New Delhi: Foreign investors entering India via Mauritius are set to face greater scrutiny of their investments, with the two countries inking a protocol to amend their double-taxation avoidance agreement.
This could also open exits of past investments to questioning, with no grandfathering provisions likely to insulate them from the amended rules, experts said.
The stock market ignored the development, rallying past the 75,000 mark on Wednesday.
The amendment specifically states that relief under the treaty cannot be for the indirect benefit of residents of another country.
In almost all cases, the shareholders or investors in Mauritius entities making investments in India are from other countries.
Tighter Norms
This limitation on third-party countries will be a concern, along with the new requirement to demonstrate that tax relief is not one of the principal purposes of the investment, said experts.Revenue authorities would now scrutinise the exemption available under the treaty as per the 'Principal Purpose Test' laid down in the protocol.
"This test has a much higher threshold of commercial rationale to be based in Mauritius as compared to General Anti-Avoidance Rule provisions," said Punit Shah, partner, Dhruva Advisors.Foreign portfolio investors based out of Mauritius currently claim tax exemption on capital gains on derivatives transactions.
"It would be imperative for the FPIs to prove that there is a sufficient non-tax justification and commercial rationale for them to be based in Mauritius in order for them to claim the treaty benefit," Shah said.The protocol has been amended in line with provisions of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting that both countries have joined. Mauritius at that time had not included India as a treaty partner to whom the multilateral instrument (MLI) to combat tax avoidance would apply. Both countries have now agreed to amend the treaty bilaterally.
MLI is part of the Base Erosion and Profit Shifting (BEPS) rules crafted to ensure large multinationals pay a minimum level of tax on income arising in each jurisdiction they operate in. As per the BEPS rules, there is a provision to decline the shelter of a double-taxation avoidance agreement covered by the MLI, if the principal purpose of a business arrangement is to save tax and is gauged by using the Principal Purpose Test.
Experts say though the protocol would come into force from a future date, based on past practice, it is likely to be applied even for shares acquired before April 1, 2017. Capital gains on investment made before that date weren't previously taxable under grandfathering provisions.
"It is generally understood that the new provision would apply even to past investments where the taxable event takes place after it comes into effect," said Akhilesh Ranjan, advisor, tax policy at Aeka Advisors.
This could also impact the favourable dividend withholding rate (5%) that is provided for in the treaty, Goenka said.
No comments:
Post a Comment