Double taxation is taxes levied of the same earnings at two levels. One common example is taxation of earnings at the corporate level and then again at the shareholder dividend level. Another example is taxation of foreign investments in the country of origin and then again upon repatriation, although many countries have signed agreements to prevent this latter type of double taxation.
Mauritius has, as a tax planning jurisdiction focused the development of its Global Business sector on the use of its growing network of Double Taxation Avoidance Treaties (DTAs). The expanding network of these DTAs reinforces the seriousness of Mauritius as a tax efficient jurisdiction for structuring investment abroad in the Global Business sector. Mauritius has been used as a route for investment into emerging regions such as India and China.
In the case of the treaty negotiated between India and Mauritius, it seems that what started out in 1983 to be a leg-up for Indian businesses wanting to ply their trade in other countries in the region, turned soon thereafter into an ideal (and much larger) vehicle for entrepreneurs from outside India to avoid double taxation upon their investments made into that country. It is arguably due to the genesis of this treaty that it was then, and remains to this day the most advantageous of all of the DTA's with India.
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Over the last two decades, as a result of liberalised fiscal and investment policies, India has stood witness to record GDP growth rates, flourishing services and manufacturing sectors, an exponential rise in foreign direct investment. As a consequence, Mauritius has secured a prominent slot in the tax treaty planning of private equity players, MNCs and global funds. Even in the times of crisis, India is targeting a growth rate of 5 to 6%.
That is not to say that there have been no challenges and changes along the way. In 2003 the Indian Government withdrew the ability of Non Resident Indians to hold their personal portfolios of Indian quoted investments through private Mauritius Companies. The 2004 Indian budget withdrew withholding tax on dividends paid and abolished capital gains tax on certain transactions. But as we shall see, substantial opportunities still exist.
Mauritius remained the largest source of foreign investment in India, contributing USD 39 bn in FDI inflows during the period April 00 to May 09, representing 44% share of total flows.
Mauritius has a small number of well heeled residents but they are certainly not the source. Part of the answer lies in the use of the Category 1 Global Business Licence companies ("GBL1") incorporated in Mauritius and which will have been the conduit for all these investments. It is these entities that make use of the 1983 DTA (and some of the other 34 such treaties with Mauritius) and by so doing reduce their overall tax bill in the process.
As to why for example, those US investors of nearly US$ 6.5 billion over the period were not using this jurisdiction might seem a mystery. As will be seen, the taxation effect of not doing so could be seriously detrimental to their financial health. It might be the case therefore that the investments were directed into listed securities on an Indian Stock Exchange and for long term investment. In such cases, the taxation on the eventual gains is the same both inside and outside the treaty. Additionally, some of the investments may have been Government to Government which again would not have any taxation implications. On the other hand, there is certainly plenty of anecdotal evidence to suggest that the possible avoidance of CGT in India by using the Mauritius GBL 1 is simply off the radar of many uninitiated advisers. Hopefully this article might land on the desk of one such person in due course.
India no longer charges a withholding tax on dividends declared by an Indian company. They are thus tax exempt in the hands of the shareholders although the Indian company itself will be required to pay a dividend distribution tax at the rate of 16.995% (inclusive of surcharge and education excess) on such dividends. Consequently, provided that dividend withholding tax is not reintroduced in India, the use of the treaty would appear at first glance to be of no beneficial effect to the investor. He can remit his Indian dividends to his home country and pay local taxes upon the gross dividend received.
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However, a large proportion of the US$ 94 billion invested over the last 9 years will have been with a view to making capital gains (and very often from unlisted securities), rather than securing a regular dividend flow. Set out below is a table which gives the rate of Indian CGT applicable under various circumstances.
The MRA confirmed that the Fund would be treated as a société for tax purposes in Mauritius, as the Fund falls under the definition provided in the ITA 1995.
Furthermore, given that the management and control of the Fund rests with the General Partner and the General Partner is managed from Mauritius, the Fund would be treated as a resident société for Mauritius tax purposes in accordance with the definition assigned to the term in section 73(c) (ii) of the ITA 1995.
