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India–Mauritius: End Of An Affair?

Published on Fri, Jul 17,2015 | 23:34, Updated at Tue, Jul 21 at 23:02Source : CNBC-TV18 |   Watch Video :

For a decade now, India has been wanting to re-negotiate its double tax avoidance treaty with Mauritius. That day is finally here and if the former Finance Minister of Mauritius – Rama Sithanen – is to be believed, Mauritius is giving up its right to tax capital gains. Now it’s been known for long that India has wanted to include in the treaty a limitation of benefits clause, like it has in the Singapore agreement. But, a complete overhaul of the capital gains tax regime? That was unexpected. What impact could these potential changes have on foreign investors investing in India via Mauritius? To discuss this, CNBC TV18’s Menaka Doshi is joined by Rupak Saha of GE and Rohan Shah of ELP…

Below is the transcript of Rupak Saha & Rohan Shah’s interview with Menaka Doshi on CNBC-TV18.

Doshi: You can start first by explaining to us the India- Mauritius Tax treaties as it stands today, the benefits that it has and therefore the attractiveness of the Mauritius route?

Shah: Primarily, the Article 13 of that treaty which effectively ensures that capital gains earned by a resident of Mauritius would be effectively be taxed in the Mauritius. In Mauritius, as we know there is no effective tax on the capital gain so it is extremely attractive for anyone who is an investor in any stream – foreign direct investment (FDI), foreign institutional investor (FII),  private equity (PE) because of the factor of the capital gains benefits that they get to effectively invest from there. As a result, of course we have the predominance of all streams of our investment through some Mauritian vehicle. So, capital gains is really the main thing and in the clause as it is today there is no limitations of benefits as long as you prove tracks residency you will have the benefit.

There are some lesser benefits in the context of debt and some people perceive that there may be some arbitrage in the context of the fees for technical services. However, predominantly it is the capital gains in the context of equity.

Saha: What Rohan articulated is quite correct but let me elaborate on that a little bit more. Most of the third country investors who are using Mauritius as a holding platform, the absolute benefit of the Indian capital gains tax is not necessarily same for all investors. So, for example if the home country of the investor does tax the capital gain then even if you save any Indian capital gain it really doesn’t make much of a difference.  

I must tell you that there are still many jurisdictions including the United States which does tax capital gain made by its resident in other jurisdictions even if such capital gains is made by subsidiary company of the US investor. So, you should not automatically jump to the conclusion that Indian Capital gains benefit from an Indian capital gains, in all cases results in a higher post tax return to the investor.

Doshi: Can I argue that over the last decade or so, going all the way back to the ‘Azadi Bachao Andolan’ case, the Mauritius route has been a very controversial vexed one and one that the Indian revenue department has wanted to continue deny benefits of. Therefore, in fact the attraction of Mauritius has been waning over the last several years?

Saha: I think it is possibly a mixed statement. I think the Indian revenue has been trying consistently to dispute the treaty benefit which Rohan articulated. However, by and large if you look back into the judicial precedents and of course the governments own circular in this respect, I think for most part, the treaty has been fairly successful to the investors who have essentially routed their investment through that jurisdiction. So, I don't think the interest has been waning in this treaty as much as many people would like to believe.

Doshi: Let us come to what the potential changes to the treaty could be. Earlier this week, the Former Finance Minister of Mauritius dropped a bomb when he suggested that he had in fact seen the protocol and that in the protocol Article 13 had been rewritten and that Mauritius had given up the right to tax capital gains. How believable is this?

Shah: My sense here is that what you are hearing is not a situation where Article 13 is going to be sort of rewritten to effectively say that the taxing jurisdiction which was vested in Mauritius will now vest in India. I think more and more, the likelihood is that there will be a limitation of benefits clause, whether it will mirror what we have with Singapore which means certain monetary thresholds to indicate substance and presence or whether some other formulation like main purpose type clauses to ensure that benefits are not wrongly taken I think there is greater likelihood from what one hears of a limitation of benefits type clause. If you do not fall within that, then you do not effectively get the benefit of the tax being imposed in Mauritius which would then mean that to the extent of those transactions or those entities who don't meet the limitation of benefit clause, India could tax those. So, I don't think it is a complete abdication.

Doshi: Again I will caveat this by saying that it could be speculation… we don’t know the source of information for the former Finance Minister of Mauritius. However, let me put this question to you hypothetically, if Article 13 were to be re-written, if Mauritius were to give up its ability or right to tax capital gain in that country what would it mean for foreign investors.

