Mauritius uses tax incentives to attract investment across sectors and to promote selected policy goals, including supporting a green economic transition, skills development, employment, and job creation. This chapter examines the landscape of tax incentives in Mauritius and delves into details on tax incentive design. It analyses how corporate income tax incentives promote their stated policy goals, offering suggested areas of reform. The chapter also underscores the importance of transparency, monitoring and evaluation of incentive policy to promote a more effective use of incentives. Mauritius could strive for a smarter use of investment tax incentives to create more fiscal space to support its trajectory towards a high-income economy.
OECD Investment Policy Reviews: Mauritius 2024
OECD Investment Policy Reviews
Abstract
Robust evidence as to the effectiveness of incentives in attracting investment is limited, yet, many governments feel compelled to provide generous tax incentives due to global competition with other countries. If governments decide to provide incentives, it is crucial to assess scope, policy goals and costs of incentives, as enhancing their design can help to reduce redundancies and support positive spillover effects (Celani, Dressler and Wermelinger, 2022[1]). Focusing on certain design mechanisms, as explored in the chapter, while limiting the generosity of some incentives can be an important step to foster a smart use of investment tax incentives.
Mauritius has a long history of tax incentives and low corporate taxation. In the 1970s, the government introduced the Export Processing Zone (EPZ) scheme, seeking to diversify the economy beyond sugar production. It provided tax holidays, duty exemptions, and other incentives to companies engaged in manufacturing for export (Cling and Letilly, 2001[2]). In subsequent years, many additional incentive programmes followed until the government decided to simplify the tax system in 2006, by introducing a flat tax of 15% for corporate and personal income taxes, while in parallel repealing most investment incentives (OECD, 2014[3]). Since then, several incentive schemes have re-emerged, due to Mauritius’ objective to boost investment and economic growth that create job opportunities, partly due to global competition with other countries that offer generous tax benefits - even though the low tax burden under Mauritius' standard tax treatment without incentives can compete with preferential regimes of other economies (Republic of Mauritius, 2017[4]; Celani, Dressler and Hanappi, 2022[5]).
Mauritius offers investors a range of tax and non-tax incentives. Among the main incentives for investors are corporate income tax (CIT) incentives that are introduced by annual Finance Acts and consolidated into the main tax law (the Income Tax Act 1995). They take the form of full and partial CIT exemptions, reduced CIT rates, a tax credit and tax allowances. Although not covered by this analysis, Mauritius also offers many additional benefits, including other types of tax benefits (e.g. exemptions from value added tax, customs and import duties), financial and in-kind incentives (e.g. refunds of selected business expenses, provision of building facilities or land) and regulatory benefits (e.g. regulatory sandbox scheme).
Mauritius has taken steps to enhance transparency of investment incentives and follows many good practices in this respect: tax-incentive granting legislation is consolidated in the main tax law (the Income Tax Act 1995), the scope of CIT incentives is clearly determined in the law, and an up-to-date investor guide maintained on a government homepage provides clear information on available benefits. Consultations with the private sector suggest that some of the numerous incentives seem to be granted on an ad hoc basis rather than based on an overarching strategy, potentially impeding the most effective use of incentives as well as regulatory predictability.
CIT incentives are designed to support the growth of domestic and foreign private sector investment as well as social and economic development objectives, including job creation, skills development, social inclusion and supporting a green transition. CIT incentives support these goals mostly by targeting certain qualifying expenditure (e.g., costs for solar panels, training or wages) and outcome conditions (e.g. requiring a minimum number of jobs created). While setting adequate outcome conditions and accurately evaluating them can be challenging, requirements such as employment creation can promote development objectives, but they require careful monitoring to ensure that the outcome has been met. This necessitates resources, administrative capacity, and close coordination with other government agencies. Mauritius also implemented additional policy measures to complement its development efforts.
Mauritius could consider re-evaluating the design of its CIT incentives to streamline income-based incentives in favour of expenditure-based ones. Most of its CIT incentives use income-based tax instruments (CIT exemptions or reduced CIT rates) that often apply for multiple years and lower effective tax rates significantly (by up to 55% for some industries). Expenditure-based incentives (tax allowances or credits) could enable better targeting of incentives towards reducing specific business costs, thereby encouraging spending that might not occur without the incentive (IMF, OECD, UN, World Bank, 2015[6]). Furthermore, expenditure-based incentives are expected to be less affected by the new international tax agreement establishing a Global Minimum Tax (GMT) for large MNEs (OECD, 2022[7]). Under these rules, jurisdictions that tax large multinational enterprises’ (MNEs) income below 15% risk forgoing potential tax revenues as other jurisdictions are allowed to impose top-up taxes on such MNEs. These new rules are likely to have significant implications for Mauritius’ tax incentives.
An effective use of investment incentives necessitates monitoring and regularly evaluating the costs and benefits of incentives, including vis-à-vis public revenue mobilisation, investment attraction, and the respective policy objective. Mauritius monitors the costs of incentives and provides annual tax expenditure reporting but could track further datapoints as to the beneficiaries of incentives and investment outcomes (e.g. new jobs created, minimum share of exports or value addition). Such data could provide a solid foundation for policy evaluations, crucial for assessing if incentives are best designed to support their intended policy goals. Mauritius does not yet evaluate its incentive measures in this respect but would benefit from doing so to understand the effectiveness of measures in place.
A county’s tax system is only one out of many aspects pivotal for investment decisions and often not the most important one. Many investors consider other elements of the investment climate as more important when deciding on a project location (OECD, 2015[8]). Many of these elements are already well developed in Mauritius (e.g. political stability, quick administrative procedures), and the government implemented measures to advance certain aspects (e.g. supporting education by offering free education until graduation) (Ministry of Finance, Economic Planning and Development, 2023[9]). Mauritius could consider further addressing factors challenging its investment climate with measures, other than tax incentives, that may be more suitable to do so.
Design investment incentives based on an overarching strategy. Mauritius offers a broad range of investment incentives, some of which appear to be the outcome of ad hoc decisions influenced by sectorial lobbying, at times benefiting existing firms in well-established industries with no need of additional benefits. Following an overarching strategy when designing incentives could enhance regulatory predictability and a more effective use of investment incentives.
Re-evaluate the design of CIT incentives to streamline income-based incentives in favour of expenditure-based ones. Expenditure-based instruments (tax allowances and credits) target specific costs of a new investment and are more likely to create additional investment. They will also be less affected by the GMT and could be designed as a more cost-effective alternative to current generous income-based CIT exemptions and reduced rates. Incentives should be used to complement, not replace, wider efforts to improve the investment climate. While tax and non-tax incentives can help promote certain investor behaviour, other policies might be more appropriate.
Implement monitoring practices and a regular evaluation mechanism to assess if incentives support their intended policy objectives and at what cost. Mauritius already monitors the cost of incentives through annual tax expenditure reports but could consider collecting further data on beneficiaries and project outcomes as a basis for evaluations. Implementing a periodical evaluation process would be crucial to identify the most effective, as well as redundant, incentives and could help to inform policy decisions.
Phase out redundant tax incentives to create fiscal space for needed reforms. The government may want to consider streamlining the wide offering of investment tax incentives, phasing out less efficient ones and adjusting excessive benefits where possible, enabling greater fiscal space for measures strengthening the investment climate and needed reforms.
