Amended DTAA between India and Mauritius

Amended DTAA between India and Mauritius

Subject: Economy

Section: Fiscal policy

• Purpose of Amendment:
  • The amendment aims to plug treaty abuse for tax evasion or avoidance.
  • Introduces the Principal Purpose Test (PPT) to ensure tax benefits are not obtained as the primary purpose of a transaction or arrangement.
• Key Amendments:
  • Article 27B introduced, defining ‘entitlement to benefits’ under the treaty.
  • PPT will deny treaty benefits (like reduction of withholding tax) if obtaining such benefits is one of the principal purposes of the transaction.
• Effect on Investments:
  • Mauritius historically favored for investments due to non-taxability of capital gains until 2016.
  • Last amended in May 2016 to allow taxing capital gains on shares acquired by Mauritian tax residents, exempting investments until March 31, 2017.
• Impact on FPIs:
  • DTAA was a major reason for foreign portfolio investors (FPIs) routing investments through Mauritius.
  • Mauritius ranks fourth in FPI investments in India, after the US, Singapore, and Luxembourg.
• Amended Preamble:
  • Preamble now focuses on eliminating double taxation without creating avenues for non-taxation or reduced taxation through tax evasion.
  • Aims to prevent “treaty shopping arrangements” for indirect benefits to residents of third jurisdictions.
• Expectations and Litigation:
  • BEPS MLI Impact: Structuring investments through Mauritius should consider BEPS MLI impact for availing tax treaty benefits.
  • Rise in Litigation: Investors need to demonstrate commercial rationale behind transactions to avoid denial of treaty benefits.
  • Ongoing litigation on beneficial ownership and substance concerning Indian investments already prevalent.
• India’s Global Alignment:
  • Reflects India’s intent to align with global efforts against treaty abuse, particularly under the BEPS framework.
  • Anticipated Developments: Possible announcements in the budget post-elections in July 2024 regarding Pillar Two amendments in domestic tax laws.
• Global Tax Regime:
  • Pillar Two Regime: Over 135 jurisdictions agreed to implement a minimum tax rate of 15% for multinationals.
  • Global Anti-Base Erosion (GloBE) rules introduced to ensure a global minimum corporate tax rate.
  • Expected to generate around $150 billion in additional global tax revenues annually.

Conclusion:

The amended DTAA between India and Mauritius aims to prevent tax evasion, aligning with global efforts against treaty abuse under the BEPS framework.

However, uncertainties remain regarding the treatment of grandfathered investments, highlighting the need for guidance from the CBDT. This amendment may lead to a rise in litigation as investors must demonstrate the commercial rationale behind their transactions. India’s intent to align with global tax regimes, such as the Pillar Two Regime, reflects a broader effort to ensure fair taxation and prevent tax avoidance on a global scale.

About Principal Purpose Test (PPT)

The Principal Purpose Test (PPT) is a provision commonly found in modern tax treaties, including Double Taxation Avoidance Agreements (DTAAs). It is designed to prevent treaty abuse and ensure that the benefits of a tax treaty are not granted inappropriately to those who do not have a legitimate claim to them.

Objective:

• The main objective of the PPT is to counteract tax avoidance strategies that abuse tax treaties.
• It aims to ensure that the benefits of a tax treaty are granted only to those transactions or arrangements that have a genuine commercial or economic purpose.

Conditions for Application:

• The PPT provision comes into play when one of the principal purposes of a transaction or arrangement is to obtain tax benefits.
• If it is established that obtaining the tax benefit was a principal purpose, the treaty benefits can be denied.

In essence, the Principal Purpose Test is a mechanism to ensure that tax treaties are not used as a tool for tax avoidance. It emphasizes the importance of genuine economic activities and commercial purposes in availing treaty benefits, discouraging artificial or abusive arrangements solely for tax advantages.

Grandfathering rule

The “grandfathering rule” is a provision often included in tax laws or treaties to protect existing investments or arrangements from the impact of new tax laws or changes in tax treaties. It allows certain investments or transactions that were made before the new rules came into effect to continue enjoying the benefits of the old rules. It provides continuity of benefits, stability, and predictability for investors and businesses, ensuring that they are not unduly affected by sudden changes in tax regimes.