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India-Mauritius trade pact put on hold

Talks not to resume till the island nation expedites revision of double-taxation avoidance agreement

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India has decided to formally suspend negotiations to finalise a trade liberalisation pact with Mauritius. It has cautioned Mauritius the negotiations will not resume till the island nation expedites revision of its (DTAA) with India.

The two sides have failed to amend DTAA due to differences over capital gains tax, especially the definition of ‘enterprise’ and the treatment of ‘shell companies’.

However, Mauritius has been insisting on separating the two issues — of trade liberalisation through the comprehensive economic cooperation and partnership agreement (CECPA); and revision in DTAA. Mauritius is also keen to act to position itself as a preferred route for channeling outward Indian to Africa.

IN LIMBO
India’s point Negotiations on CECPA won’t resume till Mauritius expedites DTAA revision because the pact would entail monetary concessions to Mauritius, impacting the talks of modifying DTAA
Mauritius’ point Extremely eager to sign CECPA; wants trade liberalisation through CECPA and revision of DTAA separated
Sticky point DTAA revision held up due to differences over capital gains tax, especially the definition of ‘enterprise’, treatment of ‘shell companies’
INVESTMENT OVERVIEW
$71 billion FDI from Mauritius to India from Apr 2000 to Oct 2012, the most from any country
$9.942 billion FDI from Mauritius in 2011-12, 27.25 per cent of India’s total FDI inflows

At a meeting in New Delhi recently, Arvin Boolell, Mauritius’ minister for foreign affairs, regional integration and international trade, had urged Commerce Minister to separate the talks on CECPA and DTAA revision.

However, the Department of Revenue (DoR) under the finance ministry, is of the view conclusion of the trade deal would entail monetary concessions to Mauritius, impacting the talks of modifying DTAA. Also, the definition of enterprise and treatment to shell companies cannot be different in DTAA and CECPA.

So it has been decided the trade deal, which Mauritius is extremely eager to sign, will not be concluded till Mauritius speeds up revisiting the India-Mauritius DTAA.

Though it has been decided the joint working group on DTAA between the two sides would hold the much-awaited meeting next month in India, the decision to put off all talks on a trade deal has been taken by DoR. It has asked the external affairs ministry to communicate the decision to Mauritius.

“Till now, ten rounds of negotiations on the India-Mauritius CECPA have been held. On account of divergence in perception between DoR and Mauritius on the definition of ‘enterprise’ and the treatment to ‘shell companies’, it has not been possible to finalise the chapters on trade in services and trade in investment (under CECPA),” a senior official involved in the negotiations told Business Standard.

The revision of India-Mauritius DTAA is a long-pending issue between the two countries. Article 13 on ‘capital gains’ of the India-Mauritius DTAA provides for taxation of capital gains only in the country of residence of the investor. The Indian side proposed to amend the treaty to provide the source-based taxation of such capital gains (in this case India) to plug the misuse of the treaty by shell companies formed by third countries’ corporate entities.

The Mauritius government issues tax residency certificate (TRC) to companies investing from that country into India and those companies could take the benefit of the treaty — by not paying capital gains tax in India. But, India alleges shell companies or post-box companies in Mauritius have mushroomed because of leniency in issuing these TRCs.

Earlier, India’s draft guidelines on the General Anti-Avoidance Rules (GAAR) had said these norms could override even DTAAs. Mauritius had strongly objected to this, but had agreed to have a clause of Limitation of Benefit (LoB) under DTAA to allow only genuine companies to take benefit of the agreement.

Later, the Prime Minister’s Office appointed the Parthasarathi Shome committee to review GAAR. The committee, in its draft report, recommended the GAAR provisions would not override the treaty if anti-avoidance rules were provided in a tax treaty in the form of LoB.

The committee’s final report is with the PMO. According to commerce department officials, the Mauritian government and the offshore financial services industry are awaiting the results of the examination of the Shome panel recommendations.

According external affairs ministry officials, the last two meetings of the joint working group on DTAA had shown “some movement” towards commercial substance. GAAR is applied where there is no commercial substance between an arrangement and it is mainly done to avoid tax.

“Mauritius has, to a certain extent, understood our genuine concerns on the matter and is willing to act to address those,” said a ministry official. However, he also added the issues concerning Article 13 remained. Mauritius also indicated in its recent Budget pronouncements that it intended to sign the finalised tax information exchange agreement with India by June 2013.

Foreign direct investment from Mauritius to India from April 2000 to October 2012 stood at $71 billion, the most from any country. In 2011-12, FDI from Mauritius stood at $9.942 billion, 27.25 per cent of the total FDI into the country, according to data provided by the Department of Industrial Policy and Promotion.

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