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Mauritius DTAA – status quo
The 2% fall in the market today, set-off by concerns on renegotiation of
the Indo-Mauritius tax treaty, appears overdone. Our call with experts
from legal firm Nishith Desai suggests that a big revamp would not be the
preferred course of action for the government, would involve an extended
time-frame and also have implications for other treaties. The falling share
of P-Note investments suggests reducing significance of Mauritius for the
equity markets, so a turn in macro economic fundamentals will remain
the key driver for the Indian market.
Renegotiation noise: multiple voices
q The market selloff was triggered by the media comment of a senior tax official on
renegotiation of the Indo-Mauritius double taxation avoidance agreement (DTAA).
q With a meaningful share of foreign investment coming in through Mauritius, levy of
capital gains tax on these investors would clearly have a big near-term impact.
q The Ministry of Finance later denied holding any talks on reviewing the DTAA.
q The Mauritius route has indeed been on the scanner for many years and to provide
an expert opinion on the issues involved, we hosted Bijal Ajinkya, Partner and
Rajesh Simhan from Nishith Desai & Associates on a call with investors.
Government’s stance – attack abuse, not the treaty
q The experts’ opinion was that the government’s concerns on the Mauritius DTAA
were related to clamping down on abuse, especially round-tripping of funds by
resident Indians, rather than the loss of tax on capital gains.
q The past few years have seen steps to check abuse – the Investment Protection
treaty signed with Mauritius and the minimum expense criterion introduced in 2006
in a similar DTAA with Singapore.
q In their view, the political leadership remains in favour of maintaining the DTAA,
given India’s strategic interests in the region and on the global political platform.
q The recent comment could reflect the pressure being felt by the government to
tackle the issues of corruption and flow of ‘black money’.
No near-term impact; DTC will be used to check abuse
q Renegotiation of the DTAA would in any case be a prolonged affair, going by the
fate of the Indo-Cyprus DTAA where renegotiation has been on for six years.
q Termination of treaties would typically involve a notice period of one year or more.
q It is thus clear that any review of the DTAA will not create immediate pressure on
Indian equities held through Mauritius registered vehicles.
q The new direct tax code (DTC), planned for roll-out from FY13, incorporates a
General Anti Avoidance regulation (GAAR), to pursue cases where investment
through the DTAA may be centred around tax avoidance.
q Pooling of funds could be considered as commercial justification for routing
investments through Mauritius, going by past legal judgements.
Significance of Mauritius has been abating
q A significant chunk of Mauritius centred investment is attributable to holdings
backed by P-Notes issued to foreign investors.
q The steady decline in the share of P-Note holdings points to reducing risk from any
significant changes in tax regulation for the Mauritius registered entities.
q The share of Mauritius based entities in total FDI has also fallen 10ppt, to 36% over
the past five years.
q The Indian equity market remains under pressure due to macro challenges like high
inflation, monetary tightening and slowing growth momentum.
q A favourable turn in global factors (read: lower commodity prices) or a step-up in
domestic policy action are key for a revival in sentiment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mauritius DTAA – status quo
The 2% fall in the market today, set-off by concerns on renegotiation of
the Indo-Mauritius tax treaty, appears overdone. Our call with experts
from legal firm Nishith Desai suggests that a big revamp would not be the
preferred course of action for the government, would involve an extended
time-frame and also have implications for other treaties. The falling share
of P-Note investments suggests reducing significance of Mauritius for the
equity markets, so a turn in macro economic fundamentals will remain
the key driver for the Indian market.
Renegotiation noise: multiple voices
q The market selloff was triggered by the media comment of a senior tax official on
renegotiation of the Indo-Mauritius double taxation avoidance agreement (DTAA).
q With a meaningful share of foreign investment coming in through Mauritius, levy of
capital gains tax on these investors would clearly have a big near-term impact.
q The Ministry of Finance later denied holding any talks on reviewing the DTAA.
q The Mauritius route has indeed been on the scanner for many years and to provide
an expert opinion on the issues involved, we hosted Bijal Ajinkya, Partner and
Rajesh Simhan from Nishith Desai & Associates on a call with investors.
Government’s stance – attack abuse, not the treaty
q The experts’ opinion was that the government’s concerns on the Mauritius DTAA
were related to clamping down on abuse, especially round-tripping of funds by
resident Indians, rather than the loss of tax on capital gains.
q The past few years have seen steps to check abuse – the Investment Protection
treaty signed with Mauritius and the minimum expense criterion introduced in 2006
in a similar DTAA with Singapore.
q In their view, the political leadership remains in favour of maintaining the DTAA,
given India’s strategic interests in the region and on the global political platform.
q The recent comment could reflect the pressure being felt by the government to
tackle the issues of corruption and flow of ‘black money’.
No near-term impact; DTC will be used to check abuse
q Renegotiation of the DTAA would in any case be a prolonged affair, going by the
fate of the Indo-Cyprus DTAA where renegotiation has been on for six years.
q Termination of treaties would typically involve a notice period of one year or more.
q It is thus clear that any review of the DTAA will not create immediate pressure on
Indian equities held through Mauritius registered vehicles.
q The new direct tax code (DTC), planned for roll-out from FY13, incorporates a
General Anti Avoidance regulation (GAAR), to pursue cases where investment
through the DTAA may be centred around tax avoidance.
q Pooling of funds could be considered as commercial justification for routing
investments through Mauritius, going by past legal judgements.
Significance of Mauritius has been abating
q A significant chunk of Mauritius centred investment is attributable to holdings
backed by P-Notes issued to foreign investors.
q The steady decline in the share of P-Note holdings points to reducing risk from any
significant changes in tax regulation for the Mauritius registered entities.
q The share of Mauritius based entities in total FDI has also fallen 10ppt, to 36% over
the past five years.
q The Indian equity market remains under pressure due to macro challenges like high
inflation, monetary tightening and slowing growth momentum.
q A favourable turn in global factors (read: lower commodity prices) or a step-up in
domestic policy action are key for a revival in sentiment.
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