On 07 March 2024, Mauritius and India signed a second Protocol to amend the Mauritius-India double taxation agreement (DTA) with the intention to better align with the OECD’s Base Erosion and Profit Shifting (BEPS) Action 6 proposal, which outlines one of the four minimum standards of BEPS. Below are the links to some of our previous newsletters for a better understanding of this topic:
- Principal Purpose Test and Double Tax Agreements
- Mauritian implementation of the MLI
- When is a Tax Treaty not a Tax Treaty?
The significant changes
Through the new Protocol, the Mauritius-India tax treaty will be amended to alter the preamble, ensuring compliance with one of the requirements of the minimum standard. This involves expressing a shared intention to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including via treaty shopping arrangements. The most significant amendment introduced by the new Protocol to the tax treaty is the inclusion of the Principal Purpose Test (PPT) Article.
Mauritius had previously signed the Multilateral Convention (MLI) to implement measures related to tax treaties aimed at preventing base erosion and profit shifting on July 5, 2017. However, the MLI only applies to tax treaties classified as ‘Covered Tax Agreements’ (CTA). The tax treaty with India was not notified as a CTA as part of MLI by Mauritius; thereby, a bilateral negotiation between the countries is the only option to achieve the minimum standard. This new Protocol elevates the status of the India-Mauritius tax treaty to that of a CTA under the BEPS MLI. This adjustment will impact anti-abuse measures, limitation of benefit rules, the principal-purpose test, and the inclusion of arbitration in the mutual agreement procedure.
The PPT is designed to deny treaty benefits if one of the primary intentions/purposes behind an arrangement or transaction is to obtain tax advantage under the treaty in a manner that goes against the treaty’s intentions and objectives. It should be noted that legitimate commercial transactions or operations undertaken by taxpayers and investors should not be impacted by the PPT, as its aim is to address abusive/avoidance arrangements.
Effective date
This Protocol will enter into force once Mauritius and India have completed their internal procedures required under their respective local laws to bring the Protocol into force. The provisions of the Protocol shall have effect from the date of entry into force, without regard to the date on which the taxes are levied or the taxable years to which the taxes relate.
Our views
Pre-2017 investments from Mauritius were enjoying double non-taxation on capital gains, owing to benefits under the Mauritius-India DTA coupled with Mauritius’s zero capital gains tax regime. However, the situation shifted in 2016 when it was decided that capital gains from investments in Indian companies made after April 2017, would be subject to taxation in India.
The grandfathering benefit under the existing treaty was the subject matter of dispute in India; the Indian revenue authorities have been challenging the corporate residence /substance of the Mauritius entities, and a matter is pending now before the Indian Apex Court.
The grandfathering provisions laid down under the Indian anti-abuse provision, i.e., General Anti-Avoidance Rules (GAAR) do not apply in respect of income from transfer of investments acquired before 01 April 2017 by a resident of Mauritius. This grandfathering benefit under GAAR and treaty will continue to be applicable under the new Protocol but will be subject to meeting the PPT requirements, including object and purpose test.
While the PPT is applicable income stream-wise, the impact of PPT test on dividend income in respect of investments made before 01 April 2017 requires consideration.
Article 3(2) of the Protocol regarding its commencement date introduces some uncertainty, leaving it ambiguous as to whether the Protocol can retroactively apply to income earned in previous years that are still open to audits or if it should only apply prospectively.
Last month, the Indian tax authority addressed concerns raised by taxpayers, stating that these issues will be clarified once the Protocol is enforced. Further, the Mauritius Revenue Authority, in their communique dated 17 April 2024 , indicated that stakeholders will be provided with clarificatory information on the amendments. In the meantime, taxpayers potentially affected by the Protocol should:
- Review any benefits, if applicable, within existing investment holding structures intended for use in the future under the India-Mauritius tax treaty after the Protocol becomes operational (including adherence to the principal purpose test).
- Evaluate the potential impact on past transactions if the Protocol is interpreted to have retrospective effect.
It is advisable for authorities to develop guidance regarding the application of the PPT and the level of substance necessary for Mauritius entities to qualify for benefits under the DTA. This guidance should encompass the grandfathering provision for investments made before 01 April 2017.
If you have any Indian /Mauritius structure, these changes may impact you. Please contact us for a free consultation.
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