Tax Treaties as Instruments of Economic Diplomacy: The Case of Mauritius

Tax treaties are bilateral agreements designed to eliminate the risk of double taxation that arises when the same income is taxed in two jurisdictions. These agreements allocate taxing rights between countries and typically reduce withholding tax rates on cross-border payments such as dividends, interest, and royalties. By lowering the tax burden on international investors, tax treaties encourage foreign direct investment (FDI) and foster stronger economic ties between treaty partners. In this context, tax treaties serve not only as fiscal instruments but also as diplomatic tools that enhance a country’s attractiveness as an investment destination.

Mauritius has actively developed a broad network of tax treaties, currently numbering between 44 and 46, with a strong focus on African jurisdictions. These treaties often include provisions that reduce or eliminate withholding taxes and establish dispute resolution mechanisms, aligning with international standards such as those set out by the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. The country’s tax regime, which includes a standard corporate tax rate of 15%—effectively reducible to 3% through various incentives—complements its treaty network and enhances its appeal as a conduit for investment into Africa.

This strategic alignment has enabled Mauritius to market itself as a reliable and efficient platform for structuring cross-border investments, particularly in emerging markets. The combination of treaty benefits, and a favourable domestic tax environment has made Mauritius a preferred jurisdiction for multinational enterprises and investment funds targeting the African region.

The development of Mauritius' tax treaty network can be traced back to its post-independence era when the country sought to diversify its economy beyond sugar production. Recognizing the potential of becoming a financial hub, Mauritius began negotiating tax treaties to attract foreign investment. The early treaties focused on avoiding double taxation and preventing fiscal evasion, laying the groundwork for Mauritius' emergence as a financial centre.

Over the decades, Mauritius expanded its treaty network, targeting countries with significant investment potential. The treaties were designed to provide clarity and certainty to investors, reducing the risk of double taxation and creating a stable investment environment. The strategic focus on African countries was particularly significant, as Mauritius positioned itself as a gateway for investment into the continent.

Despite the intended benefits, empirical studies on the impact of Mauritius’ tax treaties with Sub-Saharan African countries suggest a more nuanced reality. While these treaties are designed to stimulate FDI, evidence indicates that they may not significantly increase overall investment in partner countries. Instead, they have sometimes facilitated treaty shopping and profit shifting, whereby multinational corporations route investments through Mauritius to exploit favourable tax provisions. This practice can erode the tax base of source countries and lead to revenue losses.

A notable example is the India-Mauritius tax treaty, signed in 1982, which exempted capital gains tax on securities transactions by Mauritian residents. This provision made Mauritius a popular route for investment into India. However, following concerns over tax avoidance, the treaty was amended in 2016 to introduce source-based taxation of capital gains, thereby curbing some of the perceived abuses.

In response to international scrutiny, Mauritius has taken steps to align its tax treaty framework with global standards. In 2021, it amended its treaty with Germany to incorporate BEPS recommendations, including mandatory binding arbitration for unresolved disputes and anti-abuse provisions. These reforms reflect Mauritius’ commitment to transparency and responsible tax governance.

Nevertheless, Mauritius has faced criticism for its perceived role in facilitating tax avoidance in Africa. While it has amended treaties with some developed countries, it has been more cautious in renegotiating agreements with African nations. This reflects a delicate balancing act between maintaining its competitive edge as an investment hub and adhering to evolving international tax norms.

The strategic use of tax treaties by Mauritius also has geopolitical implications. By establishing itself as a gateway for investment into Africa, Mauritius strengthens its economic ties with both African countries and major global economies. This positioning enhances Mauritius' influence in regional and international forums, allowing it to play a more significant role in shaping economic policies and fostering regional integration.

Moreover, the tax treaties serve as instruments of soft power, enhancing Mauritius' diplomatic relations with treaty partners. The mutual benefits derived from these agreements create a foundation for broader economic and political cooperation, contributing to Mauritius' standing as a respected and influential player on the global stage.

As global tax standards continue to evolve, Mauritius will need to adapt its tax treaty network to remain compliant with international norms while preserving its attractiveness as an investment destination. The ongoing implementation of BEPS measures and the increasing focus on economic substance will require Mauritius to ensure that its tax treaties are not only beneficial but also robust against abuse.

The future of Mauritius' tax treaty network will likely involve greater emphasis on transparency, anti-abuse provisions, and dispute resolution mechanisms. By aligning its treaties with international best practices, Mauritius can continue to attract high-quality investment while contributing to global efforts to combat tax evasion and avoidance.

Mauritius illustrates how tax treaties can be effectively employed as instruments of economic diplomacy. Through its extensive treaty network and favourable tax regime, the country has positioned itself as a key player in facilitating investment flows into Africa. However, the benefits of these treaties must be weighed against the risks of tax base erosion and profit shifting. As international tax standards continue to evolve, Mauritius’ ongoing engagement in treaty reform and multilateral cooperation will be essential to ensure that its tax treaties contribute to equitable and sustainable economic development, both domestically and across its treaty partner countries.