In this blog post, Ananth Maheshwari Kini, a fourth-year student from Bharti Vidhyapeth, Pune and pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, discusses the implications of the Indo-Mauritius Tax Treaty on an MNC.

 

Introduction

The Indo-Mauritius Tax treaty or the Double Taxation Agreement between India and Mauritius is an agreement dealing with Taxation issues between the two Countries/states divided into 29 articles and signed on 6th December, 1983 (Notification F. No. 501/20/73-FTD dated 6-12-1983) which came into effect from 1st April, 1983 in India and from 1st July, 1983 in Mauritius.

It is to be noted that the present protocol is applicable only with respect to India and Mauritius. Other countries will not as such have a direct impact of this treaty, though indirect effect may be possible in some cases such as Lower tax rate in the one country may serve as an incentive for the Company to shift in that country rather than some other country.

Why This Change In The Tax Treaty?

Recently, on 10th May, 2016 the Government of India signed a protocol for amending the Tax treaty between India and Mauritius at Port Louis, Mauritius after a long period of 33 Years. This change has been made keeping in the mind “The long pending issues of treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between India and Mauritius.

Curbing Black money, increasing revenue for the Government of India, transparency in taxation system, drug smuggling and human trafficking are also some the other reason for this amendment. There have been many instances of taxes evasion in Mauritius that it has been referred as Tax Haven for Indian investors.

Impact of the Amendment

This amendment will have both positive and negative impact on the Indian economy, considering the fact that Mauritius ranks the 1st Country in terms of Foreign Direct Investment (FDI) inflows in India with over 33% of the total FDI in the last 10 years. Some of the foreign Companies in India that have been subject to heavy FDI include TMI Mauritius Ltd, Etisalat Mauritius Ltd. Vodafone Mauritius Ltd etc.

Article 4 of the Tax Treaty defines resident as ” resident of a Contracting State ” means any person who under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place or management or any other criterion of similar nature. The terms ” resident of India ” and ” resident of Mauritius ” shall be construed accordingly”

Multinational Corporation (MNCs) are companies which have their area of operation in more than two or more Countries that is except for their Home Country for example if a

Company A is incorporated and has business activity in USA along with business activity in Country B & Country C, then Company A will be termed as a Multinational Corporation.

According to the Government of India official Press Release, there are mainly four key features of the Protocol, which are as follows

  1. Source-based taxation of capital gains on share
  2. Limitation of Benefits (LOB)
  3. Source-based taxation of interest income of banks
  4. Exchange of Information Article

 

  1. Source-based taxation of capital gains on share

With this new change, now India can tax on capital gains resulting for alienation of shares in a company resident in India by a Mauritian resident which have been acquired from 1st April 2017, the tax will levied at 50% of the domestic tax rate till31st March, 2019 after which no exemption will be given. Similar, provision also has been made with respect to investment in shares.

 

  1. Limitation of Benefits (LOB)

The above mentioned tax rate at 50% of domestic tax rate will only be available to a Mauritius resident. In case of a Company, it will be deemed to be a resident of Mauritius if the expenditure on its operation is less than 27 Lakhs rupees in the preceding 12 months and has a bona fide business purpose test; that is it should not be a Shell Company.

  1. Source-based taxation of interest income of banks

Mauritian resident banks will now have to pay an interest on 7.5 % on debt arising in India made after 31st March 2017. However, any debt or loan made before 31st March, 2017 will not be taxable in India.

  1. Exchange of Information Article

Exchange of Information Article will be updated in accordance with international standards and provide for assistance in matters relating to taxation. Confidentiality with respect to exchange of information has been made mandatory but is however is subject to operation of law such as in Judicial proceeding, Taxation assessment etc.

Other major changes include levying taxes on Fees for Technical Service (FTS) (10% Tax on Fee) and Services of Permanent Establishments by Mauritius’s resident in India from 1st April 2017 which was earlier exempted from paying taxes.

Amit Maheshwari, Partner, Ashok Maheshwary & Associates, a CA firm, said that Singapore and Mauritius are the two most popular jurisdictions for routing investments, would lose their advantage. “This is expected to impact funds and companies from the US who used to come through Singapore/Mauritius to avoid double taxation.” Similarly viewed was also a shred by Manoj Purohit, Director, Grant Thornton Advisory Private Ltd, who said that “The amendment will have a greater impact on Foreign Direct Investment into India coming from Mauritius as well as Singapore.

Implications of Indo-Mauritius Tax Treaty on Companies/MNCs

The Purpose of any Tax treaty between two countries is the elimination or reduction of Double Taxation and prevention of fiscal evasion, mutual trade and investment.

The Double Taxation Avoidance Agreement or DTAA will encourage both the Indian companies and MNCs to expand their business activity in other countries by way of investment by FDI due to the tax benefits under these agreements as in case of payment of dividends etc. However, the recent protocol has lamented tax exemption in Capital gains, Service of technical service and other income of Mauritius’s company resident in India which may discourage foreign investments.

The present India – Mauritius Tax treaty in addition to the above two objectives also seeks to regulate other considerations such as fixation of Director’s fee and similar other payment of Companies (Article 16), income from immovable property (Article 6), Business profit (Article 7), Royalties (Article 12) etc. of companies situated in either of the two country.

In most of the cases, the income of company or individual of the state is taxed in the Country where it is earned unless if the income is generated by permanent establishment or is given to resident of the other state by a company resident of the country where it is earned, in such a case the income is taxable in both the states.

In case of dividends by a resident country’s company to resident of another country the dividend is taxable in the other state subject to certain conditions.

Article 23 of the aforesaid convention specially deals with elimination Double Taxation, it states that in generally the income is taxable where it is earned for example If a Mauritius’s company is resident in India has a business activity in India then the income shall be taxable only as per Indian laws.

The Present Convention has a significant impact on Companies and MNCs situated in these two countries due to the fact the Tax is charged only once in most the cases which will encourage companies to expand their area of business activity, moreover the convention also regulates fixation of Director’s fees which plays a crucial role in the appointment of Directors. Also provisions regarding income of immovable properties, income from royalties, Capital gains etc. which play an important criterion for a company for expansion and investment selection due to tax obligations.

One of the recent key amendment in the protocol that is the introduction of interest on debt may hinder Mauritian resident Banking Companies in India to raise debts/loans within India due to the payment of interest on loan.

The Supreme Court of India in the Vodafone case has held that in taxes on investment shall be decided on the bases of the generation of wealth and employment by it in the legitimate business activity, and if the investment is dubious strict actions will be taken such as in form of NGOs, Companies etc.

In absence of a Tax Treaty or a DTAA between two countries, the company or individual resident of home country and working in the source country may have to pay heavy taxes due to double taxation in both the countries, an agreement of tax treaty helps in solving this problem mutually between the countries whereby the parties stand to have a win – win situation in terms of attracting more FDIs and revenue generation.

Thus , it can rightly concluded by saying that any change in Tax rate or amendment in the Tax treaty can have far reaching effect on the economy of the both the two states in terms of Gross Domestic Product (GDP), revenue, employment, foreign investment. However, it is too early to comment of the impact of this recent amendment as it may or may not result in lower FDIs from Mauritius.

 

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