Tax Treaty India-Mauritius: A Blow to Financial Center

The Mauritian Cabinet has approved the amendment of the Double Taxation Avoidance Agreement (DTAA) with India.

According to operators, the treaty is currently one-sided and unfavorable to Mauritius.

Mauritian authorities aim to elevate the tax convention between India and Mauritius to the status of a tax agreement covered by the Base Erosion and Profit Shifting (BEPS) initiative Multilateral Instrument (MLI).

This is the context in which the revision of the India-Mauritius treaty falls. The goal is to comply with the minimum standards of the Organisation for Economic Co-operation and Development (OECD) on base erosion and profit shifting.

Mauritius signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI) in 2017.

Most tax treaties signed by Mauritius already include the anti-abuse provisions of BEPS Action 6, which include the Principal Purpose Test (PPT).

A protocol pertaining to the DTAA was signed on March 7th. The amendment will include a PPT that will determine whether a foreign investor investing in India through Mauritius can claim the benefits of the DTAA.

Multinationals with entities in India and Mauritius will face stricter conventional rules.

The protocol will, however, have an impact on certain structures set up in Mauritius to invest in India.

At Rogers Capital, it is suggested that genuine commercial transactions where commercial benefit outweighs fiscal benefit are unlikely to be affected.

“It will be difficult to justify the commercial logic of a Special Purpose Vehicle (SPV) created in Mauritius solely to hold investments in a subsidiary in India, especially when the sole purpose seems to be to route dividends received from the subsidiary to its shareholder. “

“However, proving the commercial intent of a holding company established in Mauritius, holding investments in various companies in India and other countries, should not be difficult,” it is stated.

Kamal Hawabhay, Managing Director of GWMS Ltd, believes that the PPT makes it more difficult for investors wishing to use Mauritius to invest in India.

The investor, he explains, will have to prove that their primary purpose is not to benefit from favorable taxation. Bilateral or unilateral?

Will the protocol apply to taxable events that occurred before its entry into force with retroactive implications?

It is difficult to say at the moment. However, it is argued at Rogers Capital that it appears to be applicable to structures created before the entry into force of the protocol when the taxable event occurs after the protocol comes into effect.

“When a structure was put in place before the entry into force of the new protocol, it is not clear whether one should refer to the old or new preamble to determine if the structure complies with the object and purpose of the treaty.

It would be surprising, however, if it were established that a structure that was fully compliant with the object and purpose of the treaty at the time of its creation,” a source said.

Some operators are not hiding their dissatisfaction with this treaty amendment. They question the competency of negotiators within local authorities.

This comes as India chose Mauritius first to amend this treaty before other jurisdictions. “Indian authorities are looking out for their own interests.

India’s goal is to eliminate other financial centers from competition in favor of its GIFT City. Are we doing the same in Mauritius?” one operator wonders.

A Management Company executive believes that the Mauritian government should have negotiated a win-win agreement.

The risk of contagion for other treaties, he argues, is that other countries may demand similar modifications with Mauritius.

“An amendment in a treaty not only concerns the changes made, but also the perception that actors from around the world will have,” the operator admits.

Furthermore, in a statement released on April 12th, Indian authorities maintain that concerns were premature.

They clarify that the protocol had not been ratified yet and had not yet come into effect.

Ben Lim, CEO of Intercontinental Trust Ltd, insists that India is not the future of the Mauritian financial center.

He advocates for moving towards evolving into an asset management center or a net worth center, among other options.

“Our financial center is no longer what it used to be. We need to look at other existing opportunities,” he concluded.

Some provisions of the agreement. Both governments intend to eliminate double taxation concerning taxes covered by this Convention without creating possibilities for non-taxation or reduced taxation through fraud or tax evasion.

The DTAA protocol represents the commitment of India and Mauritius to align with the requirements of BEPS Action 6 to combat tax evasion and fraud.

By removing the phrase “for the promotion of mutual trade and investment,” the aim is to exclude transactions that are not genuine and/or made in good faith.

The PPT is not subject to any other provision of the tax convention.

Source: Defi Media