Another high stake game in the offing

Mauritius-India Double Taxation Avoidance Treaty (DTAA)

Contrary to what we were led to believe only some days ago, the long-standing “dispute” with Indian authorities regarding the Mauritius-India Double Taxation Avoidance Treaty (DTAA) is far from reaching closure anytime soon.

Rama Sithanen, former Minister of Finance, closely associated with what originated as our “offshore” sector is up in arms after having, presumably, taken cognizance of the content of the outcome of the recent negotiations between the Mauritian delegation and the Indian authorities. It will be remembered that the Minister of Financial Services and Good Governance declared on his return from India that the negotiations had been very successful, implying that there had been a positive outcome for Mauritius.

If we go by what is published in the press, the line taken by the Minister following the declarations of Rama Sithanen is that the latter must surely be looking at a different document from the one that he had agreed to. Given what is at stake we would certainly wish, as much as he himself certainly would, that it is Sithanen who is in the wrong.

Be that as it may, the critical point as suggested by the former Minister is that this is no matter for partisan confrontation. The way forward calls for a more serene approach and indeed offers an occasion to turn what is looking as a serious threat into a real opportunity. An opportunity to raise up to the occasion, and go beyond partisan skirmishing to address the consequences of whatever happened in India last week with the utmost urgency and circumspection.

From what we know as at the time of writing, there can be three possible scenarios.

First, the Minister of Financial Services and Good Governance is right and the document which has been signed in India still saves the day for Mauritius in spite of the concessions which must have been made, presumably on both sides of the table, for an agreement to be reached. In which case nothing more needs to be done and we await the “ratification” of the Protocol and continue with business as usual. This, it must be said, would be a most unlikely possibility given the history of this whole business.

The second scenario which is the nightmare foreseen by Rama Sithanen is that the Mauritian delegation has really got it all wrong and made serious concessions regarding the sensitive Article 13 of the DTAA as well as agreed to Limitation of Benefits clauses. For the sake of our readers, we attempt to throw some light on the critical issues which are at the core of the whole debate. (Admittedly what follows is a simplification as our friends from the legal profession would promptly point out.)

Article 13 (4), which concerns payment of Capital Gains, stipulates that:

”Gains derived by a RESIDENT of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 (NB essentially immovable property) of this Article SHALL BE TAXABLE ONLY IN THAT STATE.”

This is the paragraph which allows foreign companies established in Mauritius and which invest in the share markets in India to take advantage of the favourable Mauritius tax regime whenever they dispose of such shares with a profit thus realizing a capital gain. As a Mauritian resident, the company is not subject to Capital Gains tax.

Any concession regarding the right to tax gains realized on the disposal of such moveable property being divorced from RESIDENCE of the permanent establishment owning them would therefore deprive Mauritius of its competitive advantage and surely signal the slow death of many OMCs.

As regards the Limitation of Benefits, it implies that fiscal benefits would only be extended to entities which satisfy certain conditions. In the case of Mauritius, the Indian authorities insist on measurable “substance” being added in the jurisdiction.

Under this scenario, some real soul searching will be the order of the day over the coming days. Time is of the essence and a prompt political reaction of the highest order would be urgently called for.

Clearly such a development would go against the public commitment taken by both the Minister of Foreign Affairs of India – Mrs Sushma Swaraj, and Prime Minister Modi during their recent visits to Mauritius — to the effect that, in line with a long tradition, India would do nothing to harm the interests of Mauritius, especially with regard to this issue which remains a central plank of the future economic strategy of our country.

The multi-dimensional aspects of the Indo-Mauritian relations, which draw on historical, cultural, economic and geo-strategic considerations, should be intelligently invoked in order to trump the baseline logic of the Indian civil servants who would have negotiated such an interesting outcome from their point of view.

The immediate effects of such a scenario in what is already a hugely challenging global environment for Mauritius could be terribly damaging for the socio-economic stability of the country. It will add a huge burden on an already difficult situation as regards the employment prospects for fresh graduates and young professionals. The financial services industry which contributes nearly 15% of the national GDP and directly and provides employment to nearly 12,000 people would be put at risk, let alone all the efforts which have been invested over the years for making Mauritius into a respectable regional financial centre.

The third scenario, and probably the most likely, is that the Mauritian side has made concessions to the insistent calls for more “substance” to be added in our jurisdiction. This, one surmises, would have been done by compromising on the “permanent residence” status being the sole determining criteria for deciding the tax jurisdiction.

In that case, conditions such as the requirement for a quantum of annual expenditure to be incurred in Mauritius would be attached for determining the permanent resident status. Although this would have some obvious benefits for Mauritius in the medium and longer term, the immediate effect would be very harmful in as much as a large number of the companies operating here would probably be unable to meet such costs.

Should such a scenario actually materialize, then, without jumping guns, since we are in the domain of speculations, let it be said that the practical solution applied when such situations have arisen in numerous and varied circumstances has been to delay any such measure by a reasonable period of time (say ten years) to allow a smooth adaptation of all the stakeholders.

The need of the hour is clearly for mobilization of all those who are willing to contribute in finding a fruitful outcome which will to the extent possible converge around the interests of all stakeholders as well as the long-term national interest. One can only hope that there will be no attempt for one-upmanship or partisanship in the treatment of this issue going forward.

  • Published in print edition on 10 July 2015

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