Over the past ten years, global corporate tax rates have been heading downwards as countries continue to compete with each other in order to attract investment and create jobs. The average global corporate tax rate declined from 33.2% in 1997 to 26.8% in 2007 . This shift to lower corporate tax rates worldwide is largely driven by tax competition. As a consequence of globalization, it is much easier for capital to cross national borders, and investors obviously prefer lower-tax jurisdictions. This, along with other benefits that accompany a lower tax regime, has prompted governments to cut tax rates on corporations and capital.

Mauritius has not been an exception to this trend. Following the tax reforms that were proposed in last year?s budget, the corporate tax rate has been slashed to 15% this year, after being lowered to 22.5% in 2006. However, being a small island in the middle of the Indian ocean, Mauritius will not be attracting investment by maintaining similar corporate tax rates to those in Europe or even Asia (East Asia is much more efficient than we are).

It is also very important to understand the difference between the official corporate tax rate and the effective tax rate. The latter represents the actual amount of tax paid by the firm after all the different tax allowances have been taken into consideration. In essence, in Mauritius, as shown in the table below, the effective tax rate paid by several listed companies has been lower than the official tax rate.

From an economic perspective, the normalization of the corporate tax regime across the different sectors of the economy presents several benefits. For the government, the simplification of the tax system in Mauritius should result in cost savings in the form of lower administrative costs. This frees up resources that could be used to reinforce the tax collection ability of the government. The lower tax regime is not only meant for foreigners. In a country that continues to face high lending costs, a lower corporate tax regime will enable small and medium enterprises to free up more resources for investment purposes.

Moreover, it can also be argued that a lower tax rate can encourage more businesses to enter the formal economy; resulting in higher tax revenues for the government. Evidence of this phenomenon has been found in Eastern European and Central Asian countries, where tax revenue collection has increased after the introduction of a simplified and lower tax regime, thanks in part to increased compliance from companies, which were previously operating in the informal sector of the economy. Furthermore, the simplification of the tax system and elimination of several exemptions should reduce corruption in tax administration.

Countries all around the world have been moving towards a lower tax regime because greater investment in an economy creates more jobs and raises more revenues. In economics, this is called the Laffer effect. It is in our view that Mauritius, a country that has seen near zero total factor productivity growth and a diminishing savings rate over the years, operates on the right side of its efficient point. This simply means that revenue collection will be maximized provided the lower tax regime is followed by further productivity enhancing measures.

<B>Increased investment</B>

For the economy, lower and uniform taxation should ensure that the allocation of resources (read private agents? investment decisions) is more efficient. This is because economic decisions would no longer be based primarily on activities that would minimize the individuals?-firms? tax payment, but rather the investment decision would be based on whether those investments would lead to improved economic gains for the firm.

Ours is an increasingly competitive world and outdated leftist concepts will not work in terms of creating jobs and generating long term sustainable growth. In a recent World Bank study, Mauritius was ranked first in Africa in terms of doing businessand 27th globally. Overall, the tax reform in Mauritius along with other implemented supply-side measures should lead to a ?virtuous cycle? of increased investment leading to stronger productivity, economic growth and employment in the country.

<B>Contributed by</B> <B>Investment Professionals Ltd </B> (Feedback:[email protected])