Introduction

We are now in 2024 – the Year the Global Minimum Tax (GMT) is set to go live and dramatically transform the international tax landscape.

In view of contributing to the understanding of the GMT, we are pleased to share with you our short article which focuses on the history and the mechanics of the GMT, and its implications for Mauritius.

Historical development of the GMT

The concept of GMT is not a new one. In fact, it can be traced back to the early 1980s when countries began competing primarily on tax rates – the “Global race-to-the-bottom”. It then gradually gained widespread discussion and scrutiny as existing international tax structures, developed in the last century, began showing signs of weakness in the face of rising Globalisation and Digitalisation of the economy.

Indeed, with Globalisation, it became easier for multinational enterprises (MNEs) to minimise their tax obligations by operating in a particular Country or Countries (usually with superior infrastructures and workforce but high corporate tax rates) and then reporting their profits in another country (usually with inferior infrastructures and workforce but low corporate tax rates) using a technique called ‘Transfer pricing’. Consider the following example of a MNE A:

Fig. 1 – An example of profit-shifting by a MNE to its affiliate in a country with low corporate tax rate to minimise its tax obligations.

Digitalisation, for its part, made it possible for certain MNEs to offer their services (e.g. cloud storage, streaming services) to consumers around the world without the need for a physical presence in those countries. As existing international structures rely heavily on physical presence, it became difficult for governments to tax these types of MNEs.

These issues were brought into spotlight in the wake of COVID-19 pandemic when governments worldwide were struggling with revenue shortfalls and surges in public expenditure, forcing them to review the existing international tax structure in view of mobilising more resources.

It is in this spirit that in October 2021, over 135 countries (including Mauritius) agreed to a two-pillar solution to update the key elements of the international tax structure. While Pillar 1 is concerned with a better distribution of taxation of MNEs based on the country of operation, Pillar 2 aims to control tax competition on corporate profits by introducing a GMT of 15%.  Of note, only Pillar 2 or the Global Anti-Base Erosion Model (GloBE) rules is of concern in this present article.

The mechanics of the GMT

The Pillar 2/GloBE rules are designed to ensure that large MNEs with revenues exceeding €750M in at least two out of the last four years pay a base tax rate (GMT) of 15%, regardless of where they are operating from or declaring their profits in.  It is aimed at preventing MNEs from engaging in profit-shifting (as in Fig. 1 above) or tax avoidance strategies. Consider the following example of a MNE B:

Fig. 2 – An example illustrating how the GMT works.

In the example above, notice how the “top-up” tax of 6.5% is paid to Country X, where the MNE is headquartered. However, this would be different if there was a Qualified Domestic Top-up tax (QDMTT) involved.

Article 10 of the GloBE rules provides for a QDMTT which jurisdictions are free to introduce or not. If implemented in a jurisdiction, QDMTT operates to ensure that any additional tax on economic activities in a jurisdiction that results from the GMT is to the benefit of the domestic jurisdiction.

What are the implications of a GMT for a small country like Mauritius?

Mauritius has already introduced the QDMTT under its domestic laws with the amendment of S.4 (Imposition of tax) of the Income Tax Act to add a new subsection 3 which reads:

“Notwithstanding the other provisions of this Act, a company forming part of an MNE group which is liable to a Top-up Tax in a year may be required by the Director-General to compute and pay a Qualified Domestic Minimum Top-up Tax in such form and manner as may be prescribed.”

As explained above, this will ensure that any top-up tax due from MNEs located in Mauritius will be paid in Mauritius itself, levelling the playing field with larger countries. Moreover, collecting tax through the Mauritian QDMTT will significantly reduce compliance burdens for MNEs by saving them from being subject to top-up taxes in other countries in respect of the operations in Mauritius. However, it is important to highlight that these will only be possible with the issue of prescribed Income Tax Regulations which will have to be based on the OECD Anti-Base Erosion Model Rules. Yet, this was not announced in last year’s budget speech and the Government has so far not provided a timeline for the implementation of the QDMTT.

Some have argued that the implementation of a GMT/QDMTT will seriously limit Mauritius’ capacity to use tax incentives as a tool to attract foreign investments and businesses. While this may be true, it remains that Mauritius can still compete on corporation tax rates for entities outside Pillar 2’s reach, that is, Mauritius’ 15% tax rate will still be attractive to businesses with annual revenues below €750M. Furthermore, despite being a small country, Mauritius possesses a strong legal framework, great infrastructures, a literate and dextrous labour market, an ideal geographical location, and sophisticated financial systems that it can still rely on to continue attracting foreign investments and businesses.

Conclusion

As the world is transforming its international tax landscape, the small island of Mauritius is faced with unique challenges but also presented with new opportunities. What awaits our small country is uncertain, but what is certain is that we are known to be resilient when faced with challenges and make the most out of opportunities presented to us.