Mauritius aims to return to high income status and strives to build economic resilience through diversification and investment attraction. Tax revenues are a crucial source of income to support its ambition to diversify, as they can finance much needed reforms to address challenges like skills and infrastructure gaps, limited innovation capacity and under-developed value chains (AfDB, 2022[10]).
Mauritius’ tax-to-GDP ratio has been rising steadily over recent decades, peaking at pre-pandemic levels in 2019 at 20.4% (Figure 6.1, Panel A). At 20% in 2021, the ratio is lower than South Africa and the Seychelles, but higher than in Thailand and Malaysia.1 Developing countries typically tax between 10-20% of GDP, compared to a 40% average for high income economies (Besley and Persson, 2014[11]). Mauritius’ tax-to-GDP ratio exceeds the average for Africa (15.6%) and Asia-Pacific (19.8%) but remains below the OECD average (34.1%) (OECD, 2023[12]).
The main tax revenue sources are consumption taxes, amounting to 11.7% of GDP (or 58% of total tax revenues), out of which value-added taxes amount to 6.2% of GDP and other taxes from goods and services to 5.5% of GDP (Figure 6.1, Panel B). The reliance on consumption taxes is commonly observed across developing and emerging economies with limited fiscal capacity as they can be broad-based and are relatively easy to administer, despite being typically a regressive tax instrument (OECD, 2022[13]).
When average income levels rise, direct tax revenues (e.g. personal income and corporate income tax) tend to increase (Benedek, Benitez and Vellutini, 2022[14]). This is also the case in Mauritius, where direct tax revenues have increased in recent years, but its income tax revenues, relative to GDP are, at 5.6%, much lower than in peer countries (Figure 6.1, Panel B). The peer countries selected for this analysis collect between 7.7% and 13.7% of national GDP (Malaysia and South Africa, respectively), with only Thailand (5.8%) showing a similar level to Mauritius.
(% of GDP)
Source: OECD (2023[12]), OECD Global Revenues Statistics, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.
CIT accounts for more than half (55%) of Mauritian direct tax revenues, making it a relatively important source of revenue. Throughout the last decade, CIT revenues grew at a fairly slow pace, reaching around 3% of GDP. The last change of the statutory CIT rate was in 2006 when it was lowered from 25% to 15% in parallel with the removal of some incentive schemes, resulting in a subsequent rise of revenues. While CIT revenues have been stable over the last years, they remain relatively low compared to peers (Figure 6.1, Panel B). With 3.1% of GDP for 2021, Mauritius falls behind all peers that collected CIT revenues ranging from 3.9% (Thailand) to 5.6% (Seychelles and Malaysia).
Mauritius adopted a sweeping tax reform in 2006 (Table 6.1). A major component was the introduction of a single flat tax rate on CIT and PIT. Prior to the reform, companies that benefited from incentives enjoyed a preferential 15% rate, while non-incentive companies were subject to a 25% statutory CIT rate. While PIT was progressive before the amendment, the lowest exemption threshold was significantly increased, decreasing the tax burden for low-income earners. Additionally, the National Resident Property Tax (NRPT) for high-income earners contributed to maintaining a certain progressivity of the tax system but was abolished in 2010 (IMF, 2008[15]).
The base-broadening reform enhanced tax revenues from personal and corporate taxes and lowered estimated tax expenditures to 1.5% of GDP (compared to 3% before). It also lowered the administrative burden for taxpayers, improved compliance and transparency of the tax system as it simplified various tax rates, exemptions and other reliefs (IMF, 2008[15]).
Note: (1) The statutory rate was lowered to 22.5% in 2005, effective as of and only during FY 2006/2007. (2) For corporate income tax purposes, the 15% rate came into effect in July 2007. (3) The MRA was established under the MRA Act in 2004 and became operational in July 2006.
Source: Income Tax Act 1995 (consolidated up to Finance Act 2023), https://www.mra.mu/download/ITAConsolidated.pdf and IMF (2008[15]), https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Mauritius-2008-Article-IV-Consultation-Staff-Report-Staff-Statement-Public-Information-22189
Nevertheless, a high CIT productivity indicator suggests the Mauritian CIT system is quite efficient. CIT productivity reflects how much one percentage point of the statutory rate can generate in CIT revenue relative to GDP (IMF, 2023[16]). Mauritian CIT productivity has been rising in recent years and is higher than in most selected peer countries (Figure 6.2). A recent World Bank Enterprise Survey noted that only 2% of participating companies mentioned having had tax administration issues (World Bank, 2020[17]). This suggests that the low level of tax revenues is likely not to be caused by tax administration or enforcement issues but rather by its narrow corporate tax base, fragmented by many incentives and a low CIT rate.
Note: CIT productivity reflects CIT revenue, as percentage of GDP, divided by the statutory CIT rate.
Source: based on author’s calculations and OECD (2023[12]), OECD Global revenue statistics (database), https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL
Mauritius has historically implemented various incentive regimes to stimulate private investment inflows. To attract export-oriented foreign investors and create jobs, the government introduced an EPZ scheme two years after independence – a period marking the beginning of its remarkable economic progress. The agrarian economy still heavily depended on sugar export revenues (contributing to 93% of annual exports) and import substitution policies (Christian and Schulze, 1999[18]; Woldekidan, 1993[19]). The EPZ accelerated economic growth, making Mauritius one of the few global success stories on their economic zone experience during that period (see Chapters 2 and 3 for more information). A key to its economic success was the reinvestment of profits by the sugar industry in the domestic economy through the EPZ (Rodrik, 1999[20]). Around 50% of capital in the zones stemmed from domestic sources, commonly from sugar families (Cling and Letilly, 2001[2]).
The Export Processing Act at the time provided numerous fiscal incentives for exporters, including CIT exemptions for up to 20 years, exemptions on tariffs on imported inputs and for distributed dividends, and many other benefits (e.g., eased labour market standards, subsidised electricity tariffs) (Alter, 1991[21]). The act also introduced administrative assistance to ease bureaucratic red tape, created by the trade protection measures that were in place (Woldekidan, 1993[19]). Economic zone regimes typically provide incentives to support investors at the start of their business operations although incentives should slowly be phased out once new industries have started. As most other emerging economies, Mauritius struggled to remove costly incentive measures after its EPZ success and instead kept existing ones and added new measures to further spur industrialisation.
In the 1990s, a second generation of incentives emerged. The Freeport regime (see Chapter 2 for a more detailed description), which still exists today, was designed to promote international trade, warehousing and transhipment activities by providing tax exemptions and incentives for logistics and trading companies (Christian and Schulze, 1999[18]; Economic Development Board Mauritius, 2023[22]). Incentives for hotel investors and operators supported a rapid rise of up-scale hotels (UNCTAD, 2001[23]). In an aspiration to become an international financial centre, the government passed the Offshore Business Activities Act 1992 allowing trusts and offshore corporations to carry out a range of offshore business activities, such as offshore banking, insurance, and funds management, international financial and consultancy services and international trading and assets management. The regime has been modernised through the Financial Services Act 2007, and companies holding a Global Business Licence (GBL) can now benefit from an 80% tax exemption for certain types of income (e.g. income derived from financial services, such as asset management, and interest income) (KPMG, 2021[24]).
