Resolving Tax Treaty dispute between India and Mauritius through OECD BEPS Inclusive Framework Membership

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RESOLVING TAX TREATY DISPUTE BETWEEN INDIA AND

MAURITIUS THROUGH OECD BEPS INCLUSIVE FRAMEWORK

MEMBERSHIP

Thesis University of Amsterdam Srishti Singh Submitted on 27th July 2018 Supervised by: Dr. Joanna C. Wheeler Dr. Bruno Da Silva

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Introduction

In light of the OECD BEPS inclusive framework, which extends the network to developing nations, the present thesis aims to focus on issues relating to the impact of such network on India and Mauritius. The primary area of analysis will be the contentious areas on tax matters between India and Mauritius, and the subsequent role of inclusive framework in resolving the issues. The main research questions concern the role of inclusive framework in resolving the age old tax dispute between India and Mauritius.

India and Mauritius have intensively engaged in massive foreign investments which was frustrated by the favourable capital gains article in the India Mauritius Income tax treaty (1982), under which capital gains accruing to the taxpayer as a result of alienation of shares was taxable only in the residence state of the taxpayer. This resulted in considerable tax evasion opportunities by investors who chose Mauritius as an attractive holding regime to invest in India. On the other hand, the growing momentum of the OECD/G20 project had engaged both nations to put an end to double non-taxation. Riding this wave, India introduced GAAR laws in 2012 in its domestic legislation followed with a May 2016 deal to close DTAA Capital gains loophole by forcing Mauritius to give up 50% of its taxing rights on capital gains for Indian investment from 1 April 2017, rising to 100% from 2019.

Thus as aforesaid mentioned, the turbulent tax dispute history between the two nations concerns treaty shopping. Being a member of inclusive framework it is assumed that both nations will aim to implement the four minimum standards. According to the report action 6 seems to the common action plan which is on priority list for both nations and is also one of the minimum standards. Also Action 6 has implications on resolving the ongoing treaty shopping issues between the two nations. Thus the research project will aim at implementation of action 6 by both nations in their domestic law as well as bilateral tax treaty network. Whereas the discussion on impact inclusive framework cannot go without the recent discussion of Multilateral Instrument (MLI) to modify tax treaties with regard to some changes in the OECD/BEPS initiative. It can have impact on India-Mauritius current situations. It is important to look into Action 6 under MLI where achieving a coherent and workable compromise will certainly be hard to achieve.

The thesis seeks to examine to what extent the inclusive framework will resolve the tax treaty dispute between India and Mauritius. Therefore the main research question concerns the tax treaty dispute resolution through Action 6 implementation by both nations through inclusive framework membership. 

In addition the research explored the primary motivation of India and Mauritius to join Inclusive framework. This could be followed analysis of the steps that both nations have taken in fulfilment of the OECD initiate under their domestic law and tax treaty network. Also the research will compare that with the existing steps that countries took before BEPS initiative to give an analysis of the shift in implementation strategy to counter tax evasion. This could be coupled with the analysis of the diverging positions and policy considerations of both nations during Action 6 implementation process.

Finally the research aims to look into the impact of MLI on bilateral tax treaty between India and Mauritius which aims to establish a common framework for including minimum standards in bilateral tax treaties. It

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could be done by detecting any mismatch and reservations under anti abuse provisions in the tax treaty under MLI which might hinder the realisation of common minimum standard of Action 6. Thus the research aims to conclude on the issues of whether the whole inclusive framework on Action 6 has been successful in reducing tax evasion opportunities between India and Mauritius. This may result in countries focusing on the implementation of the BEPS four minimum standards having to disregard issues of great importance, such as domestic tax collection through favourable investment incentives. This way the research will steer towards the resolving dilemma of developing nations who fear that subscription to inclusive framework will conflict with their flexibility to remain in line with their tax policies and to retain some degree of sovereignty over their tax framework.

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LIST OF ABBREVIATIONS:

BEPS Base Erosion and Profit Shifting

CBDT Central Boards of Direct Taxes

CTA Covered Tax Agreement

DTAA Double taxation avoidance agreement

MLI Multilateral Instrument

TRC Tax residency certificate

FATF Financial Action Task Force

FDI Foreign direct investment

FII Foreign Institutional Investment

GAAR General anti-abuse abuse rule

GBC Global Business Company

IFC International Financial Centre

LOB Limitation of benefit

OECD Organisation for Economic Cooperation and Development

PPT Principal Purpose Test

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Chapter 1:

India & Mauritius: Tracing the origin of tax treaty dispute

1. Introductory Remarks

The present chapter intends to analyse the origin of tax treaty dispute between India and Mauritius in the pre-OECD BEPS era. This period is marked before the initialling of pre-OECD/G20 project (2013) on BEPS. The purpose is give a brief background of the tax planning structures, with focus on round tripping, through Mauritius into India and forms of abuse associated with it. Afterwards the reactionary measures taken by the Indian Government and the Indian Judiciary has been assessed, which has remained uncertain due to non-uniform guidance on this issue.

2. Fiscal relationship between India & Mauritius : A historical overview

The tax treaty between India and Mauritius was signed in 1982 in accordance India’s close cultural links with Mauritius as well as its strategic interests in the Indian Ocean. In this respect, India entered into this tax treaty to benefit from the number of preferential agreements on trade and tariffs that Mauritius had concluded with various African countries, with which the relevant Indian regulations at that time did not permit free trade. But it was not until 1991, when India opened up its economy for foreign investment, which channelled considerable investments through Mauritius. From April 2000 to March 2016, financiers channelled $95.9bn of Indian investment through Mauritius. According to figures from the Mauritius Financial Services Commission, there are now more than 20,000 active global business companies in Mauritius. The treaty with India accounts for almost 75% of the value addition of global business, while Africa generates only 4% of that amount There are both commercial as well as tax-driven reasons for investing into India from 1

Mauritius. Global investors consider Mauritius a stable and established holding company jurisdiction with advanced corporate laws and an efficient legal system. The huge network of bilateral investment protection treaties (BITs) signed by Mauritius is also an important benefit available to Mauritius-based entities. Effective use of BITs is a key risk management strategy, especially when investing into emerging economies like India.

On the other hand the tax treaty has also played an important role in foreign investment in India. Mauritius has therefore emerged as the preferred route for investing into shares of Indian companies due to the capital gains tax shelter, under the tax treaty, on divestment of equity interest in Indian companies by Mauritius offshore entities. Article 13 of the tax treaty, which deals with the taxation rights of the two countries in respect of capital gains, is based on the residence rule of taxation. Article 13(4) provides that gains derived by a resident of a contracting state are taxable only in that state. Thus, according to the article, capital gains

Mauritius: Tax-Haven twilight, The Africa Report(11 Aug. 2016), at http://www.theafricareport.com/Country-Focus/ 1

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earned by a Mauritian resident on the transfer of shares in an Indian company are taxable only in Mauritius. On the other hand, Mauritius does not tax capital gains under its domestic tax laws.

Additionally the of a limitation of benefits provision or any other anti-abuse provision for capital gains comprises one of the attractive tax features of Mauritius.

