India and Mauritius to Begin Automatic Exchange of Tax-Related Information

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DELHI – With new data indicating Singapore overtook Mauritius as the leading source of FDI into India last year, Mauritius has announced it will begin participating in an automatic exchange of tax-related information with the Indian government.

In India this week for the swearing-in of Narendra Modi as Prime Minister, Mauritian PM Navin Ramgoolam emphasized his country’s desire to clean up its reputation as a tax haven and money laundering hub.

“We will not allow anybody to abuse or misuse our jurisdiction,” Ramgoolam told reporters after a bilateral visit with Modi on Tuesday.

“There must be a quick resolution to all issues related to the direct tax avoidance agreement between the two countries. We both agreed there must be quick resolution [on the issues] for certainty, clarity and predictability. We expect to sort out the issues related to the DTA very quickly,” he added.

Historically, foreign companies and investors have routed FDI into India through Mauritius-based holding companies to take advantage of the island-nation’s favorable corporate tax regime, and lack of withholding and capital gains taxes.

In recent months, however, concerns over the April 2016 implementation of India’s General Anti-Avoidance Rules (GAAR) and the potential for the incoming BJP-led government to seek renegotiation of several tax treaties have made investors wary of continuing to route FDI through Mauritius.

Mauritius’ role as a tax haven for foreign companies investing in India was first thrust into the spotlight after Vodafone’s purchase of a stake in Indian conglomerate Essar Group (via Vodafone Mauritius) triggered a series of tax disputes and legal battles with the Indian government — many of which remain ongoing.

Since then, Mauritius-routed investment has come under increased scrutiny by the Ministry of Finance and Indian electorate. This has resulted in the Indian government seeking to incorporate a Limitation of Benefit (LoB) clause into its Double Taxation Agreement (DTA) with the country.

LoB clauses limit the ability of third-country residents to obtain DTA benefits by discouraging ‘treaty shopping,’ and grant companies and investors additional legal legitimacy when routing investment through jurisdictions with LoB provisions.

Singapore’s recent incorporation of a LoB provision into is DTA with India is commonly cited as a key reason the city-state became the leading source of FDI into India last year.

While Modi did not explicitly address his intention to change India’s tax treaty with Mauritius, his first cabinet meeting as PM was dominated by the establishment of a special investigative team (SIT) to recover “black money,” or undeclared income, from international tax havens, such as Mauritius.

“It is a matter of great satisfaction for us that in the very first meeting of the cabinet chaired by the honorable PM, we have set up this SIT. This indicates the commitment of the new government to pursue the issue of black money in the right earnest,” telecom and law minister Ravi Prasad said following the cabinet meeting Tuesday.

Congratulating Modi on his recent victory, PM Ramgoolam expressed optimism on future political and economic cooperation with India.

“It was an honor and a privilege to be invited for the swearing in of Prime Minister Narendra Modi. There are strong ties between India and Mauritius [and] we want to strengthen, broaden and deepen our relations. We had fruitful discussions [about] a relation based on shared values and ancestral traditions,” Ramgoolam said.

FDI from Mauritius was down considerably from US$9.5 billion, to only US$4.9 billion in 2013-2014 – the country’s lowest level since 2006-2007. Cumulatively, Mauritius remained the top source of FDI into India between 2000 and 2014, however, accounting for 36 percent of total inflows, followed by Singapore (12 percent) and the United Kingdom (10 percent).

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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