This section comprises of the data sources, the specific variables used and the statistical tools for analysis. The following shows the broken down into sub-sections of the analysis carried out in the process of evaluating the offshore sector of Mauritius: Econometric analysis: Evaluating the significance of tax incentives in attracting FDI and PINV through Mauritius offshore sector. Double treaty taxation (DTT) and Mauritius Types of companies operating in the offshore sector of Mauritius Comparison with other offshore jurisdictions Contribution of the offshore sector in the local economy DTT and relationship between India and Mauritius Evaluation of the current situation Proposed solutions Evaluation of the proposed solutions Case study - Vodafone - Indian Premier League (IPL) Future prospects: Mauritius offers gateway to Africa Asia Trade To facilitate the description of the methodology used, we will separate the explanation used for the econometric analysis from the rest of the analysis.
3.2 Methodology of Econometric Analysis:
3.2.1 Data Collection The quantitative data employed were obtained from the annual reports of the world regulatory bodies, namely World Economic Outlook from the International Monetary Fund and World Development Indicators from the World Bank. Both institutions are functioning to promote international monetary collaboration, safe financial stability and encouraging the vision of ongoing globalization. Further data used were extracted from the Mauritius Revenue Authority and Central Statistics Office. The vital aspects of those data sources are reliability and quality. The time frame used has been assembled from 1981 to 2007 due to availability of the data. All data utilized were used annually.
3.2.2 Theoretical justification for the use of selected variables: In order to run the right methodology, the choice of the appropriate variables is imperative. The variables are identified as follows; The concepts of FDI and PINV have already been discussed in the literature review. The definitions of the tax incentives given below are largely inspired by the income tax act 1995. Reduced Corporate Income Tax (CIT) This type of incentive is quite simple to administer. To be able to attract investment in some specific regions and sections, the government generally amends the legislation and offers a lower CIT rate as an exception to the general tax regime. This implies that the firms will be able to keep a higher percentage of their profit. Theory suggests that there is a negative relationship between investment and after tax return cost of capital. Investment allowance These are deductions from taxable income based on some percentage of a new investment. Such allowances are attractive in the sense that they tend to lower the effective price of acquiring capital. Investment tends to move in the same direction as investment allowances. Inflation One key variable in determining the investment is the inflationary rate. Inflation ambiguity in the host nation is damagingly linked with capital inflows. A high rate of inflation has a tendency to illustrate a rise in risk, indicating inner economic unsteadiness. Openness This variable plays an important key role in the contribution of capital inflows and acts as an approximate for volatility as well as an engine for growth. It permits transfer of capital, knowledge and enhancing better competition. A greater degree of openness tends to improve the investment movement. Market size Emerging countries per capita income growth rates are generally high, and they are frequently expected to keep on growing. This encourages market seeking investors. Gross domestic product will be used as a proxy for market size. GDP growth tends to have an optimistic influence on inflows mainly based on effective resource management and successful use of economies of scale. Worldwide Growth Worldwide growth entails the overall performance of developed, developing and under-developed countries across the globe. The worldwide growth indicator used is the global GDP. The investment profile of the host country is greatly influenced by the foreign investor's financial health. It should be noted that other variables such as Literacy, Labour Force, International Tourism Receipt, Manufacturing value added (as a % of growth) and ICT goods exports (as a % of total exports) were initially computed in the regression but were removed when they were found very insignificant to attract FDI or PINV. Moreover, the Double taxation Treaty has not been used in this econometric model and will be evaluated separately in more depth as the econometric model is analysing the FDI and private investment of Mauritius as a whole (all countries altogether, not individually) to have a broad overview of the incentives affecting investment of Mauritius.
3.2.3 Model Specification In order to consider the impact of the diverse variables on different capital inflows, the following models are developed. The models are tailored to the Mauritian economy. Our first model will be based on FDI, which is the most important investment inflow in Mauritius.
FDI= ÃŽÂ²0+ÃŽÂ²1 FDI t-1 + ÃŽÂ²2 CIT + ÃŽÂ²3 InvAll +ÃŽÂ²4 INFL + ÃŽÂ²5 OPEN+ ÃŽÂ²6 GDPt+ ÃŽÂ²7 WldGth +u t Where, FDI = Foreign direct investment inflows (percentage of GDP) FDI t-1 = Past foreign direct investment inflows (percentage of GDP) CIT = Corporate Income Tax InvAll = Investment Allowance INFL = Inflation rate GDPt = Gross Domestic Product growth rate operates as a proxy for market size. OPEN = Openness, defined as the sum of imports and exports divided by GDP WldGth = Worldwide Growth rate Ut = Random error term Another model is designed in order to demonstrate the extent to which tax incentives affect PINV.
