CA Reetika Agarwal

CA Reetika AgarwalArticle wise analysis of Protocol – Amendment to India-Mauritius Double Taxation Avoidance Agreement

1. On 10th May 2016, the Government of India has issued a press release announcing the Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius (“DTAA”). This protocol was signed by both the countries on 10th May 2016 at Port Louis, Mauritius. This amendment follows on Finance Minister Arun Jaitely’s announcement in the budget for 2016-14 to implement General Anti Avoidance Rules (“GAAR”) from April 1, 2017.

1.1 A brief article wise analysis of Protocol is as follows:

Existing Provisions in India-Mauritius DTAAInserting/Amended/ Replaced Provisions
Article 5 “Permanent Establishment”
(2) The term “permanent establishment” shall include—

(a)a place of management ;
(b)a branch ;
(c)an office ;
(d)a factory ;
(e)a workshop ;
(f)a warehouse, in relation to a person providing storage facilities for others ;
(g)a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ;
(h)a firm, plantation or other place where agricultural, forestry, plantation or related activities are carried on ;
(i)a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months.
Inserted new clause in article 5 (2):

(j) the furnishing of services, including consultancy services, by an enterprise through an employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) for a period pr periods aggregating more that 90 days within any 12 month period.

Explanation:

The amended protocol inserted the new clause (j) in article 5 (2), thereby include the Service PE clause with 90 days threshold for services rendered through an employees or other personnel.

Article 11 “Interest”

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, subject to the provisions of paragraphs (3) and (4) of this article, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State.

3. Interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially owned by :

(a)the Government or a local authority of the other Contracting State ;
(b)any agency or entity created or organised by the Government of the other Contracting State ; or
(c)any bank carrying on a bona fide banking business which is a resident of the other Contracting State.

 

 

 

 

 

 

 

 

2. However, subject to the provisions of paragraphs (3), (3A) and (4) of this article, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State but if the beneficial owner of the interest is the resident of other contracting state, the tax so charged shall not exceed 7.5% of the gross amount of the interest.

3. Delete this paragraph

3A. Interest arising in a contracting state shall be exempt from tax in that state provided it is derived and beneficially owned by any bank resident of the other contracting state carrying on bonafide banking business. However, this exemption shall apply only if such interest arises from debt claims existing on or before 31st March, 2017.

Explanation:

1. After such amendment, right to tax the Interest income arising in the source country lies with the source country itself. Now protocol provides that Interest income arising in India to a Mauritian resident bank, will be subject to withholding tax in India, at the rate of 7.5% in respect of debt claims or loans made after March 31, 2017.

2. However, exemption would be continued in case of Interest income arising in India to a Mauritian resident bank in respect of debt claims or loans made on or before March 31, 2017 provided it is derived and beneficially owned by any bank resident in Mauritius carrying on bonafide banking business in India.

Adding the New Article 12A after Article 12 “Royalties”Article 12A “Fees for Technical Services”
1. Fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that State, but if the beneficial owner of the fees for technical services is a resident of the other Contracting State the tax so charged shall not exceed 10 per cent of the gross amount of the fees for technical services.
3. The term “fees for technical services” as used in the Article means payments of any kind, other than those mentioned in Articles 14 and 15 of this Convention as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel.
4. The provisions of paragraph 1 and 2 shall not apply if the beneficial owner of the fees for technical services being a resident of a Contracting State, carries on business in the other Contracting State in which the fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.
5. Fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the fees for technical services was incurred, and such fees for technical services are borne by such permanent establishment or fixed base, then such fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the fees for technical services exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
Explanation:

1. Amended protocol provides for taxation of Fees for Technical Services (“FTS”) at the rate of 10% of gross amount in the country of source.

2. FTS is defined as consideration for managerial and technical or consultancy services, including the provision of services of technical or other personnel. The definition is largely similar to the definition given under domestic law.

Article 13 “Capital Gain

1. Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in the Contracting State in which such property is situated.

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State.

3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3 ) of this article shall be taxable only in that State.

5. For the purposes of this article, the term “alienation” means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States.

Protocol inserted para 3A and 3B as follows:

(3A) Gains from the alienation of shares acquired on or after 1st April 2017 in a company which is resident of a Contracting State may be taxed in that State.

(3B) However, the tax rate on the gains referred to in paragraph 3A of this Article and arising during the period beginning on 1st April, 2017 and ending on 31st March, 2019 shall not exceed 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated”; and

Replacing existing para 4 with the new clause:

(4) Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident.

Explanation:

1. Now, India has the right to tax capital gains arising from the alienation of shares acquired on or after April 1, 2017 in a company resident in India with effect from financial year 2017-18.

2. The rate of taxation on the capital gains arising between the transition period of April 1, 2017 to March 31, 2019 shall be 50% of the domestic tax rate subject to fulfillment of conditions in the Limitation of benefit (“LOB”) Article.

3. Under the LOB Article, a resident of Mauritius, including a shell/conduit company, shall not be entitled to the benefit of 50% reduced rate of tax, if such resident fails the main purpose test or bonafide business test.

