Mauritius tax treaty amended - Principal Purpose Test introduced

 Earlier this year, the Mauritius Government approved the amendment to the India – Mauritius tax treaty, aligning it with the proposal of the Organization for Economic Co-operation and Development (OECD) on the minimum standards of Base Erosion and Profit Shifting. Although the Protocol amending the tax treaty was signed on March 7, 2024, the text of the Protocol has now been made public (a copy of the same is attached herewith for your ready reference). An official notification in this respect is anticipated to be issued shortly.

 

The key impact of the Protocol is the introduction of the Principal Purpose Test (PPT), to prevent treaty abuse on all income streams arising from past and future investments, basis which treaty benefits could be denied if one of the principal purposes of undertaking a transaction was to obtain treaty benefits.

 

Background

 

India adopted the Multilateral Convention (MLI) in 2019 with a view to implement tax treaty related measures to prevent base erosion and profit shifting. This allowed several tax treaties to be amended based on adoption of specified MLI positions without the need for bilateral treaty negotiations including the introduction of the PPT to prevent treaty abuse. The Mauritian Government historically excluded the India-Mauritius Tax treaty from MLI provisions, preferring bilateral negotiations for any necessary amendments between the Indian and Mauritian authorities.

 

Protocol amending the India-Mauritius tax treaty signed on March 7, 2024

 

The Protocol seeks to amend the India-Mauritius tax treaty by introducing the PPT provisions (vide a new Article 27B - Entitlement to Benefits) and amending the preamble of the treaty similar to the one adopted for the purpose of the MLI. As per the Protocol, treaty benefits shall not be granted in respect to an item of income, if it is reasonable to conclude that obtaining that benefit was one the principal purposes of any arrangement or transaction. The provisions shall not apply in a situation where it is established that granting of benefit in these circumstances would be in accordance with the object and the purpose of the relevant provisions.

 

Impact of the Protocol and way forward

 

(i) Effective date of amendment of the tax treaty – The Protocol shall come into force on the date wherein both the Indian and Mauritian Governments have notified each the other regarding the completion of legal procedures required under their law for enforcing this Protocol. Accordingly, the said date is yet to notified.

 

(ii) Retrospective amendment – Clarity awaited – The Protocol specifically states that the provisions shall apply with effect from the above date without regard to the date on which taxes are levied or the taxable years to which the taxes relate. Whilst, based on a plain reading the language seems ambiguous, it will be interesting to see Government’s stance with respect of applicability of the provisions to past transactions.

 

(iii) Grandfathering for capital gains on pre April 2017 investments – Whilst the earlier treaty amendment taxing exit gains on sale of investments provided a grandfathering for investments made on or before 31 March 2017 (whereby these investments continue to be treaty protected), the Protocol does not have any such grandfathering provisions and accordingly, the tax authorities could invoke the PPT to question the rationale for the investment structures.

Whilst the Indian courts have historically held that the Tax Residency Certificate (TRC) is sufficient evidence for availing the treaty benefits, the tax authorities have been questioning the substance and the commercial rationale for a Mauritius Investment set-up to deny the India-Mauritius treaty benefits. The proposed amendment will further equip the Indian tax authorities to probe into the Mauritius substance and commercial rationale from a treaty eligibility standpoint.