3. How did the tax treaty dispute started? 3.1. Analysis of Tax Planning Structures

The Indo-Mauritius DTAA has always remained under controversy on account of the provisions of the treaty being misused to evade taxes. As capital gains realized via Mauritius are neither taxed in India nor in Mauritius due to the India–Mauritius Income Tax Treaty (1982), it became a common practice for foreign investors to use the “Mauritius route” to make investments in India. The “Mauritius route” implies round Tripping involves getting the money out of India, say Mauritius, and then come to India like FDI or FII. The capital gains exemption, coupled with favourable investment climate in Mauritius, has facilitated investments from various foreign countries to be routed via it. Under the corporate laws of Mauritius it is very easy to have a company set up in Mauritius and run it from there without the physical presence of its beneficial owners in Mauritius. In 1992 Mauritius passed the Mauritius Offshore Business Activities Act (MOBAA) 1992, which states that offshore companies may invest in any securities listed in the Stock Exchange. The International Companies Act 1994 was also enacted by Mauritius. This resulted in existing companies that held investments in India being able to migrate to Mauritius as International Companies and then convert themselves into Offshore Companies without having any capital gains tax implications in India. In this way, such companies could benefit from the India–Mauritius Income Tax Treaty (1982) as residents of Mauritius and also not pay tax in Mauritius.

An Indian Company, with the idea of tax evasion can also incorporate a company off-shore, say in a tax haven, and then create a Wholly Owned Subsidiary (WOS) in Mauritius and after obtaining a Transfer Residency Certificate (TRC) may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defence. Also indirect transfer of assets is one of the tax planning structures where the shares to be sold are the shares in a company that owns an intermediate company. The intermediate company is the direct owner of the taxable assets in the source state. In these circumstances, the issue is further complicated because the seller and/or the buyer of the shares, together with the company of which the shares are being sold, are most likely not residents of the source state in which the asset is located. In reality, multiple layers of companies can be interposed between the company, which is the direct owner of the taxable asset, in multiple jurisdictions.

It was done through setting up a special purpose vehicle in Mauritius due to the tax advantages which this route promises. Thus Mauritius has been used as a holding company jurisdiction for making investments in India with actual investors being tax residents of countries outside Mauritius. The Indian Finance Ministry

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has estimated the cost of round tripping of FDI to India, in terms of loss of tax revenue, to be around $600 million annually . 2

In case of India, Mauritius accounts for a large share of India’s FDI inflows. While not all the flows from Mauritius constitute round-tripped Indian capital, about 10 percent of FDI inflows over the last decade are attributed to round tripping through Mauritius, a strategy used by Indian companies for tax evasion and, in some cases, money laundering. As a result, the small island was, for many years, the top country of origin for India’s FDI 3

As a result of the round tripping structure, the issue centred around whether the Tax treaty negotiated between India and Mauritius was to confer tax benefit to the actual residents of Mauritius or to entities faking presence in Mauritius through subterfuge.

4. Assessment of the Reactionary Measures 4.1. An overview of the CBDT Circulars

The ‘‘Mauritius route’’ has been the subject of considerable debate and controversy in India. Over the time, the Indian tax authorities have challenged exemption claims by Mauritian-based companies and tried to deny treaty benefits on the basis that the Mauritian company is not a beneficial owner of the shares, but rather a mere conduit. Therefore, any step taken by the domestic tax authorities in relation to the treaty has a noticeable impact on the foreign investors which in turn forces the government to react to such a change. Thus the government used to issue Central Board of Direct Taxes (“CBDT”) Circulars as a knee jerk reaction to allay the concerns of foreign investors who had started withdrawing their investments, due to uncertainty in tax treatment. The following are the key circulars issues in respect of India-Mauritius DTAA:

i. In 1994 , Circular 682 , issued by the Central Board of Direct Taxes (CBDT), clarifies that Art. 13(4) 4

of the India–Mauritius tax treaty deals with the right of taxation of capital gains only to the state in which the person deriving the capital gains is resident. Thus capital gains of a resident of Mauritius derived from the alienation of shares of an Indian company should only be taxable in Mauritius according to Mauritian tax laws and are not subject to tax in India. Relying on this, a large number of foreign institutional investors (FIIs), resident in Mauritius, invested large amounts of capital in shares of Indian companies with the expectation of realizing profits by selling the shares without being subject to tax in India.  

Investing into India: Mauritius and beyond, Withers Worldwide (13 Jul. 2016), at https://www.withersworldwide.com/ 2

en-gb/investing-into-india-mauritius-and-beyond.

World Bank, Policy Research Working Paper, What to Do When Foreign Direct Investment Is Not Direct or Foreign

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(April. 2017), at http://documents.worldbank.org/curated/en/319451493385113949/pdf/WPS8046.pdf.

Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes,Circular : No. 682,

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ii. In 2000, the income tax authorities issued “show cause notices” to certain foreign institutional investors (FIIs) in India requesting them to “show cause” why they should not be taxed on profits and dividends accruing to them in India. The basis on which the show cause notice was issued was that the recipients were mostly “shell companies” incorporated in Mauritius and operating through Mauritius, whose main purpose was the investment of funds in India. It was alleged that these companies were controlled and managed from countries other than India or Mauritius and, as such, were not “residents” of Mauritius and, therefore, could not benefit from the India–Mauritius Income Tax Treaty (1982). The show cause notices resulted in something akin to a panic and the consequent hasty withdrawal of funds by FIIs. The Indian Finance Minister issued a press note on 4 April 2000 clarifying that the views adopted by some income tax officers related to specific assessments and did not represent or reflect the policy of the Indian government with regard to a denial of tax benefits to FIIs. CBDT Circular 789 of 2000 was subsequently issued by the CBDT clarifying that where a 5

certificate of residence has been issued by the Mauritian authorities, such a certificate constitutes sufficient evidence for it to accept Mauritius residency status, as well as beneficial ownership, in applying the India– Mauritius Income Tax Treaty (1982).

iii. Circular 1/2003 of 10 February 2003 (“Circular 1”) provides further clarification regarding the India–6

Mauritius tax treaty and supplements Circulars 682 and 789.Doubts had been raised regarding the effect of Circular 789, particularly as to whether or not Circular 789 also applies to entities that are resident in both India and Mauritius. Circular 1 clarifies that, where an assessee is a resident of both India and Mauritius in accordance with Art. 4(1) of India– Mauritius tax treaty, residency is determined in accordance with Art. 4(3). By this circular, the CBDT has clarified that where a company is resident of both the countries then, for the purpose of taxation, such company shall be deemed to be a resident of the country in the place where effective management is situated. In view of this position, where the tax authority finds that a company is resident of both India and Mauritius, it would be free to proceed to ascertain where the place of effective management of such company is.

4.2. Conflict of Interpretation by Indian Judiciary

The issue of whether the use of Mauritius as an inbound investment vehicle results in tax avoidance and the stand of the Indian tax authorities and Indian courts thereon, has been an ongoing debate in the recent years. Due to the controversial impact of its provisions on liability to be taxed in India, there have been a number of decisions of the Indian Courts concerning the usage of Indo- Mauritius DTAA by assesses. The following section seeks to discuss some of the key rulings of the Indian Courts related to the Indo-Mauritius DTAA and the impact of these rulings on the treaty as such.

Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes,Circular : No. 789,

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(13 Apr. 2000), at https://www.incometaxindia.gov.in/Communications/Circular/910110000000000483.htm.

Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes,Circular : No. 1, (10

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4.2.1. Judicial Rulings prior to Azadi Bachao Andolan case:

As Azadi Bachao case marked a watershed moment in the interpretation of India-Mauritius tax treaty, it is important to look into the judicial interpretations prior to the case.

Non-application of Tax avoidance motive: AIG ruling (224 ITR 473)

The applicants were Investor Company (IC) and Investor Manager (IM), both incorporated in Mauritius. The principal motivator was a US company that actively participated in Asian economies and that had connections with investors globally.

Specific trusts were created in India to receive present and future contributions up to an earmarked amount. IC collected the amounts and gave them to the trustees of the trust for investments according to the advice of IM. Final decisions were to be taken by IM and IM's board meetings were to be held anywhere except in India and the US.

In this ruling the AAR examined the applicant's track record of investing in infrastructure related activity in China and Asia, the long-term nature of the investments, the use of the special purpose vehicle and the choice of location at Mauritius as an acceptable and cost-effective financial centre. Based on the same, the AAR observed that the Treaty benefits could not be denied to an entity investing through Mauritius where it could be substantiated that the transaction was not designed primarily to avoid income tax and where there were other relevant commercial considerations for the location of the entity in Mauritius.

Non-application of tax avoidance motive: DLJMB Mauritius Investment Company ruling [1997 228 ITR 268 AAR]

The applicant was incorporated as a limited liability company in Mauritius. It belonged to a US group of companies known as DLJ. It had obtained a tax residency certificate from the Mauritius authorities. The applicant was a special-purpose vehicle used to pool the resources of the investors and the entities managed by it in order to invest in India.

In this ruling the AAR held that the applicant had given explanations as to why it was necessary to channel all the funds through a single entity and as to the several difficulties faced in organizing a company in India for that purpose. It had also been explained that, while the tax advantage under the Treaty with Mauritius may also have been a relevant factor taken into account by the applicant, there were several other factors that influenced the decision to locate the applicant in Mauritius. The transaction in the present case could not be said to be prima facie designed for the avoidance of tax in India and hence the application was maintainable. Interpretation of “liable to tax” : TVM ruling [1999 237 ITR 230 AAR]

In this case, the applicant company was incorporated in Mauritius. TVM was engaged in the business of development, operation, marketing, sale and distribution of television programmes for a TV channel. The AAR in this ruling examined the issue of taxation of an international business company and found that such company could opt for a tax rate from 0% to 35% (as an offshore company). The AAR observed that if TVM

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asked for zero rate of tax, it would become ineligible for relief under the Treaty. But if it opted to be subject to tax and proof of the same was produced, relief under the Treaty could be granted. Hence the AAR in TVM's case ruled that in order to claim benefits under the treaty, it is important that the Mauritius entity (the investor company) establishes that it is liable to pay income tax in Mauritius. If the Mauritius entity pays zero rate of tax, it shall not be eligible to claim benefit under the Treaty. 7

4.2.2. Union of India & Anr. v. Azadi Bachao Andolan & Anr.(263 ITR 706)

This decision of the Supreme Court is indeed a landmark and has covered many key areas with regard to treaty interpretation, treaty shopping, definition of the term “resident” under the treaties, etc. The decision also dwells on the legality of tax planning. It would be of use to highlight a few key areas covered by this landmark decision.

The Indian Supreme Court upheld the validity of Circular 789 in the 2003 case of Union of India v. Azadi

Bachao Andolan (263 ITR 706) and confirmed that residents of Mauritius are not liable to tax on capital

gains derived in India.

The India-Mauritius tax treaty was unsuccessfully challenged in this case. Here the validity of the circular No. 789 dated 13 April 2000 issued by the Central Board of Direct Taxes (CBDT) was upheld by the Court reversing the decision of the Delhi High Court in Shri Shiv Kant Jha v. Union of India & Ors. which had quashed the aforementioned circular as ultra vires.

i. Sufficiency of Tax Residency Certificate (TRC): As a result, the Certificate of Residence issued by the Mauritian Authorities or Tax Residency Certificate (TRC) was held to constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAA in case of dividend income and capital gains arising to Mauritian companies. The state in which the place of effective management of a company is located is the state of residence. The Indian Supreme Court stated that the test of 'place of effective management' is only applicable, if the person (company) is a resident both of India and Mauritius.

iii. Whether the tax treaty between India and Mauritius is illegal and ultra vires the powers of the government?

Merely because the Mauritius–India tax treaty is susceptible to “treaty shopping”, does not mean that the treaty is ultra vires. The Supreme Court laid down the principle that the validity and vires of delegated legislation (tax treaties come within the purview of this term) have to be tested on the anvil of the law making power. On the contrary, if the authority is clothed with the requisite power, then, irrespective of whether such legislation fails in its object or not, the vires of the legislation is not to be questioned.

Sec. 90 of the ITA empowers the Indian central government to enter into agreements with the government of any other state for the purposes listed in clauses (a) to (d) of Subsec. (1).Thus the tax treaty was entered into

Anish Thacker, India–Mauritius Tax Treaty: The March of the Law, 10 Asia-Pac. Tax Bull. 1 (2004), Journals IBFD.

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by the central government within the parameters of the legislative provision giving it this power and secondly, because the purpose of the tax treaty is to effectuate the prescribed objectives namely to grant relief in respect of which income tax has been paid in India and a foreign country and avoidance of double taxation of income under the Act and under the foreign country’s tax laws.

The Supreme Court, therefore, held that it cannot accept the argument that the India–Mauritius tax treaty is ultra vires with regard to the powers of the CBDT under Sec. 90 of the ITA on account of its susceptibility to treaty shopping by residents of third states.

v. Legality of treaty shopping

There is nothing such as equity in a fiscal statute. There is no question of applying a fiscal statute by intention if the expressed words do not apply. If no limitation of benefits is embodied in the treaty, it has to be assumed that this was the intention of the two contracting states; otherwise, they would have incorporated a limitation of benefits clause into the treaty.

The Indian Supreme Court expressed that ' ...the maxim 'Judicis est jus dicere, non dare' pithily expounds the duty of the Court. It is to decide what the law is, and apply it; not to make it.’ Thus “treaty shopping” should ideally be looked at by the government and not by the courts as it involves various political considerations. Many developed countries allow for the use of their treaty networks to attract foreign enterprises and offshore activities. In developing countries, treaty shopping is often regarded as a tax incentive to attract scarce foreign capital or technology. Such countries can thereby grant tax concessions exclusively to foreign investors over and above the domestic tax law provisions. Developing countries need foreign investment, and treaty shopping opportunities may be an additional factor in attracting such investment. India has benefited from the investment of significant foreign funds via the “Mauritius conduit”.

