleagues we looked into the issue of flows out of Ireland using IMF data between 2009 and 2013 and what we see form an African perspective is while there was initial investment in Uganda, Kenya, Tanzania, Mauritius, Mozambique and South Africa, in reality this seems to have decreased throughout other African countries and by 2013 the only countries predominantly receive flows are South Africa and Mozambique. Please see the figures below that showing the changing pattern of the flows.

Figure 1: Flows in 2009 Figure 2: Flows in 2010

Figure 3: Flows in 2011 Figure 4: Flows in 2012

Figure 5: Flows in 2013 Figure 6: Flows in 2014

This data would need to be cross referenced as against the Double Taxation Agreements in place between Ireland and African countries: Botswana, Ghana, Zambia, Ethiopia, Morocco, South Africa. This list does not include Uganda, Mozambique or even Mauritius where the flows seem to be predominant. In addition, there are Irish business associations in the following African countries: South Africa, Zimbabwe and Kenya. In addition, there is also Irish business in Ghana that does not show up at all. There is a disconnect between the flows of finance and the treaty base in place as well as potentially actual support on the ground.
The Irish Spillover Report and Impact in Africa
Last year, the Department of Finance released “spillover” analysis of the potential impact of Irish tax policy, including the 12.5 per cent corporate tax rate, on developing nations. In the report, Michael Noonan commended the State for “taking a lead” in such research and thus showing its “full commitment” and fostering “a trusting relationship between the developed and developing world”. However, this document failed to analyze the implications of the State’s 12.5 per cent corporate tax rate not only through the lens of globalization but also through human rights. As a result, it did not unpack the subsequent knock-on effects that Ireland’s tax laws, policies and regulations are having on the on people in developing nations. As the figure below illustrates there are interlinkages between actions and laws in one states with inevitable spillovers in others and all states going forward should be at minimum aware of this.
Figure 7: The Linkages Between Tax Evasion and Human Rights

Traditionally, the IMF [International Monetary Fund] and the World Bank have always recommended between 20 and 25 per cent corporate income tax. The World Trade Organization recommends 15-20 per cent and has since revised upwards to 20 per cent. But in Ireland your rate is at 12.5 per cent. If you sign agreements like DTAs with African countries based on residence then the taxes you will collect are 12.5% but the amount lost in developing country from the Irish business that is operating is 30%. However, this minimum recommended rate is based on the economics principle of cost-benefit analysis and the idea is that on average the amount you’re taking is enough to maintain the services that you’re granting, and 12.5 per cent doesn’t cover that. In addition, in a globalized world, by having a tax rate of 12.5 per cent, you are destroying the potential of developing countries to maintain their 25-35 per cent rates so that they can start becoming financially self-sufficient as businesses compare tax rates instead of the real competition which includes: political stability,
Philip Alston, UN special rapporteur on extreme poverty and human rights, last year also warned of the human rights implications on developing nations of excessively low corporate income tax rates. Speaking at a Christian Aid conference in Dublin, he warned that the State’s 12.5 per rate had descended into a type of mantra and that “mantras are simply slogans that are repeated unthinkingly”. He said policies that gave large multinationals “a free pass on tax” were especially damaging to developing countries which rely heavily on investment from multinational corporations. “The 12.5 per cent corporate tax rate and the willingness of Ireland to countenance a wide array of special arrangements designed to attract inward investment and make itself an attractive financial hub have become almost a defining characteristic of the society,” said Alston.

The Recent Addis FFD process and its Impact on Tax in the non G20 World

States democratically opted out of the process of being part of the decision-making on what the global tax rules will look like in the future

I had the pleasure and honour of being present for part of the peripheral discussions and side events at the recently concluded FFD process in Addis Ababa a few days ago. As a lawyer and academic who is active in civil society I had an interesting time there watching and participating in the activities and several issues caught my attention from a tax and development perspective mainly the issue of fiscal legitimacy at a global level: accountability , responsibility, transparency, effectiveness, efficiency, fairness and justice in the processes at the global level of suffrage where one state has one vote!

Firstly, it is clear that the decision to build international and global democracy is constantly being kicked at the feet. I think that all states whether they are tax havens or not, developed or developing countries all have the right to participate in the legal processes that decide on laws …call it an international democracy and that this compromise will be a much better one than the one currently in place where only the G20 decide on how the laws and their architecture are to be designed.

I watched as the discussions unfolded into a deadlock on the creation of a democratic International Tax Organisation(ITO) that then was seemingly toppled over through political manouvering and offering of concessions to individual countries. Those in biggest opposition to the ITO seem to be the usual suspects from the G20 the USA (that houses the worst secrecy jurisdiction n the world-Delaware) and the UK ( that is the home of the new tax that manages to add more competition to the global and regional landscape of taxation ). Speculation was that the African countries that crumbled included South Africa the current chair of the G77 (itself a net received of IFF) and Ethiopia, the host nation (to whom concessions were promised) It seems clear that there was clearly a ‘democratic’ decision to remove the possibility of the remainder of the non G20 world to engage in a democratic process of deciding on how global taxes and wealth should be shared.

Secondly, the limits on commitments to fiscally provide more money to ODA or even domestic revenue collection, the result can only bode ill for the Development Agenda that took place a week later in New York. How is it possible that there will be more resources committed by states globally to improved health, housing, education and gender based issues and concerns as well as rooting out corruption when the states that should have decided not only to change the architecture of the international landscape on international taxes and flows democratically bowed out of the process.

Finally, the one winning point was gender. The mentions of gender throughout the end document have been strong and have maintained their concrete issues without being undermined or weakened. However the other area of human rights remain on tenuous ground as a failure to agree on availing more funds for rights will result in their non-realisation.

In conclusion the clearest issue coming forward is that the status quo has seemingly been maintained and while one waits to see how the improved structure of the UN Tax Committee will be fleshed out and one can only hope that the fullest extent of its mandate will be explored as we inch towards global fiscal legitimacy!