In a significant move to prevent tax evasion and avoid treaty misuse, India has ratified an amendment to the Double Taxation Avoidance Agreement (DTAA) with Mauritius. The protocol amendment aims to integrate robust provisions including the Principal Purpose Test (PPT) into the agreement, a stringent criterion designed to disallow tax benefits if transactions or arrangements are constructed mainly to achieve these benefits.
Marking a key development in the ongoing efforts to curb tax evasion, Article 27B has been integrated into the treaty, detailing ‘entitlement to benefits’. This provision enables authorities to withhold treaty benefits, such as the reduction of withholding taxes on royalties, interest, and dividends when it is evident that one of the main objectives of any financial transaction was to garner these benefits.
The signing of the amendment took place in Port Louis on March 7 and was announced to the public on Wednesday. Mauritius has long been the jurisdiction of choice for funneling investments into India, largely due to the exemption of capital gains tax on disposals of shares in Indian entities until 2016. In an effort to tax capital gains from the sale or transfer of shares of Indian companies owned by Mauritian tax residents, amendments were implemented in May 2016; however, these exempted investments made prior to April 1, 2017.
However, this most recent amendment has left stakeholders in the dark, as it has not clarified whether previous investments will be safeguarded—grandfathered—from the new provisions. The financial sector awaits clarifications from the Ministry of Finance on this matter.
The DTAA served as a cornerstone for the substantial inflow of foreign portfolio investments (FPI) into India via Mauritius. Remarkably, at the close of March 2024, Mauritius stood as the fourth largest source of FPI in India, behind the US, Singapore, and Luxembourg, with an investment amount reaching Rs 4.19 lakh crore, accounting for 6% of the aggregated FPI tallying to Rs 69.54 lakh crore. This figures an upsurge from Rs 3.25 lakh crore, which was 6.67% of the total FPI investment of Rs 48.71 lakh crore at March’s end in 2023.
Furthermore, the treaty’s preamble has been revamped, now emphasizing the prevention of tax evasion and avoidance. The original objective focused on ‘mutual trade and investment’ has been replaced to stress the significance of eradicating double taxation without enabling non-taxation or diminished taxation derived from tax evasion, avoidance, or ‘treaty shopping’—a ploy devised to exploit relief measures intended for the indirect benefit of residents of third jurisdictions.
Yeeshu Sehgal, Tax Market head at AKM Global, commented on the implications of these alterations. He highlighted that post-amendment, any Indian investment strategy involving cross-border structuring through Mauritius should take into account the effects of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS MLI), particularly when it comes to availing tax treaty benefits.
However, these measures might lead to a surge in litigation according to Sehgal. Mauritius-based investors will be compelled to substantiate the commercial rationale of their investments and show that acquiring treaty benefits was not the principal purpose. The question of whether this will apply to grandfathered investments is still open.
Rakesh Nangia, Chairman of Nangia Andersen India, also shared his insights, suggesting that the government’s guidance will be crucial to understanding the full extent of the amendment’s impact on investment and tax planning strategies. The ambiguity over how the PPT will be applied to investments made prior to the amendments’ effectiveness must be addressed explicitly by the Central Board of Direct Taxes (CBDT).
These amendments align India’s tax policy with international efforts to counter treaty abuse, specifically under the BEPS framework. While no announcements regarding the adoption of Pillar Two amendments to domestic tax laws have been made, tax professionals anticipate such developments might be revealed post-elections during the budget session in July 2024.
In the global tax landscape, over 135 jurisdictions as of October 2021 agreed to implement a minimum tax regime for multinational enterprises under ‘Pillar Two’. December of the same year saw the release of the Pillar Two model rules—Global Anti-Base Erosion (GloBE) rules—by the Organisation for Economic Co-operation and Development (OECD), introducing a global minimum corporate tax rate set at 15 percent. Aimed at large enterprises with annual revenues exceeding €750 million, this minimum tax is expected to yield approximately $150 billion in extra global tax revenues each year, providing a system to instigate a top-up tax on profits made in jurisdictions where the effective tax rate is below the minimum rate.