4.2.3. Judicial Decisions that applied the ratio of Azadi Bachao case:

Legality of treaty shopping: Saraswati Holding Corpn Inc (2007) 111 TTJ 0334

On appeal to the Delhi Income Tax Appellate Tribunal (“the Tribunal”), the Tribunal relied on the decision of the Supreme Court in Azadi Bachao, which upheld Circular 789, and found that, inter alia, FIIs, etc. that are resident in Mauritius would not be taxable in India on income from capital gains on the sale of shares. It also noted that the India–Mauritius tax treaty was valid in law and an attempt by a resident of a third party to take advantage of existing provisions of the tax treaty would not be illegal. Accordingly, following the decision of the Supreme Court in Azadi Bachao, Circular 789 was binding on the tax authorities and, therefore, applied in the case in question. As such, the capital gains derived by the assessee were not taxable in India.

Non-application of tax-avoidance motive & piercing of Corporate veil:

In the case of E*Trade Mauritius Limited (324 ITR 1), the AAR had received the funds for the sale shares from Converging Arrows by way of a capital contribution and loans. The shares were registered in the name of E*Trade and IL&FS had recognized E*Trade as the shareholder; E*Trade executed the share purchase agreement in respect of the sale shares held in IL&FS and the legal formalities for transfer of the sale shares

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had been carried out via E*Trade; and the consideration for the sale shares was credited to E*Trade’s accounts, as was borne out by the entries in the audited accounts.

Based on these facts, the AAR held that:

E*Trade is the legal owner of the sale shares and it would ex facie be difficult to find that the capital gain did not arise in the hands of E*Trade. The binding decision of the Supreme Court in Azadi Bachao appears to support this conclusion. In that case, it was held that a tax avoidance motive was not relevant as long as an action was carried out within the framework of the law, that treaty shopping via conduit companies is not against the law and that piercing the “corporate veil” is not permissible so as to deny the benefits of a tax treaty. Under the present state of law – i.e. the treaty provision, the Circulars issued by the CBDT, the law set out in Azadi Bachao and the legal incidents of corporate personality – an attempt to distinguish between legal and beneficial ownership could not be sustained on any reasonable basis. 8 8

The AAR determined, on the basis of the facts stated and clarified by E*Trade, that by virtue of Art. 13(4) of the India–Mauritius tax treaty, capital gains tax was not chargeable in India on the sale of shares

4.2.4. Judicial Decisions that deviated from Azadi Bachao Andolan case:

However, the ratio in the Azadi Bachao Andolan case has not been consistently followed in subsequent cases and It has been repeatedly contended by the revenue authorities in India that the Mauritian Companies are shell companies which are incorporated in Mauritius and operating through Mauritius with the sole intention of availing the benefits of the Indo – Mauritius DTAA, and the application of the DTAA should be disallowed in such cases as these companies are controlled and managed from countries other than India or Mauritius.

Non-sufficiency of tax residency certificate:

In the case of Dynamic India Fund, the Authority for Advanced Rulings (AAR) considered the contentions 9

of the revenue for the non applicability of the DTAA benefits, and it was observed that the facts canvassed by the revenue were not sufficient to allow its contention, indicating that the Authority could consider the facts of each case and is not bound to presume that the presence of a TRC is sufficient to make treaty benefits applicable in India. The objections of the Revenue were rejected not by a straight forward reference to the TRC, but because ‘there is no adequate factual material to support this contention (that control vests in a

non-Mauritius jurisdiction)’.

While the ruling of the Indian Authority for Advance Rulings in E*Trade Mauritius Limited (324 ITR 1) held that furnishing a certificate of tax residence is not sufficient; it is necessary to have certified documentary evidence to support a claim that the place of effective management of an entity is in Mauritius.

P.R. Kumar Jhabakh, Has the AAR Put the Mauritius Saga to Rest?, 64 Bull. Intl. Taxn. 12 (2010), Journals IBFD.

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TS-513-AAR-2012 9

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A TRC issued by the Mauritian authorities is, at least, presumptive evidence of the beneficial ownership of the sale shares and the relevant gains arising there from, even if it was not a conclusive presumption.

The Delhi Income Tax Appellate Tax Tribunal (ITAT) ruled on March 26, 2010, that additional documents may be required to substantiate a claim for an exemption under the India- Mauritius treaty (SMR Investments Ltd.). The ITAT held that furnishing a certificate of tax residence is not sufficient; it is necessary to have certified documentary evidence to support a claim that the place of effective management of an entity is in Mauritius.

An examination of the above mentioned decisions indicates that the sufficiency of TRC has always been challenged before the Judiciary for availing of benefits under the DTAA. The non-consistent approach of the Judiciary in this respect created uncertainty for investors who relied on TRC for availing DTAA benefits. 4.3. Implication of Vodafone Case on India-Mauritius tax treaty:

In the Vodafone tax case [S.L.P. (C) No. 26529 of 2010] As the majority of share capital of the Indian operating company HEL , which was under the direct or indirect control of Hutchison Group (Hong Kong) , was held by various Mauritius/Indian companies, which in turn were held by Mauritius/Cayman companies, the SC analysed the India- Mauritus tax treaty.

On the controversy surrounding the India-Mauritius tax treaty, the SC held that in light of i) the fact that the treaty does not have limitation on benefit (LOB) clause, ii) presence of Circular No. 789 issued by the Central Board of Direct Taxes, and iii) existence of the tax residency certificate (TRC) issued by the Mauritian authorities, the Revenue authority (RA) cannot at the time of sale, deny treaty benefits on the reasoning that the FDI was only ‘routed’ through a Mauritian company.

The SC also observed, however, that it would not preclude the RA from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance.

5. Conclusion:

The tax treaty dispute in the pre-BEPS world used to get resolved through unique way by the government and the judiciary.

The Tax authorities always tried to deny treaty benefits on capital gains to the investors investing via Mauritius which led to a series of CBDT circulars and judicial pronouncements to clarify the position. Though the Circulars issued by CBDT and the law laid down by Supreme Court in the Azadi Bachao case helped to build confidence amongst the investors in terms of legality of treaty shopping and tax residency certificate sufficiency, it never settled the dust. The subsequent decisions expressed doubts regarding the inability of the Indian tax authorities to levy capital gains tax on the transfer of shares in an Indian company and the relevant circulars to the effect that these articles should be amended to respond to the current changing fiscal scenario. Based on the judicial decisions, it is also quite clear that Treaty benefits are not

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denied if the tax authorities are convinced that an entity is not established in the tax-friendly jurisdiction for Treaty shopping but for justifiable business objectives.

Looking at the chequered history of litigation on the issue the investors had to take extra steps to ensure commercial substance in the Mauritius companies that invest into India.

In conclusion, in the pre-BEPS era the dust never settled on the issue, and the Supreme Court had clearly disapproved of the taint that the tax authorities were imagining on all Mauritius-based investments into India. Therefore, as a result of these developments investors remained cautious of using the Mauritius route when investing in India.This is likely to go a long way in mitigating the hardships likely to be faced with the Indian income tax authorities, which will be explored in the subsequent chapters.

