Can Mauritius and India work out a tax treaty truce?
The new rules by the Financial Services Commission (FSC) seek to provide much more comprehensive, but equally subjective, guidelines on ensuring proper control and management of corporate entities in Mauritius with an international investment agenda. (Image: business.mega.mu)
With the opening up of the Indian economy in the early 1990s, Mauritius, the gateway for investments into Asia and Africa, saw a massive growth in foreign inflows. However, with the uneasy relations between the two governments over the tax treaty, can these investments really be expected to keep coming?
Of course, the sub-continental major’s unease with investments routed through the island nation is not a recent phenomenon. Indian revenue authorities have, over the years, subjected Mauritius-based entities to greater scrunity, trying to prove that these are merely shell companies formed for investment purposes, and ultimately, prompted by a tax evasion rationale. However, while they have sought to deny these companies benefits under the Indian-Mauritius tax treaty, both the Central Board of Direct Taxes (CBDT) and the Supreme Court (SC) have tried to play an equitable role. Thus, while an administrative circular issued by the CBDT lays down that a Tax Residency Certificate (TRC) is sufficient for a Mauritius-based company to be eligible for tax benefits, the SC has gone a step further by upholding the validity of the circular in its landmark ruling in Azadi Bachao Andolan.
Meanwhile, the Indian government has tried time and again to renegotiate the Double Tax Avoidance Agreement (DTAA) with Mauritius. Needless to say, there have also been many attempts on the government’s part to unilaterally neutralise the effect of the Mauritius Treaty. With the General Anti Avoidance Rules (GAAR) now close to implementation ( proposed with effect from April 1, 2015), and with a clear mandate to override Tax Treaties, many believe that the Indian government now has a new tool for checks and balances and may lose interest in pushing for amendments to the DTAA.
Keeping this in mind, it is easy to understand the rationale behind the recent move by the Financial Services Commission (FSC) in Mauritius to add ‘economic substance’ to Category-1 Global Business Companies (GBC 1 companies) for TRC eligibility. The new rules seek to provide much more comprehensive, but equally subjective, guidelines on ensuring proper control and management of corporate entities in Mauritius with an international investment agenda.
While comprehensive, the new conditions may not be exactly easy to implement. Guidelines that directors resident in Mauritius be ‘appropriately qualified’ and that the company undertake ‘reasonable expenditure’ are tough to quantify and hence, difficult to measure.
Also, it has been prescribed, unusually, that where a group has more than one entity registered as a GBC 1 company in Mauritius, all such companies would be deemed to have satisfied one of the supplementary conditions listed above, if one of these companies satisfies any of the supplementary conditions.
The conditions by themselves are largely modeled along the lines of the India-Singapore treaty. However, a key difference is that unlike in the case of the Singapore Treaty, the additional conditions announced by the FSC are not part of the DTAA between India and Mauritius. Hence, the conditions proposed by the principal non-banking regulator for the island nation, the FSC, do not reflect acceptance of Mauritius’s revenue authorities on the substance requirements.
This is particularly important as one of the recommendations made by India’s Shome Committee on the implementation of GAAR is that GAAR should not apply in cases where the treaty itself provides for specific limitations. Thus, unless the changes made by the FSC are incorporated in the Mauritius treaty, despite the proposed conditions being even more stringent than Singapore’s, the GAAR could continue to override the DTAA between India and Mauritius.
Source: Financial Express