Oil and gas multinationals avoid up to $2 billion in taxes in Mozambique

TotalEnergies and ENI are set to avoid up to $2 billion in withholding taxes in Mozambique – more than the country’s annual healthcare spending – research by SOMO and CDD reveals. The oil and gas giants fail to pay their fair share of taxes in the African country because they rout their investments through letterbox companies in the United Arab Emirates (UAE). Mozambique could prevent these practices by cancelling or renegotiating its outdated tax treaties with tax havens like the UAE and Mauritius. Several other African countries have successfully done so already.

TotalEnergies (France) and ENI (Italy) lead two megaprojects in Mozambique to exploit gas reserves in the northern province of Cabo Delgado, constituting the biggest investments in Africa to date. Both multinationals established letterbox companies in the UAE to channel their consortium’s multi-billion-dollar investments, taking advantage of the 0 % interest withholding tax rate in its tax treaty with Mozambique. The investments are backed by loans from public investment banks, export credit agencies and commercial banks worldwide. If the loans for these megaprojects had not been routed through the UAE, Mozambique could have charged a 20 per cent withholding tax on nearly all related interest payments, which amounts to $1.3 – $2 billion.

The backdrop for these gas projects is Mozambique’s northernmost province of Cabo Delgado, an economically marginalised region where a violent insurgency has wreaked havoc since 2017. The discovery of gas and the resulting increase in inequality in the area has been a key driver behind the conflict.

Treaty shopping using complex corporate structures

The use of UAE-based letterbox companies by TotalEnergies and ENI are just two examples of treaty shopping, depriving Mozambique of much-needed tax revenue. SOMO found similar tax avoidance structures by mining companies Vale, Kenmare and Gemfields, which are estimated to have avoided an $117 million in Mozambican taxes between 2017 and 2022. The tax treaties with the UAE and Mauritius are estimated to have cost Mozambique $315 million in 2021 alone, SOMO calculated in a March 2023 report.

Following these revelations, SOMO delved into the details by studying the tax practices of specific companies in the Mozambican gas and mining sectors. Besides the gas projects, case studies include Gemfields, a UK miner extracting rubies in Montepuez and the Irish mining company Kenmare Resources, which operates the Moma titanium mine. On paper, both companies control their operations in Mozambique from Mauritius, taking advantage of a tax treaty that allowed them to avoid approximately $20 million in dividend withholding taxes between 2017 and 2022. Finally, there is the case of Vale and Mitsui & Co., who avoided approximately $96.9 million in interest withholding taxes associated with their Nacala Logistics Corridor between 2016 and 2020 through a financing structure routed via the UAE.

Unfair and outdated tax treaties

It is imperative that Mozambique steps out of these unfair tax treaties, curbing corporate tax avoidance and safeguarding its people’s interests. Nelsa Langa (Research Assistant at CDD): “Mozambique should free itself from these outdated tax treaties, which cost the country dearly while providing little benefit. Senegal, Kenya, Lesotho and Rwanda have all successfully renegotiated or cancelled tax treaties with tax havens Mauritius.”

Mozambique is rich in natural resources, with vast deposits not only of fossil fuels but also minerals that are of key importance for the energy transition. Amidst the exploding demand for these minerals, it is crucial to address tax avoidance promptly to prevent replication.

The Mozambican government has the tools to stop this widespread tax avoidance. By renegotiating or terminating its tax treaties with Mauritius and the UAE, it could limit companies’ opportunities for tax avoidance.