Double Tax Avoidance Treaty
The India-Mauritius Joint Working Group (JWG) meeting of 27-29th January 2014 in New Delhi was called off at the last minute.
The reason put forward for it was the non-availability of the head of the Indian delegation. This has given rise to speculations in the media and in political quarters given that such meetings are usually decided well in advance and such discussions at international level are not usually trifled with. Our External Affairs ministry has not come out with a statement to dispel the speculations that sought to equate the Indian decision to call off the JWG meeting with the strong words Prime Minister Ramgoolam exchanged with Indian Finance Minister Chidambaram at Davos regarding the todate inconclusive negotiations on the Double Tax Avoidance Treaty (DTAT). Be that as it may, the perception has now become entrenched that the Indian side wants to impose its views in the ongoing “negotiations”. In summary, these views amount to nullifying the fundamental architecture of the Double Tax Avoidance Treaty (DTAT) which was ratified way back in 1983.
On the one side, once the DTAT started being implemented (after 1991), it proved very successful. This can be gauged from the fact that Mauritius has been able to tap an average 38% of the total annual FDI going into India over the past 13 years. The scale of success drew attention. It would appear that certain officials in India could not bring themselves up to accept that a small jurisdiction like Mauritius could score such an amount of success in mobilising funds for India from the world outside. Offshore rivals to Mauritius, like Singapore, pressed the point each time they got an opportunity by seeking in 2005 to obtain the same favourable clauses in their DTAT with India as Mauritius had obtained way back in 1983.
On the other side, while Mauritius initially intended in the beginning to become an international financial centre serving as many outside jurisdictions as possible, in the manner of European and Far East offshore centres, it concentrated its drive in practice almost singularly on India. Little was it realised that we were putting all our eggs in one basket. Little did it occur that the kind of perceptions against the India-Mauritius DTAT which some Indian tax officials came up with in the course of time could eventually put the entire Mauritius finance sector at serious risk. We had also hardly given enough thought to rivals’ capacity to snatch away the business by leaning on those Indian tax officials’ propensity to hold, without evidence, that we in Mauritius would be operating not together with India for a common cause but by aiding and abetting alleged malpractices.
The inevitable happened in the ensuing tug of war. Successions of claims were put up with a view to undermine the Treaty, which became the basis of “negotiations” in forums like the JWG. Items kept being added on to prove the point across the years when negotiations dragged on wittingly to gradually erode and impair the credibility of Mauritius as a host of an international financial centre.
For example, it was claimed at first that Indian tax evaders would be moving funds unlawfully out of India for them to bring them back into India as investment into India by employing the favourable terms of the DTAT. No proof of this was given. On the contrary, Mauritius was being asked to denounce such cases which are usually referred to as “round-tripping”. Clearly, Mauritius could not go on a fishing expedition to help the Indian tax officials make the point they wanted to make. It was then alleged that Mauritius would not be willing to exchange information about alleged illicit investments undertaken through the Mauritian “tax haven” by way of so-called “round-tripping”. Despite Mauritius signing up a formal Memorandum of Understanding to exchange information with the Indian authorities, this argument was not given up.
On the contrary, another arrow was added into the quiver in the next round by accusing Mauritius of what is called “Treaty-shopping”. What this means is that citizens of countries other than Mauritius were employing Mauritius to send their investments into India in order to enjoy the advantages conferred by the DTAT. It is not the unique privilege of Mauritius to host such investors who want to minimize their tax liabilities like any rational investor. It is done by investors wholesale, whether they are going through Singapore, Dubai, London, New York, Luxembourg, Switzerland, etc., i.e., all the places. The case against Mauritius favouring “Treaty-shopping’ was heard before the Supreme Court of India which threw it out on the grounds that there was no transgression in law and that this is the use to which DTATs are put.
The Indian tax officials then came up with a further proposal to change the existing treaty and bring it on a par with others, for example, with the DTAT that was given to Singapore lately. There, clauses limiting benefits to investors have been tied up with what is called a demonstration of “substance”. Investors are considered as having “substance” i.e. being treated as residents of the offshore centres through which they channel their investments provided they incur some minimum expenses in those places; in the case of Singapore, it is $200,000 per annum. As a fallback position, if the de facto abrogation of Mauritius treaty did not take place, as it was being proposed, then an ammunition of overriding new taxes was lying in wait (Direct Tax Code) that would effectively destroy the advantages conferred on investors by the Mauritius-India DTAT.
It is not difficult for investors to incur the specified amount of annual expenditures in a jurisdiction like Singapore which has a plethora of complex and more deeply ingrained legal, advisory, accounting and other services to offer compared with Mauritius, the more so as it is a much more expensive place than Mauritius in the area of services. If the aim of the Indian tax officials was to bring Mauritius on a par with Singapore in terms of “demonstration” of “substance” it was also clear that Mauritius was being pushed on to the edge for reasons unknown.
Investors were indirectly being told that if you cannot prove having incurred a threshold of expenditures in Mauritius, comparable to Singapore, you would be denied the tax benefits (e.g., capital gains being taxed in the country of “tax residency” and in this case, Mauritius). That would serve to induce investors to opt to leave Mauritius and locate in Singapore. If the same investments would be re-routed into India through Singapore, instead of through Mauritius, that would make all the accusations previously levelled against Mauritius (round-tripping, treaty-shopping, etc.) completely hollow. The only difference eventually will be that investments which were going into India via Mauritius would henceforth go through Singapore. India would gain nothing “positive” in the process. For, it cannot be argued that our standard of legal, regulatory and other business compliances is by any means less than what obtains in Singapore.
Lately, as a further threat to selective scrutiny of investors, the Indian tax officials obtained powers (which will enter into force in 2015) to implement what is called the General Anti Avoidance Rules (GAAR). In other words, the tax tribunal set up in India for this purpose will call up investors selectively to explain their bona fide and satisfy it in all respects at the risk of being denied tax treaty benefits they are entitled to. Thus another layer of uncertainty in the expanding demands of the Indian tax officials was added up. It hangs like a sword of Damocles, not only because investors going into India through Mauritius would be subjected to a huge amount of bureaucracy, but also because they would risk their international standing and reputation while matters would take the time it pleases bureaucrats to take to sort out issues.
Seen in this perspective, it is clear that Mauritius has been picked up for hounding. Is it in order to nullify the advantages it has over a place like, say, Singapore, due to its older treaty with India? Had there been a bigger vision, politicians would have prevented this matter from escalating and spilling over in public over a decade, adding to the nuisance value of this extensive process into which it has been dragged. Had there been a bigger vision, Mauritius would have, like the newcomer Rwanda in the field of international finance, gradually gone in quest of other markets such as Africa. By becoming a player of more diversified substance such as Singapore, it would have served a diversified external market and sustained itself on a firmer footing.
Mauritius is plagued by the uncertainties several waves of tax oppositions the DTAT has been subjected to. The best thing in the circumstances would be for confidence to be restored in the basic structure in which the DTAT has operated over so many years. However, reckoning that the arrangements in place could give way somehow or at least the essence of it could someday be whisked away by all sorts of contrivances, our finance operators need to do what it was originally intended to do: go to a multiplicity of countries to serve, no matter how it will finally turn out with the DTAT with India. If we do not go in this direction, our economy will suffer.
* Published in print edition on 30 January 2014