India-Mauritius Tax Treaty Amendment to include PPT

India has recently signed a protocol with Mauritius to amend the Double Taxation Avoidance Agreement. Before we get into the details of the proposed amendment let us try to understand the DTAA amendment practices in the Base Erosion and Profit Shifting (BEPS) era.

Amendment of DTAA’s by way of Multilateral Instrument (MLI):

·???????? MLI is an instrument developed by OECD as part of its BEPS project by which governments can modify existing bilateral tax treaties in a synchronized and efficient manner to implement the tax treaty measures developed during the BEPS project, without the need to expend resources renegotiating each treaty bilaterally. ?

BEPS Minimum Standard

As part of the BEPS package, the Action 6 Report sets out one of the four BEPS minimum standards, which is that members of the BEPS Inclusive Framework commit to include in their tax treaties provisions dealing with treaty shopping to ensure a minimum level of protection against treaty abuse.

The minimum standard on treaty shopping requires jurisdictions to include two components in their tax agreements:

(i)?????????? an express statement that the common intention of the parties to the treaty is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty-shopping arrangements (which is outlined in Article 6 – Purpose of a Covered Tax Agreement) and

(ii)????????? an anti-abuse provision in the terms specified in the BEPS Action 6 final report which is outlined in Article 7 – Prevention of Treaty Abuse of MLI. Action 6 Report states that countries, at a minimum, should implement: (i) a principal purpose test (PPT) only; (ii) a PPT and either a simplified or detailed the limitation on benefits (LOB)provision; or (iii) a detailed LOB provision, supplemented by a mechanism that would deal with conduit arrangements not already dealt with in tax treaties.

Jurisdictions (Countries) can satisfy the minimum standard either by renegotiating their DTAA or through the Multi-Lateral Instrument (MLI).

Mauritius has, instead, opted to meet the BEPS Action 6 minimum standard by renegotiating and amending its bilateral tax treaty with India.

On 23rd February 2024, the Cabinet of Ministers of Mauritius has agreed to the signing of a Protocol to amend the DTAA between the Mauritius and India to comply with the OECD BEPS Action 6.

Press release by Press Information Bureau (PIB) dated 13th March 2024 mentions that the President of India and Prime Minister of Mauritius witnessed exchange of Protocol amending DTAA between India and Mauritius.

Amendments to the India-Mauritius Tax Treaty (“DTAA”):

·???????? The preamble of the DTAA has been amended to include that the intention of the tax treaty is to eliminate double taxation without creating opportunities for non-taxation through tax avoidance/evasion including through treaty shopping arrangements.

·???????? Article 27B has been inserted to incorporate Principal Purpose Test (PPT) rule in line with the Article 7(1) of the MLI.

·???????? The provisions of this protocol will come in to force from the date of entry in to force of the protocol without having regard to the date on which taxes are levied or taxable years to which the taxes relate.

Key Takeaways

Mauritius has historically been a preferred jurisdiction for investments in India due to the non-taxability of capital gains until 2016. However, the revised tax agreement in 2016 allowed India to tax capital gains from transactions in shares routed through Mauritius from April 1, 2017. Investments made before this date were grandfathered.

With the PPT test in place Indian tax authorities are likely to "look beyond" the tax residency certificate (TRC) issued by Mauritius authorities and may deny benefits of the India-Mauritius treaty if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining the treaty benefits was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in such tax benefit.

It is to be seen that whether the proposed protocol will also be applicable to investments which were grandfathered. The CBDT is likely to come out with clarifications in respect of the same. Till then it’s a wait and watch!