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By Akshay Kenkre
The Mauritius Cabinet has declared its intention to modify the Double Taxation Avoidance Agreement (DTAA) with India, marking a significant decision. This action aligns with the international campaign against Base Erosion and Profit Shifting (BEPS), which was worked upon by the Organisation for Economic Co-operation and Development (OECD) and led by the G20 nations. OECD recommended 15 action plans for the BEPS project, of which 4 were minimum standards. The agreement needed to become a Covered Tax Agreement (CTA) to implement such minimum standards in addition to the others. This revision marks a significant move toward stricter tax governance norms as multinational firms negotiate the intricate web of international tax laws.
Familiarising with the New norms
The decision was made public on February 23. While businesses have undergone transformation and the way of doing business has changed every decade, the tax laws and the tax treaties have been consistent for a long time. The provisions of tax treaties do not reflect the situations and conditions that prevailed at the time of execution of the tax treaty. For example, when India signed its treaty with Mauritius, it was an island with a sparse population and limited economic activities. Considering the same, certain exemptions were provided, which became a backdoor entry for tax avoidance schemes with India. The gaps in international tax laws made it easier for people to evade and avoid paying taxes in India. With Mauritius’s cooperation, India is leading the worldwide push to promote fair taxation procedures and stop treaty shopping, which is the practice of firms strategically relocating to take advantage of more favourable tax treaties by embracing the BEPS minimum requirements. Comprehensive reforms to the DTAA will be implemented with the goal of reducing tax avoidance and evasion. The Principal Purpose Test (PPT) and the Limitation-on-Benefits (LOB) rule are crucial. The PPT evaluates transactions to ensure that their primary aim is not to gain unjust tax benefits. At the same time, the LOB clause restricts the treaty benefits to entities that meet certain qualitative criteria, which could denote substance requirements. These clauses aim to stop tax treaty abuse and guarantee that tax benefits are only given in actual instances of economic substance and company activity.
The wave of change with India- Mauritius DTAA
Historically, the tax benefits provided by the DTAA—particularly with regard to capital gains tax—have made Mauritius a desirable entry point for investments in India. The arrangement permitted investors to avoid paying capital gains tax in India, while Mauritius did not have such a tax. This gave investors a strong incentive to route their money into India via Mauritius.
However, in 2016, changes were made to the tax treaty that required capital gains from Indian investments to be taxed in the investor’s country of operation, which significantly changed the scenario. A grandfathering of investments was allowed until 2017. With the most recent adjustments focused on, this adjustment—which was made to fill revenue losses and guarantee tax equity—has now been substantially strengthened.
Dotting the i’s and crossing the t’s – Further strengthening the loopholes:
A major step forward in the worldwide battle against tax avoidance has been made with the adoption of BEPS Action items, which include minimum standards of countering harmful tax practices, avoiding treaty abuse, adopting country-by-country reporting, and improving dispute resolution systems. This calls for increased openness and respect for the spirit of tax regulations, making the regulatory environment more difficult for multinational firms operating in Mauritius and India to navigate. The core focus in such cases is on commercial substance and the principal purpose of doing business through Mauritius.
A larger commitment to international collaboration in tax affairs is reflected in the changes made to the DTAA between India and Mauritius. The importance of governance and compliance is greater than ever as nations all over the world continue to tighten their tax rules and regulations. Businesses will need to adjust to these developments in order to continue operating internationally as the world community works toward a tax system that is more transparent and equal.
What does it mean to your business?
If you have investments routed through Mauritius, consider evaluating if your business meets the minimum standards of substance and principle. For example, if your business is undertaken in India and the dividends are repatriated to Mauritius by taking a beneficial tax treaty rate of 5% withholding tax rate in India, you may need to apply certain tests on your Mauritius investment vehicle to pass the test of substance and purpose.
What should be your next steps:
India and Mauritius are interested to undertake genuine business with each other. Both countries would not want to spoil their reputation and credibility by participating in the tax race to the bottom. A fair share of revenue in line with the economic activities is something that every country would be looking for. This means the tax function in your organisation has additional work to undertake and the responsibilities have just gone up. So, what should be your next steps as a multinational?
The above 4 steps will go a long way in ensuring and protecting you from any future tax risks and thinking ahead of time.
If you need more detail about the topic or support evaluating your India Mauritius structure, you can write to the author at info@transprice.in.