PINV = ÃŽÂ²0+ÃŽÂ²1 PINVt-1 + ÃŽÂ²2 CIT + ÃŽÂ²3 InvAll +ÃŽÂ²4 INFL +ÃŽÂ²5 OPEN+ ÃŽÂ²6GDPt+ ÃŽÂ²7 WldGth +u t Where, PINV = Private investment [Private Gross Domestic Fixed Capital Formation] (percentage of GDP) PINV t-1= Past private investment (percentage of GDP) As discussed above, ÃŽÂ²1, ÃŽÂ²3, ÃŽÂ²5, ÃŽÂ²6 and ÃŽÂ²7 are positive coefficients where as ÃŽÂ²2, ÃŽÂ²4 tend to be negative ones.
3.2.4 Analysis Techniques. The technique of analysis used will be based on an Ordinary Least Squares regression where various tests will be carried out. OLS is often used as an optimal estimator for estimating the unknown parameters in a linear regression model. With this technique we can draw reliable conclusions about the relationship that exists between the variables in the model. Linked to the OLS analysis, the underlying time series will face the subsequent tests namely, the tests of stationarity, multicollinearity, autocorrelation, cointegration and Error Correction Model which will be later explained in detail.
3.3 Methodology of the rest of the analysis
3.3.1 Description of the analysis This analysis is not only limited to the use of the econometric method but also to a wide range of different techniques. Moreover, there has the use of formative and summative evaluation. Formative evaluations fortify or enhance the point being examined - they evaluate the whole system, the qualitative aspect of the implementation, perform complete evaluation of the factor inputs, procedures and managerial aspect of the product. Summative evaluations, on the other hand, evaluate the impact or the result of some objects - they review the whole system by analysing whether the object may have caused this result, finding out the net impact of the underlying factor not only for the short-run target outcomes, and calculating the relative costs arising from the object. Formative evaluation consists of numerous evaluation types: Requires assessment - examining the current system, estimating the level of the needs and what can be carried out to overcome the need Assessment evaluation - the feasibility of an evaluation and how its usefulness can be enhanced. Concept Structure- defining step by step process of the program and the possible outcomes Functioning Assessment - supervise the reliability of the program delivered. Process evaluation - inspect the development of the program, together with substitute delivery procedures. Summative Evaluation consists of the following: Result assessment - Check if the program demonstrated significant effects on the particular defined target results Impact assessment - Broad assessment of the overall or net effects of the program as a whole. Cost-Efficiency and Cost-Benefit analysis - measures efficiency by linking outcomes to the dollar costs and values. Secondary evaluation - reassessment of the current data to solve new questions or using techniques not utilize before. Meta-analysis combines the results from various studies to come to a final overall summary conclusion on an evaluation query. In working out this project, data has mainly been collected from reports from different institutions, pieces of legislations, case studies, official statistics, surveys and interviews. We have made use of various techniques to evaluate the offshore sector of Mauritius namely econometric regression, charts, tables, cross-section analysis and cost-benefit analysis.
Methodology of the analysis is explained as follows:
DTT and Mauritius: In this section, based on the researches carried out, which were mentioned in the literature review, Mauritius offshore sector was evaluated to see whether it was in line with the theoretical study. A thorough evaluation of the FDI is made by examining the effect of pre and post DTT on FDI classified according to country of origin and examining the major investments by these countries in Mauritius.
Contribution of the offshore sector in the local economy The link that exists between the offshore sector and the economy can be studied by considering the contribution of the financial services to GDP. Data was collected from the Central Statistical Office (CSO) and was evaluated throughout the period.
Types of companies operating in the offshore sector of Mauritius Each type of company operating in the offshore sector of Mauritius has different specification and is being used in a distinct way to a particular purpose. A study was carried out to point out the importance and difference of the Global Business category 1 (GBC1) and Global Business category 2 (GBC2), which are the two most important types of offshore sector companies in Mauritius. A comparison with other offshore jurisdictions such as Seychelles, Hong Kong and Dubai is carried out.
DTT and relationship between India and Mauritius First, an assessment of the current situation was carried out to identify all the issues involved in the Indo-Mauritian double taxation treaty. Second, the reasons why Mauritius has become the preferred route to invest in India were explored. Third, India has passed the Direct Tax Code (DTC) bill, an attempt to remedy this situation. An evaluation of the proposed remedy was carried out pointing out the impact and the loopholes it has. Fourth, the case study of "Vodafone" and "Indian Premier League" was carried out to show how the double tax treaty works in real life situation.
Mauritius offers gateway to Africa Asia Trade In this section, the rising interest of India and China to invest massively in Africa is highlighted and how Mauritius can be used to act as a middleman in helping the investment to take place smoothly is being evaluated. The evaluation illustrates how Mauritius is quickly transforming into a key centre for offshore banking mostly in Africa.
Conclusion This chapter is an important step in assessing the impact of the tax regime on the Mauritian investments. The findings derived from the above OLS regressions will help to determine the significant factors attracting investment in Mauritius. Moreover, the offshore sector has been evaluated in every aspect particularly its current position to act as a gateway to Asia Africa trade and also as the jurisdiction that provides the route to Indian Investors to evade capital gains tax.