A team of Indian officials will visit Mauritius soon to negotiate changes to a 28-year-old tax treaty, in a renewed attempt to restrict its benefits to genuine residents of Mauritius.
Over 40% of foreign investment inflows to India is routed through Mauritius, a significant portion of which is believed to be third country funds and Indian money routed through the island nation to avoid taxes. India loses over $600 million in revenues annually due to the tax treaty with Mauritius.
The India-Mauritius tax treaty provides that capital gains from sale of securities in India can only be taxed in Mauritius. Since Mauritius does not tax capital gains, many investors prefer to route investments through that country.
“A team is going to Mauritius… we are on the job,” finance minister Pranab Mukherjee told . But the process could take as much time as negotiating a new treaty, he cautioned.
“It takes time. After all every country is a sovereign and it has its own laws… it may not be able to do it at a speed we want,” the finance minister said. He, however, did not provide details of the changes that will be sought by Indian negotiators.
With the ruling party in Mauritius coming back to power in elections held in the first week of May, Indian tax authorities view this as an opportune time to kickstart talks.
Mauritius resisting attempts
The tax authorities are mostly concerned about treaty shopping, the practice of routing third country investment through Mauritius to avoid paying taxes. Round-tripping of funds, or Indian money being invested in India through Mauritius, is another concern for India.
Mauritius has been resisting Indian attempts to tweak the treaty. Its Financial Services Commission (FSC) has proposed tighter norms to check misuse of the treaty by Indian entities.
The urgency to amend the rules came after Vodafone’s acquisition of Hutch a couple of years ago. The transaction was executed through subsidiaries domiciled in Mauritius and Cayman Islands. Indian tax authorities are claiming a tax of about $1.7 billion.
“It is no secret that India, as part of its treaty policy, has been insisting upon a limitation of benefits clause with all nations. We saw that change in the UAE treaty and there is evidently pressure on Cyprus & Mauritius,” said Mukesh Butani, partner and tax practice leader at BMR Advisors, who advises the Mauritius Investment Board.
“What is more important is an anti-abuse provision to avoid treaty shopping,” he said. Tax authorities have often raised their concerns when the Foreign Investment Promotion Board takes up investment proposals by overseas firms. The board, however, has been shooting down the revenue department’s objections.
India is keen on inserting a clause similar to the limitation of benefit clause in the India-Singapore treaty, which provides for an expenditure test as a proxy for demonstrating commercial substance.
The aim is to satisfy that investment routed through Mauritius has a genuine reason for coming through the country. India’s tax treaties negotiated after 2004 include anti-abuse rules like limitation of benefits provisions.
Sudhir Kapadia, tax market leader at consulting firm Ernst & Young, cautions that the new rules could impact legitimate investments from Mauritius. “Mauritius itself has strengthened its tax residency requirements to ensure a measure of commercially relevant activities being carried out in Mauritius,” he said.
An income tax official is being posted at Port Louis, Mauritius to facilitate greater exchange of information between the two countries.
China, which also has a tax treaty with Mauritius, amended it in 2006 to insert limitation clauses. India, however, caved in to diplomatic pressure and put on hold plans to renegotiate the treaty.
Recently, China introduced general anti-avoidance rules to prevent tax avoidance. Indonesia, meanwhile, scrapped its tax treaty with Mauritius.
India is also seeking to amend tax treaties with some 65 nations to ensure greater flow of information. Last year’s Lok Sabha elections witnessed a high-pitched debate on the issue of black money and tax havens.
Mauritius, incidentally, does not figure in the list of non-cooperative jurisdictions in the list of tax havens compiled by the Organisation for Economic Cooperation and Development.
