Leaked papers reveal Bitature offshore links

Tuesday July 23 2019



Cited. Mr Patrick Bitature. File photo

Cited. Mr Patrick Bitature. File photo 

By FREDERIC MUSISI

A prominent Kampala businessman benefited from an energy investment structured in Mauritius, which according to tax analysts, smacked of “a deliberate aggressive tax planning” to benefit from the Double Taxation Agreement (DTA) between the Indian Ocean island nation and Uganda.
Details of the investment scheme contained in a cache of documents seen by this newspaper show that Mr Patrick Bitature, the chairman of Simba Group of Companies, which has several business interests around the country, received funding from African Frontier 1 LLC (AF1 LLC).
The latter firm was established in Mauritius in 2011 as a Global Business Class 1 special purpose vehicle, which under Mauritian law placed it to enjoy fiscal benefits such as reduced withholding tax on dividends, interests and royalties, and pay no capital gains tax.

Its parent companies were African Frontier Capital LLC, based also in Mauritius, and Troon Management Services Ltd, domiciled in Bermuda, a British territory in Atlantic Ocean, another tax haven.
AF1 LLC, according to documents obtained by the Washington DC-based International Consortium of Investigative Journalists (ICIJ), was to invest and take up shares in Eletromaxx that set up a thermal power plant in Tororo District.
Mr Bitature is a majority shareholder in the power company. The Mauritius-based special purpose vehicle elected to invest $17.5m (Shs64b) in Electromaxx in three instalments.
The first tranche, of $5m (Shs18.4b), was halved for share acquisition in Electromaxx and personal loan to Mr Bitature, according to details contained in AF1 LLC founding documents.
The second batch of $2.5m (Shs9b) was structured as a “loan convertible into ordinary shares in the capital of Electromaxx, the documents reveal, while the third tranche, of $10m (Shs36b), was injected to acquire new ordinary shares.
Things did not work by plan, one shareholder of Electromaxx told this newspaper, preferring not to be named because they were not authorised to speak on the matter.
Instead, according to the shareholder, Electromaxx’s capital base was $5m (Shs18.4b) half being loan extended by Mr Bitature.

We could not independently verify these accounts, including revelations that the loans had been fully repaid.
Mauritius affords financial benefits to Global Business Class 1 companies such as AF1 LLC and more in situations where a double taxation agreement (DTA) exists.
Uganda has DTAs with nearly a dozen countries which means an investor in one cannot be taxed afresh by another as long as they have paid taxes, usually in the country with lower tax rates.
There is nothing criminal in a business person or entity exploring tax payment in a jurisdiction where it is least, technically called tax avoidance.
In a March 16, 2015 report, Oxfam International warned that tax avoidance widens income inequality as wealthy individuals and multinational corporations pay the least tax by establishing offshore firms in tax havens while the poor choke on taxes in countries of citizenship.

“This deprives all governments of much-needed resources to finance essential services, but especially affects developing countries,” Oxfam noted, calling on the European Union to do more to fight the problem.
Uganda is currently re-negotiating DTAs with low-tax jurisdiction countries, including Mauritius, to ensure the rich pay their fair share to boost the tax collection here.
“The renegotiations for the Uganda Mauritius DTA are still ongoing, they have not been concluded,” Mr Ian Rumanyika, the URA spokesperson, said. Details of the transaction, which links Electromaxx to its parent company and financer founded by two companies based in tax havens, are contained in leaked documents from Conyers Dill & Pearman Ltd, Bermuda’s pioneer offshore law firm established in 1928.
The law firm, with offices in London, Hong Kong and Singapore, says it specialises in handling “complex, multi-jurisdictional transactions”.

According to information on its website, it sits at the “forefront of developments in the jurisdiction, offering you unrivalled expertise in Bermuda’s laws and experience in all market sectors, including corporate, banking, finance, insurance, investment funds, aviation, shipping and private client and trust”.
Under the deal, it helped Electromaxx’s financer Troon and African Frontier Capital LLC, the fund manager, who would in respect of their holding of preference shares, each be entitled to a preferred return of 10 per cent per annum.
In a July 22 reply to ICIJ, Conyers noted that it “strictly adheres to the laws of all the jurisdictions” in which it operates and complies with legally applicable standards issued by internationally recognised bodies.
The law firm added: “Conyers assists clients who have lawful cross-border interests, both as lawyers and through the provision of corporate services, and we have a fiduciary and legal duty to protect the confidentiality of all clients, including communications with them.”

