Challenges to Cross Border Investment
 Does ‘Treaty Shopping’ have a much more serious impact on Mauritius than the combined hedging scandals at Air Mauritius and State Trading Corporation?
What are the implications for International Economic Diplomacy? US 4,5 billion of India’s US$ 8.99 Billion FDI  transits via Mauritius Offshore. Any Round Tripping loophole implies hefty Tax Revenue shortfalls for India.
Why has the Financial Services Commission not exercised caution via prudent stringent procedures to hinder the use of colourable devices devoid of commercial/economic substance beneath the Corporate Veil ?
What is the impact on the international prestige of Mauritius Offshore as a Haven for Round Tripping and money laundering? Major Equity incidence for India’s economic development strategy.
Beneficial Ownership
Administrative guidance [Circular No. 789, dated 13th April 2000 issued by the Central Board of Direct Taxes of India upholds the sufficiency of a Tax Residency Certificate for accepting the status of Beneficial Owner of Income.
A wave of Litigation signals a significant jurisprudential milestone pertaining to the importance of the legal form in the Indian Tax context: the fact that the non-resident entity has a distinct legal personae with an independent board of directors governed by the terms of its Charter documents should mitigate the possibility of it being treated as a conduit for ‘colourable devices’ with the purpose of securing a tax benefit.
While such a view awaits judicial ruling in the Supreme Court, ‘Beneficial Ownership’ is recognised in International Tax Jurisprudence. The OECD’s July 2011 Discussion Draft [Clarification of the Meaning of Beneficial Owner in the OECD Model Tax Convention] lends certainty to the concept.
Whilst Courts have been prudent in maintaining the sanctity of the Mauritius route, systematic scrutiny of FII transactions through the Mauritius Offshore platform have raised serious concerns from Indian authorities. Corporate veil may be lifted in cases of fraud or sham transactions where it is deemed that tax evasion may occur.
The alternative of structuring the purchase mechanism through an intermediate Holding Company in a favourable Tax Jurisdiction warrants re-consideration. Circular structures and round tripping may prove an adequate basis for lifting the corporate veil and re-characterise the transaction.
The Vodafone Case  establishes that once investment is equated to black money or concealed Capital, it is tantamount to circular movement of capital [round tripping], and thus Tax Residency Certificate can be effectively ignored for purposes of tax liability. This judgement holds that it would be incorrect to suggest the Indo-Mauritian Treaty will recognise Foreign Direct Investment and Foreign Institutional Investors only if it originates from Mauritius and not in cases where the investors from third countries incorporate companies in Mauritius.
The Azadi Bachao  Andolan Case, Aitya Birla Nuvo, Vodafone Case puts  international credibility stress on the financial services regulatory framework in Mauritius.
The Finance Bill stipulates that It shall be ‘presumed’ that obtaining of tax benefit is the main purpose of an arrangement unless otherwise proved by the taxpayer.
Four alternative additional tests have been laid down to determine if a transaction could be covered by GAAR.
•    These are: the arrangement creates rights and obligations that are not normally created between parties dealing at arm’s length;
•    it results in misuse or abuse of provisions of tax law;
•    it lacks commercial substance or is ‘deemed’ to lack commercial substance;
•    it is carried out in a manner which is normally not employed for bona-fide purpose.
As per the Bill, even if one part of the arrangement is found to obtain a tax benefit, the entire arrangement will be declared as impermissible.
•     GAAR also has an over-riding effect over tax treaties.
•    Tax authorities can disregard or combine steps or parties in the transaction; reallocate expenses and income between parties; relocate place of residence of a party or location of a transaction or situs of an asset to a place other than provided in the transaction; re-characterise equity into debt, capital into revenue; even look through the arrangement by disregarding any corporate structure.
•     The Bill makes it vital to obtain a tax residency certificate, in the form prescribed by India, to obtain tax benefits falling under a particular treaty (say between Country A and India. Even if such a certificate is obtained, it will not be a ‘sufficient’ condition to claim treaty benefits.
•    The retrospective tax amendment has created a negative sentiment. Investors need certainty and India’s government also needs to take care of its lack of credibility arising from growth slowdown, lack of reforms, corruption and growing concerns over governance had dampened business sentiments.
‘Treaty Shopping’ describes the act of a resident of a third country taking advantage of a fiscal treaty between two contracting States. Is Treaty Shopping unethical and illegal, or does it amount to a fraud on the Treaty?
There is nothing to prevent nationals of Third States, in the absence of any express or implied provisions to the contrary, from claiming the rights or becoming subject to the obligations, created by a Treaty .[ Lord Justice Mc Nair]
Motives with which the residents have been incorporated in Mauritius are wholly irrelevant and cannot in any way affect the legality of the transaction. There is nothing like equity in a fiscal statute. Either the statute applies proprio vigore or it does not. There is no question of applying a fiscal statute by intendment, if the expressed words do not apply.
A key principle in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases.
Many developed countries tolerate or encourage treaty shopping, even if it is unintended, improper or unjustified, for other non-tax reasons, unless it leads to a significant loss of tax revenues. Moreover, several of them allow the use of their treaty network to attract foreign enterprises and offshore activities. Some of them favour treaty shopping for outbound investment to reduce the foreign taxes of their tax residents but dislike their own loss of tax revenues on inbound investment or trade of non-residents.
 In developing countries, treaty shopping is often regarded as a tax incentive to attract scarce foreign capital or technology. They are able to grant tax concessions exclusively to foreign investors over and above the domestic tax law provisions. In this respect, it does not differ much from other similar tax incentives given by them, such as tax holidays, grants, etc.
Developing countries need foreign investments, and the treaty shopping opportunities can be an additional factor to attract them.
Mauritius today provides a suitable treaty conduit for South Asia and South Africa. In recent years, India has been the beneficiary of significant foreign funds through the « Mauritius conduit ». Although the Indian economic reforms since 1991 permitted such capital transfers, the amount would have been much lower without the India-Mauritius tax treaty.
Overall, countries need to take, and do take, a holistic view. The developing countries allow treaty shopping to encourage capital and technology inflows, which developed countries, are keen to provide to them. The loss of tax revenues could be insignificant compared to the other non-tax benefits to their economy. Many of them do not appear to be too concerned unless the revenue losses are significant compared to the other tax and non-tax benefits from the treaty, or the treaty shopping leads to other tax abuses.
There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long term development. Deficit financing, for example, is one; treaty shopping, in our view, is another.
Despite the so called ‘abuse’ of ‘treaty shopping’, perhaps, it may have been intended at the time when Indo-Mauritius DTAC was entered into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations.
 A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy.
[Source- Justice Srikrishna, Supreme Court of India, October 2003]

Rule in McDowell
  IRC v. Duke of Westminster [1936  ]reflected the prevalent attitude towards tax avoidance:
« Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow tax gatherers may be of his ingenuity, he cannot be compelled to pay an increased tax. »
« Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. »
 The principle enunciated in the McDowell’s case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. »