Tax reforms - what can we learn from Mauritius?

What is your first thought when hearing about Mauritius? Well, as they say “beauty is in the eye of the beholder”.  Accordingly, an ardent traveler will refer to it as a prime holiday destination given its beautiful beaches, fascinating scenery and rich history of people and culture. On the other hand, a global investor will go further and refer to the island as an investment destination due to its flexible foreign investment policies. As a Tanzanian on secondment to PwC Mauritius from PwC Tanzania I see it as a place to learn; and indeed, aside from my professional learning I have come to realise that several Tanzanians have come here for excellent tertiary education.

Something about Mauritius reminds me of Zanzibar - and I am not talking about beaches here, but rather its small geographic and demographic size, its low endowment of natural resources, and remoteness from world markets.  And yet despite this, Mauritius has transformed itself from a poor agro-based economy into one of the most prosperous economies in Africa. Real GDP has been growing steadily in recent years and in the latest World Economic Forum report on Global Competitiveness, Mauritius has been ranked number 1 in Africa and 49^th globally in the study covering 140 economies.

As a tax specialist, my interest naturally is in relation to how Mauritius’s tax reforms and resultant moderate tax system have led to the dramatic shift of their economy.  Of particular relevance are the 2006 reforms to simplify, revamp and harmonize the tax system to make it receptive to internal and external business opportunities.

The tax reforms effected on personal and corporate income taxes were essentially at two levels: (i) significant reduction of tax rates, and (ii) removal of various exemptions.  The tax rate reduction was by way of the introduction of a single income tax rate of 15 percent both personal and corporate; and the same rate was also applied for VAT.  Capital gains tax was also abolished.  At the same time many exemptions and reliefs were eliminated including: elimination of over 20 types of personal income tax deductions; overhaul of complex systems of exemptions; removal of investment and additional investment allowances on capital expenditure; removal of virtually all tax holidays and tax credits.

With further modification of their tax laws in the following years, Mauritius built one of the most sophisticated tax systems in the world. Some of the notable outcomes as a result of tax reforms were rapid growth of the service sector, including tourism, information and communication technology, finance and other private service oriented economic activities. As at 2017, the service sector composed 74.2% of the GDP.  Indeed, it made me think that whilst the catchphrase at home is “Tanzania ya Viwanda”, if they spoke Swahili here then it would perhaps be “Mauritius ya Huduma”!

Interestingly, despite the 2006 tax rate reductions, the tax revenue grew significantly with a 23% increment in the financial year 2007/08. Also, the inflow of Foreign Direct Investment (FDI) leapt up remarkably with an increment of 53% by 2012 as compared to 2006. Another noteworthy success was a substantial increase in the number of registered companies; indeed, by 2011 the number of registered companies had doubled. Also, the tax expenditure (namely exemptions) diminished gradually from an estimated 3.2% of GDP in 2006 to 1.3% of GDP in 2012.

The latest ease of paying taxes report ranks Mauritius 6^th worldwide and 1^st in Africa. The report measures the number of payments, time spent to settle the liability and comply with all tax regulations as well as post filing processes.  Ahead of the budget reading on 13^th June 2019, Tanzania can certainly borrow a few lessons from Mauritius’  tax reforms.  My suggested focus areas would be the following (i) adoption of a single flat low income tax rate; (ii) avail e-filing (electronic filing and payment systems) covering all types of taxes so as to maximise convenience to the taxpayer in the compliance process. (iii) focus on broad based indirect taxes on consumption and reduction of taxes on factors of production (especially taxes charged on labour costs, for example skills and development levy).

Generally, it is high time to re-visit our tax policies and make them more moderate and amenable to investors. Indeed, if we do so, perhaps we might change the mantra from “Tanzania ya Viwanda” to “Tanzania ya Viwanda na Huduma” - after all the service sector is also an increasingly important component of the global economy.

By Livin Momburi
Livin Momburi, Senior Associate - Tax Services, currently on secondment in Mauritius. 

The views expressed do not necessarily represent those of PwC. For PwC updates on Tax and other matters do follow @pwc_tz or visit our website  www.pwc.co.tz

Article published in The Citizen (04.06.2019).