Financial ExpertSpeak: Disconnect in talk and action over India tax treaty
Rama Sithanen gave ION News his candid views on the long drawn-out negotiations with India over the Double Tax Avoidance Agreement (DTAA).
Rama Sithanen spoke to ION News in an exclusive interview where he broke his self-imposed silence on the economy, and more. The former finance minister of Mauritius, who spearheaded the economic reforms that gave birth to the island nation’s offshore sector, gave his candid views on the long drawn-out negotiations with India over the Double Tax Avoidance Agreement (DTAA).
AfricaMoney brings you edited excerpts from the video interview:
You were present, either as the finance minister or an important player of the Mauritian offshore industry, in all negotiations between India and Mauritius. Would you term India a loyal partner in these negotiations?
Insofar as every sovereign country has to defend its economy interests, I have no issues with India on that count. The difficulty we had in this discussion was the gap between things which were said in public to reassure Mauritians and what was happening at the negotiation table. Officially, the Mauritian Prime Minister and Finance Minister were told in all these discussions that the economic interest of Mauritius will not be affected, there will be no unilateral decision from India and there will be no discrimination against us. Yet, what we noticed was different and obviously, we can judge based only on acts.
Can’t we say that this is hypocrisy on the part of the Indians? India’s Prime Minister Manmohan Singh said several times that he will not take any decisions which will impact the interest of Mauritius but at the same time his finance minister and his officers acted extremely harshly towards our interests and are probably pushing for radical changes in the tax treaty.
I will not use this term. It is clear that there is a difference in approach between the Finance Ministry and the Ministry of Foreign Affairs. And that’s why we thought we were doing the right thing when our negotiations were done in the presence of the Ministry of Foreign Affairs. And that’s why from our side, it is Ambassador Usha Canabady who is the delegation’s leader as the foreign affairs secretary. This ensures that we have a broad overview of the economy and not a ‘straight-jacketed view’ of finance alone. But, India wants to bring some changes in the agreement because the government thinks the treat is being abused by offshore investors. There are changes which have been proposed by India that can radically transform the treaty. India wants to amend Article 11 on interest and Article 13 on capital gains. If we change both, while India’s treaties with Singapore, Cyprus and other countries stay the same, investors focused on India will use the Mauritius route lesser and lesser.
If we want to be pragmatic when we are faced with an important partner like India which is crucial for our offshore business segment, do we have the possibility of influencing the discussion? Or, if the Indian government has decided on a course, is it not just an illusion on our part to think that we can change its mind?
I must be frank with you, this thought crossed my mind even when I was the finance minister, but obviously because of the close relation between the two countries, I think it would be in the mutual interests of India and Mauritius to seek a balanced outcome. Thus, we must respond to India’s apprehension, real or apparent, to ensure a smooth flow of investments between Mauritius and India, and, at the same time, we must continue to diversify and grow our offshore business. Nowadays, it seems like the balance of interests is only 0-10% in our favour and skewed 90-100% towards India but the situation could change. One of India’s proposals, which is over and above the changes in articles 11 and 13, and which will render the treaty powerless, is that they want to have the option of a “treaty override”. This means that, following the tax treaty, which is an agreement between two sovereign parties or states, India is asking if it can unilaterally, without consulting us, pass a local law overriding the same. Hence, people ask questions about why we should conduct negotiations over the treaty if India can override it at any time.
India has a similar treaty with 14 or 15 countries in the world, which is in effect almost a ‘copy paste’ of the Mauritian treaty. Why is the Mauritian treaty a problem for India, while those 14 or 15 treaties do not raise any issues? Are we a victim of our success, as 38-42% of the FDI which enters India transits through Mauritius?
There is the treaty in itself, and then there are those who are using the treaty. At the beginning we said that there are effectively around 15 countries which have similar clauses in certain cases that are identical or better than the clauses in Mauritius’ treaty. For example, in terms of protection of interests, both Cyprus and Singapore have a better treaty than Mauritius. In terms of capital gains, there are almost 15 countries which have the same facility as Mauritius. Now, it is not Mauritius’s fault if Kenya or Tanzania or Philippines have not developed their offshore business. We have implemented an offshore strategy and we did what needed to be done in terms of creating a conducive environment. But the three countries that everybody knows of in the offshore field are Singapore, Cyprus and Mauritius. When I was the finance minister, it was the question which had been asked, that it can be seen as discrimination. This is why we had asked for a non-discrimination clause but it was not accepted. It is this difficulty which we encountered that provoked this stubborn approach towards Mauritius. Because of uncertainties over the fate of the tax treaty over the last two years, there have been a lot of investments going through Singapore rather than Mauritius. This is the reason for which the growth in the offshore sector has decreased and India’s share has dipped.
Can the Association of Offshore Management companies in Mauritius assure us that there are no underhand activities which take place in the finance sector?
In regards to legislation, we have one of the best legislations in terms of combating money laundering, terrorist financing and tax evasion. Time and again we have been congratulated by the Centre for the Development of Enterprises (CDE). In term of the agreement between the Mauritian authorities and the Indian authorities there are several agreements providing for exchange of information. Thirdly, India has an official in the income tax office based permanently in Mauritius, to further ensure that there are no such issues. But we all know that there are international bodies which will still abuse or misuse the jurisdiction. In many allegations which appeared in many Indian publications, there is no subsequent follow up. In other cases, when there are suspicions, there are protocols where both countries exchange information and Mauritius has always played by the book. Mauritius always follows the best international practice, as recommended by the CDE, and has agreed to fight against money laundering at the international level. And, as India requested, Mauritius has signed and prepared a Tax Information Exchange Agreement (TIEA) document which needs to be signed by the Finance Minister.