By the late 1990s, Mauritius offered a wide range of incentive schemes that applied to 22 categories of investors, including export and export service enterprises, pioneer enterprises, investments in agriculture, fishing, tourism, financial services, ICT and for many other sectors (OECD, 2014[3]). EPZ incentives continued to exist and were consolidated in the Industrial Expansion Act 1993, which was introduced to level the playing field by providing additional fiscal incentives for non-EPZ firms (accounting for 47% of manufacturing output) (Bank of Mauritius, 1993[25]). The act also consolidated incentives of several other schemes for manufacturers that had been introduced by then, such as industrial building or pioneer status enterprises (engaged in “high technology activities”).2 While the act’s objective was to support diversification into higher value-added production, incentives were available for a broad range of sectors, including non-sugar agriculture and hotel services. An Investment Policy Review by UNCTAD concluded that the choice of benefiting sectors seemed to be based on ad hoc requests from respective industries rather than a strategy, a practice that may still pose challenges to Mauritius when designing incentives today (UNCTAD, 2001[23]). The World Bank argues that “Tax holidays often reflect top-down initiatives with limited strategic underpinning” (World Bank, 2021[26]).
Mauritius shifted from a complex investment system with numerous incentive packages to a simplified low-tax framework only in the early 2000s. The government commissioned a “Review of Fiscal Incentives for Investment” that notably recommended to rationalise existing incentives. While total tax revenues reached 21% of GDP in 2003, corporate tax revenues only reached 1-2% of GDP (Lucknauth, 2004[27]; OECD, 2014[3]). Additionally, the WTO agreement on Subsidies and Countervailing Measures placed restrictions on the use of export subsidies to reduce trade distortions, including through the EPZ (Torres, 2007[28]). In Mauritius, EPZ exporters and firms benefiting from various other incentives schemes were subject to a permanently reduced 15% CIT rate (Cling and Letilly, 2001[2]). To create a level playing field for taxpayers and facilitate tax administration, the tax system was simplified with a flat tax rate of 15% for both corporate and personal income taxes. Alongside this reform, the Business Facilitation Act 2006 streamlined business procedures and repealed most investment incentives, except for the Freeport Scheme, Integrated Resort Scheme, and the subsequent introduction of the Real Estate Scheme (OECD, 2014[3]).
Incentives have since re-emerged as Mauritius currently offers a broad range of tax and non-tax incentives under multiple schemes (Economic Development Board Mauritius, 2023[29]). Beyond the main CIT incentives that will be discussed in more detail throughout this chapter, Mauritius also offers a mix of other incentives under various schemes. Other tax incentives provide relief from value added tax, customs and import duties and income from financial services, interest and dividends. Financial incentives are available for SMEs and large investors and provide refunds for selected business expenses (e.g., refund of export credit insurance premium for SMEs), suggesting a focus on increasing international trade. In-kind incentives provide facilities in relation to buildings or land, e.g., for projects under the Premium Investor Scheme (see Chapter 5). Lastly, Mauritius also operates several regulatory incentives, such as a regulatory sandbox schemes and other eased procedures (e.g., relating to resident permits or residence permits for investors).
The statutory CIT rate has stayed at 15%, lower than in most other countries, including all of the economies selected as comparators for this analysis (Figure 6.3). The rate is also significantly lower than in most other African economies, which averaged to 28.0% in 2022 (Tax Foundation, 2022[30]).3 Amongst African countries, only Tunisia matches the 15% rate since 2021, lowering its rate more than a decade after Mauritius (OECD, 2023[31]).
As % of statutory tax rate
Note: Prior to 2005, companies benefiting from incentives in Mauritius were subject to a preferential CIT rate of 15% CIT rate, while other companies were taxed 25%. The statutory CIT rate was lowered to 22.5% in 2005 and has remained at 15% since 2006. The 15% rate was introduced with the Finance Act 2006 and was effective for companies as of 1 July 2007.
Source: OECD (2023[12]), OECD Global revenue statistics (database), https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL
Increasing global competition from countries that offer generous tax benefits and Mauritius’ objectives to remain an attractive investment destination and to stimulate the growth of certain sectors have caused the recent incentive rise. Incentives only partly determine whether a country’s tax system is competitive and Mauritius’ low statutory CIT rate as well as its well-functioning tax administration may be equally or more compelling to investors. OECD analysis on selected industries reveals that even without applying incentives, the tax burden under Mauritius’ standard tax treatment is as low as the tax burden in other Sub-Saharan African countries under preferential treatment (taking into account the effect of incentives) (see Figure 6.5 and Celani, Dressler and Hanappi (2022[5]) for more details). These results raise the question as to the necessity of multiple incentive regimes on top off an already low CIT rate in Mauritius. Moreover, the tax system is only one of many, and often not the most important, factors considered by investors when choosing their investment destination. Macroeconomic and business conditions, labour force, and the legal and regulatory framework are often more relevant for investors than tax considerations) (OECD, 2015[8]).
Many governments recognise the potential drawbacks associated with offering incentives, yet they are under pressure to provide generous tax relief. This pressure stems from the competition with other locations for investment opportunities and is influenced by corporate lobbying for advantages. If governments decide to implement incentives, it becomes crucial to scrutinise their scope, policy goals and generosity, as enhancing their design can help to mitigate redundancies and foster positive spillover effects (Celani, Dressler and Wermelinger, 2022[1]). Focusing on certain design mechanisms, as explored in this chapter, while limiting the generosity of some incentives, can be an important step in this regard. The OECD Investment Tax Incentives Database (ITID) contains information on incentive design across countries and informs the analysis of this chapter (Box 6.2). Box 6.3 lists tax incentives that inform the analysis of this chapter.
To better understand how tax incentives are used across countries, the OECD Investment Tax Incentives Database (ITID) systematically compiles and classifies quantitative and qualitative information on the design and targeting of CIT incentives, using a consistent data collection methodology. For each tax incentive, it includes information along three dimensions:
instrument-specific design features;
eligibility conditions; and
legal basis.
This allows for cross-country comparisons on how countries design their tax incentives and on the types of business and project characteristics. As of December 2023, the database covers 58 developing and emerging economies in Eurasia, the Middle East and North Africa, Southeast Asia, Sub-Saharan Africa and Latin America. Celani, Dressler and Wermelinger (2022[1]) present the methodology and key classifications underlying the OECD ITID as well as its scope.
Source: Celani, Dressler and Wermelinger (2022[1])
Empirical evidence on the effectiveness of tax incentives is limited but underscores that, aside from the country context, jurisdictional and macroeconomic framework conditions, the design of incentives plays a critical role in determining their success (OECD, 2022[7]; James, 2013[32]; IMF, OECD, UN, World Bank, 2015[6]). Tax incentive design encompasses various aspects, including how the incentive reduces taxation (such as the instrument used, the qualifying income or expenditures it applies to, generosity, and duration; see Box 6.3), eligibility conditions (defining which investors and projects qualify for the incentive), and the governance structure (detailing how the incentive is awarded to investors) (Celani, Dressler and Wermelinger, 2022[1]). These elements affect investor behavior and incentives uptake, making them essential for evaluating whether incentives contribute to stated policy objectives and at what cost.
Investment tax incentives provide favourable deviations from the standard tax treatment for a specific group of corporate taxpayers, based on sector, activity, location or other investor- or project-related characteristics. The most commonly observed CIT incentives are often categorised as income-based tax incentives (CIT exemptions and reduced CIT rates), which relate to the income generated by a firm, and expenditure-based tax incentives (tax allowances and tax credits), which relate to the capital or current expenditure of firms.