3.1 A resident of Mauritius shall be deemed to be a shell/conduit entity, if its total expenditure on operations in Mauritius is less than Rs 2,700,000 (equivalent to Mauritius rupees 1,500,000) in the immediately preceding 12 months.

4. Taxation (capital gains) after the transition period will be at full rate from the financial year 2019-20 onwards.

Article 22 “Other Income”

1. Subject to the provisions of paragraph (2) of this article, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Convention, shall be taxable only in that Contracting State.

2. The provisions of paragraph (1) shall not apply to income, other than income from immovable property as defined in paragraph (2) of article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply.

New protocol inserted the new para (3) after para (2):

(3) Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention and arising in the other Contracting State may also be taxed in that other State.
Explanation:

This new inserted para provides for source based taxation of Other Income.

Article 26 “Exchange of Information or document” (“EOI”)

1. The competent authorities of the Contracting States shall exchange such information or document as is necessary for carrying out the provisions of this Convention or for prevention of evasion of taxes which are the subject of this Convention. Any information or document so exchanged shall be treated as secret but may be disclosed to persons (including courts or other authorities) concerned with the assessment, collection, enforcement, investigation or prosecution in respect of the taxes which are the subject of this Convention, or to persons with respect to whom the information or document relates.

2. The exchange of information or documents shall be either on a routine basis or on request with reference to particular cases or both. The competent authorities of the Contracting States shall agree from time to time on the list of the information or documents which shall be furnished on a routine basis.

3. The provisions of paragraph (1) shall not be construed so as to impose on a Contracting State the obligation—

(a)to carry out administrative measures at variance with the laws or administrative practice of that or of the other Contracting State ;
(b)to supply information or documents which are not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State ;
(c)to supply information or documents which would disclose any trade, business, industrial, commercial or professional secret or trade process or information the disclosure of which would be contrary to public policy.
Replace with the following:

1. The competent authorities of the Contracting States shall exchange such information (including documents or certified copies thereof) as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Articles 1 and 2.

2. Any information received under paragraph 1 by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that Contracting State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. Notwithstanding the foregoing, information received by a Contracting State may be used for other purposes when such information may be used for such other purposes under the laws of both States and the competent authority of the supplying State authorizes such use.

3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation: (a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; (b) to supply information including documents and certified copies thereof which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; (c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy (ordre public).

4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph 3 but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

5. In no case shall the provisions of paragraph 3 be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.”

Explanation:

1. The amended protocol provides for more elaborate EOI clause, covers all information that is foreseeably relevant for carrying out the provisions of Treaty or to the administration or enforcement of domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities.

2. Amended protocol further provides that “If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes”.

3. Also, both the contracting state cannot decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person i.e. the amended protocol shall enable both contracting state to exchange information relating to financial and banking transactions, thereby to curb the tax evasion and tax avoidance.

Adding the New Article 26A after Article 26 ““Exchange of Information or document””Article 26A “Assistance in the collection of Taxes”
1. The Contracting States shall lend assistance to each other in the collection of revenue claims. This assistance is not restricted by Article 1 and 2. The competent authorities of the Contracting States may by mutual agreement settle the mode of application of this Article.2. The term “revenue claim” as used in this Article means an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political sub-divisions or local authorities, insofar as the taxation thereunder is not contrary to this Convention or any other instrument to which the Contracting States are parties, as well as interest, administrative penalties and costs of collection or conservancy related to such amount.

3. When a revenue claim of a Contracting State is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of collection by the competent authority of the other Contracting State. That revenue claim shall be collected by that other State in accordance with the provisions of its laws applicable to the enforcement and collection of its own taxes as if the revenue claim were a revenue claim of that other State.

4. When a revenue claim of a Contracting State is a claim in respect of which that State may, under its law, take measures of conservancy with a view to ensure its collection, that revenue claim shall, at the request of the competent authority of that State, be accepted for purposes of taking measures of conservancy by the competent authority of the other Contracting State. That other State shall take measures of conservancy in respect of that revenue claim in accordance with the provision of its laws as if the revenue claim were a revenue claim of that other State even if, at the time when such measures are applied, the revenue claim is not enforceable in the first mentioned State or is owned by a person who has a right to prevent its collection.

5. Notwithstanding the provisions of paragraphs 3 and 4, a revenue claim accepted by a Contracting State for purposes of paragraph 3 or 4 shall not, in that State, be subject to the time limits or accorded any priority applicable to a revenue claim under the laws of that State by reason of its nature as such. In addition, a revenue claim accepted by a Contracting State for the purposes of paragraph 3 or 4 shall not, in that State, have any priority applicable to that revenue claim under the laws of the other Contracting State.

6. Proceedings with respect to the existence, validity or the amount of a revenue claim of a Contracting State shall only be brought before the courts or administrative bodies of that State. Nothing in this Article shall be construed as creating or providing any right to such proceedings before any court or administrative body of the other Contracting State.

