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Finance > Venture Capital > Features
> Indo-Mauritius Treaty...
A banknetindia.com
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Indo-Mauritius
Treaty - An Opinion
- Uday Gujadhur, Mauritius
[Uday Gujadhur Partner of De Chazal Du Mee & Co, Mauritius is a well
known authority on the subject. He can be contacted at "uday.gujadhur@dcdm.intnet.mu"
]
India Mauritius double tax avoidance (DTA) treaty was ratified in 1983. The DTA is based on the OECD model Tax convention. It does not have any unique feature. India has similar DTA's with a number of countries including Cyprus & UAE. The DTA does not have any limitation of benefits clause & has been utilised effectively since 1992.
For a Mauritius company to have access to the DTA, it has to be a resident of that country & liable to tax. As per Mauritius tax laws, a company is a resident of Mauritius if it is either incorporated in Mauritius or it has its place of management and control in Mauritius. These Mauritius companies in question actually fulfilled both criteria's & were also given a Tax Residency Certificate by the Commissioner of Income tax, Mauritius. Such companies have been complying with Mauritius laws. The companies hold regular Board meetings in Mauritius, including physical ones, wherein the decisions & control are exercised over the Investments of the company among other agenda. In addition to this, certain Administration functions are also carried out in Mauritius.
The IT officers in Mumbai issued tax orders before 31 march 2000,denying Tax treaty benefits to certain Mauritius based companies set up by FII's. The main argument was that the parent companies of the Mauritius offshore Companies were effectively managing & taking decisions & that the Mauritius company was set up as a scheme to avoid Indian taxes. The IT officers disregarded the Mauritius companies as separate legal entities & lifted the corporate veil. It conveniently set aside the DTA between the two countries & its provisions. Basically they questioned the residency of the FII promoted companies in Mauritius.
It is an established International tax principle & confirmed by legal cases that a corporate body's residency is where its Place of management & control rests. As regards the use of Intermediary holding companies, this is an accepted norm, the Dutch holding companies being a prime example.
As mentioned earlier, the Mauritius /India DTA is based on OECD model. The main benefit it gives is that if a resident of one contracting state disposes of movable assets, e.g. shares, gain if any arising therefrom will be subject to tax in the state in which the alienator (seller) is a resident. This Art.13 of the DTA deals with Capital Gains. This Art.13 is not unique to the Mauritius /India DTA. In such a case the Capital gains will not be subject to CGT in India but will be taxed in Mauritius. In Mauritius any income (except capital gains) from trading activities is taxable. A DTA not only avoids the taxation of the same income twice, but is also an instrument for facilitating trade & investments between two countries. The view of the IT officers is from the tax angle which one accepts is their main duty, but at the same time they should not be ignoring certain well established tax principles. We have seen the adverse effect on FII sentiments & the dramatic impact on the Indian sensex. Of course what happened with Microsoft & the NASDAQ the previous day also did have an impact.
The stance of the ministry of finance in India & that of the CBDT is to be commended, the speed & the need to restore the tax status on the premise that a tax residency certificate issued by the Mauritius authorities is accepted. The onus is also left & rightly so on the other contracting state, i.e. Mauritius to ensure & monitor compliance by all companies with its local laws. I would presume that issues of concern, if any, by either country may/will be taken up at bilateral level as per the DTA provisions.
The image of both, India & Mauritius has suffered a set back internationally. The swift action of the Indian authorities has re-established confidence with Investors generally, the positive effect on the sensex on Friday is an indication. Going forward we hope that such issues are dealt with at the appropriate level. Mauritius should now be seen as a facilitator of Investments into India for the mutual benefit of the two friendly countries. Mauritius is also poised to facilitate Indian investments abroad to create Indian MNC's those eventually become global players. In turn Mauritius will also need to restore confidence with International Investors.