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Chapter II :

Countering Tax treaty abuse in Mauritius

1. The OECD BEPS Inclusive Framework

In their meeting in Antalya in November 2015, the G-20 leaders called upon the OECD to develop an Inclusive Framework, with the involvement of interested non G-20 countries and jurisdictions, including developing economies, which commit to implementing the BEPS project. This way the developing countries can participate on equal footing in tackling BEPS issues. The BEPS Inclusive Framework contains the BEPS four minimum standards, which countries must implement.The BEPS four minimum standards are to be subject to a peer review and monitoring process in all of the countries participating in the BEPS Inclusive Framework under the auspices of the OECD.

This means that the countries participating in the BEPS Inclusive Framework have to implement the BEPS four minimum standards by a fixed timeline and, if these minimum standards have not been implemented, the OECD will give a negative review, which could have consequences for that country.

During the first meeting on the Inclusive Framework on 30 June 2016, 82 jurisdictions, including G-20 nations, made a commitment to implement the BEPS package. India and Mauritius are members of the Inclusive Framework and , thus, have committed themselves to introduce changes in their domestic law and the tax treaties for compliance with the OECD BEPS minimum standard. The present thesis is concerned with the limitations that both countries may encounter during implementation of the OECD BEPS minimum standards. Given the chequered treaty shopping dispute between them in relation to capital gains, it is important to analyse their implementation of OECD BEPS Action 6. Action 6 is one of the minimum standards which provides for solutions to tackle treaty shopping situation . 10

The minimum standard on treaty-shopping included in the Report on Action 6 is constituted by

the provisions that jurisdictions that are members of the Inclusive Framework on BEPS have committed to include in their tax treaties. Concretely, as indicated in paragraphs 22 and 23 of the Report on Action 6, compliance with the minimum standard on treaty-shopping will therefore require these jurisdictions to include in their tax treaties:

A. An express statement that the common intention of the parties to the treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements. This should generally be done by including the following in the preamble of the relevant tax treaties:

Intending to conclude a Convention for the elimination of double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or

OECD, Inclusive Framework on BEPS Progress report (OECD 2016-17), at

http://www.oecd.org/tax/beps/inclusive-10

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avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this Convention for the indirect benefit of residents of third States)

B. Treaty provisions that will implement that common intention and that will take one of the following three forms:

i) the Principal Purposes Test (PPT) rule included in paragraph 26 of the Report together with either the simplified or the detailed version of the Limitation-on-benefits (LOB) rule that appears in paragraph 25 of the Report, as subsequently modified, or

ii) the Principal Purposes Test (PPT) rule included in paragraph 26 of the Report, or

iii) the detailed version of the Limitation-on-benefits (LOB) rule that appears in paragraph 25 of the Report, as subsequently modified, together with a mechanism (such as a treaty rule that might take the form of a PPT rule restricted to conduit arrangements, or domestic anti-abuse rules or judicial doctrines that would achieve a similar result) that would deal with conduit arrangements not already dealt with in tax treaties.

Consequently, Action 6, in addition to the minimum standard, recommends the following treaty-based SAARs to deal with other situations: One of which concerns article 13(4) of the OECD Model. Article 11

13(4) deals with gains from transfer of shares deriving more than 50% of their value from immovable property in other country.

2. Mauritius and the OECD BEPS Inclusive Framework: Assessing the Impact over the years

2.1. Mauritius : From Offshore Centre towards a Mature Financial Centre 2.1.1. How Mauritius attracts Investors: a mix of tax and non-tax reasons

Mauritius has always remained a pioneer in creating investor friendly jurisdiction , in terms of good governance, democracy, ease of doing business and the protection of investors. In this context the main drivers that attracts investors in Mauritius are as follows:

• A vast network of treaties with countries. • No capital gains tax.

• Low corporate income tax rate at 15%, along with foreign tax credits.

• Mauritius has concluded 28 IPPAs, also known in other countries as bilateral investment treaties providing invaluable protection to foreign investors;

• it forms part of a number of regional organisations such as SADC and COMESA, which facilitates trade and investment among a number of African countries;

• it possesses a highly skilled, educated and bilingual (English and French) workforce; • it has a sophisticated banking system with a number of international banks established there;

• the framework for Global business companies for investment is robust, transparent and well regulated. • Mauritius is well known for its political and economic stability, sound legal and regulatory system and

state-of-the-art infrastructure . 12

OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances – Action 6: 2015 Final Report pp.

11

69-78, sec. A. (OECD 2015), International Organizations’ Documentation IBFD.

IFA Cahiers 2017 - Volume 102A: Assessing BEPS: origins, standards, and responses - Mauritius, p.515-520.

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2.2. Brief Overview of the major investor attracting sector: The Financial Sector

2.2.1. Development of Financial Industry

The predominant investor attraction sector in Mauritius is the Financial sector. The financial services sector contributes to some 12% in the gross domestic product of Mauritius . 13

The emergence of Mauritius as a hub for holding and finance companies can be attributed to the successful 14

growth of its Financial sector. In the early 1990s, the government sought to make the financial services sector as one of the fourth pillars of the Mauritian economy. This led to the launch of the offshore sector in 1992, with the enactment of The Mauritius Offshore Business Activities Act, a comprehensive legislative framework for non-banking offshore business activities. In the same year, the Financial Services Regulatory Authority was set up and played a crucial role in establishing and developing the offshore sector . 15

Thus, after more than two decades of servicing international investors and institutional investors, Mauritius has become a mature IFC. As a mature IFC Mauritius has earned the reputation of attracting investors to invest in different jurisdictions by facilitating setting up of investment vehicles, which can avail a host of tax advantages.

Overview of GBC1 and GBC2:

Global business companies(“GBCs”) are the major investment vehicle in the financial industry which are typically set up for the purpose of offshore holding, treasuring companies or as service providers. These GBCs, with favourable tax incentives, have become one of the strongest pillars of the Mauritian economy in terms of attracting investors. The latest available balance sheet data for GBCs, which were created in the 1990s, show that at the end of 2015 they had assets of US$594 billion—or roughly 50 times domestic GDP . 16

In terms of the Financial Services Act 2007 a company can apply for a GBC1 or GBC2 license . The tax 17

benefits that these GBC1 and GBC 2 companies usually avail are as follows:

GBC 1: Companies holding a Category 1 Global Business Licence are tax resident, liable to 15% income tax but may avail a deemed tax credit on foreign source income.

FSC Mauritius 2018, Source: Statistics Mauritius - National Accounts - June 2018 Issue, https://

13

www.fscmauritius.org/en/statistics/contribution-to-gdp

Holding and finance companies are established to provide various business and tax benefits in the intermediary state

14

and in the ultimate shareholder state.