The management agreement in the AF1 LLC set-up provided for AFC LLC and Troon’s representations on Electromaxx board, their engagement in the company’s weekly and monthly commercial, operational and financial affairs “to maximise the medium to long term value of the Fund’s investment.” The special purpose vehicle, AF LLC, was to pay $250,000 (Shs913m) in management fees to African Frontier Capital LLC, its co-parent firm that doubled as the fund manager.
Electromaxx is one of the two thermal generation plants in Uganda and supplies power to the national grid through a deal with Uganda Electricity Transmission Company Limited (UETCL).
The company, which had an installed 50-megawatts capacity at its Tororo-based plant, began supplying power on the national grid in 2010.

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Electromaxx officials and Energy Ministry officials as well as their counterparts in Finance ministry, declined to disclose how much the power provider was paid over four years when increased hydro-power rendered the reserve thermal capacity largely idle.
According to Electricity Regulatory Authority (ERA), the statutory power regulator, Electromaxx by 2017 was only supplying seven megawatts essentially to keep the machines in working condition.
It remained unclear why Mr Bitature elected to source financing from a special purpose vehicle domiciled in Mauritius, a tax haven, although he broke no law and is not being accused of any wrongdoing.
However, as chairperson of the Private Sector Foundation Uganda, he would be expected to advocate for higher domestic tax collection by paying his taxes in Uganda.

Officials declined to discuss Electromaxx’s tax filings, saying they are confidential.
In response to inquiries by this newspaper, Mr Bitature acknowledged involvement with AF1 LLC and noted in an email that the transaction was concluded and AF1 LLC is “no longer an investor in Electromaxx nor my creditor.”
Asked why the AF1 LLC, a special purpose vehicle established by companies domiciled in two renowned tax havens; Bermuda and Mauritius, made investment in a company he co-owns and further advanced a personal loan to him, Mr Bitature responded: “Electromaxx is not privy to what proposal AF1 LLC has made for investment in Uganda.”
“Electromaxx did avail an interest bearing loan facility from AF1 (LLC) in 2011 and the loan has been fully repaid with interest,” he noted in an email.

Asked if the purpose of the personal loan advanced to him, when he was also a lender to Electromaxx, was to provide an untaxed transfer, he said: “As far as I am aware, nowhere in the world are loans taxed. Tax, if any, may arise only on the earnings out of the loan, be it interest or otherwise.”
He added that “all taxes, if any, as applicable under Uganda Revenue Authority and the laws of Uganda, has been fully accounted for in the financial books of Electromaxx and financial returns submitted per the tax laws of Uganda.”
A shareholder in Electromaxx separately said their transactional relationship was limited to only AF1 LLC, and no third parties.
The shareholders got in touch with AF1 LLC in 2011, according to the shareholder who asked not to be named to freely discuss the matter, as they prospected new credit lines through the capital market.
The additional financing was to expand the thermal plant’s operations in the wake of intermittent power supply to different parts of Uganda.

However, in early 2012, the government abolished electricity subsidies paid to private power generators to cushion consumers against exorbitant tariffs.
A commissioning, later in October of that year, of the 250-megawatts Bujagali dam, brought excess electricity on the national grid and rendered continued investment in private power generation risky and less viable.
Electromaxx was licenced in March 2008, initially to generate and sell 10 megawatts of thermal power from its heavy-fuel oil plant, which was eventually varied to 20 megawatts.
“We got only $5m (Shs18.4b) from AF1 LLC; Patrick (Bitature) had earlier lent the company $2.5m (Shs9b) and when we got the new funding we paid him,” the official said.
According to the Electromaxx official, they turned for credit outside Uganda because the local financial market is not favourable to local investors because the loans have high interest rates while volatility of the shilling against the dollar poses crippling ramifications.

Some tax analysts say Electromaxx’s business structuring and financial transactions with offshore companies suggests a “deliberate aggressive tax planning, because setting up in Mauritius allows the company to benefit from the double taxation agreement between Mauritius and Uganda”.
According to a May 2011 document in the files of AF1 LLC, Electromaxx’s financer, was purposed to apply for a tax residency certificate in Mauritius every year to “benefit” from the tax treaty between Uganda and Mauritius, subject to among other conditions.
These included the company at all times having at least two directors resident in Mauritius, and all board meetings being held, chaired, and minuted in the Indian Ocean island.

