Tax Policy and Foreign Direct Investment: Empirical Evidence from Mauritius

Sharvesh Digumber,Hemavadi Soondram,Bhavish Jugurnath

doi:10.5539/ibr.v10n3p42

Abstract

This study demonstrates, through the use both qualitative and quantitative data, that there are several factors determining Foreign Direct Investment flows between two countries. A total of 180 accountants were surveyed in this study, whereby the majority of respondents agreed that Capital Gains Tax is an important factor determining FDI flow within a tax treaty but is not the only significant factor. The study also used regression analysis through a gravity equation to confirm the survey’s conclusion. Using Mauritius and a host of its tax treaty partners as proxies, it was found that Gross Domestic Product per capita, Capital Gains Tax, common language and distance were major factors affecting Foreign Direct Investment flow in a bilateral tax treaty. This study gives a good insight on the reasons why foreign investors use the Mauritian tax treaty network as a platform for investment. The main rationale for such investments was attributed to Mauritius offering a 0% Capital Gains Tax rate and being a low tax jurisdiction. However, this study sheds new light on this reasoning and provides evidence that investment does not depend solely on Capital Gains Tax levy but also a host of other important factors.

Highlights

There are various factors affecting FDI flows between countries and various benefits in bringing in FDI into a country, such as increased competition, training and upgrading human resources and bringing in technology
The main aim of this study is to find out some of the possible main causes of FDI flows through the Mauritian route when it concerns trading with tax treaty partners
It has been seen that corruption index score plays an important role in attracting FDI

Summary

Introduction

There are various factors affecting FDI flows between countries and various benefits in bringing in FDI into a country, such as increased competition, training and upgrading human resources and bringing in technology. Small economies like Mauritius receive criticism about attracting „treaty abusers‟ while bringing in FDI and such a scenario motivates countries to proposing the introduction of a CGT to counter misuse of tax treaties. This study determines the factors affecting FDI when it comes to tax treaties. It tests whether CGT is the main determinant of FDI flowing to and from Mauritius or if it is one of the major determinants. If it is found that CGT is the main determinant, it can lead to suggestions that Mauritius attracts treaty abuse. There is a possibility that CGT does not significantly affect FDI flows

Objectives

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Results

Conclusion