Saha: Let me first react a little bit to what Rohan said – so I would expect that it is entirely possible that they re-write Article 13 giving up the taxing rights; Mauritius giving up the taxing rights. The point is that there in the global domain, there is definitely lot of angst about double non taxation, as to how treaties are enabling various corporate investors to what they call indulge in double non-taxation. So, if for whatever reason Mauritius domestic law is not essentially targeting capital gains then I think there is quite a possibility to avoid this double non-taxation that India convinces Mauritius – that look if you guys are not anyway going to impose a capital gains tax to your investors, then let us do it. I do not know if that has to happen what would be the quid pro quo for Mauritius to do that. However, from a tax theory perspective it is possible that the income suffers capital gains tax in at least one country. So, that would be my reaction to what Rohan said.

To your question I personally think that yes, initially there would be a little bit set back or disappointment partly because, if there is no grandfathering of existing investments again there would be the age old complaints about India doing some kind of a retroactive amendment because people who have invested through Mauritius they have targeted a certain return on investment calculation which does not factor in Indian capital gains tax. So, to the extent those investments are not grandfathered there would be noise around that. However, beyond that I don’t think it would be much of a big deterrent particularly for FDI investment because again in terms of FDI investment the returns are not necessarily always backend capital gains. It would be more interesting in the context of private equity or FII investment where the returns are much more immediate and the returns are much more rear ended upon exit.

Doshi: Are you suggesting that if in fact that change does take place, global investors like GE will not be alarmed, will not have to restructure, will not have to reorganise hopefully because they will give us some notice and hopefully there will be some grandfathering?

Saha: I don't think to that extent you can expect a consistent answer. I think there is a certain logic to the way you articulate it. It would again depend a lot upon the home country tax jurisdiction as I said earlier. If there are companies which are anyway paying capital gains tax in their home jurisdiction and if in the Indian tax, it is creditable against such home country tax there wouldn't be overall increase in taxes in which case I don't think companies would get significantly upset. As a matter of fact, maybe some of these structures which have been put forth over the years, dismantling that and simplifying them perhaps would be a boon in disguise who knows.

Doshi: Who knows you say but given the interlinking between the India-Mauritius treaty and the India-Singapore treaty, if Article 13 in the Mauritius treaty is rewritten what will the impact be to the India-Singapore treaty and therefore what will the impact be to investors coming in via Singapore?

Shah: In a way, what Singapore has would need to reflect what we now do with Mauritius and to that extent Singapore will also have to undergo a change. If they bring them at par, then at one level they will need to grandfather the past and going forward you will have both at par, where both effectively will result in a situation where India could levy the capital gains tax.

Doshi: So, that finally leaves us with the only other option which you are saying is the more likely one and that has to do with the limitation of benefits clause. Now, there again is a bunch of rumours around this, some say that the expenditure test has been fixed at USD 50,000, others say it is at USD 30,000, companies tell me those that come in via Mauritius that their annual expenditure in that country is probably between USD 10,000-15,000. So, anything above that is going to a be tough ask. What do you make of this, if there was a limitation of benefits clause, I am sure that is a better deal than a rewriting of Article 13, but what if it came with an expenditure test or a substance test of USD 50,000?

Saha: It would be tough, I agree with you. In the Mauritius context a USD 50,000 is a tough task. The other question is that as to whether this test would be at a legal entity level or at a group level. So, under Mauritius domestic laws, I think there is a recognition of a group under various laws I think even including under tax clause, I am not too sure of the local laws there. However, what I do understand is that there is a recognition of a group level. So, if there are companies which have got multiple platforms for downstream investments into various businesses which they have, then possibly that can be some kind of a saviour. However, you are right, a USD 50,000 threshold is significantly high in the Mauritian context and therefore many companies would trip in that LOB.

Doshi: That brings me to the final question because we have examined both possibilities, change in Article 13, the introduction of an LOB, it seems to me from what both of you are saying given the world of BEPS that we are living in, given the world of non tax havens and non double tax avoidance that we are living in, that a change is most likely to happen. Would that be fair to say that we are set for a big rewrite?

Shah: We are certainly set for change. I don't know if it would be a big rewirte but I believe we are set for change.

Doshi: This was inevitable, this was to come, we have been discussing this for over 10 years now and that day is finally here?

Saha: That is what you are saying! I don't know, I am simply a tax payer, you guys have your information, you tell me if there is a change to come. I don't know. However, I don't want to be again completely swayed by the fact that because we are living in the age of BEPS, etc therefore no kind of tax planning or no kind of tax optimisation is out of the window. At the end of the day whether people say it overtly or not, tax competitiveness will still play a key role in terms of capital allocation by a company. Therefore India, whatever they do, you need make sure that overall it stands competitive. Let us not forget about the fact that FIIs and FPIs play a big role in terms of the buoyancy of the stock market and the level of rupees. So, I hope if whatever your prognosis is, if that comes true, I hope that the decision makers are taking due cognizance of those follow-on consequences and it should not be a repetition of 2003 or 2004 when the revenue went chasing after Mauritian investors, the stock market had to face a run and then the government was forced to backpack and bring out that circular.

 
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