Tax Justice Network ■ Multinationals, private equity and hedge funds dodge billions in capital gains tax using a very simple trick

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Guest blog: Nick Mathiason, founder and co-director of Finance Uncovered

The global economic crisis sparked by Covid-19 means governments urgently need additional revenue as emergency stimulus packages taper.

Capital gains tax – a tax on the profit from the sale of assets such as oil blocks and telecom licences – should be a reliable pot of revenue for countries, particularly poorer, resource rich nations.

However where there’s a tax there’s an avoidance trick. With capital gains tax, the trick is relatively simple.

In Britain, for instance, while the highest rate of personal income tax is 45 per cent, the average capital gains tax rate is 15 per cent according to analysts at financial adviser firm, AJ Bell.

Now the UK Treasury has just announced a capital gains tax policy review which may see the wealthy contribute more to offset huge public spending.

But it is in the corporate sector where capital gains tax avoidance could make a material difference to helping to rebuild shattered economies. Not just in the UK, but throughout the world.

This is because when private equity firms, hedge funds and multinationals sell profitable businesses, they very often pay zero capital gains tax in the countries where the principal, relevant economic activity takes place.

Though most attention among tax justice campaigners has been on corporation tax avoidance, capital gains tax avoidance has largely gone unreported. Until now.

Lightbulb moment

You know how you always remember where you were when you stumbled on a systemic tax dodge that costs developing countries tens of billions of dollars?

Well, I was near Geneva “on a job” for Finance Uncovered. It was May 2017 and our task was to find tax dodging stories.

We’d been asked to spend three days with Public Services International union officials from Ghana, India, Malaysia, Nigeria, Norway and Uganda poring over the accounts of six companies.

My lightbulb moment came when I sat with Ugandan academic, Everline Aketch from Public Services International. Everline wanted to know the extent of profits made by Umeme, Uganda’s monopoly electricity distributor.

Immediately, the news antennae went up:  we could see that a controversial British private equity firm called Actis based on London’s South Bank had recently sold Umeme.

Actis had a chequered history as readers of the British satirical and investigative magazine Private Eye will know.

Once owned by the Department for International Development and charged with building growth businesses in Africa, Asia and Latin America, Actis was privatised in 2004 at a knockdown price making its managers extremely wealthy. The deal was widely regarded as having short changed the taxpayer.

So had Actis made a windfall profit from its sale of Umeme, and if so had Uganda received any capital gains tax from it?

Here’s what we found out.

Lucrative exit

In 2004, Umeme had been privatised. The Ugandan government issued Actis with a licence to run electricity distribution.

After eight years, in 2012 Actis plotted its lucrative exit. Over a four year period, the central London based firm sold blocks of Umeme shares onto the Uganda stock exchange. By 2016, it had completely exited.

By examining company disclosures, combing notes in Umeme’s accounts, examining arcane tax treaties between Uganda and Mauritius, and through discussions with Actis itself, we estimated the British financiers had made a $129m capital gain. It was a figure Actis did not dispute.

We also established that Uganda, where that vast profit was made, had not received a shilling in capital gains tax.

How was this done?

Well Actis deployed a simple technique – one that is used by many other major overseas investors when they buy assets in another country.

The private equity firm had placed its shares in Umeme in a Mauritius company. The shares it sold over a four year period were Mauritian. So no capital gains tax was due in Uganda, which charged capital gains tax at 30 per cent. It meant that Uganda missed out on $38m in capital gains tax  –  then equivalent to 6 per cent of its health budget.

This technique – using a tax haven company to own shares – is called an Offshore Indirect Transfer.


Over the next two years, Finance Uncovered pieced together three further examples in Germany, Namibia and Vietnam in which more than €2bn in tax was avoided.

In Vietnam, our story combined with civil society campaigning contributed to “a capitulation” by US oil giant, ConocoPhillips which had previously refused to pay an estimated $179m in capital gains tax to the south Asian nation.

This week, a new report we helped write with Oxfam Novib referred to other documented Offshore Indirect Transfer disputes in India, Peru, Uganda together with stories we had previously investigated. Our report found that in just six cases alone, developing countries missed out on $2.2bn.

The past 40 years has seen a tsunami or corporate activity with valuable assets traded. Even in our post Covid economy it is impossible to imagine an end to the profitable trading of businesses.

Attention is now growing on this simple ruse which denies tax revenue to in particular developing countries. We at Finance Uncovered are proud to have built an evidence base in this section of the tax avoidance forest. It is imperative that policymakers close the offshore indirect transfer loophole.

There are definitely policy remedies. Countries can use national legislation to prioritise their capital gains tax taxing rights if investors move shares of an asset to a tax haven. Countries can also ensure double taxation agreements between it and another jurisdiction also reflect this priority. There is no question bombed out Covid economies need these types of measures to come into play.

Nick Mathiason co-directs Finance Uncovered which trains journalists and activists to investigate tax abuse, money laundering and corruption and then helps participants get stories into the public domain.

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