Tax exemptions provide a full (100%) or partial (less than 100%) exemption of qualifying taxable income, which may refer to all of a business’ income or income from particular sources (e.g., export income).
Reduced rates are CIT rates set below the standard rate for qualifying taxable income and apply on a temporary or permanent basis.
Tax allowances are deductions from taxable income (i.e., income subject to taxes) and may target current or capital expenditures. Qualifying capital expenditures are generally asset specific (e.g., machinery, buildings, equipment). Qualifying current expenditures tend to be activity specific (e.g., spending on training, R&D, exporting). Tax allowances as defined for this work cover a variety of instruments that allow for a faster write-off of capital expenditure compared to the standard depreciation schedule. Tax allowances can accelerate the rate of deducting capital costs (up to 100% of incurred costs) or enhance deductions beyond 100% of the acquisition cost. The latter includes allowances that apply in addition to standard depreciation resulting in deductions that effectively exceed the initial capital cost, for example, allowing firms to deduct 150% of the value of a new machine. Tax allowances for current expenditure are typically enhancing.
Tax credits are deductions from the amount of taxes due (i.e., tax liability) that may relate to capital expenditures or current expenditures.
Note: Additional information on how the key design features affect tax relief is discussed in Celani, Dressler and Hanappi (2022[5]).
Mauritius provides a broad range of investment tax incentives, mainly in the form of CIT exemptions and tax allowances (Figure 6.4). Investors can benefit from a panoply of income-based tax incentives (CIT exemptions and reduced CIT rates) that apply to almost any industry. Many CIT exemptions apply temporarily for eight years (except for a five-year exemption for foreign investors, a permanent measure for cooperative societies operating in agriculture and a partial exemption for selected incomes). While setting a maximum incentive duration is a positive design feature to mitigate extensive revenue loss, most CIT exemptions in Mauritius provide full tax relief throughout the whole period, likely to cause high amounts of revenues forgone. Permanent 80% exemptions for certain types of income (e.g. profits attributable to permanent establishments in foreign countries, income from financial services and e-commerce), provided the taxpayer meets the conditions outlined in the Income Tax Regulations 1998, and reduced CIT rates of 3% (compared to the statutory rate of 15%) further exacerbate revenues forgone.4
Most tax allowances are accessible for companies of all sizes and apply across sectors, although some are available exclusively to enterprises operating in manufacturing or businesses set up on the island of Rodrigues. Tax allowances in Mauritius are designed to either accelerate the depreciation of assets, allowing for a quicker cost recovery (e.g., immediate depreciation of new plant and machinery), or to enhance the amount deductible from the taxable base (Box 6.3). The latter enables a deduction that exceeds the actual expenditure undertaken by the company, for example, a 200% deduction of a manufacturing company’s expenditure incurred for R&D and product development or a 125% deduction of costs from products manufactured locally by SMEs for large manufactures (turnover above MUR 100 million). Qualifying costs of enhanced tax allowances in Mauritius relate to both current (e.g., wages for disabled employees, training costs, R&D expenditure) and capital expenditure (e.g., acquisition of a water desalination plan, fast chargers for electric cars).
Mauritius also offers a tax credit for manufacturing businesses (except for the alcoholic beverages and tobacco industry) and enables beneficiaries to deduct 15% of qualifying expenditures from taxes due, distributed over three years (i.e., 5% in the year of acquisition and in the two subsequent income years). The credit can be carried forward for up to 10 years. Qualifying costs relate to expenditure for new plant and machinery (except motor cars) incurred between 1 July 2020 and 30 June 2026, potentially encouraging businesses to modernise assets and pivot into new production techniques. The use of a so-called “sunset provision” is a positive design feature, as time limits can accelerate a company’s incentive to invest and facilitate revisions and phase-outs of the measure for policy makers, for example, if an incentive appears to be too costly or not to be reaching its policy goal (Celani, Dressler and Wermelinger, 2022[1]). Mauritius could consider adding sunset clauses to other incentives too.
Income-based incentives (CIT exemptions and reduced CIT rates) can cause economic distortions and involve substantial costs in terms of revenue forgone, significantly lowering effective tax rates in Mauritius (Box 6.4). At the same time, it is unclear to what extent incentives are effective at attracting additional investment. In many cases, it seems income-based incentives are used primarily because of global tax competition with other economies, making it difficult for countries to unilaterally remove such benefits (Klemm and Van Parys, 2012[33]). Mauritius had already phased out incentive schemes in the early 2000s when introducing its flat tax rate of 15% but incentives re-emerged, due to tax competition with other countries, the country’s objective to stimulate the growth of certain sectors and to boost the economy after global economic crises (e.g., the financial crisis 2008).
Many governments use income-based incentives to attract investment, including most comparator countries selected for this analysis (Figure 6.4). The CIT incentive mix in Mauritius contains a higher share of income-based incentives than in Malaysia, the Seychelles, and South Africa but a lower share than in Thailand. On the other hand, all comparator countries selected for this analysis use expenditure-based instruments in their CIT incentives mix. South Africa phased out its reduced CIT rate of 15% for special economic zones in May 2020 and only features expenditure-based incentives in the form of tax allowances.
Instruments used, as % of incentives per country registered in the ITID
Note: Incentives in the form of CIT exemptions, followed by a reduced CIT rate, are registered as a single entry in form of a CIT exemption.
Source: Author’s calculations based on OECD ITID, accessed December 2023.
Expenditure-based incentives (tax allowances and credits) relate to qualifying expenditures. The tax benefit depends on the share of the current or capital expenditures deductible from taxable income (i.e., tax allowance rate) or from taxes due (i.e., credit rate). Expenditure-based incentives enable targeting towards reducing specific costs of investors, including costs for capital assets (e.g., machinery and equipment), certain activities (R&D, training of employees) or job creation (Celani, Dressler and Wermelinger, 2022[1]). Most CIT incentives in place are generous exemptions and reduced CIT rates that apply either for multiple years (e.g., CIT exemptions for freeport operators) or permanently (e.g., 3% reduced rates for export income or the pharmaceutical sector). Such generous CIT exemptions and strongly reduced rates significantly reduce effective tax rates (ETRs) in Mauritius (Box 6.4).
Forward-looking corporate effective tax rates (ETRs) are a way of measuring the extent to which tax incentives affect tax costs and influence business investment and location decisions. ETRs are a useful indicator to compare the impact of tax incentives on effective taxation. The composite Effective Average Tax Rate (EATR) is constructed as a weighted average across finance- and asset-specific EATRs. It is a synthetic tax policy indicator reflecting the average tax contribution a firm makes on an investment project earning above-zero economic profits over its lifetime. The EATR is a useful indicator to compare the generosity of distinct types of preferential tax treatment relative to the standard tax treatment and to assess tax relief from investing in one as opposed to another sector, region or country or to assess the relief provided through specific incentive design everything else being equal.
(EATRs under investment tax incentives considering tax incentives that target the corresponding industry, ordered by generosity of the most generous preferential treatment)
Note: This figure considers investment tax incentives available to investors as of 1 January 2021. EATRs are calculated for a standardised investment in industrial machinery outside of an SEZ. EATRs under standard tax treatment uses tax system features from the OECD CTS database. EATRs under each tax incentive considers tax incentives with sector conditions targeting the food industry as collected through the OECD Investment Tax Incentives databases. EATRs under standard tax treatment may differ from standard CIT rates as they incorporate fiscal depreciation and related provisions. These EATRs do not necessarily align with those presented in OECD CTS as they may reflect different modelling assumptions. Annex C of Celani, Dressler and Hanappi (2022[5]) presents the additional parameters used in the calibration. Table A D.1 in Annex D of Celani, Dressler and Hanappi (2022[5]) presents the EATRs under each tax incentive in this figure.