FSC Mauritius , Annual report (2002), p.7, at https://www.fscmauritius.org/media/1313/annual-report-2002.pdf

15

IMF, MAURITIUS, SELECTED ISSUES ,IMPLICATIONS OF INTERNATIONAL TAX TRANSPARENCY AND

ANTI-16

TAX AVOIDANCE INITIATIVES FOR MAURITIUS (November 6 2017) , p.4

Mauritius - Key Features, Country Key Features IBFD (accessed 26 May 2018).

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Thus Companies holding Category 1 Global Business License enjoys a deemed taxation at 80% of the normal rate of 15%, i.e. 3%. GBC1 companies have access to Mauritius' extensive double tax agreement network and can avail the benefits from such DTAAs.

GBC 2: A Company holding a Category 2 Global Business Licence is considered as non-resident for treaty purposes and is thus not covered by any Double Taxation Agreement concluded by Mauritius, except for exchange of information purposes, if the agreement so provides. Thus such companies cannot avail tax benefits from DTAAs.

The host of tax advantages has opened a series of tax planning opportunities. For example, such offshore holding companies are often established in Mauritius, which acted as a conduit of the group to obtain tax advantages that would otherwise not be available to the group.

3. Mauritius and the OECD BEPS Inclusive Framework 3.1. Key Motivations:

A. Negative Perception of the Jurisdiction as an empty shell:

As a preferred choice for inbound and outbound investment for Asia and Africa, Mauritius is at times perceived by the international community as a jurisdiction where profits are being shifted away from the jurisdictions where the value is created. An urgency has also been felt by the authorities to maintain a reputation for transparency following publication of the Paradise Papers, which put the spotlight on a number of tax-friendly jurisdictions . 18

B. Positive rating as a transparent Jurisdiction:

After assessing the legal and regulatory framework for information exchange and actual practices, the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes, in August 2017, rated Mauritius as a compliant jurisdiction . The recent ‘compliant’ rating will help the jurisdiction in its future 19

assessments of regimes such as holding companies where transparency and effective exchange of information on beneficial ownership. Thus Mauritius was further motivated to join Inclusive Framework in order to enhance its reputation as a transparent jurisdiction.

Thus, as a member of the Inclusive Framework, Mauritius has been supporting the BEPS initiative. Mauritius has committed to implementing these actions, and has also participated in technical working groups, for example, on the Limitation-on-Benefits (LOB) rule under BEPS Action 6 . 20

Making the connections - Mauritius: Pivot between Asia and Africa, Eversheds Sutherland (24 Nov. 2017), https:// 18

www.eversheds-sutherland.com/global/en/what/publications/shownews.page?News=en/uk/mauritius-pivot-between-asia-africa

OECD, Global Forum releases second round of compliance ratings on tax transparency for 10 jurisdictions, (21 Aug. 19

2017), http://www.oecd.org/countries/mauritius/global-forum-releases-second-round-of-compliance-ratings-on-tax-transparency-for-10-jurisdictions.htm

Supra note 15, p.7.

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C. Relevance of Substance requirements:

The reputation of Mauritius as favourable jurisdictions for locating a holding company has turned from boon to bane in the aftermath of OECD BEPS Project. Mauritius IFC model acting as a conduit would not be a sustainable business model in the aftermath of OECD BEPS. OECD BEPS requires commercial substance which needs Mauritius to refine its IFC model through more economic substance.

In particularly Action 6 is the most relevant to Mauritius. The regular use of Mauritius as a platform for inbound and outbound investment in India and Africa has raised treaty shopping concerns, as evidenced in first chapter, which is in fact depriving a number of developing countries of tax revenues.

i. Meeting LOB/PPT Tests under Action 6: In this context, the use of holding and finance companies has been perceived as a problem in the Action 6 report. According to Action 6, holding and finance companies may fall into the ambit of the LOB, PPT and other anti-avoidance measures if they lack substance. A bona fide holding or a finance company may be incorporated in a tax-favourable jurisdiction and does not constitute abuse as long as it has sufficient substance and operations. [52] However, with regard to treaty shopping, as perceived by Action 6, holding companies lack substance if their main motive is only to obtain treaty benefits.

It is now essential for the holding and finance companies to reflect business purposes, economic substance and non-tax attributes so as to not be regarded as abusive. Pure holding structures are no longer a viable option.

ii. Meeting the requirements under the LOB clause

Impact of Anti-Avoidance Measures on Holding and Finance Structures

The Action 6 final report contains draft LOB clauses, in a simplified and detailed version.GBCs which are principally investment holding companies are unlikely to meet the objective requirements of the proposed LOB clause. The concept behind an LOB clause is to deny treaty benefits for people who are not “qualified persons”. In respect of satisfying the qualified persons test the companies would need to have a minimum level of activity in that jurisdiction. The draft LOB clause also allows treaty benefits to be granted to persons who are not qualified persons but who are engaged in the “active conduct of a business in its state of residence and the income is derived in connection with, or is incidental to, that business”. The active benefit test is an obstacle to pure holding and finance companies who do not engage in any business activities, as their only purpose is to hold investments in other operating companies.

On the other hand, finance companies can qualify if the benefit is extended to the business of making and managing businesses on their own account. The company must, therefore, undertake substantial business operations and have sufficient economic substance. An LOB clause supplemented by a conduit arrangement rule is satisfied, if the income was passed on and the intention could not be attributed only to tax reasons, but also business reasons, a genuine holding company or finance company could fall outside the scope of the conduit arrangements.

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iii. Meeting the requirements under PPT clause

The PPT approach looks at the purpose behind a particular structure or arrangement. While the test looks at the factual set of circumstances in order to assess a structure objectively, it attempts to identify the purpose of a transaction or structure. In other words, the question to be answered is whether tax is the main driver for a structure or transaction.

Thus where an arrangement is linked to a core commercial activity and its form is therefore not driven mainly by obtaining a tax benefit, then the PPT test is likely to be passed. In this context, a company exercising real economic functions, using real assets and assuming real risks, and with real personnel in the group, the PPT test is likely to be passed.

Thus the GBC sector requires creation of real substance to be eligible as resident with real control and management from Mauritius. In wake of the increased scrutiny by international organisations and uncertainty for GBC Sector, Mauritius will also have to devise a strategy for the GBC sector beyond tax reforms. The measure must ensure that the GBC has enhanced substance and reporting requirements, including more information on ultimate beneficial owners without hindering thE competitiveness of the Mauritius IFC. 4. Creating Substance: Pre OECD BEPS Era

4.1. Fulfilment of General Substance requirements :

Mauritius has been proactive in enhancing its jurisdiction with substance prior to 2013 OECD BEPS Project through the following generic substance requirements.

