Base Erosion and Profit Shifting (BEPS) in International Taxation System: The Case of Mauritius in the Light of OECD/G20 Initiatives

Introduction

Emerging trends in free trade and globalization have rendered the international taxation system obsolete which was designed a century ago. This is mainly because these rules enabled base erosion and profit shifting (BEPS)¹ opportunities. This has reduced the confidence of governments and the public in the international taxation frameworks.

In 2013, the OECD member countries and the G20 leaders discussed the means and ways to tackle BEPS issues at the international level. This was the first serious attempt to enhance trust in the international taxation system by streamlining cross-border transactions and new trading methods. In this regard, a comprehensive package comprised of 15 action plans on BEPS was designed. The purpose was to implement recommendations locally and through international agreements in a harmonized manner to ensure the formation of an appropriate monitoring and transparency framework. In addition to attributing taxing rights to countries where economic activities take place, the BEPS action plans aim to (1) facilitate the information sharing process across countries and revenue authorities, (2) minimize the incidence of double taxation (3) suggest dispute resolution procedures that are more efficient in terms of time and cost, and (4) set up mechanisms to monitor the BEPS action plans implementation process.

Xu (2018) has classified the 15 BEPS action plans into five main categories which are:

Category 1:

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  Taxation rules for the digitalized economy (Action 1)

Category 2:

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  Rules to prevent double taxation namely recommendations on hybrid mismatch agreements (Action 2)

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  Controlled Foreign Corporation (CFC)² rules (Action 3)

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  Policies on interest deductions (Action 4)

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  Minimizing harmful tax practices (Action 5) and

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  Prevention of treaty abuses (Action 6)

Category 3:

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  Suggestions to align economic value creation to taxation which includes rules on the permanent establishment (Action 7)

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  Recommendations on transfer pricing³ of intangibles, risks and capital and high-risk transactions (Actions 8, 9 and 10),

Category 4:

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  Rules for information sharing and dispute resolution namely BEPS data analysis (Action 11)

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  Compulsory disclosures (Action 12)

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  Country-by-Country (CbC) reporting⁴ (Action 13) and

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  Mutual agreement procedure (Action 14) and

Category 5:

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  Implementation and monitoring of BEPS actions plan through the multilateral instruments (Action 15)

Mauritius is a developing country located in the Indian Ocean. The Gross Domestic Product (GDP) of Mauritius is USD 13 billion as of 31^st December 2021 (Statistics Mauritius, 2022). Since the country’s independence in 1968, Mauritius has transitioned from a poor sugar economy into one of the most remarkable flourishing economies in Africa. This economic development is attributed mainly to a long history of political stability and good governance in addition to the growing corporate, ICT and tourism sectors. As of 31^st December 2021, the tertiary economic sector comprises 65% of the entire Mauritian economy as compared to the 19% and 16% secondary and primary sectors respectively (EDB, 2022). Moreover, as part of the tertiary economic sector, the financial services sector of Mauritius accounted for 14% of the GDP for the year 2021 (EDP, 2022).