EATRs in the food industry vary widely across the seven countries, because of differences in standard tax systems, but mainly due to generous tax incentives available in some countries. Figure 6.5 presents forward-looking EATRs for a standardised investment under standard tax treatment (horizontal black marker) and under available tax incentives in the food industry across the seven countries. Countries that provide tax incentives in the food industry typically use more than one instrument.1 The availability of multiple incentives in one industry does not necessarily imply that instruments overlap or are cumulative. Instead, additional eligibility requirements apply often and link incentives to additional characteristics of investors or investment projects.
In some countries, tax incentives significantly reduce the EATR in a given industry. Preferential tax treatment results in EATRs that are up to 55% lower than under standard tax treatment (Mauritius). On average, investment tax incentives targeting the food industry lower EATRs by around 30%.
Some countries provide very generous tax treatment to sectors that are already of economic importance in the country. This may indicate that there is room to phase out incentives that risk becoming redundant to recoup revenue forgone, particularly when sectors are maturing, and spillovers have been realised. Figure 6.6 presents the degree of preferential treatment in the food sector, measured as the difference between the EATR under incentives and the EATR under standard tax treatment and expressed as a percentage of the EATR under standard treatment. It relates this measure to indicators of the sector’s relative economic importance within a country, such as the industry share in GDP (Panel A) and in goods exports (Panel B).
A degree of preferential treatment of 0% indicates that no tax incentive is targeted to the industry. Countries that appear in the upper-right quadrant provide generous tax treatment to an economically important sector. For example, Mauritius and Senegal provide a significant reduction in effective taxation in the food industry compared to the standard tax treatment (degree of preferential treatment is above 50%), although the sector already represents a much larger share of GDP than in other countries (4-6% of GDP) and more than 20% of exports.
Note: Figure considers investment tax incentives available to investors as of 1 January 2021. Degree of preferential treatment (vertical axis) measures the difference between the EATR under standard tax treatment in the country and the most generous tax treatment in the food industry expressed as a percentage of the EATR under standard treatment. A generosity of 0% indicates no tax incentive targets the industry.
Panel A: Industry value added as a share of GDP is estimated multiplying the ISIC Rev.3 industry share in UNIDO INDSTAT 2 by the share of manufacturing in GDP. The food and beverage industry is used as a proxy for the food industries’ share in GDP and goods exports. Eswatini data is from 2011 and Senegal data is from 2014. Value added data is not available for Angola and 2017 output is used a proxy. Panel B: Data for Angola is from 2018.
Source: Celani, Dressler and Hanappi (2022[5]), https://doi.org/10.1787/3eaddf88-en
1. Some countries do not provide tax incentives that target the food industry specifically (e.g., Kenya, South Africa) and Eswatini does not have manufacturing-specific incentives.
The new international agreement establishing GMT for large Multinational Enterprises (MNEs) might help curb some of the harmful tax competition observed worldwide and encourage better incentive design (Box 6.5). Mauritius is one out of 140 participating jurisdictions. The agreement requires MNEs with revenues above USD 750 million to pay a 15% minimum effective tax rate (ETR) in all jurisdictions in which they operate. If in-scope MNEs in Mauritius are subject to ETRs below 15% (for example through reduced CIT rates or exemptions), Mauritius could potentially forgo revenue that can be collected by the home jurisdiction of the MNE or other signatories, through a top-up tax. It is thus advisable that countries having generous incentives packages, such as Mauritius, assess how many of its investors will be affected by the GMT and consider undertaking the necessary tax reforms to prevent revenue loss (OECD, 2022[7]; Christians et al., 2023[34]). The government already introduced a Qualified Domestic Minimum Top up Tax (QDMTT) in its Finance Act 2022 (effective from 1 July 2022) but has not yet provided a timeline for implementing the QDMTT (KPMG, 2023[35]). Mauritius is in the process of engaging in internal consultations with stakeholders and seeking cabinet approval for implementing pillar two. Implementation will require an assessment of whether the current tax incentive design is still fit for purpose.
Pillar Two of the new international tax agreement establishes a global minimum effective corporate tax rate of 15% for large multinational enterprises (MNEs). Where an MNE’s effective tax rate (ETR) in a jurisdiction falls below 15%, the MNE would potentially be subject to top-up taxes under the Global Anti-Base Erosion (GloBE) Rules, a core component of Pillar Two. The GloBE Rules establish the minimum corporate tax and are complemented by the subject-to-tax rule which will allow developing economies to tax certain base-eroding payments (such as interest and royalties) when they are not taxed up to the minimum rate of 9%. The GloBE Rules apply top-up taxes to profits above a substance-based income exclusion (SBIE), which allows some profits based on economic substance (tangible assets and payroll) to be deducted from the GloBE base.
A recent OECD report prepared at the request of the G20 Indonesian Presidency explores the impact of GloBE Rules on tax incentive use (OECD, 2022[7]). This report draws on the OECD Investment Tax Incentives Database (ITID) to provide evidence on tax incentives use in developing countries; outlines key provisions of the GloBE Rules; analyses the impact of GloBE on different common tax instruments and outlines some options for policymakers to explore.
The GloBE Rules will not affect all jurisdictions, MNEs and tax incentives in the same manner. The impact of the GloBE Rules on tax incentives will depend on their design, on the jurisdiction’s tax system (its baseline tax system and its use of base narrowing provisions), and on the characteristics of MNEs and the activities they perform in the jurisdiction. For example, existing tax incentives may continue to be used by MNEs below the EUR 750 million revenue threshold, without them being affected by the GloBE Rules.
The impact of the GloBE Rules will strongly depend on the design of tax incentives. Certain types of tax incentives will be strongly affected, particularly certain income-based tax incentives such as full exemptions or significantly reduced CIT rates, which are widely used across the world. Others may not be affected at all, such as accelerated depreciation for tangible assets. Understanding the degree to which tax incentives may be affected by the rules requires careful consideration of the detailed design of tax incentives.
Targeted tax incentives, incentives with economic substance requirements and expenditure-based tax incentives targeted at tangible assets may be less affected. The targeting of tax incentives to certain categories of income or expenditure or limitations to tax benefits will impact which tax incentives might be affected. However, the value of providing strongly reduced CIT rates or CIT exemptions to in-scope firms might merit a reassessment of the use of these tax incentives.
The GloBE rules should prompt jurisdictions to review the use of tax incentives and consider tax incentive reform. This is particularly the case for tax incentives that may become inefficient due to the operation of the GloBE rules.
Source: (OECD, 2022[7])
Because expenditure-based incentives reduce the costs of incurring certain targeted types of expenditures (e.g., machinery, training, etc), they contribute to making investments more profitable at the margin, thereby encouraging investment that may not occur without the incentive (IMF, OECD, UN, World Bank, 2015[6]). The benefit for the company depends on the size of the investment it undertakes and can also be linked to specific activities and policy objectives (e.g., skills development, technological upgrading etc.). Expenditure-based incentives are also more transparent (in terms of revenue costs) as the size of the tax benefit is relative to the amount invested. They are also less likely to be affected by the recently agreed GMT for large MNEs. For the reasons mentioned above, Mauritius could consider further prioritising expenditure-based tax incentives.
