Review the Indo-Mauritius treaty, but business must be allowed to continue: Rama Krishna Sithanen

Interview with Former Vice-Prime Minister of Mauritius

Foreign investments routed through Mauritius, with which India has a double taxation avoidance agreement (DTAA), have been the subject of controversy for over a decade. Allegations that the route is used to “round-trip” black money and conceal the identity of stock market investors usually peak around Budget time, frustrating foreign investors and spooking the markets. Yet there seems no early solution to ongoing negotiations between the two countries over reviewing the three-decade-old treaty. Rama Krishna Sithanen, former vice-prime minister of Mauritius, was in India to attend a seminar organised by Financial Technologies. He discusses a possible way forward with Palak Shah. Edited excerpts from the interview:

China got its treaty amended with Mauritius in 2007. This allowed it to tax capital gains of Mauritian companies holding Chinese shares. So how does India’s demand lack merit?
First, we need to place the issue in context. The DTAA between India and Mauritius has existed for nearly three decades now. Every time the Indian government raised the issue of alleged abuse and misuse of the treaty, Mauritius has responded, collaborated and cooperated. To give you a couple of examples: when the issue of round-tripping of funds was raised, where it was alleged that Indians were investing their black money back into the country via Mauritius, we amended the treaty. I was in office then and we started issuing tax residency certificates to ensure there were no cases of round-tripping.

Mauritius allowed India to post, on a permanent basis, a tax information officer here to enhance and strengthen the exchange of information between two sovereign states and prevent misuse of the treaty. Whenever India makes a request for information, we have replied satisfactorily. So there is a big disconnect between reality and what the newspapers write. On his visit to India, the Mauritius prime minister made it clear that the country would cooperate to fight money laundering, terrorist financing and to prevent misuse of the treaty. A joint working committee from both countries is reviewing some provisions of the treaty. I do not know about the exact negotiations but the discussions are on how substance should prevail over form and to what extent anti-abuse provisions can be built into the treaty. Many investors are waiting for certain and stable guidelines. In the view of our excellent relations, the outcome of negotiations between the two countries will be satisfactory and the revised treaty will prevail over domestic legislation.

It seems easy to acquire a tax residency certificate in Mauritius. Also, tax officials in India complain that, often, Mauritius is not forthcoming about information when they make an attempt to lift the corporate veil to trace the ultimate beneficiaries.
That is untrue. We have replied to about 64 information requests made by India. I was in office for 10 years and am not aware if any request was not met and I stand to be corrected. All competent authorities in Mauritius, whether the Financial Services Commission, Ministry of Finance, banks or any tax authority, have provided information. Even now, there is regular exchange of information between the two countries.

The OECD [Organisation for Economic Co-operation and Development] has laid down international guidelines for information sharing. Accordingly, we assess whether the request for information is relevant. Also, let me be clear that the treaty does not provide for exchange of certain types of information but Mauritius has even cooperated with regard to tax or banking information. Our only point is that a proper case should be made out backing the allegations. There is a memorandum of understanding between the Securities and Exchange Board of India and Financial Services Commission of Mauritius and also between the revenue departments of the two countries for information sharing and to see that the treaty is not misused. What more are you expecting? Mauritius is willing to walk the extra mile. We have taken a decision to keep a strict check on round-tripping but allegations in newspapers continue.

As for tax certificates, they are issued on an annual basis. They are subject to auditors’ certifying that there is no case of round-tripping. And to be fair, we have never received any complaint of round-tripping from any of the competent authorities in India.

Mauritius is used as a post box by many US companies and funds investing in India. How does your country keep a check on this?
We had invited some journalists from India to see with their own eyes the scenario in Mauritius. Then, when I asked them the difference, they said their perception had changed after visiting Mauritius compared to earlier when they wrote stories sitting in Delhi and Mumbai. They said there is evidence of substance in Mauritius. You need to fulfil many criteria of substance to acquire a tax residency certificate. A company board must meet in Mauritius and major decisions must be taken here. You need to bank with a Mauritian bank and your account must be audited by a Mauritian firm. These procedures have been upheld as legal by many judicial decisions in your own country. A review may be required of the treaty but flow of business must be allowed to continue. Mauritius as a jurisdiction is open for review. The OECD has assessed the regulatory, supervisory and legal framework of Mauritius with respect to issues including anti-money laundering and terror financing. We passed the test and are classified as a “white” jurisdiction. We were never blacklisted by the OECD. Mauritius has updated its legislation to make it compatible with the best standards. We are also assessed by Financial Action Tax force, the global watchdog for money laundering.

The Mauritius tax treaty is also beneficial for Indian companies since we are among the very few countries that provide an efficient gateway to Africa. We have the skill and right institutions in terms of regulation and supervision. Many FIIs [foreign institutional investors] choose Mauritius due to the ease of doing business here. There are many countries with which India has tax treaties with provisions and facilities more beneficial for companies than in the Mauritius treaty. The market is highly competitive and business can move to Cyprus, the UAE or Singapore. However, FIIs have stuck to Mauritius, which shows that the DTAA is not the only consideration for attracting business. Mauritius has built a good case because there is stability and certainty of law. Most Indian companies investing abroad use an international financial centre like Mauritius to avoid bureaucratic red tape that they may face in countries where they invest. Our country is not just another island economy that is fully dependent on business from global FIIs. We have our own tourism, hospitality, sugar, manufacturing, real estate, garment and textile industries. The business coming from FIIs is part of our diversification drive to make Mauritius more resilient. This global business accounts for six per cent of our GDP and 25 per cent of tax collections and employs three per cent of our population. The rest is our own economy.

By certainty of law in Mauritius, are you referring to the recent controversy over Vodafone’s investment in India? What is the perception among investors after the Supreme Court judgement on the case and the government’s response to it?
India is known to be a country where the rule of law prevails. There has been a judgement by the apex court, which everybody has noted. There was another judgement in which the review petition of the government was rejected. India is a sovereign state and it is up to its people to decide the best way forward. But these may have implications, so the issue should be addressed within the framework of law, which India has always done.

General anti-avoidance rules (GAAR) announced in the recent Budget have spooked FIIs and participatory note investors. Do you think it will affect the funds flow from Mauritius?
It is too early to comment on the introduction of GAAR. We are waiting for clear guidelines because the initial signals are confusing. With respect to Mauritius, I have read in the newspapers that an official from the finance ministry said the Central Board of Direct Taxes circular of 2000 with regard to the tax residence certificate, which allows FIIs to avoid double tax, will be respected. I am not aware of FIIs based in Mauritius migrating to other jurisdictions. If I have understood correctly, the same GAAR rules and procedures will apply to all jurisdictions.