2. Amendment to India-Mauritius DTAA – significant changes
On 10 May, 2016, the Governments of India and Mauritius signed a Protocol at Port Louis,
Mauritius for amending the existing treaty signed in 1982 for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital
Gains.
Mauritius was a preferred route for offshore investments into India on account of the
favourable capital gains provisions in the treaty. The availability of treaty benefits has been a
subject matter of disputes in the past as the Indian tax authorities sought to deny the
benefits on the grounds of ‘treaty shopping’. However, in majority of the cases the decisions
are in favour of the taxpayers.
The Indian Government attempted to renegotiate the tax pact with Mauritius over the past
few years to check the roundtripping of funds and other treaty abuses. The Protocol is a
result of the said negotiations
The key amendments to the Protocol are summarized below:
Source based taxation of capital gains on shares:
Until now, the capital gains arising on transfer of shares was subject to tax in the country of
residence of the Taxpayer. However, under the Protocol, the same is now restricted only for
investments in shares acquired upto 31 March 2017 irrespective of the date of subsequent
transfer of such shares.
The taxation rights are now provided to the State of residence of the company whose shares
are transferred (Source State) and which are acquired on or after 1 April 2017.
Further, in respect of capital gains arising during the transition period from 1 April 2017 to 31
March 2019, the tax rate will be limited to 50% of the domestic tax rate as applicable in the
Source State (subject to fulfilment of the conditions in the Limitation of Benefits Article).
Limitation of Benefits (LOB):
The benefit of 50% reduction in tax rate during the transition period shall be subject to the
LOB Article which would be available on fulfilment of the below tests:
Motive test –
If the affairs of the taxpayer are arranged with the primary purpose of taking advantage of
the transitory period benefit granted by the Protocol, then the said benefit will not be
available. It is also clarified that companies which do not have a bona fide business activity
will be considered as if their affairs were arranged with the primary purpose of taking
advantage of the benefit of the lower tax rate.
3. Activity test –
Under this test, the transitory period benefit will not be available to a shell or conduit
company.
A shell or conduit company means any legal entity who is a resident of a Contracting State,
but which has negligible or nil business operations or no real and continuous business
activities carried out in that Contracting state.
Expenditure test –
As per this test, a taxpayer will be deemed to be a shell or conduit company if its expenditure
on operations in the Resident State is less than INR 2.7 million / Mauritian Rs. 1.5 million, as
the case maybe, in the immediately preceding period of 12 months from the date on which
the capital gains arises.
However, a taxpayer will not be deemed to be a shell or conduit company, if it is listed on a
recognized stock exchange of the Resident State or where its expenditure on operations in
the Resident State exceeds the above threshold in the 12 months immediately preceding the
date of capital gains.
Source-based taxation of interest income of banks:
Interest arising in India and paid to Mauritian resident banks will be subject to withholding tax
in India at the rate of 7.5% in respect of debt claims or loans made after 31 March 2017.
However, interest income of Mauritian resident banks carrying on bona fide banking
business in respect of debt-claims existing on or before 31 March 2017 shall be exempt from
tax in India.
Exchange of Information (EOI):
The Protocol also provides for updation of EOI Article as per international standard. EOI will
also be possible in respect of persons who are not residents of the Contracting State, as
long as the information requested is in possession of the concerned State. Specifically,
information held by banks or financial institutions can be exchanged under the EOI Article.
Other amendments:
The Protocol has introduced an Article for taxation of Fees for Technical Services (FTS)
which is largely in line with the FTS Article which is generally present in various other
treaties entered into by India. As per the protocol, FTS arising in India and paid to a resident
of Mauritius may be taxed in India, but the tax rate cannot exceed 10% of the gross amount
of FTS if the beneficial owner of the FTS is a resident of Mauritius.
As per the existing treaty, any income which is not expressly dealt with by any other Article
of the treaty will be taxable in the country of residence of the recipient of income. Under the
protocol, any income arising in India to a Mauritius resident would be subject to tax in India,
unless it is expressly dealt with by a specific provision of the treaty.
4. The Protocol has introduced the concept of service PE under the treaty. Accordingly, the
term PE will now include furnishing of services, including consultancy services by an
enterprise of one State through its employees or other personnel engaged by the enterprise
for such purposes where the activities continue for a project (or two or more related projects)
for a period aggregating to more than 90 days within any 12 month period.
Effective date:
The Protocol will be effective in India and Mauritius only after completion of the procedures
in both the countries for bringing it into force and shall be effective from AY 2018-19 onwards
except for provisions relating to EOI, tax collection which will become effective immediately.
Conclusion
The discussions for amendment in the tax treaty had begun in the regime of the UPA
government and after discussions over the past many years, the governments of both the
countries have finally arrived at a pact in the second year of the Modi government.
The amendment is indeed a welcome move from the Government as it is in line with the
Government’s agenda to improve transparency in tax matters as well as bring about
certainty in taxation matters for foreign investors. It will also tackle the long pending issues of
treaty abuse and round tripping of funds attributed to the India-Mauritius treaty. The protocol
also stimulates the flow of exchange of information between India and Mauritius and
supports India's commitment to OECD’s BEPS initiative to prevent double non-taxation.
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