Many countries strategically design incentives not just to attract investment, but also to promote broader policy objectives. Well-designed incentives may help to correct market failures and promote social and economic development objectives, but their costs should be evaluated jointly with the benefits (OECD, 2022[36]; IMF, OECD, UN, World Bank, 2015[6]). This can be done through specific eligibility conditions that require investors to meet particular outcomes (e.g., investment size, job creation), or operate within specific sectors (e.g., renewable energy), or by designing incentives to reduce certain costs (e.g., tax credits for R&D or training expenditure), or to curtail taxes on specific income (e.g., reduced CIT rates for export earnings) (Celani, Dressler and Wermelinger, 2022[1]). Analysing these design features provides insights into the types of investors, sectors and activities a country aims to attract and what the main policy goals of incentives appear to be (described in the following section).
Mauritius’ incentives design focuses on sector and outcome conditions, investment size and new businesses (Figure 6.7, Panel A). While some of its incentives are available to all firms (e.g. accelerated tax allowances), the majority of incentives requires one or multiple eligibility conditions to be met (e.g. CIT exemptions connected to the Investment Certificate). Sector conditions are used for more than half (56%) of incentives. Outcome, investment size and new business conditions are less frequently used (for 12% of incentives, respectively).
Almost all sectors can benefit from tax incentives in Mauritius. Most tax allowances apply across sectors, enabling all industries to benefit. Some other incentives are slightly more targeted towards specific sectors but due to the broad set of available measures, investors operating in most industries will be able to benefit from at least one CIT incentive. For example, the 15% tax credit is available for all manufacturing enterprises, except those operating in the production of alcoholic beverages and tobacco products. Reduced rates of 3% also apply to selected manufacturing industries (medical, biotechnology and pharmaceutical manufacturing) as well as to freeport operators and export income.
While some CIT exemptions are available for investors operating in any industry, others are targeted to certain sectors (those available for eight years linked to Investment Certificates or specific schemes). Mauritius offers a CIT exemption to large investors that provides for tax relief for five years and is available for all sectors. Most other CIT exemptions are designed as eight-year exemptions, providing full tax relief, available for agriculture (e.g., bio-farming, sustainable agriculture, aquaculture, industrial fishing), many manufacturing industries (e.g., food processing, production of pharmaceuticals, high-tech manufacturing) and certain service sectors (e.g., for deep ocean water air conditioning installations, pharmaceutical research, ICT, and other industries related to “digital technology and innovation”). A partial 80% exemption for profits attributable to permanent establishments that a resident company has in a foreign country is available for all industries.5
Mauritius uses a broader set of eligibility conditions in its tax incentives framework than peer countries (Figure 6.7, Panel B). This is partly because it has more incentives in place than peer economies but may also result from strategic choices or higher administrative capacity to monitor if incentive conditions were met. All selected peers offer multiple CIT incentives that target sectors.
Mauritius conditions some of its tax exemptions on a minimum investment size, similar to Malaysia and Thailand (Figure 6.7). Investment size criteria in Mauritius are only used for CIT exemptions and require firms to undertake a minimum level of capital investment, ranging from USD 45 000 (MUR 2 million) to USD 25 million. While minimum investment thresholds at MUR 2 to 5 million (USD 45 000-113 400) are relatively low for the CIT exemptions linked to the Investment Certificate, they amount to MUR 50 million (USD 1.1 million) for freeport operators and to USD 25 million for an incentive that aims to attract large foreign investors. Governments sometimes introduce high investment thresholds to attract large MNEs, in the hope to increase productivity and ensure technology transfer and positive FDI spillover effects. However, minimum investment size thresholds can discourage investment by domestic and foreign SMEs, despite their high innovation potential which may be counterproductive (OECD, 2022[36]; OECD, 2015[37]). Some countries therefore use a staggered approach to investment size criteria and lower the threshold for SMEs, for instance, depending on a company’s annual turnover. Countries may also require a minimum investment amount to be spent for fixed assets to create economic substance (OECD, 2023[38]). A more effective approach could be to opt for expenditure-based incentives instead as they are easier to monitor and can be designed to benefit investors proportionally to their investment costs.
Outcome conditions are another tool to promote policy objectives, requiring beneficiaries to achieve certain performance results relating to a range of areas, including reaching certain revenue volumes, sourcing a minimum share of domestic inputs, or spending a minimum amount of expenditure on training, among others. Such conditions are linked to outcomes of the investment project, rather than characteristics of the investor or investment project. While outcome conditions can promote positive spillovers of investment and other economic goals, they require careful monitoring and administrative resources to ensure that the outcome has been met (Celani, Dressler and Wermelinger, 2022[1])
In Mauritius, investors need to fulfill requirements related to job creation, or to achieving a minimum share of exports or value addition, to benefit from some incentives. For example, the full CIT exemption connected to the Investment Certificate requires investors operating in agro-processing to either invest MUR 2 million or create ten new jobs. The same incentive requires companies operating in food processing to create at least 20% value addition of the finished product’s ex-factory costs and to export at least 50% of final products. Out of selected peers, Thailand also incorporates outcome conditions in many of its investment tax incentives. Its merit-based incentives enable investors to benefit from an extended incentive duration if additional requirements are fulfilled, for instance, spending at least 1-3% of turnover or not less than THB 200-600 million on R&D-linked machinery.6
Certain incentives in Mauritius are only available for new businesses. Some of the eight-year CIT exemptions apply exclusively to companies that have been incorporated on or after 1 July 2021 (all exemptions related to the Investment Certificate, bio-farming and sheltered farming projects). Business stage conditions that target new business entrants are a way to support companies in their infancy, potentially more in need of additional support than existing ones which may already be well established.
Lastly, Mauritius also uses ownership conditions for its five-year exemption for large foreign investors (requiring investors to be individuals that are not citizens of Mauritius) and regional targeting by offering incentives exclusively for the island of Rodrigues.
Square colour indicates the number of incentive instruments (Panel A, x-axis) or CIT incentives in a country (Panel B, x-axis) per corresponding eligibility condition (y-axis)
Note: Outcome refers to eligibility conditions that require businesses to achieve certain performance results. Special Economic Zones eligibility condition refers generically to all types of economic zones, including Special Economic Zones, Industrial Zones, Free Ports, and others. Other tax and non-tax incentives in Mauritius may be subject to different requirements.
Source: Authors based on the OECD Investment Tax Incentives database.
Some design features and eligibility conditions of tax incentives can offer insights into intended objectives of policy measures. The ITID identifies certain social and economic development goals that countries often support through tax incentives, such as fostering local linkages, job quality and skills development, social inclusion, R&D, promoting exports and reducing the environmental impact of businesses (Figure 6.8, Panel A). Such goals can be promoted through outcome conditions (e.g., creating a minimum number of jobs) or targeting certain sectors (e.g., renewable energy sector). Tax incentives can also encourage these objectives by supporting certain activities via qualifying expenditure (e.g., tax allowances for R&D or training expenditure) or qualifying income (e.g., reduced CIT rate for export income) (Figure 6.8, Panel B).
Notes: The ITID identifies development goals that are commonly targeted through CIT incentives which include the six areas shown in the figure. See Annex A for indicator methodology. Panel A.: Development areas supported through design features of at least one CIT incentive, by country; Panel B.: % of targeting channel used, by development goal.
