Monday, 13 July 2015

India and Mauritius reach tentative understanding on revised tax treaty

We are pleased to release an alert which highlights recent media reports which indicate that India and Mauritius have reached a tentative understanding on a revised tax treaty. While there is no formal announcement as yet from the two Governments on this development, it has been reported that the revised tax treaty is expected to contain a “Limitation of Benefit” (LOB) provision which could potentially deny benefits of the tax treaty to cases involving treaty abuse. It has also been reported that the revised tax treaty could provide for a more beneficial rate for taxing interest income earned by a Mauritius tax resident from investment in Indian debt instruments. It is likely that the Indian authorities may seek to have a stronger provision for “exchange of information” in the revised tax treaty.

Abuse of tax treaties, including through treaty shopping, has emerged as a global concern which is reflected in the OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan 6 on preventing the granting of treaty benefits in inappropriate circumstances. The OECD report under this Action Plan clarifies that tax treaties are not intended to generate double non-taxation and seeks to develop treaty provisions for preventing treaty abuse in inappropriate circumstances. The recommendations proposed in the report include incorporating anti-abuse rules in tax treaties such as a LOB provision similar to those found in US tax treaties and a general anti-abuse rule based on a principal purpose test similar to the “main purpose” tests found in UK tax treaties. At this stage, however, it is not known whether the proposed LOB provision in the Tax Treaty would be influenced by the OECD’s proposals under Action Plan 6. It is also not known whether the revised Tax Treaty would contain transition provisions to “grandfather” or “sunset” existing investments.

The reported tentative understanding to include an LOB provision in the Tax Treaty is a significant development and foreign investors investing in India through Mauritius would need to consider impact of this development as and when more details are available.

It may further be noted that the India-Singapore tax treaty provides for a similar capital gains exemption from Indian taxes, subject to LOB conditions being satisfied, and such an exemption is linked to and is co-terminus with the continuity of the exemption as under the India -Mauritius Tax Treaty.

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