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Mauritius agrees to treaty revision with India

Thursday, 29 May, 2014

Mauritius Prime Minister Navin Ramgoolam has announced that the jurisdiction intends to adopt automatic exchange of tax information with India.

Speaking after a meeting with India's new Prime Minister Narendra Modi, Ramgoolam said the offer was intended to allay the Indian tax authorities' concerns that Mauritius was being used for money laundering.

However, India's principal dispute with Mauritius is not tax fraud or money laundering, but the use of Mauritius-based companies by Indian resident investors to 'round-trip' their investments back into India. This enables the investors to claim exemption from Indian capital gains tax under the two countries' double taxation treaty. As a direct result of the treaty, Mauritius is among the biggest sources of foreign direct investment (FDI) into India, although much of that FDI is round-tripped Indian money.

So Ramgoolam has also promised to accept the addition of a limitation-of-benefit clause to the treaty. Investors wish to use Mauritius entities to channel foreign direct investment into India will have to show 'economic substance' for their choice of Mauritius as a base. This is a similar criterion to the 'strong presence' test included in the corresponding India-Singapore double taxation agreement to ensure that benefits are available only to genuine foreign investors.

This clause is one reason why Singapore last year overtook Mauritius as the leading source of FDI into India, handling USD6 billion of FDI compared to USD4.85 from Mauritius. The presence of a limitation of benefit clause provides some reassurance to Singapore-based investors that they will not be challenged by the Indian authorities, whereas FDI inflows to India from Mauritius have fallen because of investors' fears of the new Indian general anti-avoidance rule.

Ramgoolam promised a 'quick resolution' on the treaty negotiations to provide 'certainty, clarity and predictability' for the foreign investment sector.

Sources