Mauritius to plug double tax treaty loophole
The move will make it difficult for firms that unduly use the India-Mauritius double tax-avoidance pact to their advantage
In a draft circulated by the Financial Services Commission, which regulates financial services except banking and global business, the island nation has proposed stricter regulations, including guidelines governing company directors and conditions such as minimum expenditure requirements and assets held in Mauritius.
Mauritius moved a step closer to plugging the loopholes in the India-Mauritius double tax-avoidance agreement that allow companies to avoid paying taxes on their investments in India.
It is doing so by laying down rules for companies which would require them, among other things, to create a tangible business structure, and not just a company on paper.
The move comes at a time when the Indian government has expressed its reservations about companies routing their investments through Mauritius to reduce the tax burden.
In an amendment in the Guide to Global Business, the Financial Services Commission (FSC), which regulates financial services except banking and global business in the country, has introduced stricter regulations, including guidelines that will determine if management and control of a company is from the island nation. It has also listed minimum expenditure and asset requirements for such companies.
The amendments suggest that listing on the local stock exchange could be one of the ways of meeting so-called economic substance requirements.
According to Mukesh Butani, chairman of BMR Advisors, Mauritius is trying to address India’s concerns and ensure that taxpayers benefiting from the treaty are not affected by the strict provisions of Indian tax authorities.
“Investors are considering whether they should move to other jurisdictions,” he said. “Mauritius is in a way preparing for GAAR (general anti-avoidance rules that will be implemented from April 2015),” Butani said.
With the introduction of GAAR, foreign institutional investors availing the benefits under the treaty will come under the Indian tax department’s scrutiny.
Mauritius said companies will have to comply with these so-called “economic substance” norms to obtain a tax residency certificate (TRC), which is a precondition for availing the benefits under the India-Mauritius pact. As per Circular 789 issued in 2000 by India’s Central Board of Direct Taxes, the TRC issued by the Mauritius Revenue Authority is sufficient evidence for claiming tax treaty benefits.
Under the bilateral agreement between the two countries, capital gains from sale of securities can be taxed only in Mauritius. Capital gains tax is close to zero in Mauritius and consequently almost 40% of investments into India come through that country.
India has been trying to renegotiate the tax pact with Mauritius for the past few years to check so-called round tripping and other treaty abuses. Round tripping entails moving money out of one country into another, and getting it back under the garb of foreign capital.
After prolonged negotiations, Mauritius has agreed to include a limitation of benefit clause, similar to the one in the treaty between Singapore and India. The accord with Singapore stipulates that only those companies that spend a minimum of $200,000 in Singapore can avail of the benefits of the treaty.
According to the norms, “global business” companies in Mauritius will have to satisfy at least one of the following criteria: assets of at least $100,000 in Mauritius; shares listed in an exchange licensed by the local regulator; and a yearly expenditure on the lines of a similar company controlled and managed from Mauritius or having an office in Mauritius.
To establish whether a business is managed and controlled from Mauritius, the norms spell out that at least two directors in the company should be resident in Mauritius with appropriate qualifications and that the company should have a principal bank account in Mauritius.
The new rules also say that if a company is licensed as a collective investment scheme, closed end fund or external pension scheme, it would have to be administered from Mauritius. The commission also wants directors to provide sufficient time to the affairs of each board and be actively involved in the control and management of a company.
The additional requirements have to be complied with by 1 January 2015 by companies that want to seek renewal or a fresh TRC.
Sridhar Nagarajan, chief executive officer of Standard Chartered Bank (Mauritius) pointed out that only 5% of Mauritius’s gross domestic product (GDP) comes from global business transactions, much lower compared to some tax havens where such transactions account for more than 50% of GDP.
“Global business flow related to India has shown significant reduction over the past year. It may be going through other centres like Singapore. But the Indian government should realise that Mauritius is a very transparent jurisdiction and shares information with India even without an information sharing arrangement. That is not the case with other jurisdictions where-in cumbersome legal procedures are to be followed to obtain the same information,” he said. “The Financial Services Commission has also been proactive in trying to assuage the concerns of the Indian government by initiating amendments to the global business guidelines with an aim to significantly increasing the “substance” requirements. This will invariably impact smaller international clients and medium-sized Mauritian management companies which service them in terms of compliance costs. However, we hope it brings some certainty to investors and thus reverse the investment trend” he added.