Mauritius-India DTAA ( Double Taxation Avoidance Agreement) Amendment

Mauritius-India DTAA has been amended to comply with BEPS minimum standards, approved by the Cabinet to prevent tax avoidance.

• This amendment aims to comply with the Base Erosion and Profit Shifting (BEPS) minimum standards of the Organisation for Economic Co-operation and Development (OECD).

Key Amendments and Implications:

BEPS Minimum Standards Compliance:

• The amendment aligns with the BEPS minimum standards, focusing on preventing tax avoidance and minimizing opportunities for non-taxation or reduced taxation through exploitative tactics.
• The minimum standard necessitates the inclusion of rules in bilateral tax treaties to effectively address treaty shopping.
• This involves clear statements in the title and preamble of the treaties, indicating the intent to prevent non-taxation or reduced taxation through tax evasion or avoidance, including treaty shopping.
• It brings the India-Mauritius tax treaty under the BEPS Multilateral Instrument (MLI), introducing anti-abuse measures, limitation of benefit rules, principal-purpose tests, and arbitration in the mutual agreement procedure.

Impact on Multinationals:

• Experts suggest that multinational corporations with entities in both India and Mauritius may face more challenging treaty rules, leading to enhanced anti-abuse measures.
• The modification introduces limitation-on-benefits (LOB) rules, principal-purpose tests (PPT), and addresses conduit arrangements, signaling a shift in the tax landscape for companies with investments in these countries.

Background and Significance:

Historical Significance of DTAA:

• Mauritius has historically been a preferred channel for foreign portfolio and direct investors due to tax advantages stemming from the DTAA with India.
• The DTAA facilitated capital gains tax exemptions for investors based in Mauritius, making it an attractive route for foreign investments into India.
• 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.

Changes in Capital Gains Taxation:

• Changes in 2016 linked to shares purchased after April 1, 2017, altered the taxation of capital gains from investments in Indian companies, impacting the tax advantage previously enjoyed.
  • Capital gains arising from an investment in an Indian company will be taxed in India.
• The amendment addresses the capital gains tax implications and aligns with evolving international tax norms.

Economic Impact:

• Mauritius contributed $161 billion in cumulative FDI to India from 2000-2022, making up 26% of total FDI inflows, primarily facilitated by 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.

About Base erosion and profit shifting (BEPS):

• BEPS involves tax planning strategies used by multinational enterprises to exploit gaps and mismatches in tax rules to make profits “disappear” for tax purposes or to shift profits to locations where there is little or no real activity but the taxes are low.
• Developing countries, with a higher reliance on corporate income tax, are disproportionately affected by BEPS practices, leading to an annual loss of USD 100-240 billion in revenue.
• To address this issue OECD/G20 Inclusive Framework on BEPS provides 15 measures to tackle tax avoidance, enhance the coherence of international tax rules, and promote a more transparent tax environment.

About Double Taxation Avoidance Agreement (DTAA):

• A DTAA is a bilateral agreement between two countries with the aim of preventing individuals and companies from being taxed on the same income in both countries.
• The purpose of such agreements is to promote international trade and investment by providing clarity on the taxing rights of each country.

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