The Indo Mauritian Double Tax Treaty Accounting Essay

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Double tax avoidance agreement treaty was signed between Mauritius and India not only to avoid double taxation but most importantly to promote investment and trade opportunities. The treaty can be accessed from MRA website at http://mra.gov.mu/download/Mtius_India.pdf.

The treaty was signed in 1983, even though the global business sector was not known at that time, it was only in 1992, that the sector began to take off. In 1992, Mauritius became the road to India as soon as it embarked on a non-banking offshore regime and together with the coincidence liberation of the Indian economy. Thereupon, Mauritius has been continuously considered as the preferred platform by investors to invest in India which has been advantageous in terms of FDI for both countries. According to data from (DIPP), India received for the last ten years 44 % of FDI that came through Mauritius.

However, the treaty with India has been subject to many controversies from Indian tax authorities since 1994. Below are some outlines of main cases which depict the controversies.

3.2 NATWEST CASE: 220 ITR 337 (Advance Ruling No P.9 of 1995)

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In this case, an English bank was using Mauritius as an investment route to India, by setting two subsidiaries in Mauritius. The application was in respect to the tax liabilities of capital gains and dividend income under the Indo-Mauritian double taxation treaty.

The Authority for Advance Ruling (AAR) rejected the application since it was believed that the main purpose for incorporating the subsidiaries by parent company was reduction of tax. The transaction was intended to be prima facie for the avoidance of tax.

Nevertheless, as far as capital gain is concerned, Article 13(4) of the Indo-Mauritian double tax treaty was applied by the AAR, where it emphasized that this gain is taxable in Mauritius since there has been no mention of beneficial owner. As a result, the dividend income was taxable in India and capital gain was not.

3.3 AIG's Case: 224 ITR 473 (Advance Ruling No. P-10 of 1996)

The case concerned the setting up of a fund in Mauritius and to route all investments to India. At start, Indian tax authorities bind the case based upon the NatWest ruling reasoning by providing that the intention behind such incorporation was to avoid tax.

Conversely, AAR argued that setting of such fund in Mauritius was not only to avoid tax in contrast to the NatWest Case, but also for commercial and cost advantages. Since AIG gave commercial justification for routing its investments in India via Mauritius, the AAR concluded that the applicant was fully entitled to the benefits from the treaty.

3.4 In Re: XYZ/ABC, Equity fund (2001)

In this ruling, the applicant dealt with the purchasing and selling of derivatives instrument. According to the AAR income earned on this transaction would be regarded as business profits and eventually not termed as capital gains. Moreover, it was held that the applicant has no PE in India, implying that business profits income will be taxed in Mauritius and not in India. Additionally, the AAR concluded that the TRC issued by Mauritian tax authorities was enough in constituting the resident status of the applicant. Hence, he was qualified for obtaining tax benefits under the applicable treaty.

3.5 Union of India v Azadi Bachao Andolan (2003)

In this case, circulars of the Central Board of Direct Taxes (CBDT) were questioned in terms of its validity. Having one issued in 1994 clarifying that capital gains obtained by Mauritian resident from the transfer of shares in India will be taxed in Mauritius only and the one issued in 2000 states that the 'Mauritius TRC' was enough in proving tax resident status. Accordingly, this leads to the right of receiving the benefits of the treaty. However, two writ petitions were filed with the Delhi High Court against those circulars.

Another key element taken into consideration was the treaty shopping. It is when a third country will access to the terms of the DTAA enacted between two countries by being resident in one of the countries with objective to cut down tax liability.

On appeal, the supreme court of India refused the verdict of the Delhi High Court by holding that the country was free to discuss the provision of the treaty and there is no judiciary power on such matters. The court further claimed that since nothing has been mentioned against treaty shopping in the treaty, the circulars were not considered as illegal or bad.

3.6 Post Azadi Bachao Andolan

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Even though after the judgment of the Supreme Court, rumblings from the tax authorities of India continue and issues pertaining round-tripping started to follow. According to Wikipedia, round tripping occurs Indian companies shifted Mauritius and have re-routed their funds for investments in India through Mauritius. This is categorized as tax evasion where such firms are bypassing tax system of India.