7. Where, at any time after a request has been made by a Contracting State under paragraph 3 or 4 and before the other Contracting State has collected and remitted the relevant revenue claim to the first-mentioned State, the relevant revenue claim ceases to be – (a) in the case of a request under paragraph 3, a revenue claim of the first mentioned State that is enforceable under the laws of that State and is owed by a person who, at that time, cannot, under the laws of that State, prevent its collection, or (b) in the case of a request under paragraph 4, a revenue claim of the first mentioned State in respect of which that State may, under its laws, take measures of conservancy with a view to ensure its collection, the competent authority of the first-mentioned State shall promptly notify the competent authority of the other State of that fact and, at the option of the other State, the first-mentioned State shall either suspend or withdraw its request.

8. In no case shall the provisions of this Article be construed so as to impose on a Contracting State the obligation: (a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State; (b) to carry out measures which would be contrary to public policy (ordre public); (c) to provide assistance if the other Contracting State has not pursued all reasonable measures of collection or conservancy, as the case may be, available under its laws or administrative practice; (d) to provide assistance in those cases where the administrative burden for that State is clearly disproportionate to the benefit to be derived by the other Contracting State.”

Explanation:

1. The newly inserted Article provides that both the Contracting States shall lend assistance to each other in the collection of revenue claims.

2. The term “revenue claim” is defined as an amount owed in respect of taxes of every kind and description imposed on behalf of the Contracting States, or of their political sub-divisions or local authorities which is not contrary to the treaties or other instrument signed between the two states.

Adding the New Article 27A after Article 27 “Diplomatic and Consular Activities”

Article 27A “Limitation of Benefits” (“LOB”)

1. A resident of a Contracting State shall not be entitled to the benefits of Article 13(3B) of this Convention if its affairs were arranged with the primary purpose to take advantage of the benefits in Article 13(3B) of this Convention.

2. A shell/conduit company that claims it is a resident of a Contracting State shall not be entitled to the benefits of Article 13(3B) of this Convention. A shell/ conduit company is any legal entity falling within the definition of resident with negligible or nil business operations or with no real and continuous business activities carried out in that Contracting State.

3. A resident of a Contracting State is deemed to be a shell/conduit company if its expenditure on operations in that Contracting State is less than Mauritian Rs.1,500,000 or Indian Rs. 2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise.

4. A resident of a Contracting State is deemed not to be a shell/conduit company if: (a) it is listed on a recognized stock exchange of the Contracting State; or (b) its expenditure on operations in that Contracting State is equal to or more than Mauritian Rs.1,500,000 or Indian Rs.2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise. Explanation: The cases of legal entities not having bona fide business activities shall be covered by Article 27A (1) of the Convention.

Explanation:

1. Under the LOB Article, a resident of Mauritius, including a shell/conduit company, shall not be entitled to treaty benefits under Article 13(3B) (regarding capital gains on alienation of shares arising during April 1, 2017 to March 31, 2019) if its affairs were arranged with the primary purpose to take advantage of benefits in Article 13(3B) of the convention.

2. A resident of Mauritius shall be deemed to be a shell/conduit entity, which is defined as

(1) legal entity falling within the definition of resident with negligible or nil business operations or with no real and continuous business activities carried out in that Contracting State.

(2) total expenditure on operations in Mauritius is less than Rs 2,700,000 (equivalent to Mauritius rupees 1,500,000) in the immediately preceding 12 months from the date on which the gains arise.

3. However, it also states that a resident of a Contracting State shall not be deemed as a shell/conduit company if: (a) it is listed on a recognized stock exchange of the Contracting State; or b) its expenditure on operations in that Contracting State is equal to or more than the above threshold.

4. It also specifically provide that the legal entities not having bonafide business activities shall be covered by Article 27A (1) of the Convention.

1.2 This protocol shall enter into force on the date of the later of these notifications and the provisions contained in Article 1,2,3,4,5,6,7 and 8 of the protocol shall have effect:

Article as per ProtocolVis a vis Article of India- Mauritius DTAAShall have effect from
Article 1Article 5 “Permanent Establishment”In India: From 1st April, 2017

In Mauritius: From 1st July, 2016

Article 2Article 11 “Interest”In India: From 1st April, 2017

In Mauritius: From 1st July, 2016

Article 3Article 12A “Fees for Technical Services”In India: From 1st April, 2017

In Mauritius: From 1st July, 2016

Article 4Article 13 “Capital Gains”From 1st April 2017
Article 5Article 22 “Other Income”In India: From 1st April, 2017

In Mauritius: From 1st July, 2016

Article 6Article 26 “Exchange of Information and Documents”Immediate effect
Article 7Article 26A “Assistance in collection of Taxes”Immediate effect
Article 8Article 27A “Limitation of Benefits”In India: From 1st April, 2017

In Mauritius: From 1st July, 2016

1.3 Amended India-Mauritius DTAA is indeed a welcome move and the Government of India needs to be praised for such a significant amendment. It will have transparency in tax matters and will help to curb tax evasion and tax avoidance. Also, at the same time, existing investments i.e. investments made before 1.4.2017 has been grand fathered and will not be subject to capital gain taxation in India.

Disclaimer: Views expressed above are personal.

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