The country’s tax policies are very favorable. For the DRC, where it is a major investor in the extractive sector, the economic benefits for the host countries are uncertain.
According to an IMF report published on Monday, July 15, 2024, Mauritius, an island nation in the Indian Ocean off the coast of Africa, poses a tax evasion risk for numerous African countries, particularly in the extractive industries. The country is one of the top five investors in seven out of fifteen sub-Saharan African economies that heavily depend on mineral wealth.
In the Democratic Republic of Congo (DRC), 63% of foreign direct investment in the extractive sector comes from Mauritius. However, the leading 10 multinationals, which account for 67% of copper exports and 80% of cobalt sales, are based in China, Canada, Switzerland, Kazakhstan, and the United Kingdom.
Mauritius has an impressive investment capacity. According to its Central Bank, which uses IMF data, the total stock of foreign investments by companies registered in Mauritius amounted to $312.5 billion in 2022, more than 24 times its GDP of $13 billion for that year, as reported by the World Bank.
The challenge with Mauritius stems from its extremely favorable tax regime compared to many African countries. Its corporate tax rate is 15%, whereas the global average is 25%. Additionally, free port activities, primarily used in the extractive sector to store resources and speculate on price increases, are allowed. These activities allow for the generation of significant profits that are not taxed by the country of origin of the minerals and are subject to only a 3% tax in Mauritius.
Countries are working to protect themselves from the threat of tax evasion. The DRC, for example, has enacted legislation to counter profit shifting to tax havens. However, the IMF points out that “The effectiveness of these initiatives is currently hampered by the limited capacity of the tax administration to audit complex transactions, suggesting that strengthening audit capacity is crucial to comprehensively address transfer pricing and profit shifting.”
The discussion around countries’ ability to mobilize domestic resources is crucial and extends beyond the principle of tax justice. This principle was first championed in 2015 by the high-level panel on illicit financial flows led by former South African President Thabo Mbeki. In numerous subsequent documents, the United Nations has acknowledged that tax evasion deprives countries, especially the poorest ones, of the resources needed to ensure their citizens’ fundamental rights are met.
In the Democratic Republic of Congo (DRC), despite improvements in tax revenue, there remains a significant shortfall between actual collections and potential revenues, especially within the extractive sector as assessed by the IMF. The country’s abundant mineral resources contribute to economic growth, but efforts are needed to ensure this growth becomes more inclusive. Although the mining sector’s value creation grew by an average of 11.3% annually from 2002 to 2023, the GDP per capita in 2023 was $649, which, despite tripling over the past decade, remains below the sub-Saharan African average of $1,637.
Gross national income per capita, reflecting the share of GDP remaining within the country after deducting remittances, has also increased over the past decade. However, it stood at just $339 in 2021, significantly lower than the sub-Saharan African average of $1,230.
Since the release of the Mauritius Leaks, Mauritius has indicated it implemented reforms in its tax system. However, an analysis of its tax legislation suggests there is still room for improvement.