The MRA further confirmed that the partners of the Fund who are not resident in Mauritius would not be liable for income tax in Mauritius in respect of their share of income in the Fund because the Fund would not derive any income from Mauritius. However, the Manager and the General Partner, being resident in Mauritius for tax purposes, would be taxable on their worldwide income.
Tax treaty benefits are only available to resident entities or persons. Accordingly, a resident entity must be liable to tax in Mauritius or Seychelles under its laws by reason of its domicile, residence or criterion of a similar nature. Mauritius provides a wide range of resident entities and hybrid structures including the Global Business Company, the Trust and the Sociéte.
The objective of double taxation can be achieved Tax treaties employ various methods or a combination ofÂ
One method of avoiding double taxation is for the residence country to altogether exclude foreign income from its tax base. The country of source is then given exclusive right to tax such incomes. This is known as complete exemption method and is sometimes followed in respect of profits attributable to foreign permanent establishments or income from immovable property. Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes.
This method reflects the underline concept that the resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the source country is given by the residence country against its domestic tax as if the foreign tax were paid to the country of residence itself.
Mauritius has entered into a considerable number of double-tax treaties (unusually for a low-tax jurisdiction). Generally speaking, the treaty benefits are available to all Mauritian companies other than International Companies.
All of Mauritius' treaties are based on the OECD model treaty, and contain exchange of information clauses; however, the exchange is limited to matters concerning the working of the treaties themselves.
The treaty with India, which had underpinned the emergence of Mauritius as the dominant channel for FDI into India, came under attack from Indian tax authorities in 2002 as a result of alleged abuses by Indian-resident investors. After a series of high-profile court hearings, the status quo appeared to have been restored. However, rumblings from the Indian authorities with regard to the alleged 'abuses' are still continuing in 2010.
In October 2006, in an attempt to head off pressure from India to change the countries' Double Tax Avoidance Agreement, the Mauritian government announced that it would tighten up rules on the issuance of Tax Residence Certificates, and in future would issue them for only one year at a time.
"Let me state very clearly that we will collaborate to prevent any alleged misuse of the treaty," said Mr Sithanen, at a news conference on a trip to New Delhi. "But keeping in view historical, cultural, political and diplomatic ties between the two countries we need a global solution that will not penalise Mauritius." He claimed that: "The problem of roundtripping has been eliminated completely."
In September that year, an Indian government official had said: "We are proposing to bring the DTAA with Mauritius on a par with the DTAA with Singapore. The DTAA with Singapore had included additional clauses to check round-tripping of investments."
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The new proposals were said to include a rule that only companies listed on a recognised stock exchange be eligible for capital gains tax exemption under the treaty, and that a company should have a total expenditure of $200,000 or more on operations in the residence state (ie Mauritius) for at least two years prior to the date on which a capital gain arises. Under the treaty as it stands, there is a very basic residence requirement. These provisions would match those included in the India/Singapore treaty.
Indian tax officials expressed the hope that Mauritius would stiffen the requirements for tax exemptions under the DTAA, and pointed to a new protocol that Mauritius had added to its treaty with China, under which capital gains arising in Mauritius on the sale of Chinese assets are subject to a 10% tax in China in some circumstances. The protocol came into force on 1st January 2007.
The Mauritian authorities had moved to placate the Indians in 2006, tightening up on the issuance of Category 1 Global Business Licence applications for Collective Investment Schemes, Private Equity Funds, Venture Capital Funds, Investment Companies, CIS Manager, and Investment Adviser/Managers; but India announced that it wanted further action before it would implement parts of the Comprehensive Economic Cooperation Partnership Agreement (CECPA) which will be highly favourable for Mauritian exports to India.
The DTAA with Indonesia, for somewhat similar reasons, was lapsed on 1st January 2005 after the Indonesian government gave notice of termination in 2004 and refused to discuss the matter. "The reasons given were that, following an assessment and evaluation of the implementation of the treaty, the Indonesian government has concluded that there was an abuse that was inflicting a loss upon Indonesia.