India and Mauritius have taken significant steps to fortify their Double Taxation Avoidance Agreement (DTAA) in a bid to combat tax evasion and avoidance. The revised protocol includes a Principal Purpose Test (PPT), which restricts treaty benefits if it’s found that obtaining these benefits was the primary purpose behind a transaction or arrangemnt.
The amended treaty, signed on March 7 in Port Louis and made public recently, introduces Article 27B defining ‘entitlement to benefits’. Under this, the PPT will deny treaty benefits like reduced withholding tax on interest, royalties, and dividends if obtaining these benefits was one of the principal purposes of the transaction.
Mauritius has historically been a favored investment destination for India due to non-taxability of capital gains until 2016. The recent amendment, however, raises questions about the treatment of past investments under the DTAA. Investors await clarification from the Ministry of Finance on this matter.
The DTAA with Mauritius has attracted substantial foreign portfolio investments (FPI) into India, making Mauritius the fourth largest source of FPI investments after the US, Singapore, and Luxembourg. With FPI investments from Mauritius reaching Rs 4.19 lakh crore by March 2024, this treaty amendment holds significant implications for investors.
Furthermore, the preamble of the treaty has been revised to emphasize eliminating double taxation without allowing for non-taxation or reduced taxation through tax evasion strategies like ‘treaty shopping’.
Experts highlight that the amendment aligns with global efforts against treaty abuse, especially under the BEPS (Base Erosion and Profit Shifting) framework. They anticipate potential litigation due to the stricter conditions for treaty benefits and urge the Indian government to provide clear guidance on the impact of these changes on investments and tax planning.
The amendment reflects India’s commitment to international tax norms and is seen as a precursor to potential domestic tax law changes, possibly to be announced in the upcoming budget after elections in July 2024.
The global tax landscape is evolving rapidly, with over 135 jurisdictions agreeing to implement a minimum tax regime for multinationals under ‘Pillar Two’ of the BEPS framework. This includes introducing a global minimum corporate tax rate of 15% to combat tax avoidance and ensure fair taxation across borders.
In summary, the India-Mauritius tax treaty amendment underscores a concerted effort to prevent tax evasion and abuse, aligning with global initiatives to ensure transparency and fairness in international taxation. Stay tuned for further developments as these changes unfold.
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