OECD’s Tax Twist: Mauritius / India Deal in Chaos

The financial sector is in an uproar over the OECD’s demand for changes to the existing tax treaty between Mauritius and India. The issue at hand is the “Principal Purpose Test” (PPT), aiming to prevent tax evasion by closing loopholes in the tax base and transfer pricing between jurisdictions.

The OECD, an intergovernmental organization comprising democratic countries with a market-driven economy, has issued instructions to amend the current tax treaty to include a clause that would eliminate any strategies that could be used by unscrupulous actors in the financial sector to exploit differences in tax laws and regulations between countries.

This move has caused concern among financial sector operators, fearing that the new protocol may lead to the elimination of grandfathering provisions and allowing companies to avoid double taxation on their investments.

The grandfathering provision was introduced in 2016 as a transitional measure to avoid double taxation on investments made under the Double Taxation Avoidance Agreement (DTAA).

The Mauritian Finance Association, representing the financial sector, organized a roundtable discussion on May 17 at the Royal Green, Moka, to address the implications of the new protocol on the future of the Mauritius-India tax treaty.

Samade Jhummun, CEO of Mauritius Finance, expressed concerns that the country’s name may be added to a list of non-compliant countries, which would lead to uncertainty and potential losses for investors.

Prabal Chakrabortty, Country Head of Global Payment Solutions at HSBC Mauritius, explained that the new protocol simply formalizes the existing process, stating that even under the old protocol, Indian authorities had requested explanations for benefits granted and most claims were successful.

Akshar Maherally, Managing Director of WTS Tax Consulting, pointed out that investments related to grandfathering provisions would require additional steps before obtaining exemption from Capital Gains Tax, unlike under the 2016 protocol when fiscal rights were granted without conditions.

Wasoudeo Balloo, partner and head of fiscal and legal services at KPMG Mauritius, emphasized that clarification on the elimination of grandfathering provisions is essential.

He expressed concerns about retroactive application of PPT and whether Indian tax authorities could reopen evaluations considering that prescription in India dates back ten years.

In response to these concerns, Minister of Financial Services and Good Governance Soomilduth Bholah reassured financial sector operators that the future of grandfathering provisions remained uncertain until the protocol is ratified by both countries.

He pledged to seek clarification from India and emphasized that the government will approach this process with optimism.

The minister reiterated this commitment during budget debates for the 2024-25 period in Parliament.

Source: l’Express