Expert view
Mr Robert Mwanyumba, a tax expert, said “essentially what this means is that since Mauritius, which has a lower corporate income tax of 15 per cent or so against Uganda’s thirty per cent, then you avoid the tax in Uganda.”
“In addition, Mauritius has no capital gains taxes while in Uganda the rate is 20 per cent. So any transfer of assets or shares offshore may lead to actual no taxes paid,” Mr Mwanyumba said, adding: “Classic avoidance on taxation is where you declare proceeds from a sale as a loan rather than income. Given that loans are not subject to taxation as they are not deemed as income, an entity gets to acquire the money in its entirety and can even chalk it up as a liability on the books.”
Mr Bitature and an Electromaxx shareholder deny this was their scheme. The Southern and Eastern Africa Trade Information and Negotiations Institute (SEATINI) and the United Kingdom-based Tax Justice Network, in a 2016 joint study on impact of Double Taxation Agreements on financing for development, estimated that Uganda loses close to Shs3.6b in foregone Withholding Tax revenue on dividends and interest.
Ms Jane Nalunga, the SEATINI’s country director, told this newspaper yesterday that “the Uganda-Mauritius (tax) treaty does not adopt the ‘force of attraction principle’, which limits its taxing rights despite the fact that income might be sourced from Uganda”.

“We reiterate our position to the Ministry of Finance to fast-track the (double-tax agreements review) negotiations while ensuring that Uganda maximises the benefits. Uganda needs this revenue which is lost through tax avoidance and evasion to fund its development and social needs,” she said.
A former Mauritian Finance minister Roshi Bhadain, whose docket oversaw the offshore sector, said it “is basically the multinationals and the management companies” who are majority beneficiaries of reduced tax schemes.
For a long time, shell companies in Mauritius were “just files on a desk” he said, adding: “...the government of Mauritius is losing and the governments in Africa [are] losing. And people are not getting anything. The Mauritian people, the African people are not getting anything out of this system.”

About the leaks

Mauritius Leaks is a cross-border investigation into how one law firm on a small island off Africa’s east coast helped companies leach tax revenue from poor African, Arab and Asian nations.
Led by the International Consortium of Investigative Journalists, the investigation is a collaboration by more than 50 journalists in 18 countries. More than 200,000 documents from the Mauritius office of a prestigious offshore law firm, Conyers Dill & Pearman, are at the heart of the investigation. ICIJ corroborated company information from the leaked documents with data in the Mauritius corporate registry and the Financial Services Commission’s register of licensees. The documents offer a rare window into corporate tax avoidance in countries in Africa, the Middle East and Asia.
The documents include emails, contracts and business plans provided by some of the world’s biggest players in finance and law, including KPMG and the London-based multinational law firm Clifford Chance. Together, they reveal attempts by corporations and individuals to exploit tax rules that allow them to avoid taxes of such countries as Egypt, Mozambique and Thailand.

“Mauritius is a bit like the Luxembourg of Africa,” said Tove Ryding, policy and advocacy manager for tax justice at the European Network on Debt and Development. Mauritius has “specialised as a gateway to Africa so we see a lot of corporations that come and set themselves up in Mauritius because it allows them to transfer money in and out Africa without incurring much tax.” Conyers sold its Mauritius business to three former employees in 2017. Conyers told ICIJ that it “strictly adheres to the laws of all the jurisdictions in which we operate and is routinely reviewed by regulatory authorities and external auditors.”
Mauritius Leaks exposes how anti-poverty crusader Bob Geldof’s investment fund and household-name corporate titans such as Wal-Mart and Whirlpool discussed taxes and trusts as part of operations in Africa and Asia. Known as the “Mauritian miracle”, the island’s economic success has been built on offering investors in Africa tax advantages through a Mauritian “double-whammy.”
Offshore firms such as Conyers sell the former French colony, population 1.265 million, as the go-to-destination for multinational corporations seeking to create shell companies easily. Many of those creations are what is known as “shell” or “brass plate companies,” with no employees or offices and whose only tangible link to Mauritius is a postal address shared by dozens or even hundreds of similar firms. Mauritius allows multinationals to route investments through “resident” shell companies, which pay an effective corporate income tax rate of 3 per cent or less, to avoid paying substantially higher taxes in other countries.

The second part of the “double whammy” is an array of what are known as double tax treaties with countries in South Asia, Southeast Asia, the Middle East and Africa. Such treaties are intended to ensure that multinational corporations are not taxed on the same income twice. But every year, the world’s poorest countries lose billions of dollars as those firms use treaties and other loopholes to route money through shell companies in tax havens.
Mauritius rejects criticism of its role as a tax revenue haven, but it has responded to increased pressure and introduced stricter rules to prevent tax abuse. At the same time, the country is pursuing more than a dozen new tax treaties, some involving some of the world’s poorest countries, and it is resisting pleas from countries such as Uganda to overhaul their tax treaties. The team behind the international investigations included the Quartz AI Studio, which helped mine the documents through the use of machine learning, a type of artificial intelligence.

musisif@ug.nationmedia.com

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