'Limitation of Benefits' holding up India-Mauritius DTAA review

Mauritian govt has suggested a 'different type' of an LoB clause under DTAC

The India-Mauritius Double Taxation Avoidance Agreement (DTAA) review is stuck over differences between the two sides on the type of ‘limitation of benefits’ (LoB) clause to be inserted in the tax treaty.  

The Mauritian government has suggested a “different type” of an LoB clause under the Double Taxation Avoidance Convention (DTAC) than what India has with Singapore.  

“Every LoB is not the same. There are various types of LoBs. There can be an LoB where expenditure can be on an annual basis,”  Rama Sithanen, Chairman of International Financial Services Ltd told Business Standard. He is former Finance Minister of Mauritius.

However, the Indian government wants the LoB provision in the India-Mauritius DTAA to be similar to what it has with Singapore.

An LoB clause in the India-Singapore tax treaty requires investors coming into India through Singapore to incur minimum expenditure of $2,00,000 in the southeast Asian nation  and have a track record of two years to get treaty benefits.  

The proposal on LoB was submitted by Mauritius in March this year during the last meeting of the joint working group which was set in 2006 and was assigned to review the several clauses of the treaty that signed on 1982.

The revision of India – Mauritius DTAC is a long pending issue and the government is under pressure for an early conclusion of the deal.  Article 13 on ‘Capital Gains’ of the India-Mauritius DTAC  provides for taxation of capital gains arising from alienation of shares only in the country of residence of the investor.

Indian side proposed to amend the treaty to provide source based taxation of such capital gains to retain our tax base. Indian side proposed to limit the practice of ‘treaty abuse’ by incorporating Limitation of Benefits Article in the treaty.

According to officials in the Ministry of External Affairs, the last two meetings of the JWG had shown “some movement” towards commercial substance. “Mauritius has, to a certain extent, understood our genuine concerns on the matter and is willing to act to address them. There has been forward movement on information exchange.”

Both sides have also recently finalized but are yet to sign the Tax Information Exchange Agreement (TIEA) outside the DTAA. It is expected that the TIEA will be signed during the upcoming visit of the Mauritius’ finance minister Xavier Duval.

The Mauritian government, which is currently under the Indian public eye  on concerns over round-tripping of investments and large-scale money-laundering for being a so-called tax haven, is taking several measures to arrest such incidences in order establish itself as a credible financial hub.

“We are probably the least preferable destination for an investor who is looking for a round-tripping. This is because the conditions have become very stringent at the level of banks, at the level of management companies, financial services commission, checks have become so stringent that investors would take a second look,” said March Hein, chairman, Financial Services Commission.

The finance ministry is of the view that conclusion of the trade deal would entail a series of monetary concessions to Mauritius impacting the talks of modifying the DTAC. Thus it has been decided that the proposed trade deal – India Mauritius Comprehensive Economic Partnership Agreement - which Mauritius is extremely eager to sign, will not be concluded till such time as Mauritius does not agree to revisit the DTAC up to India’s satisfaction.

Foreign Direct Investment (FDI) inflows from Mauritius have been $73.67 billion (38.11% of the total FDI inflows) from April 2000 to March 2013. This makes Mauritius the single largest source of FDI into India.