GS Paper III

News Excerpt:

The Mauritius Government has decided to amend the Double Taxation Avoidance Agreement (DTAA) with India in order to go with OECD’s proposal on Base Erosion and Profit Shifting. 

More details on the news:

• This move by Mauritius is seen as a significant stride towards harmonizing with global tax norms. The amendment focuses on preventing tax avoidance through exploitative tactics.
• This modification would now elevate the India-Mauritius tax treaty to the status of a covered tax agreement under BEPS MLI (Multilateral Instrument), ushering in a new era of anti-abuse and limitation of benefit rules, principal-purpose test and inclusion of arbitration in the mutual agreement procedure.
• Multinational corporations with entity structures in India and Mauritius could now possibly see enforcement of more challenging treaty rules on account of implementation of BEPS MLI. 

Base Erosion and Profit Shifting Multilateral Instrument (BEPS MLI)

• The Base erosion and profit shifting (BEPS) refers to tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax.
• The BEPS MLI is a convention created by the Organisation for Economic Co-operation and Development (OECD) and endorsed by the G20 to prevent base erosion and profit shifting (BEPS) practices.
• It offers concrete solutions for governments to close loopholes in international tax treaties by transposing results from the BEPS Project into bilateral tax treaties worldwide.

BEPS Minimum Standards compliance

• The BEPS MLI allows governments to implement agreed minimum standards to counter treaty abuse and to improve dispute resolution mechanisms while providing flexibility to accommodate specific tax treaty policies.
• The minimum standard necessitates the inclusion of effective rules in bilateral tax treaties to tackle treaty shopping:
• First, treaties should include, in their title and preamble, a clear statement that the States that enter into a tax treaty intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping.
• Second, countries will implement this common intention by including in their treaties: requires a combination of a “limitation-on-benefits” rule (LOB, which is a specific anti-abuse rule) and of a “principal purpose test” rule (PPT, a general anti-abuse rule).
• The inclusion of above two rules will be supplemented by a mechanism that deals with conduit arrangements, such as a restricted PPT rule applicable to conduit financing arrangements in which an entity otherwise entitled to treaty benefits acts as a conduit for payments to third-country investors.

Foreign investment in India from Mauritius before and after DTAC amendment in 2016

• Initial Preference for Mauritius: Mauritius was initially the preferred channel for foreign portfolio and foreign direct investors due to the tax advantage that accrued to them due to the DTAA between two countries.
• The agreement laid down that capital gains tax had to be paid in the country where the foreign investor was based.
• Since the rate of capital gains tax in Mauritius was zero, investors from this country paid no capital gains tax.
• DTAC Amendment in 2016: Situation changed in 2016 when it was decided that in case shares purchased after April 1, 2017, capital gains arising from an investment in an Indian company will be taxed in India.
• With the double tax avoidance treaty with Singapore being linked to the agreement with Mauritius, investments from Singapore have also been brought into the Indian tax net.
• Cumulative FDI worth $161 billion came from Mauritius to India in the two decades from 2000 - 2022 (26 per cent of total FDI inflows into India), thanks largely to the DTAA.
• Since the signing of the DTAC amendment in 2016, FDI inflows from Mauritius have dropped from $15.72 bn in 2016-17 to $6.13 bn in 2022-23, with Mauritius becoming India’s third largest source of FDI.

Conclusion:

Mauritius' decision to align with BEPS standards shows a commitment to global tax norms, fostering transparency and preventing tax avoidance. These changes foster transparency and fairness in international taxation, promoting a more equitable global economic landscape.