In fact, the government of Mauritius has taken appropriate measures to combat money laundering and tax evasion. In that respect, a Memorandum of Understanding (MoU) was signed between the two countries for efficient exchange of information. Furthermore, Mauritius on its part has also ratified 'Know Your Clients' (KYC) regulation by making it stricter in a view to impede the misuse of the treaty. Besides, A Joint Working Group (JWG) was formed in 2006 consisting of members from both Indian and Mauritian government to take any pre-emptive actions to encumber the misuse of DTAA. (Refer to appendix G for more measures)

In 2006, the Mauritius Minister of Finance, Rama Sithanen alleged that he was prepared to work together with India "let me state very clearly that we will collaborate to prevent any alleged misuse of the treaty" he said at a conference on a trip to New Delhi and claimed also that "the problem of round tripping has been eliminated completely"

After stringent measures taken by Mauritian government, things appeared to have been restored but recently these same issues have come in the timeline and continue to be a subject of discussion and negotiation between the two countries. It has been alleged by the Indian tax authorities that the Indian Government is losing approximately Rs 2000 crore per year on tax income due to the treaty with Mauritius.

With the recent Vodafone case (see appendix H for the case), known as the wakeup call for Indian government which although it did not have any direct link with Mauritius has given rise to new rules. As mentioned earlier, capital gains derived from sale of shares of an Indian company is subject to tax in Mauritius and according to the court decision in 2003, any person who is in possession of Mauritian tax residency certificate and who does not detain a PE in India, will enjoy the benefits of the treaty irrespective whether substance in Mauritius has been created or not. But now, after the Vodafone case, it has held that there should be the creation of substance in Mauritius in order to benefit from the treaty.

3.7 General Anti-Avoidance Rules (GAAR)

GAAR is a draft guideline which has enacted by the India Direct Tax Code in order for shell companies are not created for the mere purpose to escape tax. GAAR will aim at producing more substance in Mauritius other than just having post-box companies will not do, they should have their office and carrying board meeting in Mauritius, hire local labor and pass a minimum expenditure tests. Therefore, to keep away from getting caught by GAAR, these companies will need to show commercial substance in Mauritius if they want to benefit from the Indo-Mauritian treaty. However, it is to be noted that the introduction of GAAR provision can override the treaty. Negotiations are still in the pipeline though to whether to implement it or not.

Chapter 4. Research Methodology

4.1 Introduction

Creswell states "Research is a process of steps used to collect and analyze information to increase our understanding of a topic or issue". In this respect research methodology has been used to get a clear notion of the subject matter under study.

4.2 Determine and define the research question

During my internship, I was offered a traineeship in a global business management company, since I was exposed to the global business activities and due to the fact that the issue of double tax treaty with India was in the timeline, it was decided to investigate more on the subject matter. In this respect, emphasize was put on the management companies as they are the one who deals much more with the global business company 1 which get benefits from the double tax treaty. Following this, some of the research questions were defined:

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The performance of global business sector in the last 10 years?

Do DTAA have a real impact on the global business sector?

What is happening with the Indo-Mauritian treaty?

Will this particular treaty threaten the global business sector?

The above questions have helped to arrive at the selected topic which is "Global Business Sector: a perspective of double tax treaty".

4.3 Research strategy

The research strategy employed has been done into two parts by the use of quantitative as well as qualitative data. The first part has been approached by trend analysis, charts, percentages and tables for analyzing, interpreting and presenting the results.

Therefore, in the first instance, the following measures are used to assess the contribution of global business sector namely GDP, revenues of Management companies, Substance building and in the second instance the variable FDI will be used for further analysis along with the numbers of DTAAs.

As for qualitative data, a survey questionnaire was considered as an appropriate strategy in meeting the requirements of research objectives where it focuses not only on double tax treaty as a whole but also pays particular attention to the Indo-Mauritian treaty. In addition, for analysis purposes, the questionnaire was exploited by means of quantitative approach.

4.4 Collection of data

There are two types of data, namely primary data and secondary data.

Primary data is information collected through a survey where original data are acquired. This can be done through questionnaires, interviews, observations. In our case, questionnaire was used to collect the primary data as it carries some merits such as respondents have sufficient time to give well thought out answers, less expensive, more familiar amongst people, preserves anonymity and easy to analyze. The questionnaires were partly hand-delivered to the respondents where a brief explanation of the objective of the study was given to the respondents. The questionnaire was also accessible online and sends to companies which were willing to answer the survey.

