1. Tax levy by Mauritius can solve treaty abuse: India

Tax levy by Mauritius can solve treaty abuse: India

Concerned over DTAA misuse, govt for island nation levying capital gains tax on entities incorporated there

By: | New Delhi | Published: November 21, 2015 12:31 AM
Concerned over DTAA misuse, govt for island nation levying capital gains tax on entities incorporated there

Concerned over DTAA misuse, govt for island nation levying capital gains tax on entities incorporated there

India has said the question of the India-Mauritius double taxation avoidance agreement (DTAA) being abused by some companies would be sufficiently addressed if the island nation starts levying capital gains tax on the entities incorporated there. The finance ministry has made it clear that it was only worried about non-taxation in both the countries of the gains that Mauritius-based entities make in India, rather than which of the two countries actually collects the tax.

The DTAA allows Mauritius-incorporated entities’ capital gains from Indian operations to be taxed in the island nation, but its zero-rated capital gains tax regime has led to non-taxation of such gains in both countries. This has posed a headache for New Delhi with tax-evaded income shifted out of India coming back in the form of foreign direct investment (FDI) through Mauritius-based shell companies.

“We are aware that some entities take advantage of the treaty in an unintended manner. Our effort has been to ensure that its benefits are correctly given and that the treaty is not abused by any entity. Countries which have traditionally been low-tax jurisdictions can no longer continue with the policies that benefited them in the past. If Mauritius starts levying capital gains tax, we will have no problem (with the treaty). The problem is capital gains tax not being levied in either of the countries,” said Akhilesh Ranjan, joint secretary in the revenue department at a conference organised by industry chamber CII,in New Delhi.

Ranjan said that many low-tax countries are joining in the joint effort of G20 nations and the Paris-based think tank OECD to curb the corporate practice of shifting profits away from the country of economic activity to a low-tax jurisdiction.

“I believe Mauritius would sign the multilateral agreement (being prepared by the G20 and OECD to curb tax evasion) at around the same time India would be signing,” said Ranjan. Once both India and Mauritius join the multilateral agreement, their bilateral DTAA will automatically stand modified incorporating the anti-tax evasion provisions envisaged in the multilateral agreement.

That means investments into India routed through a Mauritius-incorporated entity will get the benefit of the DTAA only if that entity has a minimum prescribed investment in the island nation, and proves that the principal purpose of a holding company in Mauritius was not to avoid taxes. This will prevent shell companies from avoiding capital gains tax in both the countries.

Ranjan explained that the proposed multilateral agreement will not prevent any nation from having a zero-rate tax policy as taxation is a sovereign function. It, however, will prevent treaty abuse and restrict benefits only to entities that have a business rationale.

Mauritius has been actively participating in OECD’s discussions on the base erosion and profit shifting project. Former Mauritius deputy prime minister and sitting MP Pravind Jugnauth recently told FE that Prime Minister Narendra Modi, who recently addressed the Mauritius Parliament, had assured that India would not do anything that may harm its treaty partner’s interest. “We expect that philosophy would continue in our economic relations,” Jugnauth had said.

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