The double taxation avoidance agreement between India and Mauritius has come under fire from critics who accuse both countries of encouraging round-tripping and money laundering. What is their response? Bedell Partnership's Yuvraj Juwaheer explores

Mauritius has no doubt earned an excellent reputation as a credible financial services centre over the past 20 years and it must be acknowledged that the India/Mauritius double taxation avoidance agreement (DTAA) has played a pivotal role in this success. 

Though India has several treaties offering similar tax benefits, the Mauritian platform has arguably remained the favoured route for foreign direct investment (FDI) into India by way of Mauritian special purpose vehicles.

Both countries have benefited from the DTAA. While India has received a significant amount of FDI for economic growth, Mauritius has been able to develop its financial services industry, which now constitutes about 5% of its GDP.

Moot points on the treaty

The DTAA has been the subject of some criticism in India and elsewhere, in particular that there may be elements of round-tripping and treaty abuse in avoiding capital gains tax in India, and money laundering.

Over the past few years, there has been mounting pressure on the Government of India to revise the treaty, due to the public perception of its misuse; in particular to revise Article 26 of the DTAA regarding exchange of information, as well as Article 13 and the capital gains tax clause. 

Mauritius for its part has always been sensitive to these concerns and has tried to accommodate all interested parties. In this regard, it has enacted legislation to ensure transparency of information and has also set up institutions such as the Financial Intelligence Unit (FIU), the Financial Services Commission (FSC) and the Independent Commission against Corruption.

Mauritius has also signed the IOSCO Multilateral Memorandum of Understanding (MoU), and both the FSC and the Bank of Mauritius have entered into bilateral MoUs with their counterparts in several jurisdictions.

The Mauritius response

It is important to note that Article 26 of the DTAA provides for exchange of information. To assist in this process, an officer from the Indian tax authorities is present at the Indian High Commission in Mauritius to ensure transparent and effective resolution of such requests. 

The FSC also signed an MoU, in December 2002, with the Securities and Exchange Board of India for the sharing of information on securities dealings, and the Mauritius Revenue Authority (MRA) shares information on a confidential basis with competent tax authorities of other countries. 

In addition, the Mauritius Income Tax Act has been amended to enable the MRA to obtain information on clients' bank accounts upon such requests being directed to banks operating in Mauritius. This would not have been possible some five years ago, when any request for such information by the MRA required a court order. 

The FIU shares intelligence on suspicious transactions reported to this body with the financial intelligence unit of any other country, and would share intelligence automatically with the financial intelligence unit of India on any improper business or suspicious transaction which is reported to it and where India needs to be notified. 

To this extent, Mauritius has made plenty of progress and is ahead in its commitment to maintain its international reputation as a well-regulated and leading financial centre. For these reasons as well as others, there should be little concern with the Mauritius Government signing a tax information exchange agreement (TIEA) as proposed by the Indian Government.

In addition to the above measures, India and Mauritius have set up a joint working group to effectively and fairly deal with issues relating to the exchange of information between competent authorities in both countries. 

In particular, the provision of prompt information to the Indian tax authorities has been considered crucial. 

To facilitate this, it has been agreed by both India and Mauritius that a TIEA should be put in place to provide for an efficient and effective information exchange on a confidential basis. The TIEA is expected to be signed by both India and Mauritius shortly and is set to come into effect by June. 

To date, Mauritius has signed several TIEAs, all of which are based on the Organisation for Economic Co-operation and Development (OECD) model. The agreements signed (and which are already in force) are with Australia, Denmark, Finland and Norway. 

The TIEA with India would also follow the OECD model and would set out the details of how efficient exchange of information for tax purposes can be carried out between the competent authorities of both India and Mauritius, while maintaining confidentiality of client details, such that exchanged information is not divulged to the public.

The impact of the TIEA

There is no doubt that the TIEA will create enhanced co-operation between the income tax authorities in both India and Mauritius. It will certainly ensure transparency of information and bring comfort to both the Indian Government and the public that Mauritius is a top-tier financial jurisdiction. 

As a result of the TIEA, the income tax authorities in India will have access to adequate information to assess the status of clients from Mauritius and as a result, it is likely that they may be less probing towards investors from Mauritius. 

Consequently, it is expected that clients who may have shown hesitation in conducting their business through Mauritius will now be attracted to the jurisdiction. Thus, the TIEA will contribute positively to bring more quality business to Mauritius. 

It will also make Mauritius more transparent and create a more positive environment in which to do business, while also helping to dispel the argument for the amendment of the capital gains tax clause in the DTAA.

Conclusion

The whole debate around exchange of information has been prompted by the round-tripping argument and that disposal of investments through Mauritian special purpose vehicles in India are not taxed in India, because of the DTAA, with the resultant loss of revenue in the form of capital gains tax. 

The uncertainty over the possible renegotiation of the DTAA and the debate on exchange of information has no doubt adversely impacted the flow of investments into India and the use of Mauritius as a financial centre. It is clear that the tightening of the regulatory framework to prohibit any perceived irregular and improper business is to the advantage of all. 

The new TIEA will bring certainty and enhance the already close relationship that Mauritius and India have enjoyed for decades. This is good for business and good for international investors.

Yuvraj Juwaheer is a partner and head of Bedell Partnership in Mauritius.