Secondary data encompasses information which is ready made. The variables used all derived from secondary source. The term GDP (Gross Domestic Products) at factor cost, is a commonly used measure of the national product which is the aggregate money value of all goods and services produced in an economy over a specified period of time. Data from GDP has been acquired from the CSO (Central Statistical Office). Revenues of management companies have been taken in terms of turnover and profit before tax, these figures obtained from annual reports of the FSC (Financial Services Commission). Information about substance building has been obtained from the FSC. Finally Inward FDI (Foreign direct investment) was used, it can be defined as the funds provided by a foreign investor which is not the country origin of the investor. The data has been taken from Bank of Mauritius. The analysis was under a period of eleven years from 2001 to 2011.

Survey Questionnaire

Questionnaire design

The questionnaire (Appendix I) started with a covering letter in order to enlist the participation of staff and ensure confidentiality of data for ethical reasons.

The questionnaire consisted of a mixture of dichotomous questions (Yes/No) and in some questions "Don't know" has been inserted in order to avoid biased response in case the respondent does not know the answer, with follow up questions; a four point Likert Scale from "Strongly Agree" to "Disagree" for respondents to indicate their feelings about the statements covering the different issues of the problem. Open-ended questions were used for qualitative reasons in order to enhance our recommendation side.

The questionnaire was divided into four sections to stay focus and facilitate analysis. Section A of the questionnaire consists of three questions which concerns respondent profile. Section B focuses on double tax treaties as a whole in order to get an opinion on the impact of such treaties from the respondents and consists of four questions. As for section C, it deals mainly with the double tax treaty with India, where the issue of GAAR guidelines has been exploited and this particular section contains ten questions. Lastly, section D concerns four general questions which will be used for further analysis.

The questionnaire was structured in such a way so as to enable the respondents to formulate their views relating to the topic under study.

Sampling size

The target population to be sampled was the personnel of the management companies (MCs). MCs were taken among the Financial Services Providers as they played an essential intermediary role in the Global Business Sector. They are concerned in the formation and administration of Global Business Companies and offer a variety of services that comprise of processing applications for GBC 1 and GBC 2; providing company secretarial services; preparation of accounts; providing registered office facilities, acting as corporate trustees and providing resident directors. The sampling method used was random sampling, where 20 MCs including corporate trustees were chosen out of 166. The survey included staff at various levels ranging from analyst to director to ensure that the sample is representative of the topic under study.

Pilot testing

Before conducting the survey, a pre-test was carried out. It was viewed as an important step to finalize a questionnaire. Four questionnaires were pre-tested randomly among personnel of two management companies. The objective was to ensure that the questions were properly phrased and set. Following the pilot testing, some minor changes were brought to the questionnaire so that it was easily understood and easier for respondents to fill.

Response rate

It is to note that the response rate was not so high whereby 82 questionnaires were collected out of 100 within the set deadline. This may be explained by the fact that the officers had busy working schedules which prevent them from filling the questionnaire. However, most respondents demonstrated support and interest in getting the questionnaires filled though some of them were quite indifferent and had to be approached several times to complete the questionnaires.

Evaluation and analysis

The data gathered for the survey was scientifically analysed, with the use of statistical software (SPSS) and Excel. Data was interpreted and represented using appropriate pictorial representations. Thus, the usefulness of the collected data was highlighted through proper interpretation which provided conclusions about the problem under study. As for the simple regression analysis, the stata software was used.

4.7 Conclusion

This chapter can be concluded in terms of limitations of the survey. In fact the exigencies of the employees' service and shortage of time have acted as a hindrance for me to analyse a greater sample size and also profound observations of different sections of the global business sector. However, it can be gainsaid that the sample taken was cut across the population of the personnel of the MCs and gave a true portray of the feelings of the staff for the purpose of this research.

Chapter 6: Recommendation and Conclusion

6.1 Introduction

This chapter provides some recommendations following the research and analysis of the survey carried out. These recommendations are proposed in order to enhance the global business sector.

6.2 Performance of the global business sector

In respect of our analysis, the global business sector has been well poised to benefit the economy of Mauritius and it is to reckon that it has well contribution to the GDP of the country. However it is to note the profit derived from the management companies, an important global business service provider has decreased in the last few years. Coming to double tax treaties, it is no doubt that the evolution of the global business sector is partly due to its double tax treaties came into force with different countries.

