Fiscal expert Dev Erriah is convinced that India Tax Authority will not agree to amend the Double Taxation Agreement by keeping the same clauses for capital gains. The fiscal treaty has no future today and all hopes have faded away, he says.

How do you view the Double Taxation Agreement (DTA) between Mauritius and India? Don’t you think it’s high time to put a cross on the treaty given the new amendments imposed by the Indian authorities regarding the Capital Gains Tax (CGT) and the clause on the Limitation of Benefits?

The DTA between Mauritius and India has, since 1996 and in particular in early 2000, been very beneficial and favourable to Mauritius. Particularly for global business companies which have taken advantage of the non-capital gains tax clause in the 1983 DTA until the first major attack based on abuse of the Treaty around 2003 following the Jan Andolan Azadi Bachao case (“Azadi Bachao Case”) and the Vodafone case brought in the Indian Supreme Court.

The court maintained that the DTA should be given effect as it is a binding agreement between Mauritius and India and confirmed that global companies whose place of effective management is in Mauritius shall be entitled tothe benefit of article 13 as regards CGT in India although there is no CGT in Mauritius.

One valid argument in the Azadi Bachao Case was that since there is no CGT in Mauritius, there is no double taxation as regards capital gains and therefore Mauritius companies should not benefit from clause 13. Otherwise, this would result in a non-double taxation of the gains which is not the aim of the DTA. A point which is greatly addressed in BEPS (Base Erosion Profit Shifting) and is a challenge for tax treaty jurisdiction like Mauritius.

The two main Indian Supreme Court cases have given rise to a judicial certainty in the interpretation and application of the DTA but have culminated in a great fiscal and political tension in India. This tension has been causing havoc and uncertainties in the global business sector in Mauritius which is called upon to amend the DTA now.

Obviously with the Indian proposals to amend  Article 13 of the DTA so that capital gains realized in India on movables owned by global companies resident in Mauritius must be taxed in India, we must say goodbye to the Mauritius-India DTA and move on as there is tremendous shift of global business from Mauritius to other jurisdictions.

How can you explain the mess in which we have landed today? Don’t you think it’s because the recent negotiations between the two countries on this issue have been done in a disorderly way?

As a result of this political tension in India, the political fear of an erosion of an Indian tax base with the use of Mauritius global companies under the DTA coupled with the implementation of BEPS, the DTA has no future today and all hopes have already faded away.

The Indian Tax Authority is proposing an amendment to the DTA specifically clause 13 and other clauses so as to introduce limitation of benefit clauses to restrict the use of the DTA and to prevent treaty shopping.

In the light of the G 20 recommendation and implementation of Base Erosion and Profit Shifting by OECD, all hopes which the Mauritius-India Treaty entails today will vanish.

I am of the opinion, honestly and sincerely, that we have to close this chapter of the Mauritius-India DTA, put it behind us and develop our global business sector without putting emphasis on the DTA as a major characteristic of our global business. The Indian Tax Authority will not agree to amend the DTA by keeping the same clauses for capital gains and interest so as to erode or cause any erosion again to its tax base by allowing non-double taxation.

The Mauritian Authority and all stakeholders in the industry must understand that India which is an OECD member country and forming part of the G20 countries and the Indian Tax Authority will push for the implementation of BEPS Action.

India will seize this opportunity to force Mauritius directly or indirectly to comply with the BEPS Action Plan by amending the DTA to avoid non-double taxation in respect of income, interest and capital gains. Hence, India’s ardent desire to amend the DTA at this very stage without alluding to any emotional or tight friendly ties, since BEPS provides this opportunity to India to do so.

In that respect, Mauritius cannot prevent India from  amending article 13 or other clauses which allow non- double taxation, non-taxation, tax avoidance of any form and treaty abuse. India will have an excuse to say it is forced to proceed with amendments because it will have to implement BEPS as an OECD and G 20 member.

I believe there has been a mix up of emotions and pragmatism in the recent negotiations of the amendment to the DTA which should not have been the case. Mauritius, under the previous or new government, could not do anything to prevent India from amending the DTA under international law notwithstanding the principle of '‘pacta sunt servanda'’.

This is so because Article 13 of the DTA creates a situation of non-double taxation or no taxation and abuse of the treaty. What Mauritius could do is either accept the amendments as proposed, which is not advisable as the DTA will worth nothing, or accept that the treaty be terminated or revoked by India.

With the advent of BEPS which reinforces India’s position to prevent treaty abuse, Mauritius will not have any choice than to accept amendments or termination or revocation.

Can the Global Business sector stand the test of time without the fiscal treaty?

In the world of offshore business, as an International Financial Centre, Mauritius is classified as a tax treaty jurisdiction as opposed to the conventional offshore centres like Cayman Island, British Virgin Islands, Bahamas, Jersey, Guernsey and Isle of Man. With the advent of BEPS and the implementation of certain Actions namely Actions 2 and 6 at national level, the Mauritius network of DTAs concluded so far will have to be reviewed so that there is no clause in those DTAs which grants treaty benefits in inappropriate circumstances, thereby avoiding non-double taxation, treaty shopping and elimination of tax avoidance altogether.

Consequently clauses referring to interests and capital gains will be amended to eliminate so that interest and capital gain will be taxed at source in the country at least, if it is not taxed in the country of the resident company of the other contracting state, that is Mauritius.

In this circumstance, Mauritius will have to implement those BEPS Actions if it wants to be a reputational IFC and to remain in the white list of all international institutions and countries. Otherwise certain countries namely OECD countries would terminate or revoke present DTAs, which would mean that Mauritius no longer would be a tax treaty jurisdiction.

This being said, Mauritius may continue to be an IFC without emphasis on DTA’s like Cayman Island, British Virgin Islands, Bahamas andother Crown Dependencies in the Channel Islands where those Islands are thriving as IFCs notwithstanding the absence of DTAs with countries like UK, USA or emerging countries like India, China or some African states.

To continue to exist and thrive as an IFC of substance and good repute, Mauritius will have to focus on providing other financial services like aircraft finance and leasing, other regulated structured products like securitization, pension, insurance and use of specialized collective investment vehicles, etc.

The Finance Minister is canvassing the idea that the Business model of our offshore sector  which is India centric needs to be reviewed and geared towards Africa. What do you think of this paradigm shift concerning this sector?

Since the Mauritius-India DTA will by all means be amended in the light of BEPS Actions, the Finance Minister is absolutely correct in saying that the business model of our offshore sector is too centred on the Mauritius-India DTA. It will have to be reviewed and realigned not necessarily towards Africa but oriented so as not to fall into the same mistake as India.

I mean here that DTAs ratified with African states based on the OECD or UN Models have been proved flawed following BEPS Report as those models allow non double taxation, tax avoidance and abuse of treaties.

An over emphasis on a business model of our off-shore sector geared towards Africa may give rise to the same problems as in India. African States may use the same reasons to blame our network of DTAs as India has done. South Africa has already called for the amendment of the Mauritius- South Africa DTA. Recently Kenya raised issues about non-double taxation under the Mauritius-Kenya DTA.