More than a third of foreign direct investment (FDI) coming into India is routed through Mauritius, and the Indian authorities have been trying to renegotiate the terms of the double tax treaty – which was originally signed in the early 1980s – for some time. But only now has Mauritius shown willingness to reach a new agreement, though Foreign Minister Arvin Boolell is adamant that provisions which would harm the Mauritius economy will not be acceptable.
“We have come up with a panoply of measures to be more responsive to India’s concerns,” he said. “But the objective is not to kill the global business community. We want certainty to be brought back. Nothing should be done to harm the financial interests of Mauritius.”
Sudhir Nayak, of Nexia International member firm SKP Group, said the renegotiation should not mean a change in the existing articles or the taxing rights allocation between the two countries, but he expects a limitation of benefits (LoB) clause to be inserted into the treaty.
“Renegotiation could involve factors which provide greater importance to substance over form and limit the number of persons who might have ready access to the treaty without corresponding substance,” he said. “It is probable that the same might be incorporated through insertion of a LoB clause by way of a protocol.”
Despite a number of failed renegotiation attempts, this time round it is likely that agreement can be reached, with both parties seeking to improve the terms of the treaty for their own ends. India’s proposed general anti-avoidance rules (GAAR) are also a decisive factor.
“While the renegotiation has been in the news since 2006 and involved more than five meetings of the Joint Working Group (JWG) with limited breakthrough, it appears that, firstly, the proposed draft GAAR guidelines, and secondly, the desire to see India route its investments in Africa through Mauritius, may have prompted the organisation of the next meeting of the JWG in August 2012,” said Nayak.
Boolell (pictured left) has stated that once a LoB clause has been included, there should be no treaty override.
“When we come to LoB, it has to be embedded into the treaty,” said Boolell. “No one should act unilaterally. Domestic laws should not override the treaty.”
That comment highlights the role the GAAR has played in making Mauritius more open to renegotiating the tax treaty, and Boolell has held discussions with Indian Prime Minister Manmohan Singh to assess the implications of India’s GAAR for foreign institutional investors (FIIs) using Mauritius.
“This announcement appears to be closely linked to the introduction of the GAAR provisions in May 2012 and the subsequent release of the draft GAAR guidelines last month, which provide that FIIs, which are taxed under the domestic tax law provisions, rather than claim treaty protection, may be outside the ambit of GAAR,” said Nayak.
Nayak said that while the Mauritian government has adopted a stance that the benefits under the capital gains article of the treaty cannot be renegotiated, certain concessions could be made in favour of India through provisions which might, for example, state that the treaty benefits may only be claimed by residents fulfilling prescribed conditions.
Nayak said such conditions could be similar to the LoB provisions in the India-Singapore tax treaty, which deny treaty benefits to shell or conduit companies. Several other options include conditions that could require a minimum level of operations to confirm substance in the companies, or there could be a redefining of tax residents able to claim access to the treaty, akin to the amendment of the India-UAE tax treaty in 2007. The conditions may also be related to a requirement to engage in more frequent exchange of information between the tax authorities, as well as possibly granting limited rights to Indian auditors to audit the operations of Mauritian tax residents investing in India and providing their reports to the local authorities.
Boolell claims Mauritius already actively engages with India when it comes to information exchange.
“There has been effective exchange of information on 170 cases over three years between the two nations and some were even outside the framework of the double taxation avoidance agreement,” he said.
Reaction
There could be staunch opposition to the renegotiations, warns Nayak. The main fear of taxpayers is that renegotiation will lead to increased uncertainty.
“Given the recent fluctuation of FDI flows into the Indian capital markets, Indian advisers are wary of the proposed renegotiation since the same could trigger greater uncertainty among FIIs similar to those witnessed at the time the Finance Bill 2012 was presented in March 2012. Any significant changes in the India-Mauritius tax treaty, along with the draft GAAR guidelines in relation to FIIs claiming treaty benefits, may be significantly opposed by advisers and taxpayers alike.”
However, the Mauritian commitment to keeping the capital gains article intact is one source of hope for those who fear greater uncertainty.
“It is noteworthy that the Mauritian government has made it clear that the capital gains article in the tax treaty is sacrosanct and should perhaps provide a measure of confidence to investors,” said Nayak.
Despite these attempts to renegotiate, one adviser feels the Indian government’s efforts to change the treaty are unnecessary.
“The need for revision of the treaty is not required now, as the authorities – after the introduction of GAAR – have enough powers to deny treaty benefit to the taxpayer who fails to prove the substance of the transaction,” said Amit Singhania, of Amarchand & Mangaldas.
The Mauritius treaty renegotiation, draft GAAR guidelines and more will all be discussed at International Tax Review's third annual India Tax Forum in Delhi on September 5 & 6.
Confirmed speakers include: RN Dash, ex-Director General of Income Tax (International Taxation), Government of India; Girish Srivastava, ex-Director General of Income Tax (International Taxation), Government of India; Mohan Parasaran, Senior Advocate, Supreme Court of India and Additional Solicitor General of India; Prashant Bhatnagar, head of India tax, Procter & Gamble; and R Mani, head of India tax, Tata
The foremost Indian tax specialists will tackle this issue and more. It is a unique opportunity to hear their views, increase your understanding of the upcoming changes and how best to prepare for the future.
