Indo-Mauritius tax treaty amendments credit negative for Mauritius: Moody's

Rating agency Moody’s today said the substantial amendments to the Double Tax Avoidance Agreement (DTAA) between Indian and Mauritius are credit negative for Indian Ocean nation. The financial centre in Mauritius will be a less attractive platform for investing in India than it used to be.

The amended treaty removes a longstanding advantage that allowed investors to avoid paying capital gain taxes in India by channeling their investment through Mauritius.

A curtailment of new investment flows via Mauritius would cause a deterioration in the balance of payments equal to 1-2 per cent of Gross Domestic Product (GDP) annually.  Consequently it would put pressure on Mauritian foreign exchange reserves.

However, a sharper shift in investor sentiment would have more dire consequences, Moody’s said in statement.

On 10 May, the government of Mauritius (Baa1 stable) announced major changes to DTAA which has been in place with India since 1983.

Moody's said Mauritius’ financial industry is a key economic pillar and the primary source of net financial inflows from abroad. The tax changes will particularly weaken Mauritius’ balance of payments, consequently increasing its external susceptibility.

The financial industry contributed 10% of GDP in 2015 and substantial financial net inflows over the past five years allowed the central bank to accumulate foreign-exchange reserves of almost $4 billion as of March 2016, up from $2 billion in 2010.

Companies using the DTAA operate in Mauritius under a Global Business Company 1 (GBC1) license, are subject to Mauritian tax jurisdiction, and benefit from an advantageous tax regime, including low corporate taxes and a 0% capital gain tax. 

At year-end 2014, Mauritian companies with GBC1 licences held $200 billion in Indian assets, according to the Financial Sector Commission of Mauritius, constituting 38% of their $520 billion total assets held worldwide, including in Mauritius. However, in general, these assets are invested abroad and in countries that have DTAAs with Mauritius.

The changes to the DTAA with India will be carried out during a transitional period, starting in April 2017, and benefit from a grandfathering clause that exempts Indian assets acquired before April 2017 from the new dispositions. Nevertheless, the changes to the DTAA will weaken the country’s balance of payments, it added.