A. Framework for Prevention of Money Laundering and Terrorist Financing: Mauritius has put in place an Anti-Money Laundering/Combating Financial Terrorism (AML/CFT) framework that meets international standards contained in the FATF 40 + 9 Recommendations . 21

C. OECD Peer Review Process: Mauritius appeared on the initial list of the OECD issued in April 2009 among those jurisdictions having substantially implemented the internationally agreed tax standards. In 2010 Mauritius voluntarily underwent both phases 1 and 2 reviews of the OECD. After assessing the legal and regulatory framework for information exchange and actual practices, the OECD Global Forum, in August 2017, finally rated Mauritius as a compliant jurisdiction. This shows that Mauritius has demonstrated the availability and accessibility of both legal and beneficial ownership information, as well as accounting and bank information in practice. Peers continue to be satisfied with the quality and timeliness of Mauritius’ information exchanges . 22

FSC Mauritius, FSC Code on the Prevention of Money Laundering and Terrorist Financing, https://

21

www.fscmauritius.org/en/being-supervised/amlcft/fsc-code

OECD (2017), Global Forum on Transparency and Exchange of Information for Tax Purposes: Mauritius 2017

22

(Second Round): Peer Review Report on the Exchange of Information on Request, Global Forum on Transparency and Exchange of Information for Tax Purposes, OECD Publishing, Paris, p.9-11,

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4.2. Fulfilment of Specific Substance requirements: 4.2.1. Policy Aim:

A. Facing the Financial Crisis:

Even before the advent of OECD BEPS Project, the role of the Financial Centres were challenged and revisited with the global economic slowdown in 2009. Following the crisis, there was a mounting pressure on International Financial Centres (IFC’s) with respect to transparency and exchange of information . 23

Following the G20 Meeting held in April 2009 in London, the Organisation for Economic Co-operation and Development (OECD) published a list of “cooperative jurisdictions”. With the aim to ensure the soundness and transparency of IFC, Mauritius adopted measures to extend full cooperation to overseas regulators and judicial authorities requesting information on Mauritian entities.

The inclusion of Mauritius on the OECD’s ‘white list’ of jurisdictions in 2009 which have substantially implemented internationally agreed standards, came as a recognition of the constant efforts of the FSC to ensure substance and sound repute . 24

B. Measures to preserve the competitiveness of IFC: On the other hand, the Indian Supreme Court Ruling in Azadi Bachao Case, upholding the validity of the Tax Residence Certificate issued by the Mauritian Authorities, put to rest apprehensions in relation to slowing of the flow of financial business directed to the Indian market. Thus the adoption of measures to create substance was in response to the preservation of the image of Mauritius as a financial centre of good standing, in the wake of uncertainty of its competitiveness due to court rulings in India . 25

Mauritius has remained proactive in fulfilling the below described specific substance requirements for the Financial industry.

4.2.2 Specific Substance Requirements:

i. Compliance with International standards of Financial sector regulations:

In the final report the IMF/WB FSAP team acknowledged that several measures had been taken by Mauritius since the 2002/2003 FSAP in policy making and legislation and these have supported the further development of the financial sector.

ii. Introduction of GBCs to streamline licensing applications : In order to create substance and eliminate all those who are not active in the financial industry, section 19 of the Financial Services Development Act 2001 introduced the concept of “Qualified Global Business". This led to the introduction of the concept of Category 1 Global Business Companies (GBC1) and Category 2 Global Business Companies (GBC2)

FSC Mauritius, Annual report (2010) at https://www.fscmauritius.org/media/1314/annual2010.pdf

23

FSC Mauritius, Annual report (2009),p.8, at https://www.fscmauritius.org/media/1321/711_annual_report2009.pdf

24

FSC Mauritius, Annual report (2002), p.45-47, https://www.fscmauritius.org/media/1313/annual-report-2002.pdf

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respectively. According to section 19 of the Financial Services Development Act, Qualified Global Business is "…any business or other activity – specified in the Second Schedule and which is carried on from within Mauritius with persons all of whom are resident outside Mauritius and which is conducted in a currency other than the Mauritius currency…" . 26

iii. Commercial motive test for setting up GBC companies:

A shift from “fit and proper" test in all licensing qualification processes for GBCs in 2002 towards the 27

Ultimate Purpose Test for GBC Licensing in 2007. The shift in the test could be attributed to the enhance 28 the commercial motive of setting up GBCs which might be otherwise inspired solely on tax motive. Under the Ultimate purpose test it is to be seen that whether the ultimate purpose of the company is an investment or providing a service outside Mauritius. Such measures introduced by the FSA aimed at encouraging global business companies to have more substance in Mauritius.

iv. Stringent conditions for the issuance of a tax residence certificate (TRC). Since October 2006, TRCs are issued to GBCs 1 by the Mauritius Revenue Authority (MRA) upon the recommendation of the FSC. To be eligible for a TRC, a GBC 1 is required to prove that the company is controlled and managed from Mauritius . Following are the tests that was required to be fulfilled: 29

◆ Maintain at least two resident directors in Mauritius; ◆ Chair and initiate Board Meetings from within Mauritius;

◆ Maintain an account with a local bank through which its funds will flow;

◆ Maintain its registered office in Mauritius where all statutory records will also be kept; and

◆ Have a local qualified company secretary. Under the condition attached to a GBC 1 licence, the Management Company of the GBC 1 acts as qualified company secretary.

Such TRCs are to be renewed each year and issued pursuant to a specified DTAA.

v. Substance creation for Management companies:Management companies are licensed by the FSC to set up, administer and manage the affairs of GBC’s . They are to ensure that their clients are fit and proper to 30

conduct business in Mauritius. In this respect, the licensing regime applicable to Management Companies (in their capacity of service provider) is more stringent than the regime applicable to client companies (GBCs)

Supra note 22, p.47

26

FSC Mauritius, Annual report (2003),p.46, https://www.fscmauritius.org/media/1324/2003annualreport_part1.pdf

27

FSC Mauritius, Annual report (2008) part 1, p.11, https://www.fscmauritius.org/media/

28

1311/2008annualreport_part1.pdf

FSC Mauritius, Annual report (2007), p.25, https://www.fscmauritius.org/media/1322/713_annual_report2007.pdf

29

All applications for a GB Licence need to be submitted through a MC as per section 72(1)(a) of the FSA 2007. MCs

30

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set up for investment purposes. MCs are required to maintain and keep records of the identity of their 31

customers and to keep full and true written record of every transaction in relation to their business activities. For this purpose, On 13 September 2006, additional changes were brought to the Licensing Conditions applicable to Management Licences whereby the Management Companies need the prior approval of the FSC for the appointment of any director/officer (as defined in the Companies Act 2001) and for the issue/ transfer of any shares or any change liable to affect its legal or beneficial interest . 32

vi. Enactment of The Financial Services Act as a single regulatory body:The Financial Services Act 2007 (‘the FSA’) came into operation on 28 September 2007 , repealing the Financial Services Development Act 33

2001 and the Financial Services Development (Amendment) Act 2005. The FSA streamlines and consolidates the regulatory framework for Financial Institutions and Financial Service Providers other than Banks. The Act has introduced new provisions in line with international best practices on fit and proper requirements, appointment of controllers, officers and beneficial owners.