6.3 Indo-Mauritian treaty

The treaty is still under negotiation as whether to override the treaty to adopt the GAAR guidelines or to implement limitation of benefits (LOB) clause in the treaty is still undecided by the authority concerned. It should not forget that Mauritian authorities are walking extra mile to address the concern raised by India and will do so in line of the best international practices. "If there is any loophole that is to be plugged, we will do it with vehemence, with force and in a very meaningful and effective manner" said Mauritius Foreign Minister Arvin Boolell.

Whatever the agreement will be, it will be a win-win outcome for both parties as, if drastic measures are taken, it will surely have severe repercussion on the countries. Moreover, Mauritius has strong long historical ties with India, India will not put Mauritius in a bad posture because of the privilege relationship that Mauritius has with this particular country. It should be pointed out that if the same situation had arisen with another country, the treaty would be repudiated. For instance, for somewhat similar reasons the double tax treaty with Indonesia was terminated. The reasons advanced by the Indonesian government was that there was an abuse (round tripping) of the treaty whereby causing a loss in revenue to Indonesia. 

LoB is an anti-abuse condition that prohibited tax exemptions to shell entities. If limitation of benefit clause is inserted in the treaty, it will look for to formalize a minimum requirement for substance. Mauritian authority has already given indication of the agreement to the provision of such limitation of benefits and it is still under discussion by India. If this is to be implemented, it is expected to prevail and no domestic legislation will override the treaty.

In case, the Indian authorities go ahead with GAAR guidelines which can override the treaty, Mauritius will have to abide and to seek how to maintain the performance of the global business sector. This should not be as tough as it is considered by many individuals as Mauritius had already got an experience from South Africa GAAR on the DTAA between Mauritius and South Africa. Lessons learnt from it can be implemented.

There is a fear that investors may move out from Mauritius due to the issue with this particular treaty. The solution to this is to educate the investors about the numerous advantages that Mauritius has. By informing investors that it would cost less to function from Mauritius and being a conduit for investment into India, not only because of its DTAA but also due to its professional's teams, quality of service and its regulatory framework, geographical closeness, cultural kinship amongst others. It is in this manner that Mauritius will not lose its attractiveness.

6.4 Other solutions to respond to the demand of India provided by respondents

There should have a better KYC check to prevent frauds.

Improve transparency on transactions like financial checklist provided by FSC which should be filled accordingly before filing of financial statements

Levy a percentage as tax from any capital gain.

Creation of more substance in terms of their existence and operations.

6.5 Other issues

To curb round tripping which gives rise to money laundering, the government has introduced panoply of legislation since 2002 such as the Prevention of Corruption Act, The Prevention of Terrorism Act and the Financial Intelligence and Anti-Money Laundering Act. One of the imminent ways to curtail round tripping is disclosure. According to Arvin Boollel, disclosure is in fact mandatory. In addition, Mauritius was regarded as the jurisdiction which has been forthcoming with information, in a report prepared by India on Black money. Nevertheless, more enforcement of customer due diligence will facilitate in reducing round tripping and money laundering.

Mauritius has promoted itself as an investment platform to be used by India as a gateway to channel investments into Africa. During the last two years, Mauritius has seen a group of Indian business delegation using the country to invest in Africa. It should be noted as at December 2012, Mauritius had been used for outward Indian investment of about $5.3 billion.

Mauritius being the chief source of FDI to India and also the ideal state for Indian outward investment into Africa will continue to supply benefits to both countries and should remain so as it is model that works.

Furthermore, diversification to Africa is a good initiative since Africa represents a lucrative market into which Mauritius could tap. In case there is serious problem with Indo treaty, the global business sector will be secured since India will be no longer the targeted market.

6.6 Conclusion

Mauritius has known considerable changes since independence, it has been shifted nicely from the sugar to the textile sector, tourism and finally to financial services sector. Its impetus to handle cyclical risks has made the country survived and prospers in the same time during those different cycles. In order for the financial sector to flourish, it has to look beyond the treaty paradigm just like an infant needs to be weaned away from the mother when he grows. Moreover, Mr Rama Sithanen, chairman of IFS, a leading management company said that there is a strong link between the ICT business sector, outsourcing and global business sector and there is a need to scale it up with a view to consolidate further the global business sector. It is to point out also that many countries are adopting this approach.