The DTAA Conundrum

There was a two-day visit by an Indian delegation of officials this week concerning the Double Tax Avoidance Agreement (DTAA) between the two countries which exists since 1983. The objective apparently was to get the Mauritian side to sign off certain agreements that were reached by a delegation of Mauritian officials in July last year having overturning effects on the very substance of the treaty between the two countries, to our detriment.

Briefly, it was apparently agreed to do away with what constitutes the DTAA’s main attraction to our offshore clients investing in India, to the effect that, in accordance with its Clause 13, they will be taxed in Mauritius on capital gains achieved on their investments. In July last year, the Mauritian delegation to India, accompanied by the Minister of Good Governance, would have, contrary to common sense, agreed with the Indian tax officials to overturn this Clause, so that investors from Mauritius going into India would henceforth be taxed on their capital gains not by Mauritius – the case so far – but by India.

The Indian delegation was here to secure confirmation of this inexplicable concession made by the July 2015 Mauritian delegation to India. Apart from trying to raise additional taxes, the objective of the Indian officials is, according to reports that were released last year, at about the same time as we were making concessions on our tax treaty with India, to establish an offshore centre in India itself.

Conscious of the seriously damaging consequences such a give-away would have on the future of our offshore sector, Minister of Finance Vishnu Lutchmeenaraidoo, wrote officially to request that the concessions so made be annulled. He also went to India last year in a bid to reverse this absurd concession which will have disastrous effects on the financial sector of Mauritius. He must have understood the disaster this implies for our economic well-being as foreign investors withdraw from our international financial centre.

Not coincidentally perhaps a delegation from the City of London was here this week. It has been reported that Mauritius would be helped by legal practitioners from over there to help develop deeper substance so as to become a more enduring international financial centre. It looks like the story of the bird in the hand against the two in the bush.

The Indian officials wanted to go away with the inexplicable concessions made by our official delegation to India last year. We do not know whether the resistance put up against this inept decision by Vishnu Lutchmeenaraidoo will succeed. We cannot but support him in this unequal struggle.

It may be recalled that, worried about the fate of the City of London as a financial centre, Mr Boris Johnson, mayor of the City since 2008, decided last week to oppose the British Prime Minister David Cameron’s bid for Britain to stay in the EU in the referendum to take place over there on 23rd June 2016. Mr Johnson is concerned that sticking to the EU and the increasing rules of scrutiny and accountability Brussels would impose on London would jeopardise London’s status as an international financial centre. That’s why he is advocating a ‘Leave EU’ vote for Britain.

International finance is a ruthless world in which someone will not cheerfully give away to another centre the advantages it enjoys or raise a potential rival. If we want to progress in this field, we have to build up on what we already have patiently built up, not by dismantling it. But if our decision-makers have no mind to take back what they have given away, the risk exists that we may not only lose the edge we’ve developed on the Indian market for our offshore.

In a bid possibly to justify the inept concessions made by the Mauritius side last July, apprehension has been raised about the decision announced by Mr Arun Jaitley in his February 29th 2016 Budget speech to the effect that the General Anti-Avoidance Rules (GAAR, which the Indian tax authorities had announced in some earlier year to bring under greater scrutiny claims to exemption from tax by foreign investors into India) will become effective anyway as from April 2017. There’s nothing new about it. The decision had already been taken and operators are aware of it since long.

The false inference is sought to be made to the effect that the GAAR will nullify our treaty benefits in any case once it gets implemented in 2017. If that were the case, the Indian tax officials would not have bothered to come over here to secure confirmation of the July 2015 concessions possibly nullifying the advantage conferred by Clause 13 of the DTAA.

In reality, the GAAR is about a body set up in India to put under scrutiny all substantial investors going into India as regards the exemption from tax of their benefits. And it will apply not solely to investors from Mauritius; it will apply to all of them coming from all other financial centres. Besides, any tax decisions made under the GAAR should pass the test of an independent GAAR tribunal. If our investors can prove their bona fide and compliance with other requirements of the DTAA, the decision of the GAAR will not nullify the provision of Clause 13 of the DTAA. Those without substance or the necessary locus standi will be penalised, not the genuine investors going into India under the Treaty. So, there is no direct link.

Are we trying to convince ourselves that things like the GAAR and other international decisions, such as the OECD’s Base Erosion and Profit Shifting (BEPS) which we have not signed up to yet, will anyway undermine the DTAA? And that it were better therefore that we gave away with the unacceptable concessions already made about the DTAA last year?

The job of governments is to go on building up the economic base of a country. A government can take some bets on the economy’s finances but, unless they are calculated bets based on our capacity to create value out of which we pay up for whatever debts we might incur in the process, the consequence could be disastrous. Greece could teach us some debilitating lessons it has learnt by not growing its economic base realistically while taking on huge debts for unproductive investments and now relying on the IMF, the ECB and EU governments to painfully bail it out of the debts incurred.

Likewise, a government will only take risks to let go of established sectors of activity after it has beefed them up for a richer future, not before on the assumption that, in future, something stronger will replace what we are losing out. It would be unwise to run out of existing substance under the assumption that something mightier than that will be raised later; it could be a mere figment of the imagination. Concepts of better days to come are great but they remain insubstantial creations of the mind. They don’t yield jobs, rather they may destroy jobs. They don’t increase the GDP, rather they risk putting at great risk future GDP.

* Published in print edition on 4 March 2015 

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