The new legislation has also strengthened the powers of the FSC to ensure an effective supervision of its licensees, which includes regulating the beneficial ownership requirements under the FSA Act. 34

viii. Exchange of Information in relation to Global Business Company: Section 83 of the FSA was amended such that the FSC may, pursuant to an agreement or arrangement for the exchange of information and under condition of confidentiality, exchange information with a public sector agency in relation to a Global Business Company or in relation to a financial institution carrying out any services or business activities under any of the relevant Acts ; 35

ix. Substance criteria for GBC companies : For substance creation , GBC’s should meet the following criteria as laid down under section 71(4) of the FSA 2007. The FSC ensures that the GBC’s:

• have at least 2 directors, resident in Mauritius, of sufficient calibre to exercise independence of mind and judgement;

• maintain at all times their principal bank account in Mauritius;

FSC Mauritius, Global Business,

https://www.fscmauritius.org/en/being-licensed/applying-for-a-licence/global-31

business

FSC Mauritius, FSC Annual report (2007) p.24, https://www.fscmauritius.org/media/

32

1322/713_annual_report2007.pdf

FSC Mauritius, FSC Annual report (2008) part 1, p.20, https://www.fscmauritius.org/media/

33

1311/2008annualreport_part1.pdf

Under the Financial Services Act, The Financial Services (Approval of controllers and beneficial owners) Rules The

34

objective is to define the application of Section 23 of the Financial Services Act which relates to the requirement for FSC’s approval before a change or transfer of shares/beneficial interest in a licensee is considered effective.

Via customer due diligence documentation, The Financial Services Commission (FSC) has access to information on beneficial ownership prior to the incorporation of Category 1 Global Business Companies (GBC1’s) – additional information can also be obtained from Management Companies (MCs) at any time under powers provided by section 42 of Financial Services Act 2007 (FSA 2007).

Highlights of Some of the Amendments Brought to the Financial Services Act,FSC Newsletter (Jan 2014), at http:// 35

www.globalfinance.mu/index.php?option=com_content&view=article&id=252:highlights-of-some-of-the-amendments-

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• keep and maintain, at all times, their accounting records at their registered office in Mauritius;

• prepare or propose to prepare their statutory financial statements and cause or propose to have such financial statements to be audited in Mauritius;

• provide for meetings of directors to include as least 2 directors from Mauritius.

• Section 71(6) of the FSA was amended to allow Category 1 Global Business Companies (‘GBC1’s’) to conduct business both inside and outside Mauritius. The aim of this amendment is to strengthen the global business sector and domestic economy and to reinforce the position of Mauritius as a jurisdiction of choice and substance. Moreover, this framework will encourage Regional Headquarters’ incorporation and activities in Mauritius;

5. Tax treaty network: Pre OECD BEPS

Mauritius has focused the development of its Global Business centre on the use of its growing network of double taxation treaties for structuring investment abroad. Prior to commencement of OECD BEPS Project, Mauritius had ratified over thirty treaties and was party to a series of treaties under negotiation.

A. Scope of Double Taxation avoidance Treaties

Majority of Mauritian DTAAs concluded before 2013 had no anti-abuse clause modelled on the lines of Art. 13(4) of the OECD BEPS.Article 13(4) presents BEPS concerns especially in treaties with low tax jurisdictions like Mauritius which does not impose CGT on its companies, with the result that companies investing through Mauritius completely avoid paying CGT and are able to earn large profits from their investments. This can constitute a revenue loss of many millions of dollars’ revenue forgone on a single transaction.

On the other majority of the DTTs that are in force with Mauritius restrict taxing rights of capital gains on sale of shares to the country of residence of the seller of those shares, which will be Mauritius in most investment cases.

Few tax treaties included anti-abuse clause under art. 13(4) providing for land rich company provision This included DTTs with Zimbabwe(1992), Sri Lanka(1996), Lesotho(1997), Germany(2011) and Egypt (2012). PPT rule under Special provisions article is found in only one treaty with Germany (2011). The LOB rule can be found in only one treaty with Sweden (2011). Only the renegotiated treaty with China (2006) had both anti-abuse clauses under art.13(4) of the OECD Model and art.13(5) of the UN Model.

The new protocol added another anti-abuse clause u. art.13(5) , in addition to the existing restriction on immovable properties, that if a Mauritius company owns directly or indirectly 25 percent or more equity interests in the PRC company in the 12 months preceding the disposal of equity interests in the PRC company, the Mauritius company may be subject to taxes in the PRC on the capital gains derived by it from the disposal of equity interests in the PRC company.

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6. Creating Substance requirements: Post OECD BEPS Era:

6.1. Fulfilment of the General Substance requirements: A. Embracing automatic exchange of information

In line with international cooperation/developments Mauritius has committed to the automatic exchange of information which is showcased by the signing of:

• the US Foreign Account Tax Compliance Act (FATCA): the negotiation of a TIEA and a reciprocal inter-government agreement (IGA) model 1 with the US IRS on the FATCA in 2013 ; 36

• the OECD common reporting standard: Mauritius financial institutions will have to report annually to the MRA on the financial accounts held by nonresidents for eventual exchange with relevant treaty partners. The first reporting period ends on 31 December 2017 and will have to be made to the MRA by 31 July 2018 for eventual exchange with the relevant treaty partners by 30 September 2018 ; 37

B. Subscription to Multilateral Convention on Mutual Administrative Assistance in Tax Matters: To enhance its transparency and collaboration framework, in June 2015 , Mauritius signed the Multilateral 38

Convention on Mutual Administrative Assistance in Tax Matters, developed by the Organization for Economic Cooperation and Development (OECD).

C. Multilateral Competent Authority Agreement for Country-by-country reporting (CbC MCAA): Mauritius became signatory to the MCAA in 2017 , showcasing the jurisdiction’s intent to improve 39

international tax compliance by further building on its relationship with respect to mutual assistance in tax matters.

D. Active Participation in the MLI Hoc Group (OECD): Mauritius has actively participated in the Ad-Hoc Group set up by the OECD to work on the drafting of the Multilateral Instrument under Action 15 of the Base Erosion and Profit Shifting (BEPS) . 40

IFS Mauritius, FATCA at http://www.ifsmauritius.com/fatca

36

Mauritius to begin automatic tax information exchange from September 2018, Africa Money (Sept. 2018) at http:// 37

africamoney.info/mauritius-to-begin-automatic-tax-information-exchange-from-september-2018/

OECD, Mauritius Signing Ceremony - Convention on Mutual Administrative Assistance in Tax Matters (23 June

38

2015), OECD at http://www.oecd.org/countries/mauritius/mauritius-signing-of-convention-on-mutual-administrative-assistance-in-tax-matters.htm

OECD, Seven more jurisdictions sign tax co-operation agreement to enable automatic sharing of country-by-country

39

information (BEPS Action 13) (27 Jan, 2017) OECD at

http://www.oecd.org/tax/automatic-exchange/news/seven-more- jurisdictions-sign-tax-co-operation-agreement-to-enable-automatic-sharing-of-country-by-country-information-beps-action-13.htm

Mauritius commits to sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base 40

Erosion and Profit Shifting by 30 June 2017,Ministry of Finance and Economic Development, Press release (7 June

2017) at http://mof.govmu.org/English/DOCUMENTS/COMMUNIQUE%20-MULTILATERAL%20CONVENTION.PDF

Resolving Tax Treaty dispute between India and Mauritius through OECD BEPS Inclusive Framework Membership