THE DOUBLE TAX AVOIDANCE TREATY WITH INDIA : End of negotiations… and beginning of derailment of the Global Business Sector?

The Global Business Sector (“GBS”), previously known as the “offshore” sector, is arguably an important pillar of the Mauritian economy. The GBS together with the banking and insurance sectors constitute the Financial Services Sector (FSS). According to a study by the Human Resource Development Council (HRDC) issued in May 2012, the contribution of the FSS to the Mauritian economy reached 10.1% of GDP in 2011 and the number of employees in the FSS was estimated at 13,500 in 2011 and was expected to reach 17,500 by 2015.
The GBS has been in the news lately following the announcement on 30 June 2015 by the Ministry of Finance that the renegotiation of the terms of the Double Tax Avoidance Treaty (DTAT) with India was finally over. This was followed by public concerns raised on 6 July 2015 by experts in the domain, notably Messrs Dan Maraye & Rama Sithanen, about the concessions made with respect to some of the litigious clauses of the DTAT, which were likely to derail the GBS for good. An examination of the issue at hand by way of questions and answers would help to comprehend the situation and what is at stake:

What is the DTAT?
The DTAT is a treaty between two countries which sets out how income generated in one country by residents of the other country is to be taxed, with the overall aim of preventing double taxation of the income in the two countries. The Mauritius-India DTAT was entered into in 1983. In the 1990’s, discerning businessmen participated in the birth of the Mauritian GBS by encouraging foreign investors to channel their investments in India through companies set up in Mauritius. This led to employment for Mauritians, licence fees and tax revenue for Mauritian authorities, increase in investments in India and investors were subjected to favourable tax rates with their gains on investments taxed in Mauritius.

Why has there been pressure for the DTAT to be renegotiated?
The pressure groups in India argue that many investors are in fact Indians who set up companies in Mauritius and invest in their own country from Mauritius – a process known as ‘round-tripping’ – with a view to avoid tax in India. This issue has been taken into account by Mauritian authorities which reinforced the local rules to facilitate identification and prevention of investments funds sourced from India. Additionally the Indian tax authority seems to nurture the belief, echoed in certain sections of the Indian press, that the tax revenue would be higher if investors did not channel investments through Mauritius. A possible fallacy in this line of thinking would be in the assumption that investors are perfectly indifferent to tax rates.

What change has been reportedly made to the Renegotiated DTAT?
On the basis of media reports, the Joint Working Group seems to have agreed to add a clause to the DTAT on ‘limitation of benefits’ (LoB) under which global business companies (GBCs) set up by international investors in Mauritius would have to incur annual administrative expenses of at least Rs1.5 million in Mauritius for at least two consecutive years to be eligible for the DTAT provisions. Though this requirement would reinforce the ‘substance’ of GBCs, it may have the unwelcome effect of being too onerous for smaller foreign investors holding few investments in India and drive them out, along with the Mauritian management companies servicing them.

Experts have urged the Government to avoid modifying Clause 13 of the DTAT – what is it about and how is its removal deleterious for the GBS?
Clause 13 of the DTAT is considered one of the litigious parts and the Mauritian counterparts in the negotiation process had over the years defended it from removal or modification. The Clause 13 provides that the gains made by sales of assets such as shares held in Indian companies by Mauritian GBCs are taxed in Mauritius and not India. The capital gains tax rate in Mauritius is in effect zero. Altering Clause 13 – for instance by providing for capital gains to be taxed in India – would therefore drive investors away from Mauritius and thereby hurt the GBS beyond repair.

In worst case scenario of the removal / alteration of the Clause 13, who would be impacted and to what extent?
Management companies which administer GBCs would take a severe hit, along with international banks which channel investors’ funds and audit firms which conduct the audit of the financial statements of GBCs. Employment in these service providing firms would certainly be jittery and fresh graduates will see their employment opportunities severely hampered. A growing number of GBCs also have local offices and employees who might get the axe. Even peripheral service providers, like taxi drivers who service employees in this sector, would be hit. The ripple effect in the whole economy would be unavoidable.

Are there assurances given that the best interests of Mauritius are being safeguarded?
Mrs Sushma Swaraj, the Indian External Affairs Minister, gave the assurance that the interest of Mauritius would be secured under the terms of a renegotiated DTAT during her visit to Mauritius in November 2014. Mr Narendra Modi, the Indian PM, also stated during his two-day visit in March 2015 that “nothing will be done to harm this critical sector” of Mauritius. The Mauritian Finance Minister stated on 30 June 2015 the negotiations had culminated in a positive ‘denouement’, thanks in large part to the above mentioned assurance given by Mr Modi.

Conclusion
In light of the above, in the context of a weakened tourism industry & battered textile sector with new sectors such as ‘ocean economy’ still at conception stage, a hit to the Mauritian Global Business Sector consequential to a hasty renegotiation of the DTAT under unfavourable terms for Mauritius would be nefarious for the country as a whole and underline a serious faux-pas of the new government.


Commentaires

Tax havens are bound to collapse any time. Like it or not countries at source and destination are increasinly pressured to review for obvious fiscal reason and under public scrutiny. All in all it is always black money, often dirty money. Many corporations hardly pay any taxes by parking their money in tax havens. For Mauritius it is easy money hardly based on any sort of innovation. Merely paper work. I don't think the likes of Eva Joly will ever give up. Mauritius would do better bet on real productivity and competitiveness for a place in the future.