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| Assessing the India-Mauritius DTAA Amendment: Taxation Implications |
The government of Mauritius has recently taken steps to revise the Double Taxation Avoidance Agreement (DTAA) with India, aligning with OECD’s Base Erosion and Profit Shifting (BEPS) initiative. This move aims to address tax avoidance practices and ensure fair taxation for multinational corporations operating between the two nations.
Double Taxation Avoidance Agreement (DTAA):
DTAA is a bilateral treaty signed between countries to prevent double taxation for non-resident individuals or entities. India has established DTAA with 85 countries, facilitating tax clarity and fairness for non-residents, including Indians abroad.
History of India-Mauritius DTAA:
Initially signed in 1983, the India-Mauritius DTAA has significantly spurred foreign investments into India, amounting to over $160 billion. However, recent amendments seek to address loopholes and enhance tax agreement effectiveness.
Primary Objective of Amendment:
The primary focus of the DTAA amendment is to combat tax avoidance tactics, ensuring that the agreement aligns with BEPS MLI standards. This includes the introduction of anti-abuse measures, such as limitation of benefit rules and principal-purpose tests, to deter exploitation of the tax treaty.
Base Erosion and Profit Shifting (BEPS):
BEPS, spearheaded by the OECD, aims to prevent tax evasion by multinational corporations through complex profit-shifting strategies. The adoption of BEPS guidelines seeks to standardize anti-abuse rules across global tax agreements, promoting fair taxation practices.
Impacts on Investors:
The revised India-Mauritius tax agreement, incorporating BEPS principles, may pose challenges for investors seeking to route investments into India solely for tax benefits. Genuine investors will need to demonstrate substantial economic presence beyond tax considerations to benefit from Mauritius tax incentives.
India's Proactive Role:
India has actively contributed to BEPS discussions, recognizing the importance of balancing investment promotion with tax integrity. Strong domestic anti-avoidance laws and mandatory disclosure requirements further strengthen India's stance against tax evasion.
Deterrence of Tax Avoidance Structures:
The introduction of anti-abuse rules, such as limitation of benefits clauses and principal-purpose tests, aims to discourage entities from engaging in tax-driven transactions without genuine commercial substance.
Other Measures to Combat Tax Evasion:
India has implemented stringent domestic laws since 2017 and mandates comprehensive disclosure of investor arrangements to facilitate timely risk assessment by tax authorities. Additionally, amendments linking capital gains taxation to investments in Indian companies have widened the tax net, impacting FDI inflows from Mauritius.