Companies registered in Mauritius are the largest source of FDI into India, making it crucial for New Delhi to amend double tax avoidance agreement (DTAA) in its bilateral tax treaty

India and Mauritius are set to begin a fresh round of negotiations to amend their double tax avoidance agreement (DTAA) to ensure that capital flows into India meet the latest global standards meant to check aggressive tax planning.

Companies registered in Mauritius are the largest source of foreign direct investment (FDI) into India, making it crucial for New Delhi to upgrade its bilateral tax treaty, adopting the latest international practices that prevent multinational companies from artificially shifting profits to low-tax countries.

Investments into India routed through Mauritius-based companies crossed $114 billion between April 2000 and June 2017, accounting for 34% of FDI into India during the period, ahead of inflows from Singapore, Japan, and the UK. Bilateral talks were necessitated after Mauritius in July excluded the India-Mauritius DTAA from the scope of a multilateral deal brokered by the Organisation for Economic Cooperation and Development (OECD) aimed at upgrading all existing bilateral tax treaties of participating nations to the latest anti-tax avoidance norms.

The tax standards prescribe greater transparency in reporting of business operations by companies and limit their ability to exploit tax arbitrage. India, which was an active participant in drafting the multilateral treaty, adopted it in June in Paris but when Mauritius joined the club a month later, it kept the bilateral treaty with India outside the scope of the multilateral deal.

Including the two nations, 71 countries are now party to the global anti-tax avoidance framework. Two people with knowledge of communications between Delhi and Port Louis, on condition of anonymity, separately said talks to upgrade the DTAA will start soon.

“We have to work with Mauritius to amend the DTAA and prevent treaty abuse,” said one of the two cited above. An email sent on Friday evening to the ministry of finance and economic development of Mauritius, which signed the multilateral agreement, remained unanswered.

The DTAA, meant to prevent double taxation of the same income in both the countries, had actually resulted in income escaping tax in both the countries, a practice referred to as double non-taxation. To fix this, the DTAA was amended in 2016. However, aggressive tax avoidance by multinational companies involves complex ways of artificially moving profits from countries where economic activity takes place to low or no tax countries where a group company may be incorporated. OECD’s multilateral deal is trying to fix this.

According to a Deloitte India analysis, the island nation may introduce changes in four areas of taxation identified by OECD, either by amending its bilateral tax treaties or by changing its domestic law. These are treaty abuse, dispute resolution, harmful tax practices and country-by-country reporting of operations by companies.

“At the multilateral instrument signing ceremony, Mauritius reiterated its commitment to take steps to prevent treaty abuse in its tax treaties by 2018. India-Mauritius tax treaty already contains detailed limitation of benefit clause. This provision can be strengthened by including a principal purpose test clause,” said the analysis. A principal purpose test proposed by OECD seeks to prevent investors cornering tax treaty benefits inappropriately.

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