Source: Author’s calculations based on OECD ITID, accessed November 2023.
Mauritius has at least one CIT incentive in place that promotes each of the development goals identified by the ITID and thereby supports more areas than peer economies (Figure 6.8, Panel A). The three areas supported by most incentives are employment and job creation, social inclusion and improving the environmental impact of businesses. One incentive can be designed to support multiple policy goals. For instance, Mauritius offers an enhanced tax allowance that enables investors to deduct 200% of wage costs of disabled or female employees. Thereby Mauritius uses qualifying expenditure (wage costs) to support the objectives employment and job creation as well as social inclusion (Figure 6.8, Panel B).7 Job creation is also supported through outcome conditions that require investors to create at least ten jobs (or alternatively invest MUR 2 million) to benefit from an eight-year full CIT exemption for agro-processors.
Tax allowances aiming to improve the environmental impact of businesses are available to all investors, independent of size, sector of operation or ownership structure, and thus have the potential to contribute to an economy-wide green transition. These accelerated depreciations target capital expenditure for machinery and equipment that reduce the environmental impact and enable an immediate depreciation for solar photovoltaic systems or a quicker cost recovery for so-called “green technology equipment” (Figure 6.8, Panel B). Green technology equipment includes renewable-energy equipment, energy-efficient equipment or noise control devices, water-efficient machinery and equipment for waste or wastewater recycling.8 Accelerated depreciations for tangible assets are also not affected by the GMT (OECD, 2022[7]). For companies incorporated after 1 July 2020, Mauritius also offers an enhanced tax allowance, targeting 200% of the expenditure incurred on fast chargers for electric cars, that facilitates the use of electrical vehicles and may stimulate the demand for renewable energy infrastructure.
Some of the key challenges in Mauritius are the lack of suitably skilled workers, particularly in the manufacturing sector (see Chapter 3), and the low levels of R&D (HSBC, 2023[39]). Mauritius already took steps to address this issue through a set of policy measures, including by offering an enhanced tax allowance to investors, across industries, locations and business sizes, that enables them to deduct 200% of expenditure incurred for training of employees. This showcases good practice incentive design as expenditure-based instruments (such as tax allowances) lower the marginal cost of additional investment and may stimulate companies to invest in activities causing the targeted expenditure (i.e., training) (IMF, OECD, UN, World Bank, 2015[6]).
To encourage innovation, Mauritius also introduced accelerated depreciation of 50% in respect of capital expenditure incurred on R&D and a 200% deduction for qualifying expenditure on R&D (i.e. staff costs, consumable items, computer software directly used in R&D and subcontracted R&D) (Republic of Mauritius, 2017[4]). The OECD INNOTAX portal highlights that many countries use similar incentives to promote R&D and innovation, although commonly request investors to comply with additional rules for R&D subcontracting or limit the deductible amount (OECD, 2023[40]).9 It is important to note that other policy measures could be equally well or better suited to complement these efforts. For example, Mauritius recently streamlined the regulatory procedures for hiring foreign workers and established links between employers and training institutions (HSBC, 2023[39]). The government is encouraged to continue adopting alternative policy options to investment incentive for addressing its skills development objectives.
Transparency for investment facilitation purposes involves how clearly and available incentive-relevant information is communicated to investors (OECD, 2023[41]). Foreign investors unfamiliar with the local market might not be fully aware of the benefits available, particularly if incentives are granted under different schemes; increased transparency can help overcome information asymmetries and Mauritius already follows best practise approaches in this regard: it introduces most CIT incentives through Finance Acts that amend its main tax law, the Income Tax Act 1995, and provides a consolidated version of the Act on the Mauritius Revenue Authority’s (MRA) homepage, reflecting the latest changes. Mauritius also provides an up-to-date investment guide on the EDB’s homepage that outlines available incentive schemes.10 Both sources facilitate verifying if incentives are still in place or whether they have changed. If Mauritius wants to further enhance its investment guide, it could provide more details on eligibility conditions of the various schemes or links to respective guidelines.
The MRA is the main body responsible for administering tax incentives although other public authorities and ministries can also be involved in their governance and granting procedures, making regular exchange between involved actors pertinent. While tax allowances are exclusively administered by the MRA, CIT incentives connected to certificates (e.g., Investment Certificate, freeport licence, approved manufacturers) require investors to submit applications with supporting documents to the EDB and commonly to receive permits from other ministries. For example, investors engaged in food-processing operations that want to benefit from a CIT exemption under the Investment Certificate scheme need to liaise with the EBD, two ministries and another competent authority for registration and obtaining permits. Other authorities are commonly involved in the governance of tax and non-tax incentives if incentive schemes are available for sectors falling under their responsibility.
While for most tax incentives the scope of benefits and granting procedure is clearly determined in the law, Mauritius also operates the Premium Investor Scheme that does not pre-determine benefits in the law and instead requires bilateral negotiations between investors and the EDB (with subsequent approval of the Ministry of Finance, Economic Planning and Development (MOFEPD) (Economic Development Board Mauritius, 2023[42]). Negotiations generally favour larger investors with more resources and higher negotiating power and can contribute to more aggressive privilege-seeking by firms. Larger investors may receive benefits long after they have entered the market and may not be the firms most in need of incentives, and therefore likely to receive windfall gains from government support (OECD, 2023[41]). Mauritius could consider adjusting the scheme to limit discretion and excessive benefits to foster a level playing field for investors of all sizes.
The authority in charge of designing investment tax incentives is the MOFEPD. Mauritius generally does not seem to have a systematic review system for legislative proposals and regulatory oversight mechanism in place (OECD, 2022[43]). Also in the context of incentive policy, it is not clear how the ministry determines policy gaps and which factors influence the choice of incentive design features, such as tax instruments, generosity of tax relief, duration or eligibility conditions. There does not appear to be a clear strategy guiding how incentives are designed and which sectors should benefit. The MOFEPD is recommended to align incentives schemes with objectives outlined in an overarching national strategy. Based on OECD recommendations, Mauritius plans to introduce Regulatory Impact Analysis (RIA) across the government which ideally would also extend to incentive policy making.
The MOFEPD sets out policies with regards to tax incentives, and a budget committee, comprising high-level officials from MOFEPD, reviews, analyses and takes policy decisions on the proposals. The MOFEDP also drafts respective legislation, which is vetted by the State Law Office after consultations with the MRA, parent ministries and other institutions concerned. However, it is not clear if such consultations occur on an ad hoc basis or as a systematic part of the legislative process. Consultations during a fact-finding mission indicated that lobbying from the private sector and the sectoral desk of the EDB appears to be influential, causing incentives to be introduced due to ad hoc requests. This supports findings from a recent OECD report, suggesting that external stakeholders at times seem to be unaware of upcoming legislation to be presented in the National Assembly. The report also identified issues in approaches to stakeholder consultations (e.g., regarding transparency of stakeholder representatives) which may risk regulatory capture (OECD, 2022[43]). The MOFEPD could consider introducing a structured, regular consultation mechanism with other ministries and public authorities involved in incentive policies as well as affected stakeholders. Such a mechanism could enhance transparency of the legislative planning process and prevent policy overlaps due to fostered exchange.
