By Pranav Sayta & Archit Shah
The governments of India and Mauritius have recently signed a protocol amending the Double Taxation Avoidance Agreement (DTAA) with an intention of curbing treaty abuse for tax avoidance.
The protocol intends to include the concept of principal purpose test (PPT), which essentially means that tax benefits under the DTAA will not be available to the taxpayer if it is established that obtaining tax benefit was one of the principal purposes of the transaction or the arrangement.
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Mauritius has been a preferred jurisdiction for investments in India over the last few decades. The DTAA between India and Mauritius was amended in 2016 (2016 protocol) to subject transfer of any investments made by a Mauritius entity into India post-April 1, 2017, to taxation. The treaty, thus, provided for exemption from tax investments made prior to March 31, 2017. Indian domestic tax laws also provide for exemptions from applicability of the Indian general anti-abuse rules (GAAR) for transfers of any investments made prior to April 1, 2017.
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Even after the aforesaid amendment of the DTAA in 2016, considerable investments continue to be made into India from Mauritius. While the sale of shares of an Indian company acquired by a Mauritius entity post-April 1, 2017, does not enjoy treaty exemption in India, the sale of shares of a non-Indian company arguably continues to be exempted from tax, even if such a non-Indian company derives substantial value from India.
To address treaty shopping and to align the global base erosion and profit sharing (BEPS) agenda, the protocol intends to cover the following:
1. Amend the preamble of the DTAA to provide for eliminating double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this convention for the indirect benefit of residents of third jurisdictions).
2. Introduction of Article 27B — Entitlement to Benefits: The new article provides that the benefit under the treaty shall not be granted in respect of any income if it is reasonable to conclude that obtaining the tax benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit unless it is established that granting the benefit was in accordance with the object and purpose of the treaty.
While the domestic GAAR provides that the main purpose of an arrangement should not be to obtain tax benefit, the PPT can be invoked even when one of the principal purposes is to obtain a tax benefit. Further, while domestic GAAR has more checks and balances, including the burden of proof on the revenue authorities and the requirement of an approving panel, the same is not mandated under PPT.
The above amendment seems to be in line with the recent changes in DTAA between India and other countries like Singapore, the Netherlands, etc. and further stresses the need for a commercial rationale for arrangements/ transactions. The amendment is expected to add a further burden on investors that are already prone to litigation on account of beneficial ownership and substance concerning Indian investments.
As per the protocol, both the countries are expected to be issuing notifications in due course and the later of the two notifications shall be considered the date on which the protocol can be considered effective. However, the language seems to create ambiguity on whether the protocol shall impact the income earned prior to it being effective.
While the intent of the protocol seems to suggest that it may apply only prospectively, or only to income earned (for instance, capital gains or dividend income) after the protocol becomes effective, the language, however, is not completely clear and does seem to create room for ambiguity in terms of its date and period of applicability.
Further, as stated above, the 2016 Protocol grandfathered and exempted future capital gains, on the transfer of investments made prior to April 1, 2017. As stated earlier, this is consistent with the grandfathering under the domestic GAAR as well. However, the current protocol seems to create doubt as to whether this grandfathering under the treaty continues to be available after the protocol becomes effective, and as to whether the PPT shall impact capital gains on future transfers even if the investment was made prior to April 1, 2017.
Appropriate clarifications on both the aforesaid aspects (prospective applicability and continuance of grandfathering) would go a long way in providing much-needed clarity and certainty to international investors and help reduce unnecessary controversy and litigation. It would also further enhance India’s attractiveness as a fair and welcoming investment destination.
The amendment to the preamble along with the introduction of Article 27B has further cemented the intention of the two nations to strictly act upon tax avoidance and evasion. This amendment will require investors to substantiate strong and genuine commercial rationale for any transaction or arrangement to obtain the tax benefits as provided under the India-Mauritius DTAA.