Gaining a deeper insight into whether incentives reach their policy goals and at what cost necessitates monitoring and evaluation mechanisms. Many generous incentives limit revenue collection in Mauritius, particularly those providing full CIT exemptions for multiple years. Mauritius has been using various tax incentives for decades and it would be crucial to assess if they positively contributed to FDI attraction and other policy goals. Monitoring data and evaluation findings are essential for taking informed, evidence-based policy decisions, including whether to adjust or streamline incentives. Removing costly and ineffective incentives can create additional fiscal leeway, crucial for progressing with national priorities, such as expanding infrastructure or education programmes.
Monitoring encompasses tracking data on the use of incentives, their beneficiaries, outcomes, and costs. Monitoring should also include scrutinising investor compliance with eligibility criteria, for example, through collecting evidence that shows respective requirements were met or by conducting audits to uncover potential fraud or abuse.
One option to track costs of tax incentives is tax expenditure (direct or revenue forgone) reporting which Mauritius is already engaged in. It publishes annual reports on its national budget and budgetary measures, including tax expenditures, on a dedicated homepage of the MOFEPD. Tax expenditure reporting not only fosters transparency on the use of public funds but also supports the government through enhanced oversight on budget use. Tax expenditure reporting should be published periodically and can support evaluation on costs of policies (OECD et al., 2023[44]). In many developing countries tax expenditure reporting is a legal requirement, although this does not seem to be the case in Mauritius (Kassim and Mansour, 2019[45]). The government is legally required to regularly report on the national budget but the provision does not make specific mention of tax expenditure reporting (GTETI, 2022[46]).
Mauritius has had higher tax expenditures, as % of GDP, compared to peers since the COVID-19 pandemic (Figure 6.9, Panel A). The share is likely to have increased due to higher fiscal support packages for companies hit by the pandemic. In absolute values Mauritius’ total tax expenditures amounted to around USD 452 million in 2022, out of which USD 137 million (or 30.3%) are CIT expenditure. Panel B shows the development of selected tax expenditure streams in Mauritius in recent years and highlights that both CIT and VAT expenditure increased from 2017 to 2021 (Figure 6.9, Panel B). Both expenditure streams significantly dropped in 2022, which is likely to be caused by the recovery of GDP. On the other hand, expenditure connected to personal income tax (PIT) remained relatively constant throughout the years.
As % of national GDP
Note: Data in the figure reflects tax expenditure as % of national GDP and was drawn from the Global Tax Expenditure Database (for 2021: 0.12% allocated to PIT, 1.59% to CIT, 2.17% to VAT; for 2022: 0.13% to PIT, 1.07% to CIT, 1.80% to VAT). Data on estimated tax expenditure shared by Mauritius’ authorities deviate and indicate even higher CIT expenditures (for FY 2021/2022: 0.17% allocated to PIT, 1.48% to CIT, 1.50% to VAT; for FY 2021/2022: 0.16% to PIT, 1.55% to CIT, 1.66% to VAT).
While Mauritius has already taken strides to enhance fiscal transparency, more could be done in this area. The Global Tax Expenditures Transparency Index (GTETI) ranks Mauritius 87 out of 104 assessed countries that provide tax expenditure reports. The GTETI suggests that Mauritius could further improve its tax expenditure reporting by specifying the methodology used (e.g., indicating methods used to calculate tax expenditure and a tax benchmark explanation) and by further elaborating on descriptive tax expenditure data (i.e. the information reflected in the report to identify and explain the nature of different TEs), for example, by mentioning beneficiaries, timeframes and legal references. The GTETI also highlights shortcomings on evaluations of tax expenditures in Mauritius, as there does not seem to be an evaluation framework in place.
An effective tax system and revenue generation are crucial for Mauritius’ trajectory to return to high-income status. Structured and regular evaluations of incentives are essential to track costs, to assess if policies are contributing to intended economic and development objectives and to weigh their benefits against associated costs. Data obtained from monitoring of incentives take-up and tax expenditures could serve as a foundation for such evaluations. Mauritius is recommended to implement a periodical evaluation mechanism to assess how incentives are used, if they are supporting their intended policy objectives and at what cost. Embedding a regular evaluation mechanism in the law and clearly attributing responsibilities could further support the efficiency of such assessments.
One approach to begin evaluations could involve mapping out all incentive measures, including their policy goals, and track which investors receive incentives, including performance indicators (e.g., created jobs) and firm level characteristics (e.g., size of enterprise, foreign ownership, sector, etc.) and the costs of incentives per firms. While evaluation measures require additional capacity, they could offer a clearer understanding of the various economic actors benefitting from such schemes and could be useful for identifying any potential redundancies, incongruencies and inefficiencies, even if from a more theoretical point of view. Tax expenditure data could also be used for evaluations. The current report features tax expenditures per type of tax and type of expenditure (e.g., deduction, exemption, etc.). Further disaggregation of tax expenditure per incentive and ideally per beneficiary could help the government to inform evaluations of incentives.
In the longer term, the MOFEPD could contemplate conducting empirical assessments to compare the performance and firm characteristics (e.g., share of innovative firms) of companies that have benefited from incentives with those that have not. This could be done by comparing data obtained from monitoring activities with census data from Statistics Mauritius that include detailed financial and performance information on all active firms in Mauritius. In case of potential capacity shortages within the ministry, Mauritius could also consider commissioning econometric evaluations to external providers (e.g., to research centres). While it is hard to determine the direct impact of incentives, evaluations of all or selected incentive schemes will help to understand if incentives have contributed to achieving their intended objectives, for instance in terms exports, jobs creation, skills and other outcomes and at what expense (e.g., incentive expenditure per new job created). The results of such assessments allow to identify costly initiatives to potentially revise or remove them to create more fiscal space.
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← 1. Malaysia, the Seychelles, South Africa and Thailand are used as comparators for this analysis. Selected comparators reflect a mix of regional and non-regional peers that were chosen based on their size (the Seychelles), level of economic development and their level of FDI inflows (Malaysia, Thailand, South Africa).
← 2. The Industrial Expansion Act 1993 consolidated EPZ incentives and benefits governed by the Buildings Incentives Act 1986, the Small Scale Industries Act 1988 and Pioneer Status Enterprise Act 1991 into one act.
← 3. The average reflects CIT rates in 2022 from 53 out of 54 African countries (except Somalia).
← 4. While most CIT exemptions for investors provide full tax relief for multiple years, Mauritius also provides a partial exemption of 80% for selected incomes (e.g. from financial services, foreign dividends, interest, e-commerce and profit attributable to permanent establishments amongst others).
← 5. Part II of the Second Schedule to the Income Tax Act, 1995, Item 40 of Sub-Part C.
← 6. Thailand introduced it’s “activity-based” CIT exemptions in 2017 through the Thailand Investment Promotion Act, Announcement of the Board of Investment No. 10/2560.
← 7. Deduction of wages for female employees supports gender equality that is summarized under social inclusion in the database.
← 8. Regulation 7 and fourth schedule of the Income Tax Regulations 1996: “green technology equipment” means the following equipment: (i) renewable energy equipment; (ii) energy-efficient equipment or noise control device; (iii) water-efficient plant and machinery and rainwater harvesting equipment and system; (iv) pollution control equipment or device, including wastewater recycling equipment; (v) effective chemical hazard control device; (vi) desalination plant; (vii) composting equipment; (viii) equipment for shredding, sorting and compacting plastic and paper for recycling; or (ix) equipment and machinery used for eliminating, reducing or transforming industrial wastes; but excludes a passenger car.