Pranav Sayta & Archit Shah, Respectively, international tax and transaction services leader, and tax partner, EY India
By Pranav Sayta & Archit Shah
The governments of India and Mauritius have recently signed a protocol amending the Double Taxation Avoidance Agreement (DTAA) with an intention of curbing treaty abuse for tax avoidance.
The protocol intends to include the concept of principal purpose test (PPT), which essentially means that tax benefits under the DTAA will not be available to the taxpayer if it is established that obtaining tax benefit was one of the principal purposes of the transaction or the arrangement.
Mauritius has been a preferred jurisdiction for investments in India over the last few decades. The DTAA between India and Mauritius was amended in 2016 (2016 protocol) to subject transfer of any investments made by a Mauritius entity into India post-April 1, 2017, to taxation. The treaty, thus, provided for exemption from tax investments made prior to March 31, 2017. Indian domestic tax laws also provide for exemptions from applicability of the Indian general anti-abuse rules (GAAR) for transfers of any investments made prior to April 1, 2017.
Even after the aforesaid amendment of the DTAA in 2016, considerable investments continue to be made into India from Mauritius. While the sale of shares of an Indian company acquired by a Mauritius entity post-April 1, 2017, does not enjoy treaty exemption in India, the sale of shares of a non-Indian company arguably continues to be exempted from tax, even if such a non-Indian company derives substantial value from India.
To address treaty shopping and to align the global base erosion and profit sharing (BEPS) agenda, the protocol intends to cover the following:
1. Amend the preamble of the DTAA to provide for eliminating double taxation without creating opportunities for non-taxation or reduced taxation through evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this convention for the indirect benefit of residents of third jurisdictions).
2. Introduction of Article 27B — Entitlement to Benefits: The new article provides that the benefit under the treaty shall not be granted in respect of any income if it is reasonable to conclude that obtaining the tax benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit unless it is established that granting the benefit was in accordance with the object and purpose of the treaty.
While the domestic GAAR provides that the main purpose of an arrangement should not be to obtain tax benefit, the PPT can be invoked even when one of the principal purposes is to obtain a tax benefit. Further, while domestic GAAR has more checks and balances, including the burden of proof on the revenue authorities and the requirement of an approving panel, the same is not mandated under PPT.
The above amendment seems to be in line with the recent changes in DTAA between India and other countries like Singapore, the Netherlands, etc. and further stresses the need for a commercial rationale for arrangements/ transactions. The amendment is expected to add a further burden on investors that are already prone to litigation on account of beneficial ownership and substance concerning Indian investments.
As per the protocol, both the countries are expected to be issuing notifications in due course and the later of the two notifications shall be considered the date on which the protocol can be considered effective. However, the language seems to create ambiguity on whether the protocol shall impact the income earned prior to it being effective.
While the intent of the protocol seems to suggest that it may apply only prospectively, or only to income earned (for instance, capital gains or dividend income) after the protocol becomes effective, the language, however, is not completely clear and does seem to create room for ambiguity in terms of its date and period of applicability.
Further, as stated above, the 2016 Protocol grandfathered and exempted future capital gains, on the transfer of investments made prior to April 1, 2017. As stated earlier, this is consistent with the grandfathering under the domestic GAAR as well. However, the current protocol seems to create doubt as to whether this grandfathering under the treaty continues to be available after the protocol becomes effective, and as to whether the PPT shall impact capital gains on future transfers even if the investment was made prior to April 1, 2017.
Appropriate clarifications on both the aforesaid aspects (prospective applicability and continuance of grandfathering) would go a long way in providing much-needed clarity and certainty to international investors and help reduce unnecessary controversy and litigation. It would also further enhance India’s attractiveness as a fair and welcoming investment destination.
The amendment to the preamble along with the introduction of Article 27B has further cemented the intention of the two nations to strictly act upon tax avoidance and evasion. This amendment will require investors to substantiate strong and genuine commercial rationale for any transaction or arrangement to obtain the tax benefits as provided under the India-Mauritius DTAA.
Pranav Sayta & Archit Shah, Respectively, international tax and transaction services leader, and tax partner, EY India
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